Yield Curve Flattens Citigroup

Second quarter earnings and revenue are well short of estimates.
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Updated from 7:03 a.m. EDT


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second-quarter earnings rose sharply from a charge-soaked year-ago period. Excluding items, the results fell slightly and missed Wall Street estimates as the company grappled with shrinking loan margins and a weak trading environment.

Citigroup earned $5.07 billion, or 97 cents a share, in the quarter, compared with $1.14 billion, or 22 cents a share, last year. The 2004 period included a $4.95 billion charge related to WorldCom litigation. Excluding that and other items, the bank's earnings from continuing operations fell 7% from a year ago.

"The capital markets environment was one of the worst we have seen in years, and combined with a flattening yield curve, led to a significant decline in our fixed-income markets revenues," Citigroup said. "Rising short-term interest rates and a flattening yield curve resulted in spread compression across several businesses."

Citigroup had second-quarter revenue of $20.17 billion, down 3% on a continuing-operations basis from a year ago. Revenue in the global consumer segment rose 3% from a year-ago (excluding a gain) to $12.0 billion, while revenue from corporate and investment banking slid 15% to $5.16 billion and revenue from global wealth management rose 1% to $2.1 billion.

Analysts were forecasting earnings of $1.02 a share on revenue of $21.41 billion.

The company said new laws caused a spike in bankruptcy filings, adding about $175 million to the company's credit costs in North America cards. Citigroup expects the spike to be "temporary."

In Citi's North American consumer finance division, revenue fell 1% from a year ago despite a 6% increase in average loans. The bank's domestic net interest margin shrank by slightly more than half a percentage point from a year ago as falling long-term rates crimped the company's investment return.

In Citigroup's capital markets and investment banking division, revenue fell 12% from a year ago to $3.97 billion, hurt by a 28% decline in fixed-income revenue like bond trading and market making, partially offset by higher revenue from foreign exchange and commodities.

Within the capital markets unit, equity revenue rose 40% from a year ago, reflecting improved trading results in stocks and derivatives. Investment banking revenue fell 1%, as lower bond underwriting was offset by a 13% jump in advisory and other fees.

The stock fell $1.02, or 2.2%, to $45.40 ahead of the bell.