Citigroup shares jump on pace of earnings and strength in core business

The Citigroup Inc (Citi) logo is seen at the SIBOS banking and finance conference in Toronto, Ontario, Canada October 19, 2017. Picture taken October 19, 2017. REUTERS/Chris Helgren

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July 15 (Reuters) – Shares of Citigroup Inc (CN) jumped more than 10% on Friday after the third-biggest U.S. bank posted a 27% drop in weaker-than-expected quarterly profit due to the strength unusual in its treasury services and trading activities. desks took advantage of market volatility, cushioning an investment banking meltdown.

Treasury and Trade Solutions (TTS), Citi’s crown jewel, reported a 33% increase in revenue to $3 billion on higher net interest income and expense growth , the best performance in a decade, the bank said.

Markets revenue, meanwhile, jumped 25% to $5.3 billion, thanks to volatility in the commodity and foreign exchange markets, a particularly strong segment for the bank.

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Investors and analysts hailed the quarter as a long-awaited sign that Chief Executive Jane Fraser’s ambitious plan to restructure the bank and bring its share price and profitability in line with its peers is paying off.

“The results we saw from Citi today show that the turnaround plan is on track. Trading and interest income are offsetting weakness across the investment banking industry,” said writes Thomas Hayes, president and managing member of Great Hill Capital LLC, on Friday. “It’s the cheapest big bank with the highest upside potential.”

The bank’s profit fell to $4.5 billion, or $2.19 per share, in the quarter ended June 30, from $6.2 billion, or $2.85 per share, a year ago. earlier. Excluding items, Citi earned $2.30 per share, according to Refinitiv calculations, beating analysts’ average estimate of $1.68 per share.

The drop in profits also reflects a $375 million increase in reserves for potential loan losses as the economic outlook darkens. A year earlier, exceptional government stimulus and the recovery of the economy from the pandemic had allowed it to free up $2.4 billion in reserves.

This increase in reserves pushed Citi’s overall borrowing costs to $1.3 billion, a stark contrast to the $1.07 billion benefit it enjoyed a year earlier.

Reserve building aside, the stronger-than-expected results suggest Citi’s core operating businesses are doing well, analysts and investors said.

“Citigroup appears to be one of the highlights of the banking earnings season so far,” said David Wagner, portfolio manager at Aptus Capital Advisors, adding that the treasury and business solutions business was “running full steam ahead.” scheme, isolating all losses”. of the investment banking segment.”

Revenue at TTS, which handles international trade payments and cash management, jumped on the back of a 42% rise in net interest income from higher rates and deposits, as well as a 17% increase fees, Citi said.

As with its peers, trading also emerged as a bright spot this quarter for Citi, as investors rebalanced their portfolios amid geopolitical tensions, soaring inflation and fears that an aggressive policy tightening Federal Reserve plunges the economy into a recession.

That helped offset a 46% drop in investment banking revenue to $805 million as volatility dried up underwriting and advisory fees for investment bankers whose deals drove Wall’s profits. Street at the height of COVID-19.

REDEMPTION BREAK

Despite the strong underlying results, Citi will suspend share buybacks in the face of threats to the economy and the need to build up a key regulatory capital ratio, which is rising, Chief Financial Officer Mark Mason told reporters.

The buyback pause confirmed analysts’ expectations and followed a similar move by JPMorgan Chase & Co on Thursday. Read more

For Citi, the halt to buybacks brings unusual pain because its shares are trading for around half of the company’s net worth, as shown on its balance sheet – far cheaper than other major banks.

The bank, which disclosed an $8.4 billion exposure to Russia in the second quarter, said it was exploring all options to exit its consumer and commercial banking operations in the country. Major US banks and securities firms are exiting operations in Russia as they struggle to comply with US sanctions imposed after the invasion of Ukraine.

Credit card marketing also showed signs of profitability, with Citi-branded card revenue increasing 10% on higher loan balances, an 18% increase in new accounts and higher interest rates. Mason said the bank hasn’t loosened its credit standards and hasn’t seen signs that more card loans are deteriorating.

“Signs of growth in card balances and fee growth as well as personal banking and wealth management will be key indicators we will watch as the expected pressure within investment banking plays out” , wrote David Sekera, U.S. market strategist at Morningstar.

“Overall, we believe the bank performed well on all of these measures this quarter.”

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Reporting by Mehnaz Yasmin and Niket Nishant in Bengaluru and David Henry and Saeed Azhar in New York; Editing by Aditya Soni, Jonathan Oatis, Nick Zieminski and Michelle Price

Our standards: The Thomson Reuters Trust Principles.

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