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Citi Warns of Third Quarter Profits Slump

Christopher Owen

2 October 2007

Citigroup has announced that dislocations in the mortgage-backed securities and credit markets, and deterioration in the consumer credit environment are expected to have an adverse impact on its third quarter financial results. Citi currently estimates that it will report a decline in net income in the range of 60 per cent from the prior-year quarter, subject to finalising third quarter results. "Our expected third quarter results are a clear disappointment. The decline in income was driven primarily by weak performance in fixed income credit market activities, write-downs in leveraged loan commitments, and increases in consumer credit costs," said Charles Prince, Citigroup chairman and chief executive. Citi's statement follows yesterday's dramatic profits warning and senior management shake-up by Swiss banking giant UBS, which has suffered huge losses in its investment banking arm. The Zurich-based group said it was likely to record an overall group pre-tax loss of between SFr600 million ($514.4 million) and SFr800 million for third quarter, ended 30 September. Pre-tax profits for the first nine months of 2007 would be in the order of SFr10 billion it said, announcing that staff numbers on the investment banking side were to be cut by about 1,500 by the end of this year. In contrast, Credit Suisse said it was confident that its quarter would not be derailed by problems in the US credit markets and stated that net income from continuing operations, after tax, for the third quarter will not fall outside the range of plus or minus 20 per cent of SFr1.30 billion. The group said that it expected net income for the first nine months of 2007 to be at a record level. Though Citigroup's anticipated profit decline was larger than predicted, many investors were pleased the $1.4 billion writedown in the bank's $57 billion leveraged loan portfolio amounted to 2.5 per cent — smaller than the 4-6 per cent write-downs made in the third quarter at major investment banks Goldman Sachs, Lehman Brothers, Bear Stearns and Morgan Stanley. "Our fixed income trading business has a long history of earnings power and success, as shown in this year's record first half results," said Mr Prince. "In September, this business performed at more normalised levels and we see this quarter's overall poor trading performance as an aberration. While we cannot predict market conditions or other unforeseeable events that may affect our businesses, we expect to return to a normal earnings environment in the fourth quarter."