Investors brace for Citigroup to post another loss - AP - National Business News

So far, the nation's major banks have announced some very comforting earnings numbers for the second quarter. But Wall Street is worried that the next big report will create alarm rather than provide more reassurance.

After stronger-than-expected quarterly profits at Wells Fargo & Co. and JPMorgan Chase & Co., investors are itching for a peek Friday inside the books of Citigroup Inc. The nation's biggest bank by assets is expected to post its third straight quarterly loss due to the year-old credit crisis; what Wall Street wants to know is how many more credit-related losses Citi will suffer, and how much more pruning its CEO will have to do to make the global bank profitable again.

"There's evidence that they're making progress, but there's going to be more pain," said Christopher Whalen, managing director at the consulting firm Institutional Risk Analytics.

Gary Crittenden, Citigroup's chief financial officer, already warned investors a month ago that while write-downs on credit market investments known as collateralized debt obligations would be lower than in the first quarter, they would still be "substantial." He also said credit costs would be higher in the second quarter than in the first as the bank builds up reserves for future losses in its mortgage portfolio.

Analysts expect Citi to write down anywhere from $7 billion to $12 billion in the value of its assets, bringing it to a second-quarter loss of 66 cents a share. That would be a smaller shortfall than those suffered during the fourth quarter of 2007 and the first quarter of this year, but significantly worse than its profit of $1.24 a share in the second quarter of 2007, right before the credit markets seized up.

So far, Citigroup has already marked down some $38 billion of value from its assets. To bulk its capital levels back up, it has raised about $40 billion by shedding businesses, lowering its dividend, selling stock in the markets, and selling big stakes to outside investors. It has also already eliminated more than 13,000 jobs from its more than 300,000-member global workforce.

Chief Executive Vikram Pandit, who took the job in December after the ouster of Charles Prince, said in May the bank will shrink its $2.2 trillion in balance sheet assets by about $400 billion to $500 billion, and focus more on what it deems "core" businesses, including old-fashioned retail banking, wealth management, credit cards and transaction services.

Most industry analysts have been cautiously optimistic about the moves Pandit has made, but still negative about the short-term prospects for the company. Citigroup's shares tumbled as low as $14.01 on Tuesday, the lowest level since Oct. 8, 1998, when Citicorp and Travelers Group merged and the stock hit $13.29. A year ago, Citigroup stock was trading above $50.

The reason behind the anxiety is that Citigroup, because of its size and its massive exposure to consumers, is regarded as a microcosm of sorts of the entire banking industry, which appears to many investors to be on government life support right now. Just last Friday, IndyMac Bancorp became the second-largest bank in history to fail and get taken over by the Federal Deposit Insurance Corp.; and last weekend, the government pledged to give financial aid to mortgage financiers Fannie Mae and Freddie Mac if needed.

Bank stocks have recovered from the initial shock of those two pieces of news, but the fact remains that the average consumer is struggling.

Even the CEO of JPMorgan Chase, which has lost much less money over the past year than Citigroup, said he expects prime mortgage losses - which already doubled from the first quarter to the second - to triple from current levels in the coming quarters. JPMorgan also said it expects credit card losses to rise to 5 percent in the second half, and average 6 percent next year.

Meredith Whitney of Oppenheimer & Co. said in a research note Wednesday that delinquencies and charge-offs in credit cards are still increasing and payment rates are still slowing despite the rebate checks mailed out to U.S. taxpayers over the past couple of months.

"The state of the U.S. consumer is showing no signs of improvement and we foresee further difficulties ahead," she wrote.

Back in 1990, during the savings and loan crisis, the loss rate on all bank loans was about 2 percent, Whalen said. If credit keeps deteriorating at the pace it has been, Whalen estimates that overall loan losses in the industry could rise to twice that amount.