Citigroup's cost cuts may not bring 09 profit

NEW YORK, Nov 17 - Heads may be rolling at Citigroup Inc, but that won't necessarily stop the red ink from flowing next year.

The bank said earlier Monday it expects to shed 52,000 jobs by early 2009 to cut costs as global economies slow. But if the company's credit losses are big enough, they may overwhelm any savings from cost cutting.

"Performance will be determined by how big credit losses are," Bill Fitzpatrick, equity research analyst for financial stocks at Optique Capital Management in Milwaukee, said Monday. Optique does not own Citigroup shares.

"They're taking the right steps, but you need a more benign economic environment before the company and the stock price recovers," Fitzpatrick said.

It is easy to imagine Citigroup losing money in 2009 for the second straight year.

The bank is trying to scale its balance sheet down to roughly its size in 2005 and 2006.

If it were to generate about $85 billion in revenue in 2009, similar to levels of a few years ago, and expenses were no more than the $50 billion to $52 billion it is aiming for, it could face losses if it had to set aside at least $35 billion for the year to cover loan losses.

That amounts to $8.75 billion a quarter, which Citigroup could easily surpass after setting aside $9 billion in the third quarter of this year. It is widely believed that economies worldwide deteriorated markedly in October and early November, and reserves for loan losses could increase quickly.

"Commercial loans, emerging markets loans, credit card loans, they're all under pressure," said James Ellman, president of hedge fund Seacliff Capital in San Francisco.

PROFIT SCENARIO

Citigroup may be able to turn a profit in next year's third and fourth quarters, particularly if the economy starts to stabilize or recover.

The bank has recorded higher loss reserves relative to loans than many of its peers, including JPMorgan Chase & Co, which means it may not have to set aside money for losses as aggressively as it has done this year.

Veteran banking analyst Charles Peabody sees Citigroup setting aside about $20 billion for credit losses next year, with the biggest hit in the first quarter.

Citigroup's biggest U.S. credit exposure by far is in the housing market, Peabody said. If that market stabilizes, the effect of credit deterioration in other markets will look comparatively small.

The bank's share price may decline further in the near term, but could double in 12 to 18 months, assuming the company can generate $2 of profit per share a year, and shares trade at about 10 times their earnings, he added.

"It's a very compelling value," Peabody said.

Citigroup stock fell 63 cents, or 6.6 percent, to $8.89 on the New York Stock Exchange on Monday.

Wall Street analysts, on average, expect Citigroup to earn $1.05 a share before items next year, according to Reuters Estimates.

But analysts cautioned that predicting the outlook for any bank is difficult, and 2009 may be a grim year for Citigroup.

"Citi is not out of the woods yet," Optique's Fitzpatrick said.