International
Citigroup reported Q4 2007 loss of $9.83 billion; Write-downs and increased credit costs were a massive $22.2 billion
By Finfacts Team
Jan 15, 2008, 13:01

Citigroup and its predecessors have had a presence in Ireland since 1965. During the 1960’s, the First National City Bank, a US bank, undertook rapid expansion and opened up new overseas offices in 10 countries including Ireland. The bank had already been operating in Europe since 1902. The bank opened its Dublin office on 6th May 1965 at 1 Dawson Street, Dublin 2 (now a bookshop). The bank moved very shortly afterwards to 71 Stephen’s Green, Dublin 2 in 1967 where it remained until 1993. During the intervening years, the bank operated a full service corporate and commercial branch. In 1976 the bank changed its name to Citibank, N.A. Shortly afterwards in 1996, due to the prevalence of favourable economic conditions, the bank established a Dublin Service Centre to centralise cash management and securities services operations which led to a tenfold increase in employee numbers. This was a major expansion of the Irish operation which now required a new premises to house all the Citibank activities. The bank was operating out of 5 different locations and in 1998 started construction on a 375,000 sq ft building in the 12-acre extension of the IFSC. This was the largest single office block building to be constructed in Dublin for over 20 years at the time.

• Results reflect write-Downs on Sub-Prime related direct exposures in Fixed Income Markets and increased Credit Costs related to US Consumer Loans

• Record results in International Consumer, Transaction Services and Global Wealth Management

• Strong Business Volumes; Average Deposits Up 21%, Average Loans Up 19%

• Full Year 2007 Revenues of $81.7 Billion, Net Income of $3.62 Billion

• Full Year Record Revenues and Net Income in International Consumer, Transaction Services and Global Wealth Management

• Full Year Record International Revenues, Up 15%

Citigroup Inc. today reported a net loss for the 2007 fourth quarter of $9.83 billion, or $1.99 per share. Results include $18.1 billion in pre-tax write-downs and credit costs on sub-prime related direct exposures in fixed income markets, and a $4.1 billion increase in credit costs in US consumer primarily related to higher current and estimated losses on consumer loans. 

For the full year 2007, net income was $3.62 billion, or $0.72 per share.

The US banking giant said that new investments include $12.5 billion of preferred securities. The Government of Singapore Investment Corp., or GIC, will buy $6.88 billion, as it has done in respect of its plan to invest $9.6 billion in Switzerland's UBS bank. Other investors include former Chairman and Chief Executive Sandy Weill and Saudi Prince Alwaleed bin Talal bin Abdulaziz Alsaud, an existing big investor in Citi.

Citigroup also announced it would offer public investors about $2 billion in newly issued convertible preferred securities.

The bank confirmed it would slash its dividend by 41% in order to retain capital.

Management Comment
 
"Our financial results this quarter are clearly unacceptable. Our poor performance was driven primarily by two factors – significant write-downs and losses on our sub-prime direct exposures in fixed income markets, and a large increase in credit costs in our US consumer loan portfolio. Looking beyond these two factors, revenues and volumes continued to grow strongly in a number of our franchises and we generated record results in international consumer, transaction services, wealth management, and advisory," said Vikram Pandit, Chief Executive Officer of Citi. The Indian-born Pandit replaced Chuck Prince who was ousted as CEO in November.

Chuck Prince had infamously dismissed fears about an early end to the postmillennial debt frolics last July. “When the music stops,” he told The Financial Times, “in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

"Over the past five weeks I have been touring our businesses and listening to many of Citi's important constituents – employees, investors, clients, regulators, and many others. These discussions have only confirmed my deep belief in the power and strength of Citi. We have a unique franchise that is well positioned in growing markets with tremendous capabilities to serve clients around the world. We intend to build on our advantages to deliver superior results for our clients, investors, and employees," said Pandit.
 
FOURTH QUARTER SUMMARY

• Revenues were $7.2 billion, down 70%, driven by significant write-downs on sub-prime related direct exposures in fixed income markets. Revenues across many businesses increased, driven by growth in business volumes.  
   

  • U.S. consumer revenues grew 6%, driven by higher business volumes with average deposits and managed loans, both up 10%.

