Friday, troubled financial services firm Citigroup, Inc. (C) reported a net loss of $8.29 billion for the fourth quarter of fiscal 2008 and said it will realign its businesses into two, Citicorp and Citi Holdings, for future profitable growth. The bank also said that it has reached an agreement with the U.S. Government on the loss sharing program.
The bank's quarterly loss was mainly due to write-downs and losses in Securities and Banking, net credit losses, and a $6 billion net loan loss reserve build. On a year-over-year basis, the net loss narrowed from the prior-year quarter.
Q4 Results
Citi's net loss for the quarter was $8.29 billion, or $1.72 per share, compared with a net loss of $9.83 billion, or $1.99 per share, a year ago. For the sequentially preceding quarter, the bank reported a net loss of $2.82 billion, or $0.60 per share.
On average, analysts polled by First Call/Thomson Financial expected the bank to post a loss of $1.31 per share in the fourth quarter on revenues of $14.16 billion. Analysts' estimates typically exclude one-time items.
Citi said the results reflected the negative impact of $7.8 billion in revenue marks in Securities and Banking, a $5.3 billion downward credit value adjustment on derivative positions, excluding monolines, $2.5 billion of losses in private equity and equity investments, $2.0 billion of restructuring costs, and a $6.0 billion net loan loss reserve build.
Loss from continuing operations reached $12.14 billion, or $2.44 per share, wider than last year's loss from continuing operations of $10.03 billion, or $2.03 per share.
Income from discontinued operations of $3.8 billion primarily reflected a $3.9 billion after-tax gain on the sale of Citi's German retail banking operations.
Quarterly revenues totaled $5.6 billion, down 13% from $6.42 billion in the prior-year quarter. Citigroup said the revenues across all businesses reflected the impact of a difficult economic environment and weak capital markets. The bank's revenues totaled $16.68 billion in the sequential third quarter.
"Our results continued to be depressed by an unprecedented dislocation in capital markets and a weak economy," said Vikram Pandit, Chief Executive Officer of Citi.
Segmental Revenues
Citi's Global Cards business recorded a 27% decline in revenues to $4.61 billion, mainly due to lower securitization results in North America, the absence of a $584 million pre-tax gain on Visa and MasterCard shares recorded in the prior-year period, and the impact of foreign exchange. Global Cards managed revenues declined 6%.
Consumer Banking revenues of $6.08 billion were down 22%, hurt by a 47% decline in investment sales, lower mortgage servicing revenue, the impact of foreign exchange, lower volumes and spread compression.
The Institutional Clients Group's fourth-quarter revenues were negative $8.19 billion, compared with negative $10.79 billion last year. Meanwhile, Transaction Services revenues rose 4% from last year to $2.4 billion on double-digit revenue growth in Treasury and Trade Solutions.
Further, the bank's Global Wealth Management business recorded an 18% fall in revenues to $2.84 billion, reflecting the adverse impact of market conditions on capital markets and investment revenues, particularly in North America and Asia. Revenues also included an $87 million write-down on auction rate securities related to the August 7, 2008 settlement. While average loans and deposits declined 3% and 4%, respectively, client assets under fee-based management declined 35%. The bank attributed the decline in client assets under fee-based management to lower asset valuations, reflecting falling market values.
Geographical Revenues
Citi's North American operations reported fourth-quarter revenues of negative $2.32 billion, compared with negative $689 million last year. Europe, Middle East and Africa's, or EMEA, revenues were $2.99 billion, in comparison with negative $1.56 billion in the prior-year quarter.
Further, Latin America reported a 26% decline in revenues to $2.69 billion from $3.64 billion in the fourth quarter of fiscal 2007. Asian revenues were down 63% to $1.99 billion from $5.4 billion in the previous year.
FY08 Highlights
Citi reported fiscal 2008 net loss of $18.72 billion, or $3.88 per share, compared with a profit of $3.62 billion, or $0.72 per share a year ago. Full-year revenues fell 33% to $52.79 billion from $78.5 billion in fiscal 2007. Wall Street analysts projected a loss of $3.36 per share for fiscal 2008, with revenue estimate of $62.76 billion.
Business Realignment
Citi said that it will realign into two businesses, Citicorp and Citi Holdings, to optimize the company's global businesses for future profitable growth and opportunities. Citicorp will focus on leveraging the competitive advantages of the company's global universal bank in more than 100 countries. Meanwhile, Citi Holdings, which will be made up of brokerage and retail asset management, local consumer finance and a special asset pool, will focus on tightly managing risks and losses, and maximizing the value of the assets.
