March 25, 2023

DealBook: Citigroup Earnings Plummeted in Third Quarter on Write-Down

A Citibank branch in New York.Brendan McDermid/ReutersA Citibank branch in New York.

9:42 a.m. | Updated

Citigroup said on Monday that its third-quarter earnings plummeted because of a $4.7 billion loss related to the joint venture brokerage business Morgan Stanley Smith Barney.

Last month, Citigroup agreed to sell its part of the joint venture, beginning with a 14 percent stake, to Morgan Stanley. Citigroup said at the time that it was writing down the value of its remaining interest in the brokerage business.

The loss was offset slightly by an uptick in mortgage lending and buoyed by a rebound in capital markets. Citigroup, the nation’s third-largest bank, reported net income of $468 million, or 15 cents a share, on revenue of $14 billion, compared with net income of $3.8 billion, or $1.23 a share, in the quarter a year earlier.

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Excluding the loss on its brokerage unit, a one-time accounting charge and credit adjustments, the bank reported earning $3.27 billion, or $1.06 a share, up from $2.57 billion, or 84 cents a share, in the period a year earlier.

Citigroup was expected to record earnings per share of 96 cents on revenue of $18.7 billion.

Like its rivals in the industry, Citigroup is grappling with sluggish growth in the United States.

Under the leadership of Vikram S. Pandit, its chief executive, the bank has worked to sharply reduce the bank’s expenses and credit losses. “Our core businesses showed momentum during the quarter as we increased lending and generated higher operating revenues,” Mr. Pandit said in a statement.


Along with Bank of America, Citigroup was among the banks most crippled by the financial crisis of 2008. Mr. Pandit has vowed to restore the bank to profitability, in part by shedding more troubled assets.

Citigroup is still trying to work through the glut of bad assets it holds in its Citi Holdings Unit.

Increasingly, a large share of the company’s earnings stem from its consumer banking unit in North America, which includes mortgage lending.

John C. Gerspach, the bank’s chief financial officer, emphasized in a conference call on Monday that Citigroup was able to successfully grow across its “core businesses.”

While Citigroup did not get the same help from mortgages as rivals like JPMorgan Chase and Wells Fargo, which reported robust profits on Friday from a refinancing frenzy, the bank reported an 18 percent increase in profit in its North American banking segment, in part because of mortgage lending. Even though mortgage originations were down, revenue in the unit was up, in part as a result of widening spreads on the loans. Mr. Gerspach suggested the bank could have been more nimble by increasing staffing to handle the burst in refinancing activity.

On Friday, JPMorgan’s chief executive, Jamie Dimon, pointed to robust growth in its mortgage banking unit, sounding an optimistic note on the housing market.

“We believe the housing market has turned the corner,” Mr. Dimon said.

Mr. Gerspach, however, struck a more cautious tone. “There is still a question, clearly in my mind, as to whether we have a strong enough economy to support the housing market,” he said.

The bright spot for Citigroup on Monday was a 67 percent increase in profit from its securities and banking unit, as the bank benefited from revived capital market activity.

“We continue to gain market share in investment banking,” Mr. Gerspach said. He pointed to “improved market share in every investment product.”

Outside of the United States, however, some of Citigroup’s results were lackluster. Profit in its international consumer banking unit fell 3 percent, to $862 million, from $885 million in the period a year earlier. With a large international footprint, the bank has positioned itself to benefit from increased lending in Asia and Mexico.

“There is an underlying growth story in the numbers,” Mr. Gerspach said.

Latin America, where Citigroup has positioned much of its hopes for increased profitability, saw some gains. Revenue in the region grew 7 percent, to $2.4 billion. Some of the profit was crimped by reduced loan spreads in Asia.

Across the bank, consumer banking posted revenue gains of 2 percent, to $10.2 billion, from the period a year earlier, while net income in the consumer banking unit increased 18 percent, to $2.2 billion.

