Citigroup Climbs on Better-Than-Expected Trading

Citigroup Inc. led financial stocks higher after better-than-expected trading revenue and lower credit costs helped second-quarter profit beat analysts’ estimates and the company resolved a mortgage-related probe.

Citigroup climbed 3 percent to $48.42 at 4:10 p.m. in New York trading, the best performance in the Standard & Poor’s 500 Financials Index. The shares have lost 7.1 percent this year, compared with the 4.4 percent advance of the 84-company index.

Revenue from equity and fixed-income trading, while down 15 percent from a year earlier, fell less than the New York-based firm predicted two months ago. Earlier today, Citigroup and the U.S. Justice Department announced a $7 billion agreement that resolves a probe into sales of mortgage securities leading up to the financial crisis.

The quarterly results “came in ahead of expectations with trading and investment-banking revenues beating a low bar,” Sanford C. Bernstein & Co. analysts led by John McDonald said in a note to investors. “The DOJ settlement should drive future legal provisions down.”

Net income fell 96 percent to $181 million, or 3 cents a share, from $4.18 billion, or $1.34, a year earlier, New Citigroup said today in a statement. Excluding special items, profit was $1.24 a share, surpassing the $1.05 average estimate of 25 analysts surveyed by Bloomberg.

The mortgage settlement, signed over the weekend, requires the company to pay $4 billion to the Justice Department, and a total of $500 million to state attorneys general and the Federal Deposit Insurance Corp. A further $2.5 billion will go toward consumer relief, according to the company.

Legal Costs

“Despite the significant impact of today’s settlement on our net income, our capital position strengthened,” Chief Executive Officer Michael Corbat said in the statement. The bank’s Basel 3 Tier 1 common-capital ratio increased to 10.6 percent from 10.5 percent in the first quarter.

Revenue adjusted for accounting costs fell 3 percent from a year earlier to $19.4 billion, while operating expenses excluding the cost of the settlement dropped 3 percent to $11.8 billion.

Citigroup released $696 million in loan-loss reserves, compared with $784 million a year earlier, according to the statement.

The bank has now disclosed almost $11 billion in legal and related costs since the start of 2012, according to data compiled by Bloomberg. Citigroup set aside $402 million for legal expenses in the quarter excluding the mortgage settlement, compared with $832 million a year earlier, according to the statement.

Ukraine Bets

“We expect the company is likely to guide future quarterly legal provisions to this $400 million ballpark, which would be a significant improvement,” Bernstein’s McDonald said.

Second-quarter revenue from fixed-income markets declined 12 percent from 2013’s second quarter to an adjusted $3 billion. Revenue from equity trading fell 26 percent to $659 million, driven by at least $90 million in losses the bank took on bets to protect itself against swings in stock prices triggered by Russia’s conflict with Ukraine, Chief Financial Officer John Gerspach said on a call with reporters today. About 40 percent of the equity losses were attributable to the Ukraine positions, he said.

The combined 15 percent drop over the year-earlier period was less than that predicted in May by Gerspach, who said capital-markets revenue would slide 20 percent to 25 percent.

Investment-banking revenue rose 16 percent to $1.34 billion from a year earlier.

Citi Holdings

The decline in equity trading coincided with the departure of several top-level executives from that business. Citigroup’s equity-trading head, equity sales chief and the global head of equity derivatives all left since March.

Traders at other units have also left this year, including Jeff Feig, global head of foreign exchange, and the head of distressed debt trading, who departed last week.

The Citi Holdings division, where the company houses businesses tagged for sale, posted a loss of $3.48 billion linked to the cost of the mortgage-bond agreement. Excluding those costs, the unit had net income of $244 million.

Citigroup had been discussing a settlement over the faulty mortgages since April, a person familiar with the matter said last month, and discussions broke down June 9 after the bank’s offers failed to satisfy prosecutors. Government officials had demanded more than $10 billion to resolve the issue, while Citigroup raised its offer to less than $4 billion, the person said.

Mexico Unit

Corbat has also faced other setbacks this year, including a $400 million loan fraud at Citigroup’s Mexico unit, the rejection by regulators of a proposed dividend increase in March, and a slowdown in bond trading, which accounted for 17 percent of Citigroup’s revenue last year.

The Federal Reserve rejected Citigroup’s annual capital plan earlier this year, citing deficiencies in the bank’s ability to project revenue and losses in its global operations. Regulators rejected the firm’s request to quintuple its dividend and repurchase $6.4 billion of shares.

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