C Citigroup Inc

Bank beats analysts' expectations as one-time gain lifted EPS and trading revenue

By Telis Demos 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 16, 2019).

Strong U.S. consumer banking gave Citigroup Inc. a boost in the second quarter, helping it overcome slow trading and corporate activity.

Citigroup said Monday its second-quarter net income rose 7% from a year ago. Quarterly profit was $4.8 billion, from $4.5 billion from a year ago. Per-share earnings were $1.95 a share. Analysts had expected $1.81 a share.

Revenue at the bank was $18.76 billion, up 2% from $18.47 billion a year ago. Analysts polled by Refinitiv had expected $18.5 billion.

Citigroup is the first of the big U.S. banks to report second-quarter results. The New York bank and its rivals have been under pressure in recent months. On the Wall Street side of the business, tepid market volatility is hurting trading desks. On the Main Street side, banks are grappling with the prospect of lower interest rates. The Federal Reserve had been raising rates since late 2015, which boosted banks' lending profitability. But the central bank is now signaling it is ready to cut rates.

"We're clearly pivoting from an environment where we had predicted...rising rates to this point," Chief Executive Michael Corbat told analysts. "From our perspective we don't believe that the market has made that full adjustment."

Trading revenue at Citigroup was up 4% to $4.1 billion, but that included a one-time gain on the bank's stake in a trading platform. Without that gain, Citigroup's core trading revenue declined 5% from a year ago.

On that basis, it would be the third straight quarter of declines in the trading unit. Banks have warned that despite record stock markets, clients have remained cautious and weren't paying their banks to help them put on big new bets.

The one-time gain in trading also flattered the bank's earnings per share. Without it, the bank would have earned $1.83 per share.

Overall corporate and institutional banking revenue was flat for the quarter, at $9.72 billion. Investment banking revenue fell 10%, driven by a 36% drop in fee revenue from advising companies on mergers and acquisitions.

Large multinational companies are the backbone of Citigroup's business. Executives said those clients' borrowing decisions are sensitive to ongoing trade tensions, such as the simmering and unresolved discussions between the U.S. and China.

"There's a bit of caution that corporate clients are exercising, and in particular in Asia," Chief Financial Officer Mark Mason said to reporters. "It's a byproduct of the trade tensions impacting demand for corporate lending there."

But the bank generated solid growth from its consumer unit. Global consumer banking revenue at Citigroup was up 3% to $8.51 billion.

The bank's U.S. retail presence lags behind peers in many respects, but the bank has been investing heavily to expand it, particularly through digital and mobile banking. Revenue for U.S. consumer banking was up 3% to $5.16 billion, driven by a pickup in Citigroup's branded cards, where revenue grew 7% to $2.20 billion. The bank has been letting many of its promotional zero-interest-borrowing card offers lapse, leading to a revenue pickup.

But there are also signs that customers continue to demand higher deposit rates, which could squeeze banks' profitability. Even though the Fed has signaled it might cut rates, Citigroup said commercial customers such as small businesses and giant corporations continued to press for higher deposit rates or to move money out of noninterest accounts.

Citigroup's cost of deposits continued to rise. The bank's average rate paid on deposits rose to 1.53%, from 1.46% at the end of the first quarter.

"It's a little bit hard to pinpoint exactly when that stabilizes," Mr. Mason told analysts. "There are other factors, such as the competitive landscape out there for deposits."

Citigroup is trying to meet 2020 financial targets closely watched by investors, which makes this year's results crucial.

For the quarter, Citigroup produced a return on tangible common equity of 11.9%. The bank is aiming for a return of 12% this year.

In June, Citigroup won approval from the Federal Reserve to pay out another $21.5 billion to investors in dividends and buybacks in the next 12 months.

The bank continued to slash costs. Expenses were down 2% to $10.5 billion.

Citigroup shares fell 0.1% on Monday. It has led major banks with a 38% gain so far in 2019. The broader KBW Nasdaq Bank index is up 15% this year.

Write to Telis Demos at telis.demos@wsj.com

(END) Dow Jones Newswires

July 16, 2019 02:47 ET (06:47 GMT)

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