Shares of Citigroup were up nearly 3 percent in early trading in New York on Monday.

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DealBook: Morgan Stanley and Citigroup Reach Deal on Smith Barney

Gregory J. Fleming leads Morgan Stanley Smith Barney, which is owned by Citigroup and Morgan Stanley.Brendan McDermid/ReutersGregory J. Fleming leads Morgan Stanley Smith Barney, which is owned by Citigroup and Morgan Stanley.

Morgan Stanley and Citigroup agreed on Tuesday to value their brokerage joint venture, Morgan Stanley Smith Barney, at $13.5 billion, allowing Morgan Stanley to buy full control of the business at a favorable valuation.

That will set the price for which Morgan Stanley will buy an additional 14 percent stake in the business, raising its stake in the brokerage to 65 percent. It will buy a 15 percent stake from Citigroup by next June, with the goal of buying the entire operation by 2015.

The two firms agreed to the valuation of the brokerage on Monday afternoon, after the investment bank Perella Weinberg Partners submitted its own appraisal of Morgan Stanley Smith Barney’s worth, according to a person briefed on the matter.

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Perella Weinberg had been called in because of a vast difference in valuation between the two firms. Despite calling the brokerage an important part of its future, Morgan Stanley valued the enterprise at about $9 billion, well below the $23 billion that Citigroup had described.

By settling on the $13.5 billion value, the two banks have aimed at establishing a firm valuation for Morgan Stanley Smith Barney, without needing to call in a third party to reassess the brokerage’s value for every stake purchase.

The business — melded from Citigroup’s Smith Barney unit and Morgan Stanley’s counterpart — has become an increasingly important part of Morgan Stanley’s business future. The brokerage business’s stable profits, arising from the management of wealthy customer’s assets, stand in contrast to the weaker earnings at the rest of Morgan Stanley’s operations.

“This mutually beneficial agreement gives both parties certainty and transparency on price and timing, and is a significant milestone for Morgan Stanley in the implementation of our strategy,” James P. Gorman, Morgan Stanley’s chairman and chief executive, said in a statement.

But the relatively low valuation of the brokerage will mean that Citigroup will need to take a write-down in its third quarter, costing the firm a big charge against earnings and capital.

Still, selling off Smith Barney is a legacy of Citigroup’s efforts to shed noncore businesses as it rebuilds itself from the financial crisis of 2008.

Vikram S. Pandit, Citigroup’s chief executive, said: “As we have shown, the more we put the past behind us, the more we can focus on our future, which is in the core businesses in Citicorp.”

In early trading on Tuesday, shares of Morgan Stanley were up more than 1 percent, and Citigroup shares were up slightly.

The joint venture deal between the banks was forged in 2009. Mr. Gorman has emphasized the importance of the business over the last year. In July, he said, “Our wealth management business will considerably increase its value to our clients and financial advisers through superior functionality, and to our shareholders through enhanced and stable earnings.”

He has also said the brokerage business would be renamed Morgan Stanley Wealth Management, retiring a name that dates to the 1938 merger of the brokerage firms Charles D. Barney Company and Edward B. Smith.

This post has been revised to reflect the following correction:

Correction: September 11, 2012

An earlier version of this article misstated the role played by the investment bank Perella Weinberg Partners, While the bank did provide an appraisal of the Smith Barney brokerage business, it was Morgan Stanley and Citigroup that came up with the $13.5 billion valuation of the business.

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Wealth Matters: Advisers Keep Eyes on the Horizon in a Choppy Economy

Given that this has already been a year of political and financial upheaval that none of these people had anticipated, this advice may be the only viable option. Still, each had his own take on how the long view would look.

Richard Cookson, chief investment officer at Citi Private Bank, has been the contrarian throughout. He admitted that he made the wrong call on the United States stock market this year, predicting that it would go down when, in fact, it went up. But he said that increase in value was meaningful only if you had invested in dollars.

