Citigroup Profit Beats Estimates on 35% Jump in Bond Trading

  • Net income falls 11 percent to $3.84 billion from a year ago
  • CEO Corbat cites ‘underlying momentum across our franchise’

Citigroup Inc. posted third-quarter profit that beat analysts’ estimates as bond-trading revenue surged 35 percent from a year earlier, helped by interest-rate and currencies trading.

The lender helped lead bank shares higher Friday after reporting net income of $3.84 billion, or $1.24 a share, down 11 percent from a year earlier. That still beat the $1.15 average estimate for adjusted earnings per share.

Citigroup and its rivals have spent years awaiting the end of a fixed-income trading slump that has slashed Wall Street profits and forced thousands of job cuts. For Chief Executive Officer Mike Corbat, who has largely stuck by the bank’s trading business while disposing of other units and assets, the quarter extended a mid-year reprieve after market swings set 2016 off to a sluggish start. Earlier Friday, JPMorgan Chase & Co. reported a 48 percent surge in quarterly fixed-income trading revenue.

“I am very encouraged by the underlying momentum across our franchise,” Corbat, 56, said in a statement. Still, “we remain intensely focused on shareholder returns.”

Citigroup climbed 2.1 percent to $49.47 at 10:13 a.m. in New York, outpacing the 24-company KBW Bank Index, which advanced 1.4 percent. Shares of the New York-based bank dropped 4.4 percent this year.

Revenue fell 5 percent to $17.8 billion, topping the $17.3 billion that analysts predicted. The decline was mostly attributable to currency swings and a 48 percent drop within Citi Holdings, a collection of assets tagged for disposal.

The firm’s fixed-income traders generated $3.47 billion, beating the $2.95 billion average of seven analysts’ estimates compiled by Bloomberg. So-called spread products revenue jumped as much as 45 percent, and rates and currencies trading rose about 30 percent, Chief Financial Officer John Gerspach said on a conference call with journalists.

Federal Reserve officials’ differing public pronouncements about the outlook for interest rates helped boost trading volumes, he said.

“While the Brexit vote really seems to have engaged our corporate clients last quarter, with the rate debate that happened during the third quarter, we got good engagement from our investor clients and that led to spread product revenues being up significantly,” Gerspach said. “The nice thing about the Fed is, depending upon who spoke when, you got a different view of which way rates were going. ”

Revenue from equity trading fell 23 percent to $663 million, excluding a valuation adjustment last year. That missed the $786 million average estimate.

Total trading revenue climbed 16 percent to $4.13 billion, surpassing Gerspach’s prediction in mid-September for a “mid-single-digits” increase. Investment banking revenue climbed 15 percent to $1.09 billion, topping the $1.06 billion average estimate of six analysts. In the broader institutional clients group, led by President Jamie Forese, revenue was roughly flat at $8.63 billion.

Costco Deal

Corbat has been paring branch networks in markets that don’t generate acceptable returns. This month, the firm agreed to sell retail-banking units in Brazil and Argentina, reducing a century-old presence in South America’s two biggest economies.

He also invested in other areas for growth, taking over as the lender behind Costco Wholesale Corp.’s co-branded credit cards this year from American Express Co. Citigroup struggled with that rollout in June, as customers flocked to social media to complain about glitches and delays. Corbat told analysts in July the bank had deployed “a lot of resources” to ease the deluge, and Gerspach said Friday that the problems have been resolved.

Corbat labeled the consumer bank a bright spot in the third quarter. Revenue from the division, run by Stephen Bird, rose 1 percent to $8.23 billion. Still, the business’s net income tumbled 24 percent.

While the Costco deal helped drive up revenue from Citi-branded cards 15 percent to $2.2 billion in North America, taking over the portfolio fueled expenses and required additional reserves for potential loan losses. Gerspach reiterated that the portfolio won’t add to earnings in the first year.

Latin America

Earlier this month, Citigroup said it plans to invest $1 billion over four years in technology and branch upgrades in Mexico as it looks to move beyond a 2014 loan fraud and settle doubts over its commitment to the nation. The bank also renamed the local unit Citibanamex to better link the Mexico business with its parent.

Latin America consumer revenue rose 5 percent, excluding a gain in last year’s quarter from the sale of a business in Mexico. Revenue in the Asia consumer bank rose 3 percent. The results exclude the impact of currency movements.

In July, Citigroup cut its forecast for net interest margin, the difference between what it makes on loans and pays for funds -- a key measure of banking profitability. It expects the margin to be 2.9 percent in the second half of 2016, down from a previous forecast of 2.95 percent. It was 2.86 percent in the third quarter, the bank said.

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