Tough times for BoA and Citi

Bank of America asks for more government assistance and Citi restructures.
No one can honestly say they were expecting stellar earnings reports from Bank of America or Citigroup, but the news on Friday underscored the depth of the economic misery that the US û and the world û is in.

Citi's role as a global bank offers an insight into the global economic problems. Look at its earnings report and you see that Asia is playing a role in the decline of its business.

But first the headline news: On Friday, Bank of America reported a fourth-quarter loss of $1.79 billion, or 48 cents per share, compared with a year-earlier profit of $268 million, or 5 cents per share. It also said it needs more government assistance û to the tune of $20 billion. BoA's acquisition of Merrill Lynch, which lost $15.31 billion in the three months before the deal closed on January 1, is now very much in question by many analysts and shareholders.

So far, the US government has invested more than $90 billion in BoA and Citi combined.

Also on Friday, Citi reported a net loss for the 2008 fourth quarter of $8.29 billion, or $1.72 per share, based on 5.347 billion shares outstanding. The bank said that revenues of $5.6 billion were affected by write-downs and losses on securities and in banking. The results also included $6.1 billion in net credit losses and a $6 billion net loan loss reserve build.

For the full year 2008, Citi reported a net loss of $18.72 billion, or $3.88 per share.

The bank simultaneously announced that it will restructure into two businesses, Citicorp and Citi Holdings. Citicorp will focus on leveraging the company's global universal bank in more than 100 countries, while Citi Holdings will be made up of brokerage and retail asset management, local consumer finance and a special asset pool. The bank noted that the plan has already been discussed with CitiÆs primary regulators at the Federal Reserve Board.

"Given the economic and market environment, we have decided to accelerate the implementation of our strategy to focus on our core businesses,ö Citi CEO Vikram Pandit said in a statement. ôThis will help in our ongoing efforts to reduce our balance sheet and simplify our organisation, which will enable us to better serve our clients and customers in both businesses without disruption.ö

The statement added that ômanagement reporting will reflect this structure starting with the second quarter of this yearö.

The aim is for Citi to be a relationship-focused global bank to businesses and consumers. Citicorp's global institutional bank will consist of: global transaction services, the corporate and investment bank (which will be re-focused with a lower risk profile) and Citi private bank.

Citicorp's retail bank will consist of branded card businesses globally, regional consumer and commercial banking franchises in the US, Asia, Latin America, Central and Eastern Europe and the Middle East.

Citi Holdings will be a group of non-core businesses. These businesses and assets will initially include: brokerage and asset management (including Citi's 49% stake in Morgan Stanley Smith Barney, as well as Nikko Cordial Securities, Nikko Asset Management and Primerica Financial Services); local consumer finance (in Asia there are consumer finance operations in Japan, India, Thailand and Hong Kong); and a special asset pool, which will manage the assets covered by the loss-sharing agreement with the US government parties in a ring-fenced portfolio; and other non-strategic assets.

According to the Friday statement, a search for a strong manager with operational experience and capital markets knowledge to head Citi Holdings is currently underway.

Asia's role

Marketing wise, it was savvy to announce the restructuring plan alongside the earnings report. The plan helped balance headline news of a negative $10.6 billion securities and banking revenue in the institutional clients group, mainly due to net losses and write-downs of $7.8 billion; a $5.3 billion downward credit value adjustment on derivative positions, excluding monolines; and losses of $2.5 billion in private equity and equity investments. Asian revenues declined $2.6 billion, which the bank said reflected losses on proprietary investments and difficult market conditions. The decline was partially offset by a strong performance in rates and currencies.

Indeed, Asia was specifically mentioned with regard to a few of the business dips. For example, global wealth management revenues declined 18%, which the bank said was a reflection of ôthe adverse impact of market conditions on capital markets and investment revenues, particularly in North America and Asiaö. Global wealth management revenues declined 33% in Asia.

Meanwhile, credit costs increased 54% in Asia, reflecting a 32% or $39 million, increase in net credit losses, and a $46 million incremental net loan loss reserve build. The bank said that the higher credit costs reflect a continued deterioration, primarily in India. The net credit loss ratio increased by 96bp to 4.02%.

On the consumer banking front in Asia, excluding Japan Consumer Finance, revenues declined 20%, mainly driven by a significant decline in investment revenues as investment sales dropped 83%, which the bank said was a reflection of the decline in equity markets across Asia. The bank said that declines in average loans and deposits of 12% and 9%, respectively, were mainly due to the impact of foreign exchange. In Japan Consumer Finance, revenues declined 47%, reflecting a decline in net interest revenues as the portfolio continues to be managed down.

There are some silver linings in the announcement. For example, Citi said its deposit base remained stable compared to the third quarter of 2008, and expenses, excluding restructuring and repositioning charges, were down 4% since the third quarter 2008 and 14% since the fourth quarter 2007. Of course, Citi has reduced its staff by approximately 29,000 people since the third quarter, and by approximately 52,000 in the full year 2008.

ôWe continued to make progress on our primary goal in 2008 û which was to get fit,ö said Pandit in the announcement. ôWe significantly strengthened tier-1 and structural liquidity, we reduced our balance sheet, expenses, and headcount. We also made significant progress in reducing risk from our balance sheet. Our legacy assets declined to approximately $300 billion, over $300 billion of assets are now covered by a loss sharing arrangement, and we added $14 billion to our loan loss reserves.ö
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