Andrey Rudakov/Bloomberg NewsVikram S. Pandit, chief of Citigroup.
7:57 p.m. | Updated
Despite signs of life on Main Street, Wall Street is still struggling.
That dichotomy was evident on Tuesday, when Citigroup reported fourth-quarter results that fell far short of what analysts were forecasting, despite a pickup in lending and a drop in losses on bad loans.
The culprit was the banking giant’s capital markets division, where revenue fell 10 percent last quarter as traders headed for the sidelines, hurting businesses like stock and bond trading as well as investment banking. Investors wasted little time in showing their disappointment; even as the market staged a modest rally Tuesday, Citigroup’s shares sank more than 8 percent to $28.22.
More than anything else, Citigroup executives said fears about the European debt crisis made clients increasingly risk-averse during the quarter, which concluded with a “very, very weak December,” according to John C. Gerspach, the bank’s chief financial officer.
“Europe remains the largest overhang on the market at this time,” he added. “There are a lot of dark clouds.”
Over all, earnings dropped 11 percent to $1.16 billion, or 38 cents a share, well below the 50 cents a share Wall Street was looking for, according to Zacks Investment Research. Revenue was also weak, falling 7 percent to $17.2 billion.
Results in the year-ago period, when Citigroup posted profit of $1.3 billion, or 43 cents a share, had been helped by sizable accounting gains on the value of Citigroup debt, which were absent from the fourth-quarter results for 2011.
“It’s just a weak quarter across the board at the investment bank,” said Glenn Schorr, an analyst with Nomura Securities. While some businesses performed well, like international banking and consumer lending, he said, overall revenue was lower than expected while expenses were higher. “Those are difficult things to move at the snap of a finger.”
Mr. Schorr said pressure was mounting on Citigroup’s chief executive, Vikram S. Pandit, to improve results at the investment bank, even if that means deeper job cuts.
“Before today, people would have been O.K. with the job he’s done given the difficult situation he inherited,” Mr. Schorr said. “Still, investors want a more explicit game plan for the investment bank, asking if they are sized the right way for the opportunities going forward.”
Mr. Schorr said the question of how deep to cut was hanging over all of Wall Street, given the drop in trading revenues since mid-2011 and the potential impact of new regulations from Washington that restrict lucrative but risky activities like proprietary trading.
Like other battered financial names, including Bank of America, Citigroup’s shares have been rising recently on hopes that the financial crisis in Europe might be easing and the economic recovery in the United States is gaining steam. Since the end of November, Citigroup shares have rallied 20 percent.
However, with fourth-quarter earnings reports now arriving, it seems that at least some of that optimism might be premature. JPMorgan Chase’s capital markets business also appeared lackluster when the bank announced its latest results last week, and further evidence of this trend is likely to come Wednesday when Goldman Sachs discloses its fourth-quarter earnings, and on Thursday when results from Bank of America are due.
On the other hand, Wells Fargo, which is much less exposed to the ups and downs of Wall Street, reported better than expected earnings on Tuesday. More focused on traditional lending and banking, Wells Fargo reported net income of $4.1 billion and nearly $16 billion for the year. Its shares rose 0.73 percent on Tuesday to $29.83.
For the full year, Citigroup reported net income of $11.3 billion, up 6 percent from 2010, one measure of progress in the company’s slow but steady recovery under Mr. Pandit, who has been trying to transform Citigroup from a sprawling but shaky global banking giant into a stronger, more nimble corporate lender.
After the financial crisis, Citigroup required a $45 billion bailout from Washington, and while that has been paid back, Mr. Pandit is still in the process of shedding assets and lightening the bank’s balance sheet. Citi Holdings, which is made up of businesses the company is trying to exit, showed a 25 percent drop in assets as it lost about $800 million.
Echoing the wary stance of investors, Mr. Pandit sounded a note of caution Tuesday. “The current environment is certainly challenging,” he said in a letter to employees. “We’ve shown that we can weather a tough environment without investors, regulators and other observers questioning our safety and soundness.”
“However, the weak global economy negatively affected market activity, and many of our clients reduced their risk, especially in the fourth quarter,” he said.
Within the capital markets businesses, bond trading was especially weak. Total securities and banking revenues dropped 10 percent to $3.19 billion, but in equity markets, revenues totaled $240 million, a 60 percent drop from the same period in 2010. Investment banking results, which include providing advice on mergers and acquisitions, also suffered, falling 45 percent to $638 million.
Besides the weak trading results, earnings were also hit by several charges, including a $557 million increase in reserves for litigation expenses, and a $400 million restructuring charge resulting from the elimination of 5,000 jobs in the fourth quarter. Much of the litigation charge is linked to the fallout from the mortgage meltdown, a continuing source of red ink for other big banks as well that isn’t likely to subside anytime soon.
One bright spot was a drop in loan losses, which fell 40 percent to $4.1 billion, suggesting that for consumers at least, the economy was becoming more solid. In addition, the bank said that total loans outstanding rose 14 percent to $465.4 billion for the year.
Article source: http://dealbook.nytimes.com/2012/01/17/citigroup-profit-and-revenue-decline-for-quarter/?partner=rss&emc=rss
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