Publish date:

Citi Rallies Despite Writedowns, Job Cuts

Even with billions in new writedowns and 9,000 layoffs, the damage wasn't as bad as some had feared.

Updated from 9:59 a.m. EDT

Citigroup

(C) - Get Report

posted a big first-quarter loss on billions of dollars more in writedowns and announced thousands of planned layoffs, but shares rose as the damage did not appear as bad as some feared.

The loss for the period was $5.1 billion, or $1.02 a share, including $12 billion in pretax writedowns and a $3.1 billion increase in credit costs in the global consumer business. Revenue dropped by half to $13 billion in the quarter.

Citi's results factored in $6 billion in writedowns on subprime-related securities, $3.1 billion on leveraged finance commitments, a downward credit value adjustment of $1.5 billion, writedowns of $1.5 billion on auction rate securities.

Citi Lights Up Wall Street

var config = new Array(); config<BRACKET>"videoId"</BRACKET> = 1509314510; config<BRACKET>"playerTag"</BRACKET> = "TSCM Embedded Video Player"; config<BRACKET>"autoStart"</BRACKET> = false; config<BRACKET>"preloadBackColor"</BRACKET> = "#FFFFFF"; config<BRACKET>"useOverlayMenu"</BRACKET> = "false"; config<BRACKET>"width"</BRACKET> = 265; config<BRACKET>"height"</BRACKET> = 255; config<BRACKET>"playerId"</BRACKET> = 1243645856; createExperience(config, 8);

CEO Vikram Pandit, in a company statement, said the "unprecedented market and credit environment" weighed on the company's earnings, but the bank sees "strong momentum throughout the organization."

"To start with, we're not happy with our financial results this quarter, although they're not completely unexpected given the assets we hold," Pandit later said on the conference call. "Through all of this, even as we expect economic news to be challenging, my confidence in this company's abilities and our future is extremely high," he said later.

On average, analysts surveyed by Thomson Financial were looking for a loss of 95 cents a share, meaning Citi was worse than expected. However, the top line exceeded estimates of $12.77 billion.

The bank, on the conference call, also said it was cutting another 9,000 jobs. Still, shares of Citi recently were popping 7.5% to $25.83, as investors' worst fears were side-stepped by the firm, analysts say.

Pandit is aggressively repositioning the company to include greater efficiency amid a troubled economic environment. Pandit, who took over as CEO after Charles Prince's departure from the firm late last year, is attempting to gain a handle on what many consider an unwieldy super-financial services conglomerate.

At the end of last month, Citi formally announced a new corporate organizational structure in which its business lines will be combined and arranged by geographic location. The company is also splitting its consumer banking and credit card divisions into two separate units, among other things.

The bank said Friday it would cut 9,000 jobs, including 7,000 in its consumer business, bringing its total identified workforce eliminations to roughly 30,000. Last quarter, Citi identified 4,200 jobs for elimination, mostly in investment banking, in addition to the 17,000 identified a year earlier by Prince.

Citi took repositioning charges of $622 million in the quarter.

CFO Gary Crittenden, in response to a question posed by Oppenheimer analyst Meredith Whitney, said that operating leverage -- the process in which revenue grows faster than expenses -- will be a difficult measurement as the company moves forward with its restructuring.

"We're in the active process of divesting businesses, and that's a lumpy process almost by definition," Crittenden said on the call. "There's no assurance that the amount of marks we've taken in this quarter are finished. We're three quarters into this; I think we have substantially reduced our amount of risk, but there is always the prospect that you could have additional marks, and that throws the calculation of that number pretty much out the window.

"What I would say is I think you should hold us accountable for a couple of things -- that we make significant progress on head count and that we make significant process that is discernible in our numbers on expenses," he added. "Those are things that you should be able to see if we're dong a good job on re-engineering. I think for now that's going to have to be the best way to think about our progress on expense management."

The company is also aggressively working toward a healthier balance sheet. Citi has raised more than $30 billion of capital in December and January. In addition, the company is slowly reducing some of its riskiest assets.

Within its subprime-related exposures, Citi reduced its gross lending and structuring exposures by 20% to $6.4 billion from the fourth quarter, and its net asset-backed securities collateralized debt obligation super senior exposures by 22% to $22.7 billion, it said.

On the leverage lending side, the company reduced its exposure by 13% to $37.7 billion. Roughly 45% of that was in funded commitments, the company said during the conference call.

Still, as the credit crisis lingers and housing's decline worsens, large banks like Citi,

JPMorgan Chase

TheStreet Recommends

(JPM) - Get Report

and

Wachovia

(WB) - Get Report

continue to take hits.

Citi's credit costs totaled $6 billion for the quarter, approximately $3.8 billion of which were for actual losses, while the company took a $1.9 billion provision to increase loan loss reserves. Citi's U.S consumer business -- which includes mortgage, credit cards and auto loans, among other things -- had the bulk of the losses.

Looking ahead, Pandit said that in the second quarter and going forward, the company will continue to divest nonstrategic assets and to "allocate capital to the products and regions that will drive increased revenues, enhance the value of our franchise, and ultimately, maximize shareholder value."

Several ratings agencies took action against Citi's debt ratings following the earnings report. Fitch Ratings downgraded the firm's long-term issuer default ratings to double-A minus from double-A.

"The potential depth of problems across Citi's U.S. consumer portfolio will likely make a restoration of desirable financial metrics a 2009 event at the earliest. This comes on top of financial challenges in Citi's securities and banking operations in both the near and intermediate terms as Citi looks to reduce problematic exposures, right size this business and focus activity on customer value-added transactions," Fitch said in a note.

"Citi's ratings continue to be underpinned by its solid funding structure and liquidity management as well as its diverse franchise by product and geography," it said. "Fitch may downgrade Citi further if sizable bottom line losses persist and capital falls below targeted levels."

Standard & Poor's placed the company's counterparty credit rating of double-A minus on a negative credit watch, while Moody's Investors Service affirmed its double-A3 ratings on Citi but lowered its outlook to negative.

Like many of its big peers on Wall Street, Citi's loss did not appear to rattle investors.

Merrill Lynch

(MER)

on Thursday posted a

$1.97 billion loss

in the first quarter on more than $6 billion in writedowns. The stock, however, closed up 4.1%.

JPMorgan Chase on Wednesday reported a 50% drop in profit, but

beat expectations

with earnings of $2.37 billion.

"Citi's miss vs. consensus today had more to do with rising credit costs and reserve build than the market-related losses," writes Betsy Graseck, an analyst with Morgan Stanley. "While Citi was $3

billion higher than our estimate, the Street was building in significantly higher write-downs."

Andrew Marquardt, an analyst at Fox-Pitt Kelton Caronia Waller, says the shares will react positively following no further dividend cut, capital markets-related hits that were less than last quarter and credit costs that were also less than last quarter, he writes.

"Bottom line is that capital markets-related negative marks were less than we expected at $12 billion pre-tax (we modeled closer to $20 billion and compares to $18 billion last quarter)," writes Marquardt. "Overall results were better than our low expectations, and while credit and market dislocations remain valid concerns, it appears management is properly addressing a still tough environment."