Citi says trading environment has improved from 2018's rough end

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NEW YORK (Jan 14): Citigroup Inc offered some hope that the worst is over for its bond trading business, after the toughest quarter for that unit in seven years.

The lender’s shares jumped 3%, reversing an earlier decline, after Chief Financial Officer John Gerspach said Monday that the trading environment was starting to improve this month. The brighter outlook came after the lender reported revenue from fixed-income trading, it’s largest securities business, plunged 21% in the fourth quarter, as wild markets kept clients on the sidelines.

“Volatility has somewhat moderated and both equity prices and yields have shown signs of stabilization,” Gerspach said on a call with reporters. “But, again, it’s really early and market conditions — even though there have been improvements — they have yet to fully recover at this point.”

To combat the trading weakness, the bank cut costs by 4% to US$10.3 billion, led by a 6% decline in compensation expenses. That, along with a lower-than-expected tax rate, helped the lender top earnings estimates.

That was welcome news for a stock that had been hammered over the last few months of 2018, plunging 27% in the fourth quarter. Citigroup climbed 3.2% to US$58.52 at 10:15 a.m. in New York, bringing its advance this month to 12%.

Bank shareholders have been in the dark for weeks, eager to learn whether traders and dealmakers were able to navigate global market swings, including the biggest monthly drop in the S&P 500 Index since 2009. Analysts including Barclays Plc’s Jason Goldberg had cautioned clients that Citigroup’s most recent guidance came in early December, before the storm worsened.

Citigroup’s combined revenue from stock and bond underwriting also dropped more than analysts estimated in the fourth quarter. And the company missed a full-year profitability target by an even wider margin than it signaled just five weeks ago.

“A volatile fourth quarter impacted some of our market-sensitive businesses, particularly fixed income,” Chief Executive Officer Michael Corbat said Monday in a statement disclosing results. The firm will focus on improving profitability this year, he said.

Bright spots included a 47% jump in revenue from advising on mergers and acquisitions, which reached US$463 million. The bank’s treasury and trade solutions business, which helps corporations move money around the world, boosted revenue 7% to US$2.4 billion — surpassing the firm’s fixed-income traders for the first time. They only generated US$1.94 billion — falling below US$2 billion for the first time since the final quarter of 2011. It was their worst performance under Corbat.

Just three months ago, things were looking brighter for the fixed-income division, which handles bonds, commodities and currencies. In mid-October, the bank disclosed that the business had snapped five straight quarters of declining revenue. When news of the turnaround broke, it helped send the stock up as much as 4.2% that day.

But by early December, Gerspach said the momentum was fading, particularly in Group of 10 rates trading. Asked Monday what other products were affected by volatility, the CFO joked “everything”, but he pointed in particular to foreign exchange and spread products.

Revenue from Citigroup’s sprawling credit-card unit, the largest in the world, increased 1% to almost US$5.1 billion during the quarter. Investors have grown increasingly worried about the business, as rising interest rates have tempered consumers’ demand for such loans. Citigroup has been curtailing its promotional offers, while encouraging existing customers to maintain balances on their cards.

2019 Goal

The lender said it still believes it can achieve a return on tangible common equity of 12% in 2019, up from 10.9% last year.

The bank’s efficiency ratio, a measure of how much it costs to produce a dollar of revenue, dropped to 57.4% last year, 86 basis points better than the prior year. The company had been aiming to shave 100 basis points from that measure last year, but Gerspach said in December the move might be closer to a 90 basis-point decline.

JPMorgan Chase & Co and Wells Fargo & Co are set to report quarterly results Tuesday, with Bank of America Corp, Goldman Sachs Group Inc and Morgan Stanley due later in the week.

Here are other key numbers from the third quarter: 

Net income amounted to US$4.3 billion or US$1.64 a share, after a loss in the same quarter a year ago, when the company booked a US$22.6 billion tax-related charge. 

Excluding an additional one-time tax-related gain, Citigroup posted per-share profits of US$1.61 a share, topping the US$1.55 average of analyst  estimates compiled by Bloomberg.  

The bank’s total revenue of US$17.1 billion missed analysts’ estimates of about US$17.5 billion. The bank’s equity traders posted US$668 million in revenue, an 18% increase from a year earlier. 

Last year’s fourth quarter suffered from a US$130 million loss tied to the embattled South African retailer Steinhoff International Holdings NV.  

Revenue from bond underwriting fell 13% to US$634 million, a smaller drop than analysts predicted, while stock underwriting slumped 28% to US$181 million. That was worse than what analysts anticipated, bringing total underwriting below their estimates as well. The cost of credit within the consumer-banking unit climbed 1% during the quarter, driven by an increase in net credit losses in the unit, which the bank blamed on higher usage of its North American credit cards.