Citigroup Beats Estimates as Bank Reaches Mortgage Accord

Citigroup Inc. posted second-quarter profit that beat analysts’ estimates after excluding $3.7 billion in costs tied to a mortgage-bond settlement. The shares jumped 4 percent.

Net income fell 96 percent to $181 million, or 3 cents a share, from $4.18 billion, or $1.34, a year earlier, the New York-based company 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.

Citigroup and U.S. authorities announced a $7 billion agreement earlier today to resolve a probe into sales of mortgage securities leading up to the financial crisis. The deal, 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.

“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.

Corbat, 54, follows his counterparts at bigger banks in grappling with authorities over allegations of misrepresenting the quality of mortgage-backed bonds sold to investors. JPMorgan Chase & Co., the largest U.S. lender, agreed in November to pay $13 billion to resolve similar federal and state probes. The government has sought about $17 billion from No. 2 Bank of America, a person familiar with the talks has said.

Revenue, Expenses

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. Analysts surveyed by Bloomberg projected $18.8 billion in revenue.

Citigroup rose 4 percent to $48.86 in New York trading at 8:14 a.m. The shares had dropped 9.8 percent this year through yesterday.

Citigroup has now disclosed almost $11 billion in legal and related costs since the start of 2012, according to data compiled by Bloomberg.

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. The combined 15 percent drop over the year-earlier period was less than that predicted in May by Chief Financial Officer John 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.

Executive Departures

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 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 Fraud

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.

Before it's here, it's on the Bloomberg Terminal.