Citigroup Inc. (C), the third-biggest U.S. bank, said profit rose 24 percent, beating analysts’ estimates on higher investment-banking fees and reductions in loan-loss reserves. The shares declined after the bank said expenses will be higher than previous forecasts.
Second-quarter net income rose to $3.34 billion, or $1.09 a share, from $2.7 billion, or 90 cents, in the same period last year, New York-based Citigroup said today in a statement. The average estimate of 23 analysts surveyed by Bloomberg was for earnings per share of 96 cents.
A 61 percent gain in investment-banking revenue at Citigroup, led by Chief Executive Officer Vikram Pandit, mirrored the results JPMorgan Chase & Co. (JPM) reported yesterday. A $2 billion release from loan-loss reserves also bolstered earnings. The results countered a decline in trading revenue from the first quarter and allowed Pandit to post a sixth straight profitable quarter.
“Investment-banking results, particularly on the trading front, were much better than we expected,” Charles Peabody, an analyst with New York-based Portales Partners LLC, said in an interview on Bloomberg TV. “Their investment banking, which would be mergers and acquisitions and underwriting, was up very strong both quarter over quarter and year over year.”
Citigroup shares declined, erasing an earlier gain, after the company said on a conference call with analysts that expenses would remain elevated through the end of this year. The stock fell 64 cents, or 1.6 percent, to $38.38 at 4:15 p.m. in composite trading on the New York Stock Exchange, the biggest drop in the KBW Bank Index of 24 companies.
Operating costs rose 9 percent to $12.9 billion due in part to increased legal bills and a weakening U.S. dollar, Chief Financial Officer John Gerspach told analysts. The annual total will probably exceed the range of between $48 billion and $50 billion previously given by the bank, Gerspach said.
“Higher expenses lead to lower profits,” said Gerard Cassidy, an analyst with Royal Bank of Canada, who has an “outperform” rating on the shares. “Unless they’re able to offset those expenses with greater revenue growth, and management did not say that was going to happen, one can conclude that when analysts make their earnings adjustments, they’re going to be lowering their earnings estimates.”
The bank’s total revenue declined 7 percent to $20.6 billion, compared with JPMorgan’s 7 percent revenue increase to $26.8 billion in the same period.
Citicorp revenue, which includes investment banking, trading, the retail bank and global transaction services, fell 1 percent to $16.3 billion. Citi Holdings, which Pandit created in January 2009 to sell troubled businesses and securities, posted an 18 percent decline in revenue, to $4.01 billion.
“While we are comfortable with the broader macro-economic trends that underpin our strategy, we are concerned with the impact the near-term economic environment will have on the industry for the second half of the year,” Pandit told analysts on the conference call. “But with that said, we are consistently profitable and remain focused on growing responsibly.”
Revenue at Citigroup’s investment bank, run by Ray McGuire, increased to $1.09 billion from $674 million in the same quarter last year. Moshe Orenbuch, a Credit Suisse AG analyst, had predicted revenue of $865 million while Richard Staite, a London-based analyst with Atlantic Equities LLC, had estimated $890 million.
McGuire, 54, added more than 40 managing directors this year as Pandit seeks to boost market share. Citigroup doesn’t disclose the investment bank’s profit.
Citigroup’s investment-banking unit advised on completed deals worth $98.8 billion in the quarter, almost quadruple volume for the same period last year. Overall deal volume increased 45 percent to $579.3 billion, according to data compiled by Bloomberg.
JPMorgan, the second-largest U.S. bank by assets behind Bank of America Corp. (BAC), yesterday reported a $5.43 billion profit, or $1.27 a share, 6 cents higher than the average estimate of analysts surveyed by Bloomberg. Revenue at the firm’s investment bank, led by James Staley, increased 37 percent to $1.9 billion.
The sovereign debt crisis in Europe and slowing economic growth in the U.S. depressed trading volume and curtailed revenue in the second quarter as investors bought and sold fewer bonds and equities, according to analysts including Chris Kotowski at Oppenheimer & Co. in New York.
Citigroup’s fixed-income trading revenue fell to $3.03 billion from $3.8 billion in the first quarter. Equity-trading revenue declined to $812 million from $1.07 billion in the first three months of 2011.
The slump in fixed-income trading was driven by “credit- related and securitized products,” Gerspach said on the call.
The bank’s revenue from trading in equities fell because of “a challenging trading environment, particularly in derivatives,” Gerspach said.
Losses dropped by about $1 billion to $218 million at the Citi Holdings unit from the same period a year earlier. Losses on soured loans fell to $3 billion from $5 billion last year.
Results got a boost from the Special Asset Pool unit, which contains some of the bank’s most toxic mortgages and securities. The business, run by Aloysius “Ish” McLaughlin under Citi Holdings head Michael Corbat, posted a $629 million profit for the quarter tied to gains on selling $12.7 billion of assets, the bank said. The profit compared with $122 million in the same period a year earlier.
Gerspach told reporters on the conference call that the assets included corporate bonds and mortgage-backed securities and were sold “in preparation” for capital requirements prepared by the Basel Committee on Banking Supervision.
Losses declined to $746 million from $1.23 billion last year in the local consumer-lending unit of Citi Holdings, which includes the CitiFinancial consumer-finance operation and the bank’s store-branded cards business.
Citi Holdings assets declined to $308 billion from $465 billion.
Citigroup, once the largest lender in the world, posted $29.3 billion in combined losses tied to sub-prime mortgages for 2008 and 2009. Under Pandit, the firm took a $45 billion bailout, which it returned to taxpayers with a profit of about $12 billion last year. Shares are down about 90 percent since Pandit became CEO in 2007.
The bank disclosed that it has at least $22 billion in loans, trading assets and other “exposures” to Greece, Italy, Portugal, Spain and Ireland. Citigroup also said it has money at risk to retail customers and small businesses through locally funded lending. Most of that is through Citi Holdings businesses and is focused on Greece and Spain, the bank said.
“Our exposure to the businesses and the sovereigns in those countries certainly is appropriate given our size, our stature and our business model,” Gerspach, 57, told reporters.
The bank had previously disclosed a $31.1 billion exposure to Italy at the end of December 2010 including commitments such as legally binding letters of credit. That figure didn’t include hedges, according to filings.
Manuel Medina-Mora, Citigroup’s global consumer bank chief, boosted that division’s global profit to $1.61 billion from $1.14 billion last year.
Profit at the U.S. consumer unit, run by Cecelia “CeCe” Stewart, rose to $684 million from $52 million in the same period last year. Revenue fell 9 percent to $3.37 billion. Stewart oversaw a $757 million release from loan-loss reserves, allowing the bank to bolster profit with funds that had been set aside for future losses on bad loans.
While revenue from the consumer bank’s Latin American and Asian units rose a combined 13 percent to $4.46 billion, profit fell 14 percent to $895 million. As Pandit increases lending in countries such as Brazil, China and India, the bank’s costs are rising, according to Staite at Atlantic Equities, who has a “overweight” rating on Citigroup shares.
“After Vikram Pandit came on board, they started to ramp up their investment in these areas,” said Staite, who predicts the bank’s international consumer-banking profit will fall in 2012 due to increased costs. “You’ve got to believe that at some point it will translate into actual profit.”
To contact the reporter on this story: Donal Griffin in New York at Dgriffin10@bloomberg.net