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Citigroup Third-Quarter Profit Misses Estimates (Update 2)

  • Citigroup reports third-quarter earnings of $3.2 billion or $1 a share
  • Excluding CVA/DVA and tax benefit, third-quarter EPS was $1.02
  • Revenue came in at $17.9 billion or $18.2 billion excluding CVA/DVA.
  • Analysts were expecting third-quarter EPS of $1.04 on revenue of $18.615 billion according to Thomson Reuters.
Updated from 8:11 a.m. EDT with additional information, management comments from media call

NEW YORK (TheStreet) -- Citigroup (C) on Tuesday reported third-quarter profit that missed estimates as revenue declines were only partially offset by improvements in credit quality and declining expenses.

The third-largest bank reported net income of $3.2 billion, or $1 a share, compared to $4.2 billion or $1.34 a share in the second quarter and $468 million, or 15 cents a share, a year earlier.

Revenue came in at $17.9 billion, down 13% from the second quarter and 30% from the year-ago quarter.

The third-quarter earnings included a $336 million accounting loss due to the fluctuations in the valuation of Citigroup bonds (CVA/DVA), compared to a loss of $776 million in the prior year. It also included a tax benefit of $582 million. The year-ago quarter included, among other one-off items, a $4.7 billion pretax loss from the sale of a stake in the Morgan Stanley Smith Barney joint venture.

Adjusted for these non-recurring items, the bank reported third-quarter earnings of $1.02 a share on revenue of $18.2 billion, down from $1.06 a share on revenue of $19.4 billion a year earlier.

Analysts were expecting the bank to report earnings of $1.04 a share on revenue of $18.615 billion. Most analysts exclude CVA/DVA gains and losses from their core earnings estimates.

Shares of Citigroup were losing 1.3% in morning trading Tuesday.

"We performed relatively well in this challenging, uneven macro environment," CEO Mike Corbat said in a statement. "While many of the factors which influence our revenues are not within our full control, we certainly can control our costs and I am pleased with our expense discipline and improved efficiency year-to-date."

Corbat replaced Vikram Pandit as CEO of Citigroup almost to the day last year. He has since embarked on a massive restructuring effort that includes laying off about 11,000 employees and exiting unprofitable markets.

Those initiatives are expected to deliver $900 million in savings in 2013.

Expenses for Citigroup as a whole dropped 4% quarter over quarter and year over year. Expenses at Citicorp, the bank's core business, declined 6% year over year.

Still, declining expenses weren't enough to offset weakness in the bank's fixed income trading and mortgage banking businesses.

Revenue at Citicorp, the bank's core arm, fell 7% from the prior year to $17 billion, excluding CVA/DVA.

Securities and banking revenue, which accounts for about a third of Citicorp revenue, declined by 7% from the prior year, led by a 26% decline in fixed income trading revenue, which was steeper than analysts expected. The results reflected "lower volumes and a more uncertain macro environment," the bank said.

Equity markets revenue was down 25% from the second quarter but improved 36% from a year earlier, as the bank gained market share.

North America consumer banking revenue declined 12%.

Like its peers, the bank's mortgage origination business came under pressure as refinancing volumes dropped and margins on sale of mortgages compressed.

Still, the bank reported solid growth in commercial loans of 15%, while deposits grew 8%.

International consumer banking, which accounts for more than half of consumer banking revenue, declined 1% but was up 2% on a constant-dollar basis. "Most underlying drivers showed sustained momentum," Chief Financial Officer John Gerspach said during a media conference call.

Meanwhile, credit losses continued to decline although the pace of "reserve releases" slowed. The loan loss reserve release of $675 million in the quarter was 55% lower than in the prior year period, reflecting a $4 million reserve build in Citicorp (compared to a $689 million reserve release in the third quarter 2012) and a reserve release in Citi Holdings of $679 million.

Gerspach said that the bank's U.S. operations, particularly credit cards, continues to see reserve releases. However, reserves grew in the international consumer business. The build was due to portfolio growth as well as specific loan loss reserve builds in Mexico related to Citi's exposure to homebuilders.

Citigroup also highlighted the progress it had made in reducing the earnings drag from its non-core arm Citi Holdings.

The bad bank assets at $122 billion account for only 6% of Citigroup's balance sheet, down from 7% in the second quarter.

The bank also continues to make progress in building capital. Its Basel III Tier I common ratio stood at 10.4% at the end of the third quarter while the supplementary leverage ratio is an estimated 5.1%.

-- Written by Shanthi Bharatwaj in New York.

>Contact by Email.

-- Written by Shanthi Bharatwaj in New York.

>Contact by Email.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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