10-15-2013 05:00 AM

Citi's Quarterly Profit Misses Estimates

Mario Tama/Getty Images A Citibank branch in New York.
Updated, 11:06 a.m. |
Grappling with a tepid mortgage market and a broad slowdown in its fixed-income business, Citigroup reported disappointing third-quarter earnings growth on Tuesday.
Citigroup, the nation’s third-largest bank by assets, said profit rose to $3.23 billion, or $1 a share, from $468 million, or 15 cents a share, in the period a year earlier. But the bank’s results were undercut by weakness in the fixed-income unit and fell short of analysts’ expectations for profit of $1.04 a share.
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Adjusted for one-time items, Citi’s earnings were slightly higher, at $3.26 billion, $1.02 a share.
Revenue swelled 30 percent, to $17.88 billion, from $13.7 billion in the period a year earlier. Excluding one-time items, the bank reported revenue of $18.2 billion, compared with $19.2 billion in the third quarter of 2012, short of the analysts’ estimate of $18.74 billion.
Revenue from the bank’s fixed-income trading swooned 26 percent, to $2.78 billion, a more precipitous drop than at JPMorgan Chase, which also reported a slump in trading revenue on Friday.
To offset the slump, the bank has had to rely on reining in expenses to bolster revenue.
Citigroup’s results come amid a general uneasiness across the nation as the federal government hurtles toward a possible default on its debt obligations.
“We performed relatively well in this challenging, uneven macro environment,” Michael L. Corbat, the chief executive of Citigroup, said in a statement.
For Mr. Corbat, the bank’s third-quarter earnings report comes at a critical moment: his one-year anniversary atop the bank. It was almost a year ago that Mr. Corbat took over the reins after Vikram S. Pandit was forced out in a boardroom coup led by Citi’s chairman, Michael E. O’Neill, who maneuvered behind the scenes for months to orchestrate the management change.
Pablo Martinez Monsivais/Associated Press Michael Corbat, the chief of Citigroup, in Washington earlier this month.

Since taking over, Mr. Corbat, a veteran of Citigroup who was spearheading much of the bank’s international business, has grappled with some of the same problems that dogged Mr. Pandit, including how to shed unprofitable assets.
And like Mr. Pandit, Mr. Corbat has assiduously tried to cut costs and slim down business units at the sprawling bank. As part of that push, the bank has sold its remaining stake in a brokerage joint venture with Morgan Stanley.
But like its rivals, Citigroup is challenged by a lackluster American economy and slowing demand for loans. John C. Gerspach, the bank’s chief financial officer, put it bluntly on a conference call on Tuesday. “I can’t think of a significant business that had revenue growth year over year,” he said.
Hurt by weak mortgage growth at home, Citigroup has pinned some of its hopes for growth on its international operations. More than 50 percent of the bank’s revenue comes from outside of North America. As a result, it has successfully sidestepped some of the turmoil hurting its peers in the banking industry.
But in the latest quarter, Citigroup was bedeviled by many of the same forces that have dragged down earnings at its rivals. Fixed income, which has been a bright spot for the banking industry, was undercut by lackluster bond markets. Revenue dropped broadly, though, falling 7.1 percent in Asia and 1.3 percent in Latin America.
Citigroup continued to whittle down expenses, though. Operating expenses for the third quarter were $11.66 billion, down 3.6 percent from the period a year earlier. As part of a plan for further savings, Citigroup announced last month that it would eliminate more jobs in its mortgage business, laying off roughly 1,000 workers. The goal, Mr. Corbat has said, is to reduce the bank’s overall costs by $1.1 billion by next year – a move that would involve a cost reduction of $900 million this year.
The paring back, though, does not insulate Citigroup from broader challenges buffeting the banking industry. On Friday, JPMorgan and Wells Fargo reported dips in mortgage banking revenue, undercut by a slowdown in mortgage refinancing. The once-lucrative business stream has slowed, in part because of a shift at the Federal Reserve, which had sharply reduced interest rates in the aftermath of the financial crisis to propel growth. The low rates lured homeowners to refinance their mortgages.
This spring, the Fed signaled that it would scale back its stimulus program as the economy continued to rebound. Such messages from the Fed led interest rates rise, hurting refinancing activity. Janet L. Yellen, the nominee to be the next leader of the Fed, has been a strong supporter of holding short-term rates hovering around zero while unemployment remains higher than 6 percent.
Still, Mr. Gerspach said, that is not enough to assuage skittish investors. Pointing to the broad uncertainty roiling the financial markets, Mr. Gerspach said the Fed, through many regional governors, was sending “mixed messages.”
In the third quarter, mortgage originations at the bank were $14.5 billion, effectively stalled from the period a year earlier, but a 16 percent drop from the second quarter. Revenue from mortgage banking plummeted 76 percent, to $167 million, from the period a year earlier.
In the consumer banking unit, revenue fell 6.9 percent, to $9.24 billion, from the third quarter of 2012. That decline points up a persistent problem for lenders: the American consumer.
Across the nation, consumers still reeling from the financial crisis and ensuing recession are trying to stay out of debt and cut their bills, banking analysts say. The tepid appetite for loans is taking its toll on banks. Mr. Gerspach said there was still evidence of “deleveraging” among consumers.
Citigroup reduced assets 29 percent in the third quarter at its Citi Holdings unit, which houses a morass of soured assets. The loss in the unit shrunk to $102 million from a loss of $670 million in the period a year earlier.
The credit quality at Citigroup also continued to improve. The bank said its loan-loss reserve release, a cushion against losses, was $675 million, 55 percent less than in the third quarter of 2012.
Shares in Citigroup were down 14 cents, at $49.46, in midmorning trading on Tuesday.



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