  • International consumer revenues increased 45%, driven by organic volume growth, the impact of recent acquisitions, a $507 million pre-tax gain on Visa Inc. shares, and a $313 million pre-tax gain on the sale of an ownership interest in Nikko Cordial's Simplex Investment Advisors. Average deposits and loans increased 21% and 30%, respectively, and investment sales were up 24%.

  • In markets & banking, securities and banking revenues were negative due to write-downs and losses related to deterioration in the mortgage-backed and credit markets, including:
     
     

    • Write-downs of $17.4 billion on sub-prime related direct exposures. These exposures on September 30, 2007 were comprised of approximately $11.7 billion of gross lending and structuring exposures and approximately $42.9 billion of net off-balance sheet financial vehicles ABS CDO  (Asset Backed securities - Collateralized Debt Obligations) super senior exposures (ABS CDO super senior gross exposures of $53.4 billion). On December 31, 2007, sub-prime related direct exposures were comprised of approximately $8.0 billion of gross lending and structuring exposures and approximately $29.3 billion of net ABS CDO super senior exposures (ABS CDO super senior gross exposures of $39.8 billion). See detail in Schedule B on page 12.

    • Lower revenues due to write-downs on non sub-prime securitized products and in fixed income proprietary trading.

    • These results were partially offset by double-digit revenue growth in interest rate and currency trading, commodities, and record advisory revenues.

    
    Transaction services revenues were a record, up 44%, driven by increased liability balances, up 35%, and higher assets under custody, up 26%.
     
    Markets and banking international revenues included strong double-digit revenue growth in Asia, Latin America, and Japan.  
     

  • Global wealth management revenues increased 27%, as U.S. revenues grew 7% and international revenues more than doubled due to double-digit organic growth and increased ownership in Nikko Cordial.

  • Alternative investments revenues declined as strong growth in client revenues was offset by lower revenues from private equity and hedge fund activities, and a lower market value on Legg Mason shares.

  • Acquisitions contributed 7% to revenue growth during the quarter.

  • The net interest margin increased 15 basis points versus the third quarter 2007.

  
   

• Operating expenses increased 18%, primarily driven by the impact of acquisitions, increased business volumes, charges related to approximately 4,200 net headcount reductions, and the impact of foreign exchange. Expenses reflect savings from structural expense initiatives announced in April 2007.
   
   

  • Excluding the impact of acquisitions, organic expense growth was 9%.

  • The company opened or acquired 267 new retail bank or consumer finance branches during the quarter, including 188 internationally and 79 in the U.S. During 2007, 712 retail bank and consumer finance branches have been opened or acquired.

  
   

• Credit costs increased $5.41 billion, primarily driven by an increase in net credit losses of $1.56 billion and a net charge of $3.85 billion to increase loan loss reserves.
   
   

  • U.S. consumer credit costs increased $4.1 billion, comprised of $689 million in higher net credit losses and a net charge of $3.31 billion to increase loan loss reserves. The $3.31 billion net charge compares to a net reserve release of $127 million in the prior-year period. The increase in credit costs primarily reflected a weakening of leading credit indicators, including increased delinquencies on 1st and 2nd mortgages, unsecured personal loans, credit cards, and auto loans. Credit costs increased also due to trends in the U.S. macroeconomic environment, including the housing market downturn, and portfolio growth.

  • International consumer credit costs increased $374 million, comprised of $257 million of higher net credit losses and a net charge of $217 million to increase loan loss reserves. The $217 million net charge compares to a net charge of $100 million in the prior-year period. The increase in credit costs primarily reflected portfolio growth, the impact of recent acquisitions, and an increase in net credit loss ratios in consumer finance. The credit environment in international consumer remained generally stable.

  • Markets & banking credit costs increased $905 million, driven by higher net credit losses, including $535 million of net credit losses on loans with sub-prime related direct exposure. Credit costs also include a $284 million net charge to increase loan loss and unfunded lending commitment reserves, reflecting a slight weakening in overall portfolio credit quality, as well as loan loss reserves for specific counterparties. The loan loss reserves for specific counterparties includes $169 million for sub-prime related direct exposures.

  
   

• Taxes were a net credit of $7.31 billion, reflecting pre-tax losses in the fourth quarter. The effective tax rate was 42.9% vs. 29.8% in the prior-year period due to higher tax rates in the jurisdictions where the losses were incurred