Friday, July 20, 2007

Citigroup profit rises, but shares slide on credit fears

By Greg Morcroft, MarketWatch

NEW YORK (MarketWatch) -- Citigroup said Friday its second-quarter profit rose 18%, driven by strong growth in international and alternative investments businesses.

Citi reported net income rose 18% to $6.23 billion, or $1.24 a share, from $5.27 billion, or $1.05 a share, in the year-earlier period.
Revenue rose 20% to $26.63 billion, from $22.18 billion.
"We continued to generate revenue and volume growth in our U.S. consumer franchise, while making excellent progress in re-weighting Citi toward our other businesses, especially our international franchises, where revenues and net income increased over 30%," CEO Chuck Prince said in a news release.
Analysts polled by Thomson First Call had expected the company to earn $1.13 a share on revenue of $24.89 billion.

Despite the earnings growth, Citi shares fell 1.6% on widespread concerns in the market about credit issues. Citigroup Inc. is bracing for the possibility that it will be left holding more leveraged loans for corporate buyouts, the company's chief financial officer said Friday. Citigroup was unable to sell debt to investors on four deals in the second quarter, leaving the world's biggest bank and its peers holding so-called bridge loans on their balance sheets, said CFO Gary Crittenden. Citigroup and other lenders will have to pay more to get investors to swallow the risky debt, and the bank took a revenue hit in the second quarter as a result, he said. See full story.
Citi posted healthy gains in several businesses and said that for its international businesses, revenue and net income rose 34% and 35%, respectively.
The firm said its alternative investment unit, which includes the firm's proprietary trading, posted revenue and net income gains of 77%. Second-quarter revenue at the unit rose to $1.03 billion from $584 million, and net income jumped to $456 million from $257 million.
"Revenue and net income growth was primarily driven by higher revenue from proprietary activities, up 87%. Revenue growth reflected both realized and mark-to-market gains across private equity, hedge fund and other portfolios," Citi said in a news release.
Citi said operating expenses rose 16% in the quarter, driven by increased business volumes and acquisitions.
Credit costs rose to $934 million in the quarter, including a $259 million rise in credit losses and a $465 million charge to increase loan loss reserves. The $465 million net charge compares to a net reserve release of $210 million in the prior-year period, the company said.
"The main negative is a large year-over-year increase in credit costs, though the increase linked quarter was not as bad," Deutsche Bank analysts wrote in a Friday research report.
Citigroup's corporate and investment bank generated $8.96 billion in revenue, up 33% from a year earlier. Net income rose 64% at the unit, to $2.83 billion.
At the global wealth management division, which includes Smith Barney and the private bank, profit climbed 48% and revenue rose 28%.
Smith Barney's revenue climbed 31% to $2.61 billion. Revenue at the private bank rose 17%, to $586 million.
The gains in the wealth management business include results of Japan's Nikko Cordial. Citi raised it stake in Nikko Cordial to about 68% earlier this year. End of Story

Clearwire CEO stresses positives of venture (Seattle P.I.)


Clearwire Chief Executive Ben Wolff discussed the Sprint Nextel partnership Thursday with the Seattle P-I, saying that the 20-year agreement is "positive in a number of ways."

Here are excerpts from that conversation:

On a new consumer brand:

"There will be a new consumer brand, a co-brand if you will, that both we and Sprint are involved with. That doesn't mean that Clearwire or Sprint will go away, but the ingredient brand will be something that is recognized by the public as a brand that identifies with personal broadband and mobile Internet services."

Wolff declined to say if a name had been chosen, adding that "it is a work in process." But he said Clearwire will continue to operate as a "parent brand" for the service.

On how the markets will be divided:

"When you look at the top 200 markets in the country, we actually will end up building out a little more than half.... They (Sprint Nextel) certainly have a larger concentration of the biggest cities, but we will be building some of the top 10 markets in the country, some of the top 25 and some of the top 50. So, as much as our business so far has been a mix of urban and suburban and rural markets, it will continue to be so.... It is really about regional operating efficiencies. When we ultimately talk publicly about what our regional operating markets will be, you'll see that the way the responsibilities are assumed by each company, it is really based on regions of the country. When you think about different regions of the country, they are always a mix of different market sizes."

On whether Clearwire considered a sale or merger:

"I would say that a variety of different options and structures were considered by the companies and discussed, and at this point our mutual conclusion is that the most optimal way to get the country built out with a mobile WiMax network is to pursue the structure that we have today, both from a capital efficiency perspective and from the standpoint of the focus of each of the teams."

On how much Clearwire will have to spend to build out its portion of the network:

"That we haven't either finalized or publicly disclosed. ...Realize that this is an announcement based on a letter of intent, and now there is an awful lot of work to do to figure out -- for both companies -- exactly what all of the details will mean."

On the importance of the deal:

"First we wind up with customers having the ability to effectively have the benefit of a nationwide mobile WiMax network without having to have either one of the companies -- but Clearwire, more specifically -- incur the cost associated with a nationwide build. That is a tremendous benefit. It is also, frankly, a benefit for us to leverage some of Sprint's existing infrastructure, so when you think about our ability to access their cell towers and some of their nationwide fiber assets ... they can be useful both from a time-to-market and a cost perspective for us."

Auto Makers, Unions Wish Lists for Talks (AP)

When Ford Motor Co., Chrysler Group and General Motors Corp. formally begin contract talks with the United Auto Workers over the next few days, their wish list will not be a secret. They want to reduce their total labor costs to match those of the companies that are killing them: Toyota Motor Corp. and Honda Motor Co.:

WHAT THE COMPANIES WANT: The Detroit Three pay about the same hourly wage as their rivals with U.S. factories. But when you add in absenteeism and pension and health care costs for active and retired workers, the companies say their costs are $25 to $30 higher than Toyota (nyse: TM - news - people ), Honda (nyse: HMC - news - people ) or Nissan Motor Co. (nasdaq: NSANY - news - people ) The Detroit Three lost a combined $15 billion last year.

THE COSTS: According to annual reports, Ford's hourly labor cost averaged $70.51 last year. GM's was $73.26 and Chrysler's was $75.86. Toyota, Honda and Nissan have costs that average $48 per hour.

WHAT THE UNION WANTS: UAW President Ron Gettelfinger recently has said the UAW is not in a concessionary mode. The union gave health care concessions to GM and Ford in 2005, and Gettelfinger has hinted that Chrysler would get a similar deal. It also has approved competitive work rules in many factories. Some rank-and-file members say they expect more concessions in the contract talks, while others are opposed because auto executives are making millions.

OTHER ISSUES: The companies also want to deal with absenteeism and the jobs bank, in which employees get most of their pay while not working. Both contribute to the higher costs, the companies say. But the biggest issue is the unfunded liability for retiree health care, estimated to total $90.5 billion for the Detroit automakers. The companies have floated the idea of paying part of the obligation into a union-run trust, relieving the companies of the obligation. Honda and Toyota, with far fewer retirees, don't have the same expenses. The union has declined to comment on such a move.