Updated with IMF forecast and added data throughout.
Citigroup reported better than expected adjusted earnings of $3.1 billion, or $1 per share, on revenue of $18.6 billion. Those earnings beat analysts' estimates of 89 cents in adjusted EPS, according to Bloomberg data; however, revenue came in slightly lower than expectations.
The earnings beat was fueled by cost cuts, an improvement in the credit quality of the banks loans and the maintenance of earnings at its investment bank."Contributing to the beat were both lower than expected credit costs (positive as reserve releases were below our estimates) and a lower than expected tax rate (not a high quality earnings driver)," wrote UBS analyst Brennan Hawken, in a Monday note to clients. Citigroup shares rose over 1% to $26.94 in afternoon trading, stemming stock losses of over 20% in the last three months. The Bank's steady profits mostly resulted from bottom-line expense cuts and credit improvements. Citigroup said that its allowance for loan losses dropped to $27.6 billion, or 4.3% of total loans, compared with allowances of 5.4% at this time last year. Those credit improvements beat some expectations. "While a low tax rate, a $984 million reserve release, and some slowing in Asia will draw some attention, we think the overall Citi story is intact and very interesting at 51% of tangible book value," wrote Nomura Securities analyst Glenn Schorr, in a Monday note to clients. Notably, Citigroup's North America consumer banking unit saw credit quality improve sharply as net credit losses fell $625 million, or 29%, to $1.5 billion compared to this time in 2011. Those credit improvements matched similar results at JPMorgan and Wells Fargo on Friday. Overall, Citigroup's net income -- excluding the impact of accounting gains on the banks credit spreads and a $424 million charge on the sale of a 10.1% stake in Turkish lender Akbank -- was $3.1 billion, 1% lower than the second quarter 2011. The bank's core operations increased earnings 5% and maintained flat revenue, while overall operating expense of $12.1 billion was 6% lower than the prior year period, in line with estimates. Profits at Citigroup's international consumer bank fell 12% to $795 million and revenue fell by a similar measure to $4 billion, but the drop was given a push by currency adjustments as the U.S. dollar strengthened against emerging market currencies like the Mexican Peso. While falling international earnings may disappoint investors who have long expected a recovery in Citigroup's shares as the bank executes on a multi-year runoff of unwanted U.S. businesses, bolsters capital and focuses on overseas growth, they mask strong growth and credit trends in Citigroup's emerging market operations. Excluding currency adjustments, revenue grew 8% in Latin America and was flat in Asia and other emerging markets. Meanwhile, the bank said that all international regions grew deposits and loans as credit quality generally improved. Overall, Citigroup's international consumer banking credit quality improved from the prior year period as net credit losses fell 12% to $613 million. The bank said that even as loan portfolio's continued to grow, delinquency rates were stable across all products and regions. Those results helped to assuage fears that Citigroup's strategy to target banking opportunities in regions with higher-than-trend gross domestic product (GDP) growth outlooks could backfire, as investors and economists still work to fully gauge the spillover effects of developed market weakness on emerging market economies. On Monday, the International Monetary Fund cut its forecast of global economic growth on downside risks to the euro area, a U.S. fiscal cliff and the expiration of stimulus efforts in the emerging markets. Monday earnings indicate resilience in Citigroup's strategy, even if investors should continue to scrutinize credit trends, such as a $120 million build of loss reserves at its banking unit in Latin America. Emerging market trends may also help the bank eventually sustain growth, as it completes a multi-year runoff of unwanted assets called CitiHoldings. In the second quarter, CitiHoldings saw revenue fall 62% year-over-year to $924 billion, as its net loss widened by nearly 40% to $920 million. Still, the unit continues to shrink and now stands at $191 billion in total assets, down 28% from this time in 2011, and $850 billion when it was first opened. Most of Citigroup's core revenues remain under pressure, even as the bank's operations become more lean and it benefits from improving credit quality on U.S. loans, noted Wells Fargo analyst Matthew Burnell. Analysts had expected Citigroup's earnings to get a boost from expense cuts. KBW's David Konrad calculated that expense should drop to $12 billion from $12.3 billion in the first quarter and nearly $13 billion this time last year. Those cost savings and in-line credit trends helped Citigroup beat earnings estimates, even as revenue of $18.6 billion came in below estimates. In a key earnings surprise, Citigroup grew revenue at its investment bank, combatting expectations of declining earnings. The nation's third largest bank by assets reported investment banking revenue of $5.4 billion, beating estimates and an expected year-over-year drop. Still, Citigroup's investment banking earnings fell sharply from the first quarter, when a surge in debt underwriting benefitted most Wall Street players. Prior to second quarter earnings season, which kicked off on Friday when JPMorgan (JPM - Get Report) and Wells Fargo (WFC - Get Report) reported mixed but generally stronger than expected earnings, analysts cut their earnings estimates of large cap banks citing an investment banking and trading slump. In July, Credit Suisse and KBW analysts cut Citigroup's earnings per share estimates citing investment banking and capital markets weakness. KBW's David Konrad expected investment banking revenue to be approximately $5 billion, down from core revenues of $6.7 billion in the first quarter and $5.3 billion at this time last year, on a slowdown in client activity as Eurozone debt fears escalate. "Overall, we view this quarter as a slight miss thinking about the quality of earnings, and we are below the street in forward estimates," Konrad added in a Monday note, however, the analyst highlighted a bigger than expected improvement in Citi groups Basel III Tier 1 core Capital to 7.9% and the bank's trading price at 52% of tangible book value as points of optimism for investors. For more on Citigroup's second quarter earnings and its strategy versus money center banking peers JPMorgan and Bank of America (BAC - Get Report), see why it's emerging market exposure faces a crucial test this quarter. -- Written by Antoine Gara in New York