--Citi's revenue fell 10% from a year earlier, to $18.6
billion
--Expenses fell 6%, to $12.1 billion
--CEO Pandit: Results "solid" in "difficult environment"
(Updates with comments about the Asian business in the 12th
paragraph.)
By Matthias Rieker
Citigroup Inc.'s (C) second-quarter profit fell 12% from a year
earlier on a decline in revenue and a smaller benefit from
releasing reserves set aside for losses from defaulting loans.
Citi's focus has been on growing abroad and cutting expenses,
but second-quarter results were caught in the cross currents of the
rising dollar against other currencies. At the same time, the
results benefited in North America from the booming mortgage
business driven by low interest rates and U.S. government programs
for struggling home owners.
The $2.9 billion profit, flat from the first quarter, and core
earnings of $3.1 billion excluding one-time gains and charges, beat
the average analyst estimate of $2.8 billion.
Revenue fell 9.7%, to $18.6 billion from a year earlier. The
prior quarter included a large loss on the valuation of Citi's
debt; in the second quarter, Citi booked a small $219 million
gain.
Citi shares recently were up 1.6%, to $27.08, which is off from
a 3% to 4% rise in pre-open activity.
Chief Executive Vikram Pandit called the quarter "solid" and
pointed to the diverse set of businesses as a reason for what he
considers Citi's ongoing recovery. Expenses declined 6%, to $12
billion, in part because Citi cut roughly 5,000 staff earlier this
year. Pandit reiterated that the focus on reducing operating costs
would continue.
Total loans rose 1% from a year earlier, to $655 billion, and
core loans rose 10%, which excludes the shrinking loan portfolios
Citi intends to exit.
"Despite an economic slowdown in many emerging markets, our
Global Consumer Banking net income remained stable," Mr. Pandit
said in a memorandum to staff. "Our markets businesses performed
well in the face of volatility." The CEO noted that revenue grew
faster than expenses in all core lines of business.
Mr. Pandit has worked to rebuild Citi after the financial crisis
around its international operations. But, uncharacteristically, the
consumer business in North America ended up doing better than
abroad because revenue from deposits and consumer lending in Asia
and Latin America were hampered by the impact of translating the
foreign currency income into dollars.
The rising dollar sliced $700 million off revenue, but reduced
expenses and the cost of providing for bad loans; the net effect
was a $100 million reduction to earnings, a decline Citi doesn't
hedge.
Booming mortgage originations in the U.S. aren't sustainable but
will continue at least into the third quarter, Chief Financial
Officer John Gerspach said during a conference call with investors.
However, "We still see good growth" in consumer lending in Latin
America from Brazil to Mexico, he said.
"In Asia, things have slowed," he added. Card lending is still
doing well in Asia, but retail banking "is suffering right now from
a decline in investment sales," Mr. Gerspach said.
The consumer lending slowdown in some Asian countries "imply
some revenue headwinds for Asia into the third and fourth
quarters," Mr. Gerspach said in a conference call with investors.
But Mr. Pandit added he continues to expect Citi's Asian business
to grow faster than elsewhere.
Revenue in the international consumer business would have been
up 4% had currency swings not pushed the figure down, while revenue
in North America's consumer business remained flat. Overall,
revenue in Citi's consumer business remained roughly flat from a
year earlier, at $9.8 billion.
Net income in all consumer businesses fell slightly from a year
earlier, to $2 billion, and rose in securities and banking, to $1.4
billion.
Capital markets revenue, however, held its own: It was roughly
flat from a year earlier and rose 2% from the strong results in the
first quarter, to $5.4 billion. Markets struggled with
uncertainties about economic growth in the U.S. and Asia while the
European debt crisis continued, but Citi benefited from its
strength in trading volatile currencies--the very issue that hurt
its global consumer revenue.
Mr. Gerspach said Citi is "pretty satisfied with the overall
performance in securities and banking," but layoffs are possible if
markets are choppy.
Gerard Cassidy, an analyst with RBC Capital markets, wrote in a
research note, "Securities and Banking results were much better
than we were expecting due to lending revenue from gains on hedges
as credit spreads widened."
Expenses, the provision for credit losses and fee income "were
all better than our expectations," Mr. Cassidy said, but revenue
from lending and investing "was weaker."
Citi Holdings--the division in charge of shrinking assets and
business that are troubled or Citi no longer considers core to its
operations--continued to shrink as planned; it generated a $920
million loss.
Citi reduced its reserve for bad loans by $984 million, half of
what it released into earnings a year earlier, a sign that credit
quality continues to improve. It also booked a $424 million loss
from the sale of a 10% stake in Akbank TAS (AKBNK.IS). Citi retains
a 9.9% stake in the Turkish bank.
Citi's per-share earnings of 95 cents beat analysts' estimates,
even excluding the gain from the valuation of its own debt.
Analysts polled by Thomson Reuters had expected 89 cents a share,
excluding mark-to-market adjustments on debt gains.
--Saabira Chaudhuri contributed to this article.
Write to Matthias Rieker at matthias.rieker@dowjones.com