Citigroup Beats Analysts’ Estimates on Investment Banking

Citigroup Profit Beats Analysts’ Estimates on Investment Bank
Pedestrians pass in front of a Citigroup Inc. Citibank branch in New York. Photographer: Scott Eells/Bloomberg

Citigroup Inc., the third-biggest U.S. bank, reported second-quarter profit that beat analysts’ estimates on revenue from advising on mergers, corporate lending and underwriting stocks and bonds.

Net income fell 12 percent to $2.95 billion, or 95 cents a share, from $3.34 billion, or $1.09, a year earlier, the New York-based bank said today in a statement. Excluding accounting adjustments and a loss from the sale of a stake in a Turkish bank, earnings were $1 a share, compared with the average estimate of 89 cents in a Bloomberg survey of 18 analysts.

Revenue from advising clients on mergers and acquisitions helped Chief Executive Officer Vikram Pandit, 55, manage declines in trading stocks and bonds amid fallout from the European sovereign-debt crisis. Citigroup’s 21 percent drop in investment-banking revenue was smaller than the 35 percent decline JPMorgan Chase & Co., the biggest U.S. lender, reported last week.

“This company is steadily turning around,” Gerard Cassidy, managing director of equity research in RBC Capital Markets’ Portland, Maine, office, said in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “It’s a gigantic company, and it takes time but it is steadily turning around, and they’re making progress on improving the fundamental performance.”

Expenses Drop

Revenue excluding the accounting adjustments and the sale of Akbank TAS in Turkey, was $18.8 billion, 7 percent lower than a year earlier, while expenses dropped 6 percent to $12.1 billion.

The company probably won’t need “massive” headcount reductions to respond to market challenges, Chief Financial Officer John Gerspach said today on a conference call with reporters. The bank employed about 261,000 people at the end of June, compared with 263,000 three months earlier, according to data posted today to its website.

Citigroup rose 0.6 percent to $26.81 in New York trading at 4:15 p.m. The stock slid 25 percent during the second quarter, the worst performance among the biggest U.S. lenders, as regulators struggled to contain the crisis in Europe.

Revenue from advising clients on mergers and acquisitions rose 2 percent to $201 million from the same period last year. Richard Staite, a London-based analyst with Atlantic Equities LLP, had estimated $130 million. Fees from managing bond sales fell 21 percent to $486 million, a smaller drop than predicted by David Trone, an analyst at JMP Securities LLC., who estimated $331 million. Equity-underwriting fees tumbled 39 percent to $167 million.

Express Scripts

Citigroup was among the lead advisers to Express Scripts Holding Co., the largest U.S. processor of drug prescriptions, on its $29.1 billion purchase of Medco Health Solutions Inc. on April 2.

Raymond J. McGuire runs Citigroup’s merger advisory business while Tyler Dickson oversees underwriting. Both report to Jamie Forese, head of the bank’s securities and banking division.

Citigroup said that revenue from corporate lending increased 70 percent to $608 million. Moshe Orenbuch, an analyst at Credit Suisse Group AG, had predicted $225 million. About half of the gain came from so-called hedges, bets the bank made to protect itself against potential losses on the loans, according to the statement.

Stock Trading

Revenue from trading stocks and bonds fell 9 percent excluding the accounting adjustment, to $3.37 billion, less than the $3.5 billion predicted by Orenbuch. Trading revenue at JPMorgan declined 15 percent to $4.54 billion.

Fixed-income trading declined 4 percent to $2.82 billion, Citigroup said. The bank had gains in Anil Prasad’s currency-trading business and so-called rates, interest-rate products such as Treasuries, inflation-protected bonds and interest-rate swaps. Credit-trading, led by Carey Lathrop, and securitized products declined, the lender said, without giving more details.

Revenue from trading shares fell 29 percent to $550 million. That compared with JPMorgan’s equity-trading revenue, which fell 9 percent to $1.04 billion for the same period.

Derek Bandeen runs equity-trading in London. Pandit overhauled the unit in January, 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.

Past Problems

“Our business is past the problems of the second half of last year, and we continue to execute well,” Gerspach told analysts on a conference call.

Revenue at the global consumer-banking business was little changed at $9.77 billion. International revenue at the unit, which is run by Manuel Medina-Mora, fell 4 percent to $4.6 billion, reflecting the impact of foreign exchange, the company said. Total profit dropped 1 percent to $1.99 billion.

Citigroup may have taken a “hit” as currencies in some of its biggest markets declined against the U.S. dollar during the quarter, Charles Peabody, an analyst at Portales Partners LLC, said in June. The Mexican peso, Brazilian real and Indian rupee are among currencies that have weakened, which could lead to “value destruction” for the lender, said Peabody, who has a sell rating on Citigroup shares.

Consumer Banking

The consumer-banking unit also increased the amount of money set aside for future losses on loans outside North America by $86 million, Citigroup said. That contributed to a 12 percent drop in the division’s international profit to $795 million. Pandit told shareholders in a March 9 letter that the bank has an “intense focus on capturing emerging-market trade.”

In North America, consumer banking revenue rose 4 percent to $5.14 billion as mortgage sales increased, Citigroup said. The unit lost $1.51 billion on soured loans, a 29 percent decline on the same period last year, and reduced the amount it has set aside for future loan losses by $814 million.

Losses at Citi Holdings, the division Pandit created to house unwanted assets, increased 39 percent to $920 million, the bank said. Trone had estimated $1.16 billion while Staite had predicted $1.07 billion. Assets at the division fell 28 percent to $191 billion.

Citigroup said last month it would retreat from an effort to win Federal Reserve approval to boost payouts to shareholders this year. Pandit had vowed in March to seek approval for a “meaningful” payout after the Fed objected to its initial submission for 2012.

Pandit scrapped Citigroup’s dividend in 2009 after the bank almost collapsed and took a $45 billion bailout from U.S. taxpayers. The lender has since repaid the rescue funds, and last year it resumed a 1-cent quarterly payment.


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