Mario Tama/Getty ImagesCitigroup’s headquarters in Manhattan. The bank’s executives have been working to cut costs, including eliminating 11,000 jobs.
8:37 p.m. | Updated
Capitalizing on its emerging market business — a welcome antidote to the lackluster United States economy — Citigroup handily beat expectations on Monday as net income surged 42 percent in the second quarter.
The nation’s largest banks are bedeviled by a challenging trifecta — sluggish demand for loans, a stagnant American economy and a raft of financial regulations that have eroded profits. Thanks to its international securities business, though, Citigroup was able to sidestep much of the pain from a challenging consumer banking landscape.
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Citigroup, the nation’s third-largest bank by assets, reported a profit of $4.18 billion, or $1.34 a share, compared with $2.95 billion, or 95 cents a share, in the period a year earlier. Revenue rose 11 percent, to $20.48 billion.
Excluding a $477 million gain from a valuation adjustment on Citigroup’s debt, the bank reported earnings of $1.25 a share. The performance exceeded analysts’ profit expectations of $3.55 billion, or $1.19 a share, on revenue of $19.76 billion.
“Our businesses performed well during the quarter and these results are well balanced through our products and geographies, especially in the emerging markets, where growth is being challenged,” Michael L. Corbat, the chief executive of Citigroup, said in a statement on Monday.
Under Mr. Corbat’s leadership, the sprawling bank has hitched its hopes for growth to emerging markets, especially in Asia and Latin America. Citigroup is working to whittle down extraneous businesses that do not conform with its global operations, where its securities and lending operations dwarf those of many of its United States rivals. As part of that push, the bank has shed $18 billion worth of assets. Citigroup also sold the remainder of its stake in the Morgan Stanley Smith Barney brokerage joint venture. So far, the strategy is working well.
The bank’s international business is a “distinct positive,” Tom Lewandowski, a financial services analyst with Edward Jones, said.
More than 50 percent of Citigroup’s revenue comes from outside of North America. Despite simmering concerns about less-than-stellar economic growth in emerging markets, profit within Citigroup’s international consumer banking business grew by 4 percent, to $826 million. Revenue in those units swelled by 5 percent, to $4.7 billion.
Even at its more tepid, growth in emerging markets has exceeded that in the United States. In Mexico, for example, economic growth was not as robust as expected, Citigroup said. “Mexico shocked everyone,” John C. Gerspach, the bank’s chief financial officer, said in a conference call on Monday. And while a slowdown in China, which reported a slump in second-quarter gross domestic product on Monday, could spread to other Asian economies, Citigroup’s business has not been hit yet.
In fact, Citigroup reported gains across its emerging markets business, especially in its securities business. In Asia, demand for credit grew, nudging the volume of loans up 10 percent for the quarter. Mr. Gerspach said that the bank “did a very good job of managing our business in the emerging market this quarter.”
Still, Citigroup’s emerging markets business does not entirely inoculate the bank from broader challenges facing the United States industry. On Friday, JPMorgan Chase and Wells Fargo reported declines in mortgage banking revenue, eroded in part by a lull in mortgage refinancing. A sharp uptick in interest rates has caused the refinancing boom to sputter.
And continually rising rates could reduce borrowers’ appetite for refinancing existing mortgages or buying a house. Within Citigroup’s consumer banking unit, profit fell slightly by 1 percent, to $1.95 billion. As fewer consumers fell behind on their bills, Citigroup was able to empty some of the reserves — approximately $228 million — for the losses. While it received a boost from that improvement in credit quality, Citigroup is still grappling, like many of its large peers, with skittish American consumers who remain skeptical of taking on new debt.
The wariness was clear in Citigroup’s American lending operations. “The U.S. consumer is still going through a period of deleveraging,” Mr. Gerspach said.
Adding to the uncertainty in the United States are new capital rules introduced by regulators last week. Since the financial crisis of 2008, regulators have been steadily introducing new requirements aimed at bolstering capital levels that could help Wall Street withstand market turbulence.
Under the new rules, called the so-called leverage ratio, regulators are pushing for banks to hold more capital as a percentage of their assets. Banks have two months to comment on the rules. Mr. Gerspach cautioned that the requirements could undercut the bank’s ability to compete with its international rivals. Already, the leverage ratio for Citigroup’s holding company was around 4.9 percent, hovering just below the 5 percent requirement that will go into effect by 2018.
“We would all be better if there was a level playing field around the world,” he said.
A bright spot for Citigroup was its securities and investment banking business, as revenue surged by 25 percent, to $6.8 billion. Within fixed income, revenue swelled by 18 percent, to $3.37 billion. Revenue from stock trading rose 68 percent, to $942 million. Revenue from underwriting and advisory business was up by 21 percent, as well.
Investors are closely watching the bank’s quarterly reports during the first year under the leadership of Mr. Corbat, who took the reins in October after the ouster of Vikram S. Pandit. Michael E. O’Neill, the bank’s forceful chairman, pushed Mr. Pandit out in favor of his handpicked successor, Mr. Corbat.
Building on the path outlined by Mr. Pandit, Mr. Corbat has promised to continue cutting costs. Toward that goal, Citigroup reduced assets in its Citi Holdings unit by 31 percent in the second quarter, to $131 billion. In an encouraging sign for Citigroup, losses within the unit that houses a morass of soured assets fell to $570 million, from $910 million in the period a year earlier. Losses were lowest since Citigroup created the unit in 2009, after the financial crisis.
Even as Mr. Corbat has aggressively moved to reduce the bank’s costs, operating expenses rose 1 percent, to $12.1 billion. As one of his first initiatives after taking over as chief executive, Mr. Corbat announced plans to eliminate 11,000 jobs.
Shares of Citigroup rose $1, or 2 percent, to $51.81.
Article source: http://dealbook.nytimes.com/2013/07/15/citigroup-profit-climbs-42-percent/?partner=rss&emc=rss
