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Friday, 01 August 2014

Arrested development

Corbat's Citi takes a step backward

Mike Corbat’s Citigroup has taken a step backward. The mega-bank’s chief executive ends his first year in charge with third-quarter earnings below estimates and a meager 6.4 percent return on equity. Granted, markets over the summer were hardly amenable. But the breaks Citi got elsewhere make the bank’s overall performance look that much worse.

First of all, Citi Holdings is no longer a major drag on earnings. The unit, which houses the bank’s toxic and unwanted assets, lost just $104 million in the three months through September. That compares with $3.5 billion in the same period last year and $500 million in this year’s second quarter.

Meanwhile, expenses are falling, thanks to Corbat’s move early on to speed up previous boss Vikram Pandit’s cost-cutting plans. At almost $11.7 billion, running Citigroup is now some $570 million cheaper than it was in each of the first two quarters of this year.

Then factor in the effect of a much lower tax rate this time round. Citi had to hand over just 25 percent to various governments around the world, compared with 28.5 percent in the first quarter and 33.7 percent in the three months to June. That boosted the bottom line by as much as $400 million.

Some deterioration in the core businesses was to be expected, considering the spike in interest rates earlier in the summer and dashed expectations that the Federal Reserve would trim the amount of securities it purchases. So a fall in both the mortgage-lending and fixed-income trading businesses should be no surprise.

The sharp decline in the latter, though, looks a tad worrying. The 26 percent drop from the same period last year is way more than the 8 percent JPMorgan reported last week. If that ends up being the worst among Citi’s peers, it’ll suggest the bank is not on as strong a path as first-half results implied – though equities trading was up a solid 36 percent. Corbat needs to demonstrate that the overall disappointing third-quarter showing is a one-off.

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Context News

On Oct. 15 Citigroup reported third-quarter net income of $3.2 billion, or $1 a share. Excluding the negative impact of improvements in its own liabilities and a $100 million tax benefit, net income was $3.3 billion, or $1.02 a share, below the consensus sell-side estimate of $1.06. Revenue was $18.2 billion, excluding improvements in Citi’s liabilities, 5 percent below the same period last year. Return on equity was 6.4 percent and return on tangible equity was 8.3 percent.

Net income was roughly flat with the same period last year, after stripping out the negative impact of improvements in Citi’s own liabilities and a $2.9 billion after-tax charge from writing down its valuation of the Morgan Stanley Smith Barney joint venture.

Operating expenses dropped 4 percent to $11.7 billion. Citi Holdings, which houses the bank’s toxic and unwanted assets, posted a loss of $104 million, compared with a $3.5 billion loss in last year’s third quarter. Citi Holdings now accounts for 6 percent of Citigroup’s assets.

Fixed-income trading revenue was $2.8 billion, excluding the negative impact of improvements in the bank’s own liabilities, 26 percent below the amount of such revenue for the same period last year. Equity trading revenue rose 36 percent to $710 million and investment banking revenue dropped 10 percent to $839 million.

Net income at the global consumer banking division fell 23 percent to $1.6 billion. The bank’s loan-to-deposit ratio was 69 percent.

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