Friday, April 17, 2009

Citigroup Posts $1.6 Billion Profit

. Friday, April 17, 2009

By stockOzone team

Citigroup Inc, the US bank thriving on $45-billion bailout funds, ended a five-quarter losing streak by posting a $1.6-billion profit, that too, on gains from an accounting rule that helps companies in distress.

Otherwise, the bank posted a first-quarter loss, to common shareholders, of $966 million after massive losses and dividends to preferred stockholders.

The profit of $1.6 billion, which excludes the preferred dividends, is a significant improvement compared with a net loss of $5.11 billion, or 34 cents, a year earlier. The New York-based bank said posted a loss per share of 18 cents because of payment of preferred dividends.

Citigroup's results, however, topped analyst forecasts. European shares were higher at midday on Friday, with banking stocks the main risers.

Citigroup investors hadn't seen a profit since chief executive officer Vikram Pandit took over in 2007. While the bank cut compensation costs and other expenses, it couldn't halt rising delinquencies on home and credit-card loans.

"It's very hard for me to foresee that one quarterly earnings report, or one announcement by Vikram Pandit that they are more profitable than they've been since the third quarter of '07 means all past things are forgiven," said Douglas Ciocca , a portfolio manager at Renaissance Financial Corp in Leawood, Kansas. "There has to be demonstration of traction."

Citigroup posted a $2.5-billion gain because of an accounting change adopted in 2007. Under the rule, companies are allowed to record any declines in the market value of their own debt as an unrealised gain.

The rule reflects the possibility that a company could buy back its own debt at a discount, which under traditional accounting methods would result in a profit. Critics say a company in distress is unlikely to realise the gains, and would have to reverse them eventually if it recovers.

Such reversals probably contributed to a first-quarter loss at New York-based Morgan Stanley, the Wall Street Journal reported April 8.

Citigroup, one of 19 US banks gearing up for the release of "stress tests" run by the Federal Reserve, has quadrupled on the New York Stock Exchange since falling to an all-time low of $1.02 on March 5, in the wake of the company's announcement that as much as $52.5 billion of preferred stock would be exchanged for common shares to bolster the bank's equity base.

Under that plan, as much as $25 billion of the government's investment in the bank will be converted into regular shares, giving it a 36% voting stake. Citigroup's tangible common equity a cushion against losses that many investors and analysts study will increase to $81 billion from about $30 billion, the bank says. Existing shareholders will be left with about a fourth of their original stakes. The government support and additional capital probably are enough "for now" to spare existing shareholders from being wiped out completely, David Trone , an analyst at Fox-Pitt Kelton Cochran Caronia Waller, wrote in an April 9 note to investors.

"For prospective new investors, it may be too early to dive in, given continued high-risk exposures that may well require more dilutive actions," Trone wrote.

The stock closed at $4.01 on Thursday. At its peak in late 2006, Citigroup stock was worth $56.41, for a market value of $277 billion. At the current price, the market value stands at about $22 billion.

In November, Pandit, 52, pledged to cut 52,000 jobs from the company's 352,000-employee workforce, including 26,000 through business divestitures.

In January, Pandit reorganised Citigroup, tagging the CitiFinancial consumer-finance and Primerica insurance units for eventual disposal and putting them into a separate division, Citi Holdings, with other businesses deemed "non-core." The move, he said, would help investors focus on the earnings power of the company's "core" retail, corporate and investment-banking businesses.

He also shifted some of Citigroup's distressed trading securities into a long-term "held-to-maturity" investment status, sheltering them from further writedowns while betting the debt instruments will eventually pay off. The bank still faces speculation about its survival prospects, as reflected in the elevated prices for its credit-default swaps, a type of instrument that investors use to insure against a debt default.

Citigroup's credit-default swaps as of Thursday were trading at 557, up from 193 at the end of last year. By comparison, rival New York-based bank JPMorgan Chase and Co.'s swaps are trading at 174. Lehman Brothers Holdings Inc's swaps were at 322 a week before the US securities firm filed for bankruptcy last September.

Disclosure: Author does not own any of the stocks discussed here.

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