Citigroup Earnings Miss as Bond Trading Slump Slows Recovery

Citi more dependent than most big banks on fixed income

CEO Michael Corbat of Citigroup. (Photo: AP) CEO Michael Corbat of Citigroup. (Photo: AP)

Jan. 16 (Bloomberg) — Citigroup Inc.(C), the third-biggest U.S. bank, reported fourth-quarter profit that missed Wall Street estimates as bond trading slumped. The stock fell more than 3% in New York trading.

Net income more than doubled to $2.69 billion from $1.2 billion a year earlier, when Citigroup reported a $653 million charge, and earnings per share rose to 85 cents from 38 cents, the New York-based bank said today in a statement. Excluding accounting charges and special items, profit was 82 cents a share, less than the 95-cent average estimate of 26 analysts surveyed by Bloomberg.

CEO Michael Corbat, 53, sought to cut costs and boost revenue even as trading from bond and foreign exchange markets came under pressure. The effort was marred by a 15% drop in fixed income revenue excluding accounting charges. Adjusted profit decreased 8% at the securities and banking unit and 16% for global consumer banking, according to the firm.

“We haven’t seen any rebound in fixed income,” Marty Mosby, a bank analyst with Guggenheim Securities LLC, said in an interview before the results were announced. That’s what the bank “really needs because they are more heavily dependent on that than the other money-center banks,” he said. Mosby has a buy rating on the stock with a $68 price target.

Stock Reacts

The results were close to the most pessimistic Wall Street estimates, and Citigroup fell 3.3% to $53.19 at 10:20 a.m. in New York. The stock gained 32% last year, trailing the 35% return for the 24-company KBW Bank Index.

Quarterly revenue excluding an accounting charge tied to the value of the firm’s own debt and other items declined 2% to $17.9 billion. For the full year, net income rose 84% to $13.9 billion on a 10% increase in revenue to $76.4 billion.

Adjusted quarterly profit was $1.06 billion at the securities and banking unit and $778 million at the transaction services segment. Both businesses are overseen by co-President James “Jamie” Forese, 50.

Within securities and banking, fixed income revenue excluding an accounting adjustment shrank 15% to $2.33 billion from a year earlier. That compares with the $2.5 billion estimate of Sanford C. Bernstein & Co.’s John McDonald. The bank generated $13.1 billion from fixed-income markets for the year, a 7% decline from 2012. Francisco “Paco” Ybarra, 52, oversees the bank’s global markets operations.

Investment Bank

Revenue from investment banking, which includes managing bond and share sales for clients and providing advice on mergers and acquisitions, rose 3% to $1.04 billion, according to the bank. Equity markets revenue climbed 16% to $539 million from a year earlier while falling 24% from the third quarter, the company said.

The decline in fixed-income revenue from the third quarter was led by weaker customer activity in credit and securitized products, Chief Financial Officer John Gerspach said on a call with journalists. The businesses account for about one-third of the segment’s revenue, and interest rates and currencies account for a little more than half, he said.

“We saw a fall-off in client volumes,” he said. “It’s not that we’ve got something that’s broken and that needs to be fixed. For the full year, it was an excellent performer.”

Within fixed income, Carey Lathrop is global head of credit, and Jeffrey Perlowitz and Mark Tsesarsky are co-heads for securitized products. Andy Morton manages interest rates and Anil Prasad runs the currency business. Howard Marsh is head of municipal bonds. Stu Staley oversees commodities.

Consumer Bank

Adjusted profit from consumer banking, run by co-President Manuel Medina-Mora, 63, with about 4,000 branches across almost 40 countries, dropped to $1.63 billion from $1.95 billion in the year-earlier quarter. Mortgage originations in North America declined 43% over the third quarter to $16.8 billion, according to a financial supplement.

Return on equity for the quarter was 5.3%. By contrast, Wells Fargo & Co. reported a 13.8% ROE, JPMorgan Chase & Co.’s was 10% and Bank of America Corp. posted 5.7%. New York-based JPMorgan is the biggest U.S. bank by assets and Bank of America, based in Charlotte, North Carolina, is second. San Francisco-based Wells Fargo has the highest market value.

Bond Trading

Wall Street banks are grappling with a slump in bond trading amid new regulations and a changing landscape. Uncertainty around the Federal Reserve’s decision to taper its monthly bond purchases, and a U.S. government shutdown kept bond investors sidelined during the fourth quarter, according to Todd Hagerman, a Sterne Agee & Leach Inc. analyst and former Fed bank examiner.

That left Citigroup more vulnerable than many of its competitors “given their outsized rates and currencies business,” Hagerman said before the results were announced. “It will raise the question: are they going to be in a position to generate positive operating leverage in 2014 when they continue to face these headwinds in the top line?”

Revenue from fixed income, currencies and commodities trading, or FICC, probably fell to $73 billion at the 10 largest global investment banks in 2013, about half the level of 2009, according to industry analytics firm Coalition Ltd.

Pay Curbs

As the year came to a close, Corbat sought to keep a lid on pay. Investment bankers could receive payouts that are little changed compared with 2012, while traders and salespeople could get cuts of 2%, a person familiar with the matter said in December.

The lender is also facing regulatory investigations and legal challenges. It’s cooperating with government agencies in the U.S. and elsewhere over probes in the foreign-exchange market, and facing inquiries related to its sales of mortgage- backed securities.

Citigroup set aside $1.4 billion for litigation and legal costs during the first nine months of 2013, according to regulatory filings. That compared with $11.1 billion at JPMorgan and $4.8 billion at Bank of America. Figures for the final quarter haven’t been released. Legal and related costs were $809 million in the quarter, the bank said.

Citigroup continued winding down and selling investments in the Citi Holdings unit, which contains a consumer finance operation and billions of dollars of U.S. mortgages. Losses at the business, created as a home for the company’s unwanted assets after the financial crisis, widened from the third quarter to $422 million. Assets fell 4.1% to $117 billion.

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