Citigroup Reports Dismal 1st Quarter
It's No Surprise, Though, And Its Shares Advance

By Tomoeh Murakami Tse and Thomas Heath
Washington Post Staff Writers
Saturday, April 19, 2008

NEW YORK, April 18 -- The bad news from Citigroup on Friday just kept coming: Losses of more than $5 billion. Revenue down 48 percent. Fresh write-downs and set-asides for expected losses on bad debt of $16 billion. And finally, 9,000 job cuts.

Citigroup's report of first-quarter results was worse than most analysts expected, adding to the series of grim earnings announced this week by financial institutions. Earlier, Merrill Lynch and Wachovia reported losses, and J.P. Morgan Chase said its profit declined by 50 percent from a year earlier.

But the results from Citigroup, among the companies hit hardest by the credit market turmoil, revealed few surprises. And at a time when investors seem to be cheering all but the most horrendous results, the bank's shares rose 4.5 percent -- spiking just as shares of J.P. Morgan and Merrill Lynch did on the days they reported.

Together with encouraging earnings from such large companies as Caterpillar and Honeywell International, Citigroup's results were enough to send the Dow Jones industrial average up 228.87, or 1.8 percent, to 12,849.36. The Standard & Poor's 500-stock index advanced 24.77, or 1.8 percent, to 1390.33.

The tech-heavy Nasdaq composite index had the biggest percentage increase, up 2.6 percent, or 61.14, to 2402.97. Tech shares were boosted by strong earnings from Google announced after markets closed Thursday, which silenced critics who had worried that the advertising recession would hurt its profit. Google shares were up 20 percent Friday.

The broad market rally -- the S&P rose 2.2 percent this week -- is a sign that investors are increasingly betting that the worst of the credit crunch is over.

Shares of financial companies, which declined 14.7 percent in the first quarter, rose 5.2 percent this week. While there may be more bumps ahead, investors are now more willing to ride them out, analysts said, in part because financial shares have fallen so far already.

Investors may also believe that the chances of more ugly surprises have lessened with financial institutions providing gloomy but not unexpected reports, analysts said. Merrill, whose earnings came in modestly below expectations, and Citigroup each reported their worst earnings ever in the previous quarter.

"A lot of people think the bad news is now out of the way," said Stephen J. Massocca, co-chief executive of Pacific Growth Equities.

But plenty of risks lie ahead, as Citigroup's executives pointed out. Citigroup's earnings report, which included losses in mortgages, auto loans and similar debt, underscored the continuing difficulties facing U.S. consumers. It also showed how losses are spreading from complex subprime mortgage securities into less-risky mortgages and other types of loans.

The markdowns included $6 billion on subprime-related assets, $3.1 billion on leveraged loans used to finance corporate buyouts and $1.6 billion on commercial real estate and non-subprime mortgages. Citigroup also took a hit of $1.5 billion on auction-rate securities, an unconventional corner of the credit market that froze in February.

"There's no assurance that the amount of marks that we have taken in this quarter are finished," said Gary L. Crittenden, Citigroup's chief financial officer. "I think we have substantially reduced our amount of risk, but there is always the prospect that you could have additional marks."

The company said it lost $5.1 billion in the first quarter, or $1.02 a share, on revenue of $13.2 billion. That compares with a profit of $5 billion on revenue of $25.46 billion a year earlier.

Vikram S. Pandit, Citigroup's chief executive, said the results reflected the "continuation of the unprecedented market and credit environment and its impact on our historical risk positions."

Pandit, 51, took the helm in December after Charles O. Prince III was forced to resign as losses mounted. Pandit reassured investors and analysts in a conference call that Citigroup was taking aggressive steps to strengthen its balance sheet, including the sale of its commercial lending and leasing unit to General Electric announced Wednesday.

Pandit has promised better oversight and greater efficiency as he works to get the firm back on track. While vowing to pursue growth opportunities in fast-growing markets, he has also focused on cost cutting and divested what he deems to be non-core businesses. Over the past several months, Pandit hired risk-management professionals and reorganized the bank to emphasize regional structure. It is a move meant to increase accountability.

Citigroup also said Friday that it would cut 9,000 jobs over the next 12 months, on top of the 4,200 cuts announced in the first quarter.

Byron MacLeod, an analyst with Gradient Analytics, called Citigroup's financial report "a mixed bag."

"Investors want to see aggressive action at this point," he said. "You want to make sure the company really cleans house. The provisions are a part of that. The layoffs are a part of that. They appear to be taking aggressive action taking the company in line with an ideal structure going forward."

MacLeod added, however, that investors should go in with "their eyes wide open." The bank will probably have to set aside more money for losses in 2008, MacLeod said, as more assets on its balance sheet go sour. That could lead to further earnings disappointments, he said.

William L. Walton, chairman and chief executive officer of Allied Capital, a business-development company in the District, agreed.

"The economy has yet to feel the full effect of the credit troubles that have occurred," he said. "There seems to be two markets here. The credit market, which is flashing red. And the equity market, which is simply volatile."