Citi's Cor­bat tem­pers in­vestor ex­pec­ta­tions in de­but

The Financial Daily - - INTERNATIONAL -

NEW YORK: Mike Cor­bat, Cit­i­group Inc's new CEO, used his earn­ings de­but to tem­per in­vestor ex­pec­ta­tions for a turn­around at the com­pany, de­liv­er­ing sub­dued prof­its and say­ing the bank still had a lot left to clean up.

Cor­bat, who took over as chief ex­ec­u­tive in Oc­to­ber af­ter the board abruptly ousted Vikram Pan­dit, promised in­vestors the third-largest U.S. bank will do a bet­ter job for share­hold­ers dur­ing his ten­ure. But he warned that the en­vi­ron­ment re­mained chal­leng­ing and it would take time.

Cit­i­group's fourth-quar­ter profit missed Wall Street's ex­pec­ta­tions by a wide mar­gin, even though earn­ings were up from a year ear­lier as trad­ing rev­enue re­bounded. The bank's shares fell 2.9 per­cent for the day.

The bank took $2.32 bil­lion of charges for lay­offs and law­suits in the fourth quar­ter. It also de­clined to re­lease loan loss re­serves just yet, a step which would have boosted prof­its. Pan­dit was still in the job when the fourth quar­ter started, and some an­a­lysts said that by not re­leas­ing re­serves Cor­bat may have un­der­stated fi­nan­cial re­sults.

"It may be that the new CEO is hold­ing back," said Gary Townsend, pres­i­dent of hedge fund Hil­lTownsend Cap­i­tal LLC. "There's no rea­son that the quar­ter when Pan­dit left and (Cor­bat) came in should be great." Cit­i­group de­clined to com­ment on whether that was its strat­egy.

But an­a­lysts on the con­fer­ence call re­peat­edly chal­lenged Chief Fi­nan­cial Of­fi­cer John Gerspach on why the com­pany did not draw down more of its loan loss re­serves, par­tic­u­larly those for mort­gage as­sets, whose value is be­ing lifted by the stronger hous­ing mar­ket

Gerspach said that while the hous­ing and mort­gage loss trends are good, the com­pany had first wanted to make sure the U.S. govern­ment got past the so-called "fis­cal cliff" threat to the econ­omy and the dam­age that might have done to hous­ing.

"What we would like to see now is how the U.S. deals with the on­go­ing debt ceil­ing de­bate," Gerspach said. He even­tu­ally al­lowed that if the econ­omy proves re­silient to pro­longed de­bates in Wash­ing­ton over govern­ment debt, "maybe that will give us the ba­sis then to make some other de­ci­sions."

Such a cau­tious ap­proach to the re­serves may well set up Cor­bat to re­port higher earn­ings later in his ten­ure, ac­cord­ing to RBC Cap­i­tal Mar­kets an­a­lyst Ger­ard Cas­sidy. Cor­bat said Citi's var­i­ous busi­nesses were com­bat­ing com­pet­i­tive and reg­u­la­tory prob­lems, as well as is­sues dat­ing to the fi­nan­cial cri­sis that con­tinue to plague the bank.

Citi shares rose in Cor­bat's first three months as CEO, out­pac­ing peers, as some in­vestors wel­comed Pan­dit's re­place­ment and an­tic­i­pated changes in the bank's struc­ture.

Cor­bat, how­ever, seemed in no hurry to im­me­di­ately de­liver on those ex­pec­ta­tions. He said he was not yet ready to re­lease new per­for­mance bench­marks for in­vestors to judge the abil­ity of his team to meet their goals.

"We've got to get to a point where we stop de­stroy­ing our share­hold­ers' cap­i­tal," Cor­bat said. "We are not sat­is­fied with these bot­tom-line earn­ings." That left some dis­ap­pointed. "It was a stay-tuned type of mes­sage," said Tom Le­wandowski, an an­a­lyst at bro­ker­age Ed­ward Jones who rec­om­mends Citi stock.

"I ex­pected to hear more than we got," par­tic­u­larly in the way of goals for com­pany per­for­mance, Le­wandowski said RBC Cap­i­tal's Cas­sidy said most in­vestors are still will­ing to wait for changes. "Tra­di­tion­ally, six months is a fair amount of time for new man­age­ment to get their arms around the sit­u­a­tion."

While Cit­i­group's stock is up more than 40 per­cent in the past 12 months, in­vestors still see the com­pany as an en­ter­prise on a dif­fi­cult mis­sion to shrink its way to pros­per­ity, Townsend said.

The skep­ti­cism shows in the com­pany's stock price. Cit­i­group's shares trade for only 0.8 of its tan­gi­ble book value, or its net worth. JPMor­gan Chase & Co, which an­nounced its third-con­sec­u­tive year of record prof­its, trades for 1.2 times its tan­gi­ble book value, while Wells Fargo & Co trades for about 1.6 times.

There was rel­a­tively lit­tle in the way of 2013 out­look from the bank, though CFO Gerspach did tell an­a­lysts that Citi ex­pects in­ter­est mar­gins to be steady in 2013 rel­a­tive to 2012. Bank in­vestors have had a close eye on mar­gins lately. Fourthquar­ter net in­come was $1.2 bil­lion, or 38 cents a share, com­pared with $956 mil­lion, or 31 cents a share, in the same quar­ter of 2011.

Rev­enue from fixed in­come mar­kets in­creased 58 per­cent, driv­ing Citi's Se­cu­ri­ties and Bank­ing seg­ment back to prof­itabil­ity. Com­pany-wide rev­enue, ad­justed for cer­tain items, in­creased 8 per­cent, while op­er­at­ing ex­penses were un­changed.

Re­sults were re­duced by new le­gal costs of $1.29 bil­lion, or 27 cents a share, and a pre­vi­ously an­nounced cor­po­rate restruc­tur­ing charge of $1.03 bil­lion, or 21 cents a share. -DNA

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