NEW YORK -- Two banks knee deep in the financial turmoil swirling around posted losses in the third quarter Thursday as fallout from the credit crisis continued.
Citigroup c suffered its fourth straight quarterly loss and said it has cut 11,000 jobs since June, drubbed again by the relentless downturn in housing and turmoil in the financial markets.
The bank said Thursday it lost $2.8 billion, or 60 cents a share, in the third quarter, compared with a profit of $2.2 billion, or 44 cents a share, a year ago. The deficit for the July-to-September period brings Citi's total losses over the past 12 months to $20.2 billion.
The shortfall for the quarter was narrower than anticipated. Analysts polled by Thomson Reuters expected a loss of 70 cents a share.
But the results were hardly reassuring. Citi wrote down $4.4 billion in investments, plus another $612 million from a settlement related to auction-rate securities; recorded $4.9 billion in credit losses; and took a $3.9 billion charge to boost reserves. The bank has written down the value of its investments tied to souring mortgages and other bad debt by about $51 billion since this time last year.
The frailty of the financial system has led the government to pledge $25 billion to each of the big four U.S. banks — Citigroup, JPMorgan Chase, Bank of America and Wells Fargo. Of these four institutions, Citi appears to be on the shakiest footing. It is the only one to have posted quarterly losses over the past year, and it is shrinking while its peers are growing.
With $2.05 trillion in total assets now, Citigroup has officially forfeited the title of largest bank by assets, falling behind JPMorgan Chase's $2.25 trillion in total assets. Bank of America currently has $1.91 trillion in assets, and will have more when it completes its buyout of Merrill Lynch, which on Thursday reported a $5.2 billion loss. Wells Fargo has assets of $622 billion ahead of its acquisition of Wachovia.
Citi not only eliminated 11,000 jobs during the third quarter — bringing its total headcount reduction so far this year to 23,000 — but it also shed $50 billion in assets. CEO Vikram Pandit announced in May that Citi intends to rid itself of nearly $500 billion in assets to get out of businesses such as risky mortgages; the bank said that over the past year, it has lopped off $308 billion in total assets.
Meanwhile, the bank has not made any major acquisitions. While JPMorgan Chase snapped up Bear Stearns and Washington Mutual, and while Bank of America nabbed Merrill Lynch, Citigroup lost the bid for Wachovia and its massive deposit base to Wells Fargo.
"With Wachovia out of the picture, there is no doubt that Citigroup will pursue another acquisition," said Isabel Schauerte, an analyst with the research and consulting firm Celent, in a note. "However, if anything, these results suggest that the bank should focus on repairing its troubled balance sheet while waiting for another buying opportunity that has the scale Citi is hungry for."
On the positive side, Citigroup's write-downs were smaller than in the second quarter. Expenses were down $1.2 billion compared with the previous quarter and the bank maintained a Tier 1 capital ratio of 8.2%. A Tier 1 capital ratio essentially measures equity against risky assets. Citi's ratio is considered strong by historical measures, and is expected to tick higher when the government takes its stake.
But as JPMorgan's and Wells Fargo's third-quarter reports illustrated on Wednesday, the credit environment, particularly when it comes to consumers, is worsening.
During a conference call with investors, Chief Financial Officer Gary Crittenden said that if the unemployment rate keeps rising above 6% and the economy keeps slowing, there will be negative consequences — "that card losses could exceed their historical peaks, and that mortgage losses could continue to grow."
In North America, more credit card holders became delinquent and more had to be written off, Citi said. The credit loss rate jumped to 7.3% from 6.46% in the second quarter and from 4.37% a year ago. Credit card loss rates worsened in Latin America and Asia, too.
Citigroup also said defaults in residential real estate loans, notably first mortgages, increased.
As the bank tightened its lending standards, average loans to consumers grew by a mere 1% year from a year earlier, while corporate loans were down 15%.
"We are very focused on client profitability," Crittenden said.
Investment bank Merrill Lynch mer said its third-quarter loss widened as it took more than $12 billion in charges and write-downs tied to the sale of mortgage investments and fallout from the credit crisis.
Not only did Merrill struggle with losses tied to the ongoing credit crisis, revenue in the company's wealth management division — long considered the bank's strength — declined as well amid volatility in the financial markets.
