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Citigroup restates Q3 earnings on $600M legal charges

Following the ongoing regulatory inquiries and investigations, Citigroup Inc. (C) restated its third-quarter 2014 earnings, giving effect to additional legal charges worth $600 million. This announcement led to a 1.92% fall in the bank’s share price in after-hours trading session.

The Justice Department along with the Commodity Futures Trading Commission and regulators in Britain and Switzerland are working on criminal and antitrust investigations and expects the bank’s full co-operation. Notably, after discussions with the U.K. Financial Conduct Authority (FCA), which is in settlement talks with JPMorgan Chase & Co. (JPM), UBS AG (UBS), Barclays Plc (BCS), HSBC Holdings Plc (HSBC) and Royal Bank of Scotland Group Plc (RBS), Citigroup increased its legal reserves.

The bank is expected to be charged $300 to $400 million for settling currency-benchmark manipulation inquiry. However, the FCA is planning to make some settlements in November.

Restated Results

Citigroup lowered net income for third-quarter 2014 to $2.8 billion or 88 cents per share from $3.4 billion or $1.07 per share, as operating expenses were adjusted at $13 billion including additional legal expenses of $600 million. Further, efficiency ratio was increased by 300 basis points to 66%.

Among other metrics, return on average assets was reduced by 13 basis points to 0.59% and return on average common stockholders’ equity declined 120 basis points to 5.3%.

All fully implemented Basel III ratios were revised lower. Common Equity Tier 1 Capital, Tier 1 Capital, Total Capital and Estimated Supplementary Leverage Ratio were restated at 10.66%, 11.43%, 12.77% and 5.99%, respectively from 10.74%, 11.51%, 12.85% and 6.02%, respectively.

Further, both book value per common share and tangible book value per common share were reduced by 20 cents to $67.11 and $57.53 per share, respectively.


For the second time in a year, this banking giant has restated its results. Previously, following the detection of fraud in its Mexico-based subsidiary, Citigroup announced revised earnings for fourth-quarter 2013 and full-year 2013 in Feb 2014. Due to the fraudulent activity, the company recorded post-tax $235 million (pre-tax $360 million) as charges, which led its net income for 2013 to fall to $13.7 billion from $13.9 billion.

Citigroup has come a long way since 2008, when it had to accept $45 billion as bailout money to survive the economic downturn. Citigroup is striving hard to bring an end to the litigation issues and move forward. Though higher legal costs drove down profitability, such settlements bring relief to affected investors and help resolve the bank’s shoddy practices to a large extent.

Trouble has been brewing for the banks for quite sometime now. A slew of lawsuits have continued for major banks since the financial meltdown. Numerous lawsuits alleging banks of such wrongdoings are expected to tarnish their reputation and financials over time.

Moreover, pending lawsuits further trigger financial hassles while tarnishing the company’s image. Therefore, it is in the interest of the company to resolve such matters at the earliest. However, investors and other financial institutions bearing the brunt of these faulty practices are expected to be fairly compensated.

The lawsuit settlement by banks stress on their efforts to resolve all legal issues, and thereby reduce costs over the upcoming period. Moreover, such agreements will likely help revive the economy, and bode well for the company.

Citigroup currently carries a Zacks Rank #3 (Hold).
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