Pandit Needs Citi's Rebuilt Engine To Start Driving Profits

15th Jul 2010 20:14

By Matthias Rieker Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--On Friday, Citigroup Inc.'s (C) second-quarter results will show whether the bank is really turning a corner. Chief Executive Vikram Pandit is surely aware that Citi will have to demonstrate that the engine he reassembled from the wreckage of its corporate meltdown is strong enough to keep driving profits. Citi surprised its board and Wall Street in April with strong first-quarter results and improved revenue. Last year, the bank was profitable on and off, swayed by erratic charges and gains. Now the shrunken bank, once the biggest in the world, must demonstrate that its recovery--and Pandit's turnaround strategy--are on track, and its profits sustainable. To reassure investors, it needs to get rid of more unwanted businesses and loans, and generate a decent return on its core business. Analysts expect the bank to earn 5 cents per share, compared to 15 cents in the first quarter, according to Thomson Reuters. Under Pandit, Citi cut costs, rid itself of businesses and loans, and focused on doing more business with its core clients, rather than being all things to all people. Still, Citi's securities and commercial banking segment was the biggest swing factor in turning the fourth-quarter loss into a first-quarter profit. And since May, skittish capital markets have thrown a wrench into Pandit's progress. There are worrisome signs that banking in the U.S. has yet to recover. J.P. Morgan Chase & Co. (JPM) reported Thursday that its investment banking income fell 44% from the first quarter, to $1.4 billion, and that loan demand remained anemic. Citi, with its large international operations, depends less on the recovery of the U.S. economy. Pandit has pinned much hope on Citi's global empire. Barclays Capital analyst Jason Goldberg says Citi expects operations in Asia and Latin America to have helped Citi's second quarter. Still, three key questions--unrelated to capital markets and global banking--will weigh on investors' view of Citi's results Friday, said Morgan Stanley analyst Betsy Graseck: "Is credit improving, even at a slower rate? What is the underlying ROE and ROA? And what's the outlook on shrinking Citi Holdings and the consequent impact on capital?" Citi Holdings holds those assets and businesses Citi wants to sell or wind down. Citi recently announced deals to sell auto and credit card loan portfolios, and private equity funds. Goldberg said volatile markets so far haven't derailed Citi's efforts to shrink. If Citi falls short of expected results, Wall Street might not see it as a complete failure for Pandit, Graseck said. But analysts and investors will scrutinize carefully what happened. Any setback in Citi's core business will hit confidence in its recovery. Should Citi clear the earnings-expectations bar, Wall Street won't be as picky. Pandit wants to see revenue growth, but Wall Street and probably even Citi's own board will be satisfied if the bank simply has to allocate less money to bad loans. J.P. Morgan delivered an improvement in credit costs on Thursday, and it would be surprising if Citi failed to do so. -By Matthias Rieker, Dow Jones Newswires; 212-416-2471; [email protected] (END) Dow Jones Newswires July 15, 2010 15:14 ET (19:14 GMT)