Loan woes hurt Citigroup, UBS AG

Bank stocks rise despite bad news about loan losses.

NEW YORK (AP) — Citigroup Inc. and UBS AG warned they suffered significant loan-related losses in the third quarter, becoming the latest and biggest banks to reveal huge ill effects from the spike in mortgage defaults and freeze-up in the credit markets.

Shares in both companies rose, though, and the Dow Jones industrial average jumped to a record above 14,000, as investors who sold off the financial sector this summer bet the worst is over for the banks.

Citigroup estimated third-quarter profit will decline about 60 percent to some $2.2 billion. The largest U.S. bank said it will write down about $1.4 billion of its $57 billion portfolio of highly leveraged loans, lose about $1.3 billion on the value of securities backed by subprime loans, and lose $600 million in fixed-income credit trading. It also said consumer credit costs rose $2.6 billion, mostly due to a boost in loan-loss reserves.

CEO Chuck Prince predicted the bank will fare better now, though.

Quotable

“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,” Prince said in a recorded call.

Switzerland-based UBS also anticipates results to improve, after writing down $3.4 billion in the third quarter because of problems in U.S. subprime mortgages. For the first time in nine years UBS will post a pretax loss, which the bank guesses will be about $690 million.

Beyond that, “we expect positive investment bank performance,” said UBS CEO Marcel Rohner after the announcement. “On top of that, we have our predictable businesses, wealth management and asset management. So we expect a positive fourth quarter.”

Shares

UBS’s U.S. shares rose $1.69, or 3.2 percent, to $54.94 in trading Monday, while Citigroup rose $1.05, or 2.3 percent, to $47.72.

Citigroup’s nearly $6 billion in charges and writedowns “could help put problems behind it,” wrote Deutsche Bank analyst Mike Mayo, while Lehman Brothers analysts wrote that they wonder “if this move helps flush out the negative factors plaguing financials.”

Though Citigroup’s anticipated profit decline was larger than predicted, many investors were pleased the $1.4 billion writedown in the bank’s $57 billion leveraged loan portfolio amounted to 2.5 percent — smaller than the 4-6 percent writedowns made in the third quarter at major investment banks Goldman Sachs, Lehman Brothers, Bear Stearns and Morgan Stanley.