Citigroup Misses Estimates by a Wide Margin (Update 2)

  • Citigroup reports fourth-quarter earnings per share of 85 cents. Excluding one-time and non-core items, earnings came in at 82 cents per share.
  • Revenue came in at $17.8 billion or $17.9 billion, excluding items.
  • Analysts expected EPS of 95 cents on revenues of $18.18 billion.
  • For 2013, the bank posted a profit of $13.9 billion on revenues of $76.4 billion.

Updated from 8:30 a.m. ET with management commentary and additional information throughout.

NEW YORK (TheStreet) -- Citigroup (C) finished the year with $13.8 billion in profits, its highest since 2006, but shares were down 3.6% in early trading to $53.02, as fourth-quarter earnings fell well short of expectations.

Net income for the fourth quarter came in at $2.7 billion or 85 cents a share on revenue of $17.8 billion. During the fourth quarter of 2012, the bank reported a profit of $1.2 billion or 38 cents a share on revenues of $17.9 billion.

The fourth-qarter results included a "CVA/DVA loss" of $164 million, or $100 million after tax.  An accounting quirk requires banks to book a loss when the value of their bonds rises. The results also included a $189 after-million tax benefit from the sale of Citi's credit card business in Brazil. Results for the prior period included a $1 billion repositioning charge, or $653 million after-tax.

Excluding these items, the bank reported earnings 82 cents a share, compared to an adjusted EPS of 69 cents a year earlier.

While that represents a 19% year-over-year growth in earnings, the report missed consensus estimates.

Analysts polled by Thomson Reuters on average estimated the bank would report EPS of 95 cents on revenue of $18.18 billio. Consensus estimates included litigation charges and repositioning charges but excluded the gain from credit card unit sale and CVA/DVA charges.

"Although we didn't finish the year as strongly as we would have liked, we made substantial progress toward our key priorities in 2013," CEO Michael Corbat said in a statement. "Having grown our operating net income by 15% over 2012, we achieved our highest amount of net income since before the financial crisis. We accelerated our growth in capital and ended the fourth quarter with an estimated Basel III Tier 1 Common ratio of 10.5%, exceeding our target for the year. We also grew loans in our core businesses by 7%, utilized $2.4 billion of our deferred tax assets, and reduced the assets in Citi Holdings by 25% while cutting its annual loss in half. In addition, we improved our efficiency by executing on the repositioning actions announced at the end of 2012, reducing expenses and growing revenues."
 
Revenue at Citicorp, the company's core banking arm, fell 4% from the fourth-quarter, excluding CVA/DVA, led by a 5% decline in global consumer banking revenue and a 4% decline in securities and banking revenues.

Global consumer banking revenue was weak due to "significantly lower refinancing activity and continued spread compression." Retail banking revenue in North America declined 35% due to lower mortgage banking fees. International consumer banking revenue grew 2% on a constant-dollar basis.

In the securities and banking division, investment banking fees grew by a modest 3% year-over-year. Fixed income trading revenue -- the biggest driver of markets revenue -- was particularly weak, declining 15% year-over-year. The bank said the decline reflected a "challenging trading environment and the absence of the strong fourth quarter 2012 revenues of Citi Capital Advisors, which Citi continues to wind down."

 CFO John Gerspach said during a media conference call that the bank's credit and securitized products business saw a "fall off in client volumes."

Transaction services revenue meanwhile was flat year-over-year, but up 1% on a constant dollar basis. Gerspach said that the flat revenue was reflective of low interest rates and that the bank was making good progress in capturing market share and growing volumes.

On the bright side, Citicorp's operating expenses fell 6% year-over-year, excluding repositioning charges. Citicorp's efficiency ratio -- operating expenses as a percentage of revenue -- was 58% in 2013. The bank is targeting an efficiency ratio in the mid- 50s by 2015 for Citicorp.

The bank made more progress at reducing the drag from its so-called "bad bank" Citi Holdings, which houses non-core assets. Revenues actually grew 24% versus the prior year driven by the absence of repurchase reserve builds for representation and warranties claims.

Net losses at Citi Holdings fell to $422 million from $1 billion in the prior period, reflecting lower credit costs. The unit released $540 million in loan loss reserves compared to a $51 million reserve build in the year-earlier quarter.

Citigroup's goal is to reduce the net losses and assets at Citi Holdings in order for the bank to meet its target return on assets of 90 basis points to 110 basis points by 2015.

However, Gerspach warned that elevated legal costs will continue to be a headwind for the unit.

Citigroup as a whole saw legal expenses of $809 million in the fourth quarter compared to $1.3 billion a year earlier.

-- 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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