(Citigroup international story updated with Europe disclosures, management commentary)



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international growth story was intact in the third quarter, with the bank continuing to post robust revenue growth in its overseas consumer banking business.

The bank said

net income rose to $3.8 billion or $1.23 per share in the third quarter

compared to $2.2 billion or 72 cents per share in the year-ago period.Revenues came in at $20.8 billion, up slightly from the year-ago quarter. Excluding the one-time gain from falling value of its own debt, Citigroup reported an earnings per share of 84 cents on revenues of $18.9 billion.

Citigroup has been among the few banks that has shown strong loan growth in an anemic recovery, thanks to its strong presence in Asia and Latin America. That trend continued well into the third quarter, despite concerns that high inflation and macro-economic uncertainties in Europe and U.S. will crimp growth in emerging markets.

International consumer banking revenues in Latin America, Asia and EMEA(Europe, Middle East and Africa) gained 10% to $4.9 billion, from $4.42 billion in the year-ago quarter.

The bank also reported strong double-digit growth in loans, thanks largely to the performance of its international consumer banking operations. End of period loans at Citicorp, the unit which houses its core businesses, grew by 13% to $444 billion. Latin America and Asia each saw double digit growth year-over-year in average loans, average deposits and purchase sales. Sandler O'Neill analysts expected international loans to grow by 3%.

Overall, consumer loans expanded by 6% to $237 billion, while corporate loans surged 21% to $207 billion over the prior year period.

Still, international profit growth lagged that of revenues, with the bank remaining in investment mode in emerging markets. Net income from international consumer banking operations declined 12% to $919 million. Operating expenses increased 12% to $2.9 billion, reflecting ongoing investments and the impact of foreign exchange movements and higher business volumes.

The bank said that the international business in Asia achieved operating leverage one quarter ahead of schedule, with revenues outpacing expenses. Citi's Latin American business remains on track to start paying off in the fourth quarter of 2008.

Profits also declined due to lower releases of reserves of $9 million, down from $440 million in the third quarter of 2010 as credit trends normalize in Asia and other emerging markets. Net credit losses declined 9% to $691 million. "Overall credit quality in international RCB

regional consumer banking continued to improve as delinquencies in both cards and retail banking were lower across all buckets even as the underlying loan portfolios grew at double digit rates versus the third quarter 2010," the bank said.

"We feel very good about the underlying credit in both regions," said CFO John Gerspach said in a conference call with reporters.

Separately, Citigroup also improved its disclosure on its exposure to Europe, disclosing both gross and net exposure to the troubled zone of Greece, Italy, Ireland, Portgual and Spain and also France and Belgium. Gross funded exposure to GIIPS stood at $20.6 billion, while net exposure stood at $7.1 billion. Gross exposure to France and Belgium stood at $14.4 billion, while net funded exposure was $2 billion as of September 30.

The bank also has unfunded commitments to the tune of $9.2 billion to GIIPs of which $8.4 billion is to corporations, and $18 billion in unfunded commitments to Belgium and France (of which $12.4 billion is to companies).

Citigroup shares have suffered in recent months as investors worried about its exposure to Europe. While the bank's net exposure seemed in line with its peers, investors burned by the crisis remained skeptical of the disclosures because they ignored the "gross" exposure. To that extent, the latest disclosures were an improvement.

Analysts bullish on Citigroup argue that its global presence makes it the best long-term play among the large, money-center banks, as developed economies in the West may take years to fix the problems created by the financial crisis. The higher interest rates in emerging markets also provide an offset to margin pressure from a prolonged low-interest rate cycle in the U.S.

A slowdown in emerging markets will mean more downside for Citi, however, as analysts have built in strong growth in these markets in their earnings estimates.

Recent data from emerging markets from Brazil and China to Singapore and Indonesia show signs that developing economies are feeling the pain of the troubles in Europe and U.S. The IMF recently downgraded its outlook for emerging economies in Asia this year and next, saying that the risks to the economies were "tilted to the downside."

Still, analysts are quick to point out that those economies are likely to grow at a faster pace than the U.S. or Europe in the event of a downturn making Citigroup a relative winner.

Gerspach said in the media call that the bank remained positive in its outlook for emerging markets, even though the pace of growth will likely moderate a little in those economies. "The underlying themes are still intact, in that we will get most of the growth from emerging markets for several years," he said. "We have said that we do not expect emerging markets to continue at the pace of growth seen in 2010 and early 2011. As those economies adjust their growth levels to inflation and other problems, we will pace our investment spending accordingly," he said.

Citigroup CEO Vikram Pandit is sure to tout the bank's international expansion plans. But he will also have to start tackling some of the negative headlines that have been emanating from Asia over the past year that suggests management challenges.

The bank's Japan unit has run into trouble with regulators following an investigation that alleged that it failed to make timely disclosures while selling products to retail customers. It has had problems in Japan before and was forced to shut down its private bank in 2004.

Hong Kong's Securities and Futures Commission fined Citigroup Global Markets Asia HK$6 million ($770,000) for failing to promptly report a Ponzi scheme operated by one of its former employees.

The bank also took a hit in Indonesia after debt collectors allegedly working for the U.S. bank were tied to a "mysterious death" of a customer. That was followed by ban from selling wealth management services in Indonesia following the arrest of an employee accused of stealing $2 million from clients.

Earlier this year, the police in India registered a case against Citigroup in connection with a $67.2 million alleged fraud at a branch in a New Delhi suburb.

The problems abroad might pale in comparison to the mortgage mess in the U.S. But the bank has too much riding on overseas growth to ignore the risks.

--Written by Shanthi Bharatwaj in New York

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