Citigroup Beats Estimates on Accounting Gain, Credit Quality

Citigroup Profit Rises 74%, Beats Estimates
Citigroup’s credit-valuation adjustment, or CVA, mirrored a similar $1.9 billion gain posted by JPMorgan Chase & Co. last week. Photographer: Jin Lee/Bloomberg

Citigroup Inc., the third-biggest U.S. bank, said profit rose 74 percent, beating analysts’ estimates on a $1.9 billion accounting gain and a reduction in losses tied to soured loans.

Net income for the third quarter was $3.77 billion, or $1.23 a share, compared with $2.17 billion, or 72 cents, in the same period a year earlier, the New York-based bank said today in a statement. The average estimate of 25 analysts surveyed by Bloomberg was 82 cents. Excluding the accounting benefit, earnings per share were 84 cents.

Citigroup’s credit-valuation adjustment, or CVA, mirrored a $1.9 billion gain by JPMorgan Chase & Co. last week. The benefit helped Citigroup Chief Executive Officer Vikram Pandit, 54, weather a quarter in which its shares tumbled 38 percent amid concern revenue from trading and investment-banking would drop because of Europe’s debt crisis and the U.S. debt-ceiling fight. Excluding the accounting adjustment, revenue fell 8 percent.

“They are making progress,” Thomas Brown, CEO of Second Curve Capital LLC, said in an interview with Betty Liu on Bloomberg Television’s “In the Loop.” “All the big banks, I think, are moving in the right direction.”

Late Payments

Chief Financial Officer John Gerspach said on a conference call with analysts that the company may see an increase in late payments and losses on home loans “reflecting re-defaults of previously modified mortgages.” The pace of improvement in home-equity delinquencies has slowed, Gerspach said.

Citigroup dropped 47 cents, or 1.7 percent, to $27.93 in composite trading on the New York Stock Exchange at 4:15 p.m. Shares of the company were down 40 percent this year through last week. The KBW Bank Index, which tracks the performance of 24 U.S. banks, fell 27 percent in the same period.

Wells Fargo & Co., the largest U.S. home lender, said year-over-year net income rose 22 percent to a record $4.06 billion, while revenue declined to $19.6 billion from $20.4 billion in the second quarter. Wells Fargo fell 7.5 percent.

Citigroup said last month it would limit hiring to only “critical” jobs as Pandit, whose strategy is to expand in emerging markets, tries to control costs. Pandit is also trying to boost revenue as new regulations on minimum capital levels take effect.

‘Challenging’ Environment

“Citi continues to navigate a challenging economic environment and delivered another quarter of solid operating results,” Pandit said in the statement. “We continue to manage our risk prudently while growing the businesses that are core to our strategy.”

Citigroup’s total revenue including the CVA gain was $20.8 billion, compared with $20.7 billion for the same period last year. Excluding the adjustment, revenue fell to $18.9 billion. The bank’s expenses rose 8 percent to $12.5 billion as Pandit increased operations in Latin America and Asia.

Gerspach said expenses for the year would be at the low end of the bank’s $48 billion to $50 billion guidance range, excluding the impact of foreign-exchange, legal costs and related costs.

The bank’s losses on bad loans dropped 41 percent to $4.51 billion from $7.66 billion for the same period last year, as fewer customers missed their payments. Citigroup reduced its provision for losses on future loans by $1.42 billion, compared with $1.97 billion last year.

Securities and Banking

The CVA helped Citigroup’s securities and banking unit, which includes trading and investment banking, post a $2.14 billion profit compared with $1.36 billion for the same period last year and $1.19 billion in the previous quarter. Excluding the CVA, revenue tumbled across all trading and investment-banking businesses amid market turmoil caused by the sovereign debt crisis in Europe and concerns that the global economy was weakening, the bank said.

Revenue from fixed-income trading excluding the accounting change fell 33 percent to $2.3 billion from about $3.5 billion in the same period last year and $3.03 billion in the second quarter of this year.

“When an investor looks at the results, they should look at the core operations,” said David Knutson, a credit analyst with Legal & General Investment Management in Chicago. “The CVA will offset the operating weaknesses primarily in investment banking.”

Accounting Gain

Most of the accounting gain stems from a rule that required Citigroup to write down the value of its debts as investors grew less confident of the bank’s ability to repay them during the quarter. This led to a widening of the bank’s credit spreads, the extra yield investors demand to own a corporate bond rather than U.S. Treasury notes. Credit-default swaps tied to Citigroup’s debt, which typically climb as investor confidence deteriorates, soared during the quarter.

The gain is required under the theory that a profit would be realized if the debt were repurchased at a discount.

Revenue from trading equities tumbled 73 percent to $289 million from $1 billion last year and from $812 million in the second quarter, excluding the CVA gain. The bank blamed a slump in revenue from “principal strategies,” which includes proprietary trading, where Citigroup places its own money on market bets. Revenue from the trading of derivatives, contracts whose value is derived from financial instruments including shares, also declined.

Mike Pringle

Derek Bandeen runs Citigroup’s equities business. In an April overhaul, Bandeen promoted Mike Pringle to a new position leading global equities trading, placing him in charge of risk, trading personnel and use of capital, according to an internal memo.

Fees from investment banking, which includes advising clients on mergers and acquisitions as well as managing sales of customers’ bonds and shares, fell 21 percent to $736 million from $930 million last year, the bank said. Citigroup underwrote $21.1 billion of U.S. corporate bonds during the third quarter, down from $35.8 billion for the same period last year, as overall issuance tumbled, data compiled by Bloomberg show.

“There was no product set or geography that allowed you to escape the volatility that plagued this quarter,” said Charles Peabody, an analyst with Portales Partners LLC, who has a “hold” rating on the firm’s shares. “Citigroup will not be immune from that.”

Profit at the bank’s transaction-services unit slid 3 percent to $892 million as expenses tied to “continued investment spending” increased 17 percent to $1.44 billion.

Regional Banking

Citigroup’s regional consumer bank, run by Manuel Medina-Mora, boosted profit by 31 percent to $1.61 billion, the company said. The North America division’s revenue slumped 9 percent to $3.42 billion. Profit increased to $692 million from $177 million last year due to a release from loan-loss reserves and fewer bad loans.

Consumer-banking profit from outside the U.S. fell 12 percent to $919 million, Citigroup said. While sales gained 10 percent, operating expenses rose 12 percent to $2.9 billion, due in part to investments and the impact of foreign exchange, according to the bank.

“It’s important that Citi maintains its focus on growing emerging-market operations, particularly at a time when many competitors are on the back foot, having to contemplate shrinking overseas,” said Richard Staite, an analyst with Atlantic Equities LLP in London who has an “overweight” rating on the bank’s shares. “That’s a great opportunity for Citigroup to take market share.”

Citi Holdings

Assets at Citi Holdings fell to $289 billion, a 31 percent dip from $421 billion last year. Pandit created the division in January 2009 to hold and sell the bank’s unwanted businesses. Losses at the unit narrowed 30 percent to $802 million from $1.15 billion a year earlier.

Pandit said that he no longer wants to sell the bank’s retail partner cards business, which deals in store-branded credit cards.

JPMorgan Chase, the second-biggest U.S. bank at midyear, reported net income of $4.26 billion last week including the accounting benefit. Bank of America Corp., the biggest U.S. bank, may report a profit of $2.73 billion tomorrow, according to a Bloomberg survey of analysts.

Citigroup posted its seventh profitable quarter in a row after losing a total of $29.3 billion for 2008 and 2009.

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