Citigroup lifts US banking shares

UK banking shares rose yesterday after Citigroup, a US financial sector heavyweight, reported a smaller-than-estimated loss by reducing mortgage-bond writedowns, eliminating jobs and borrowing money at lower rates.

"Citigroup has been the turning point for the session," said Martin Slaney, head of spread betting at GFT Global Markets. "It has put a positive shine on still negative news."

Banks, which have been hit hard by the global credit squeeze and other factors, topped the list of gainers on the London Stock Exchange's FTSE-100 index. HSBC closed the session up 3.7%, Royal Bank of Scotland ended nearly 10% stronger and Barclays finished up 9.7%.

"The market was conditioned to expect something really bad (from Citigroup) and in fact it's not quite as bad as everybody expected, there is a bit of relief," said Mike Lenhoff, chief strategist and head of research at Brewin Dolphin.

In New York, meanwhile, Citigroup, the biggest US bank by assets, said its second-quarter net loss was $2.5bn (£1.25bn). The group said its earnings were hit by writedowns and increased bad-loan reserves. Wall Street analysts estimated the New York-based bank's loss at $3.67bn.

The bank's securities and banking division wrote down the value of its assets by $7.2bn before taxes, and an asset revaluation cost its consumer lending business $745m. Those writedowns totalling about $8bn are significantly lower than writedowns taken in the first quarter and in last year's fourth quarter. Credit Suisse Group analyst Susan Roth Katzke predicted in a June 24 note that the company would have as much as $10bn in writedowns for the second quarter.

However, credit costs jumped to $7.2bn as more consumers defaulted on their loans - implying that while losses in the credit markets are decelerating, losses from actual defaults in Citigroup's mortgages, home equity loans, car loans and credit card lines are mounting.

The $7.2bn in credit costs included $4.4bn in credit losses and a $2.5bn charge to bulk up reserves for future loan losses.

Citigroup has failed to turn a profit for three straight quarters, losing a cumulative $17.4bn during that period after writing down its assets by about $46bn. Its shares have tumbled by more than 60% during the past year, and recently hit their lowest point since the day Citicorp and the Travelers merged in October 1998.

But after better-than-expected results from two other big consumer banks this week - JPMorgan Chase and Wells Fargo - the market appears to be deciding that the prospect for the ailing financial sector may not be as dire as they feared.

Citigroup's results were helped by a number of measures to shrink the bank's balance sheet taken by chief executive Vikram Pandit. Since he took over in December, Citigroup's assets have fallen by $99bn since the first quarter. Pandit has also been moving to slice Citi's cost base and the bank said it had cut 6000 jobs in the second quarter and 11,000 in the first half of the year.

Earlier this month, Pandit agreed to sell Citigroup's German consumer banking business to the French-owned Credit Mutuel Group for around $8bn. Citigroup revealed earlier this year that it hopes to offload $400bn of assets.

The bank has already cut its dividend and raised more than $40bn of capital.

In other moves to revitalise the business, Pandit put former Morgan Stanley colleague John Havens in charge of trading and investment banking, assigned US consumer head Steve Freiberg to oversee a new credit card division and recruited former Wells Fargo executive Terri Dial to oversee consumer banking in the United States.

Elsewhere in the financial sector, the Wall Street Journal reported that the big mortgage company Freddie Mac is considering raising capital by selling as much as $10bn in new shares to investors.