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Trouble at Home for Citigroup

Matthew Goldstein

Citigroup's(C Quote) first-quarter earnings rose a modest 4% from a year ago as strong results in investment banking, especially overseas, helped offset a small decline in revenue from its consumer segment.

The company also authorized a $10 billion stock repurchase program. Citigroup shares closed at $48.05 on Thursday, up 3 cents since the start of the year and 11.3 times the 2006 consensus earnings estimate of $4.06 a share.

Citigroup earned $5.64 billion, or $1.12 a share, in the quarter compared with $5.44 billion, or $1.04 a share, a year ago. On a continuing-operations basis, the bank earned $5.55 billion, or $1.11 a share, including a $550 million stock-options expense and a $657 million tax-related gain.

Analysts had been forecasting net earnings of $1.02 a share in the latest quarter, according to Thomson Financial.

Total revenue rose 5% to $22.18 billion, missing the Thomson Financial estimate of $23.20 billion. Revenue included a gain of $136 million from the sales of investments in the quarter.

In premarket trading, shares of Citi were up 41 cents to $48.46.

Revenue from global consumer lending, the bank's biggest division, fell 1% from a year ago to $11.96 billion, although earnings in the division rose 8% to $3.07 billion. Citi had lower revenue in credit cards and loans, reflecting the narrowing spread between short- and long-term bond yields.

The performance of the bank's U.S. consumer-side business, which posted a 4% slide in earnings to $2 billion, was troubling. The weakness in domestic retail banking could be an indication that U.S. consumers are pulling back a bit on spending in light of the rise in short-term interest rates -- something that has immediate impact on credit card rates and interest payments on home equity loans.

But Citi's international consumer business was a strong performer in the quarter. The world's biggest financial services firm generated $1.1 billion in earnings from its overseas retail operation, a 21% gain over the prior year.

The divergent performances at home and overseas could put pressure on the New York-based lender to bolster its U.S. retail operation with an acquisition this year. Citi recently got clearance from the Federal Reserve to resume making significant acquisitions. The Fed had imposed the moratorium to give the bank time to stiffen its internal procedures designed to route out conflicts of interest in far-flung operations.

Another strong area for Citi in the quarter was corporate and investment banking. Revenue from the group jumped 21% to $7.28 billion, while earnings rose 15% to $1.93 billion. Revenue from fixed-income markets rose 8% from a year ago to $3.15 billion, while equity-market revenue jumped 67% to $1.18 billion.

The corporate and investment banking segment's international revenue rose 34% while its earnings rose 80% from last year.

In global wealth management, revenue rose 14% to $2.48 billion, while earnings fell 10% to $287 million. The earnings decline reflected higher compensation costs, the integration of Citi's acquisition of Legg Mason's(LM Quote) brokerage operations, and the absence of a Japan subsidiary that was closed in September.

The first quarter "included strong growth in client activity across many franchises," Citi said in a statement. "We are seeing the benefits from our investment spending, which helped generate record revenues in our international businesses and record revenues globally in our corporate and investment banking business. Strength in these franchises more than offset weaker results in our U.S. consumer business."

"We executed on our strategic initiatives, adding a record 238 new branches in 19 countries, as well as opening our first private bank office in mainland China," the company said. "We remain sharply focused on our strategic initiatives, leveraging our unique strengths to achieve long-term earnings growth and superior returns for our owners."