The earnings parade began on Wall Street Monday with Citigroup ( C), the nation's biggest financial services firm, reporting a 35% rise in profits, aided by the sale of a life insurance business. In the quarter, Citigroup, earned $7.14 billion, or $1.38 a share, up from $5.3 billion, or $1.02 a share, a year earlier. Citigroup's profits included a $2.2 billion after-tax gain on the sale of a life insurance and annuities business. Without the proceeds from the sale, the quarter wasn't as impressive. Earnings on a continuing basis were $4.99 billion, down 1% from last year's comparable figure of $5 billion. On an operating basis, Citigroup earned 97 cents a share, including expenses totaling 4 cents a share related to Hurricane Katrina. The Thomson First Call consensus estimate was for earnings of 99 cents a share. Total revenue of $21.5 billion was 15% above a year ago and beat the $20.47 billion consensus. Revenue gains at Citigroup were fueled by a 46% surge in revenue from fees and commissions to $4.83 billion. Citigroup CEO Charles Prince said the Katrina charge reflects "the credit implications of the economic dislocation and hardship our customers are experiencing." The bank's strong suit in the quarter was its corporate and investment banking division, which recorded a 24% gain in net income to $1.8 billion. Citigroup's investment bank reveled in the surprisingly strong quarter for initial public offerings and bond underwriting deals. The weak link was its global consumer bank, which accounts for more than half of Citi's revenue. Earnings from retail banking fell 13% to $2.7 billion, largely due to weakness in Citigroup's U.S. banking operation. Earnings in the U.S. retail banking operation fell 17% to $1.76 billion.
Retail banking was hobbled in the U.S. by the impact of a narrowing spread between short- and long-term interest rates, and an increase in personal bankruptcy filings ahead of a tougher federal bankruptcy law that takes effect this week. The retail bank woes felt by Citigroup in the quarter could be a common malady of banks in the third quarter. The impact of the new bankruptcy law was most evident in the bank's credit card group. Net income in cards fell 7% to $1.18 billion, largely because of a big increase in loan loss reserves and the impact of charge-offs on customer bad debts. Of particular concern for banks is the so-called flattening yield curve, which can crimp the profitability of a bank's lending operating. Ever since the Federal Reserve began raising interest rates a year ago, banks have been dealing with the profit-pinching phenomenon. Normally, long-term rates rise when the Fed raises short-term rates. But that's not happening this time. And the narrowing spread between interest rates has made it more difficult for banks to make money off of their investments. For the past few years, banks feasted on the wide gap between short-term and long-term interest rates, borrowing on the cheap and reinvesting the money in higher-yielding mortgage-backed securities. This so-called "carry trade" was a big source of income for many banks. But the flattening yield curve has been the death knell for this kind of quick profit, and it poses a problem for banks heavily invested in interest-rate-sensitive securities.