Citigroup (C) Q4 Results to Record $2.7B Legal Charges
On Tuesday, following the ongoing regulatory inquiries and investigations, Citigroup Inc. (C) announced expected legal and related costs of about $2.7 billion to be recorded in the fourth-quarter 2014 results, thereby impacting profits of the bank. Moreover, repositioning costs of about $800 million are expected. Notably, after giving effect to such costs, marginal profit is anticipated in the fourth quarter.
The company expects to incur litigation charges related to recent foreign exchange investigations, LIBOR-related investigations along with anti-money laundering and related compliance investigations.
Further, repositioning costs, which are expected to trend higher, are on additional cost cutting including headcount reductions. Notably, Mike Corbat, the chief executive officer (CEO) of Citigroup announced in Mar 2013 that his plan involved restructuring, reducing or exiting some of the operations in 21 markets globally to enhance returns. It was intimated that most of these involve consumer businesses. Therefore, with the ambition of achieving financial targets in 2015 by restructuring the business, Citigroup retreated from the consumer banking business in slow-growth markets including Japan, Egypt and Hungary.
Concurrent with the third-quarter 2014 earnings release in October, in continuation of the streamlining of its international operations, Citigroup also announced “strategic actions.” The company stated that it proposes to exit the consumer banking business in 11 markets. The global footprint will now cover 24 markets that represent more than 95% of Global Consumer Banking’s (:GCB) current revenues.
The 11 markets include Costa Rica, Czech Republic, Egypt, El Salvador, Guam, Guatemala, Hungary and Japan. Citigroup expects to significantly complete its strategic actions by the end of 2015. The move comes in line with the company’s strategy to focus on markets where it has a strong presence and long-term growth prospects.
Therefore, according to Corbat, Citigroup is following its strategy of reducing costs through streamlining and enhancing returns and serving its clients in a better way. Moreover, legal charges expected in the fourth quarter will help in meeting mostly current outstanding litigations. However, these charges might rise following any further relevant issue.
Citigroup also restated its third-quarter 2014 earnings, giving effect to additional legal charges worth $600 million. Notably, after British and Swiss regulators probing into the foreign exchange market manipulation charged six major global banks, Citigroup was charged with $358 million to the UK's Financial Conduct Authority (FCA), $350 million to the Office of the US Comptroller of the Currency (OCC) and $310 million to the Commodity Futures Trading Commission (:CFTC).
Conclusion
Citigroup has come a long way since 2008, when it had to accept $45 billion as bailout money to survive the economic downturn. Citigroup is striving hard to bring an end to the litigation issues and move forward. Though higher legal costs drove down profitability, such settlements bring relief to affected investors and help resolve the bank’s shoddy practices to a large extent.
Trouble has been brewing for the banks for quite sometime now. A slew of lawsuits have continued for major banks since the financial meltdown. Numerous lawsuits alleging banks of such wrongdoings are expected to tarnish their reputation and financials over time.
Amid troubled tides, Citigroup is encountering issues from various fronts including the ongoing investigations related to the Mexican fraud and the Federal Reserve’s rejection of its 2014 capital plan. On the capital front, Citigroup is working to improvise the loopholes of the rejected 2014 Capita Plan and is preparing for the 2015 Capital Plan.
We believe the company is well positioned to resolve its internal inefficiencies and setbacks. Further, we believe the streamlining initiatives will bolster the company’s capital position, reduce expenses and drive operational efficiencies.
Citigroup currently carries a Zacks Rank #3 (Hold). Some better-ranked finance stocks include LNB Bancorp Inc. (LNBB), German American Bancorp Inc. (GABC) and Heartland Financial USA, Inc. (HTLF). All three carry a Zacks Rank #2 (Buy).
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