Citigroup’s (C) third quarter 2009 loss from continuing operations of 23 cents per share was in line with the Zacks Consensus Estimate. This compares favorably with a net loss of 72 cents in the prior-year quarter. Results for the quarter included $8 billion in net credit losses and an $802 million in net loan loss reserve build.

GAAP net income in the third quarter of 2009 was $101 million, compared to a net loss of $2.8 billion in the prior-year quarter. On a per share basis, however, the company reported a GAAP net loss of 27 cents per share, based on an average 12.1 billion shares outstanding. This compares to a net loss of 61 cents in the prior-year quarter.

Results for the quarter were impacted by an incremental net loss of 18 cents per share related to the completion of Citi’s previously announced exchange offers. However, these have also resulted in an after-tax gain of $851 million. The loss for the quarter also reflects preferred stock dividends, which reduced income available to common shareholders by $288 million, or 2 cents per share.

Total revenue decreased 32% sequentially but increased 25% year-over-year to $20.4 billion. The revenue decreased sequentially as the prior quarter revenue had included an $11.1 billion gain from the Smith Barney transaction.

Net interest income for the quarter was down 6% sequentially and 10% year-over-year to $12.0 million, whereas net interest margin (NIM) declined 31 basis points (bps) sequentially and 22 bps year-over-year to 2.93%. Total non-interest income decreased 51% sequentially but increased 194% year-over-year to $8.4 billion.

Operating expenses decreased 2% sequentially and 16% year-over-year to $11.8 billion, primarily due to ongoing re-engineering efforts and expense controls.

The allowance for loan losses increased to $36.4 billion, or 5.9% of total loans. Net credit losses remained elevated at $8.0 billion, but were down from $8.4 billion in the prior quarter.

Deposits were $833 billion, up 3% from $805 billion in the prior quarter. Sequential growth in deposit was strong in both Transaction Services and Regional Consumer Banking.

Credit quality metrics continued to deteriorate during the quarter. Total non-accrual assets as on Sept. 30, 2009, increased to $28.1 billion (4.56% of total assets) compared to $23.6 billion (3.64%) as on June 30, 2009. Allowance for loan losses as a percentage of total loans increased to 5.85%, compared to 5.60% as on June 30, 2009. However, provisions for credit losses, claims, and benefits decreased 28.0% sequentially to $9.1 billion, mainly due to lower loan losses.

Tangible Common Equity and Tier 1 Common ratios improved during the quarter to 10.3% and 9.1%, respectively. The improvement of capital ratios was due to the completion of exchange offers, which resulted in an additional $64 billion of Tier 1 Common and $60 billion of Tangible Common Equity. Tier 1 Capital remained stable at 12.7%.

During the quarter, Return on Common Equity (ROE) deteriorated significantly to negative 12.2% compared to a positive return of 14.8% in the prior quarter. Citigroup’s book value at the end of the quarter also deteriorated to $6.15 per share, compared to $14.16 at the end of the prior quarter and $18.10 at the end of the prior-year quarter.

Citicorp generated revenues of $13.0 billion in the reported quarter, down 13% sequentially and 19% year-over-year. The decline was attributable to the negative impact of credit value adjustments in securities and banking, and securitizations in North America branded cards. The segment reported a net income from continuing operations of $2.3 billion, compared to $3.1 billion in the prior quarter and $3.6 billion in the prior-year quarter.

Citi Holdings recorded revenues of $6.7 billion, compared to $15.8 billion in the prior quarter and $704 million in the prior-year quarter. The current quarter’s results include a $320 million pre-tax gain on the sale of Citigroup’s managed futures business to the Smith Barney JV. The segment reported a net loss from continuing operations of $1.8 billion compared to a net income of $1.4 billion in the prior quarter and net loss of $6.9 billion in the prior-year quarter.

Citigroup, once the largest U.S. bank by assets, fell behind last year after a series of acquisitions by rivals. Citi has been among the banks hardest hit by the credit crisis and recession. The bank has been severely hurt by billions in losses and write-downs of problem loans and toxic assets.

The U.S. government has injected $45 billion in bailout funds into the bank, $25 billion of which was converted to a 34% equity ownership stake and guarantees to protect against losses on more than $300 billion in risky assets. Top-level management at the company is formulating plans to downsize the government’s stake in the company through a multibillion-dollar stock offering.

Also, there have been major management changes in the recent months, adding new directors and replacing key executives.

We expect Citigroup to incur higher credit losses in the upcoming quarters as its restructuring process continues. Moreover, the obscurity around the valuation of Citi Holdings will remain a drag on the shares in the near term. As such, we are maintaining our Neutral recommendation on the shares of Citigroup.
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