Citigroup Disappoints on Earnings

By Valentin Schmid
Valentin Schmid
Valentin Schmid
Valentin Schmid is the business editor of the Epoch Times. His areas of expertise include global macroeconomic trends and financial markets, China, and Bitcoin. Before joining the paper in 2012, he worked as a portfolio manager for BNP Paribas in Amsterdam, London, Paris, and Hong Kong.
October 15, 2013 Updated: October 15, 2013

NEW YORK—Citigroup said its earnings fell slightly in the third quarter after a $1 billion drop in revenue from its bond trading business and a slump in mortgage refinancing.

Net income for the July-to-August period fell to $3.26 billion from $3.27 billion in the same period a year ago after excluding an accounting gain and other one-time items. The earnings amount to $1.02 per share compared with $1.06 per share last year. Analysts expected $1.04. 

Revenue fell 5 percent to $18.2 billion compared with $19.2 billion a year ago. The market expected $18.71 billion. 

Earnings were further boosted by a reduction in the amount of money the bank holds in reserve for bad loans. Banks can almost change this number at will. If they increase the reserve, earnings go down, but conversely they have a buffer if loans go bad. If the lending environment improves, banks can release money from the reserve, which benefits earnings. Citi did this amounting to a gain of $675 million. 

Traditional Banking Suffering 
Traditional businesses didn’t fare so well. The bank said “significantly lower” mortgage refinancing business in the U.S. contributed to a 7 percent decline in Citi’s consumer banking revenue. Rising interest rates in the second quarter made it less attractive for consumers to refinance their mortgages. 

“Significantly lower U.S. mortgage refinancing activity and continued spread compression globally more than offset the ongoing volume growth in most international businesses,” stated the report. 

The rising rates also hurt Citi’s securities and banking unit. Revenues at Citi’s bond trading unit slumped 26 percent in the third quarter, to $2.8 billion from $3.7 billion as bond yields climbed. Rates rose in anticipation that the Federal Reserve would start reducing the bond purchases that has been making to stimulate the economy. Citi said that “performance [was] impacted by the macro environment, especially in fixed income.”

Debt underwriting and advisory revenue also slumped. “Investment Banking revenues of $839 million were 10 percent below the prior year period, driven primarily by declines in debt underwriting and advisory revenues,” the report states.

Market Reaction 
Citigroup’s stock closed down 74 cents to $48.86, near the lows of the day. At the end,it was not enough that the bank managed to increase its capital ratios and the market sold off the stock. The most commonly used Tier 1 capital ratio stood at 10.4 percent. 

Citigroup remains “hopeful” that lawmakers in Washington will be able to avert a potential U.S. default, said John Gerspach, Citi’s Chief Financial Officer, on a call with reporters. The bank has been preparing for different contingencies over recent weeks and no longer holds any U.S. Treasury securities that mature on the Oct. 31, or earlier, the executive said. 

The Associated Press contributed to this report. 

Valentin Schmid is the business editor of the Epoch Times. His areas of expertise include global macroeconomic trends and financial markets, China, and Bitcoin. Before joining the paper in 2012, he worked as a portfolio manager for BNP Paribas in Amsterdam, London, Paris, and Hong Kong.