Skip to main content

Slow Progress at Citi

Shares rise as credit quality remains solid.


(C) - Get Citigroup Inc. Report

might be concentrating on expense management these days, but two important businesses -- consumer and alternative investments -- didn't help the company much last quarter.

Citi had particularly strong growth in its capital markets and wealth management business in the first quarter, but the U.S. retail and lending operations increased a meager 6% to $7.7 billion from a year earlier. Total U.S. consumer profit fell 12% to $1.76 billion in the quarter.

Citi's alternative investments business was also a poor performer in the quarter. Revenue dropped 17% to $562 million on lower revenue from hedge funds, an absence of a gain on the sale of shares of Travelers Cos. and the absence of a tax benefit it recorded a year earlier, the company said.

Still Chuck Prince, Citi's CEO, maintains that the $2 trillion-asset company is making progress on all of its priorities -- growing its U.S. consumer business, "reweighting" the company to have a larger contribution from international businesses, and managing costs and credit losses.

"We have clear goals," Prince said during a conference call. "We really see demonstrated evidence that we're on the right track and we're making progress."

Prince said he remains "cautiously optimistic" of the U.S. consumer business.

In the first quarter Citi made $5 billion, or $1.01 a share, down from the year-ago $5.56 billion, or $1.11 a share. Excluding a charge related to last week's plan to cut 17,000 jobs, the company made $1.18 a share, well above the $1.09-a-share Thomson Financial analysts' consensus estimate.

Revenue rose 15% from a year earlier to $25.4 billion.

On the bright side, consumer deposits, loans and assets under management all rose at double-digit paces last quarter. In addition, Citi's agreement last week to purchase Old Lane Partners, which manages $4.5 billion in assets through its global multi-strategy hedge fund and a private-equity fund, should boost its alternative investment platform.

TheStreet Recommends

Old Lane was founded by seven industry veterans, a number of whom will take on leading roles within the $59 billion-asset business. Vikram Pandit, a former investment banking veteran at Morgan Stanley, will become CEO of Citi's alternative investments.

Servicing revenue and gains on securities sales in Citi's U.S. lending business rose, but credit costs in its U.S. businesses also escalated.

Net credit losses in its U.S. consumer lending unit rose 11% to $286 million, while loans that were 90 days or more past due rose 25% to $3 billion. Citi's company-wide credit costs almost doubled to $2.7 billion from a year earlier.

Still, Prince said he "feels good about the composition" of Citi's loan portfolio.

The company "avoided the riskier products at some costs to revenue" in prior years, he said. "I think we're seeing that play out."

Joe Dickerson, an analyst at Atlantic Equities in London, says that while Citi had impressive results from its U.S. credit card business and capital markets, the international consumer operations posed a problem since it "did not see earnings growth."

The business had a 16% year-over-year profit decline, "driven by poor results in international consumer finance, where earnings were down 85% on weakness" in Japan, emerging markets and Latin America, Dickerson writes.

Citi took a $40 million charge in the fourth quarter to restructure its Japanese consumer finance business. The company is closing 85% of its 320 loan offices and 100 automatic loan machines in Japan as a result of recent changes in tax laws lowering the maximum interest rate allowed on new consumer finance loans by 2010.

Aside from troubles in its lending business in the country, Citi's private banking arm in Japan was virtually shut down in 2004 over alleged fraud and stock manipulation.

Prince said he expects to see continued headwinds in its Japanese consumer finance business through the third quarter.

Shares rose $1.23 or 2.4% to $52.82.