Citigroup posts $2.5B loss, but beats expectations

Citigroup has become the latest big bank to quell Wall Street's worries about a financial sector implosion, posting a $2.5 billion second-quarter loss that was smaller than expected.

Citi rose nearly 8 percent Friday and helped lift other financial stocks, having joined JPMorgan Chase & Co. and Wells Fargo & Co. in convincing investors that the prognosis for the sector, while gloomy, may not be as dire as the market feared.

But it's hard to get too enthusiastic about clearing a low bar. It was Citi's third straight quarterly loss and neither JPMorgan nor Wells Fargo managed to notch a profit gain compared to last year. Meanwhile, the brokerage Merrill Lynch & Co. reported a wider-than-expected quarterly loss. And next week, Wachovia Corp. and Washington Mutual Inc. are anticipated to reveal losses, too, with Bank of America Corp. expected to report a steep profit decline.

"I don't think anyone's breathing too easily right now," said Prakash Shimpi, who works in the risk management practice at Towers Perrin. Determining the dollar value of certain assets backed by debt is still a tricky process, he said, even a year after the crisis began.

Citigroup, the nation's largest banking company by assets, lost the equivalent of 54 cents per share in the April-June period. In the same timeframe last year, the bank earned $6.23 billion, or $1.24 per share.

The shortfall was tamer than the 66-cent-per-share loss that analysts, on average, were expecting, according to Thomson Financial.

Citigroup Inc.'s securities and banking division wrote down the value of its assets by $7.2 billion, before taxes, and an asset revaluation cost its consumer lending business $745 million. Those write-downs totaling about $8 billion are significantly lower than write-downs taken in the first quarter and in last year's fourth quarter.

However, credit costs jumped to $7.2 billion as more consumers defaulted on their loans - implying that while losses in the credit markets are decelerating, losses from actual defaults in Citigroup's mortgages, home-equity loans, auto loans and credit card lines are mounting. The $7.2 billion in credit costs included $4.4 billion in credit losses and a $2.5 billion charge to bulk up reserves for future loan losses.

Citigroup, like other banks, is bracing for mortgages and credit cards to bring more hefty losses. Default rates continued to rise on these loans, and Chief Financial Officer Gary Crittenden said that credit card loss rates could soon rise to their highest levels ever.

"I think we have two to four quarters left," Crittenden said in an interview, referring to rising credit card losses. "Because of the mix of our business, it's possible that the peak will be higher than it was in the past." He said Citigroup's credit card exposure right now includes more risky, but higher-yielding, cardholders than in previous downturns.

Citigroup has failed to turn a profit for three straight quarters, losing a cumulative $17.4 billion during that period after writing down its assets by about $46 billion. Its shares have tumbled 65 percent over the past year, and recently hit their lowest point since the day Citicorp and Travelers combined in October 1998.

Citigroup stock rose $1.38, or 7.7 percent, to $19.35 Friday.

Citigroup's results were helped by asset sales, moderating expenses, and record revenues in transaction services, interest rate and currency trading, and commodities.

Deutsche Bank analyst Mike Mayo upped his rating on Citigroup stock from "sell" to "hold," and raised his price target for the stock from $14 to $20. Mayo said Citigroup's credit quality is not so different from its peers, and that its revenues were stronger than he expected - which should help Citi turn a profit soon even if there are further write-downs.

The bank has raised about $40 billion over the past several months by shedding businesses, lowering its dividend and selling stock.

And during the second quarter, Citi lopped off $99 billion from its total assets, which now stand at $2.02 trillion. Back in May, Chief Executive Vikram Pandit said the bank would shrink its then-$2.2 trillion in balance sheet assets by about $400 billion to $500 billion over the next few years.

"While there is still much to do, we are encouraged by our progress in delivering on our commitment to the re-engineering efforts," Pandit said in a statement.

Shimpi said banks, as they have been, will continue to bolster their risk management and tighten up their underwriting standards - from consumer loans to corporate loans to debt securities.

"These kinds of standards are tried and shrewd and old. We need to find our way back to some of them," Shimpi said.

Still, there is only so much that banks can do to prevent losses from a crumbling credit environment.

"We have to recognize that defaults and losses are part of the fabric of the lending business," Shimpi said. "You can't get away from it."