Is this beginning of the end of elevated legal costs for the industry?
Citigroup on Tuesday said it will record a fourth-quarter charge of about $2.7 billion to cover its heavy legal bills. Notably, the $1.4 trillion-asset company said the charge should be enough to "cover a significant portion of our outstanding legal matters based on current information."
Chief Executive Michael Corbat elaborated on that message during a presentation Tuesday at the Goldman Sachs U.S. Financial Services Conference 2014.
"Clearly we have been operating in a heightened legal and settlement environment," Corbat said. "I think we have done a good job this year in terms of getting mortgage [settlements] and getting some other important things behind us."
"We think [the $2.7 billion charge] largely addresses those issues," Corbat said. "But until they are closed you can't say they are done and behind you."
Citigroup disclosed the charge at the Goldman conference.
Investors certainly hope Corbat is right. Citigroup and virtually all of its large-bank brethren have been repeatedly hammered with expenses to cover litigation and investigations stemming from the financial crisis. Just last quarter, Citigroup increased its legal provisions by $600 million because of the investigations into its alleged manipulation of the foreign-exchange markets.
Citigroup and Bank of America were among six banks that agreed last month to pay a combined $4.3 billion to settle allegations they had tried to rig the foreign-exchange market.
Citigroup's charge seemed to signal that the company is wrapping up its legal issues, said Marty Mosby, an analyst at Vining Sparks IBG.
"It's probably not 100% of [their legal issues], but it's a majority of the clearing of the decks," Mosby said.
Many banks record additional charges for legal matters in the fourth quarter, and other banks may follow Citigroup's lead, Mosby said. However, neither Bank of America nor Wells Fargo, which both presented on Tuesday at the Goldman conference, mentioned their legal bills or expenses.
One investor who attended the Goldman conference expressed his frustration with Corbat during an question-and-answer period with the audience.
"I kind of feel like Lucy and the football as it relates to these repositioning charges and legal costs, although it is not just you, but a lot of banks," said the investor, who was not identified during the presentation. "You have already had a large mortgage settlement cost. You failed [the] CCAR [stress tests],obviously. All of which, I hope will be reflected when the management's compensation is evaluated for next year."
Those aren't Citigroup's only legal headaches, however, as the New York bank continues to face inquiries into several matters. During a Q-and-A with Goldman analyst Richard Ramsden, Corbat said the company's most significant issues still outstanding are "the combination of foreign exchange," London interbank offered rate and anti-money-laundering probes, and "some other small ones."
Citigroup did not provide a breakout of how much of the $2.7 billion charge would apply for each legal issue. The company also did not say if the charge would definitively cover all legal issues. Mark Costiglio, a Citigroup spokesman, referred questions about the $2.7 billion charge to the press release and to Corbat's comments at the Goldman conference.
In addition to the $2.7 billion legal charge, Citigroup will record a charge of about $800 million in the fourth quarter to cover the costs of reducing employee headcount and close branches. As a result, Citigroup will be "marginally profitable" in the fourth quarter. Citigroup said it will report fourth-quarter earnings on Jan. 15.
The investor who complained to Corbat asked Corbat if he was confident that the legal issues would not repeat themselves next year.
"We've tried to recognize based on conversations, based on things in the market what we think is a number that puts us in the ballpark of what those should be," Corbat said. "But candidly we don't control that at the end of the day."
The way Citigroup appears to be wrapping up its issues with legal costs closely resembles what happened at Bank of America, Mosby said. Mortgage-related legal issues plagued Bank of America, while Citigroup has been plagued with issues tied to foreign-exchange markets and the alleged rigging of LIBOR.
"Back in 2012, Bank of America had this cloud of uncertainty and pressure on top of them, but they aggressively addressed their issues and were able to take care of most of them, and it brought B of A back," Mosby said. "Citi has been having to deal with the same things, and it seems like they now are at the point where they are feeling pretty comfortable that it's behind them."