Citigroup Beats On Higher Revenues, Shrinking 'Bad Bank' (Update 3)

  • Citigroup reports second-quarter profit of $4.2 billion, or $1.34 a share.
  • Excluding CVA/DVA gains, EPS was $1.25 per share
  • Net revenue comes in at $20.5 billion, or $20 billion excluding CVA/DVA.
  • The consensus estimate among analysts was EPS of $1.17 on revenues of $19.75 billion.

Updated from 8:47 a.m. ET with additional details on performance and management commentary from media call.

NEW YORK ( TheStreet) -- Citigroup ( C) on Monday said net profit for the second quarter rose 42% year-over-year, on higher revenues, continuing improvement in credit quality and shrinking losses at its non-core arm.

The New York-based bank reported net income for the second quarter of $4.2 billion or $1.34 a share, compared to $3.8 billion or $1.23 a share in the first quarter and $2.9 billion or 95 cents a share during the second quarter of 2012.

Revenue for the second quarter was $20.5 billion, up 11% year-over-year.

The current quarter's results included $477 million in pre-tax gains from the revaluation of the firm's bonds as spreads widened. The year-ago quarter included a $219 million pre-tax gain from bond revaluation a loss of $424 million ($274 million after tax) from the sale of a 10.1% stake inAkbank.

Excluding items, second-quarter earnings per share was $3.9 billion or $1.25 per share, up 25% from prior year, while revenues came in at $20 billion, up 8% over the period.

The bank handily beat consensus estimates. Analysts polled by Thomson Reuters expected earnings of $1.17 a share on revenues of $19.75 billion.

Shares were rising 2% in early trading Monday to $51.87.

Revenues at Citicorp, the bank's core business arm, rose 7% to $18.9 billion, excluding items. Earnings rose 23% to $4.7 billion year-over-year.

Citi Holdings, the bank's non-core arm, saw revenues rise by 17% from the prior-year period, while losses shrunk by37% to $570 million. Citi Holdings assets at the end of the second quarter accounted for 7% of Citigroup assets, down from 8% at the end of the first quarter, as the bank continued to sell troubled mortgages and wind down its portfolio.

"Our businesses performed well during the quarter and these results are well-balanced through our products and geographies, especially in the emerging markets, where growth is being challenged,"Citigroup CEO Mike Corbat said. "We also continued to make progress in several critical areas. We reduced the earnings drag caused by Citi Holdings, where we saw the largest percentage reduction of assets since 2010. We again consumed a modest amount of DTA deferred tax assets, bringing the total utilized to about $1.3 billion for the first half of the year."

Credit costs declined 25% for Citigroup as a whole to $2.02 billion. The bank released $784 million in loan loss reserves, compared to $1 billion a year earlier.

CFO John Gerspach said during the company's media call that the pace of reserve releases will likely slow in Citi's credit card business business. However, the bank should continue to release mortgage loan loss reserves in the coming quarters to offset the majority of the credit losses in its North America mortgage business.

The global consumer banking business saw revenues rise 5% on a constant dollar basis. International global consumer banking revenues rose 5% on a constant dollar basis, despite fears that weakening growth in emerging markets would hurt business.

International GCB net income increased 4% to $826 million, as higher expenses and higher credit costs offset revenue growth. Credit costs in international markets rose 21%, "reflecting portfolio growth and seasoning, as well as reserve builds for specific credits in commercial markets business," Gerspach said.

The North American consumer businesses witnessed a revenue decline of 1%, as retail banking revenues were weakened by continuing decline in lending margins and lower mortgage origination.

"Growth in emerging markets is slower than what we thought it would be heading into the year," Gerspach told reporters. Still, he pointed out that emerging market growth was still significantly faster than developed markets and that the U.S. was likely growing at a slower pace than originally assumed.

Second-quarter securities and banking revenues rose 21% from a year earlier, excluding accounting gains, boosted by strong trading revenues and investment banking fees.

Gerspach said the bank's second quarter results showed "further progress" in its goal of generating consistent and quality earnings.

When Mike Corbat replaced Vikram Pandit as CEO of the 200-year old bank in October 2012, he immediately put into effect an extensive restructuring plan that aimed at making the bank smaller, less complex and less risky.

The bank announced that it would cut 11,000 jobs or 4% of its workforce and exit underperforming markets, moves which were expected to save $900 million in 2013 and $1 billion in 2014.

Management said in the first quarter that the benefit of those initiatives should kick in in the second quarter.

Expenses at Citicorp declined 2% quarter-over-quarter and year-over-year % to $10.59 billion

Corbat is targeting an efficiency ratio -- expenses as a proportion of revenue -- of mid-50s for Citicorp. He also said that Citigroup as a whole will generate a return on tangible common equity of 10% or more by the end of 2015 and will post a return on assets of 0.90% to 1.1% by that time.

As of the end of the second quarter, Citicorp had an efficiency ratio of 56%, according to a presentation posted on the website. That is up slightly from 55% in the first quarter, but down from 61% in the year-ago quarter. Return on assets at the end of the second quarter for Citigroup stood at 0.89%. Return on average common equity was 8.8%.

Corbat has also said he will focus on freeing up capital by utilizing deferred tax assets or future tax write-offs and selling non-core assets as rapidly as possible but in an economically rational manner.

The bank has utilized $1.3 billion in deferred tax assets in the first half of the year. The bank also sold $3 billion worth of mortgages in its North America portfolio and also completed the sale of its 35% stake in the Morgan Stanley Smith Barney Venture.

Citigroup finished the quarter with an estimated Basel III Tier I Common Ratio of 10%.

The bank's estimated Basel III supplementary leverage ratio at the holding company level is 4.9%. New rules issued by U.S. regulators require U.S. banks to have a Basel III Tier I supplementary leverage ratio of 6% -- with a 5% requirement at the holding company level -- much higher than the 3% required by international rules.

Citigroup said that based on March numbers, it already met the 6% requirement at the depositary institution level.

Banks have until 2018 to comply with the new rules.

-- Written by Shanthi Bharatwaj in New York.

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

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