Loan Losses Squeeze Citigroup, Earnings Disappoint

October 16, 2009 Updated: October 1, 2015
A pedestrian walks by Citibank on July 17, 2009 in New York, New York. (Spencer Platt/Getty Images)
A pedestrian walks by Citibank on July 17, 2009 in New York, New York. (Spencer Platt/Getty Images)

NEW YORK—Investors clamoring for a quick economic turnaround received a sobering reminder on Thursday as Citigroup, Inc. reported disappointing third-quarter earnings, hurt by bad loans.

The bank eked out a $101 million profit prior to dividends to government shareholders. Common shareholders endured a loss of 27 cents per share.

While those bleak results still beat analysts’ expectations, Citigroup shares fell sharply on Thursday.

But investors looking for clues on how the U.S. economy is performing need to dig deeper—the rosy pictures painted by the banking industry are far from reality.

Even as banking giants such as JPMorgan Chase and Goldman Sachs—which also announced earnings on Thursday—reported better-than-expected financial results, those were largely due to investments and underwriting. The real picture—one that is most telling of the nation’s economic situation—lies in consumer loans such as mortgages and credit cards.

And as JPMorgan and Citigroup results this week showed, U.S. consumers are still struggling to make ends meet.

“While consumer credit trends are improving in international markets, the U.S. consumer credit environment remains challenging," said Vikram Pandit, chief executive officer of Citigroup in a statement. Unlike most other large U.S. banks, Citigroup operates numerous locations internationally.

Earlier in the week, JPMorgan increased its expected losses from consumer loans such as mortgages, home equity, and credit cards by $2 billion in the quarter. Citigroup, an even bigger provider of consumer loans, said total losses from consumer defaults were a staggering $8 billion. The bank bumped up its expected losses during this quarter by $800 million.

Last quarter, banks warned that if the nation’s unemployment rate continues to soar, banks will report larger losses into 2010 despite economists’ predictions of a fleeting recession.

The silver lining for Citigroup is that consumers continued to save during the quarter, adding more than $28 billion in deposits. Deposits totaled $833 billion globally at the bank as of Aug 31.

Avoiding a Showdown

Last week, Citigroup sold its energy trading business Phibro LLC to Occidental Petroleum for about $250 million.

The sale was reportedly brokered to avoid a potentially tense showdown between Citigroup and the Obama administration. Andrew Hall, a star trader at Phibro, was slated to make around $100 million this year in compensation from Citigroup.

And that irked Kenneth Feinberg, the Pay Czar who oversees payout packages at companies receiving TARP funds (Citigroup still has $45 billion in unpaid balance owed to the U.S. taxpayers).

Citigroup’s loss could turn out to be Occidental’s gain. The Financial Times reported earlier this year that Phibro could have been worth more than $2 billion.