Citi profit sags as revenue shrinks, expenses grow
Citigroup Inc's first-quarter profit fell 32 percent as shrinking loans and poor trading results pressured revenue while expenses surged.
The results highlighted how the third-largest U.S. bank, which teetered on the brink of collapse in the financial crisis, has stabilized but is still struggling to generate real growth.
The results were better than expected, which supported Citigroup's stock on a day when the U.S. equity market was falling. But like other big banks, the company's profit came mainly from dipping into money previously set aside to cover bad loans.
We're not seeing a lot of revenues being thrown off by main businesses ... They haven't been able to turn recovery into growth, said Len Blum, a managing partner of investment firm Westwood Capital, who personally owns bank stocks.
All three of the biggest U.S. banks -- Bank of America, JPMorgan Chase and Citigroup -- have posted shrinking loan books for the first quarter, raising questions about the strength of U.S. economic growth.
The biggest boon for banks right now is that credit losses are dropping. Citigroup's credit losses fell 25 percent in the quarter and steadily declined all last year.
Citigroup is among the most international of the major U.S. banks, and that helped some businesses in its Citicorp unit, where the bank houses the operations it plans to continue operating over the long term.
That unit's Latin American consumer banking, investment banking and transaction-processing services all posted higher income from continuing operations, for example, even as North American investment banking and transaction-processing operations posted profit declines.
BEATING ESTIMATES
Overall, Citigroup earned $3.0 billion, or 10 cents per share, in the first quarter, beating analysts' average forecast of 9 cents a share, according to Thomson Reuters I/B/E/S. A year earlier it earned $4.4 billion, or 15 cents per share.
Revenue dropped 22 percent, including a 29 percent drop in its fixed income trading revenue. [ID:nN18189626]
The slump in trading revenue reflected a volatile quarter in the markets, driven by Middle Eastern political upheaval and a Japanese earthquake and tsunami. That market environment is also expected to dampen profits at top U.S. investment banks Goldman Sachs Group Inc and Morgan Stanley, which report their quarterly results later this week.
On a conference call with investors, Chief Executive Vikram Pandit said the bank is building its investment banking franchise. Operating expenses rose 7 percent to $12.33 billion.
It is a reversal for Pandit, who spent his first few years at the helm slashing costs in an effort to right the foundering bank.
Under prior executive Charles Chuck Prince, investors and analysts criticized the bank for having bloated expense levels even when revenue was rising.
Citigroup's expenses rose in part due to higher legal expenses, though Chief Financial Officer John Gerspach declined to identify the source of those higher legal expenses on a conference call with reporters.
But he said the bank will incur $25 million to $30 million in annual costs, as well as one-time charges of up to $50 million over the next few quarters, related to a foreclosure-related settlement with bank regulators.
Last week, 14 banks including Citigroup agreed to overhaul their mortgage operations and compensate borrowers who were wrongly foreclosed upon, as part of a settlement with bank regulators. [ID:nN13259474]
Gerspach said Citigroup would hire up to 500 people as part of the settlement.
Citigroup is also trying to rid itself of underperforming home loans. Gerspach told analysts that the bank has sold $10 billion worth of mortgages from Citi Holdings over the last five quarters. Citi Holdings is where the bank houses assets and businesses it plans to shed.
RECOVERY TO GROWTH
In 2010, the bank posted its first annual profit since 2007, showing that Pandit had turned the bank around after it received $45 billion of government funds over the course of three rescues.
By the end of 2010, the government had shed its common shares in Citigroup, and last month the bank reinstated a nominal dividend and said it would reduce its number of shares outstanding through a reverse share split in May.
But Pandit still has to prove that Citigroup can move past recovery to growth, despite broad challenges facing the banking industry's attempts to boost profits.
Citigroup shares are still relatively cheap, trading at about 0.76 times their book value, according to Nuveen Investments analyst Alan Villalon. Bank shares generally are trading between 1.2 to 1.3 times stated book value, he said. Some investors have been buying Citi shares because they look relatively undervalued.
Citigroup did add assets to its balance sheet in the first quarter, bringing its total assets to $1.33 trillion, a 3.6 percent increase from the fourth quarter of 2010.
But loans fell 1.8 percent from the fourth quarter, with gains in assets coming from areas like trading account assets.
Citigroup shares closed on Monday unchanged at $4.42.
Regional banks KeyCorp and M&T Bank Corp, which also reported first-quarter results on Monday, both also beat estimates, and both reported lower loans on their books compared with the fourth quarter.
(Reporting by Maria Aspan; additional reporting by Joe Rauch in Charlotte and Lauren Tara LaCapra in New York; Editing by Tim Dobbyn and John Wallace)
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