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Economy Next Hurdle for Citi

Hammered by mortgage and credit jitters, the banking giant now frets about consumer spending.

Tough times appear to be on the horizon for

Citigroup

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CEO Vikram Pandit.

And this time, troubles surrounding the nation's largest bank have less to do with subprime calamity and more to do with the possibility the U.S. economy is sliding into a slowdown that could take financial firms along for the ride.

Citi shocked no one by posting

bitter losses in mortgages on leveraged loan bets that saw it record a fourth-quarter writedown of $18.1 billion, leading to a record loss of $9.83 billion in the quarter. The bank also said it planned on raising some $14.5 billion from foreign and domestic investors and slashing its dividend by about 40% to 32 cents, to steady the troubled financial conglomerate.

Cramer: Expect More Doom at Citi

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But perhaps even more telling was the big bank's guidance on an expected slowdown in consumer growth underpinned by expected increases in home loan, credit card and auto loan delinquencies. Citi boosted its loan loss reserves by $4.1 billion in anticipation that the price of commodities and basic goods are pinching consumers.

Citi CFO Gary Crittenden, during an analyst call to discuss its fourth-quarter numbers, said that although delinquencies in the U.S. are stable, there are growing expectations of higher losses in the offing. The negative macroeconomic outlook coupled with loan losses on the bank's books weighed down the company's shares as much as 8% in Tuesday trading.

Adding to fears was an unexpected drop in retail sales, which fell 0.4%, the first decline since June, according to a Commerce Department report issued Tuesday morning. And recent warnings of increased loan delinquencies from

American Express

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and

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also have ramped up concern about the American consumer.

Citi, which has been swooning on losses from leveraged loans and mortgage debt since the summer, said that it would cut headcount by 4,200 and suggested that it would likely follow up with further reductions to better resize the bank in the future.

Pandit described the bank's underwhelming performance as "unacceptable" and vowed to "do better" in subsequent quarters. But Citi's latest revelations demonstrate the extent of its problems both inside and outside the 370,000-strong financial firm.

At this point, it's still difficult to say how well Citi will navigate the terrain ahead. It has lost nearly half its value during the height of the subprime crisis and approximately 18% since Pandit took the CEO seat several weeks ago. And the sentiment for the company appears to be decidedly negative, despite the huge capital-raising efforts underway and the measures it has taken to write down toxic loans.

Standard & Poor's opted to lower Citi's rating on Tuesday to AA-minus from AA, and lowered Citibank N.A. ratings to AA from AA-plus, citing the bank's losses. Fitch Ratings, which lowered Citi's long-term debt rating to AA from AA+ in November, maintained a negative outlook on the bank, but did say that its capital-raising initiatives were a big positive.

Citi already raised $7.5 billion from the Abu Dhabi Investment Authority last year and announced plans to raise an additional $14.5 billion from investors including former CEO Sandy Weill and Saudi billionaire Prince Alwaleed, as well as the Kuwait Investment Authority and the New Jersey Division of Investment. An additional $2 billion will be raised via newly issued convertible shares that will be sold to public investors.

Given Citi's scale and headcount, it should not be expected that Pandit would be able to right the ship overnight. But the company's actions of late offer a sense of the bureaucracy involved in figuring the best path toward recovery at the firm.

Twice already during Pandit's tenure, Citi has indicated its staunch opposition to strategic moves that might alleviate some of the firm's financial pressure, only to find itself having to do an about-face weeks later. It cut its dividend to 32 cents after a trove of analysts suggested that such action would be necessary to maintain its capital ratios. The bank also said it would not be forced to take some $58 billion in so called structured investment vehicles onto its balance sheet, until Pandit announced that it would have to do just that weeks after he took the reins of the firm.

If Cramer's Wrong About Recession, Explain Citi

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At this point, it appears that any number of actions could be in the wings for Citi, including a spinoff of businesses, more job cuts and future writedowns. The future of the franchise, however, will still center on integrating the financial firm's various businesses and making them run efficiently and smoothly -- a task neither ex-CEO Weill or Prince has been able to accomplish.

Bruce Foerster, president of consulting firm South Beach Capital, notes, "over the longer term, assuming that they're attacking the balance sheet with a vengeance, the next thing the board needs to do is ask, 'do we retain this behemoth as it is?'

"You can't just take your paint brush out and put a new coat on Citi," Foerster adds. "That's been tried before."

Pandit said during the earnings call that "these are complicated times." But what's becoming even more complicated for Citi shareholders is figuring out the firm's bigger picture strategy.