Citigroup Earns Profit as 'Derisked' Bank (Update2)

Citigroup earnings updated with more management commentary, information throughout.

  • Citigroup reported a profit of $3.8 billion or $1.23 per share.
  • Revenues rose to $20.8 billion
  • Analysts expected an EPS of 81 cents per share on revenues of $19.25 billion

NEW YORK ( TheStreet) -- Citigroup ( C) beat third quarter analyst expectations, reporting a net income jump of 72%, driven by an accounting gain, strong international consumer banking operations and continuing improvements in credit quality.

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. An accounting quirk that enables banks to report a gain from the falling value of their own debt added $1.9 billion to Citi's pre-tax revenues and 39 cents to the earnings per share.

JPMorgan Chase ( JPM) which reported last week, also said that debt valuation adjustments or DVA added an accounting gain of $1.9 billion, or 29 cents per share, from the decline in the value of its own debt, which helped offset a $542 million pre-tax loss from its private equity business and an additional $1 billion in pre-tax litigation expenses.
Citigroup CEO Vikram Pandit

Still, Citigroup's report displayed underlying strength. Excluding those accounting gains, Citigroup reported a third-quarter earnings per share of 84 cents, still ahead of analyst expectations of 81 cents per share. Profits were boosted by a $1.4 billion release of reserves, versus $2 billion in the prior year. The bank saw improving credit trends in its cards business and management said during the conference call that it was "very comfortable" with its loan loss reserves.

Revenues came in at $20.8 billion, up slightly from the year-ago quarter. Excluding the one-time gain, revenues were $18.9 billion, 8% below the prior year period and 8% below the second quarter 2011.

Weak trading and investment banking revenues offset strength in international consumer banking businesses. Investment banking fees fell 32% on a sequential basis and 21% on a year-on-year basis to $736 million.

Fixed income, commodities and currency trading, excluding DVA, was $2.3 billion, 33% below the prior year period, driven by significantly lower results in credit products and securitized products. Equity trading revenues, excluding DVA, plunged 73% year-over-year to $289 million hurt by significant declines in derivatives and "principal strategies" revenues, which the bank is in the midst of winding down.

"Citi continues to navigate a challenging economic environment and delivered another quarter of solid operating results," Vikram Pandit, Citi's Chief Executive Officer, said in a statement. "We continued to manage our risk prudently while growing the businesses that are core to our strategy."

The bank, however, saw continued strength in its emerging markets. The regional consumer banking business saw revenue growth of 2% to $8.3 billion over the previous year. Revenue growth of 10% in international businesses was offset by a 9% decline in North America.

Loan growth was strong, with end-of-period loans at Citicorp, which houses the core businesses, increasing 13% on a year-on-year basis. Loans increased by nearly 1% on a sequential basis. On a constant currency basis, loans grew 4% sequentially.

Operating expenses increased 8% from the prior year period to $12.5 billion, reflecting higher expenses from the impact of foreign exchange translation, higher legal and related expenses and ongoing investment spending. However, the bank pointed out that its investments in Asia achieved operating leverage in the third quarter, ahead of schedule and that its investments in Latin America will start paying off in the fourth quarter.

Citigroup's bad bank, Citi Holdings , saw a reduction of $132 billion in assets, with revenues declining 27% to $2.8 billion from the prior year period. The bank said that it had decided to retain its retail partner cards business in its core portfolio after it reported significant strength. "Over the past few years we have significantly strengthened our retail partner cards business and it has earned $2.2 billion pre-tax through the first three quarters. After a careful review of the business, which took into account current trends in credit and technology, we have decided that it makes strategic sense to move retail partner cards and a vast majority of its assets from Citi Holdings into Citicorp. The transition will be completed by the end of this year," the bank said.

In a media call, CFO John Gerspach said OneMain, the bank's other credit card portfolio, will likely remain in Citi Holdings as it was not core to its strategy. He said the pace of asset sales in Citi Holdings will moderate as the bank will likely face challenges in selling its mortgage portfolio under the bad bank.

CEO Vikram Pandit said the bank will continue to bet on emerging market growth, as developed market growth will likely be slow for years. "Regardless of any cyclical slowdowns in the emerging markets, we think the secular trends such as trade and rising consumption in the emerging markets will persevere and we will pace our investments accordingly," he said.

Pandit emphasized the "de-risked" profile of the bank, in his presentation, ostensibly speaking to investors who still view the bank as a risky play. "We've completely revamped our risk profile, risk approach, and most importantly, our risk culture," he said.

Citigroup disclosed more details on its European exposure at the gross and net level, including exposures top France and Belgium, along with breakdowns on sovereign, corporate and financial institution basis. 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 CEO also reiterated his intention to return capital to shareholders starting 2012, subject to regulatory capital and said he was confident they would achieve a Basel III Tier 1 Capital ratio of 8% to 9% by end of 2012.

--Written by Shanthi Bharatwaj in New York

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