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Citigroup's Bad Bank Drives Second-Quarter Profit Despite Mortgage Settlement

NEW YORK (TheStreet) -- Citigroup (C - Get Report) was able to post a second-quarter profit even after announcing a $7 billion settlement with the U.S. Department of Justice, Federal Deposit Insurance Corp. and states attorneys general surrounding the bank's packaging of residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) written during the housing bubble of 2003 and 2008.

Citigroup's earnings were buoyed by a smaller-than-expected slump in the firm's fixed income currency and commodity trading revenue and a turn to profitability in its run-off portfolio, CitiHoldings.

Chief Financial Officer John Gerspach said on a call with the media that the bank's markets business benefited from a stronger-than-expected close to the quarter as political tensions in Europe dissipated. "Tensions eased regarding Russia and the Ukraine ... You actually saw a relief rally," Gerspach said.

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On Monday, Citigroup reported a second-quarter profit of 3 cents a share on revenue of $19.3 billion. Excluding Citigroup's settlement with state and federal regulators, which consisted of a $4 billion civil monetary payment to the DOJ, $500 million to state AGs and the FDIC, and $2.5 billion in consumer relief, the bank earned $1.24 a share for the quarter.

The bank took a $3.8 billion charge to its CitiHoldings business as a result of the settlement, which the bank said resolves "all pending civil investigations related to our legacy RMBS and CDO underwriting." Only $500 million of the settlement and costs related to the bank's consumer relief is tax deductible. As a result, the firm utilized approximately $1.1 billion of deferred tax assets in the second quarter.

Citigroup's quarterly revenue figure of $19.34 billion beat analysts' consensus of $18.9 billion composed by Thomson First Call. The firm's adjusted EPS of $1.24 a share also surpassed estimates of $1.05 a share.

The firm also benefited from a strong performance at CitiHoldings, which saw revenue rise 33% to $1.46 billion and adjusted losses turn to a $244 million profit. CFO Gerspach confirmed on a media call that the bank expects CitiHoldings to remain profitable through 2014.

Citicorp, the bank's ongoing lending and trading businesses, by contrast, saw revenue tumble 8% and adjusted net income drop 18%. 

The bank's total quarterly revenue fell 6% year over year, while adjusted profit was roughly flat. On Friday, Wells Fargo (WFC) reported a smaller 3% drop in revenue and an rise in profit of more than 4%. 

"During the quarter, we continued to grow loans in our core businesses, reduce operating expenses by simplifying our products and processes and utilize our deferred tax assets. Despite the significant impact of today's settlement on our net income, our capital position strengthened to an estimated Tier 1 Common ratio of 10.6% on a Basel III basis, and our tangible book value increased," Michael Corbat, Citigroup's CEO, said in a statement.

Citigroup shares rose nearly 4% to $48.87 a share in premarket trading. Shares had lost nearly 10% year to date on the bank's struggles with the Federal Reserve-administered stress tests and a fraud uncovered in its Banamex unit.

Tangible book value per share rose to $66.76 in the quarter, meaning the firm's share price continues to trade at a significant discount to TBV, in contrast to competitors such as JPMorgan (JPM - Get Report), Wells Fargo (WFC) and Morgan Stanley (MS).

Citigroup's Earnings Make Life Harder for CEO Corbat

-- Written by Antoine Gara in New York

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