Citigroup Earnings Miss Analysts’ Estimates on Litigation

Citigroup Inc. fell the most in more than two months in New York trading after posting profit that missed analysts’ estimates on higher legal costs and a decline in benefits from releasing loan-loss reserves.

Citigroup dropped 2.9 percent to $41.24 at 4 p.m., the second-worst performance on the 24-company KBW Bank Index after Bank of America Corp. Net income climbed 25 percent to $1.2 billion in the fourth quarter from $956 million a year earlier, the New York-based lender said today in a statement.

Chief Executive Officer Michael Corbat, 52, took over in October and last month announced plans to eliminate about 11,000 employees and pull back from some emerging markets, undoing part of the expansion strategy of his predecessor, Vikram Pandit. The bank increased revenue by less than analysts expected while legal costs soared, including expenses tied to the settlement of a federal foreclosure probe.

“We recognize our net income today doesn’t yet reflect either the amount or caliber of earnings our shareholders expect and that our franchise is capable of,” Corbat said on a conference call. “It’ll take some time to work through the challenges of the current environment to realize this potential.”

Citigroup’s earnings adjusted for one-time items including restructuring costs and the mortgage settlement were about 76 cents a share. Twenty-one analysts surveyed by Bloomberg estimated 96 cents on average.

Revenue Increase

The higher costs came as Citigroup’s total revenue increased 6 percent to $18.2 billion, less than the $18.7 billion estimated by analysts surveyed by Bloomberg News. Revenue from fixed-income trading, one of Citigroup’s biggest businesses, also fell short of some estimates. The Citi Holdings division, which contains $156 billion of the bank’s unwanted assets, posted more losses than analysts had forecast.

“The weakness came on trading revenues being about $1 billion less than we expected and expenses were also $1 billion above expectations, even excluding the specially identified items,” Oppenheimer & Co. analyst Christopher Kotowski wrote in a note to clients.

Legal costs at the Citicorp division, which contains the consumer-banking and trading units, more than tripled to $735 million, the bank said. While some of the increase was related to the federal foreclosure settlement, Chief Financial Officer John Gerspach told journalists that most of the cost was related to “a variety of issues” at the U.S. consumer bank.

Not Unique

“It’s tied to the U.S. consumer business and beyond that I don’t think there’s much more to say at this point,” Gerspach said. “There is a series of items. I don’t think they’re unique to us.”

Gerspach told analysts on a later conference call that U.S. regulators, including the Consumer Financial Protection Bureau, are probing various U.S consumer bank products across the industry. He declined to specify how this could affect Citigroup.

Corbat oversaw a $142 million release from the reserve for loan losses, compared with $1.47 billion a year earlier. Richard Staite, an analyst in London with Atlantic Equities LLP, had predicted a release that was about three times bigger.

A reserve release improves net income as the bank reduces the amount of losses it forecasts on future soured loans. The biggest U.S. lenders have boosted earnings this way as credit quality improved after the financial crisis. Citigroup’s benefit was the firm’s smallest since 2010, according to a financial supplement.

‘Trashed’ Quarter

Citigroup has repeatedly “trashed the fourth quarter,” said Charles Peabody, an analyst with Portales Partners LLC in New York. “One has to wonder if the first three quarters of the year are truly reflective of their core earnings power.”

Corbat might be treating his first quarter in charge after Pandit as a “kitchen sink” quarter in which he seeks to deal with as many negative items as possible, Kotowski said.

Citigroup gained 21 percent in the quarter in New York trading, the second-best performance after Charlotte, North Carolina-based Bank of America on the KBW Bank Index. The stock climbed 50 percent in 2012, its biggest increase since 1999.

The shares have advanced 12 percent since Citigroup directors installed Corbat as CEO in October to replace Pandit. The board concluded that Pandit had mismanaged the firm’s operations, including his failure to get Federal Reserve approval to increase dividends or introduce share buybacks, a person familiar with the matter said at the time.

Forese, Medina-Mora

Corbat’s plans to overhaul the bank’s operations included the appointment of Jamie Forese and Manuel Medina-Mora as co-presidents. Forese, 49, is now in charge of all institutional businesses, including trading and investment banking, while Medina-Mora, 62, continues to run consumer banking.

Medina-Mora’s consumer bank posted a $1.76 billion profit for the quarter as expenses increased 6 percent, including the higher legal costs. The figure missed the estimate of David Trone, an analyst at JMP Securities LLC in New York, who predicted $2.04 billion.

Profit at the North America consumer bank gained 6 percent to $1 billion while net income at the Latin American unit rose 9 percent to $401 million. Asian consumer banking profit slid 3 percent to $397 million as revenue fell while expenses rose.

Corbat plans to fire 6,200 workers from the consumer bank and pull back or sell the division’s operations in Pakistan, Paraguay, Romania, Turkey and Uruguay, according to a December statement.

Trading Rebound

Forese oversaw a rebound in trading and underwriting revenue as investors sought out some riskier assets with greater potential returns during the quarter. Still, revenue at some of the businesses fell short of analysts’ forecasts.

Citigroup’s revenue from trading fixed-income products increased 58 percent excluding accounting adjustments to $2.71 billion from a year earlier. That was less than the $3.12 billion predicted by JMP’s Trone.

The fourth-quarter result showed “lackluster fundamentals,” Trone wrote in a note to clients. “Even after taking out negative items, Citi struggled to deliver much profit.”

The equities-trading business, overseen from London by Derek Bandeen, almost doubled revenue from a year earlier to $455 million. Moshe Orenbuch, an analyst in New York with Credit Suisse Group AG, had estimated $490 million.

Junk Bonds

Citigroup was the top underwriter in the quarter of junk bonds, which are rated below BBB- by Standard & Poor’s. The bank overtook New York-based JPMorgan Chase & Co. to take the top spot as companies sold almost $130 billion of the risky debts, more than triple the amount sold in the last quarter of 2011, according to data compiled by Bloomberg. Firms sold more junk bonds in 2012 than they have since at least 1999, the data show.

This helped Citigroup’s bond-underwriting division increase revenue 62 percent to $632 million, beating the estimate of JMP’s Trone by more than $100 million. Tyler Dickson oversees the lender’s underwriting operations.

The unit kept its position as the third-biggest underwriter of U.S. investment-grade debt as issuance swelled 53 percent to $227 billion, the data show. While the firm slid to fifth from fourth among emerging-market bond underwriters, Citigroup increased its share of that business as debt sales jumped to $356.1 billion from $251.2 billion a year earlier.

“You had a record issuance of debt, particularly high-yield and investment-grade debt,” said Portales’s Peabody, who has an underperform rating on Citigroup shares. “A lot of that debt was international companies and that’s where Citi has a relative advantage.”

JPMorgan Profit

JPMorgan, the biggest U.S. bank, posted net income of $5.69 billion yesterday on gains from the mortgage business. Bank of America, the second-largest lender, reported a $732 million profit earlier today.

Wells Fargo & Co., No. 4 in the U.S., reported $5.09 billion in profit for the period as lending increased, the San Francisco-based company said last week.

Losses at the Citi Holdings division fell 20 percent to $1.1 billion. JMP’s Trone had forecast an $877 million loss while Atlantic Equities’ Staite had predicted $753 million. Assets in the division fell 31 percent to $156 billion as the bank sold off delinquent loans.

While there’s “no silver bullet” for getting rid of the unit, putting the lender’s “legacy issues” behind it remains a priority, Corbat told analysts.

“We’ve got to get to a point where we stop destroying our shareholders’ capital,” Corbat said.

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