Citigroup Records a Loss and Plans 9,000 Layoffs
Vikram S. Pandit passed his first test at Citigroup. His next one may not be so easy.
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Citi set aside funds to cover losses in its global consumer unit.
Despite announcing one of the biggest quarterly losses in Citigroup’s history, Mr. Pandit, the company’s new chief executive, seemed to win over investors on Friday. Shares of Citigroup rose 4.5 percent in the hope that he can heal the ailing financial giant.
The results — which included a $5.1 billion loss, another multibillion-dollar write-down and a pledge to eliminate 9,000 more jobs — were not as bad as many people feared. The news generated a rally in financial shares that helped lift the Standard & Poor’s 500-stock index by 1.8 percent, capping the stock market’s best week since February.
Now comes the hard part for Mr. Pandit. With one grim quarter behind him, he must make good on promises to streamline Citigroup’s operations, control costs and improve risk management. Investors expect results, and will punish Citigroup stock if he fails to deliver them.
“Citigroup may not be in the intensive care unit,” said Meredith Whitney, a banking analyst at Oppenheimer, “but it is still in the operating room and has a ton of tubes in it.”
Citigroup has disappointed investors for years, and turning the company around will not be easy. For example, executives concede it could take at least five years for the company’s technology systems to catch up to those of its rivals.
Mr. Pandit is moving quickly to cut costs. As part of the layoffs announced on Friday, Citigroup will cut 7,000 jobs in its consumer banking operations and 1,700 jobs in its investment bank. Those reductions come on top of more than 4,200 layoffs announced in January.
While those numbers may seem big, the total represents less than 3.5 percent of Citigroup’s global work force at the start of the year.
Of bigger concern are rising losses on consumer loans, which are likely to haunt the bank in the months ahead. With unemployment rising and the economy flagging, losses on mortgages, credit cards and auto loans could grow at an alarming pace, executives say.
“We are in uncharted territory,” Gary L. Crittenden, Citigroup’s chief financial officer, said in a conference call with analysts on Friday. “There are times where we could face significant headwinds during the year.”
For the first quarter, Citigroup took more than $13.8 billion in write-offs and set aside an additional $3.1 billion to cover souring loans. The company’s first-quarter loss in 2008 was roughly equal to its earnings in the first quarter of last year.
Citigroup reported a net loss of $5.1 billion, or $1.02 a share, in contrast to $5 billion, or $1.01 a share, a year earlier. Revenue fell to $13.2 billion, a 48 percent drop from 2007.
Wall Street analysts long expected Mr. Pandit to swallow hefty losses in the consumer businesses and investments to get a fresh start. The quarterly results, littered with eight special items including a $622 million restructuring charges, were as messy as analysts feared.
Citigroup recorded a $6 billion pretax write-down on bad investments related to subprime mortgages and $1.8 billion on the decline in value of commercial real estate as well as other securities tied to structured investment vehicles and less risky home loans.
The company also took a $3.1 billion charge tied to the collapse of values on high-yielding buyout loans, a $1.5 billion hit from its exposure to bond insurance companies, and another $1.5 billion write-down on its inventory of auction-rate securities as markets for student loan and municipal bonds failed.
Citigroup set aside $3.1 billion more to cover future losses in its global consumer division, an area that analysts say has long been underserved.
“We are not happy with our financial results this quarter, although they are not completely unexpected given the assets we hold,” Mr. Pandit said Friday in a conference call with investors. But he later added, “We are on top of our risks.” Until recently, Citigroup shareholders have had little to cheer. Since Sanford I. Weill put together the landmark Citicorp-Travelers Group merger in April 1998, the company has been plagued by years of dismal results and a series of scandals. The failure to properly integrate the company has resulted in bloated costs, brutal politics and a lack of a cohesive culture.
Mr. Pandit is now tackling those problems head-on. He has settled on a plan that will keep the bank’s diversified business model largely intact but promises better execution and risk oversight. He has also vowed to push the company into products and overseas markets that promise faster growth. To raise capital, he is shedding several businesses, as he did with the sale on Wednesday of Citigroup’s North American commercial lending business to General Electric and in offloading the Diners Club credit card portfolio to Discover Financial.
Citigroup executives have reduced the bank’s exposure to the most risky mortgage-linked investments. The company has also sold about $9 billion of leveraged loans to buyout firms, though at steep discounts.
Mr. Pandit and his top lieutenants argue that these are early signs of progress. They also recognize that investors have their doubts.
“We have begun to indicate that we have the capability to manage assets, head count and expense,” Mr. Crittenden said in an interview on Friday. “We will have to earn it.”
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