Citigroup results surpass expectations

NEW YORK -- Citigroup reported its smallest quarterly loss since 2007, but its problems are far from over.

The bank released first-quarter results Friday that were buoyed largely by strong revenues from bond trading, but that burst of activity is not expected to continue. And Citigroup also said it's still facing loan losses that are expected to increase throughout this year.

Citigroup became the fourth bank in a week with earnings news that pointed toward a recovery in the banking industry after the devastation caused by the mortgage and credit crisis and the recession. But the outlook for the industry is still difficult because the global recession is causing defaults in mortgages, credit cards and commercial real estate loans

Chief Financial Officer Ned Kelly said in a conference call with investors that certain consumer delinquency rates have been moderating, but he still expects loan losses to worsen before they improve.

"The elephant hasn't made its way through the python," Kelly said.

Citigroup posted a first-quarter loss to common shareholders of $966 million after massive loan losses and dividends to preferred stockholders. Before paying those dividends, which were tied to a private stock offering in January 2008, the bank earned $1.6 billion.

The results topped analyst forecasts. The company reported a loss per share of 18 cents, which was narrower than the 34 cents analysts predicted, according to Thomson Reuters. A year ago, Citigroup suffered a loss of more than $5 billion, or $1.03 a share.

But after an initial pop in pre-market trading, shares dipped 21 cents, or 5.2 percent, to $3.80 in late morning trading.

Citigroup's revenue doubled in the first quarter from a year ago to $24.8 billion thanks to strong fixed-income and other trading in its investment bank.

Its credit costs were high, though -- $10 billion -- due to $7.3 billion in loan losses and a $2.7 billion increase in reserves for future loan losses. The credit costs stemmed mainly from consumers; the rate at which Citigroup had to write off their loans as unrecoverable more than doubled over the past year to 5 percent.

A big concern among investors is that the strong trading activity seen by banks in the first quarter can't continue. The first quarter saw a surge in corporate bond issuance as the credit markets started thawing from their frozen fourth quarter. JPMorgan Chase & Co. CEO Jamie Dimon said Thursday that trading activity is unlikely to remain so robust, and Kelly acknowledged Friday that the first quarter is historically the strongest for its investment banking unit.

Furthermore, Citigroup was able record a $2.7 billion mark-up as investors grew more worried about the bank's creditworthiness in the first quarter. Those worries decreased the value of Citigroup debt on the market. So the credit derivatives on Citi's books -- complex assets based on the value of debt -- gained in value because technically, Citigroup owed other parties less.

That $2.7 billion mark-up helped offset other mark-downs. Total mark-downs in the securities and banking division ended up amounting to $2.2 billion.

To be sure, mark-downs are not hitting Citigroup as hard because the bank has wound down the investment bank's risky assets to $101 billion from $227 billion over the past year.

But another reason is accounting. Citigroup has moved more of those risky assets into an "accrual" account. Accrual accounting measures assets as if the loans underlying them will be held to maturity, while fair-value accounting values assets based on their current market price.

Citigroup has been the weakest of the large U.S. banks, posting quarterly losses since the fourth quarter of 2007. But in March, CEO Vikram Pandit triggered a stock market rally after he said that January and February had been profitable for Citigroup.

It was one of the first signals that the banking industry might not be as sick as many believed. Earlier that month, fears that banks would need to be nationalized sent stocks plunging to 12-year lows.

Citigroup's better-than-expected report on Friday come after surprisingly solid earnings from JPMorgan Chase, Goldman Sachs Group Inc., and Wells Fargo & Co. over the past week. While recent results from these healthier banks have brought some relief to investors, many have been waiting to see how more troubled banks such as Citigroup have fared.

Pandit said in a statement Friday that he was "pleased" with Citigroup's performance.

"While we and the industry face challenges in the coming quarters as we work through the weak economy, we will remain focused on strengthening the Citi franchise," he said.

In early March, Citigroup stock hit an all-time low of 97 cents per share. It has since quadrupled, but remains down 40 percent for 2009. And at $4.01 a share Thursday, Citigroup stock was down 93 percent from its late 2006 peak.

Since late 2007, Citigroup has gotten a new CEO, a new chairman, and a new structure that splits its traditional retail and investment banking business from its consumer finance units, asset management, and risky mortgage-related assets. It's also been downsizing by selling off businesses and laying off a fifth of its employees. And it's gotten $45 billion in government funding and a federal backstop on roughly $300 billion in assets.

Citigroup said Friday it is delaying the government's exchange of billions of dollars worth of preferred shares into common shares until the government completes its "stress test." The government has been gauging the health of U.S. banks, and the results are expected in early May.