The bank experienced a total write-down of $3.55 billion on its fixed-income and credit businesses in the third quarter of the year. "The losses in fixed income were within the range of predicted outcomes, but at the far end of the range," said Prince.
The $2.8 billion write-down in the credit sector, however, was "greater than would have been expected from the market dislocation, and simply reflects poor performance," Prince said. "The quarter was well below expectations and frankly surprising."
Citigroup expects the deterioration to continue for the rest of this year.
Many of the problems were due to the bank's exposure to the US mortgage market. It had $24 billion of subprime exposure at the start of the year, and $13 billion by the end of the second quarter. This figure had declined slightly over the third quarter, said chief financial officer Gary Crittenden. The credit losses were $250 million higher than the bank originally warned last month, as its portfolio deteriorated faster than expected.
The bank also underestimated its losses on its holdings of collateralised debt and loan obligations, which were $1.56 billion – again $250 million higher than the original warning. In this case, Citigroup said the mismatch was due to "refinement of loss calculations".
Citigroup's announcement is the latest and most dramatic in a series of significant write-downs by banks. But several analysts doubt whether the write-downs have been large enough. In a research note late last month, Diane Hinton, a New York-based analyst for the rating agency Standard & Poor's, commented: "Questions remain on whether the [write-downs] are sufficient, given the inherent difficulty of valuing assets in a dry market... we also note a broader lack of reporting transparency concerning valuation methods and inputs used."See also: Merrill writedowns throw light on risk management
Credit Suisse and Citi expect profit losses for Q3
UBS takes $3.4 billion hit
Credit and liquidity risk hammer earnings
The week on Risk.net, July 7-13, 2018Receive this by email