DealBook: Citigroup’s Earnings Fall 32%

Tim Boyle/Bloomberg News Vikram S. Pandit, Citigroup’s chief executive, has been engaged in an ambitious plan to overhaul the bank.

7:45 p.m. | Updated

Citigroup took another halting step forward on Monday in its long march back from the brink, reporting a $3 billion profit in the first quarter, in spite of continuing losses in its mortgage unit and lackluster investment banking results.

The company earned 10 cents a share, a penny above analysts’ expectations, but down 32 percent from the comparable period a year earlier, when it earned its first profit since the financial crisis struck.

As has been the case for other financial giants, Citigroup’s revenue actually fell during the first quarter, as nearly every major region and business except Latin America experienced a slowdown from a year earlier. Over all, revenue declined 22 percent, to $19.7 billion. Expenses also continued to rise, in part because of new business investments as well as higher legal costs.

Citi’s results were buoyed by the release of $3.3 billion in reserves that had previously been set aside to cover losses on credit cards and other loans. That helped offset deeper losses in its domestic mortgage business and a weaker performance from its trading and investment banking groups.

“Our core businesses performed well despite the difficult economy,” Vikram S. Pandit, Citigroup’s chief executive, wrote in an internal memorandum to employees. “We’ve come a long way — and we continue to move forward.” Mr. Pandit is expected to give a fuller report on Thursday at Citigroup’s annual shareholder meeting in Midtown Manhattan.

The bank is also planning a 10-for-1 reverse stock split early next month that will almost certainly draw criticism from stockholders who argue it is little more than a symbolic effort to raise the bank’s stock price.

On Monday, when the broader markets fell sharply, the company’s stock was unchanged at $4.42 a share.

Citigroup’s earnings were tempered by the same factors that weighed on the earnings of Bank of America and JPMorgan Chase, which reported their first quarter results last week.

Traditional banking businesses have been hit by rising foreclosure costs, new financial regulations and a slowdown in growth for home loans. Wells Fargo and several big regional players are expected to report similar trends when they announce their results later this week.

But Citigroup, whose stock price plummeted to below $1 during the financial crisis, is under intense pressure to show improvement. For the last three years, Mr. Pandit has been engaged in an ambitious plan to overhaul the troubled company, streamlining its sprawling operations and changing it from a global financial supermarket into a leaner and more focused lender.

Citi is close to completing its plan to shrink its balance sheet. Today, the pile of assets that Citi plans to sell or divest is down to $337 billion, less than half of its peak of $827 billion in early 2008. CitiFinancial, its large consumer lending franchise, is one of its last major businesses to go on sale, and several private equity firms are in the final stages of bidding.

The bank also identified assets worth an additional $12.7 billion that it will sell in order to free up capital, resulting in a pretax charge of $709 million when it booked the assets at their current market value.

“We are very much on track,” John C. Gerspach, Citigroup’s chief financial officer, said on a conference call with reporters. “We are going to continue to make progress but it will be at a reduced pace from where we were in 2010.”

Federal regulators acknowledged Citi’s progress when they approved Mr. Pandit’s plan to reinstate the dividend in early May at a token one-tenth of a penny per share. But unlike several major competitors that announced large share buyback programs, Mr. Pandit has said that the bank is unlikely to buy back stock until sometime in 2012.

Meanwhile, the company faces rising costs, especially in its loan servicing business. And unlike JPMorgan Chase, Citigroup did not book a large upfront charge to reflect the higher operating costs required to meet the new servicing requirements outlined in a regulatory enforcement order issued last week.

Instead, Citi officials expect operating costs for the mortgage business to rise about $25 million to $35 million per quarter as it hires as many as 500 new employees to handle the increased volume of foreclosures.

The bank also expects to take additional charges tied to the overhaul of its servicing business, which could total as much as $40 million to $50 million over the next few quarters.

Citi, like most of its big competitors, also faces an array of legal claims from Fannie Mae, Freddie Mac and other investors who say that the bank sold them securities backed by faulty mortgage loans. Mr. Gerspach said Citi had added about $122 million to its reserves to cover those potential liabilities.

Citigroup’s investment banking profit fell by 46 percent, to $1.7 billion, from a year ago, when the trading environment was much stronger.

Investment banking fees fell 18 percent amid a slowdown in its merger advisory business as well as slower stock and bond underwriting.

Trading revenue from its fixed income, commodities and currency group, which long drove the bank’s growth, dropped 29 percent. Trading revenue from equities fell 19 percent.

Overseas, the news was mixed. For several quarters, the bank’s consumer businesses in Asia and Latin America have been one of the few bright spots.

Loan losses eased more quickly in those regions than in the United States, and corporate lending has been picking up in those areas. Nearly 70 percent of earnings from Citi’s core operations came from overseas in the first quarter.

This post has been revised to reflect the following correction:

Correction: April 18, 2011

Article source: http://dealbook.nytimes.com/2011/04/18/citigroup-earnings-fall-32/?partner=rss&emc=rss