August 7, 2022

DealBook: Citigroup Beats Forecast Despite Sluggish Economy

After two and half years of clawing itself back from the brink, Citigroup said that earnings rose 24 percent amid decent investment banking results and lower consumer loan losses.

Citigroup announced a profit of $3.3 billion, or $1.09 a share, beating analyst consensus estimates of 96 cents per share. The New York bank had reported a $2.7 billion profit, or 90 cents a share, in the second quarter of last year.

The bank benefited from the reversal of about $2 billion of funds that it had previously set aside to cover credit card and other loan losses. That helped offset worsening losses in its domestic mortgage unit and a slowdown in operating profits in Europe and Latin America.

Overall, revenue fell 7 percent, to $20.6 billion during the period as the bank contended with a sluggish domestic economy and some of the most turbulent markets since the throes of the financial crisis.

Citigroup’s results came after JPMorgan Chase’s announced a solid second quarter performance across almost all of its businesses on Thursday, posting a $5.4 billion profit. Strong investment banking results and a boost from the reversal of loan loss reserves helped offset the bank’s lingering mortgage troubles.

But investors have remained leery about other banks’ ability to grow revenue.

Indeed, Citigroup shares have fallen sharply since the bank completed a reverse stock split in early May that brought its price to around $45 from $4.50. Today, Citi shares trade at around $39, down 13 percent in the last two months.

Vikram S. Pandit, Citigroup’s chief executive, was upbeat about the bank’s progress.

“Citi achieved another solid quarter of operating performance as we continue to execute our strategy,” he said. “Although the near-term macroeconomic outlook is uneven, Citi is consistently profitable and we remain focused on producing responsible growth by serving our clients.”

For the last three and a half years, Mr. Pandit has been engaged on an ambitious plan to overhaul the beleaguered bank, transforming it from a sprawling financial supermarket into a leaner, more focused lender.

Under pressure from regulators, he has overhauled its leadership and reduced its balance sheet. Today, the pile of assets that Citi plans to sell or divest is down to $308 billion, more than half of its peak of $827 billion in early 2008.

Mr. Pandit shed about $29 billion of assets during the first quarter. Still, the bank has struggled to find buyers for some of the biggest businesses that remain earmarked for sale: CitiFinancial, its large consumer lending franchise, and a large portfolio of private-label credit card loans.

And unlike several of its stronger competitors, Citigroup has not bought back any of its own shares. JPMorgan, for example, announced that it had repurchased about $3.5 billion of the company’s stock in the second quarter. Mr. Pandit has said that the bank is unlikely to do so until sometime in 2012.

Citigroup’s mortgage business has fared better than many of its biggest rivals, although its losses continue to balloon. Still, it did not announce any massive charges tied to its home lending business that have dampened the earnings of its competitors.

Bank of America announced a $20 billion hit to its second-quarter earnings as part of a broader effort to clean up its mortgage problems. JPMorgan has taken billions of dollars of charges to bolster its servicing operations and properly reserve against mortgage-related legal claims. Both Bank of America and Chase have servicing operations and portfolios of troubled home loans that dwarf the size of those belonging to Citigroup.

Citigroup’s investment banking results were down sharply from a year ago and the first quarter. Profit fell by almost one-third, to $1.2 billion amid a difficult fixed-income trading environment, which has long been one of the bank’s biggest source of income. Traders on the currency, interest rate, and mortgage desks were hardest hit, while municipal and credit products fared better.

Investment banking fees rose 61 percent amid a pick-up in deal advisory work and debt and equity underwriting assignments.

Overseas, the news was also varied. For the last two years, the bank’s consumer businesses in Asia and Latin America have been one of the few bright spots. Loan losses eased faster in those regions than in the United States, and corporate lending has been quicker to gain steam. Nearly 70 percent of earnings from Citi’s core operations came from abroad during the period, about the same portion as in the first quarter.

Still, the bank suffered from a slowdown in its European investment banking operations, where profits were almost half of what they were in the first three months of the year.

Although revenue declined in Citigroup’s credit card division as a result of new legislation that curbed lucrative penalty fees, the unit did benefit as fewer borrowers fell behind on their loans. As a result, the bank was able to release almost $1 billion of money it had previously set aside to cover losses.

For the last two years, Citigroup has also broken out its results into two separate business segments. Citigroup Holdings, which contains the bulk of most troubled mortgage assets and other businesses earmarked for sale, as well as Citicorp, its ongoing operations.

Citi Holdings reported loss of $168 billion, down significantly from a loss of $1.2 billion a year earlier. Citicorp profits, however, also fell. The bank earned about $3.7 billion from its core operations, down 2 percent from last year.

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