By Christina Rexrode And Peter Rudegeair
Citigroup Inc. said Thursday its first-quarter profit jumped a
larger-than-expected 21% as the lender slashed costs to overcome a
drop in trading revenue.
Shares rose 2.2% to $54.41 in midday trading.
The New York-based bank reported a profit of $4.77 billion, or
$1.51 a share. That compared with $3.94 billion, or $1.23 a share,
in the same period of 2014. Excluding one-time items, per-share
earnings were $1.52 in the latest period, beating the $1.39 a share
projected by analysts polled by Thomson Reuters.
Revenue slipped 2.3% to $19.74 billion, hurt partly by the dip
in trading revenue. But the adjusted revenue of $19.81 billion was
basically in line with what analysts had expected, $19.82
billion.
The bank's cost-cutting, with operating expenses falling 10% to
$10.88 billion, was better than analysts had expected.
"This is a big deal," said BMO Capital Markets analyst James
Fotheringham, who had predicted higher expenses.
Sanford C. Bernstein analyst John McDonald said that the
quarter's narrative--Citigroup beating expectations via
cost-cutting, even without the benefit of strong trading--validated
the bank's overall strategy of shrinking and simplifying, a mission
it has been on since it was battered in the financial crisis.
Citigroup cut spending on compensation, equipment, advertising and
other business costs. However, the strategy also raised questions
about how the bank will improve efficiency when it can no longer
pull the expense levers.
Legal expenses also fell. The bank set aside $403 million for
litigation and related expenses, down 65% from $1.16 billion. The
year-ago legal costs were higher because the bank was preparing for
a mortgage-securities settlement with the Justice Department, which
was reached in July.
Citigroup has said that it expects potential settlements on
other issues, including industrywide probes over the alleged
manipulation of currencies and interest rates, as well as the
bank's compliance with anti-money-laundering rules. But the bank
already set aside money for those potential expenses in the fourth
quarter.
Profit in the consumer bank rose 3%, helped by a jump in U.S.
consumer banking, which makes up the bulk of the retail bank. That
offset declines in Latin America and Asia consumer banking.
Profit in the investment bank and related units were roughly
flat, hurt by the drop in trading revenue.
Citigroup's trading revenue was down 9.5%, to $4.36 billion from
$4.81 billion a year ago. That was worse than J.P. Morgan Chase
& Co. and Goldman Sachs Group Inc., which logged increases, and
Bank of America Corp., which fell by a smaller proportion, 5%.
However, Citigroup's results were in line with the bank's warning
last month.
Part of the difference among the banks' trading results relates
to the types of products they focus on. J.P. Morgan tends to trade
currencies and rate products, which had a strong quarter. Citigroup
and Bank of America focus on so-called other products like
mortgage-backed securities and corporate bonds, which had a weak
quarter.
Chief Financial Officer John Gerspach noted lower levels of
activity across distressed credit and lower issuance of muni bonds
to explain the weak quarter for the fixed-income
products--fluctuations that should be expected in a low-rate
environment, he said on a call with reporters.
However, Citigroup's trading was also hurt by another factor:
The bank lost money when the Swiss franc unexpectedly surged
earlier this year, while J.P. Morgan and Bank of America both made
money. Without the loss on the Swiss franc, rates and currencies
trading revenue would have been up more than 20%, Mr. Gerspach
said.
Like other banks, Citigroup is eager for interest rates to rise,
which will allow it to charge more on loans. Citigroup's net
interest margin, which measures how the bank makes money by
charging more on loans than it pays on deposits, rose slightly over
the year, to 2.92% from 2.9%. Analysts described Citigroup's net
interest margin as resilient, particularly as other banks' margins
have come under pressure.
Mr. Gerspach noted the bank wasn't just waiting for interest
rates to rise, saying that its financial targets were never
dependent on a big increase in rates.
In investment banking, Citigroup earned $298 million in fees
from advising on mergers in the first quarter, up 70% from $175
million the year before. Merger advisory revenue was up 42% at J.P.
Morgan and 50% at Bank of America, a signal that companies are
eager for deal-making.
Overall, the tone was far calmer than earnings a year ago when
Citigroup turned in better-than-expected results, but analysts and
investors homed in on how the bank had failed the Federal Reserve's
stress test just weeks before. Mr. Corbat at the time vowed to find
an "industrial-strength" solution to the stress-test missteps. Last
month the Fed approved Citigroup's stress-test request to raise its
dividend for the first time since the financial crisis.
Write to Christina Rexrode at christina.rexrode@wsj.com and
Peter Rudegeair at peter.rudegeair@wsj.com
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