Citigroup Inc. Chief Executive Officer Vikram Pandit, emerging from a U.S. bailout with higher capital levels and loan-loss reserves than any peer, still has a $617 billion reason to worry.

That’s the amount of assets left in Citi Holdings, the division that Pandit set up to strip his bank of unprofitable businesses, troubled loans and securities. While the bank has unloaded almost $100 billion of the assets so far, getting stuck with the rest may hinder earnings for years, analysts said.
“I wouldn’t say that all of their issues are completely behind them,” said Bill Tanona, an analyst at Collins Stewart Inc. in New York who rates Citigroup “hold.” “We still have a soft economic environment and high unemployment, so losses are likely moving higher in the short term.”
Citigroup joined Bank of America Corp. in exiting a taxpayer bailout program. Both lenders received “exceptional financial assistance,” according to Treasury Secretary Timothy Geithner. Citigroup plans to raise capital and repay $20 billion of U.S. funds as the government unwinds a stake in the bank. Wells Fargo & Co., which wasn’t in the special category, said it will raise money to repay a $25 billion bailout.
Citigroup fell 6.3 percent in New York Stock Exchange trading yesterday to $3.70. The stock has tumbled 45 percent this year, valuing the New York-based lender at about $85 billion. The bank earned $101 million in the third quarter, a fraction of the $3.59 billion of net income that JPMorgan Chase & Co. reaped in the same period, and expects to lose $6.4 billion this quarter on the bailout repayment.
Winding down Citi Holdings carries its own risks, because many of the assets, such as loans, are still producing interest income. In a research note, Sanford C. Bernstein LLC analyst John McDonald estimated that the bank’s overall revenue may decline by 16 percent in the next two years to $78.9 billion as Citi Holdings assets get sold or retired. Bad-Loan Costs By 2011, Citigroup may post a $9.36 billion profit, McDonald estimated, as bad-loan costs decline by half to $21.9 billion. That compares with an estimated net loss of about $1.7 billion this year and is less than half the $22 billion that Citigroup earned in 2006.
Any profit the bank does make will be spread among more shareholders. By selling at least $20.5 billion of common stock and equity units, Citigroup’s common shares outstanding will increase to about 28.5 billion, according to Edward Najarian, an analyst at International Strategy and Investment Group in New York. That’s up from 22.9 billion as of Sept. 30 and 5 billion at the end of 2007. “They had a desire to no longer be regarded as an exceptionally assisted financial company, but they clearly paid a steep price for that,” Najarian said. “Shareholders already got diluted hugely once. Now they’re getting diluted by another 25 percent.”
After the share sale and repayment of bailout funds, Citigroup will have a Tier 1 common equity ratio of 9.0 percent, Richard Staite, a London-based analyst at Atlantic Equities LLP, wrote in a note yesterday. That compares with 8.2 percent at JPMorgan as of the end of the third quarter and 8.4 percent at Bank of America after its share sale to repay the U.S.
Pandit has stuck to the strategy he set in January 2009 to sell or wind down businesses outside consumer banking, investment banking, trading, corporate cash management and securities custody.
The businesses he’s keeping, grouped under the name Citicorp, had a combined $13 billion of income from continuing operations in the first nine months of the year, up 12 percent from the same period of 2008. Of 16 geographic business segments in Citicorp, only one has lost money so far this year. That segment, European consumer banking, had a loss of $166 million during the period, compared with an $87 million profit the prior nine months.
The rest, grouped under Citi Holdings, includes the CitiFinancial personal-lending, CitiMortgage and Primerica life- insurance units, along with about $182 billion of Citigroup’s riskiest mortgages, auto loans, commercial real estate and credit-card loans. Citi Holdings had a loss of $6.79 billion in the first nine months, narrower than the $21.3 billion loss reported for the same period of 2008.
Michael Corbat, appointed by Pandit to manage Citi Holdings, reduced total assets at the division to $617 billion as of Sept. 30, from $715 billion at the end of 2008. This year, he’s sold businesses including Japanese brokerage and asset- management, Diners Club in Europe and a consumer-finance unit in Italy.
Citigroup has reported a mixed outlook for credit costs as consumers and businesses face the worst recession since World War II. Total loan charge-offs declined in the third quarter for the first time since the credit crisis began, while loans 90 days past due climbed to 4.7 percent from 4.2 percent in the second quarter.
(Source: Bloomberg)