Citigroup (C) reported a smaller than expected net loss of $0.49 per share from continuing operations, against the Street’s estimate of a $0.61 loss.
Citi even generated $18.7 billion in revenues, higher than the consensus estimate of $17.7 billion. (Citi also recorded a $7.2 billion pre-tax write-down, but investors have gotten used to that by now.)
- Tier 1 ratio of 8.7%
- Credit costs increased $4.5 billion to $7.2 billion
- Operating expenses up 9% to $15.9 billion
- $2.5 billion charge to loan loss reserves
- $2.4 billion of writedowns due to monolines
- $3.4 billion of writedwons related to sub-prime
- $545 million writedown on commercial real estate
- $325 million on Alt-A
We will be covering the conference call at 8:30 Eastern live. What is Vikram Pandit doing that John Thain isn’t? Citi and Merrill were exposed to similar kinds of deteriorating asset classes, yet Merrill’s write-down was much larger than the Street expected and Citi’s was smaller. Look for colour on outlook. Jamie Dimon said yesterday that he expects losses on prime mortgages could triple. It will be interesting to see if Pandit and Citi have similar expectations.
Conference Call Notes (Note: Material in quotes is paraphrased and is not verbatim)
08:28: Music playing…
08:31: Call begins… Usual introductory remarks and disclaimers about forward-looking statements.
08:32: CFO Gary Crittenden begins… Results driven by writedowns and higher N. American credit costs.
08:34: Good progress on reengineering plan. reduced losses by $2.6 billion sequentially. Key positive trends: Sequential revenue up. Key drivers continue to grow. Net interest margin expanded due to lower funding costs. Reduced lower-yielding assets. Expenses and headcount down. Capital poistion strong…
08:36: Adjusted for marks, revenues have continued to grow since record quarter of 2007.
08:39: Slowdown in card purchas sales in North America, consumers spending less.
08:41: Net interest margin up to 3.81%. Benefit of fed rate cuts. Total assets down 99 billion, 2/3 driven by reduction of legacy assets. Better results “highly dependent on rate cuts.”
08:43: Headcount growth slowed from 12% to 16% yoy to 1%… driven by acquisitions. Headcount down 2500 from last quarter, net decline of 14,000.
08:45: $250 billion of assets shed from balance sheet in last three quarters.
08:50: Cost of credit increased by $4.4 billion driven by higher net credit losses in cards and mortgages. Delinquency levels and bankruptcies higher. Net loan loss reserve higher by $2 billion.
08:52: Expect higher losses in cards and mortgages in the near term. Continued stress in personal loan portfolio.
08:54: Loans to parties with lower FICO scores (below 620) grew 16% to 23%. Delinquencies growing… at historically high levels.
08:56: Mix of cards changing. Used to be a bank card business, now adding more retail partner cards. Now account of 1/3 of portfolio. Retail cards have higher delinquencies and loss rates.
08:57: Tightening underwriting criteria. Collectors more agressive now with delinquent customers, calling more often, earlier (whoopee!).
08:59: Consumer banking revenue growth only 1%. $745 million loss in N. America on hedging on Mortgage Servicing Assets.
09:00: Lower compensation costs offset by higher acquisition costs and losses on foreign exchange.
09:05: Exposure to monoline increased quarter-over-quarter from $7.3 billion to $8 billion.
09:09: High grade CDO exposure is “largely hedged.”
09:10: Auction rate exposure to $6.9 billion, down from $11 billion peak.
09:11: Exposure in risky asset classes are declining sequentially. Credit costs may continue to rise through the year. We’ve built reserves, consumer credit costs, if they continue to rise, could have “meaningful impact.”
09:15: Franchise remains strong, cut losses in half sequentially.
09:16: Q&A begins… UBS analyst asks about jump in net interest margin… Answer: “Most of it related to rate cuts.” And reduction in legacy assets. “At an attractive level now.”
09:29: Meredith Whitney asks for elaboration on methodology for mark-downs… Answer: We look at credit ratings and apply a discount rate based on expectation of housing price decline expectations. We use Case-Shiller and are assuming a 23% peak-to-trough decline.
09:30: Deutsche Bank analyst asks why Citi didn’t cut dividend and expectations for future write-downs… Answer: Excluding marks, we’re doing very well… strong organic growth across all categories, doing good job on management of expenses. Credit continues to be an issue, may deteriorate in future. Agressively reserving for further deterioration in mortgages. Fundamental earning power remains strong.
09:37: Dick Bove asks when Citi will reach NI of $2 billion per quarter again, which he thinks is required level of income to maintain dividend… Answer: “We can’t tell you… can only tell you about trajectory.”
09:39: Goldman analyst asks about Dimon’s comment about losses tripling on Prime… how is C’s portfolio doing?… Answer: Obviously deteriorating. We see no change in trend. We’ve reserved for embedded losses in portfolio. Impossible to forecast though.
09:48: Sandler O’Neill analyst asks for colour on difference between prime and sub-prime… Answer: 90 day delinquencies improving in sub-prime… prime is getting worse. Stimulus checks have helped card business, but difficult to ferret out.
09:54: Call ends.