Citigroup beats earnings estimates as economic recovery spurs release of reserves

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July 14 (Reuters) – Citigroup Inc (CN) on Wednesday announced a quarterly profit increase that swept away previous estimates, fueled by the bank’s decision to release loan loss reserves that helped offset falling revenue due to the decline in credit card transactions and loans.

The bank withdrew $ 2.4 billion in funds it had set aside during the COVID-19 pandemic for expected losses that have yet to materialize. A year ago, it added $ 5.9 billion to its loss reserves.

An economic recovery fueled by the rollout of vaccines across the country and a $ 1.9 trillion stimulus package put in place by the Biden administration earlier this year brightened the outlook for Wall Street’s biggest banks, all freeing up funds set aside during the height of the pandemic.

“The pace of the global recovery is exceeding previous expectations and with it, consumer and business confidence is rising,” said Jane Fraser, CEO.

While the latest bank results clearly indicate that a recovery is underway, it may not immediately translate into full-scale profits due to low interest rates, weak demand for loans and a significant slowdown in business activity, analysts said.

Citigroup also struggled to offset the slowdown in credit card business where customers cut spending and paid off loans during the pandemic, unlike larger and more diverse rivals JPMorgan Chase (JPM.N) and Bank of America (BAC.N).

There were positive signs in the quarter, however, as consumer spending rebounded. Spending on Citi credit cards in the United States jumped 40% from the previous year.

CFO Mark Mason said the bank expects more customers to revert to their pre-pandemic methods of carrying revolving balances and paying interest to Citigroup as government stimulus payments end later this year.

The results were also buoyed by the investment bank, with revenue edging up to $ 1.8 billion as traders benefited from a record M&A boom. Advisory fees for transactions jumped 77%.

Equity subscription income increased 11%, helped by higher subscription fees from initial public offerings and Special Purpose Acquisition Companies (SPACs). On the other hand, turnover from debt underwriting fell by 21%.

“On a basis of own basic economic earnings (that is, basic earnings before provision minus net charges), results actually exceeded expectations at $ 1.86 / share. The beat is mainly due to better than expected credit quality, “the Oppenheimer analyst said. Chris Kotowski in a note to clients.

Citi shares were trading flat after rising 3%.

TRADING TAKES A HIT

For the quarter ended June 30, net income jumped to $ 6.19 billion, or $ 2.85 per share, from $ 1.06 billion, or 38 cents per share, a year earlier. Analysts on average expected earnings of $ 1.96 per share, according to data from Refinitiv IBES.

Overall turnover plunged 12%, while loans fell 3%.

Citi’s consumer banking declined in the quarter as fewer customers took loans on their cards. Customers continued to pay off their monthly balances and credit cards were down 4%. Revenues from these cards have decreased by 12%.

Global consumer revenue fell 7% to $ 6.8 billion, from the quarter last year, largely due to declining card balances.

Trading revenues fell 30% to $ 4.8 billion as the bank suffered from year-over-year comparisons when unprecedented volatility in financial markets helped generate record trading volumes for banks from Wall Street.

Income from fixed income trading, a strong point for Citigroup, fell 43% to $ 3.2 billion from a year earlier.

On Tuesday, JPMorgan and Goldman Sachs (GS.N) reported sharp declines in bond trading income. Read more

Citigroup’s spending jumped 7% in the quarter, on spending to improve its risk and control systems to comply with regulatory requirements. The magnitude of the increase suggests the bank could miss its April estimate that spending for the entire year would only increase by 2% to 3%.

Investors are particularly concerned about the spending as the bank has not been able to say how much money and how long it will take to meet regulatory demands and fix its systems.

The spending is part of what Fraser called Citigroup’s “transformation” and includes technological improvements that she says will ultimately reduce costs.

Reporting by Anirban Sen in Bengaluru and David Henry in New York; Editing by Sriraj Kalluvila

Our standards: Thomson Reuters Trust Principles.

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