Citigroup Inc. today reported a net loss for the second quarter of US$2.5 billion, due to US$7.2 billion in pre-tax write-downs and the fact that credit costs increased by US$4.5 billion.

But losses and writedowns fell by about half from the first quarter, and were not as bad as analysts had feared.

Revenues were US$18.7 billion, down 29%, largely driven by continued write-downs in the Securities and Banking segment due to its sub-prime related exposures in fixed income markets and a downward credit valuation adjustment related to exposure to monoline insurers. Revenues were stable across other businesses. The net interest margin increased 34 basis points versus first quarter 2008 to 3.18%.

In the Institutional Clients Group, Securities and Banking revenues were down 94% to US$539 million, due to substantial write-downs and losses related to the credit markets. These include write-downs of US$3.4 billion on sub-prime related direct exposures, downward credit value adjustments of US$2.4 billion related to exposure to monoline insurers, write-downs of US$545 million on commercial real estate positions, and write-downs of US$428 million, net of underwriting fees, on funded and unfunded highly leveraged finance commitments.

Global Cards revenues increased by 3%, driven by double-digit growth in purchase sales and average loans outside North America, partially offset by lower securitization results in North America. Consumer Banking revenues increased by 1%, driven by strong loan and deposit growth, partially offset by lower investment sales. Transaction Services revenues were up 30% to a record US$2.4 billion, driven by strong growth in customer liability balances, up 15%, and assets under custody, up 13%. Global Wealth Management revenues grew 4% on strength in banking and lending revenues which were partially offset by a slowdown in capital markets, particularly in Asia.

“We continue to demonstrate strength in our core franchise. We cut our second quarter losses in half compared to the first quarter. The cost of credit increased by 20% from the first quarter, but write-downs in our Securities and Banking business dropped by 42%. Additionally, headcount and expenses declined sequentially. While there is still much to do, we are encouraged by our progress in delivering on our commitment to the re-engineering efforts,” said Vikram Pandit, CEO of Citi.

The firm also reported credit costs of US$7.2 billion primarily consisted of US$4.4 billion in net credit losses and a US$2.5 billion net charge to increase loan loss reserves. Net credit losses increased US$2.4 billion, primarily driven by residential real estate lending in North America and Global Cards. The incremental net charge to increase loan loss reserves of US$2 billion was mainly due to residential real estate in North America.

During the current quarter, Citi further strengthened its capital position by issuing US$4.9 billion of common stock and US$8 billion of preferred stock. Tier 1 capital ratio was 8.7% at quarter-end. Also, on July 11, the company announced the sale of its German retail banking operation, which is expected to result in an estimated after-tax gain of approximately US$4 billion upon closing. This is expected to result in a pro forma increase to the second quarter Tier 1 Capital ratio of approximately 60 basis points.

“As part of our efforts to improve capital and balance sheet efficiency, we reduced legacy assets substantially during the quarter. We recently closed on the sale of CitiStreet and just last Friday, announced the sale of our German retail banking operation for a substantial gain. We continue to be focused on building the strongest team by attracting world class leaders to Citi and developing our current talent. This, combined with a sharp focus on customer relationships in all regions and an ongoing commitment to our strategic targets, will drive our earnings power going forward,” said Pandit.