By Matthias Rieker Citigroup Inc.'s (C) second-quarter profit jumped 24%, thanks to a $2 billion reserve release and improved credit. But the bank struggled to grow earnings in many businesses around the world.
Overall, Citi reported a better-than-expected profit $3.34 billion. At Citicorp, the core division that the bank wants to grow, revenue and profit fell–and expenses rose. Revenue rose in consumer lending and in investment banking in Latin America and Asia, and loans grew broadly. But even outside the U.S., profits fell.
That decline is because Citi is “in investment mode,” Chief Financial Officer John Gerspach said during a conference call with reporters. Those investments–in new products, branches, technology and marketing–are starting to pay off, and profits, particularly in Asia and Latin America, should improve in the second half, he said.
In North America, however, revenue growth won’t catch up with rising expenses until the middle of next year, Gerspach said.
The CFO said Citi had a “solid quarter,” and Citi’s financial condition continues to improve. Capital ratios improved and loan losses fell.
Citi’s shares fell 0.3% in recent trading to $38.90.
Citi “digested elevated legal expenses, a weak trading environment and higher expenses and still posted solid growth in earnings per share,” Sanford C. Bernstein & Co analyst John McDonald said in a research report. He said he hoped “management will be able to increase its dividend and start share buybacks in 2012.”
Citi returned to profitability last year after surviving the financial crisis due to $45 billion in government bailout funds; it has since struggled to convince investors that it can grow revenue.
Now revenue grew in many business lines–consumer banking in Latin America was up 15%, and in Asia 10%. But profits rose only in the relatively small Latin American capital markets and in transaction processing.
Overall costs increased 9% at Citigroup, to $13 billion, and expenses at the Citicorp unit rose 10%, to $10 billion. Revenue for Citigroup overall fell 7%, to $21 billion, and revenue at Citicorp fell 1%, to $16.3 billion. An “extensive reengineering program [is] under way,” the CFO said.
Credit-loss provisions in the second quarter were $3.39 billion, down sharply from $6.67 billion a year earlier.
The U.S. consumer business got the biggest boost as Citi didn’t need to set aside as much reserves for bad loans. Citi plans to add 200 branches in the next three years.
Improving credit drove Citi’s 41% increase in net income from consumer banking overall, to $1.6 billion. Overall consumer-banking revenue rose 2%, to $8.2 billion. In a memorandum to staff Friday, Chief Executive Vikram Pandit said, “We increased our loans throughout our core businesses as credit quality improved.”
Citi’s profit from capital markets fell 8% from a year earlier and 10% from the first quarter, to $5.5 billion, as bond underwriting and trading revenue declined. Profit fell 29% from a year earlier, to $1.2 billion. On Thursday, J.P. Morgan Chase & Co. (JPM) reported higher profit and revenue from capital markets.
Gerspach said Citi’s investment-banking advisory business was “pretty solid” following hires made to recapture lost ground. “It’s nice to crack $1 billion again,” he said, referring to the investment banking’s second-quarter revenue–a 69% rise from a year earlier.
The loss at Citi Holdings, which includes assets the company is seeking to unload, narrowed.
All said, the bank reported a profit of $1.09 a share, from 9 cents a share a year earlier. Analysts polled by Thomson Reuters recently estimated a per-share profit of 96 cents on $19.89 billion in revenue.
