Citigroup - 60% decline in earnings

Citigroup, the US financial services company based in New York, has warned that third quarter net income will fall by 60% following the turbulence in the global markets over the summer period.

The Chairman and Chief Executive, Chuck Prince, said the results are a disappointment and the drop in income was due predominantly to the write-downs in leveraged loan commitments, weak performance in fixed income credit market activities and rises in consumer credit costs.

Mr Prince added that normal earnings should be resumed in the fourth quarter although market conditions and other unexpected events may impact on business.

It is likely that the warning will add further pressure to Mr Prince who was already up against criticism from some investors for Citi’s underperforming share price compared to its Wall Street competitors.

Back in July, the Chairman and Chief Executive wrote off fears that the increase in buyouts financed by cheap credit was ending and stating that Citigroup was fine.

However, on the group’s website, Mr Prince remarked that they are one of the largest providers of leveraged financing to clients globally. When the leveraged loan market severely dislocated this summer, it had a significant impact on the group, resulting in large write-downs.

Citigroup announced that it would report write-downs of approximately $1.4 billion before tax on funded and unfunded highly leveraged finance commitments. These totalled $69 billion at the end of the second quarter, and $ 57 billion by the end of the third quarter.

The bank experienced losses of approximately $1.3 billion before tax on subprime mortgage-backed securities warehoused for future collateralised debt obligation securitisation and other subprime positions. It also announced that it had lost roughly $600 million before tax on fixed income credit trading due to market instability.
Citigroup shares have dropped 16% this year but rose 0.7% per cent to $46.98 in pre-market trading yesterday.

Other US banks to avoid the credit squeeze are Lehman Brothers and Goldman Sachs who have both announced better than expected profits.

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