Overall, Merrill, which has agreed to be acquired by Bank of America, lost $5.2 billion, or $5.58 a share, during the third quarter, compared with a loss of $2.2 billion, or $2.82 a share, a year earlier. Analysts polled by Thomson Reuters, on average, forecast a loss of $5.22 a share.
Merrill recorded $3.8 billion in write-downs and losses as the credit crisis worsened in September. The charges were tied to investments in government-sponsored entities and other investment banks, which were either taken over by the government or failed during the month. Merrill did not disclose what types of investments and exposure it had that led to the losses.
"Our results were particularly impacted by the month of September, which represented one of the worst months in the history of the credit markets," Nelson Chai, Merrill's chief financial officer, said during a conference call discussing quarterly results.
Volatile markets in September also cost Merrill business in its wealth management division. That portion of the business, which employs 16,850 financial advisers worldwide, was likely considered the most attractive piece of Merrill when Bank of America decided to buy the company last month, said David Easthope, a senior analyst at consulting firm Celent.
"The crown jewel was the adviser army, which could provide a recurring stream of revenue and footprint," Easthope said. "It's maybe not the shiny jewel once thought."
Bank of America did not immediately comment on its future unit's results.
Merrill's global wealth management division saw its revenue fall 9% to $3.2 billion during the quarter, due primarily to declines in transactional and origination revenue as clients cut back on their activity amid the decline in the economy.
If the economy continues to struggle, customers are likely to pull back on their investing, and asset flows will shrink, reducing revenue, Easthope said. The slowdown could continue for several quarters, he added. Client assets totaled $1.475 trillion at the end of the third quarter, compared with $1.762 trillion a year earlier.
"It's not a bright future for any of these types of institutions" in the near term, Easthope said.
Merrill's prospects, along with the broader sector, dimmed last month as concerns about the stability of financial firms mounted. After investment bank Lehman Brothers filed for bankruptcy protection, investors became worried that the stand-alone investment bank model was no longer viable and the banks would succumb to liquidity pressures. Banks, meanwhile, became nervous about lending to each other amid concerns of more potential failures. Merrill said Thursday it had about $77 billion in its excess liquidity pool at the end of September, more than enough to cover all debt maturing over the next year.
As Lehman fell apart, Merrill agreed to the deal with Bank of America, which came just days before the government bailed out insurance giant American International Group with an $85 billion loan. The all-stock transaction was initially worth about $50 billion. Based on Bank of America's closing price Tuesday of $23.82 and the number of shares Merrill had outstanding at the end of September, the deal is currently valued at about $32.76 billion.
After the financial fallout in September, the U.S. government approved a plan to invest up to $250 billion in financial services firms to provide additional capital support. Merrill Lynch said it will participate in the program, and expects to issue $10 billion in preferred stock and warrants to the U.S. Treasury Department.
The government plan, which includes additional lending programs for banks, should help improve liquidity in the credit markets, Merrill's chief executive, John Thain, said during the conference call.
"The combination of the capital injection, the access to FDIC-insured debt and the ability to issue (commercial paper) through the Fed facility provides the capital and liquidity and financing that I think is necessary to start to unlock the credit markets, and I think you will gradually see the credit conditions get better," Thain said during the call.
Merrill recorded multiple charges tied to the sale or mortgage-related investments and other securities as it looked to reduce exposure to the troubled market and improve its balance sheet. As previously announced, Merrill took a write-down of $5.7 billion from the sale of collateralized debt obligations, or CDOs.
CDOs are complex financial instruments that combine various slices of debt, and often include pieces of mortgage-backed securities. As mortgages increasingly defaulted over the past year and a half, the value of bonds and other debt backed by mortgages has plummeted in value.
At the end of July, Merrill agreed to sell the CDOs to investment manager Lone Star Funds for about 22 cents on the dollar.
Merrill said it still had $1.1 billion in net exposure to CDOs at the end of the third quarter, down from $4.3 billion the previous quarter.
Another $2.6 billion was written down by Merrill as it completed or planned to complete additional sales to reduce its mortgage exposure.
Merrill was able to offset some of its mortgage-related and investment losses through the previously announced sale of its 20% ownership stake in financial data provider and media firm Bloomberg LP. Merrill recorded a gain of $4.3 billion on the sale.
The bank was also able to book gains totaling $2.8 billion tied to the widening of its own credit spreads during the quarter.