July 13, 2024

DealBook: Profit Up 24%, Citigroup Seeks Global Growth

The New York bank Citigroup said that earnings rose 24 percent in the second quarter.Robert Caplin/Bloomberg NewsThe New York bank Citigroup said its earnings rose 24 percent in the second quarter.

Vikram S. Pandit, chief of Citigroup.Andrey Rudakov/Bloomberg NewsVikram S. Pandit, chief of Citigroup.

8:43 p.m. | Updated

For two and a half years, Vikram S. Pandit was forced to hunker down to fix Citigroup’s troubled businesses and fend off the bank’s critics in Washington.

Now, after reporting a 24 percent profit increase for the second quarter, Mr. Pandit, Citi’s chief executive, is starting to play offense.

Citigroup has been hiring dozens of investment bankers, dialing up advertising and drawing up plans to add several hundred branches from Buenos Aires to Bucharest, including more than 200 in major cities across the United States. The bank is in the middle of stitching together its disparate technology systems — a mammoth effort known internally as Project Rainbow — and spending more than $1 billion a year to keep up its prized global transaction services franchise.

As a result, expenses have shot up more than 9 percent from last year and are expected to remain elevated though the end of 2011. Investors may have to wait a year or longer to see the payoff.

Despite an earful from Wall Street analysts, Citi executives say that after several years of cutting back on investment spending, they need to loosen their purse strings to make up lost ground.

John Gerspach, Citigroup's new finance chief.Citigroup, via ReutersJohn Gerspach, Citigroup’s finance chief.

“Coming out of the crisis, there wasn’t a lot of investing going on in 2008 and 2009,” John C. Gerspach, Citigroup’s chief financial officer, said during a conference call with journalists.

Stronger rivals like JPMorgan Chase, Goldman Sachs and Wells Fargo have been investing all along. Now, Mr. Gerspach added, “We are in investment mode.”

How Mr. Pandit keeps close tabs on expenses while building out his global banking franchise is perhaps his next great challenge. After clawing Citi back from the brink of collapse during the financial crisis, he has been engaged in an ambitious plan to transform it from a sprawling financial supermarket to a leaner, more focused company.

Mr. Pandit has been successful shedding assets, improving risk management and severing the bank’s ties with the federal government. His efforts, however, have not lifted Citi’s share price. It has floundered since the completion of a reverse stock split in early May that took the price to around $45 from $4.50. On Friday, it closed at $38.38, down 1.64 percent.

Citi showed the inherent power of its franchise when it pulled off a second-quarter profit of $3.3 billion, up from $2.7 billion last year, despite a sluggish global economy. Many analysts were skeptical of that headline.

Despite modest loan growth and strong investment banking fees, almost half of the bank’s pretax operating profit came from the reversal of more than $2 billion of funds the bank had set aside earlier to cover credit card and other loan losses.

And unlike the solid gains that JPMorgan showed on Thursday, revenue at Citigroup fell 7 percent from a year earlier, to $20.6 billion.

Profit in Citigroup’s investment bank was down by almost one-third from a year ago, falling to $1.2 billion. Traders on the currency, interest rate and mortgage desks were hard hit, while Citi’s equity derivatives group also reported lower revenues.

Its North American banking operations also struggled, with a litany of mortgage troubles continuing to weigh on its results. “I consider mortgages the biggest risk we run,” Mr. Gerspach said.

Although tighter supervision and the smaller size of Citi’s mortgage unit allowed it to avoid the charges that swamped Bank of America and Chase’s results, Citi was still forced to set aside an extra $224 million to cover potential losses on securities backed by faulty loans that it had sold to investors. That brought its total reserves to $1 billion.

The bank also raised its projections of mortgage servicing cost increases to around $70 million a quarter — double its prior estimates, although nowhere near the billion-dollar charges taken by its larger peers.

Abroad, the news was mixed. 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. That was true again in the second quarter, when nearly 60 percent of profit came from emerging markets.

But its European results were weak, particularly in its investment banking unit.

And then there is the expense problem. Operating costs for Citi’s core operations rose to $10.1 billion, a 14 percent increase from a year ago. Bank executives said that about one-third of that cost could be attributable to unfavorable exchange rates and another third to increased legal expenditures tied to mortgages and other issues. The rest comes from technology investments, hiring and other expansion efforts, largely outside the United States.

“We don’t like the idea that our expenses are going to be above guidance any more than anyone else does,” Mr. Gerspach said. “You can either manage back down to the guidance by cutting investment programs, or you can agree to press on.”

Some Citi analysts and investors, who have a long history of hearing the bank’s executives make promises they cannot fulfill, were skeptical. Others say the bank has little choice.

“The company was on its death bed, and the investing they were doing was to make sure they survived,” said Gerard Cassidy, a banking analyst at RBC Capital Markets. “Now, they are looking to make up for that period of time.”

Just as with investment spending, Citigroup will be playing catch-up to its main competitors when it comes to buying back 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.

This post has been revised to reflect the following correction:

Correction: July 15, 2011

An earlier version of this article misstated the loss for Citi Holdings. The group’s loss was $168 million, not $168 billion.

A photo caption with an earlier version of this article misstated the second quarter for Citigroup’s earnings. It was this year, not last year.

Article source: http://feeds.nytimes.com/click.phdo?i=98201d74947ab60be31a863407d7df18

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