Citigroup warned on Monday that it expects third quarter net income to drop by 60 per cent because of the credit turmoil over the summer, but said it would return to "normal" earnings next quarter.
"Our expected third quarter results are a clear disappointment. The decline in income was driven primarily by weak performance in fixed income credit market activities, write-downs in leveraged loan commitments, and increases in consumer credit costs," said Charles Prince, chairman and chief executive of Citigroup.
But the bank remained bullish on its profit outlook, calling the third quarter trading performance an "aberration".
"In September, this business performed at more normalized levels ... While we cannot predict market conditions or other unforeseeable events that may affect our businesses, we expect to return to a normal earnings environment in the fourth quarter," said Mr Prince.
Citi's warning comes after UBS revealed it had sacked senior managers and slashed jobs after reporting a third quarter loss of a $3.4bn after writedowns on fixed income assets. Deutsche Bank is also expected to suffer a big hit from the credit squeeze.
So far US investment banks have avoided major pain - with Goldman and Lehman Brothers reporting better than expected profits and Bear Stearns, which was more exposed to the mortgage market, still recording a profit.
Citi said it would record writedowns of about $1.4bn before tax on funded and unfunded highly leveraged finance commitments. These totaled $69bn at the end of the second quarter, and $57bn by the end of the third quarter.
The bank said it suffered losses of roughly $1.3bn before tax on subprime mortgage-backed securities warehoused for future collateralized debt obligation securitization and other subprime positions. It said it had also lost about $600m before tax on fixed income credit trading because of market volatility.
The bank was expected to earn $1.08 a share for the period, accrording to analysts surveyed by Bloomberg. Last year the company made a third quarter profit of $5.5bn, or $1.10 per share. A 60 per cent drop in income suggests the company made $3.3bn, compared to $5.5bn last year.
The scale of the warning leaves Mr Prince, who was only made chairman last year, looking vulnerable.
In July, he dismissed fears that the music was about to stop for the cheap credit-fuelled buy-out boom, declaring that Citigroup was "still dancing".
"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing," he said in an interview with the FT in Japan.
Citigroup has been a leading lender to private equity buy-outs and has been involved in several financings that have run into problems.
On Monday it said revenues from equity underwriting, advisory, and transaction services were growing at a double-digit pace, and customer volumes in its consumer business showed good growth. In Wealth Management, Citigroup's said it was generating "solid" results.