Citi's 'Unacceptable' Quarter

After a nearly $10 billion loss and a dividend slash, CEO Pandit's bank secured a $12.5 billion cash infusion. The stock helped drag the major indexes down more than 2%

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By Associated Press and BW Staff

Citigroup (C) reported "unacceptable" fourth-quarter results, losing $9.83 billion in the last three months of 2007—its first quarterly loss in 16 years—as the value of its mortgage portfolio fell by $18.1 billion. The nation's largest bank slashed its dividend by 41%, to 32 cents a share to boost its cash levels. And the company said it will lower its workforce by 4,200 employees, on top of the 17,000 job cuts announced last spring.

To shore up its finances, New York's Citigroup also secured $12.5 billion in much-needed cash. The investment from outside investors included $6.88 billion from the Government of Singapore Investment Corp. for a 4% stake. Other investors were Capital Research Global Investors, Capital World Investors, the Kuwait Investment Authority, the New Jersey Division of Investment, shareholder Prince Alwaleed bin Talal of Saudi Arabia, and former chief executive Sanford Weill and his family foundation.

The $12.5 billion adds to the $7.5 billion that Citi got in November from the Abu Dhabi Investment Authority in exchange for a 4.9% stake in the company.

Poor Financial Performance

Over the past several weeks, Asian funds have been buying up the battered stocks of struggling U.S. banks. Early Tuesday, Merrill Lynch (MER) said it will receive a total of $6.6 billion from the Korean Investment Corp., Kuwait Investment Authority, and Japan's Mizuho Corporate Bank—in addition to the $4.4 billion it has already gotten from Singapore's state-run Temasek Holdings.

Many investors and analysts still wonder whether the worst is behind Citigroup. After ticking higher in pre-market trading, the shares closed down 7.3% to $26.94 on Jan. 15. For its fourth quarter, Citigroup posted a net loss of $9.83 billion, or $1.99 a share, compared with a profit of $5.13 billion or $1.03 a year earlier. Revenue fell 70%, to $7.22 billion from $23.83 billion. Analysts had expected a net loss of $1.03 a share on revenue of $10.64 billion, according to Thomson Financial.

"Our financial results this quarter are clearly unacceptable," said CEO Vikrim Pandit in a release. "Our poor performance was driven primarily by two factors—significant writedowns and losses on our subprime direct exposures in fixed-income markets, and a large increase in credit costs in our U.S. consumer-loan portfolio."

More Downgrading May Be Ahead

Pandit took over the reins as CEO a month ago from Charles Prince, who resigned amid troubles in the credit markets and the U.S. housing market.

Standard & Poor's Ratings Services lowered its rating on Citigroup's credit on Jan. 15 to AA–, from AA, reflecting "severe" losses in the bank's fixed-income division. S&P is still considering downgrading Citi's credit further. The downgrade "takes into consideration [that] Citigroup's performance could be rocky in 2008 amid prospects for a continued difficult operating environment for U.S. banks," S&P said.

Citi's moves were widely anticipated on Wall Street after months of scrutiny over the bank's ratio of cash to debt. That ratio weakened when Citigroup lost money in mortgage-backed bond instruments called collateralized debt obligations and brought $49 billion in risky funds known as structured investment vehicles (SIV) onto its books.

Highest Paying Sector

Citigroup said the dividend cut, along with the Asian investments and a stock offering of about $2 billion, will help boost its Tier 1 capital ratio, a measure of its financial strength.

Financial companies have been the highest dividend-paying sector in the stock market, but many—including Washington Mutual (WM), National City (NCC), and the government-sponsored lenders Freddie Mac (FRE) and Fannie Mae (FNM)—have pared those payouts in recent months.

The Jan. 15 announcements from Citigroup fall short of many shareholders' wish for the bank to cut its 320,000-member workforce by more than the 17,000, as announced last spring, and sell off some of its units. Pandit said—after winning the CEO job in December—he would take "an objective and dispassionate review of all the businesses."

On Jan. 15 he said Citi would continue to sell "non-core" assets. The bank already has sold shares in Redecard, a credit card business in Latin America, and an ownership interest in a unit of the Japanese brokerage Nikko Cordial it bought last year.

Boosted Loan-Loss Reserves

Citi's $18.1 billion writedown was significantly wider than the $6 billion writedown it took in the third quarter last year, and bigger than the $8 billion to $11 billion it predicted in October it would take for the fourth quarter. As of Dec. 31 it had a total of $37.3 billion in direct subprime mortgage exposure, down from $54.6 billion three months prior.

The bank also boosted loan-loss reserves by $4.1 billion, foreseeing further problems in its U.S. consumer businesses as deflated home prices, high energy and food costs, and slowly rising unemployment weigh on people's ability to make their loan payments.

"While the large writedown was widely expected, the reserve build was higher than we had anticipated, reflecting increased delinquencies on mortgage, credit cards, and auto loans," wrote Standard & Poor's equity analyst Frank Braden in a note. He kept a hold opinion on the stock.