Citigroup Posts $2.5 Billion Loss, Besting Estimates

By Simone Baribeau
Washington Post Staff Writer
Saturday, July 19, 2008

Citigroup reported a $2.5 billion second-quarter loss yesterday as it continued to suffer from investments related to subprime mortgages and from deteriorating credit card and prime mortgage portfolios.

But the earnings were better than analysts expected, and Citigroup's stock rose 7.7 percent, to $19.35.

The results rounded out a week of difficult -- in some cases dismal -- losses in the banking sector, as the mortgage crisis continues to batter banks' earnings.

Citigroup's losses resulted in part from $7.2 billion in write-downs on the value of assets on the company's books, mostly related to subprime mortgages and leveraged loans. The company also reported a $4.5 billion increase in credit costs, largely from its own losses in mortgages and credit cards.

Widespread consumer loan deterioration, particularly in credit cards, could be a sign that the beleaguered financial sector is in for more trouble, analysts said.

"We've got a real problem coming here later this year," said Joseph Brusuelas, chief economist at Merk Investments. "You've got a consumer who is reeling from high gas prices, who has seen stagnant wages and who is faced with a housing crisis."

Citigroup wasn't the only financial institution to take a hit. Earlier this week, second-quarter profits for J.P. Morgan Chase and Capital One fell 53 percent and 40 percent, respectively. Merrill Lynch posted a $4.65 billion loss.

Some analysts said the turnaround in financial stocks could be short-lived.

"We had a suckers' rally this week, and people are going to get beat back next week," Brusuelas said. He said upcoming earnings reports from Wachovia and Washington Mutual are likely to be discouraging.

Citigroup has been particularly hard-hit by the mortgage crisis. This quarter's $2.5 billion loss was dwarfed by results from the past two quarters, when the bank lost $9.83 billion and $5.11 billion. Citigroup earned $6.23 billion in the second quarter last year.

Recently, the company has been working to reduce risk and focus on revenue-generating lines of business. After taking on a new chief executive, Vikram Pandit, in December, Citigroup began implementing a plan to eliminate about a quarter of its assets. Since January, the bank has shed about $99 billion, about a fifth of its target. Most of the assets are securities, largely those backed by subprime mortgages, but last week the company also announced the $7.7 billion sale of its German retail banking operation to France's Crédit Mutuel.

The company has also trimmed its workforce by about 11,000 since the beginning of the year.

The Federal Reserve's interest rate cuts also boosted Citigroup's bottom line, and net interest revenue rose 26 percent compared with the corresponding period last year. In addition, the stimulus checks issued by the federal government helped credit card customers make payments. It was too soon to tell whether the checks also bolstered prime mortgage payments, Citigroup Chief Financial Officer Gary Crittenden said.

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