Tuesday, 15 January 2008

And Now For The Expected

As expected Citigroup (C) produced some horrible numbers for the fourth quarter, slashed their dividend and announced much needed capital injections. From Bloomberg:

Citigroup Reports Record Loss on $18 Billion Subprime

Citigroup Inc. posted the biggest loss in the U.S. bank's 196-year history as surging defaults on home loans forced it to write down the value of subprime-mortgage investments by $18 billion.

The fourth-quarter net loss of $9.83 billion, or $1.99 a share, compared with a profit of $5.1 billion, or $1.03, a year earlier, the biggest U.S. bank said today in a statement. New York-based Citigroup also cut its dividend by 41 percent and said it will receive $14.5 billion from outside investors to shore up depleted capital.

``We are taking comprehensive action to position Citi for the future with the capital strength that will allow us to refocus on earnings and earnings growth,'' said Chief Executive Officer Vikram Pandit, who was installed in December after Charles Prince stepped down amid mounting subprime losses.

Citigroup racked up record losses as it misjudged the depth of the mortgage crisis. The writedown for subprime home loans and related securities was almost double what the company expected as recently as November. Citigroup's markdown is the biggest so far, exceeding the $14 billion reported by Zurich-based UBS AG, Europe's biggest bank...

...Citigroup, founded in 1812 as the City Bank of New York, cut the quarterly dividend to 32 cents a share from 54 cents. The reduction, the first since the merger of Citicorp and Travelers Group Inc. in 1998, will help save the company about $4.4 billion on an annual basis. The company said as recently as November that it had no plans to lower the payout to shareholders.

Not reported in the above story was that some of the writedowns were related to the cutting of 4,200 jobs. The capital injection dilutes existing shareholders by approximately 11%. However the name of the game now is one of survival and institutions like Citi and Merrill Lynch will take capital from whoever is willing to invest it.

Speaking of Merrill Lynch (MER), which is expected to report results on Thursday, they announced today that they too are in the process of substantially diluting their existing shareholders and impairing their earnings ability just to stay afloat. Also from Bloomberg:

Merrill Lynch Gets $6.6 Billion From Kuwait, Mizuho

Merrill Lynch & Co., the U.S. bank battered by subprime mortgages losses, raised $6.6 billion by selling preferred shares to a group including the Kuwaiti Investment Authority and Japan's Mizuho Financial Group Inc.

The group also includes the Korean Investment Corp. and clients of U.S. money managers TPG-Axon Capital and T. Rowe Price Associates Inc., Merrill said in a statement today. The mandatory convertible securities carry a 9 percent annual dividend and a 17 percent conversion premium. The investors won't have a say in how Merrill is run, the bank said.

Merrill is raising money after $8.4 billion of writedowns on U.S. mortgage investments led to the biggest loss in its 93- year history in the third quarter. Today's investment comes a month after the New York-based firm raised $6.2 billion from Singapore's Temasek Holdings Pte and Davis Selected Advisors LP.

"We look forward to our relationship with Kuwait Investment Authority providing Merrill Lynch with additional opportunities to grow its presence there," Merrill Chief Executive Officer John Thain said in today's statement. "Because of their extensive corporate client base in Japan and their deep network in China, the Pacific Rim and globally, we expect future collaboration with Mizuho to be very productive."

Yeah, nice attempt to put a positive spin on a dire situation Johnny boy. You've just diluted your existing shareholders by 16% and added almost $600m a year in preference dividend payments to your cost line.

All in all, nothing surprising in either of these reports. Some may argue that Citi's writedowns were less than expected however at the end of the day whether it was $18 billion or $24 billion it's a terrible number and underscores the extent of the problems in the financial sector.