Citigroup Posts Q1 Loss; Smith Barney Unit Lackluster, Too

Citigroup reported a net loss of $5.1 billion or $1.02 per share, $0.07 per share worse than consensus analyst expectations, according to Thomson Financial. Unlike, say, Merrill Lynch, Smith Barney’s Global Wealth Management unit (retail brokerage), one of the centerpieces in CEO Vikram Pandit’s revival, did poorly too. (Merrill reported earnings yesterday, and despite CDO woes, its retail brokerage did pretty well.)

Citigroup reported a net loss of $5.1 billion or $1.02 per share, $0.07 per share worse than consensus analyst expectations, according to Thomson Financial. Unlike, say, Merrill Lynch, Smith Barney’s Global Wealth Management unit (retail brokerage), one of the centerpieces in CEO Vikram Pandit’s revival, did poorly too. (Merrill reported earnings yesterday, and despite CDO woes, its retail brokerage did pretty well.)

The bank’s first quarter results include another $15.2 billion in write-downs, including: $6 billion for direct sub-prime related exposures, $3.1 billion on leveraged finance commitments, $1.5 billion on its auction-rate securities inventory, $1.5 billion related to credit exposure to monoline insurers and a $3.1 billion increase in credit costs in the global-consumer division. This week Pandit rejected talk of a break-up in an interview with Business Week, saying he “couldn’t get a better set of assets.” (That said, Pandit is getting rid of non-core businesses, such as its Diners Club International credit-card network, which it sold last week. Yesterday, Citi announced it would sell its North American commercial-lending and leasing business.)

In the release, Pandit notes that the firm is still in recovery mode: “Our financial results reflect the continuation of the unprecedented market and credit environment and its impact on hour historical risk positions.” “Despite the negative factors in the broader markets, we continue to see strong momentum throughout the organization with robust volumes in many of our products and regions.”

Global-wealth management, which consists of the brokerage Smith Barney and the private bank, saw none of that momentum this quarter. Total revenues in GWM were $3.2 billion, a 16-percent increase from the same time last year; however, net income for the division was $299 million, a 33-percent drop from the first quarter of last year.

Smith Barney, which normally accounts for roughly two-thirds of those earnings, saw net income drop 56 percent to $142 million in the first quarter; by contrast, the private bank contributed $157 million, a 27-percent increase from the year-ago quarter. Management attributed the historic switcheroo of earnings contributions to “higher expenses and credit costs” at Smith Barney, and “increased customer activity” in the private bank.

Smith Barney brokers who to spoke with Registered Rep. are nevertheless upbeat. “I’m just happy the stock is up 2 points,” said one. Citi shares were up by 7 percent to $25.41 in early afternoon trading. The advisor added that Pandit’s stock-option-heavy pay package was a vote of confidence for the future of the stock and the company. Further, Pandit’s public dismissal of “break-up” talk, and his characterization of Smith Barney as “crucial” to Citi’s success, make for a much rosier long-term outlook. “Because we move so much of Citi’s product, we’re compared to ABC when Disney bought them—they needed a place to put their shows,” he says.

Whether clients lacked a similar measure of confidence in the firm, or if it was the market’s volatility that caused it, Smith Barney clients pulled out more assets than they put in during the first quarter. Total client assets in Smith Barney were nearly $1.5 trillion, an increase of 16 percent over the first quarter of last year. But, in a worrisome sign, clients withdrew $1 billion net from Smith Barney in the quarter. (By contrast, Merrill gathered $4 billion in net new client assets in its first quarter.) That’s in sharp contrast to last year’s first quarter, when Smith Barney enjoyed a net $7-billion inflow. As for the private bank, it hasn’t had net new assets since the third quarter of last year. Smith Barney’s pre-tax profit margin fell to 10 percent in the first quarter, down from 23 percent at the same time last year.

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