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Citi: Consumer Credit Woes Moderating

The bank cites slowing deterioration in mortgages and credit cards, though some analysts say it may be too soon to call a bottom

Is the worst over for the consumer credit crisis? Citigroup (C) said on July 17 that it was seeing some moderation in consumer credit losses and that it could signal a plateau for distressed mortgages and credit cards.

In a conference call with analysts, bank officials said they foresee a moderation in growth of net credit losses for the second half of the year. Meanwhile, cost-cutting and asset sales are boosting profits. "We are encouraged," said new CFO John Gerspach.

Citi reported net income for the quarter of $4.3 billion, or 49¢ a share, on revenues of $30 billion. That compares with a net loss of $2.5 billion, or a loss of 55¢ a share, on revenues of $17.5 billion for the corresponding quarter of 2008.

Citi's results were boosted by an $11.1 billion pretax gain on the sale of a majority stake in its Smith Barney brokerage unit. Without that gain, Citi would have lost $2.4 billion in the quarter.

Citi shares fell slightly in Friday trading.

Credit Cycle: Past the Bottom?

Citigroup CEO Vikram Pandit said in the conference call that the credit cycle typically has three overlapping phases: a "mark-to-market phase for trading assets," the consumer credit cycle, and the commercial real estate cycle.

"Over the past several quarters, we had significant losses in the first phase; this quarter saw slightly positive marks," Pandit said. "While one can never be sure, this phase of the cycle may be largely behind us."

Pandit said Citi has "seen some encouraging signs lately" regarding consumer credit and has reduced its exposure to commercial real estate.

Among the signs noted by Gerspach is a moderation in the growth of mortgage delinquencies and signs of improvement in the rate of credit-card delinquencies.

Some Analysts Not as Optimistic

But Scott Sprinzen, a financial analyst at Standard & Poor's—like BusinessWeek, a unit of The McGraw-Hill Companies (MHP)—is not so sure the worst is over.

"It was a generally weak quarter overall despite the large reported net earnings," said Sprinzen. "There isn't enough evidence to draw a definitive conclusion. We're still skeptical that the bottom has been reached in the credit cycle." The good news, he noted, is that Citi has an outsized pool of reserves relative to other banks, which "positions them well if there should be further deterioration in the portfolio."

Sprinzen says a strength that both JPMorgan Chase (JPM) and Citi shared was the diversification of their business lines: "The investment bank including the trading operations helped to make up for some of the weaknesses in the commercial bank. At least it worked to their advantage so far this year."

Steve Sherman, the director of research at the Aston/Optimum Large Cap Opportunity Fund (AOLCX), also noted that concerns about consumers are still worrying investors.

"There's a fair amount of concern about credit-card lines and leverage to the consumer," Sherman said. That a company with $1.8 trillion in assets is valued at $17 billion means that "investors are saying we don't really know how much they are going to make on these assets. And the potential losses on those numbers could dwarf the value of the business."

Der Hovanesian is Banking editor for BusinessWeek in New York. Mintz is news editor for in New York.

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