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Citi expects credit loss reserve build for Q3 on outlook for slow recovery

Citigroup Inc. is likely to post another credit loss allowance build when it reports third-quarter earnings in October, CFO Mark Mason said.

The bank's economic outlook has deteriorated and Citi now expects "a somewhat slower pace of economic recovery, particularly in the U.S., reflecting a slower pace of rehiring, less of a pickup in travel, etc.," Mason said during a conference presentation Sept. 14.

Citi's allowance at June 30 reflected a forecast that U.S. unemployment would average 8.9% in the fourth quarter of 2020, and fall to 5.9% during the fourth quarter of 2021. The unemployment rate was 8.4% in August. Citi's guidance contrasts with guidance given by Wells Fargo & Co. CFO John Shrewsberry on the same day that banks might keep allowance levels roughly stable.

"Our current outlook is less about any meaningful changes in the balance of 2020, and more around how one looks at the curve," Mason said. "Obviously the economic forecast is going to extend beyond 2020 in order to estimate lifetime reserves. Given that, and given our approach for having a base model and then making a management adjustment based on a probability of a downside, I expect that there will be some type of build."

Citi increased its allowance by $5.58 billion in the second quarter to $26.42 billion. It increased its allowance by $8.06 billion in the first quarter, including the initial adoption of the current expected credit loss accounting standard known as CECL.

Mason said the third quarter allowance build will be "significantly lower than anything we've seen in the other quarters," and that Citi is still working on its economic forecast and determining its provision.

Mason also projected that Citi's revenues will decline by a high-single-digit percentage year over year in the third quarter. He said trading revenues would continue to be strong, although lower than in the first half of 2020, but that the performance in fixed income and equities would be "overshadowed" by "lower interest rates, lower levels of consumer activity and more muted investment banking" performance.

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