Firm’s net misses estimates on fixed-income drop

Tuesday, July 19, 2005 | 9:39 a.m.

Citigroup Inc.'s profit failed to meet analyst estimates for the first time in more than three years as revenue from fixed-income trading declined in what Chief Executive Charles Prince called "one of the worst" capital-markets environments.

The biggest U.S. financial-services company said today that second-quarter net income rose to $5.07 billion, or 97 cents a share, from $1.14 billion, or 22 cents, a year earlier. New York-based Citigroup was expected to earn $5.3 billion, or $1.02 a share, the average estimate of eight analysts surveyed by Thomson Financial.

Citigroup struggled to make money buying and selling debt and derivatives as the gap between short-term and long-term interest rates narrowed and customers traded less. More U.S. customers filed for bankruptcy ahead of a new law and others used home equity loans to pay down balances, crimping profit at the bank's credit card business.

Citigroup's earnings had exceeded analyst estimates since the first quarter of 2002, according to data compiled by Bloomberg.

Bank of America Corp., the No. 2 U.S. bank by assets, reported Monday that second-quarter profit rose 12 percent in part because of an increase in commercial lending. Its earnings of $1.06 a share beat analyst estimates by 5 cents.

Citigroup's 28 percent plunge in revenue from fixed-income markets, which includes bond, currency and commodity trading, mirrored results that led to profit drops at rivals such as Goldman Sachs Group Inc. and Morgan Stanley. That decline, to $1.83 billion from $2.54 billion, exceeded the average drop reported by Citigroup's Wall Street peers for the quarter that ended in May.

"We were not positioned for the decline in long-term rates and the flattening of the yield curve," Chief Financial Officer Sallie Krawcheck said on a conference call with analysts and investors. "On the fixed-income side, we did underperform."

The yield on the benchmark 10-year U.S. Treasury note slipped to 3.9 percent on June 30 from about 4.5 percent at the quarter's start. In that same three-month period, the Federal Reserve twice increased its overnight lending rate target, raising it to 3.25 percent from 2.75 percent.

Citigroup's shares fell $1.42, or 3.1 percent, to $45 in composite trading on the New York Stock Exchange, the biggest drop since September. The stock has gained 3.2 percent in the past year, trailing the benchmark Philadelphia Stock Exchange KBW Bank Index's 6.6 percent rise.

The bank announced July 14 that President Robert Willumstad resigned to seek a CEO job elsewhere.

Total earnings fell compared with the $5.34 billion, or $1.02 a share, that Citigroup would have earned in the year-ago period, excluding the $4.95 billion legal reserve. Revenue in the recent quarter fell to $20.2 billion, falling short of the $21.6 billion estimate averaged by analysts in a Thomson survey.

Profit at the company's corporate and investment-banking unit plunged 22 percent to $1.37 billion.

"The capital markets environment was one of the worst we have seen in years, and combined with a flattening yield curve, led to a significant decline in our fixed income markets revenues," Prince, 55, said in a statement.

Citigroup said commodity and foreign-exchange revenue rose. Randy Barker, 46, and Geoffrey Coley, 45, co-head Citigroup's global fixed income department and sit on the bank's management committee.

Equity trading revenue rose 40 percent to $728 million. Citigroup said merger advisory fees increased 13 percent to $264 million. Revenue from equity underwriting was little changed at $254 million. Debt underwriting fees dropped 6 percent to $514 million.

Profit at Citigroup's consumer bank, which accounts for more than half of the company's revenue, rose 6 percent to $2.9 billion, excluding a gain from an asset sale in the year-ago period. With the gain included, it dropped 7 percent.

Revenue at the unit rose 3 percent to $12 billion, excluding the gain. The consumer bank includes credit cards, retail branches and loans to individuals and small businesses.

"New bankruptcy legislation caused a short-term spike in bankruptcy filings, adding approximately $175 million to our credit costs in North America cards," Prince said in the statement.

President Bush signed a law in April that makes it harder for individuals to avoid paying debts by declaring bankruptcy.

Citigroup's wealth-management unit, which contains the Smith Barney brokerage and the company's private bank, earned $322 million, down 11 percent. Alternative investments, the division that includes hedge funds and private equity, posted a profit of $385 million, a rise of 38 percent.

The bank used the increase in legal reserves in the year-ago period to pay for a $2 billion settlement last month with Enron Corp. shareholders.

Citigroup sold most of its insurance-underwriting business earlier this month to MetLife Inc. for about $11.7 billion on July 1. Net income included $342 million in profit from discontinued operations.