Citi Scopes Out Its Turning Point — 2012

"America's global bank," as Citigroup Inc. was dubbed this year by its chief executive, has finally found something in America to be encouraged about.

For the first time since the company began crawling out of the loan distress accompanying the financial crisis, its quarterly net credit losses tied to consumer lending shrank faster in North America than in the rest of the world, perhaps signaling that the overseas recovery trends Citi has benefited from all year are finally starting to make landfall here.

Net credit losses in the consumer business fell nearly 11% during the third quarter in North America, to $5.5 billion. Elsewhere, net credit losses dropped 7.7%, to $1.2 billion.

The dollar amounts remained high by any measure but were not worrisome enough to prevent CEO Vikram Pandit from predicting Monday that Citi would start returning capital to investors the year after next.

Pandit's pronouncement, which triggered something of an intraday run-up in Citi's share price, was vaguely reminiscent of the assurances he gave in March 2009 that Citi was returning to profitability after a frightening flirtation with insolvency in late 2008. That declaration, communicated in an employee memo strategically leaked worldwide in the weeks leading up to the company's report on results from the first quarter of 2009, generated an immediate pop in Citi's shares and served to calm a panicky market, helping pave the way for a dramatic run-up in stocks that year.

Pandit's pronouncement about returning capital to shareholders in 2012 might never achieve similar status as a distinct turning point for the company, but at least this time he had plenty of numbers at the ready to help support his case. Citi ended the quarter with a Tier 1 capital ratio of 12.5%, up from 12% in the previous quarter. The Tier 1 common ratio rose, from 9.7%, to 10.3%, which should leave the company on safe ground as the Basel Committee on Banking Supervision reworks capital requirements for banks.

"Given our businesses, our strategy and our current understanding of Basel requirements, we believe the right level at which Citi should operate long-term is at a Tier 1 common ratio of 8% to 9%. We currently expect to exceed these levels in 2012," Pandit said Monday on a conference call with analysts.

"As we have been saying, we believe that 2011 will be a year of rulemaking in the U.S. and model calibration across the industry," he said. "As a result, we anticipate that we should be in a position to return capital to our shareholders in 2012, subject to our regulators' providing additional guidance to the industry."

Whether the capital would be returned in the form of dividends or share buybacks has not yet been determined, Pandit said, and probably will not be discussed until late 2011 or early 2012.

Citigroup, meanwhile, will focus on further draining the pool of assets in Citi Holdings, the division comprising distressed or noncore investments and businesses that the parent intends to shed. At the end of the third quarter, Citi Holdings had $421 billion of assets, accounting for 21% of the company's total. Chief Financial Officer John Gerspach said the division should shrink below $400 billion of assets by yearend.

Citi Holdings, which includes the retail-partner cards business and the CitiFinancial subprime consumer lending network, still accounts for the bulk of the company's net credit losses. About $4 billion of the company's $6.7 billion in third-quarter consumer credit losses were contained in the division.

Citi earned nearly $2.2 billion in the third quarter, including a $2 billion release of loan-loss reserves and a $435 million loss on the recently announced sale of student-loan assets. Per-share earnings of 7 cents topped Wall Street's average estimate by a penny and reversed a year-earlier loss of 27 cents a share. The results were not as strong as the previous quarter's, owing to the student-loan transaction and an anticipated profit contraction in the securities and investment banking division, where net income fell 17% from the second quarter. But net income from consumer banking rose 5%, driven by Latin America and North America.

Unlike rival JPMorgan Chase & Co., Citi did not set aside significant litigation reserves in the quarter to cover legal costs potentially stemming from the scandals upending home foreclosures.

Gerspach distanced Citi from the foreclosure troubles that surfaced in recent weeks. He told reporters on the conference call that Citi had not relied on so-called robo-signers to push through affidavits and had not turned up anything in internal reviews of policies and processes to suggest the need for a foreclosure moratorium.

The company did annual training of, and required annual certification for, mortgage-servicing employees involved foreclosures, Gerspach said. "They understand the fact that they need to have personal awareness of the information in the affidavits; they understand that the affidavits need to be signed in front of a notary," he said.

He said Citi was appropriately staffed to "handle the onslaught" of foreclosures and loan workouts. And though the company had ties to a Florida law firm being examined to determine whether it submitted improper loan documentation in the state's courts, Gerspach reiterated Citi's announcement from last week that it has stopped referring foreclosure work to the firm, the Law Offices of David J. Stern PA.

He also said that, at the time Citi used the third party, the firm had been approved by the government-sponsored enterprises that provide the backbone for the U.S. housing finance system.

When asked whether government officials, either in their capacity as regulators or as caretakers for the 12% equity stake in Citi that remains in the hands of the Treasury Department, had discussed with, or recommended to, Citi the idea of a foreclosure moratorium, Gerspach replied, "Not at all."

Citi's stock rose 5.6% in Monday's session to close at $4.17 a share.