Citigroup reported better-than-expected results as an accounting benefit for distressed companies, cost-cutting and improved trading results helped offset red ink from consumer lending and credit cards.
The third-largest U.S. bank, bailed out with $45 billion of taxpayer money, joined Goldman Sachs Group Inc, JPMorgan Chase & Co and Wells Fargo & Co in signaling that massive government efforts to jump-start the ailing economy are helping boost bank earnings.
The bulk of the writedown in Citigroup's toxic assets are probably behind them, said Marshall Front, chairman of Front Barnett Associates LLC in Chicago, which invests $500 million and is buying Citigroup stock. But there are obviously huge hurdles ahead with respect to the credit cycle that will provide strong headwinds.
Citigroup's quarterly loss narrowed to $966 million, or 18 cents per share, from $5.19 billion, or $1.03, a year earlier. According to Reuters Estimates, the loss was 12 cents per share before one-time items. On that basis, analysts had expected a loss of 30 cents per share.
Excluding the impact of preferred stock, Citigroup said quarterly earnings were $1.59 billion, its first profit on that basis since the third quarter of 2007. The New York-based bank lost $37.5 billion in the next five quarters.
Its revenue doubled to $24.79 billion, topping the average $21.73 billion forecast.
Perhaps the banking sector crisis is bottoming, said Richard Hunter, head of U.S. equities at Hargreaves Landsdown in London.
Citigroup Chief Executive Vikram Pandit has been slashing costs and trying to unload weak businesses and troubled or toxic assets that caused many of the bank's difficulties.
ACCOUNTING BLIP MAY HAVE HELPED
Citigroup also said it would delay a planned exchange of $52.5 billion of preferred shares into common stock, but would not change the terms.
That news pushed Citigroup shares down 36 cents, or 9 percent, to close at $3.65 on the New York Stock Exchange as investors braced for the issuance of more shares at a lower price.
Results included a $2.5 billion gain from an accounting rule that allows a company to record a benefit when the market's view of its creditworthiness declines.
The rule assumes that the company could close out some liabilities at a discount to their value on the company's books, creating a profit.
JPMorgan Chase & Co recorded $638 million of gains from widening of its credit spreads in the first quarter. Morgan Stanley posted $2.7 billion of similar gains in its quarter ended November 30.
It's difficult to see the current figures as anything more than a blip, especially when it's largely due to an accounting rule benefiting companies in distress, said Manoj Ladwa, senior trader at ETX Capital in London. Increasing defaults on home and credit card loans and an outflow of funds from their wealth management business does not bode well.
The bank cut 13,000 jobs in the first quarter, ending with 309,000 workers, and shed $116 billion of assets, leaving it with $1.82 trillion.
Fixed-income trading results helped the institutional clients group, which includes investment banking, swing to a $2.83 billion profit in the first quarter.
But consumer banking lost $1.23 billion, reflecting residential real estate losses. Credit card operations lost money in North America and saw overall profit fall by two-thirds to $417 million.
Credit costs rose 76 percent to $10.3 billion, including $7.3 billion of net credit losses and a $2.7 billion increase to reserves.
The challenges are still enormous, said Michael Holland, founder of Holland & Co in New York. In the context of what we heard from JPMorgan yesterday with its continuing concerns about the consumer, Citi is going to suffer too.
SHEDDING TROUBLED ASSETS
Pandit in January split Citigroup into Citicorp, which includes businesses the bank wants to keep, and Citi Holdings, which includes brokerage and insurance units, bad debt and other assets that it wants to shed.
There are hundreds of billions of assets that we would think about exiting over time, Chief Financial Officer Edward Ned Kelly said on a conference call.
Quarterly expenses fell 23 percent, and Kelly said the bank is targeting the lower end of its goal for full-year expenses of $50 billion to $52 billion.
Citigroup added substantially to credit reserves in the fourth quarter, which may have made credit performance appear better than expected in the first quarter. The bank's Tier-1 capital level was little changed from the fourth quarter.
Referring to credit deterioration, Kelly said in an interview, That's not to suggest that it's over, but there was that difference between what we projected and what actually crystallized. We're comfortable with the reserve level.
Citigroup is delaying the planned exchange of preferred shares for common stock until the U.S. government completes stress tests to gauge which large banks need more aid.
Results of the tests are due in early May.
The exchange contemplates a swap of up to $27.5 billion of preferred securities at a $3.25 per share conversion price, and the government converting up to $25 billion of preferred into a potential 36 percent stake.
Through Thursday, Citigroup shares were down 40 percent this year, compared with a 19 percent drop in the KBW Bank Index. Citigroup traded above $56 in early 2007.
(Reporting by Jonathan Stempel and Dan Wilchins; additional reporting by Dena Aubin in New York, and Paul Lauener and Sitaraman Shankar in London; Editing by Lisa Von Ahn, John Wallace, Toni Reinhold)