Citigroup Inc. set aside $1.5 billion in the fourth quarter to settle claims that it misled customers with biased stock research and to cover loan losses.
The provision includes $200 million in additional reserves for bad loans, a $400 million payment to settle regulatory probes into Wall Street’s conflicts of interest in stock research and funds for related lawsuits. The world’s largest financial services company will still report 2002 net income that’s greater than any other company, Chief Executive Officer Sanford Weill said on a conference call.
Citigroup is the first of several banks expected to reduce earnings after Friday’s announcement of a $1.4 billion settlement between state and federal regulators and the 10 largest securities firms over research conflicts. Concerns about regulatory investigations and litigation have helped push Citigroup shares down 19 percent this year, the largest annual decline in a decade.
”The increase in the legal reserve should give investors some solace that they’re not going to have to think about this for a while,” said Steve Wharton, who helps manage $60 billion for Loomis Sayles Inc., including Citigroup shares.
Citigroup faces at least 62 lawsuits tied to its research practices, according to regulatory filings.
The charge will reduce Citigroup’s fourth-quarter earnings by 29 cents a share. Analysts had expected the bank to earn 75 cents, according to Thomson First Call, or $3.79 billion based on the total shares outstanding as of October.
Goldman Sachs analyst Richard Strauss lowered his fourth-quarter profit forecast for Citigroup to 45 cents a share from his previous estimate of 74 cents. Strauss expects Citigroup to earn $2.61 a share for all of 2002, down from $2.90 a share the previous year.
The earnings announcement concludes a year in which Citigroup confronted mounting loan losses in Argentina, the energy industry and elsewhere, in addition to regulatory inquiries into its business with Enron Corp. and into its stock research.
”The year 2002 has been a very difficult one for our company,” Weill said. Still, Citigroup will report record net income for the year, which probably will be more than any company in the world, Weill said. ”Not a bad performance when you consider what we had to face.”
The $200 million increase in reserves for bad loans amounts to 4 cents a share. Bank of America Corp., the No. 3 U.S. bank, announced Monday that loan losses related to airline and utility companies would require it to set aside $1.2 billion in reserves in the fourth quarter.
Citigroup’s remaining provision of $1.3 billion, or 25 cents a share, is to cover ongoing probes into its business with Enron, lawsuits related to both Enron and stock research probes and the $400 million research settlement with regulators.
The bank is defending itself vigorously against the lawsuits, which may take several years to resolve, Weill said.
Weill said he and his managers came up with a figure based on their ”best judgment” now because ”we wanted to understand what we might have to settle for over a period of many years in the future.” The company did not break down what portion of the $1.3 billion had been set aside for each group of claims.
The reserves may not ultimately be enough to cover the entire cost of settling private litigation.
In the 1990s, Prudential Financial Inc., for example, ended up paying about three times as much as it originally estimated to settle regulatory charges and investor lawsuits alleging that its Prudential Securities Inc. brokerage subsidiary fraudulently sold $8 billion of limited partnerships during the 1980s.
New York securities lawyer Mark Gardy said the government’s investigation of the banks will result in the disclosure of documents and other evidence that will provide ammunition for their lawsuits. Gardy is suing several investment banks for fraud.
Citigroup shares fell 46 cents to $37.68 in New York Stock Exchange composite trading.
The other banks involved in the settlement were Credit Suisse First Boston, Merrill Lynch & Co., Goldman Sachs Group Inc., Morgan Stanley, Lehman Bros. Holdings Inc., Deutsche Bank AG, UBS Warburg and J.P. Morgan Chase & Co.
The agreement, which includes fines and funds for independent research and restitution to investors, ended a year of probes into how securities firms issued research reports and allocated shares of initial public offerings as markets soared in the late 1990s.
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