Citigroup Profit Falls 10 Percent In 2Q, But Bank Sees Fewer Loan Losses
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NEW YORK — Citigroup said Friday its second-quarter net income dropped 10 percent to $2.7 billion even as its losses from failed loans fell. The drop in income reflects the bank's sale a year ago of the Smith Barney brokerage, which inflated its earnings at the time.
Citigroup Inc. joined JPMorgan Chase & Co. and Bank of America Corp. in reporting earnings that rose in the April-June period as loan losses fell. That's a positive sign for the economy, because it indicates that consumers are having an easier time paying their debts. But Citigroup, like the other banks, also had a decline in trading revenue because of the stock market's plunge this spring.
All three companies surpassed analysts' earnings forecasts, but investors were uneasy about the future, especially since Congress has just passed the banking industry overhaul bill. The bill is raising questions for investors about how banks will make money if their ability to trade is hampered by new regulations. Banking stocks helped lead the overall stock market sharply lower.
Citigroup was among the hardest hit banks by the financial crisis of 2008, and it was further hurt as many customers fell behind in loan payments during the recession. The bank's second-quarter losses from failed loans fell 31 percent to $7.96 billion from $11.47 billion a year ago.
Despite the improving trend, CEO Vikram Pandit remained cautious about future growth, saying in a statement that "economic conditions remain challenging."
Like JPMorgan, Citigroup also removed some money from its reserves for future loan losses, which helps boost earnings. It's also an indication that the bank is becoming more confident that the worst of the defaults is over and that delinquency and default levels are likely to shrink in the coming quarters.
Citigroup removed $1.51 billion from its loss reserves during the quarter. A year earlier, the bank added $4 billion to those reserves.
John Gerspach, Citi's chief financial officer, said during a conference call with reporters that reserves could be released in future quarters as well if credit trends continue to improve.
Loan losses have dropped four straight quarters, and Gerspach said he was particularly encouraged by a slowdown in new delinquencies in the credit card business.
"It's a business I'd expect to get back on its feet through 2011," Gerspach said of Citi's big credit card lending division. He wasn't as optimistic that delinquencies from mortgages would drop as fast as those from credit cards.
Jeff LaFrance, a banking analyst at Gradient Analytics, said the trend of shrinking losses should continue, which puts Citigroup in a good position to continue to release reserves. That in turn, will be a keep to profitability going forward, particularly if investment banking and trading revenues continue to falter.
"The trend is there for continued improvement in loan quality," LaFrance said.
The stock market's second-quarter slump sent Citigroup's revenue from its securities and banking division down 11 percent from a year earlier to $6 billion. That was down 26 percent from the first quarter.
The weak market raises doubts about whether trading revenues will return in the third quarter, said Alois Pirker, research director at Aite Group. Still, Pirker said the second quarter was a strong one for Citigroup and noted the improving credit quality is a big boost for the bank.
"It's very positive overall," Pirker said.
Investors, though, didn't agree. The drop in trading profits at Citigroup, Bank of America and JPMorgan Chase raised questions about banks' ability to make big profits if trading is curtailed by new government regulations in the coming years. Citigroup dropped 16 cents, or 4 percent, to $4 in afternoon trading as the broader market fell.
Citigroup said it earned $2.7 billion, or 9 cents per share, during the April-June period. That compares with $3 billion, or 49 cents per share, during the same quarter last year. The year-ago period's profit was inflated because Citigroup recorded an after-tax gain of $6.7 billion during the quarter from the sale of a majority stake in Smith Barney to Morgan Stanley.
Analysts forecast the bank would earn 5 cents per share.
Total revenue fell 33 percent to $22.07 billion from $33.1 billion during the year-ago period. Citigroup's revenue fell just short of the $22.16 billion analysts had forecast.
Citigroup received $45 billion in government bailout money during the 2008 financial crisis. The company repaid $20 billion of the money late last year and the rest was converted into common stock. At the time Citigroup repaid the $20 billion, the government said it would sell the $25 billion in stock by the end of 2010.
Earlier this month, the government said it has now sold a total of 2.6 billion shares at a profit. It still owns 5.1 billion shares.
During the credit crisis, Citigroup split its operations into two divisions as part of its plan to return to profitability.
Citigroup Holdings, which holds assets the company decided to sell including its worst-performing loans, lost $1.21 billion during the most recent quarter, compared with a profit of $1.22 billion last year. The year-ago figures includes the gain from the sale of Smith Barney.
Profit in the Citicorp division, the unit that operates its primary businesses which are considered fundamental to future growth, rose 17 percent to $3.78 billion during the second quarter.
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STEPHEN BERNARD 07/16/10 12:35 PM ET Associated Press