Citi Drops After CFO Warns More Reserves Coming in Third Quarter

(Bloomberg) -- Citigroup Inc. shares dropped after Chief Financial Officer Mark Mason warned revenue would drop and the bank would set aside more in reserves to cover potential losses in the third quarter.

While the reserve build will be “meaningfully lower” than it was in the first two quarters of this year, the bank now expects a slower recovery than it did at the end of June, Mason told investors at a conference on Monday.

“That’s really due to a slower pace of rehiring,” Mason said. He also mentioned “a slower pace of recovery in terms of consumer behavior and buying activity.”

Citigroup, the world’s largest credit-card issuer, increased reserves by roughly $10.5 billion in the first six months of the year as unemployment soared during the coronavirus pandemic and millions of Americans sought relief on their bills from banks. Many banks have grown worried about a second wave of layoffs hitting white-collar workers and sparking industrywide increases in losses.

Mason said Citigroup expects revenue from fixed-income and equities trading to climb by a percentage in the low double digits in the third quarter. Still, firmwide revenue will probably fall by a percentage in the high single digits because those increases will be countered by lower interest rates, less consumer spending and muted investment-banking activity, he said.

Citigroup shares dropped 0.5% to $50.75 at 2:23 p.m. in New York, making it the second-worst performer in the S&P 500 Financials Index. The stock has fallen 36% this year, compared with the 19% decline for the 66-company index.

In response to the pandemic, Citigroup will begin the “rationalization” of its organizational structure, the bank said in a presentation posted on its website. It will also further consolidate its real estate footprint and begin moving employees to lower-cost locations. Mason didn’t discuss those moves in his verbal remarks.

“We’re operating in unprecedented and uncertain times, but we’re managing well through this crisis,” Mason said.

Loan Error

Mason also acknowledged the recent operational error by Citigroup in which $900 million was mistakenly sent to a group of hedge funds that were acting as lenders to the cosmetics giant Revlon Inc. Mason called the error unacceptable, saying the firm accelerated plans for new software to handle such payments. The Wall Street Journal reported Monday that regulators are planning a consent order against the bank for failing to improve risk-management systems.

The bank has made $1 billion of additional investments in its infrastructure and controls this year, he said. It also appointed Karen Peetz as chief administrative officer and will centralize governance and regulatory affairs efforts under her.

“These investments have served us well as we manage today through the impact of Covid-19,” Mason said.

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