The company plans to implement the transition to the new structure to the maximum extent and as quickly as possible. Citi will manage the company consistent with the new structure starting immediately, and management reporting will reflect the structure starting the second quarter of this year.
The company has been implementing various cost cutting measures since Vikram Pandit took over as chief executive officer in December 2007. Citigroup is currently abandoning its acquisition-fueled growth strategy that built the company from a small consumer-finance business into one of the world's largest financial institutions.
In a separate release, Richard Parsons, Lead Director for Citi, said that there has been one announced departure from the Board. "Together with other anticipated departures, this gives us the opportunity to reconstitute the Board and we will do so as quickly as possible," Parsons added.
Loss Sharing Program
Further, the bank said it has entered into definitive agreements with the U.S. Department of Treasury, The Federal Deposit Insurance Corporation, and the Federal Reserve Bank of New York, or FDIC, with respect to the loss sharing program, previously announced on November 23, 2008. The definitive agreements have been reached on January 15.
The asset pool covered under the program includes $301 billion of assets, including loans and securities backed by residential and commercial real estate, consumer loans and other assets. Loss coverage period is 5 years for non-residential assets and 10 years for residential assets
If the covered losses exceed Citi's first loss position plus approximately $16.7 billion, the Federal Reserve will extend a loan to the bank in an amount equal to the aggregate value of the remaining covered asset pool as determined in accordance with the loss sharing program.
Fee for the loss coverage will be $7.059 billion of 8% cumulative perpetual preferred stock and a warrant to Treasury to purchase 66,531,728 million shares of common stock at a strike price of $10.61 per share. The preferred stock is substantially similar to the preferred stock issued on December 31, 2008 and the warrant is substantially similar to the warrant issued on December 31, 2008, the bank noted.
Other Events
The bank said it reduced headcount by about 29,000 since the third quarter of 2008 and about 52,000 in the full-year 2008.
On January 13, Citigroup announced a deal with investment bank Morgan Stanley (MS) to combine their brokerage operations. The joint venture combines Morgan Stanley's Global Wealth Management Group and Citi's Smith Barney, Quilter in the UK, and Smith Barney Australia. The bank said it will exchange Smith Barney for a 49% stake in the Morgan Stanley Smith Barney Joint Venture and a $2.7 billion cash payment. The transaction is expected to close in the second half of 2009. The bank also estimates that the transaction will result in a pre-tax gain of approximately $9.5 billion, or about $5.8 billion after-tax.
On December 23, Citigroup reached a deal with Wipro Ltd.'s (WIT) division Wipro Technologies to sell Citi Technology Services Ltd., for an all cash consideration of approximately $127 million. Based in India, Citi Technology Services provides IT services to Citi and its affiliates around the world and has about 1,650 employees.
In mid-November, Citigroup announced its plans to cut about 52,000 jobs and reduce expenses by 20% from its peak as the economic crisis continues to worsen. The cuts were in addition to the 23,000 jobs eliminated by the company during the first nine months of 2008.
Peer Performance
Among others in the sector, JP Morgan Chase & Co (JPM) on January 15 reported over 76% decline in its fourth-quarter profit, principally due to higher loan loss reserves. The New York-based company's net income for the quarter was $702 million, much lower than $2.971 billion reported a year ago. Earnings per share dropped to $0.07 from $0.86 last year. JP Morgan also warned that if the economic environment worsens further in 2009, it is reasonable to expect additional negative impact on its market-related businesses.
Earlier today, Bank of America Corp. (BAC) reported a net loss for the fourth quarter compared to a profit in the year-ago period, daunted by escalating credit costs, including additions to reserves, and significant write-downs and trading losses in the capital markets businesses. The Charlotte, North Carolina-based company reported a net loss of $1.79 billion and a net loss applicable to common shareholders of $2.39 billion, or $0.48 per share, for the quarter. Total revenue, net of interest expense, rose to $15.68 billion from $12.80 billion last year.
Another peer and German banking giant Deutsche Bank AG (DB) currently anticipates a hefty net loss in the fourth quarter compared to a profit last year, negatively impacted by exceptional market conditions that severely hit its sales and trading businesses, mainly in Credit Trading. Deutsche Bank now expects fourth-quarter net loss in the region of EUR 4.8 billion, in comparison with a net income of EUR 1 billion recorded in the previous year.
Outlook
Going ahead, the bank sees reduced volatility from marks in 2009 as a result of the actions it took to reduce risk, and reclassify certain securities and loans from trading and available or hold for sale to hold to maturity or held for investment.
C is trading at $3.97, down $0.14, on a volume of 132.02 million shares. The company's 52-week trading range was $3.05 - $29.73.
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