Citigroup Inc. today warned that the souring of the credit markets that prevailed early this year will cost it $5.9 billion in the third quarter, a blow that may cause profits for the period to fall 60 percent from a year earlier, The Wall Street Journal reports.
The largest U.S. bank by market capitalization said it will write down $1.4 billion in the value of loans for activities like LBOs, write down another $1.3 billion on securities backed by subprime mortgages and LBO loans on its books, see losses of $600 million in its credit trading operation, and, in its consumer business, pay $2.6 billion to cover credit losses and reserve against future loan losses.
The results, which follow an earlier announcement of credit losses by UBS AG and writedowns by four big Wall Street banks two weeks ago, further fill out the picture of the damage done to big capital-markets players when credit markets seized up this summer after a spree of lending to heavily indebted companies and consumers.
The losses are another blow to Citigroup Charles Prince, who is already under heavy pressure to turn around a bank whose stock price in recent years has barely budged, lagging far behind its peers.
“This to me seems to be the tipping point for a change in CEO at Citigroup,” Deutsche Bank analyst Mike Mayo told The Wall Street Journal. As a result, bad news could ultimately be good news for Citigroup shareholders, many of whom have been clamoring for Prince’s head. Mayo suggested Robert Rubin, chairman of Citigroup’s executive committee and the former Treasury secretary, as an interim replacement for Prince.
Year-earlier net income was $5.51 billion, or $1.10 a share. The mean estimate of analysts surveyed by Thomson Financial was for earnings for the quarter ended Sunday of $1.09 a share. Citi intends to release its third-quarter results Oct. 15.
Citigroup executives acknowledged that the investment bank did poorly even given the broader market disruptions.
“As is evident, the market disruption had a severe impact on our results in markets and banking,” Chief Financial Officer Gary Crittenden says in a transcript posted on the bank’s Web site. “However, our performance was below expectations even taking into account turbulent market conditions.”
Citi’s announcement came six hours after Swiss financial-services giant UBS said it will post a third-quarter loss in after making more than four billion Swiss francs ($3.44 billion) of write-downs in its fixed-income portfolio.
Citigroup’s investment banking revenue suffered on several fronts. Wall Street’s leveraged buyout machine stalled this summer, when risk-averse credit markets refused to take on all the debt big banks had agreed to underwrite. Citi was a leading lender in LBOs, with $57 billion in loan commitments at the end of the third quarter, $38 billion of that total unfunded, Crittenden said in the transcript. The $1.4 billion in writedowns, net of underwriting fees, reflect all commitments scheduled for funding through early 2008, he said.