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Updated 11:29 AM EDT, Tue, Jun 16, 2020

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Citigroup Preparing For Looming Credit Defaults Due To Quarterly Profits Decline

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(Photo : Image by Kai Pilger from Pixabay )

Image by Kai Pilger from Pixabay

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US investment bank Citigroup Inc reported a 46 percent decrease in its first-quarter profits on Wednesday. The bank stated that it is expecting worse results in the coming quarter given the coming deluge of defaults in customer loans and credit card debts.

Banks across the US are currently preparing for a flood of loan and credit card defaults amid the millions of jobs lost and lack of cash caused by the coronavirus pandemic. Businesses and economic activity across the nation have mostly screeched to a halt over the past few weeks as coronavirus cases continue to climb.

Analysts have raised new concerns over continued losses in the coming months as the economic outlook worsens in the US. The country is one of the heaviest hit by the virus with over 644,000 confirmed cases and more than 28,000 dead.

Like other major US banks, Citigroup is particularly susceptible to massive writedowns in the coming months given its high exposure to credit card loans. Credit card delinquencies are historically linked to unemployment. According to government data, unemployment beneficiaries in the country had skyrocketed by more than 388 percent to around 7.45 million.

USB analyst, Saul Martinex, points out that Citigroup, unfortunately, doesn't have the same buffer as other banks such as JPMorgan to absorb the coming defaults. Citigroup heavily relies on its credit card business, which accounts for about 16 percent of its net income. Given the current situation, the bank will likely incur massive losses in the coming quarters.

Citigroup did state that it has prepared an additional $4.9 billion in reserves, which can be used to cushion the blow of its expected loan losses. The additional expense had resulted in the bank reported an $837 million loss for its US business for the first quarter of this year.

The company stated that it does expect further losses in the coming quarters given the rising unemployment rate and the US' falling gross domestic product. Citigroup's chief financial officers, Mark Mason, had told analysts that its grim forecast was within reason but the severity will still be dependent on the efficacy of government programs aimed at helping cash-strapped Americans.

The bank did not give out any estimates of the losses it expects in the coming quarters. However, it did reveal some vital data about its business activity thus far. In March, the company experienced a 30 percent overall decline in credit card spending. Citigroup expects that number to decline further in the second quarter along with the company revenues from its spending and borrowing businesses.

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