Citigroup's $2.9 Billion Profit Misses Street Estimate on Accounting Cost

Monday, 16 Apr 2012 08:24 AM

 

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Citigroup Inc., the third-biggest U.S. bank, said profit fell 2.3 percent, missing analysts’ estimates on a bigger-than-projected accounting cost. Fixed- income trading revenue almost tripled from the fourth quarter.

First-quarter net income dropped to $2.93 billion, or 95 cents a share, from $3 billion, or $1 a share, in the same period last year, the New York-based bank said today in a statement. The average estimate of 17 analysts surveyed by Bloomberg News was $1.02 a share in adjusted earnings.

Chief Executive Officer Vikram Pandit is trying to reverse last year’s 10 percent revenue slump and return capital to shareholders after failing part of a Federal Reserve stress test in March. Wall Street firms’ trading businesses benefited in the first quarter as U.S. unemployment fell and Europe’s debt crisis eased.

“While the operating environment improved in the first quarter, there is still much macro uncertainty and we will continue to manage risk carefully,” Pandit, 55, said in the statement.

Citigroup rose to $34.08 in New York trading from $33.41 on April 13. The shares advanced 27 percent this year before today’s increase.

Accounting Cost

Citigroup’s profit was $1.11 a share excluding a $1.3 billion accounting cost called a credit valuation adjustment, or CVA, and gains the bank made on sales of stakes in other lenders. The CVA costs primarily stem from an accounting rule that requires firms to write up the value of their own debts.

The one-time items reduced earnings by 16 cents a share. Moshe Orenbuch, an analyst with Credit Suisse Group AG, had predicted the cost would be 6 cents.

Citigroup revenue rose 1 percent to $20.2 billion for the quarter, compared with $20 billion a year earlier. Including the CVA, revenue fell 2 percent to $19.4 billion, the bank said.

Expenses were unchanged at $12.3 billion. Pandit had pledged in January to “right-size our businesses to match the environment” after a year in which shares plunged 44 percent.

Total trading revenue excluding CVA was $5.64 billion, an 11 percent gain on the same quarter last year and almost three times as much as the fourth quarter of 2011. Francisco “Paco” Ybarra, who reports to Forese, runs the trading operations in London.

Fixed Income

Revenue at the fixed-income unit -- where executives include credit-trading boss Carey Lathrop -- rose 19 percent to $4.74 billion, excluding CVA. David Trone, an analyst in New York with JMP Securities LLC, had predicted that Citigroup would post fixed-income revenue of $2.78 billion.

Equities-trading revenue slid 18 percent to $902 million, excluding CVA, from the same period in 2011. First-quarter equities revenue almost quadrupled from $232 million in the fourth quarter.

Equities-trading chief Derek Bandeen overhauled the business in the quarter, shutting a so-called proprietary- trading unit and appointing new global heads of equity derivatives, cash equities and “Delta One” trading. The Delta One desk typically helps clients speculate on or hedge the performance of a group of securities.

“They happened to be there when the markets took off,” said Charles Peabody, an analyst with Portales Partners LLC in New York said of Citigroup’s trading businesses in a phone interview. “I don’t think it has anything to do with improved execution.”

Stake Sales

Pandit sold stakes in Turkish lender Akbank TAS, Shanghai Pudong Development Bank and Housing Development Finance Corp. in Mumbai during the quarter.

Citigroup’s net income compares with the $5.38 billion posted last week by JPMorgan Chase & Co., the biggest U.S. bank. Wells Fargo & Co., the fourth-largest lender, reported a $4.25 billion profit.

Investors took more risks during the quarter as the European Central Bank increased lending to banks, easing anxiety tied to the region’s sovereign debt crisis. The five largest Wall Street banks helped clients buy and sell more commodities, sovereign debt, currencies and mortgages, leading to a 76 percent increase in fixed-income revenue compared with the fourth quarter of last year, JMP Securities LLC analyst David Trone estimated in a March 22 note.

More Risk

“Positive developments out of Europe and a general willingness to take on risk have pushed capital market stocks higher,” Trone wrote.

The trading rebound comes as Pandit seeks to cut more than 1,000 jobs across the division that contains Citigroup’s trading and investment-banking units. Revenue at the securities and banking division, overseen by Jamie Forese, tumbled 16 percent to $19.7 billion in 2011, leading Chief Financial Officer John Gerspach to cite “management and execution challenges” in parts of the business.

Richard Staite, an analyst in London with Atlantic Equities LLP, said the surge in trading in the first quarter is unlikely to last as investors take fewer risks during the rest of the year.

“We think many investors will remain on the sidelines during a period of relatively weak and uncertain economic growth,” Staite wrote March 30. He said a pattern has developed for the past three years in which a strong first quarter “has been followed by disappointment.”


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