Citi Earnings Beat Spurs Optimism (Update2)

Separately the company said it recorded a $745 million net mark-to-market loss on the mortgage servicing right and related hedges in its North American consumer banking arm.

As with other banks, higher credit costs in its mortgage business reflected a "weakening of leading credit indicators, including higher delinquencies in first and second mortgages, unsecured personal loans and auto loans," it said. Net charge-offs rose 146 basis points to 2.33%.

The company's firm-wide credit costs totaled $7.2 billion in the second quarter, which included another $2.5 billion addition to reserves and $4.4 billion of charge-offs related to its North American residential real estate portfolio and global card business, it said.

In its credit card business, the higher credit costs reflected "a weakening of leading credit indicators, trends in the macro-economic environment, including the housing market downturn, higher fuel costs, rising unemployment trends and higher bankruptcy filings, as well as the continued acceleration in the rate at which delinquent customers advanced to write-off," Citi said. Its "managed" net credit loss ratio rose 202 basis points to 6.53% in the quarter.

The bank also reported progress in reducing staff, eliminating 6,000 jobs in the quarter and 11,000 so far this year.

Despite the rising problems in its consumer mortgage and card businesses, the company has been improving its capital position as it moves to shed nonstrategic businesses like CitiCapital, Diners Club International and CitiStreet. Just last Friday, the bank announced the sale of its German retail banking operation. Citi's Tier-1 capital level rose to 8.7% in the second quarter.