* Q2 adjusted shr $1.25 vs Street estimate $1.17
* Shares rise 2 percent
* Revenue up in most securities and banking businesses
* Bank releases $784 mln reserves vs $1.01 bln year ago
By David Henry
July 15 Citigroup Inc posted a 42 percent
jump in quarterly profit as bond trading revenue gained and
stronger home prices helped the bad mortgages on its books,
underscoring the bank's recovery since the financial crisis.
The third-largest U.S. bank is getting its house in order
after years of management problems forced it to seek three U.S.
bailouts in 2008 and 2009. Current Chief Executive Michael
Corbat and predecessor Vikram Pandit cut risk-taking in its
trading businesses, hired selectively in safer areas like
investment banking, and scaled back in markets where the bank
had few growth opportunities.
Citigroup is fixing itself amid a treacherous environment
for global banks. Rising bond yields in the United States are
expected to cut into debt underwriting volume and may cut into
bond trading profit.
Citigroup, often seen as the most international of the major
U.S. banks, faces additional pressure from slowing growth in
emerging markets. About one-half of its profit in the first half
came from emerging markets.
Even as Citigroup improves operations, it faces economic and
market problems that could weigh on its recovery, said Stanley
Crouch, chief investment officer of Aegis Capital Corp, whose
clients own Citigroup shares.
"You get this riptide, and it may not be good," Crouch
In the second quarter, Citigroup's biggest profit boosts
came from its securities and banking unit, where bond trading
revenue rose 18 percent, while stock trading revenue soared 68
percent, and underwriting and advisory work was up 21 percent.
Overall second-quarter net income rose to $4.18 billion from
$2.95 billion in the same quarter last year. Excluding gains
from changes in the value of its debt, the company earned $3.89
billion, up 26 percent from the same quarter last year.
Results beat analysts' average expectations, and Citigroup
shares rose 2 percent to $51.80.
"What you see is the result of a lot of the repositioning
and restructurings we have done over the last two to four
years," Chief Financial Office John Gerspach said on a
conference call with journalists, speaking of gains in the
securities and banking unit.
Two to three years ago, Citigroup hired a series of
investment bankers, who have been generating revenue growth for
the bank in areas like merger advisory.
STICKING WITH EMERGING MARKETS
Citi's shares have risen about 28 percent this year through
Friday's close, slightly better than the KBW Bank index.
They have doubled in value in the past year.
But the stock has faltered in recent weeks on concerns about
slowing emerging market growth. China said on Monday its economy
grew at an annualized rate of 7.5 percent in the second quarter,
the 9th quarter in the last 10 in which expansion has weakened.
So far this year, emerging markets stocks, as measured by
MSCI's index have declined 11.6 percent, while the
U.S. benchmark Standard & Poor's 500 index has gained
CEO Corbat noted "in the emerging markets ... growth is
But when an analyst asked whether Citigroup would rethink
its emerging markets investment in light of those difficulties,
he said, "The simple answer to that is, 'No.'"
A key measure of Citigroup's financial strength improved in
the second quarter. Its capital increased to an estimated 10
percent of risk-weighted assets from 9.3 percent, under the
Basel III Tier 1 common measure. That improvement exceeded
JPMorgan Chase & Co, which rose to 9.3 percent from 8.9
Citigroup's ratio improved partly because of the quarter's
profits and because it sold the rest of its stake in a brokerage
joint venture to former partner Morgan Stanley and used
up some tax credits that counted against the measurement.
Citigroup also showed it was doing relatively well against
another safety minimum proposed last week by U.S. regulators. It
pegged the so-called leverage ratio for its holding company at
4.9 percent, just below a pending 5 percent requirement for
It said preliminary calculations showed its regulated
banking subsidiaries in March met the proposed 6 percent
Citigroup also said it had drawn down its liquidity to a
targeted 110 percent of another pending requirement from 116
percent three months earlier.
HIGHER TRADING REVENUE
On a per-share basis, excluding special items and after
preferred share dividends, Citigroup earned $1.25 a share, up
from $1 a share a year earlier. The result beat the average
analyst estimate of $1.17, according to Thomson Reuters I/B/E/S.
Revenue from fixed income markets, part of the securities
and banking unit, rose to $3.37 billion from $2.86 billion,
while equity market revenue soared to $942 million from $561
Trading revenue in the year-earlier quarter was weak across
the industry as the European debt crisis brewed.
Net credit losses declined to $2.61 billion from $3.49
billion as higher house prices lifted the value of the home
mortgage assets held since the financial crisis.
In Citi Holdings, it set aside $451 million for bad loans,
benefits and claims, down from $1.23 billion in the same quarter
last year. The bank used money it had previously set aside to
cover loan losses, releasing $784 million of reserves, compared
with $1.01 billion of reserves in the same quarter last year.
Revenue in the bank's transaction services business declined
1 percent from last year to $2.73 billion, and net income fell 9
percent to $803 million. The business, which generates
consistent cash flow for Citigroup, has suffered from increased
competition and falling interest rates in overseas economies.