Citi's Still Got a Long Way to Go

NEW YORK (TheStreet) -- Citigroup(C Quote) posted a small profit for the third quarter, but investors trying to wind their way through the labyrinth of the company's balance sheet will find that the good bank won't be able to significantly grow until the bad bank goes away.

Factor in the company's continued reliance on the government -- its biggest shareholder -- and the message is reinforced that Citi looks to be unable to grow its business until it can stand on more solid ground.
The inability to expand is particularly harrowing considering that other big banks including Goldman Sachs (GS Quote), JPMorgan Chase (JPM Quote) and others are already posting strong profits.

Citi, on the other hand, received $45 billion in government bailout funds since the start of the financial crisis, and completed a $58 billion preferred-to-common stock deal this summer. The transaction makes the U.S. government, which converted some $25 billion of preferred shares, a 34% stakeholder in Citi, and as a result of the government's heavy hand, Citi has been forced to pare down its businesses and assets in response to regulators' expressed concerns on Citi's capital levels.
Citi said Thursday that as a result of its extenuating factors, combined with a continued uncertain economic environment, it is only making "selective investments" in faster growth businesses.

"[O]ur two near-term goals are getting to the point where we have sustained profitability and looking to repay TARP," CFO John Gerspach said on Citi's conference call with analysts earlier today.

"Obviously, by returning to sustained profitability as I said, we are looking to make selective investments," Gerspach continued. "So we have begun to deploy some level of additional capital and expense dollars into our Citicorp businesses. But again, we are doing that in the looking ahead at a rather uncertain economic environment, so we want to be very selective on that, at least in the near term."
Citi posted a third-quarter per share loss of 27 cents, despite making a small profit of $101 million, primarily due to the impact of the stock swap on retained earnings and the payment of government-held dividends.

Citi is having a monster of a time digging through its morass of shoddy mortgages and credit card loans gone bad, particularly as the health of the U.S. economy -- with unemployment hovering around 10% -- remains uncertain. The company has previously said it would cease offering private label retail credit cards as part of its restructuring, and it's also backing away from much of the mortgage business.
On Thursday, Citi disclosed that three quarters of its consumer loan losses were from North America.

During the conference call, CEO Vikram Pandit pointed to regulator discussions concerning elevated levels of capital for financial institutions going forward, something that Citi and other big banks will have to eventually adhere to.
Citi is also further inhibited by the fact that it needs to eventually pay back bailout funds received from the Troubled Asset Relief Program, he said. Questions regarding when Citi will pay back the TARP money have intensified lately. The company did not offer any further information Thursday saying when it would do so.
"We need to get through that, but clearly we are running the company to have more capital than that over time and if that does happen, that can open up a lot of different possibilities for us and it is really too soon to comment on it," Pandit said.

Citi is making progress in its turnaround mission, even if it is likely at the behest of regulators. Citi Holdings, the so-called bad bank, reduced its assets by $32 billion in the quarter to $617 billion. The company reduced its toxic assets by $19 billion in the quarter between asset sales and run off. Still, assets in Citi Holdings are down less than 10% since the first quarter -- the same time the company announced the splitting of the two businesses.

Citi Holdings' assets are expected to decline by at least another $25 billion in the fourth quarter and the company officially completed the sale of Nikko Cordial and Nikko Asset management on Oct. 1.

But as a result of regulators tightening of the belt, the company has also been forced to leave behind some profitable businesses as well.
Citi completed a joint venture with its profitable wealth management arm Smith Barney and Morgan Stanley (MS Quote) in early June. As of the third quarter, Smith Barney no longer contributes revenue to Citi, Gerspach said. The business had contributed $1 billion in revenue in the prior quarter.

Phibro, the company's energy trading unit, which was just sold to Occidental Petroleum Corp. (OXY Quote) had quarterly revenue in the range of $90 million and $100 million, net of pre-tax income, Gerspach also said.

"We do have a business that is going to grow, which is Citicorp, over time and you know it happens to be in those markets and those businesses, which are pretty fast growth and you ought to expect that business to get its share of capital over time," Pandit said.
--Written by Laurie Kulikowski in New York.