Citigroup Profit Tops Estimates as Bank Taps Loan-Loss Funds

Apr 14, 2014 9:04 am ET

(Updates with revenue starting in sixth paragraph.)

April 14 (Bloomberg) -- Citigroup Inc. reported an unexpected profit increase and beat analysts’ estimates as the company recouped funds previously set aside for bad loans and cut losses at a division holding unwanted assets.

First-quarter net income climbed 3.5 percent to $3.94 billion, or $1.23 a share, from $3.81 billion, or $1.23, a year earlier, the New York-based company said today in a statement. Excluding accounting charges and a tax item, profit was $1.30 a share. The average estimate of 27 analysts surveyed by Bloomberg was $1.14.

Chief Executive Officer Michael Corbat, 53, is getting help from an improving global economy that’s making it easier for consumers and businesses to repay loans. Citigroup released $673 million in loan-loss reserves set aside in earlier years, exceeding the $500 million at Wells Fargo & Co. and the $227 million estimate of Matt O’Connor, a Deutsche Bank AG analyst.

“There is enough juice left in credit costs” to boost quarterly results for the industry, Chris Kotowski, an Oppenheimer & Co. analyst, wrote in an April 3 note. He assigns the equivalent of a buy rating to Citigroup’s stock.

Citigroup rose 3.5 percent to $47.29 in early New York trading.

Citi Holdings

Profit was also boosted by improving results in a portfolio of unwanted assets the bank has marked for sale. Losses in the Citi Holdings unit narrowed to $284 million in the first quarter from $804 million a year earlier, as mortgage results improved. Revenue at the division rose 61 percent from a year earlier to $1.46 billion.

Total revenue for the quarter fell 1 percent to $20.1 billion as expenses also declined 1 percent to $12.1 billion. Analysts predicted revenue of $19.4 billion, according to the average of 19 estimates compiled by Bloomberg.

Corbat was dealt a setback to his turnaround plan last month when Citigroup failed an annual stress test administered by the Federal Reserve, which cited 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.

“Despite a quarter that was difficult for our company, we delivered strong results,” Corbat said in the statement. “Both our consumer and institutional businesses performed well and we grew both loans and deposits while holding the line on our expenses.”

ROE Goal

The stress-test rejection probably dents prospects for achieving Corbat’s 2015 goal of reaching a 10 percent return on tangible common equity, Matt Burnell, an analyst at Wells Fargo, wrote in an April 7 report.

“The capital return path that we expected to become clearer in 2014 has been delayed,” Burnell wrote.

Citigroup Chief Financial Officer John Gerspach told investors March 3 that capital-markets revenue would drop by a “high mid-teens” percentage. Adjusted for accounting items, revenue from the markets and securities services division, which includes equity and bond trading, fell 12 percent to $5.18 billion.

Bond trading, which marred the company’s two prior quarterly earnings results, fell 18 percent to an adjusted $3.85 billion in the first quarter. Equity trading rose 13 percent to $883 million.

JPMorgan Results

Revenue from bond trading at JPMorgan Chase & Co. fell 21 percent to $3.76 billion, the New York-based bank said last week. Stock trading at JPMorgan declined 3 percent to $1.3 billion.

Profit at Citigroup’s global consumer-banking division dropped 6 percent to $1.72 billion as results were hurt by fewer U.S. mortgage refinancings, the company said.

The institutional business, which includes the investment bank and transaction services, posted profit of $2.94 billion, a 3 percent drop from a year earlier.

JPMorgan, the largest U.S. bank by assets, reported first- quarter profit of $5.27 billion, and San Francisco-based Wells Fargo posted record profit of $5.89 billion.

Corbat’s team is also investigating a suspected $400 million loan fraud at the company’s Mexico unit. The bank disclosed the matter on Feb. 28, and said it reduced 2013 profit by $235 million. Authorities including the Federal Bureau of Investigation are probing the matter.

‘Old’ Citigroup

The capital-plan rejection and regulatory investigations “brought back memories of the ‘same old Citigroup,’” Burnell wrote.

Corbat, in response to the stress-test failure, asked Eugene McQuade, the departing CEO of Citibank N.A., to cancel his retirement and lead the company’s submissions to the Fed over the next year, according to a memo obtained by Bloomberg News.

In the two weeks since failing the stress test, Citigroup reached a $1.13 billion settlement with bond investors and said it would sell its Honduran consumer bank and one-third of its branches in South Korea. The company also is in talks to sell its retail and credit-card business in Spain to Banco Popular Espanol SA, the Madrid-based lender said in a filing last week.