Citigroup Shares Advance as Revenue From Bond Trading Climbs

Citigroup May Wait for 2013 Capital Plan on Dividend
Pedestrians walk in front of a Citigroup Inc. bank branch in San Francisco, California. Photographer: David Paul Morris/Bloomberg

Citigroup Inc., the third-biggest U.S. bank, rose 1.8 percent in New York trading after reporting fixed-income trading revenue that more than doubled from the fourth quarter.

Citigroup gained 59 cents to $34, after rising 27 percent this year before today. Fixed-income trading revenue jumped to $4.74 billion from $1.72 billion in the last three months of 2011 and $3.98 billion a year earlier, the New York-based company said today in a statement. David Trone, an analyst in New York with JMP Securities LLC, predicted fixed-income revenue of $2.78 billion.

Wall Street firms’ trading businesses benefited in the first quarter as U.S. unemployment fell and Europe’s debt crisis eased. Chief Executive Officer Vikram Pandit, 55, is trying to reverse last year’s 10 percent revenue slump and return capital to shareholders after failing part of a Federal Reserve stress test in March.

“Revenues were better than I thought,” said Tom Brown, CEO of Second Curve Capital LLC and a Bloomberg News contributing editor, in an interview with Betty Liu on Bloomberg Television’s “In the Loop.” “You really have a lot of earnings power here that the company is beginning to tap.”

Citigroup may wait until it submits a 2013 capital plan to the Fed to request authorization for dividend increases or share buybacks, Pandit told analysts after the bank released results. Pandit had previously said the bank was ready to return capital this year.

Analysts’ Estimate

First-quarter net income dropped 2.3 percent to $2.93 billion, or 95 cents a share, from $3 billion, or $1 a share, in the same period last year. The average estimate of 17 analysts surveyed by Bloomberg was $1.02 a share.

Profit at the consumer bank, the company’s largest unit, jumped 14 percent to $2.19 billion on a 5 percent gain in revenue, as lending surged in Latin America. The bank’s transaction-services business generated profit of $917 million, a 10 percent increase.

Citigroup’s profit was $1.11 a share excluding a $1.3 billion accounting cost called a credit-valuation adjustment, or CVA, and gains the bank made on sales of stakes in other lenders. The CVA costs primarily stem from an accounting rule tied to the theoretical cost of buying back the bank’s own debt as market prices fluctuate.

One-Time Items

The one-time items reduced earnings by 16 cents a share. Moshe Orenbuch, an analyst with Credit Suisse Group AG, had predicted the cost would be 6 cents.

Revenue rose 1 percent to $20.2 billion for the quarter, compared with $20 billion a year earlier. Including the CVA, revenue fell 2 percent to $19.4 billion, the bank said.

Citigroup released about $1.13 billion from loan-loss reserves, allowing the bank to bolster profit with funds that had been set aside for future losses on bad loans.

Expenses were unchanged at $12.3 billion. Pandit had pledged in January to “right-size our businesses to match the environment” after a year in which shares plunged 44 percent. Total staff dropped to 263,000 from 266,000 in fourth quarter.

The trading rebound comes as Pandit seeks to cut more than 1,000 jobs across the division that contains Citigroup’s trading and investment-banking units. Revenue at the securities and banking division, overseen by Jamie Forese, tumbled 16 percent to $19.7 billion in 2011, leading Chief Financial Officer John Gerspach to cite “management and execution challenges” in parts of the business.

Trading Revenue

Total trading revenue excluding CVA was $5.64 billion in the first quarter, an 11 percent gain on the same period last year. JPMorgan Chase & Co. reported $6.44 billion in trading revenue excluding accounting charges, a 3 percent decline from a year earlier. Francisco “Paco” Ybarra is in charge of Citigroup’s trading businesses, reporting to Forese.

The fixed-income unit benefited from “strong performance” in currency-trading -- run by Anil Prasad -- and trading in interest-rate products such as Treasuries, inflation-protected bonds and interest-rate swaps.

Trading in credit, run by Carey Lathrop, and securitized products declined compared with the same period in 2011, though the bank didn’t break out the size of the drop.

Equities-trading revenue slid 18 percent to $902 million, excluding CVA, from the same period in 2011, and almost quadrupled from the fourth quarter.

Equities Trading

Equities-trading chief Derek Bandeen overhauled the business, shutting a so-called proprietary-trading unit and appointing new global heads of equity derivatives, cash equities and “Delta One” trading. The Delta One desk typically helps clients speculate on or hedge the performance of a group of securities.

“They happened to be there when the markets took off,” Charles Peabody, an analyst with Portales Partners LLC in New York, said of Citigroup’s trading businesses in a phone interview. “I don’t think it has anything to do with improved execution.”

Pandit sold stakes in Turkish lender Akbank TAS, Shanghai Pudong Development Bank and Housing Development Finance Corp. in Mumbai during the quarter.

Citigroup’s net income compares with the $5.38 billion posted last week by JPMorgan, the biggest U.S. bank. Wells Fargo & Co., the fourth-largest lender, reported a $4.25 billion profit.

ECB Lending

Investors took more risks during the quarter as the European Central Bank increased lending to banks, easing anxiety tied to the region’s sovereign debt crisis. The five largest Wall Street banks helped clients buy and sell more commodities, sovereign debt, currencies and mortgages, leading to a 76 percent increase in fixed-income revenue compared with the fourth quarter of last year, JMP’s Trone estimated in a March 22 note.

“Positive developments out of Europe and a general willingness to take on risk have pushed capital market stocks higher,” Trone wrote.

Richard Staite, an analyst in London with Atlantic Equities LLP, said the surge in trading in the first quarter is unlikely to last as investors take fewer risks during the rest of the year.

“Many investors will remain on the sidelines during a period of relatively weak and uncertain economic growth,” Staite wrote March 30. He said a pattern has developed for the past three years in which a strong first quarter was followed by “disappointment.”

M&A Business

Fees from providing advice to clients on mergers and acquisitions, run by Raymond J. McGuire, fell 23 percent to $110 million. Citigroup fell to seventh from fourth among advisers on completed global deals as the bank’s market share slipped to 10 percent from 19 percent, according to data compiled by Bloomberg.

Tyler Dickson’s underwriting business, which manages the sales of shares and bonds for clients, posted revenue of $755 million, up more than 6 percent. The bank leapfrogged Bank of America to become the second-biggest underwriter of U.S. debt after JPMorgan, according to data compiled by Bloomberg. Dickson and McGuire report to Forese.

Citi Holdings, the division that holds businesses and assets that Pandit has tagged for sale, posted a $1.03 billion loss, little changed from last year. Citigroup had $209 billion of assets in the unit at the end of the quarter, a 29 percent decline on the previous year. Mark Mason runs Citi Holdings.


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