Citigroup Earnings Eroded by Economic Headwinds

Citigroup

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Citigroup (NYSE:C) sweat some value in early trading on Tuesday after reporting third-quarter earnings that fell just short of analyst expectations. The firm said revenues excluding special items — such as CVA/DVA, tax benefit, and costs associated with the Morgan Stanley Smith Barney joint venture — fell 5 percent, to $18.22 billion. On a comparable unadjusted basis, Citigroup revenues of $17.9 billion were up 30 percent on the year, a result of large one-time items in the year-ago period.

The firm reported adjusted net income of $3.26 billion, or $1 per share, which compares against net income of $468 million, or 15 cents per share, in the year-ago period. Excluding special items — the firm took a pretax loss of $4.7 billion related to the MSSB joint venture ($2.9 billion after tax) — earnings of $1.02 per share were down 4 percent on the year.

Cash value added in the third quarter was -$336 million ($206 million after taxes), which is still somewhat unattractive but a marked improvement over a negative CVA of $776 million ($485 million after taxes) in the year-ago period.

“We performed relatively well in this challenging, uneven macro environment,” CEO Michael Corbat said. “While many of the factors which influence our revenues are not within our full control, we certainly can control our costs, and I am pleased with our expense discipline and improved efficiency year-to-date.”

Operating expenses declined 3.6 percent on the year in the third quarter, from $12 billion to about $11.65 billion, and are down 1 percent this year to date. The firm’s cost of credit is down 3 percent on the year, to about $2 billion, and is down 22 percent this year to date. Legal costs declined by 18.6 percent, to $677 million.

Importantly, net credit losses at Citi Holdings fell 65 percent on the year in the third quarter and are down 52 percent this year to date, at just $635 million. Assets in this division are down 29 percent on the year, a welcome downsizing.

“We also continued to reduce the size of Citi Holdings, now 6 percent of our balance sheet, and its drag on our earnings during the quarter,” Corbat said in the report.

Citigroup hasn’t been weighed down by the same sort of all-out legal warfare that other major financial institutions like Bank of America (NYSE:BAC) or JPMorgan Chase (NYSE:JPM) have been subject to over the past few years. In part thanks to this, Citigroup has been able to outperform its peers on the stock chart, although marginally. Shares are up just over 20 percent this year to date.

JPMorgan recently reported an unexpected net loss of 17 cents per share for the third quarter, largely the result of enormous legal expenses. Analysts were expecting a profit of about $1.19 per share, which compares against year-ago earnings of $1.40 per share. JPMorgan reported a pretax expense of $9.15 billion in the third quarter, or $7.2 billion after tax, for corporate legal expenses.

Bank of America, which will announce earnings on Wednesday, recently said it would pay $500 million to release it from claims that it allegedly sold securities backed by defective mortgages. The settlement — which, to investors’ surprise, was announced alongside first-quarter earnings — was meant to resolve 80 percent of all the claims filed against Countrywide’s allegedly defective mortgage-backed securities and 70 percent of the claims filed against Bank of America-created loans.

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