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Citigroup Reports Loss on Writedowns, Credit Costs (Update4)

By Bradley Keoun

April 18 (Bloomberg) -- Citigroup Inc. posted a $5.11 billion loss, less than analysts'' most pessimistic estimates, and cut 9,000 jobs, sending its shares up as much as 7 percent in New York trading.

Citigroup, the biggest U.S. bank by assets, reported almost $16 billion of writedowns and increased bad loan reserves as customers fell behind on home, car and credit-card payments. Merrill Lynch & Co''s. Guy Moszkowksi, Institutional Investor''s top-rated brokerage analyst, had predicted an $18 billion writedown. The first-quarter net loss of $1.02 a share compared with Moszkowski''s estimated loss of $1.66.

U.S. index futures rose and the dollar advanced against the euro after Citigroup announced the results, fueling investor optimism that the credit-market contraction may be easing.

``I think the worst is largely behind us,'''' Malcolm Polley, who manages $1 billion as president of Stewart Capital Advisors LLC, in Indiana, Pennsylvania, said in a Bloomberg radio interview.

Citigroup climbed $1.40, or 5.8 percent, to $25.43 at 10:18 a.m. in New York Stock Exchange composite trading, after surging as high as $25.80 earlier today.

The bank''s writedowns and credit losses from the collapse of the subprime mortgage market now total almost $40 billion, more than Zurich-based UBS AG and Merrill. Vikram Pandit, Citigroup''s chief executive officer, has bailed out about 10 investment funds, replaced his chief risk officer and raised $30 billion to replenish capital since he succeeded Charles O. ``Chuck'''' Prince in December.

`No Silver Bullets''

Pandit''s finance chief, Gary Crittenden, said today that the bank would eliminate 9,000 jobs in the next twelve months. That includes 2,000 of the 6,200 cuts the bank has already announced.

Revenue fell 48 percent to $13.2 billion, compared with the average estimate of $11.1 billion from analysts surveyed by Bloomberg. Results included $7.6 billion of writedowns and credit costs on mortgages and bonds, $1.5 billion on leveraged buyout loans and $1.5 billion on auction-rate securities. The bank wrote down the value of assets it absorbed last year from so-called structured investment vehicles by $212 million.

The company also marked down the value of bond insurance contracts by $1.5 billion. Citigroup set aside about $1.8 billion to increase reserves for bad consumer loans.

The bank cited increased delinquencies on mortgages, unsecured personal loans, credit cards and auto loans, as well as the ``housing market downturn and rising unemployment,'''' in the U.S.

Tier 1 Capital

``This is a difficult business environment,'''' Crittenden said on the conference call. ``There are no easy solutions here, no silver bullets.''''

The bank''s Tier 1 capital ratio -- a financial measure regulators use to monitor a bank''s ability to withstand loan losses -- rose to 7.7 at the end of the quarter from 7.1 percent at the end of 2007. The minimum for a ``well-capitalized'''' rating from U.S. regulators is 6 percent. Citigroup sets its own target at 7.5 percent, partly to assure its AA- rating from Standard & Poor''s.

Standard & Poor''s said today it is reviewing Citigroup''s rating for a possible downgrade, noting that earnings may be further depressed by loss reserves on the bank''s loan portfolio. Fitch Ratings lowered the company''s rating one level to AA- from AA today, with a negative outlook. Fitch cited deteriorating earnings in the consumer business and investment bank losses.

Pandit''s Path

Credit-default swaps tied to Citigroup''s bonds dropped 22 basis points to 95 basis points, according to broker Phoenix Partners Group, the lowest in more than two months. The contracts, which gauge investors'' belief in the company''s ability to repay its debt, fall as confidence improves.

Created a decade ago from the merger of Citicorp and Travelers Group Inc., Citigroup slumped 54 percent in New York trading during the past year as credit-market losses piled up. The decline led to the ouster of 58-year-old Prince, who served as CEO for four years, as Citigroup''s market value fell below those of Bank of America Corp. and JPMorgan Chase & Co. New York-based JPMorgan reported first-quarter earnings earlier this week of $2.37 billion, matching analysts'' estimates.

Pandit, 51, is close to the end of a six-month companywide review that has taken him to offices in Warsaw, Istanbul and Seoul. He put former Morgan Stanley colleague John Havens in charge of trading and investment banking, moved U.S. consumer head Steve Freiberg to head a new credit-card division and recruited former Wells Fargo & Co. executive Terri Dial to oversee consumer banking in the U.S.

Capital Cushion

He also is taking steps to free up capital by selling assets such as $12 billion of leveraged-buyout loans and announcing a plan to pare U.S. mortgage holdings by $45 billion this year. Under Prince, Citigroup''s balance sheet swelled by $689 billion, an amount larger than the entire balance sheet of Wells Fargo & Co., the fifth-biggest U.S. bank. Total assets stood at $2.2 trillion at the end of last year.

``Pandit is doing what needs to be done, focusing on capital management, allocating capital to areas that he wants to grow and exiting businesses that he doesn''t think are core to the overall franchise,'''' said Peter Kovalski, portfolio manager at Alpine Woods Investments in Purchase, New York, which oversees about $12 billion and holds about 32,000 Citigroup shares. ``The variable he has no control over is the global economy.''''

Dividend Cut

Oppenheimer & Co. analyst Meredith Whitney wrote in a March 27 report that Citigroup''s growing consumer-loan losses may force it to raise more capital. The prospect of such infusions can weigh on a stock price because they dilute the earnings of existing shareholders. Citigroup already has sold stakes to investment funds controlled by the governments of Abu Dhabi, Kuwait and Singapore.

Citigroup finance chief Crittenden said in January that the bank wouldn''t need to raise more capital, and that its assumptions were ``stress-tested'''' against a range of economic conditions, including ``multiple recessionary scenarios.''''

Asked today if the bank might seek an additional infusion, Crittenden said, ``You can never say never.''''

Merrill analyst Moszkowski has said he believes Citigroup has a capital cushion of about $17 billion ``above and beyond'''' what was needed to offset writedowns recorded last year.

The bank had its rating cut one notch from AA in January. A lower credit rating implies a higher risk of default, forcing companies to pay higher interest rates on borrowings.

When it announced year-end earnings in January, Citigroup slashed its dividend for the first time since the 1998 merger. The 41 percent reduction allowed the bank to retain about $4.4 billion of additional capital per year.

Citigroup may soon have to cut its dividend again, according to Whitney, who was one of the first analysts last year to predict the depth of the credit crisis.

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: April 18, 2008 10:31 EDT

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