Citigroup Shares Higher as Banking Trumps Broker Write Down
Citigroup's shares are trading higher today as third quarter business results beat analysts' expectations. Improved profitability in the company's core banking businesses trumped a huge write down in the value of the Morgan Stanley Smith Barney (NYSE: MS) brokerage operation.
"Our core businesses showed momentum during the quarter as we increased lending and generated higher operating revenues," said Citigroup CEO Vikram Pandit. "For the third straight quarter, we had positive operating leverage in each of our three core businesses. Citigroup in total also had positive operating leverage as Citi Holdings had a smaller impact on our overall results."
Citi Holdings is a group holding company for non-core businesses that the company is looking to shed.
Citigroup reported third quarter revenue of $13,951 million and net income of $468 million for a fully diluted earnings per share of $0.15. However, adjusting for the impact of the write down of its joint venture, Morgan Stanley Smith Barney and CVA/DVA (credit valuation adjustment/debit valuation adjustment), adjusted revenues were $19,411 million and adjusted net income was $3,268 million for an adjusted fully diluted earnings per share of $1.06, beating analyst estimates of $0.96.
Assets at the end of the third quarter were $1,931 billion, about unchanged from the third quarter of 2011 but loans were up three percent to $658 billion and deposits were up 11 percent to $945 billion.
Total cost of credit fell by 20 percent to $2,695 million as net credit losses fell by 12 percent compared to the third quarter of 2011 to $3,979 million and a further $1,509 million was released from the net loan loss reserve.
Consumer banking in North America saw year-on-year revenue growth of six percent during the third quarter with retail banking revenue up 35 percent to $1,736 million due to improved mortgage revenue while credit card revenue was down four percent year-on-year for both Citi-branded cards and retail services. International consumer banking saw seven percent annual growth in Latin America and in the EMEA (Europe, Middle East, Africa) region but revenue in Asia was down by two percent as narrower credit spreads offset an increased volume of business.
In the Securities and Banking segment, total revenue increased by 41 percent year-on-year due to better trading profits on equity derivatives and the absence of a loss on proprietary trading. Investment banking and fixed income also performed well. Transaction Services (commercial banking) saw a two percent annual decline in revenue but expenses fell by five percent over the same period due to improvements in efficiency.
At the end of the third quarter, Citigroup took a $4.7 billion pre-tax ($2.9 billion net of tax) charge on the sale of a 14 percent stake in its Morgan Stanley Smith Barney joint venture. Citigroup retains a 35 percent stake in the joint venture.
At the end of the third quarter, Citigroup had 8.6 percent Tier 1 Capital (Basel III base) on risk-weighted assets (Basel III base) of $1,239 billion. On a Basel I base, Tier 1 Capital and risk-weighted assets were 12.7 percent and $975 billion, respectively.
Net interest margin for Citigroup as a whole improved slightly to 2.86 percent.
Citigroup reported that it has a total current net funded exposure of $9.5 billion to the troubled economies of the European Union (Greece, Ireland, Italy, Portugal and Spain) of which $1.1 billion is sovereign debt with the remainder being exposure to financial institutions ($2.0 billion), corporations ($4.4 billion) and trading exposure ($2.0 billion).
In early afternoon trading, Citigroup shares are 4.4 percent higher at 36.29 as traders reacted positively to the better-than-expected earnings report.
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