Citigroup says third-quarter net income likely to drop by 60% due to market dislocations

By Jennifer Lanning Drey

Portland, Ore., Oct. 1 - Citigroup Inc. expects third-quarter net income to decline by approximately 60% compared to the prior-year quarter due to dislocations in the mortgage-backed securities and credit markets and a deterioration in consumer credit, Charles Prince, Citigroup's chief executive officer, said in a recorded message posted Monday on the bank's web site.

"I'm obviously very disappointed in our results this quarter. I know we can do much better," Prince said.

When Citigroup announces final third-quarter results on Oct. 15, the company expects to take pre-tax write-downs of approximately $1.4 billion, net of underwriting fees, on funded and unfunded highly leveraged finance commitments, according to a company news release.

"We're one of the largest providers of leveraged financing to clients around the world. When the leveraged loan market severely dislocated this summer, it had a significant impact on us, resulting in large write-downs," Prince said.

Citigroup had total loan commitments of $69 billion at the end of the second quarter and expects to report $57 billion in loan commitments at the end of the third quarter. Of the commitments, the bank expects to have $38 billion in unfunded loans at third-quarter end, Gary Crittenden, Citigroup's chief financial officer, said in the message.

Additionally, Citigroup took pre-tax losses of approximately $1.3 billion, net of hedges, on the value of subprime mortgage-backed securities warehoused for future collateralized debt obligation (CDO) securitizations, CDO positions and leveraged loans warehoused for future collateralized loan obligation (CLO) securitizations, according to the release.

The Citigroup executives said the bank began making efforts to reduce its subprime exposure early in the year but still incurred third-quarter losses.

Citigroup had $13 billion in subprime exposure in its lending and structuring business at the end of June. The number was down from $24 billion at the beginning of the year, Crittenden said.

Fixed-income trading troubles

Citigroup further expects to report pre-tax losses of approximately $600 million in fixed-income credit trading due to market volatility and the disruption of historical pricing relationships.

"What started as a problem in the subprime and CDO markets rapidly spread to affect the pricing on corporate bonds, loans and credit default swaps," Crittenden said.

Fixed-income trading performed at more normalized levels in September, according to Prince, who called the third-quarter results "an aberration."

Credit costs up $2.6 billion

The remainder of the expected decline in net income was caused by an approximate $2.6 billion pre-tax increase in credit costs in Citigroup's global consumer business. The majority of the increase was driven by higher costs to increase the bank's loan-loss reserves, Crittenden said.

"Despite unusually poor results in certain businesses this quarter, Citi continues to execute its growth strategy and generate momentum across many of its franchises," Prince said in the news release.

Citigroup expects to return to its targeted capital ratios in early 2008.

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