Citigroup re****ts $5.1 billion loss, while Royal Bank of Scotland
prepares rights issue
Bloomberg News, International Herald Tribune, Reuters
Published: April 18, 2008
http://www.iht.com/articles/2008/04/18/business/banks.php
The global credit crisis took a further toll on the financial industry
Friday: Citigroup announced a $5.1 billion loss for the first quarter,
and the Royal Bank of Scotland, in a major turnabout, was preparing to
raise cash from its shareholders.
The re****ts culminated one of the worst weeks ever for the financial
sector, as bank after bank re****ted grim news. JPMorgan Chase took
$5.1 billion in write-downs and provisions for the first quarter,
bringing its total this year to about $10 billion. Merrill Lynch took
write-downs of $9.7 billion. UBS cut its dividend by a third, as it
moved to a stock dividend from cash to shore up its equity base.
And yet shares of financial stocks have soared this week. Investor
expectations have been beaten down so much that anything short of
horrific now qualifies as good news.
The Dow Jones Europe Stoxx Banks index rose 3.7 percent Friday, the
most since April 1. The NYSE financial index was up more than 2
percent at midday. (Page 14)
"Banks' losses are smaller than they were," said Romain Boscher, a
fund manager at Groupama Asset Management in Paris. "It's a form of
improvement."
Today in Business with Reuters
Citigroup records a loss and plans 9,000 layoffsEra of in-flight
mobile phone use begins in EuropeOptimism over Citigroup's results
spurred sharp gains in U.S. and European stocks
For Citigroup, the largest U.S. bank, it was the second straight
quarterly loss. Caught in the middle of a housing slowdown and tight
credit markets, it also announced it would cut 9,000 more jobs in the
next 12 months.
The layoffs are in addition to the 4,200 cuts announced in January,
the bank said during its conference call.
The bank's first-quarter results reflected more than $16.9 billion in
write-offs and additional loan loss reserves as Vikram Pandit moved to
reshape the company and clean up the mortgage mess in his first three
months as chief executive.
"We are not happy with our financial results this quarter, although
they are not completely unexpected given the assets we hold," Pandit
said on a call with investors.
Wall Street analysts had been expecting Pandit to swallow big losses
in the bank's consumer businesses and in investment banking so he
could get off to a fresh start. The quarter, littered with eight
unusual items and a laundry list of charges, was as messy as they
thought.
Pandit is trying to focus on stronger businesses after years of
underinvestment and questionable risk management left Citigroup
bearing the full brunt of the credit market crisis. The bank has cut
its dividend and raised more than $30 billion in capital.
All told, Citigroup has taken write-offs that total nearly $39
billion, including more than $22 billion in charges in the second half
of 2007. And with unemployment rising and the economy possibly
entering a recession, those figures could continue to grow. Loan
losses from mortgages, credit cards and other consumer loans are
expected to balloon.
RBS has so far suffered a relatively modest $3.2 billion write-down
from toxic assets. But it bears the scars of recent market turmoil and
its balance sheet has been stretched by its leading role in the €71
billion, or $113.3 billion, takeover and breakup of the Dutch bank ABN
AMRO last year.
A person with direct knowledge of the situation said Friday that RBS
was set to raise cash from its shareholders in the coming week. The
person spoke on condition of anonymity because of the sensitivity of
the negotiations.
Such a move would be a radical U-turn for Britain's second-largest
bank, after HSBC. Analysts think it could raise over $20 billion and
lead to similar action by other British banks.
The rights issue, which could be Europe's biggest ever, would also be
the first major capital increase for a British lender since the start
of the credit crunch.
Analysts and shareholders said RBS's chief executive, Fred Goodwin,
might struggle to survive such a move, as it would underscore how
ill-timed his decision was last year to lead an ABN AMRO takeover.
But they said a cash call, which would follow emergency fund-raisings
by other major banks, including Merrill Lynch and UBS, could also
raise hopes that banks are getting to grips with a credit crisis that
has led them to rein in lending, with painful consequences for the
global economy.
"It is right that these major banks should be taking a lead in raising
new equity and rebuilding confidence," Richard Lambert,
director-general of the Confederation of British Industry said in a
speech in Edinburgh, Scotland.
RBS said in a statement that it noted speculation about "a possible
rights issue," but gave no further comment. It is due to publish an
update on its trading performance and capital on Wednesday, to
coincide with its shareholder meeting.
The person with direct knowledge of the matter said the rights issue
could coincide with a British government plan to ease tensions in the
mortgage market, due as early as next week.
In fact, analysts said the move to shore up their balance sheet could
be a condition imposed by British authorities before they agreed to
step in.
That Goodwin seems to have "changed his mind so quickly would suggest
there has been meddling from elements within the tripartite
authority," said James Eden, an analyst with Exane BNP Paribas,
referring to British regulators.
If the government plan, expected to allow banks to swap mortgage-based
securities tem****arily for government bonds, is behind RBS's
about-turn, other banks could follow - despite concerns of rekindling
memories of unpopular emergency rights issues by Barclays in the 1980s
after big writedowns.
RBS now has some of the weakest capital ratios among European banks,
seen as an im****tant reason for its underperformance. It avoided a
rights issue after its acquisition of Charter One in 2004.
Shares in RBS, which have dropped 18 percent so far this year and
largely discount a capital increase, rose on re****ts of the plan and
closed Friday 18 pence higher, or nearly 5 percent, at 384 pence in
London.
The mechanism, price and size of the rights issue - and whether it
will be accompanied by a further write-down of risky assets next week
- will be crucial to the success at RBS.
"Broadly speaking, I think it would be a good thing - I wish they'd
done it before," said Edward Collins of New Star Asset Management.
"This will help the sector and will help them start to perform again.
It's hard to say who, but I wouldn't expect this to be an isolated
event."
Citigroup's first-quarter results reflected more than $16.9 billion in
write-offs and additional loan loss reserves as Pandit embarked on a
plan to reshape the company and clean up the mortgage mess in his
first three months as chief executive.
The bank absorbed heavy blows in all of its four main businesses, and
announced a $622 million restructuring charge.
Citigroup recorded a $6 billion pretax write-down on bad subprime
mortgage related investments and $1.8 billion on the drop in value of
commercial real estate as well as other securities tied to structured
investment vehicles and less risky mortgages.
It took a $3.1 billion charge tied to the collapse of 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 that market failed. Citigroup set aside
another $3.1 billion to cover future losses in its global consumer
division, an area that analysts say has long been underserved.
"We believe we have substantially reduced our risk given the size of
the write-downs, we have taken the last few quarters," the chief
financial officer, Gary Crittenden, said. He warned that consumer
credit costs may continue to worsen for the rest of the year.
Of the 9,000 layoffs, at least 2,000 have already been announced in
the investment banking unit, and executives are looking to trim staff
jobs in legal and technology where there is a significant overlap. The
layoffs represent less than 2.5 percent of the company's 369,000
employees worldwide.
Unlike the public comments of other Wall Street chief executives,
Pandit's published remarks shed no light on Citigroup's prospects in
the second half of the year.
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