A sharp drop in bond trading revenue pushed Citigroup Inc. fourth-quarter profit far below expectations, highlighting Chief Executive Vikram Pandit's challenges in fully reviving the bank.
The earnings miss by Citigroup, which only survived the financial crisis thanks to a massive taxpayer bailout, stoked concern that the bank has yet to resolve the operational weaknesses that have plagued it for years.
Shares of the No. 3 U.S. bank — which have rallied strongly over the past year as the U.S. government gradually sold off its stake in the bank — were down 6 percent in midday trading.
The bank's fixed-income revenue alone dropped 58 percent from the third quarter — compared to a 7.9 percent drop at larger rival JPMorgan Chase & Co., which reported its fourth-quarter earnings on Friday.
Trading revenues were hit in part by an accounting adjustment stemming from a market perception that Citi debt was less risky, but the results pointed to fundamental weaknesses as well.
"This was one of the weaker quarters for trading," Chief Financial Officer John Gerspach told reporters in a conference call, acknowledging Citi's investment bank has also struggled in other areas like the M&A league tables, where Citi fell to eighth place from fourth in Thomson Reuters' rankings.
But he argued that trading results tend to ebb and flow, adding that "one quarter doesn't make a trend." Gerspach also forecast that "key hires" made in 2010 would boost securities and trading performance in 2011.
He also said the poor performance had come despite relatively strong volumes.
The bank's weak trading results unsettled investors, who had been reassured by the slight drop at JPMorgan, ahead of other big bank earnings later this week including Goldman Sachs Group Inc. on Wednesday, Morgan Stanley on Thursday and Bank of America Corp. on Friday.
"There was some weakness in their investment banking unit, especially in terms of the trading unit," said Alan Villalon, an analyst at Nuveen Asset Management, in Minneapolis. "I expect that unit to be erratic, but the problem is we're following up with such strong numbers from JPMorgan that everyone was expecting Citi to post similar results."
"This highlights that Citi, over the last couple of years, they've been dealing with a lot of issues and they've lost a lot of people," he added.
Bank of America shares were 2.2 percent lower and the KBW Bank index fell 1.4 percent.
Citigroup, which took $45 billion in U.S. bailout funds during the financial crisis, reported a net profit of $1.3 billion, or 4 cents per share, for the fourth quarter. The EPS was 50 percent below what analysts had expected, according to Thomson Reuters I/B/E/S.
The bank's fourth consecutive quarterly profit compared to a year-earlier loss of $7.6 billion, or 33 cents per share. That loss was mostly caused by the costs associated with repaying the government under the Troubled Asset Relief Program.
Citigroup took a $1.1 billion hit to results, before taxes, because of a credit value adjustment. That adjustment — which Gerspach said accelerated after the government finished selling its Citi stake — is due to the bond market's perception that Citi's credit quality improved during the quarter.
Under accounting rules, that improvement forces the bank to take charges because its liabilities are worth more in theory.
"Most people are still a little shell-shocked on this kind of accounting," Gerspach said.
TURNING THE CORNER?
Pandit has sold assets, cut staff and tried to focus Citigroup on its main businesses, including investment banking and retail banking for affluent customers globally. But the results show that his overhaul remains a work in progress.
In a memo to employees, Pandit predicted that 2010 would be remembered as "the year Citi turned the corner."
The Citi CEO, who has earned $1 in salary for each of the last two years but is due for a raise in 2011, also got a vote of confidence from prominent investor Prince Alwaleed bin Talal, who congratulated Pandit by phone on the bank's net profit of $10.6 billion in 2010, Alwaleed's Kingdom Holding Co said in a statement.
Citigroup released about $2.3 billion in reserves for bad loans, mainly due to an improvement in the store credit cards business it has put up for sale.
But a slump in Citigroup's securities and trading unit hurt revenues, which fell 6 percent on a managed basis from the third quarter to $18.4 billion and were also substantially below analysts' forecast of $20.4 billion.
It remained unclear why Citigroup's trading revenues were so poor. Pandit told investors in a conference call that one reason was that bonds constitute a larger portion of its trading business than at some other banks because Citi has smaller equity and commodities businesses.
Gerspach said that excluding the "credit value adjustment" related to narrowing spreads, he was not sure the bank falls "outside the band" of the rest of the industry or that the bank's trading was more volatile than other banks.
There was "no indication that there was anything systemic" in the trading results, he added.
Through Friday, when they hit a 52-week high of $5.15, Citi's shares had surged 55 percent since the beginning of 2010, substantially outperforming the overall banking sector.
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