Citigroup Adjusted Profit Hit by Bond Trading Slowdown

By David Henry

NEW YORK -- Citigroup posted weaker-than-expected third-quarter earningsTuesday as weak bond market trading volume hurt revenue at the No. 3 U.S. bank and across Wall Street.

Citigroup's (C) bond trading revenue dropped 26 percent, or $956 million, excluding an accounting adjustment, contributing to earnings that missed analysts' forecasts.

While the drop in fixed-income revenue was more severe than at larger rival JPMorgan Chase (JPM), which reported earnings Friday, it could spell trouble for investment banks Goldman Sachs Group (GS) and Morgan Stanley (MS), which post results later this week.

"Investors should have been expecting this," said Tom Jalics, senior investment analyst at Key Private Bank. "The investment bank was a little bit weaker than people had been expecting, but the company's management had been telegraphing this for the past 6-8 weeks."

He and other investors pointed to Citi's efforts to control costs in the third quarter as the most positive part of the earnings, which were also marked by top-line weakness in retail banking. Similar moves could be imminent at other banks, especially as Wall Street bonus season -- typically a huge part of their budgets -- approaches.

"Obviously, the top-line growth measures are tough to come by in this environment, and the one lever management is able to pull is on the expense side," Jalics said.

In last year's third quarter Citigroup took a pretax charge of $4.7 billion related to selling its Smith Barney brokerage business, a charge that ended up costing Vikram Pandit, then the bank's chief executive, his job.

Pandit's successor, Michael Corbat, has struggled to improve Citigroup fortunes in an environment where client business is tepid and new regulations are raising banks' expenses.

'Uneven' Business Conditions

Corbat told analysts in a conference call that business conditions would remain "uneven" through the rest of the year.

"While many of the factors which influence our revenues are not within our full control, we certainly can control our costs, and I am pleased with our expense discipline and improved efficiency year-to-date," Corbat said in a statement.

The bank's expenses fell nearly $500 million from the second quarter to $11.7 billion as performance-based compensation and transaction costs fell, partly reflecting a weak revenue environment, Chief Financial Officer John Gerspach told analysts.

The lender, which has said it was aiming to reduce costs by $1.2 billion annually, said on Tuesday it plans to cut areas like marketing expenses in the fourth quarter.

Investors said that from the outside, it is hard to evaluate how the bank's cost-cutting is affecting its daily operations.

"Everyone knows credit is getting better and the economy will be what it is, and the question is what can [banks] do on the cost side," said David Ellison, portfolio manager in Boston at Hennessy Funds, which has about $4 billion under management and owns Citigroup shares.

"All these banks are doing a lot on that front, including Citigroup, but it's hard to see from the outside what is happening," he added. "There's a dumpster in the driveway, but all the activity is in the house, and you can't tell what's happening inside."

Customer Trading Slowdown

Customer activity at Citi and other banks fell in the third quarter after the Federal Reserve refrained from changing its bond buying program, a decision that took investors by surprise and led many to take a wait-and-see attitude until there is a clearer time frame for the end of the central bank's economic stimulus program.

The third quarter is typically a slow one for bond trading, and this was exacerbated by the Fed announcement, according to analysts.

Under generally accepted accounting principles, Citigroup's net income rose to $3.23 billion, or $1 a share, from $468 million, or 15 cents a share, a year earlier.

%VIRTUAL-article-sponsoredlinks%Excluding the Smith Barney charge, as well as the impact of tax benefits and changes in the value of Citigroup debts and those of trading partners, third-quarter earnings slipped to $3.26 billion, or $1.02 a share, from $3.27 billion, or $1.06 a share, a year earlier. On that basis, revenue fell 5 percent to $18.22 billion.

Analysts on average expected earnings of $1.04 a share, according to Thomson Reuters I/B/E/S. A spokeswoman for the bank said that estimate was comparable to the adjusted earnings of $1.02 a share.

Citigroup shares were up 14 cents to $49.74 in midday trading.

On some fronts, Corbat is making progress. Citigroup has winnowed down the assets it is looking to shed, known as Citi Holdings, to $122 billion, down 29 percent from a year earlier and down 7 percent from the second quarter. Citi Holdings now accounts for a little more than 6 percent of the bank's overall assets, compared with about 9 percent in last year's third quarter.

But results were weak at many businesses at Citicorp, the bank's main operations. Revenue for its retail banking business fell 7 percent to $9.24 billion, and revenue for its securities and banking business fell 2 percent to $4.75 billion.

-Additional reporting by Tanya Agrawal in Bangalore.

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