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Portfolio > Economy & Markets > Fixed Income

Citigroup Beats Estimates as Cost Cuts Cushion Trading Slump

By Dakin Campbell

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Citigroup Inc. (C) posted its biggest quarterly profit since the financial crisis after a cost-cutting push helped the third-largest U.S. bank weather a slump in trading.

First-quarter net income jumped 21 percent to $4.77 billion, or $1.51 a share, the firm said Thursday in a statement, the most since the second quarter of 2007. Excluding accounting adjustments, earnings per share were $1.52, surpassing the $1.39 average estimate of 27 analysts surveyed by Bloomberg.

Chief Executive Officer Michael Corbat is focusing on targets for curbing costs and boosting returns after winning Federal Reserve approval to increase capital payouts to shareholders. In the fourth quarter, he sought to put much of the bank’s expenses from probes, severance and office closures in the past by setting aside more than $3.5 billion. Chief Financial Officer John Gerspach has said the move would resolve a “significant portion” of the firm’s legal burden.

“It was a refreshing quarter for Citigroup to have, finally, some of those large legal and repositioning charges slow down,” Shannon Stemm, an analyst at Edward Jones & Co. in St. Louis, said in a phone interview. “The focus can move more to some of the underlying business results.”

Citigroup rose 1.8 percent to $54.16 at 10:19 a.m. in New York. The shares declined 1.7 percent this year through Wednesday, compared with a 1.3 percent decline in the Standard & Poor’s 500 Financials Index.

Expenses Decline

First-quarter expenses dropped 10 percent to $10.9 billion. Legal and repositioning costs accounted for $403 million of that, down 65 percent from a year earlier.

The lender is still contending with investigations into money-laundering controls and rigging of interest-rate and currency benchmarks. Its main banking subsidiary is under pressure to plead guilty to a felony in the foreign-exchange probe, two people briefed on the matter said this month.

Total revenue excluding accounting adjustments fell 1.9 percent to $19.8 billion, in line with analysts’ estimates.

Revenue from bond and equity trading, overseen by Paco Ybarra, dropped 9.5 percent to $4.36 billion. Gerspach had predicted March 2 that it would fall by as much as a “high single-digit” percentage. The New York-based bank incurred more than $150 million in losses on the Swiss franc’s surge in January, a person briefed on the matter said at the time.

FICC Trading

Fixed-income, currencies and commodities trading revenue, excluding some accounting adjustments, slumped 11 percent from a year earlier to $3.48 billion, missing the $3.64 billion estimate of five analysts surveyed by Bloomberg. At JPMorgan Chase & Co., the nation’s largest bank, revenue from that business rose 4.5 percent to $4.07 billion. At Bank of America Corp., it fell 7 percent to $2.75 billion.

Citigroup’s decline reflected weakness in so-called spread products, including lower volumes in distressed-debt trading, non-investment grade collateralized-loan obligations and municipal-bond issuance, Gerspach said on a call with reporters. The products, which typically account for 40 percent of fixed-income revenue, brought in “well below” that amount, he said. Excluding the loss on the Swiss franc, revenue from interest rates and currencies trading rose more than 20 percent from a year earlier, Gerspach said.

Investment Banking

Citigroup’s revenue from equities trading, led by Derek Bandeen, slipped 1 percent to $873 million. That compares with JPMorgan’s 22 percent jump to $1.61 billion, and Bank of America’s 0.9 percent decline to $1.15 billion.

In bond trading, Corbat relies on a group of executives, including interest-rate chief Andy Morton, and Nadir Mahmud, who runs the currencies and local-markets business. They typically account for more than 50 percent of the firm’s fixed-income trading revenue, according to a November presentation.

Carey Lathrop runs credit, Jeffrey Perlowitz and Mark Tsesarsky are co-heads for securitized products, Howard Marsh oversees municipal bonds and Stu Staley runs commodities.

Net income at the institutional clients group, run by Citigroup President Jamie Forese, rose 1.6 percent to an adjusted $2.97 billion on revenue of $9.03 billion. The unit houses the bank’s trading, corporate and investment banking, private bank, and transaction-services businesses. Investment banking revenue climbed 14 percent to $1.2 billion.

Bird’s Promotion

Global consumer banking, led by Manuel Medina-Mora until his June 1 retirement, boosted net income 3.8 percent to $1.73 billion.

Corbat picked Stephen Bird, a 17-year Citigroup veteran who most recently led the Asia-Pacific region, to succeed Medina-Mora. Bird will relocate to New York and seek to follow through on Corbat’s plan to simplify and move two dozen markets onto a single technology system that gives a common consumer experience regardless of location.

Citi Holdings, the unwanted assets the bank has tagged for sale, earned $146 million. Assets fell 5.4 percent to $122 billion by the end of last month from the fourth quarter.

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