DealBook: As Citigroup’s Profit Surges, Skittish Borrowers Hurt the Consumer Unit

Keith Bedford/ReutersA Citibank branch in New York.

8:34 p.m. | Updated

Citigroup beat earnings expectations on Monday as net income surged by 30 percent in the first quarter of 2013. But beneath the banner results, the bank is grappling with a sluggish economy and skittish American consumers who are still wary of shouldering fresh debt.

The bank, which has been aggressively working to slash costs and slog through a glut of soured assets, reported a profit of $3.8 billion, or $1.23 a share, for the first quarter. Revenue rose by 3 percent to $20.5 billion.

Still, Citigroup’s results were dampened by largely stagnant revenue growth in the consumer banking unit and persistent difficulties in Asia and Latin America. One challenge: the United States consumer.

Borrowers are still unwilling to take on new loans, even with interest rates hovering at near-record lows.

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• Document: The Citigroup news release

“I don’t think we’ve got a real strong consumer driving the economy,” John Gerspach, the bank’s chief financial officer said on a conference call on Monday. He added that “we are seeing a certain amount of deleveraging.”

For Stephanie Sanyour, 25, “deleveraging” felt like a tremendous relief. Ms. Sanyour, a television producer who lives in Des Moines, said she had devoted an entire paycheck this month to wiping out her debt on a Citigroup credit card. While the monthly payments were manageable, she said that the debt felt like a “chain on my ankles limiting my flexibility.”

Across the nation, banking analysts say, consumers like Ms. Sanyour are working to pay off their bills and stay out of debt. Such a tepid appetite for loans underpinned Citigroup’s results on Monday. While total loans inched up slightly in the first quarter to $539 billion, the bulk of the growth stemmed from demand among corporate clients beyond the United States. Consumer lending rose just 1 percent in the first quarter. In North America, revenue in the global banking unit stagnated, falling by 1 percent to $5.1 billion.

“The environment remains challenging and we are sure to be tested as we go through the year,” Michael L. Corbat, the bank’s chief executive, said in the earnings release.

Citigroup’s quarterly earnings underscore broader challenges buffeting the United States banking industry. On Friday, JPMorgan Chase and Wells Fargo reported declines in revenue, slowed in part by mortgage machines that are beginning to sputter. The refinancing boom, fed by federal largess that drove down interest rates and spurred a flurry of refinancings, is showing signs of petering out.

Combined with Citi’s earnings Monday, the results are propelling worries that banks are floundering to offset income sapped by a spate of new financial regulations and a lackluster economy. Sluggish loan demand is renewing those concerns. Jamie Dimon, the influential chairman and chief executive of JPMorgan, called loan growth “soft” for the quarter when the bank reported earnings on Friday.

Beyond the banking results, other indicators of economic health have proved dispiriting as well. Retail sales in the United States fell by 0.4 percent in March. Even though unemployment is falling, consumers remain unconvinced.

Part of the wariness among consumers, banking analysts say, arises from broad skepticism about the housing market. Even though housing prices have been rising recently, the improvements won’t rouse consumers until they remain steadily high for a longer stretch, according to analysts. “If housing prices start to stall even a little bit, then we are going to see an even greater retreat from consumers,” said J. J. Kinahan, a strategist at TD Ameritrade.

Even bank executives are skeptical about the housing market in the United States. “I wouldn’t say I am positive about the housing market,” Mr. Gerspach said.

Citigroup has pinned some of its hope for future profitability on its vast international footprint, but some regions produced lackluster returns. Revenue from consumer banking in Asia fell in the first quarter to $2 billion, down 1 percent from the same period a year earlier. The bank is struggling to navigate the shifting regulatory landscape in Asia. In South Korea, for example, national officials placed a cap on the interest rates of a range of consumer loans. Mr. Gerspach said that there were “still headwinds” in the region.

Despite the challenges, Citigroup showed strengths in other parts of its business. A bright spot in the first quarter was the securities and banking group, which was bolstered by strong gains in investment banking, fixed income and equities.

Revenue in that unit surged 31 percent, to $6.98 billion, while net income was $2.3 billion, up 81 percent from the period a year earlier. For Citigroup, the unit has been a consistent focus. Mr. Gerspach reiterated that on Monday, saying the bank continued to make “steady progress” in its share of a “client’s wallet.”

Much of the gains in securities and banking came from Citigroup’s investment banking unit, which was buoyed by increases in debt and equity underwriting. The unit’s revenue increased to $1.1 billion, up 22 percent from the period a year earlier.

Over all, investors seemed pleased with the quarterly results. Citigroup’s stock rose 9 cents to $44.87 on Monday, after trading in the morning above $46, on a day when there was wide selling in the stock market.

The quarterly report is the second under the leadership of Mr. Corbat, who took over after the abrupt ouster of Vikram S. Pandit. In October, Michael E. O’Neill, the bank’s forceful chairman, pushed Mr. Pandit out in favor of Mr. Corbat.

Mr. Corbat has vowed to continue reorienting the bank toward its core business while shedding less-profitable units. That cost-cutting began under Mr. Pandit, who helped return the bank to profitability after presiding over a turbulent chapter in its history when Citi received a $45 billion federal lifeline.

Citigroup has been aggressively whittling down a morass of soured loans and cutting less-profitable business lines to reduce costs. In December, it said it would eliminate 11,000 jobs worldwide. Within its Citi Holdings unit, Citigroup reduced assets by $60 billion in the first quarter.

Citigroup continues to be haunted by its mortgage woes. Last month, it agreed to pay $730 million to settle claims that it had persuaded investors to buy securities backed by shaky mortgage loans. The bank did not admit any wrongdoing. Cautioning investors on Monday, Mr. Gerspach said that legal expenses remained “volatile.”

This post has been revised to reflect the following correction:

Correction: April 15, 2013

Article source: http://dealbook.nytimes.com/2013/04/15/citigroups-earnings-rose-30-in-first-quarter/?partner=rss&emc=rss