Citi: Pandit's Defense Boosts Wall Street

The bank CEO's talk of profits sparks a stock rally, but others still worry about Citi's toxic assets

By Mara Der Hovanesian

Strip away the billions of toxic assets and the billions more that the feds have pumped into Citigroup (C), and what you have is a dandy little bank that actually makes money. At least that was the upbeat takeaway from Citi's beleaguered CEO Vikram Pandit, who distributed a memo to employees late on Mar. 9 about the bank's bright prospects, despite the current $1-a-share price tag.

Pandit emphasized in the memo that the bank was adequately capitalized, had passed stringent self-imposed stress tests, and was profitable through the first two months of 2009, delivering its best performance since the third quarter of 2007. In coming weeks the Treasury Dept. will conduct its own stress tests of banks—assuming further deterioration in the economy, employment, and home prices—on which will hinge further U.S. assistance.

"Despite the steps we've taken to strengthen our capital base, I am, like you, disappointed with our current stock price and the broad-based misperceptions about our company and its financial position," Pandit wrote. "I don't believe it reflects the strengths of Citi, our newly strengthened capital base, our unique global franchise, and most important, the quality of our people. These are unprecedented times in the markets, but over time, the markets will recognize the many strengths of Citi."

A Sustained Stock Market Rally?

The memo bolstered the broader markets and investors cheered that the federal government's handiwork in bolstering the ailing bank with fresh capital and guarantees might actually pay off. The Dow Jones industrial average closed trading up 379 points, or 5.8%, to 6,926, and Citi's stock price rallied 37%, to 1.44..

"Citigroup is the poster child for what happens when things go wrong, but I think enough people on Capitol Hill have had a soft spot for them," says Gary Hager of Integrated Wealth Management in Edison, N.J. "I think the plan will work and they will lead the business out of this by the end of 2009; it's a screaming buy."

Like Hager, Michael Church of Addison Capital in Yardley, Pa., is optimistic that the rally could be sustained given the coincident news from Fed Chairman Ben Bernanke that the recession might very well be over by yearend. "That Citi is saying they are making money is good enough right now," says Church. "The market was factoring in a doomsday scenario, and we were well oversold. I wouldn't be surprised if this turned into a serious rally."

That doesn't mean that all of Citi's woes are somehow miraculously behind it. Pandit's memo noted that for the first two months of the year, the bank was booking operational profits for the first time since the third quarter of 2007, thanks to $19 billion in revenues through the end of February. Pandit pinpointed stable deposits and strong investment-banking advisory fees as contributors to the earnings strength.

Citigroup has posted more than a year of losses, totaling more than $37.5 billion since it reported a $2.1 billion profit in the third quarter of 2007. Just two years ago, Citigroup was the world's biggest bank by market value, at about $270 billion. But its shares had plummeted from an all-time high of 55 to below 1 last week, for the first time ever, as investors continued to lose confidence in the government bank bailout. At that point, Citi's value had fallen to about $6 billion.