"Citigroup Profit Exceeds Estimates on Trading Gains (Update2)
By Bradley Keoun
April 17 (Bloomberg) -- Citigroup Inc., the U.S. bank rescued by $45 billion in U.S. taxpayer funds, ended a five- quarter losing streak with a $1.6 billion profit on trading gains and an accounting benefit for companies in distress.
The first-quarter profit compared with a net loss of $5.11 billion, or 34 cents, a year earlier, the New York-based bank said. On a per-share basis, the bank reported an 18-cent loss because of costs related to preferred dividends. The average estimate of 13 analysts surveyed by Bloomberg was a loss of 32 cents.
Citigroup investors hadn’t seen a profit since before Chief Executive Officer Vikram Pandit took over in 2007. While the bank cut compensation costs and took fewer writedowns, it couldn’t halt rising delinquencies on home and credit-card loans. Citigroup benefited from higher fixed-income trading revenue that also bolstered earnings at Goldman Sachs Group Inc. and JPMorgan Chase & Co.
“We’ve seen good trading results from JPMorgan, from Goldman Sachs and now from Citi,” said Gary Townsend, chief executive officer of Hill-Townsend Capital LLC. “There is a question about sustainability, but it’s clearly a good sign for the sector.”
Not a ‘One-Off’
The industry’s first-quarter profits aren’t a “one-off” phenomenon, Barclays Plc President Robert Diamond said in an April 15 interview. “It has been quite a while since we’ve seen analysts talk about revenue as opposed to writedowns and balance-sheet risks,” he said.
Citigroup rose 2 percent to $4.09 as of 9:32 a.m. At its peak in late 2006, the stock was worth $56.41, valuing the company at $277 billion. At the current price, the market value stands at about $22 billion.
The bank reported $4.69 billion of fixed-income trading revenue in the quarter, compared with a trading loss of $7.02 billion a year earlier. Stock-trading revenue was $1.9 billion, a 94 percent increase.
The company took $5.62 billion of writedowns on subprime- mortgage-related securities and other investments in its trading division, reflecting a further erosion in their market value. That compared with $14.1 billion of writedowns in the first quarter of 2008, giving the company a positive $8.47 billion revenue swing.
Citigroup posted a $2.5 billion gain from accounting rules that allow companies to profit when their own creditworthiness declines. The rules reflect the possibility that a company could buy back its own liabilities at a discount, which under traditional accounting methods would result in a profit.
Citigroup, one of 19 U.S. banks gearing up for the release of so-called stress tests run by the Federal Reserve, has quadrupled on the New York Stock Exchange since falling to an all-time low of $1.02 on March 5, in the wake of the company’s announcement that as much as $52.5 billion of preferred stock would be exchanged for common shares to bolster the bank’s equity base.
Under that plan, as much as $25 billion of the government’s investment in the bank will be converted into regular shares, giving it a 36 percent voting stake. Citigroup’s tangible common equity -- a cushion against losses that many investors and analysts study -- will increase to $81 billion from about $30 billion, the bank says. Existing shareholders will be left with about a fourth of their original stakes. The bank said it plans to complete its exchange offer with the government after industry stress tests have been completed.
The government support and additional capital probably are enough “for now” to spare existing shareholders from being wiped out completely, David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, wrote in an April 9 note to investors.
“For prospective new investors, it may be too early to dive in, given continued high-risk exposures that may well require more dilutive actions,” Trone wrote.
In November, Pandit, 52, pledged to cut 52,000 jobs from the company’s 352,000-employee workforce, including 26,000 through business divestitures.
In January Pandit reorganized Citigroup, tagging the CitiFinancial consumer-finance and Primerica insurance units for eventual disposal and putting them into a separate division, Citi Holdings, with other businesses deemed “non-core.” The move, he said, would help investors focus on the earnings power of the company’s “core” retail, corporate and investment- banking businesses.
He also shifted some of Citigroup’s distressed trading securities into a long-term “held-to-maturity” investment status, sheltering them from further writedowns while betting the debt instruments will eventually pay off.
The bank still faces speculation about its survival prospects, as reflected in the elevated prices for its credit- default swaps, a type of instrument that investors use to insure against a debt default.
Citigroup’s credit-default swaps as of yesterday were trading at 557, up from 193 at the end of last year. By comparison, rival New York-based bank JPMorgan Chase & Co.’s swaps are trading at 174. Lehman Brothers Holdings Inc.’s swaps were at 322 a week before the U.S. securities firm filed for bankruptcy last September.
Retaining top employees may be a challenge for Pandit, Oppenheimer & Co. analyst Chris Kotowski wrote in an April 8 report.
Vulnerable to Flight
“With Citi’s stock permanently diluted and the company deeply dependent on government assistance, we think it is among the most vulnerable to a flight of revenue-producing talent,” Kotowski wrote.
The receipt of taxpayer money has forced Pandit to endure congressional scrutiny of line-item expenses, including a $10 million executive-suite renovation and a 20-year, $400 million sponsorship of the New York Mets’ stadium in the New York City borough of Queens.
He vowed to cut his salary to $1 until the bank returns to profitability.
The earnings report follows earnings announcements by U.S. banks whose results have surpassed analysts’ forecasts.
Goldman Sachs on April 13 reported better-than-expected earnings as a surge in trading revenue outweighed asset writedowns. Wells Fargo & Co., the second-biggest U.S. home lender, said last week it had about $3 billion in first-quarter net income, up from $2 billion a year earlier. Profit of about 55 cents a share was more than double the average estimate of analysts in a Bloomberg survey.