Citigroup Cautious on U.S. Economy, Housing

Update 2 includes additional information, management comments throughout.

  • Citigroup reports third-quarter profit of 15 cents per share.
  • Excluding items, operating profit was at $1.06 per share, beating the consensus estimate of 96 cents.
  • Net revenue came in at $19.4 billion, excluding CVA/DVA.
  • Estimated Basel III Tier I Capital Ratio improved to 8.6%

NEW YORK ( TheStreet) -- Citigroup ( C) beat expectations in the third quarter, helped by stronger-than-expected trading revenues, a tax benefit, and a $1.5 billion reserve releases.

But the bank appears cautious on the economy, with management citing concerns about the fiscal cliff and its impact on job growth in a media conference call.

The third largest U.S. bank reported a profit of $468 million for the quarter on sales of $14 billion. The results include a $2.9 billion loss related to a write-down of the bank's 49% stake in Morgan Stanley Smith Barney joint venture and a $776 million accounting loss from the revaluation of the firm's debt(CVA/DVA), partially offset by a tax gain of $582 million.

Excluding these items, Citi reported a third-quarter operating profit of $3.3 billion or $1.06 per share. Adjusted revenues came in at $19.4 billion. Analysts expected an operating profit of 96 cents per share in the third quarter on revenues of $18.707 billion, according to consensus estimates from Thomson Reuters.

In the second quarter of 2012, the bank reported an operating profit of $3.1 billion or $1 per share on revenues of $18.8 billion, excluding extraordinary items. And in the year-ago quarter, Citi reported an operating profit of 84 cents on revenues of $18.9 billion, excluding CVA/DVA.

"Our core businesses showed momentum during the quarter as we increased lending and generated higher operating revenues," said Citigroup CEO Vikram Pandit. "For the third straight quarter, we had positive operating leverage in each of our three core businesses. Citigroup in total also had positive operating leverage as Citi Holdings had a smaller impact on our overall results."

Revenue at Citicorp, excluding CVA/DVA, grew 5% year-on-year to $18.4 billion on strength in trading and investment banking. Operating expenses declined 2%, while credit costs also declined 14%. Excluding items, profits grew 20% to $4.6 billion at Citicorp.

The contribution of Citi Holdings, the bank's non-core wing, continued to shrink, representing 5% of revenues excluding the loss on MSSB and CVA/DVA. Citi Holdings now accounts for 9% of total assets at the bank.

Reserve releases for the bank as a whole totaled $1.5 billion, up 6% from the prior year period. Citi Holdings saw an increase in reserve releases following regulatory guidance that required the bank to recognize losses in post-bankruptcy loans, even though most of them are current. The pace of reserve releases excluding this adjustment slowed.

End of period loans at Citicorp grew 11% over the prior year, reflecting "strong growth in corporate loans and growth in Latin America and Asia." Deposits rose 11% to $945 billion.

The bank saw an improvement in net interest margins quarter-on-quarter to 2.83% from 2.81%, as it gained access to cheaper deposits. Other banks that have reported so far have seen margins compress as interest rates dropped.

Strong fixed income trading revenue was the highlight of the quarter, with revenue jumping 63% year on year and 31% quarter-on-quarter, boosted by strong performance in rates and currencies.

Market volumes were down slightly during the quarter, but market conditions in terms of client flow and liquidity were much better than the previous year, CFO John Gerspach said in a media conference call.

He added that investments in the securities and banking business made in 2011 were beginning to pay off and that the bank was gaining more wallet share across businesses.

Overall, securities and banking revenues increased 15% year on year and 7% quarter-on-quarter, excluding CVA/DVA to $4.77 billion, while net income rose 67% year-on-year and 27% quarter-on-quarter to $1.619 billion excluding the accounting charge.

Global consumer banking revenue rose 2% year-on-year. Revenues in Asia dropped 4% as the spread on loans fell with interest rates and amid regulatory headwinds in countries like Korea, where Citigroup is repositioning its business.

The bank says growth in Asia has slowed but continues to outpace that of developed markets. Loan growth has begun to moderate in Asia but Latin America continues to be healthy.

In North America, consumer banking revenues rose 5% quarter-on-quarter and 6% year-on-year.

Still, Citigroup's outlook on U.S. remains cautious. The impending fiscal cliff has created a "great deal of uncertainty" that impacts corporations and consumers, Gerspach said during the media call.

The CFO also sounded more cautious in his outlook for housing. While JPMorgan Chase CEO Jamie Dimon said housing had "turned the corner", Gerspach said he sometimes has trouble seeing the corner.

"We are seeing some elements of stabilization in the housing market but there are still significant challenges," said Gerspach. "In the past we have seen periodic improvements only to come crashing down." The CFO is unconvinced that the economy is strong enough to sustain the housing market. "We need to get through the elections, the fiscal cliff and have an economy that is strong enough to sustain job growth and bring a reduction in real unemployment rate."

-- Written by Shanthi Bharatwaj in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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