Citigroup's Pandit Is 'Cautious' After First Quarter Profit, Stress Test (Update 3)

Updated with management plans to submit capital return request to Fed.

  • Citigroup reported first quarter GAAP earnings per share of 95 cents. Excluding one-off items, earnings per share were $1.11
  • Revenue came in at $19.4 billion, down slightly from the year-ago quarter. Excluding items, revenue was $20.217 billion
  • Analysts were expecting an earnings per share of $1 on revenues of $19.81 billion, according to Thomson Reuters

NEW YORK ( TheStreet) -- Citigroup ( C) CEO Vikram Pandit said during the first-quarter earnings conference call that the bank may consider resubmitting a request to return capital in June.

Citigroup is still having conversations with the Fed on the process for resubmission. The regulator will likely have 75 days from the time the request is submitted to evaluate the bank, which means Citi will only get a response for its request much later in the year.

Citi was one of four banks that failed to win the Fed's approval to return more capital to shareholders in this year's annual stress tests, as the regulator said it would not meet the minimum capital requirements under a hypothetical severe downturn if it goes ahead with its plans.

Pandit said the bank might have to undergo an entirely new stress test in June, which could means a new set of assumptions by the Fed.

Citi might still opt to simply submit a fresh request in 2013, depending upon the regulator's information on the next steps.

The bank did say that the test will likely be based off March numbers, which is good for Citi as it managed to improve its Basel 1 Tier I capital ratio by another 60 basis points to 12.4%. But management remained cautious, as the scenarios the Fed might consider is still unknown.

More updates on the submission process are expected in the next quarter's conference call.

Until then, investors might take comfort in the fact that Citigroup managed to show an improvement in all of its businesses in the first quarter, although a number of one-off items muddied the profit picture.

Citigroup said first quarter profit benefited from an improved operating environment but was hurt by a number of one-off items, according to earnings released Monday.

Net income came in at $2.93 billion, down 2% from the year-ago quarter and earnings per share was 95 cents. Revenue came in at $19.4 billion, short of estimates for $19.81 billion.

The bottomline included several one-off items that muddied the profit picture, including gains from its stake sales in India's Housing Development Finance Corporation and Shanghai Pudong Development Bank, offset by an impairment charge from its partial stake sale in Turkish Bank Akbank, all of which was already disclosed by Citigroup.

The bank was also hit by an accounting CVA/DVA loss of $1.3 billion or 27 cents per share from the tightening spreads on its own debt.

Adjusted for these items, "core" earnings per share came in at $1.11 per share, while revenues came in at $20.2 billion.

In addition the bank profited from a reserve release of $1.2 billion, though this was 65% lower than the prior period.

Analysts were expecting an earnings per share of $1 on revenues of $19.81 billion, roughly flat with the year-ago quarter's performance.

Most analysts likely excluded the one-time gains/losses from asset sales. Some include DVA/CVA items, while others do not, making it hard to tell if this was a "clean" beat for Citigroup.

But the market appears to be treating it as a solid beat. Shares were last trading up 1.6% at $33.94 in afternoon trades, after trading nearly 3% higher earlier in the session.

Initial reaction from analysts to the earnings appeared to be positive. Nomura's Glenn Schorr said it was a"well rounded" quarter, noting the rebound in securities and banking, continued loan and deposit growth and decent expense control among other positives.

Other analysts including Matt Burnell at Wells Fargo Securities and Richard Staite at Atlantic Equities also highlighted positive operating leverage, as expenses declined sequentially while topline expanded. Spiraling expenses has been a cause for concern for most analysts covering Citigroup.

Revenues from its core business , Citicorp, decreased 1% to $18.03 billion on a year-on-year basis. Sequentially, revenues were up 15%.

For a more detailed look at how Citi's revenue performance stacked up, check out Citigroup Earnings Tell a Solid Revenue Story.

The bank reported continued loan growth, with end- of- period loans at Citicorp grew 12% over the year-ago quarter and 2% sequentially.

Global consumer banking, its largest driver, rose 1% sequentially and 5% year-on-year to $10.01 billion.

CFO John Gerspach said during a media conference call that credit quality in Asia was "better than you would expect it to be".

He added that loan demand in emerging markets continued to grow. While there were pockets of growth in loans in the U.S. and the developed world, there still wasn't a "broad-based" demand for lending with the Eurozone struggling and the U.S. recovery still sluggish.

Securities and banking rebounded strongly from a dismal fourth quarter, rising 65% to $5.275 billion on a sequential basis. On a year-on-year basis, revenues were still down 12%. Excluding CVA/DVA, revenues from trading and investment banking were up 6% year-on-year at $6.7 billion.

Fixed income trading drove the division's performance, with revenues excluding accounting gains rising 19% from the year-ago quarter and jumping up nearly three-fold sequentially.

Equity trading revenues also saw a manifold jump on a sequential basis, although it was still down 18% year-on-year, faring poorly when compared to JPMorgan Chase ( JPM), which saw equity trading revenues drop only 4%.

Operating expenses at Citigroup was flat at about $12.32 billion but down 7% on a sequential basis. Expenses have been spiraling for Citigroup, which remains in an investment mode and has been affected by foreign exchange fluctuations. Like its peers it has also had to cope with rising legal expenses.

Gerspach said during the conference call that the bank had wrapped up most of its incremental spending and that investors can expect to see expenses flat to lower in upcoming quarters.

Citi Holdings, which houses the bank's non-core assets, continues to be in wind down mode and now accounts for 11% of Citi's assets, compared to about 40% in 2008.

Winding down Citi Holdings successfully is crucial, as it represents both a drag on the bank's earnings as well as its capital targets.

Reports that the bank might explore selling its entire stake in joint venture Morgan Stanley Smith Barney in May and not just a 14% stake have surfaced in recent months.

Gerspach refrained from discussing negotiations but pointed out that the joint venture was part of Citi Holdings. "Just by its placement, it means it is not part of our long-term strategy," Gerspach said in the media call.

The bank reported a tier I Capital ratio under Basel I of 12.4%, up from 11.8% at the end of the fourth quarter. It also revealed for the first time that its estimated Basel III Tier I Common Capital ratio was 7.2%.

The bank has said it will achieve a Basel III Tier I Common target of above 8% by year-end, irrespective of whether or not Morgan Stanley buys a 14% stake in the MSSB joint venture.

While the management highlighted revenue growth and positive operating leverage in its key businesses, its outlook on the environment remains cautious.

"While the operating environment improved in the first quarter, there is still much macro uncertainty and we will continue to manage risk carefully. We will continue to leverage the depth and the scale of our global presence to serve our clients and grow our businesses," said Pandit in a prepared statement.

Shares of Citi are up 30% in 2012, despite the stress test disappointment. The stock still trades at half its book value of $ 61.90 and at 66% of its tangible book value.

-- Written by Shanthi Bharatwaj from New York
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.