Citi's Balance-Sheet Blueprint

Amid the news that Citigroup posted a second-quarter loss of $2.2 billion was also news about the bank's efforts to stay well capitalized. In a conference call Friday, CFO Gary Crittenden noted that the company "improved" its capital position by increasing reserves for loans, leases, and unfunded lending commitments by $22 billion. Those reserves will help the financial-services giant absorb elevated credit costs in loan portfolios that arise from delinquent mortgage and credit-card payments, as well as other underperforming assets.

The multibillion-dollar increase bolstered Citi's balance sheet, pushing its Tier 1 capital ratio to 8.7 percent, from 7.74 percent last quarter. A Tier 1 ratio is an indication of a bank's financial strength — essentially a regulatory yardstick used to measure its ability to cover loan losses. Citi has a higher ratio than at least two rivals: at the end of the second quarter, JPMorgan Chase's Tier 1 ratio was 8.1; Bank of America's Tier 1 ratio for the first quarter was 7.51.

To further strengthen Citi's capital position, the company issued $4.9 billion of common stock and $8 billion of preferred stock during the second quarter. Then on July 11, Citi announced the sale of its German retail operation, Privatkunden AG and its affiliates, in a move that is expected to generate a $4 billion aftertax gain — and a 60 basis point boost to the Tier 1 ratio.

Crittenden assured analysts that the $22 billion reserve was not too heavy for the bank's balance sheet, which has $2.1 trillion in assets, and noted that before the company started pulling back on its reserve buildup, he wanted to be sure its exposures to the subprime market were "topping out." For example, although the trend seems to be leveling out, the company's portfolio of North American consumer mortgages is still seeing a rise in the rate of loans that are past due more than 90 days. Currently that rate is 3.69 percent, up from 3.02 percent last quarter and just under 2 percent a year ago.

In fact, any leveling-off of macroeconomic factors — such as accelerated mortgage payments or increased credit-card spending — may be just a momentary blip caused by the extra cash consumers have in hand after cashing their federal stimulus checks, reasoned Crittenden. "We want to make sure [any leveling off] is sustainable...real improvement" before pulling back on efforts to fortify the bank's capital position.

Other efforts to keep liquidity problems in check include slashing the workforce: so far this year, about 14,000 employees have been cut from the payroll at Citi. The bank will shed 7,000 more once it completes the sale of Privatkunden.

Crittenden also explained that while he could work up historical averages for how long deteriorating financial conditions may last, the variables affecting the calculations — most notably the subprime crisis and its varying effect across different geographic housing markets — are too volatile to be relied upon. For now, he'll look to shore up the balance sheet and improve Citi's capital position so the bank can "take advantage of new opportunities and weather storms."