Citi Beats Profit Estimates as Brexit Surprise Spurs Trading Flurry

While lenders are rebounding slowly after a volatile start to 2016, Citigroup, JPMorgan Chase and Wells Fargo have all topped profit estimates and reported strong lending growth.
By Bradley Keoun ,

Citigroup (C) - Get Reportbeat second-quarter profit estimates, joining JPMorgan Chase (JPM) - Get Report in reporting big benefits from the surge in bond and currency trading that followed Britain's surprise vote last month to break away from the European Union.

Earnings of $1.24 a share compared with the $1.10 average estimate from analysts in a Bloomberg survey. Net income slid 14% to $4 billion while revenue of $17.5 billion was in line with analysts' projections.

John Gerspach, the New York-based bank's CFO, told reporters on a conference call Friday that clients rushed to the firm's bond and currency business for "solutions" after the so-called Brexit vote prompted investors and economists to reassess their views on the future of global growth and politics. 

"There was some increased volatility around Brexit that we were probably positioned for," Gerspach said. The performance can't be extrapolated to coming quarters, he said, noting that each trading period "has its own story." 

The bank's bond-trading revenue in the three months through June climbed 14% from a year earlier to $3.47 billion, while stock trading rose 21% to $788 million, according to a statement. Analysts at Deutsche Bank had predicted declines of 4% in fixed-income and 6% in stocks.

Lenders are rebounding after a challenging start to 2016, when they were racked by swelling energy-loan losses, slowing growth in China and uncertainty about interest-rate increases in the U.S. San Francisco-based Wells Fargo (WFC) - Get Report  said Friday that revenue climbed 4% from a year earlier, aided by strong loan growth. 

JPMorgan, the largest U.S. bank, on Thursday posted second-quarter gains of 35% from fixed-income trading, and 2% from stocks. The firm also reported strong growth in mortgages, auto loans and credit cards, and its executives were upbeat about the remainder of the year.

Wall Street's dealmaking and underwriting units have yet to fully recover from the early volatility, however, with Citigroup's investment-banking fees tumbling 6% during the quarter to $1.22 billion.

The stock was down 0.3% as of 11:15 a.m. in New York. 

Citigroup CEO Michael Corbat, who purchased the lucrative Costco (COST) - Get Report branded card portfolio from American Express this year and fared the best among Wall Street peers on a Federal Reserve review of large banks' so-called living wills, is building on a performance last year that was the bank's most profitable since the financial crisis.

Citi was propped up during the crisis with a $45 billion bailout as the government raced to protect the economy after investment bank Lehman Brothers collapsed amid the implosion of the mammoth U.S. mortgage market.

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Citi Holdings, the loan portfolio that Corbat is exiting as he rebuilds the bank after the crisis, shrank 47% from a year earlier and turned a profit for the eighth straight quarter, according to the bank.

The unit's assets of $66 million compare with $888 billion at the end of 2007, when subprime mortgage defaults were beginning to curb the value of related securities and hurt the broader economy.

"The bank's concerted efforts to overhaul its legacy business, which had been plagued by regulatory scrutiny, complexity, toxic assets -- held within Citi Holdings, otherwise known as its 'bad bank,'" have proven successful, TheStreet's Jim Cramer, who holds the stock in his Action Alerts PLUS charitable trust, said in a note to clients. "The bank is emerging as a lean, clean operating machine."

During the call with reporters, Gerspach said he expects global growth to remain on its current pace in the months ahead. 

It's a positive sign that "markets are open, markets are active," he said.

In the meantime, the bank is positioning itself for interest rates to stay low for the foreseeable future. In late 2015, many analysts were predicting that Federal Reserve hikes this year would lead to expansion in lending margins and interest income. 

"Our basic view towards rates over the last several months has been lower-for-longer, and I think that continues," Gerspach said. "That's the way we're viewing it, that's the way we're making our plans."

This year's rise in New York oil prices to about $46 a barrel has allowed energy companies to regain access to capital markets, helping them to fend off cash shortages, Gerspach said. Whereas the bank had to set aside $233 million in the first quarter to cover potential loan losses, it was able to release $256 million in the second quarter from its credit reserves. 

Chris Kotowski, an analyst at Oppenheimer, wrote in a report that he had projected the bank would have to set aside an additional $200 million of loan-loss reserves in the quarter. 

"The beat versus our expectations came primarily on the credit front," he wrote. 

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