Image: Citigroup
Mary Altaffer  /  AP
Citigroup says it posted a $2.5 billion loss and laid off more employees in the second quarter as it struggled with surging loan defaults.
updated 7/18/2008 12:07:30 PM ET 2008-07-18T16:07:30

Citigroup has become the latest big bank to assuage Wall Street’s worries about the financial sector, posting a $2.5 billion second-quarter loss that was smaller than the market expected.

Citi rose nearly 10 percent Friday and helped lift other financial stocks, having joined JPMorgan Chase & Co. and Wells Fargo & Co. in convincing investors that the prospect for the sector, while gloomy, may not be as dire as the market feared.

The nation’s biggest banking company by assets lost the equivalent of 54 cents per share in the April-June period. In the same timeframe last year, the bank earned $6.23 billion, or $1.24 per share.

Analysts surveyed by Thomson Financial had predicted a larger loss of 66 cents share.

Citigroup Inc.’s securities and banking division wrote down the value of its assets by $7.2 billion, before taxes, and an asset revaluation cost its consumer lending business $745 million. Those write-downs totaling about $8 billion are significantly lower than write-downs taken in the first quarter and in last year’s fourth quarter.

However, credit costs jumped to $7.2 billion as more consumers defaulted on their loans — implying that while losses in the credit markets are decelerating, losses from actual defaults in Citigroup’s mortgages, home-equity loans, auto loans and credit card lines are mounting. The $7.2 billion in credit costs included $4.4 billion in credit losses and a $2.5 billion charge to bulk up reserves for future loan losses.

Citigroup, like other banks, is bracing for mortgages and credit cards to bring more hefty losses. Default rates continued to rise on these loans, and Chief Financial Officer Gary Crittenden said during a conference call with analysts that credit card loss rates could soon rise to their highest levels ever.

Citigroup has failed to turn a profit for three straight quarters, losing a cumulative $17.4 billion during that period after writing down its assets by about $46 billion. Its shares have tumbled 65 percent over the past year, and recently hit their lowest point since the day Citicorp and Travelers combined in October 1998.

Citigroup stock rose sharply in late morning trading.

Citigroup’s results were helped by asset sales, moderating expenses, and record revenues in transaction services, interest rate and currency trading, and commodities.

Deutsche Bank analyst Mike Mayo upped his rating on Citigroup stock from “sell” to “hold,” and raised his price target for the stock from $14 to $20. Mayo said Citigroup’s credit quality is not so different from its peers, and that its revenues were stronger than he expected — which should help Citi turn a profit soon even if there are further write-downs.

The bank has raised about $40 billion over the past several months by shedding businesses, lowering its dividend, and selling stock.

And during the second quarter, Citi lopped off $99 billion from its total assets, which now stand at $2.02 trillion. Back in May, Chief Executive Vikram Pandit said the bank would shrink its then-$2.2 trillion in balance sheet assets by about $400 billion to $500 billion over the next few years.

“While there is still much to do, we are encouraged by our progress in delivering on our commitment to the re-engineering efforts,” Pandit said in a statement.

On Thursday, JPMorgan Chase announced better-than-expected earnings, following Wells Fargo’s upbeat report on Wednesday.

But not all financial services companies have been clearing the low bar that Wall Street set for them this quarter.

The brokerage Merrill Lynch & Co. late Thursday reported a wider-than-expected quarterly loss and write-downs from losing investments in the debt markets approaching $40 billion. The credit lender Capital One Financial Corp., meanwhile, posted a larger-than-expected profit decline.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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