World and Nation

Citigroup’s Dramatic Profit Decline Surprises Chairman

Citigroup, the global banking giant, said Monday that third-quarter profit dropped 57 percent after it faced heavy blows to its fixed-income and consumer businesses.

The Citigroup results reflected a roughly $5.9 billion write-off that the company announced earlier this month after it was forced to recognize losses from deteriorating securities prices and bad trading bets. Included is a $2.24 billion increase in the money it set aside to cover souring mortgages and consumer loans.

Citigroup’s revenue increased 6 percent, to 22.7 billion, but failed to outpace a 22 percent increase in expenses. Net income fell to $2.38 billion, or 47 cents a share, compared with $5.51 billion, or $1.10 a share, a year earlier.

“This quarter was well below our expectations and frankly surprising,” said Charles O. Prince III, Citigroup’s chairman and chief executive, on a lengthy conference call with analysts and investors. “We are working hard on improving these areas.”

But unlike a similar statement he made two weeks ago, Prince stopped short of suggesting that he expected earnings to stabilize in the fourth quarter.

While no financial institution was expected to escape damage from this summer’s credit storm and slowdown in the housing market, Citigroup was particularly hard hit.

The heavy losses and frequent disappointing quarters have raised questions about Citigroup’s diversified business model, growth strategy and risk management practices. Citigroup’s share price on Monday hovered around $46.50, about the same place where it was trading when Prince took over the company four years ago. And despite strong support from Citigroup’s board and biggest shareholder, the problems in the quarter have raised doubts about his ability to manage the sprawling enterprise.

In the last two weeks, Prince has made significant changes as the bank has come under criticism. On Thursday, he announced a major overhaul to the structure and leadership of the investment bank, bringing the alternative investment unit into the division and installed Vikram S. Pandit as its leader. He also named new heads of its capital markets division and fixed-income trading group, which had performed well until the recent quarter. Meanwhile, it is upgrading its risk management systems.

Despite the recent turbulence, Prince said that Citigroup’s board was content with the strategy and management. “The board feels comfortable at the levels where we made the changes,” he said.

Citigroup’s overall investment banking revenue fell 24 percent. Most of the losses stemmed from its domestic fixed-income trading businesses and large book of leveraged loans.

The bank took write-downs of $1.35 billion pretax on the value of funded and unfunded leveraged loans as the market has dried up. It absorbed losses $1.58 billion as prices of subprime mortgage securities deteriorated. And it realized losses of $636 million in trading losses amid turmoil in the credit markets this summer, though executives say it would have suffered even without the turbulence. All those areas contributed to an 87 percent drop in domestic investment banking revenue.