Citigroup Hit With Huge Credit Loss

Although some news outlets are downplaying Citigroup’s crummy quarterly results this morning, make no mistake — they indicate a banking company in severe distress.

Although Citi reported a net profit of $101 million, down from $4.2 billion in the previous quarter, for common shareholders the company lost $3.2 billion, up from $2.9 billion in the year-ago period. Return on equity was -12.2 percent, down from 14.8 percent in the second quarter and right back were the company was at this time in 2008. Net interest revenue, a measure of how much Citi has to lend when factoring in funding costs, fell 10 percent.

Besides, Citi’s profit largely stems from a deal this summer under which it exchanged preferred stock for common shares. The transaction, which left the federal government (and you know who that means) as the company’s largest shareholder, produced an $851 million one-time gain for the third quarter.

No, the real story here is Citi’s $8 billion in credit losses for the period. That’s down slightly from the previous quarter, but we’re still talking about a crater-sized hole. These losses are mostly walled up in its Citi Holdings unit, which is a little like the attic where crazy uncles get locked away. Including the smell.

Yet there are signs of decay even more widely across the company’s lending lines. Overdue corporate and consumer loans are rising, reaching 5.25 percent of total loans, versus 4.4 percent in the year-ago quarter. Within Citi’s cards division, net credit losses relative to average loans jumped to 9.7 percent, up significantly from 6.5 percent a year ago. Companywide, net credit losses remain high at 5.7 percent, although that’s down a tick from the second quarter.

Fact is, many analysts expect Citigroup’s losses eventually to top 25 percent of its $1 trillion in assets. Gross credit losses in 2009 are running far ahead of last year’s totals, and the company is charging off loans at a much higher rate than its peers. Revenues are up over a year ago, but the question is whether Citi is socking away enough capital to offset rising losses. If not, that will require it to raise more capital.

Citi CEO Vikram Pandit said in a statement accompanying the quarterly results that “sustainable profitability remains our primary goal in the near term.” If by that he means profits unsubsidized by government aid, that’s a long way off.