Citigroup revealed the scale of its credit problems yesterday, and the numbers initially seemed staggering. The bank announced that it would write off $5.3 billion in loans and recognize an additional $600 million in trading losses, draining third-quarter earnings by 60%. The writedowns were concentrated in the bank's portfolios of leveraged finance commitments and subprime mortgages, the credit markets' most notorious products. However, they also reflect a general decline in credit quality. Citigroup's global consumer unit will report credit losses and reserve builds totaling $2.6 billion, much of which is related to concerns about a potentially broad deterioration in economic conditions.
These credit losses are less severe than many had feared. Anxiety about Citigroup's potential losses had been growing since at least the summer, when liquidity evaporated from the leveraged loan market. Investors became worried that Citigroup, one of the largest providers of leveraged financing, would be stuck with loans that it had expected to sell. Anxiety increased recently after major brokerage firms such as Merrill Lynch
Still, I view Citigroup as sturdier than its i-banking rivals. While the bank has often been criticized for a lack of focus, its size, geographic breadth, and diversified businesses should once more become important advantages as financial services companies confront impairments on their balance sheets. At the end of the last quarter, Citigroup's assets totaled $2.2 trillion, including $733 billion in loans. Against that backdrop, the bank's $57 billion in funded and unfunded leveraged loan commitments seems manageable. The writedowns in the leveraged loan portfolio will represent only a small fraction of the bank's total loan portfolio.
Potential losses from subprime mortgages have caused additional concerns for Citigroup's investors, but the scope of the bank's exposure is apparently limited. Citigroup reported that it will write off $1.3 billion from the $13 billion in subprime mortgage loans it's warehoused for securitizations. In addition, the bank announced higher loan loss provisions, reflecting the use of a stricter valuation model to value the loans held by its global consumer unit. These disclosures about the condition of Citigroup's balance sheet should soothe investors' fears of subprime contagion. Blue-chip Citigroup is clearly no Countrywide Financial
Citigroup's stock has trailed its rivals in recent years, declining nearly 14% year to date. At a recent share price around $47, the company's stock trades at an attractive multiple of less than 11 times earnings, and it sports a rich dividend yield of 4.6%. Those measures generally match the statistics of Citigroup's biggest rivals, such as Bank of America
But nearly half of Citigroup's revenue comes from international markets, a percentage that none of its U.S.-based rivals can match. (Citigroup further demonstrated its commitment to international expansion by announcing today that it would buy out the minority stake in Nikko Cordial, Japan's third-largest broker, to make the firm a fully owned subsidiary.) Revenue growth for Citigroup's international businesses has been strong, and it promises to be more sustainable than the growth rates the company can achieve in the relatively mature U.S. market. More importantly, those international operations have been demonstrating increasing profitability in recent quarters.
Investors who choose to pick up shares of Citigroup will likely find that their investment exhibits less volatility in the short run, and more upside return in the long run, than other financial-services stocks.
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