As it warned earlier this month, Citigroup Inc. today reported a large drop in net income for the third quarter of 2007.

Net income came in at US$2.38 billion, a decline of 57% from the prior-year quarter. On October 1, Citi announced that it expected third quarter 2007 net income to decline in the range of 60%, subject to finalizing third quarter results.

“This was a disappointing quarter, even in the context of the dislocations in the sub-prime mortgage and credit markets. A significant amount of our income decline was in our fixed income business, where we have a long track record of strong earnings, and this quarter’s performance was well below our expectations. Although we generated strong momentum in many of our franchises, our fixed income results, along with higher credit costs in global consumer, led to significantly lower net income,” said Charles Prince, chairman and CEO.

Revenues were up 6%, led by 30% growth in international revenues. Global consumer revenues increased 14%, driven by international consumer up 35%. U.S. consumer revenues were flat with the prior-year period as deposit and managed loan growth of 16% and 8%, respectively, was offset by lower securitization results in cards and the absence of gains on sale of securities in the prior-year period in consumer lending. Markets & banking revenues declined 24%, reflecting record transaction services revenues, up 38%, offset by a 44% decline in securities and banking.

Securities and banking revenues declined due to write-downs and losses related to dislocations in the mortgage-backed securities and credit markets, including: write-downs of US$1.35 billion on funded and unfunded highly leveraged finance commitments; losses of US$1.56 billion on the value of sub-prime mortgage-backed securities; and, losses of US$636 million in fixed income credit trading.
U.S. markets & banking revenues declined 87% and international revenues grew 7%.

Also, global wealth management revenues increased 41%, as U.S. revenues grew 14% and international revenues more than doubled, due to double-digit organic growth and increased ownership in Nikko Cordial. Alternative investments revenues declined 63% as strong growth in client revenues was offset by lower revenues from proprietary investment activities.

Operating expenses increased 22%, driven by increased business volumes and acquisitions, which were partially offset by savings from structural expense initiatives announced in April 2007.

Credit costs increased US$2.98 billion, primarily driven by an increase in net credit losses of US$780 million and a net charge of US$2.24 billion to increase loan loss reserves.

“Importantly, many of our businesses performed well this quarter. Our international franchise continued to expand rapidly, with revenues up 30%. Our global wealth management franchise generated record revenues and transaction services posted another record quarter on double-digit earnings growth. In securities and banking, equity markets and underwriting revenues were up a combined 33%, and our advisory revenues grew 29%. Volumes in our consumer franchise continued to grow strongly with deposits up 18%, managed loans up 13%, and we opened 96 new branches around the world,” said Prince.

“As we move into the fourth quarter, we are focusing closely on improving those areas where we performed below expectation, while at the same time continuing to execute on our strategic priorities,” Prince added.