Citi Adds Billions To Penalty Funds

   (FROM THE WALL STREET JOURNAL 12/10/14) 
   By Christina Rexrode 

Citigroup Inc. said it would spend $2.7 billion to bolster its legal reserves, wiping out the bulk of its expected fourth-quarter profit and delivering a fresh setback in what was supposed to be a turnaround year.

The nation's third-largest bank also said it would recognize $800 million in so-called repositioning costs, its largest cost-cutting tab since Chief Executive Michael Corbat took the reins two years ago.

The developments signal that the New York company is struggling to put its house in order amid deepening legal probes and uneven economic conditions that pressure profits in Citigroup's global banking and trading businesses. Citigroup shares fell 52 cents, or 0.9%, to $55.85 Tuesday, the worst performance among the largest U.S. banks.

Tuesday's announcement raises questions about whether Mr. Corbat "has produced this promised new era at Citigroup," said Arthur Wilmarth, a law professor at George Washington University in Washington who studies financial markets.

The New York company's decision to announce the charges in mid-December, more than a month before fourth-quarter results are due to be published, underscores the perception that pressure from regulators and investors is mounting after Citigroup this past spring failed the Federal Reserve's annual stress test.

Citigroup was the only big bank to disclose major new expenses Tuesday. Top executives of Bank of America Corp. and Wells Fargo & Co. also presented at an investor conference hosted by Goldman Sachs Group Inc.

There is "investor fatigue" with announcements of new legal charges, said William Schwartz, a senior vice president at DBRS, a credit research and ratings firm. Even though the announcement signals that the settlements are progressing, "It's another annoying big charge."

The legal charge covers the costs of continuing investigations into how the bank has complied with anti-money-laundering rules and probes of its trading in currencies and interest rates.

Speaking at the investor conference, Mr. Corbat said Tuesday that the fourth-quarter charge should allow the bank to "largely put those [issues] behind us."

Mr. Corbat said he thought the bank still would be "marginally profitable" in the fourth quarter. Analysts were expecting a profit of $1.12 a share, up from 82 cents a year earlier, according to FactSet. (Estimates often exclude one-time charges.) Mr. Corbat said Citigroup will "try and really shoot for a clean 2015" after taking substantial charges this year.

But Mr. Corbat also acknowledged that legal costs are notoriously hard to predict. In late October, the bank had to adjust its previously announced third-quarter earnings as it increased the amount of money set aside toward an expected legal settlement tied to its foreign-exchange trading. Citigroup and other banks last month settled foreign-exchange claims with regulators in the U.S. and U.K., though settlements with the Federal Reserve and Justice Department still are expected.

Since Mr. Corbat was named CEO in 2012, he has sought to shrink the bank to make it nimbler and more transparent. Investors had hoped Mr. Corbat's strategy would start to bear fruit in 2014.

But regulatory issues at Citigroup's Mexico unit, Banamex, a $7 billion mortgage-securities settlement with the Justice Department and a failure to gain approval for a dividend increase from the Fed disappointed investors this year.

One questioner at the conference Tuesday summed up some of the frustration, saying: "I kind of feel like Lucy and the football as it relates to these repositioning charges and legal costs, and it is not just you but it is a lot of banks." The allusion was to a recurring scene in the "Peanuts" cartoons in which Lucy pulls the football away just as Charlie Brown is set to kick it.

Under accounting rules, banks must disclose increases in their expected legal costs when they think it is "reasonably possible" they will incur such costs. But they only book those higher costs, as Citigroup did, when they deem it "probable" they will incur them, a higher standard, said Russell Golden, chairman of the Financial Accounting Standards Board.

Citigroup's Mr. Corbat said recent discussions with regulators gave the bank more clarity on what it may have to pay to ultimately put legal issues behind it. Some analysts say Citigroup may be trying to pave the way for a successful dividend or share-repurchase request in the spring tied to the next round of Fed "stress tests," which subject banks to large, hypothetical losses in a market shock or economic downturn.

After the Fed questioned Citigroup's risk management in this past year's stress test, the bank may have made a decision to treat potential losses more conservatively, said Marty Mosby, director of banking and equity strategies at Vining Sparks, an investment firm in Memphis, Tenn.

"Anything that you can do that's behind you, not in front of you, creates less uncertainty and less stress in a worst-case scenario," Mr. Mosby said.

Mr. Corbat said the bank has reworked more than half its stress-test models and was encouraging a "bottoms-up" approach to assessing risk.

"I can put my hand on heart and say I think we've done everything we can do," he said.

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Michael Rapoport and John Carney contributed to this article.

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