Citigroup Drops as Earnings Miss Estimates on Trading Slump

Jan 16, 2014 4:31 pm ET

(Updates with Goldman Sachs results in the seventh paragraph, legal costs in the ninth.)

Jan. 16 (Bloomberg) -- Citigroup Inc. led bank stocks lower after a slump in bond trading contributed to fourth-quarter results that missed Wall Street estimates.

While net income more than doubled to $2.69 billion from $1.2 billion, adjusted profit of 82 cents a share was close to the most pessimistic predictions, and Citigroup fell 4.4 percent to $52.60. It was the stock’s biggest drop since November 2012 and the day’s worst showing in the 24-company KBW Bank Index, which slid almost 1 percent.

Trading from bond and foreign-exchange markets waned, slowing Chief Executive Officer Michael Corbat’s turnaround effort. The quarter was marred by a 15 percent drop in fixed- income revenue excluding accounting charges, with adjusted profit down 8 percent in securities and banking, and 16 percent in global consumer banking, Citigroup said in a statement.

“We saw a fall-off in client volumes,” Chief Financial Officer John Gerspach, 60, said on a media conference call, citing weaker customer activity in credit and securitized products. “It’s not that we’ve got something that’s broken and that needs to be fixed. For the full year, it was an excellent performer.”

Corbat, 53, told analysts during a conference call that while traders may have taken less risk in the second half, they’re free to pursue opportunities -- “there’s nothing prescribed here,” he said. Corbat also tamped down speculation about any firmwide changes in strategy.

The bank won’t be making “silly choices” such as asset sales just to boost results, he said.

Missing Targets

Goldman Sachs Group Inc. fell the most in two months after the firm, which relies more on trading than any of its competitors, said revenue from that business dropped 13 percent in 2013.

Companywide, Citigroup’s quarterly revenue excluding an accounting charge tied to the value of the firm’s own debt and other items declined 2 percent to $17.9 billion. For the full year, net income rose 84 percent to $13.9 billion as revenue climbed 10 percent to $76.4 billion. The New York-based company ranks third by assets among U.S. lenders.

Quarterly profit was reduced by $809 million of legal and related costs, an increase from $677 million in the third period, the bank said.

Adjusted quarterly profit was $1.06 billion at the securities and banking unit and $778 million at the transaction services segment. Both businesses are overseen by co-President James “Jamie” Forese, 50.

Fixed Income

Within securities and banking, fixed-income revenue excluding an accounting adjustment shrank 15 percent to $2.33 billion from a year earlier. That compares with the $2.5 billion estimate of Sanford C. Bernstein & Co.’s John McDonald. The bank generated $13.1 billion from fixed-income markets for the year, a 7 percent decline from 2012. Francisco “Paco” Ybarra, 52, oversees the bank’s global markets operations.

Revenue from investment banking, which includes managing bond and share sales for clients and providing advice on mergers and acquisitions, rose 3 percent to $1.04 billion, according to the bank. Equity markets revenue climbed 16 percent to $539 million from a year earlier while falling 24 percent from the third quarter, the company said.

Within fixed income, Carey Lathrop is global head of credit, and Jeffrey Perlowitz and Mark Tsesarsky are co-heads for securitized products. Andy Morton manages interest rates and Anil Prasad runs the currency business. Howard Marsh is head of municipal bonds. Stu Staley oversees commodities.

Consumer Bank

Adjusted profit from consumer banking, run by co-President Manuel Medina-Mora, 63, with about 4,000 branches across almost 40 countries, dropped to $1.63 billion from $1.95 billion in the year-earlier quarter. Mortgage originations in North America declined 43 percent from the third quarter to $16.8 billion, according to a financial supplement.

Return on equity was 5.3 percent. By contrast, Wells Fargo & Co. reported a 13.8 percent ROE, JPMorgan Chase & Co.’s was 10 percent and Bank of America Corp. posted 5.7 percent. New York- based JPMorgan is the biggest U.S. bank by assets and Bank of America, based in Charlotte, North Carolina, is second. San Francisco-based Wells Fargo has the highest market value.

Bond Trading

Wall Street banks are grappling with a slump in bond trading amid new regulations and a changing landscape. Uncertainty around the Federal Reserve’s decision to taper its monthly bond purchases, and a U.S. government shutdown kept bond investors sidelined during the fourth quarter, according to Todd Hagerman, a Sterne Agee & Leach Inc. analyst and former Fed bank examiner.

That left Citigroup more vulnerable than many of its competitors “given their outsized rates and currencies business,” Hagerman said before the results were announced. “It will raise the question: are they going to be in a position to generate positive operating leverage in 2014 when they continue to face these headwinds in the top line?”

Revenue from fixed-income, currencies and commodities trading, or FICC, probably fell to $73 billion at the 10 largest global investment banks in 2013, about half the level of 2009, according to industry analytics firm Coalition Ltd.

Pay Curbs

As the year ended, Corbat sought to keep a lid on pay. Investment bankers could get payouts little changed compared with 2012, while traders and salespeople could see 2 percent cuts, a person familiar with the matter said in December.

The lender is also facing regulatory investigations and legal challenges. It’s cooperating with government agencies in the U.S. and elsewhere over probes in the foreign-exchange market, and facing inquiries related to its sales of mortgage- backed securities.

Citigroup set aside $1.4 billion for litigation and legal costs during the first nine months of 2013, according to regulatory filings. That compared with $11.1 billion at JPMorgan and $4.8 billion at Bank of America. Figures for the final quarter haven’t been released.

The firm continued winding down and selling investments at Citi Holdings, which contains a consumer-finance operation and billions of dollars of U.S. mortgages. Losses at the business, created as a home for the company’s unwanted assets after the financial crisis, widened from the third quarter to $422 million. Assets fell 4.1 percent to $117 billion.

--Editors: Rick Green, Steven Crabill