Citigroup Shares Drop After Earnings Unexpectedly Decline

Citigroup Profit Falls as Trading Revenue Slumps
Customers try out a computer station at Citigroup Inc.'s new flagship branch during its grand opening in New York. Photographer: Jin Lee/Bloomberg

Citigroup Inc., the third-biggest U.S. bank by assets, dropped 8.2 percent in New York trading after the bank reported an unexpected fall in fourth-quarter earnings on a slump in trading revenue.

The shares fell $2.53 to $28.22 at 4:15 p.m. in New York, the biggest decline on the 24-company KBW Bank Index. Fourth-quarter net income dropped 11 percent, missing analysts’ estimates for an increase, to $1.17 billion, or 38 cents a share, from $1.31 billion, or 43 cents, a year earlier, the New York-based company said today in a statement.

Trading declines mirrored results at JPMorgan Chase & Co., which said last week that revenue in every investment-banking business fell from a year earlier. Citigroup’s earnings slump capped a year for Chief Executive Officer Vikram Pandit, 55, in which the shares slid 44 percent amid concern troubled European countries would default. The bank said today it would eliminate 5,000 employees, with about 25 percent coming from the securities and banking business, and cut expenses by as much as $3 billion this year.

“The capital-markets business is weak and Citi still has a problem controlling expenses,” said Thomas Brown, chief executive officer of Second Curve Capital LLC and a Bloomberg contributing editor, in an interview with Betty Liu on Bloomberg Television’s “In the Loop.”

Analysts’ Survey

Profit adjusted for one-time items was expected to be 51 cents a share, the average estimate of 22 analysts in a Bloomberg survey.

Wells Fargo & Co., the fourth-biggest bank by assets, posted a 20 percent increase in fourth-quarter profit, to $4.11 billion, that beat analysts’ estimates on gains from mortgage financing. The San Francisco-based bank’s shares climbed 0.7 percent.

“When you look at Wells Fargo versus Citi, you’re seeing a contrast in two different companies, one good, one bad,” Matthew McCormick, a money manager at Bahl & Gaynor Inc., which oversees about $5.1 billion, said in an interview with Scarlet Fu on Bloomberg Television’s “InBusiness With Margaret Brennan.” He doesn’t see “a balmy future” for Citigroup “and thus I have to advise shareholders to avoid their shares.”

Higher Expenses

Citigroup’s revenue fell 7 percent to $17.2 billion from a year earlier, the lowest since the fourth quarter of 2009. In addition to the slump in trading, revenue also declined as the company sold off unwanted assets. Expenses climbed 4 percent to $12.9 billion as Pandit continued to invest in the bank’s emerging-markets businesses.

For the year, Citigroup’s earnings rose 6.4 percent to $11.3 billion, marking the second profitable year for Pandit, who became CEO in December 2007. Citigroup lost a total of $29.3 billion in 2008 and 2009 and took a $45 billion bailout from U.S. taxpayers, which the company later repaid.

Financial institutions are eliminating jobs to compensate for falling revenue, disclosing plans to reduce staff by more than 200,000 worldwide, according to data compiled by Bloomberg. Citigroup had said last month job cuts would total about 4,500.

“The macro environment has impacted the capital markets and we will continue to right-size our businesses to match the environment,” Pandit said in today’s statement.

Trading Revenue

Revenue from trading stocks and bonds, overseen by James “Jamie” Forese, fell 9.8 percent, including accounting adjustments, from the same period in 2010. The European crisis hurt Citigroup’s trading unit as customers took fewer risks with their money, according to Jason Goldberg, a New York-based analyst with Barclays Plc who has an “overweight/positive” rating on the bank’s shares.

Revenue from bond trading rose 10 percent from the year-earlier quarter to $1.63 billion, and dropped 57 percent from the third quarter, including so-called credit-valuation accounting adjustments. JMP Securities LLC analyst David Trone, who has a “market perform” rating on Citigroup shares, predicted bond-trading revenue of $3.04 billion.

Excluding accounting adjustments, fixed-income revenue dropped 25 percent from the previous year, the bank said.

“Investors are sitting on the sidelines awaiting EU crisis resolution,” Trone wrote in a Dec. 16 note to clients. “We don’t believe EU leaders are under enough short-term pressure to resolve the crisis anytime soon, and until it changes capital-markets results and stocks should remain stagnant.”

Derek Bandeen

Citigroup’s equity-trading unit, run from London by Derek Bandeen, posted revenue of $240 million, a 62 percent decline compared with the prior quarter and down 60 percent from the fourth quarter of 2010. Trone had predicted $571 million.

Excluding accounting adjustments, stock-trading revenue tumbled 71 percent from the same period a year earlier. Chief Financial Officer John Gerspach told journalists on a conference call that much of the decline was tied to the unit’s equity derivatives and proprietary-trading businesses.

“The uncertainty caused people not to do a lot, and when you don’t do a lot, the guy in the middle doesn’t get paid,” Stephen Errico, founder of New York-based Locust Wood Capital LP, which manages about $400 million including Citigroup shares, said in a Jan. 13 interview.

Investment Banking

Fees at the investment bank -- led by Raymond J. McGuire -- tumbled 45 percent to $638 million from the prior year. Revenue from equity underwriting plunged 78 percent to $90 million as corporations pulled back from selling shares to the public in the quarter. The total number of initial public offerings in the quarter shrank to 231 from 398 in the prior year as volume fell to $25.4 billion from $124.2 billion, according to data compiled by Bloomberg.

“In an admittedly challenging quarter, revenues were 8% below our expectations,” Jeffery Harte, an analyst at Sandler O’Neill & Partners LP, wrote in a note to clients. “However, the revenue shortfall was predominantly from capital-markets related revenues and we note that one quarter’s trading revenues historically provide minimal forward-looking insight.”

Harte has held a “buy” rating on Citigroup shares since November 2008.

The regional consumer bank posted a $1.45 billion profit, an 8 percent increase from a year earlier. Citigroup spent $1.5 billion on the unit and opened 65 branches through the first nine months of 2011, mostly in Asia and Latin America, Manuel Medina-Mora, the bank’s global consumer CEO, said in November.

Bad Loans

The bank’s losses on bad loans dropped 40 percent to $4.11 billion from the same period a year earlier, as fewer customers missed their payments. Citigroup reduced its provision for losses on future loans by $1.47 billion, compared with $2.25 billion a year earlier.

Citi Holdings, the division Pandit created in 2009 to house the bank’s unwanted assets, lost $806 million, compared with a $1.02 billion loss in the same quarter of 2010. The unit’s assets fell 25 percent to $269 billion. Citigroup halted talks to sell the OneMain consumer-finance unit, previously known as CitiFinancial, earlier this month, a person familiar with the matter said.

Bank of America Corp., the second-largest U.S. lender, probably will report adjusted earnings of $1.63 billion for the quarter when it announces results on Jan. 19, according to a Bloomberg survey of seven analysts.

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