Citigroup Inc.’s disclosure Monday of significantly increased credit costs within its consumer business last quarter, part of a four-pronged earnings warning, has some analysts reconsidering their views on the state of the consumer.

"This quarter, we continued to see higher delinquencies in our overall consumer mortgage portfolio, and our reserve increase reflects these trends," Gary Crittenden, Citi’s chief financial officer, said in a prerecorded conference call Monday, during which he and Charles O. Prince, Citi’s chairman and chief executive, discussed the company’s third-quarter performance.

Mr. Crittenden said that Citi also boosted reserves to address "losses inherent in our portfolios but not yet visible" and to address "declining new residential sales."

The company had nearly $6 billion of unexpected losses and charges in the third quarter, which would cause its earnings to "decline in the range of 60%," compared with a year earlier. Roughly 44% of the charges and losses, or $2.6 billion, came in the form of higher credit costs, largely related to its consumer portfolio, Mr. Crittenden said.

In the second quarter, the $2.2 trillion-asset New York company boosted its loan-loss reserve by $245 million, citing losses in its credit card business and a higher delinquency rate in its second-lien mortgage portfolio.

On Monday, Mr. Crittenden said third-quarter revenue growth in Citi’s U.S. consumer business would be reported as flat with the year earlier because the value of credit card securitizations has fallen as commercial paper spreads widened. In addition, the company chose to securitize card receivables that were "of higher credit quality" and fetched lower yields, he said.

In its first quarterly warning since the third quarter of 2001, Citi also said that it wrote down $1.4 billion, pretax, of leveraged finance commitments; lost $1.3 billion, pretax, on subprime mortgage-backed securities that were warehoused for future sale as collateralized debt obligations; and lost $600 million, pretax, on the fixed-income trading business.

Mr. Prince said all the factors above and the "deterioration we’re seeing in the consumer credit environment," made for a "very disappointing quarter for us."

Analysts questioned whether Citi’s third quarter is indicative of what to expect from other companies this earnings season.

"It’s interesting in that the publicly available data still paint a fairly benign picture of the U.S. consumer in the aggregate and we’re hearing of some deterioration and some reserve building at peers but we’re not hearing a similar magnitude," said analyst Jeffery Harte at Sandler O’Neill & Partners LP.

"I think you’ll see some increased credit costs and increased reserves from peers but not at the level that we see at Citigroup," he added.

Mr. Harte said that analysts will be watching whether this is "a sign that consumer credit quality is getting significantly worse or is Citigroup a bit of an outlier here?"

Tom Kersting, an analyst at Edward Jones, said he had expected some degree of reserve building at Citi but was surprised by its magnitude.

Analyst Michael L. Mayo at Deutsche Bank Securities LLC also said he was "surprised" by the size of the reserve and wondered whether Citi boosted its reserves now because it had the opportunity to do so while announcing several other negative items for the period.

"This is a clean-up time for the industry," Mr. Mayo said, adding that Mr. Prince should be replaced for presiding over such a noisy quarter. Citi declined to comment Monday on Mr. Mayo’s call for Mr. Prince’s ouster.

"While the losses are in several different business lines, they all stem from one common theme: the market’s fears about credit quality," Jaime Peters, an analyst at Morningstar Inc., wrote in a research note Monday.

Mr. Prince also echoed a comment made during last year’s third-quarter earnings call when an analyst asked about the company’s failure to achieve positive operating leverage. "We can do much better," he said again Monday.

The company’s failure to produce positive operating leverage will be a problem again this year when it reports earnings on Oct. 15. Mr. Crittenden said, "We expect expense growth to be higher than our expected revenue growth levels and result in significantly negative operating leverage in the third quarter."

The company’s third-quarter revenue should be flat with its revenue of $21.4 billion the year earlier.

"Looking ahead to the fourth quarter, while we obviously cannot predict market movements or other unforeseeable events that may affect our businesses, we expect to return to a more normal earnings environment as the year progresses," Mr. Prince added.

The reserve building will strain Citi’s capital ratios, which were already thinned by its purchase of Nikko Cordial Corp. in Tokyo, according to Mr. Crittenden. He said Citi expects to return to its targeted capital ratios of 7.5% in early 2008. It did not disclose what its capital ratio was at the end of the third quarter.

The company’s shares rose 2.3% Monday despite the bad news.

Edward Jones’ Mr. Kersting said the gain was probably driven by the fact that some investors were expecting a preannouncement from Citi.
"People are expecting some significant writedowns for various businesses," he said, "and Citigroup came out, and the number looks big and relatively alarming, but the market is sort of shrugging this off and saying, ‘Yeah, we expected pretty negative results.’ "

Deutsche’s Mr. Mayo said investors might view it as house cleaning by Citi.

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