Citigroup Inc. advanced the most among the largest U.S. banks, reaching a six-month high after reporting a surprise third-quarter profit and a surge in bond-trading revenue that beat analysts’ estimates.
Citigroup rose 5.5 percent to close at $36.66 in New York, the biggest gain in the 81-company Standard & Poor’s 500 Financials Index, after the New York-based lender said net income excluding one-time items and a $582 million tax benefit was $1.06 a share. That beat the 97-cent average estimate of 25 analysts surveyed by Bloomberg.
Chief Executive Officer Vikram Pandit, 55, is cutting jobs and disposing of unwanted assets, including a 49 percent stake in Smith Barney, as he seeks to return capital to shareholders and comply with new regulations on buffers against losses. Revenue from fixed-income trading surged 63 percent excluding accounting adjustments after tumbling last year during the European sovereign-debt crisis.
“Citigroup remains a company that has been steadily profitable for some period of time,” Todd Hagerman, an analyst with Sterne, Agee & Leach Inc. who rates the shares neutral, said before earnings were released. “They have a lot going for them in terms of their relative balance-sheet strength as well as the consistency of their earnings.”
Third-quarter net income was $468 million, or 15 cents a share, down from $3.77 billion, or $1.23, a year earlier, the company said today in a statement. Including one-time items, analysts estimated Citigroup would post a loss of $777 million. The tax benefit was related to the resolution of “certain tax-audit items,” the bank said in the statement.
“As any corporation, we have certain reserves that we set aside to handle tax-audit items,” Chief Financial Officer John Gerspach said on a conference call with reporters. “When those audit items are cleared, we either use the reserve or release it into earnings.”
Revenue excluding a Smith Barney writedown and accounting adjustments rose 3 percent to $19.4 billion. Expenses declined 2 percent to $12.2 billion.
“This was the year for Citi of good expense control because that was really lacking in 2011,” said Thomas Brown, CEO of hedge fund Second Curve Capital LLC, in an interview today with Betty Liu on Bloomberg Television’s “In the Loop.”
Fixed-income revenue rose to $3.7 billion, excluding $672 million of so-called credit-valuation adjustments tied to the firm’s bond spreads. The increase resulted from “significantly higher trading revenues” in credit-trading, overseen by Carey Lathrop, and securitized products, which is run by Jeffrey Perlowitz and Mark Tsesarsky, the firm said. Currencies and rates also had a “strong” performance, according to the statement.
Moshe Orenbuch, an analyst with Credit Suisse Group AG, had estimated fixed-income trading revenue of $2.96 billion. David Trone, a JMP Securities LLC analyst, predicted $3.11 billion.
“Every one of our products contributed,” Gerspach said on a conference call with journalists. “Market volumes are still down slightly, even from last year, even the prior quarter, but the market conditions were better this quarter in that there was better client flow.”
Revenue from stock trading, run by Derek Bandeen in London, posted a 76 percent increase to $510 million. Richard Staite, an analyst in London with Atlantic Equities LLP, had estimated $550 million.
Investment-banking revenue gained 26 percent to $926 million, with increases in fees from underwriting shares and bonds and advising on mergers.
“Our core businesses showed momentum during the quarter as we increased lending and generated higher operating revenues,” Pandit said in the statement.
Pandit agreed in September to sell Citigroup’s stake in the Smith Barney joint venture to its partner, Morgan Stanley, after the two firms argued over the brokerage’s worth. The deal forced Citigroup to write down the value of its stake.
Losses at the Citi Holdings division, which includes the Smith Barney investment, almost tripled to $3.56 billion. Mark Mason runs the unit, which had $171 billion of assets at the end of quarter, a 31 percent decline from last year.
Citigroup rose 19 percent during the quarter, more than any other lender in the KBW Bank Index. Bank stocks gained as the Federal Reserve’s effort to stimulate the economy boosted profit at lenders, according to an Oct. 1 note from KBW Inc. analyst David Konrad. The Fed said in September it would buy $40 billion more in mortgage securities each month.
Citigroup’s trading revenue tumbled last year amid market turmoil caused by the European sovereign debt crisis and concerns that the global economy was weakening. While trading volumes remain as much as 40 percent below “peak levels,” Wall Street firms gained from higher asset prices and less volatility, Goldman Sachs Group Inc. analysts said this month.
Citigroup’s consumer-banking unit, headed by Manuel Medina-Mora, boosted global profit by 7 percent to $2.16 billion. This included $1.3 billion in the U.S. division as losses on soured loans tumbled 27 percent from a year earlier.
Profit at the Asian consumer unit declined 20 percent to $449 million amid slowing economies in the region and regulatory changes in South Korea, Gerspach told reporters.
The third-quarter profit compared with a $5.71 billion profit reported last week by JPMorgan Chase & Co., the biggest U.S. bank. Wells Fargo & Co., the fourth-biggest lender, said profit was $4.94 billion.
Bank of America Corp., the second-biggest, will probably post a $287.3 million loss on Oct. 17, according to the average estimate of 8 analysts surveyed by Bloomberg.