By Christina Rexrode And Peter Rudegeair
Citigroup Inc. turned in a strong first quarter, giving Chief
Executive Officer Michael Corbat a much-needed win after a tough
2014.
First-quarter profit jumped a larger-than-expected 21%, the bank
reported Thursday. Investors sent shares 2% higher.
The boost for the New York bank followed its passing the Federal
Reserve stress test last month, which gave Citigroup the freedom to
raise its dividend.
In calls with analysts and reporters Thursday, there was a
notable change in tone from the earnings report a year ago, which
came just weeks after the bank had failed the Federal Reserve's
stress test. The Fed last month cleared Citigroup's 2015
stress-test request, giving it permission to raise its dividend for
the first time since the financial crisis.
Earnings were $1.52 per share, after adjusting for one-time
items, which was significantly higher than the $1.39 a share
projected by analysts polled by Thomson Reuters. Revenue was in
line with expectations.
The bank aggressively cut costs, which helped it overcome lower
trading revenue and weakness in consumer banking outside the
U.S.
"This is a big deal," said BMO Capital Markets analyst James
Fotheringham, who had predicted higher expenses.
Citigroup hopes 2015 will be a turning point, after a year of
being besieged by the stress-test failure and problems in its
Mexico unit, Banamex. However, there are questions about how long
the first-quarter momentum can last.
"Is this as good as it gets?" asked CLSA analyst Mike Mayo. "Is
this a false start for Citigroup or is there a lot more ahead?"
Mr. Corbat replied that the bank had made substantive changes to
diversify its revenue sources.
Sanford C. Bernstein analyst John McDonald said the quarter
validated the bank's overall strategy of simplifying and slimming
down, a mission it has been on since it was battered in the
financial crisis.
The bank slashed operating expenses by 10% to $10.88 billion
from $12.15 billion a year ago, trimming its spending on
compensation, equipment, advertising and other business costs.
Legal expenses also fell from a year ago, when the bank was
preparing for a mortgage-securities settlement with the Justice
Department. So did repositioning costs, which can include severance
and related expenses a company pays when it is shrinking or
rearranging businesses.
Low interest rates have been another theme of this quarter's
earnings, with analysts and investors asking whether banks have a
strategy to move forward even if rates stay low, which keeps them
from charging more on loans.
But Chief Financial Officer John Gerspach emphasized that
Citigroup isn't dependent on rates going higher, saying the bank
plans to meet this year's financial targets regardless of how tough
the rate environment might be.
"We weren't expecting to be bailed out by any sort of
significant rate increase," Mr. Gerspach said, "and it doesn't look
like that's going to happen."
Compared with some of its peers, Citigroup is less affected by
low U.S. interest rates because many of its loans and deposits are
outside the U.S., including in regions where they can charge higher
rates on loans.
Profit in the consumer bank rose 3%, fueled by U.S. consumer
banking. Profit in the investment bank and related units was
roughly flat, hurt by the drop in trading revenue.
Citigroup's trading revenue was down 9.5%, to $4.36 billion from
$4.81 billion a year ago. That was worse than J.P. Morgan Chase
& Co. and Goldman Sachs Group Inc., which logged increases, and
Bank of America Corp., which fell by a smaller proportion.
Part of the difference among the banks' trading results relates
to the types of products they focus on. J.P. Morgan tends to trade
currencies and rate products, which had a strong quarter. Citigroup
and Bank of America focus on so-called spread products like
mortgage-backed securities and corporate bonds, which had a weak
quarter.
Also, Citigroup lost money when the Swiss franc unexpectedly
surged earlier this year, while J.P. Morgan and Bank of America
both made money.
In investment banking, Citigroup earned $298 million in fees
from advising on mergers in the first quarter, up 70% from $175
million the year before. Merger advisory revenue was also up at
J.P. Morgan, Bank of America and Goldman, a signal that companies
are eager for deal-making.
Overall, Citigroup's profit was $4.77 billion, or $1.51 a share
before adjusting for the one-time items. That compared with $3.94
billion, or $1.23 a share, a year ago.
Revenue slipped 2.3% to $19.74 billion, but adjusted revenue of
$19.81 billion was basically in line with what analysts had
expected, $19.82 billion.
Write to Christina Rexrode at christina.rexrode@wsj.com and
Peter Rudegeair at peter.rudegeair@wsj.com
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