“The U.S. is a wee bit like the emerging market countries in the 1990s in the sense that it has been debauching its currency,” Mr. Cookson said. “The stock market does well in the local currency, but it does very badly in any other currency’s terms. If you bought it in euros or Swiss francs and didn’t hedge it, you would have done appallingly.”

Niall J. Gannon, director of wealth management at the Gannon Group at Morgan Stanley Smith Barney, has been the steady member of the group. He has continued to ignore the noise and focus on the data.

Mr. Gannon’s preferred measure for his high-net-worth clients is to analyze the earnings yield of various securities. (This is defined as the earnings per share over the previous year divided by the current price, or the inverse of the price-to-earnings ratio.)

Mr. Gannon said he was looking at stocks with earnings yields of 7.5 to 8 percent, which compare favorably with 4 percent on United States Treasuries and 4.65 percent on municipal bonds. “We continue to stress that you have to extract value where the value is coming from,” he said.

The five advisers were in accord on the outcome of the deficit talks between Congress and the White House. All predicted that the politicians would find a short-term solution that would leave the country in the same predicament a few years from now.

They also agreed that the politicians in Europe would probably come up with a short-term solution for Greece’s debt problems, but they disagreed on the potential impact of Greece’s situation on Europe and the rest of the world.

So let’s look more closely at what the group thought was good and bad in the first half and what its concerns were for the future.

HALF TIME At the end of the last quarter, two unexpected events upended the group’s predictions: the turmoil in the Middle East and what it might do to oil prices, and the tsunami and earthquake in Japan and how that disaster affected the global supply chain.

The price of oil spiked to $114 a barrel but is now back to about $96. (And while the price of gasoline has edged down in recent weeks, it is still higher than it was in December 2010.) Japan, meanwhile, appears to be on the road to recovery. But none of that could be known as it was occurring, and the way some investors panicked again showed just how fragile confidence was.

Mr. Cookson said he was proud of his call to buy Japanese stocks as a way to invest in the country’s quick recovery.

Marc D. Stern, chief investment officer at Bessemer Trust, said the fall in gas prices had helped increase consumer spending.

Now, though, the group is making the case that investors need to remain confident about the United States stock market. Mr. Stern said that there had been five stock market drops of at least 7 percent since the March 2009 low, including the most recent one from April to June. But he argued that those drops were the results of broader economic shocks. Corporate profits remain strong.

“It’s remarkable how companies are taking advantage of rising world trade, improved business opportunities and increasing capital availability,” Mr. Stern said.

While this is good news for companies and their shareholders, it has yet to make a dent in the unemployment rate. No one had a firm prediction of when the rate might fall. Mr. Stern framed it as a chicken-or-egg case: companies will start hiring when other companies hire.

Mr. Gannon said high unemployment had not affected his investment decisions. Those decisions are focused on the growing middle class in other parts of the world, which is why he continues to invest in companies like Coca-Cola, Pepsi and Nike, which derive their revenue globally.

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DealBook: Morgan Stanley’s Next No. 2, the Guessing Game

From left, Colm Kelleher and Paul J. Taubman, the co-presidents of institutional securities; and Gregory Fleming, the president of Morgan Stanley Smith Barney and Morgan Stanley Investment Management.Morgan Stanley, via Bloomberg News; Morgan Stanley; Andrew Harrer/Bloomberg NewsFrom left, Colm Kelleher and Paul J. Taubman, the co-presidents of institutional securities, and Gregory Fleming, the president of Morgan Stanley Smith Barney and Morgan Stanley Investment Management.

Wall Street has a new guessing game: whom will James P. Gorman choose to be his No. 2?

Mr. Gorman, the Australian-born chief executive of Morgan Stanley, is not expected to take over as chairman until early next year, after John J. Mack steps down.

But inside the investment bank, speculation is already swirling about the next president, a title now also held by Mr. Gorman. It is a crucial position, and the person filling it is usually seen as the heir apparent to the top spot.

