Citi Posts Big 2Q Loss, Offers Hope

Citigroup posted a huge second-quarter loss Friday, battered by a big write-down in its investment banking business, but the overall results weren’t as bad as feared and the shares moved sharply higher.

The results came a day after JPMorgan posted a 53% drop in its quarterly profits but managed to beat analysts’ expectations, helping to fuel a big run up in financial stocks.

Revenue at Citi fell by 29%, to $18.7 billion, with the bank taking write-downs related to subprime exposure in fixed income markets and a downward credit valuation adjustment related to exposure to monoline insurers. Specifically, in Citi’s institutional clients group, which houses its investment banking business, securities and banking revenues were down 94% to $539 million.

The results included write-downs of $3.4 billion on subprime related direct exposures, downward credit value adjustments of $2.4 billion related to exposure to monoline insurers, write-downs of $545 million on commercial real estate positions, and write-downs of $428 million on funded and unfunded highly leveraged finance commitments.

Interestingly, expenses at Citi jumped by 9% from a year ago, with the company citing higher business volumes, higher credit management costs, and the impact of recent acquisitions. Expenses did decline from the first quarter.

In the past year, Citi has written-down about $40 billion in assets, closed the hedge fund founded by the bank’s current CEO (in the process taking almost $9 billion onto its balance sheet), cut is dividend and slashed its workforce.

Commenting on the second-quarter results, Standard & Poor's analyst Tanya Azarchs said charges for mortgage and leveraged loan-related assets will be smaller in the future, “as super-senior collateralized debt obligations (unhedged) are already written down 80%, and leveraged loans are sharply reduced.”

She said monoline exposures are about 60% reserved against, but those and Alt-A exposures are the most likely sources of further write-offs for the bank.

“The bigger issue is the pace of consumer credit deterioration, which will require accelerating provisioning during the next several quarters,” the analyst said. 
“Underlying revenues are strong, as spread-widening and reductions of low-yielding assets expanded the net interest margin, and the international businesses grew rapidly. Even investment banking and trading revenues were strong if hedging losses and mark-downs are excluded.”

Citi said its Tier 1 capital ratio increased to 8.7%. The ratio would have been 0.60% higher with the close of the sale of the bank’s German retail operations, announced a week ago.