Citigroup warns its 3rd-quarter earnings will fall
NEW YORK _ Citigroup Inc. estimated Monday that its third-quarter profit will drop 60 percent, as the nation's largest bank took losses of more than $3 billion after writing down securities backed by underperforming mortgages and loans tied to corporate buyouts.
The bank also said its profit would be dampened after boosting loan loss reserves by about $2 billion.
Despite the profit decline, Citigroup's stock, already pummeled due to worries about how the bank fared during the volatile summer months, lifted modestly in early trading, with investors apparently relieved that loan losses weren't even wider.
Citigroup's announcement was the latest disappointment resulting from this year's problems in the mortgage industry and financial markets. Earlier Monday, Swiss bank UBS AG said it will post a third-quarter loss of up to $690 million partly due to losses linked to U.S. subprime mortgages. And on Friday, federal regulators shut down a small online bank called NetBank Inc. that failed because loan defaults.
Subprime mortgages -- home loans given to customers with poor credit history -- have gone delinquent or defaulted at rising rates this year. As investors shied away from buying mortgage-backed and other types of debt, many banks, like Citigroup and UBS, have needed to lower the value of their loans, or get stuck holding them.
Citigroup said third-quarter revenue will be about the same as in 2006. But it will write down about $1.4 billion of its $57 billion portfolio of leveraged loans, lose about $1.3 billion on the value of securities backed by subprime loans, and lose $600 million in fixed-income credit trading, as the bank had trouble navigating market volatility.
In addition, global consumer credit costs rose $2.6 billion in the third-quarter from the same period a year ago. About 75 percent of that increase is from boosting money set aside to cover loans that default, also known as loan-loss reserves.
"I am obviously very disappointed in our results this quarter. I know we can do much better," said CEO Charles Prince in a recorded call. "Looking ahead to the fourth quarter, while we obviously cannot predict market movements or other unforeseeable events that may affect our businesses, we expect to return to a more normal earnings environment as the year progresses."
Citigroup fell in premarket trading, but rose when the market opened. Shares rose 42 cents to $47.09.
"While the direction of the preannouncement should not come as a surprise, the magnitude is greater than expected with credit being a factor," Lehman Brothers analysts wrote in a note. "Still, we wonder with (Citigroup) among others, attempting to put a tough quarter behind them, if this move helps flush out the negative factors plaguing financials."
Several analysts have predicted major banks may decide to log hefty losses this quarter to clean up their balance sheets ahead of the new year.
Before Citigroup's warning, analysts had been all over the map in their earnings forecasts, but on average had anticipated a modest profit rise. The bank moved its earnings release date to Oct. 15 from Oct. 19. Last year, Citigroup's third-quarter net income was $5.51 billion, or $1.10 per share.
The week of Oct. 15, Bank of America Corp. and JPMorgan Chase & Co. -- the nation's second- and third-largest banks, respectively -- will also be reporting their third-quarter results.