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Pandit: Citi operating at profit through February

Pandit: Citi operating at profit through February

The news from Citigroup Inc. was surprising, and for a change, upbeat.
The struggling bank was profitable through the first two months of the year, CEO Vikram Pandit told employees in a letter wrote in a letter sent to employees. And it's having its best quarter since late summer 2007 _ the last time it posted a profit.
The memo helped power Wall Street's best day of 2009 as Citigroup shares soared 38 percent and sent other financial company stocks barreling higher. But investors' fears are far from quelled about Citi and the broader banking business. The company's stock is still trading near the all-time low of 97 cents a share it fell to last week, and Bank of America Corp., also seen as having been in a precarious position, is still below $5 a share.
Before investors truly commit to bank stocks, they want official results, not just chief executives' letters to their staff. In Citi's case, they want earnings reports that show the government can shut off the funding spigot. Citigroup remains down more than 60 percent since the government came to its rescue in November.
Pandit told employees that during January and February, Citi's operating revenue was $19 billion, just $2 billion shy of the full-quarter average during 2008. And based on historical revenue and expense rates, Citi's projected earnings before taxes and one-time charges would be about $8.3 billion for the full quarter.
However, those one-time items could include credit losses, write-downs and additions to loan-loss reserves. Pandit did not disclose the size of those items _ so if March is worse than January and February, the first quarter could bring Citigroup its sixth straight quarterly loss.
Although the stock market was pleased, some analysts said Pandit's letter wasn't enough to sustain a longer-term advance.
"It's a P.R. gimmick," said Alois Pirker, bank analyst at the research and advisory firm Aite Group, said of Pan. "This memo alone won't do the trick. For Citi, it's the same old problems: How do we take this business and turn it into a viable entity?"
Citigroup has been working to set itself up for profitability for several quarters by cutting costs, selling businesses and raising cash. The company recently sold control of its Smith Barney brokerage to Morgan Stanley.
If this month is as profitable for Citigroup as the previous two, the bank could prove to the naysayers in Congress and the investor community that Citigroup is not, in fact in dire straits and that government crutches were unnecessary.
But that could raise the ire of investors.
"When you've got horrible morale, credit markets in turmoil, and you can still pull this off, people are thinking, 'Jeez, maybe we went a little overboard,'" said William Smith, president of Smith Asset Management, who recently has been adding to his investment in Citigroup.
The proof will be in the actual first-quarter results, scheduled for release in April. Speculation that Citigroup and other banks are insolvent have been driving down their shares, and executives' efforts to deny rumors have been largely ineffective.
"Bear Stearns, Lehman Brothers _ they focused on battling rumors, and nobody believed them," said Anton Schutz, president of Mendon Capital Advisors, who owns Citigroup shares but has not been buying more. The CEOs of Bear Stearns and Lehman Brothers swore their companies were safe in the days leading up to their collapses.
Bank of America CEO Ken Lewis has been on the offensive, too, making an appearance on CNBC and sending reassuring memos to his employees. Two weeks ago, he told staffers that the company is not discussing a larger ownership stake with the federal government.
And investors have gone back and forth on BofA. The stock jumped 27 percent to $6.13 on Feb. 6, after Lewis said in an interview on CNBC that the company would not need more government capital, but it a 26-year low of $2.53 on Feb. 20. Even after Tuesday's jump, BofA shares remain at $4.79.
Bank of America, like Citigroup, has gotten $45 billion in government capital _ more than the $25 billion that rivals JPMorgan Chase & Co. and Wells Fargo & Co. received. Citigroup, however, also agreed to a deal late last month that will give the government up to a 36 percent stake in Citi. The government, along with other private investors, will convert some of their $45 billion in preferred stock into common shares, which dilutes the value of shareholders' stock.
If Citigroup has really been profitable this year, Smith said, "it makes you start to question, why in the world did they dilute themselves so badly?"
Government officials are drawing up contingency plans just in case Citigroup stumbles further and needs more support, according to a report Tuesday in The Wall Street Journal citing anonymous sources. The Journal said the discussions are preliminary and wide-ranging for possibilities that government officials do not expect to occur.
But investors are angling for details from the Treasury Department on how and when it will start removing banks' toxic assets from their books.
"These stocks have been beaten down so badly that they could double and still be cheap, if we in fact get a realistic plan that will help see us through this crisis," said Alan Gayle, senior investment strategist for RidgeWorth Capital Management.
Lastly, investors want to see not only if banks were profitable in the first quarter, but if they can withstand continued economic turmoil. The government is currently conducting "stress tests" to measure banks' viability in various scenarios.
In his letter, Pandit said Citi has run its own stress tests for the bank at levels worse than those being used by the government. He said he is confident in the bank's capital position based on those tests.
If Pandit's right, he might end up getting his salary back sooner than many expected _ Pandit in February agreed to a salary of $1 a year until Citigroup turned profitable again.


Updated : 2021-03-06 13:32 GMT+08:00