Citigroup profit rises, but disappoints

Citigroup said today that increased investment and consumer banking activity boosted second-quarter profit by 4 per cent, but its shares fell as rising costs caused earnings to lag analyst forecasts.

Results for the largest US bank missed estimates for the fourth time in five quarters, despite surging trading revenue and a decline in loan losses as consumer bankruptcies fell.

"The businesses are operating well, but they didn't truly overwhelm anybody," said David Katz, chief investment officer at Matrix Asset Advisors Inc. in New York.

Citigroup was the biggest percentage decliner on the Dow Jones Industrial average, falling US$1.18, ($1.93) or 2.5 per cent, to US$46.40.

Net income for New York-based Citigroup rose to US$5.27 billion, or US$1.05 per share, from US$5.07 billion, or 97 cents, a year earlier.

Profit from continuing operations increased 11 per cent to US$5.26 billion. Revenue rose 10 per cent to US$22.18 billion, matching a record.

Expenses rose 16 per cent to US$12.77 billion, including a 35 per cent jump in investment banking pay. Return on common equity fell to 18.6 per cent from 20.3 per cent in the first quarter.

Analysts polled by Reuters Estimates on average forecast profit of US$1.06 per share on revenue of US$22.34 billion.

Citigroup benefited from a US$92 million gain from selling upstate New York branches and the release of more than US$300 million from loan loss reserves.

Results were "uninspiring," despite good non-US growth, said Marshall Front, chairman of Front Barnett Associates LLC in Chicago, which owns Citigroup shares.

But he added: "I would expect pressure on the board from shareholders if things continue at less than full throttle."

Citigroup shares are up just 2 per cent since Charles Prince became chief executive in October 2003. The 24-member Philadelphia KBW Bank Index is up 21.2 per cent.

Prince has been emphasising growth of existing units rather than growth through big acquisitions.

"Citigroup seems to lack a catalyst," wrote Michael Mayo, a Prudential Equity Group LLC analyst. He cut the bank to "neutral weight" from "overweight" citing concern about costs.

Citigroup is the first major US bank to report quarterly results. Bank of America Corp and JPMorgan Chase & Co report on Wednesday, Wachovia Corp on Thursday and Wells Fargo & Co on Tuesday.

"The fear is others (big banks) will do OK rather than better-than-expected," Katz said.

Corporate and investment banking profit rose 26 per cent to US$1.72 billion as revenue surged 31 per cent to US$6.76 billion. Profit, however, fell 11 per cent from the first quarter.

Revenue from fixed-income trading rose 51 per cent from a year earlier to US$2.76 billion, and from equity trading rose 30 per cent to US$945 million. Both fell from the first quarter.

Investment banking revenue jumped 24 per cent as fees from underwriting and merger advising grew.

Prince on a conference call said results improved despite "challenging capital market conditions, which are continuing."

The gains helped offset a 0.14 of a percentage point drop in net interest margin from the first quarter, hurt by rising short-term rates.

Profit from consumer businesses rose 10 per cent from a year earlier to US$3.18 billion, as revenue rose 5 per cent to US$12.6 billion. In US consumer businesses, which have struggled, profit increased 11 per cent, but revenue rose just 1 per cent.

Citigroup opened 270 retail branches and consumer finance offices in the quarter, including 74 in the United States.

It has opened 20 US branches in 2006 and Chief Financial Officer Sallie Krawcheck said it expects to open 80 more.

More than 42 per cent of profit and revenue came from outside the United States. Citigroup said it has no plans to withdraw from the Middle East because of political instability.

"This is a pretty complicated time in the world," Prince said.

Wealth management profit, including the Smith Barney brokerage and private bank, rose 8 per cent to US$347 million. Profit from alternative investments fell 33 per cent to US$257 million. Assets rose 5 per cent to US$1.63 trillion.

- REUTERS