Citi losses masked by brokerage sale

By Joseph A. Giannone

NEW YORK (Reuters) - Citigroup on Friday said loan losses surged again in the second quarter, yet gains from selling most of its Smith Barney brokerage helped the company report the highest profit among big U.S. banks.

Citigroup, twice deemed too big to fail by the U.S. government during the past year, recorded an $11.1 billion (6.8 billion pounds) pretax gain from selling Smith Barney into a joint venture with Morgan Stanley's brokerage unit. Citi received a 49 percent stake in the venture and cash.

The deal boosted Citi's net income to $4.28 billion, or 49 cents a share, compared with a year-earlier loss of $2.50 billion, or 55 cents. That surpassed the $2.7 billion profits reported this week by both Goldman Sachs Group and JPMorgan Chase.

Yet strip out the gain and Citigroup had an operating loss. Analysts pegged the loss at 62 cents a share, compared with the average forecast for a 31 cent per share loss.

Shares of Citi, little changed late in the session after rising 5 percent earlier, illustrated how investors are not quite sure how to grade the bank's ongoing efforts to rebound from two years of woe.

"It's a mixed quarter. You weren't looking for a Goldman Sachs or JPMorgan-type of quarter, but we expected Citi to be a lot better than it was," said Michael Mullaney, who helps manage $9 billion for Fiduciary Trust Co in Boston.

Analysts and investors said the credit costs at Citi, which has banking operations in more than 100 countries and a pile of "toxic" assets, were a bigger drag than they had expected.

"They seem to be suffering more than the others as far as losses go from credit cards, mortgages and consumer loans, in general," Mullaney said.