While there are several long shots, the odds favor three senior executives. Insiders are betting on the co-presidents of institutional securities, Colm Kelleher and Paul J. Taubman, as well as Gregory J. Fleming, the president of Morgan Stanley Smith Barney and Morgan Stanley Investment Management.

They could be waiting a while to get the nod from Mr. Gorman. People close to the chief executive say he has no intention of filling the spot right away and could even wait years.

Mr. Gorman, 52, is still a young chief executive and does not see the need to publicly anoint a second in command, the people say. Choosing one would most likely ruffle the feathers of the executives passed over — a situation Mr. Gorman does not want so early in his tenure. By waiting to pick a president, Mr. Gorman can also monitor the performance of each deputy, keeping them in healthy competition with one another.

“It’s too early to give anyone that type of promotion,” said a UBS stock analyst, William Tanona. “Mr. Gorman needs to get some decent quarters behind him before doing anything like this. The company is going through a transition phase with new people, and there is still a lot to be worked out.”

It is not unusual for a Wall Street chief executive to keep the job empty. Jamie Dimon of JPMorgan Chase and Brian T. Moynihan at Bank of America both have several senior deputies but no president.

But a strong No. 2 can be useful. Goldman Sachs’s president, Gary D. Cohn, is often called to attend investment banking pitches and step in when the firm’s chief executive, Lloyd C. Blankfein, is busy.

The rumor mill at Morgan Stanley is starting in anticipation of a board meeting this month. The directors are scheduled to meet in Japan, where a top shareholder is based, to discuss management changes at the top. The current chairman, Mr. Mack, is widely expected to retire this year. If he does, it will pave the way for Mr. Gorman to step into the role.

Morgan Stanley has a deep bench of executives from which Mr. Gorman can pick a president — when he eventually does. Mr. Taubman and Mr. Kelleher, who have been running institutional securities since late 2009, are natural choices.

The two top executives played crucial roles in guiding the company through the financial crisis. Mr. Taubman, 50, helped secure a lifeline from the Japanese bank Mitsubishi in 2008 shortly after Lehman Brothers collapsed, and he is now focused on investment banking. Mr. Kelleher, 54, was Morgan Stanley’s chief financial officer during the rocky period. He is now charged with turning around sales and trading, a crucial unit that has not fully recovered from the depths of the disaster.

Both have long histories at Morgan Stanley, too. Mr. Taubman, who has been with the firm for 29 years, is one of the largest individual shareholders, with almost 1.1 million shares, valued at roughly $25 million. Mr. Kelleher, an outgoing Irishman who has eight siblings, is an accountant by trade, having worked at Arthur Andersen before joining Morgan Stanley in 1989.

As can be common with co-heads of a division, their professional relationship is tense, according to colleagues who spoke on condition of anonymity because they were not authorized to talk publicly. It is sometimes uncomfortable in meetings with the two executives, since it is readily apparent they do not get along, the colleagues say. Through a spokeswoman for the firm, Mr. Taubman and Mr. Kelleher declined to comment for this article.

The relative newcomer of the group, Mr. Fleming, 48, has known Mr. Gorman since their days working together at Merrill Lynch. Hired in late 2009 to run the firm’s asset management division, he quickly improved the group’s profitability, in part by selling noncore assets and cutting costs. This year, Mr. Gorman added the retail brokerage unit to his duties. Expanding the unit’s lower-risk, fee-based business is a crucial part of the firm’s broader strategy.

There are also dark-horse candidates to consider, like the chief financial officer, Ruth Porat, 53, and Jim Rosenthal, 58, head of corporate strategy. Both are senior executives and members of Mr. Gorman’s inner circle. Mr. Gorman could also look outside to fill out his corporate suite.

As is usually the case in these races, it is too early to call. Of course, that has never stopped Wall Street from talking.

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