Thursday, January 7, 2010

Citigroup Inc. (NYSE: C): Q4 Earnings Preview 2009

Citigroup Inc. (NYSE: C) is scheduled to release financial results for fourth quarter before the market open on Tuesday, January 19, 2010. Analysts, on average, expect the company to report net loss of 33 cents a share on revenue of $19.28 billion. In the year ago quarter, the company reported a loss of $2.44 per share on revenue of $5.60 billion.

Citigroup Inc., one of the the hardest hit banks by the credit crisis, is a global financial services company, provides consumers, corporations, governments, and institutions with a range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, and wealth management. The company is in midst of a massive restructuring effort and has sold over $100 billion in assets over the last four quarters. It has two primary business divisions- Citicorp and Citi Holdings. While Citicorp acts as a traditional bank, Citi Holdings manages riskier assets, which the firm will try to sell to raise cash.

In October, the financial services company posted net profit for the third quarter compared to a loss last year. The company swung to a third-quarter net profit of $101 million, compared to a net loss of $2.815 billion in the prior-year quarter. However, net loss available to common shareholders widened to $3.242 billion from last year's $2.934 billion. On a per share basis, loss narrowed to $0.27 from $0.61 in the previous year. Revenue rose to $20.39 billion from $16.26 billion. Analysts, on average, had projected a loss of $0.38 per share for the quarter. The results included $8 billion in net credit losses and an $802 million net loan loss reserve build.

In the third quarter, Citi Holdings assets were reduced by $32 billion and were down $281 billion from the peak levels in the first quarter of 2008. Assets in special asset pool were reduced by $19 billion in the third quarter, primarily through sales, which were executed at or near our marks.

During a conference call with analysts in October, CEO Vikram Pandit said that the consumer credit environment remains challenging in the US and that it will continue to impact the company's near-term results.

Last month, Citigroup repaid $20 billion of a total of $45 billion fund it received from the U.S. government's TARP Program by repurchasing $20 billion in preferred securities it issued to the Treasury Department in exchange for the aid. In order to repay the $20 billion, Citi issued $20.5 billion of capital and debt, comprising $17 billion of common stock, with an over-allotment option of $2.55 billion, and $3.5 billion of tangible equity units, consisting of about $2.8 billion of prepaid common stock purchase contracts and about $0.7 billion of subordinated notes. Additionally, the company also terminated the $1.8 billion of the $7.1 billion loss-sharing agreement with the Treasury.Citigroup received $45 billion under the Troubled Asset Relief Program, $25 billion of which was converted into common stock. It is expected that within the year, the government could sell off its remaining 34 percent common share stake in the company.

It is very difficult to ignore the fact that the company's capital-raising efforts would definitely reduce the company's earnings power due to the massive shareholder dilution. Also, the surprisingly low pricing of thestock offer this week provided a clear sign that investors are still nervous about the banking giant's ability to regain its financial health.

Citi on the other hand has said that it would benefit from the the repayment and the termination of loss-share agreement, through a net reduction in annual interest expense of about $1.7 billion and about $0.5 billion in lower annual amortization expense associated with the loss-sharing agreement. However, it would result in a pretax loss of some eight billion dollars. The end of the state guarantee will result a loss of 2.1 billion dollars, offset in part by annual savings of 500 million dollars. The repayment also freed the bank from government restrictions on pay and operations that were imposed on companies receiving exceptional assistance from the $700 billion bailout fund.

Upon the completion of the TARP aid, Citi's pro forma Tier 1 capital ratio at the end of the third quarter of 2009 would have been 11.0%, compared with 12.8%. The company's pro forma Tier 1 common ratio at the end of the third quarter would have been 9.0%, compared with 9.1%.

Among other developments, early this month, Citigroup agreed to sell its foreign exchange trading platform LavaFX to FXall, another rival electronic trading platform for foreign exchange, for an undisclosed sum. The sale is being seen as a part of it restructuring strategy that includes de-leveraging some of its assets through a number of steps that include joint ventures, dispositions and asset runoffs.

In retrospective, although Citigroup's capital levels are higher than other banks, its assets are riskier. Meanwhile, loan losses have continued to pile up. Moreover, fears over the possibility of a double-dip recession and concerns over massive dilution may continue to weigh on stock for some time to come. The company's stock currently trades at a forward P/E (fye 31-Dec-10) of 52.3. In terms of stock performance, Citi shares have gained 52 percent over the past year.

Full Disclosure: No Positions.

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