Citigroup (NYSE:C) recently announced that it will take a $3.5 billion charge during the fourth quarter, which will leave the bank "marginally profitable."
While this sounds like a lot of money (and it is), it's a necessary part of moving forward from the financial crisis and setting itself up for success in the future.
Why so much money?
Of the $3.5 billion, $2.7 billion is paying for costs related to investigations, and the other $800 million is tied to restructuring charges related to the company's decision to discontinue some of its foreign operations.
The investigation-related portion is important for the company to put its missteps of the past behind it, and the restructuring charge is essential to allow Citigroup to focus its efforts on those markets with the most potential for growth and profit.
Legal issues could be almost gone
According to CEO Michael Corbat, "These legal charges should cover a significant portion of our outstanding legal matters based on current information."
In other words, there are no guarantees, but the legal fallout from the financial crisis as well as other legal troubles, such as LIBOR and foreign exchange issues, might finally be a thing of the past. Over the past year or so, several of the major banks such as Bank of America and JPMorgan Chase wrapped up much of their remaining crisis-related legal expenses, and it's a relief to hear that Citigroup may be doing the same.
Citigroup agreed to pay just over $1 billion to settle a probe related to currency manipulation and has been under scrutiny for alleged money-laundering violations in its Mexican division.
Corbat has said that the bank is shooting for a "clean 2015" in terms of legal expenses, and hopefully the larger charge now will help Citigroup meet that goal.
Focus on the high-growth markets
Last time Citigroup reported earnings, the company announced plans to exit its consumer banking business in 11 global markets, including Costa Rica, Japan, and Peru, to concentrate on the markets that have the greatest potential for future growth.
While those places make up nearly one-third of the 35 markets in which the Global Consumer Banking division has operations, these markets also represent less than 5% of the division's business.
In a nutshell, Citigroup feels that it has more of a competitive advantage in the remaining 24 markets, so the best performance will be achieved by focusing on them and winding down the other operations, which aren't bringing in too much money to begin with. Doing this costs money.
So while an $800 million charge sounds like a lot, the company feels that it's an investment that will pay off in the future. Including this amount, Citigroup has spent $3.4 billion on restructuring costs since Corbat became CEO, and he said the expense should lead to an equal amount of cost savings for the company.
Don't worry about profitability – yet
Since announcing the charges, analysts' per-share earnings estimates for 2014 have dropped from $3.36 to $2.31, a pretty substantial drop. Although these charges will severely reduce Citigroup's profitability, they are an essential part of moving forward, and investors should welcome them.
In fact, next year the estimates are calling for $5.44 per share, which means that Citigroup's stock trades for less than 10 times forward earnings. And at a pretty nice discount to its tangible book value, it might make sense to buy now before the bank starts making serious money.