Citigroup warns of 60pc drop in earnings

FE Team | Published: October 02, 2007 00:00:00 | Updated: February 01, 2018 00:00:00

Daniel Pimlott, FT Syndication Service
LONDON: Citigroup warned Monday that it expected third-quarter net income to drop by 60 per cent because of the credit turmoil over the summer.
Chuck Prince, chairman and chief executive, said in a statement: "Our expected third-quarter results are a clear disappointment. The decline in income was driven primarily by weak performance in fixed income credit market activities, write-downs in leveraged loan commitments, and increases in consumer credit costs."
Mr Prince described the third-quarter trading performance an "aberration", adding: "In September, this business performed at more normalised levels...While we cannot predict market conditions or other unforeseeable events that may affect our businesses, we expect to return to a normal earnings environment in the fourth quarter."
Analysts surveyed by Bloomberg had expected Citi to earn $1.08 a share for the quarter. Last year it reported a third quarter profit of $5.5bn, or $1.10 a share. A 60 per cent drop in income suggests it will report net income of about $3.3bn for this year's third quarter.
The scale of the warning is likely to put further pressure on Mr Prince, who was already facing criticism from some investors for Citi's underperforming share price relative to its Wall Street rivals.
In July, he dismissed fears that the boom cheap credit-fuelled buy-out boom was coming to an end, declaring that Citigroup was "still dancing".
"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing," he said in an interview with the FT in Japan.
But in an audio message on Citi's website last Wednesday, Mr Prince said: "We are one of the largest providers of leveraged financing to clients around the world. When the leveraged loan market severely dislocated this summer, it had a significant impact on us, resulting in large write-downs."
Gary Crittenden, chief financial officer, added: "The market disruption had a severe impact on our results in Markets and Banking. However, our performance was below expectations even taking into account turbulent market conditions."
The group said it would record write-downs of about $1.4bn before tax on funded and unfunded highly leveraged finance commitments. These totalled $69bn at the end of the second quarter, and $57bn by the end of the third quarter.
The bank said it suffered losses of roughly $1.3bn before tax on subprime mortgage-backed securities warehoused for future collateralised debt obligation securitisation and other subprime positions.
It said it had also lost about $600m before tax on fixed income credit trading because of market volatility.
Revenues from equity underwriting, advisory, and transaction services were growing at a double-digit pace, and customer volumes in its consumer business showed good growth. In wealth management, Citi said it was generating "solid" results.
Citigroup shares, which have fallen 16 per cent this year, dropped $1.17 or 2.5 per cent to $45.50 in pre-market trading.
Citi's warning comes after Swiss rival UBS said it had sacked senior managers and would slash jobs after taking a SFr4bn ($3.4bn) write-down on fixed income assets, resulting in a third-quarter loss of up to SFr800m.
So far US investment banks have avoided significant pain, with Goldman Sachs and Lehman Brothers both reporting better than expected profits.