Citi Sees Bad Loans Pile Up as Bond Trading Provides Relief

Citigroup Inc. set aside $7.9 billion for souring loans even as the bank’s revenue from fixed-income trading surged 68%, keeping the bank solidly profitable.

The $5.6 billion windfall from trading bonds, currencies and commodities was even greater than what the firm generated in the year’s first three months, when the pandemic set off a flood of client transactions. Combined with cost cuts, it helped the bank salvage a $1.3 billion profit -- albeit one that was 73% lower than a year earlier -- as the lender braced for a wave of potential defaults amid lockdowns on commerce.

“While credit costs weighed down our net income, our overall business performance was strong,” Chief Executive Officer Michael Corbat said Tuesday in a statement announcing results. “We have been able to navigate the Covid-19 pandemic reasonably well.”

Shares of New York-based Citigroup dropped 1.6% to $51.38 at 9:55 a.m. in New York.

Citi Sees Bad Loans Pile Up as Bond Trading Provides Relief

It’s another snapshot of how Wall Street giants such as Citigroup are leaning on volatile businesses to offset mounting signs of distress from lending operations, where the virus has left consumers and corporate customers struggling. The question is whether the hot streak in trading will last through the economic pain to come.

Earlier Tuesday, JPMorgan Chase & Co. reported record trading revenue for the second straight quarter, bolstering results at the biggest U.S. bank, whose consumer-lending division is grappling with business closures and swelling unemployment. Wells Fargo & Co., meanwhile, posted its first quarterly loss since 2008 and slashed its dividend. The San Francisco-based bank doesn’t have the kind of Wall Street trading operations that can help mitigate declines elsewhere.

Citigroup said it has already provided relief -- such as waiving fees or extending deadlines -- for 2 million accounts in its massive credit-card portfolio, representing about 6% of U.S. balances. Spending on the firm’s cards slumped almost 25% as consumers worldwide were forced to stay inside for much of the quarter to stem the spread of the deadly virus. Card balances declined 7.4%.

As consumers near the end of their forbearance period, Citigroup has begun offering them a chance to re-enroll for an additional two months, Chief Financial Officer Mark Mason said in a conference call with journalists. Re-enrollment rates are below expectations and the majority of consumers who exited forbearance are current on their accounts, he said.

“It does appear the relief programs are working,” Mason said. “The majority of clients are performing well.”

Meanwhile, corporate clients drew an additional $15 billion from existing credit facilities at the bank, even as others repaid $26 billion taken out earlier.

Citigroup’s total cost of credit more than tripled during the quarter. The figure includes the addition of $5.6 billion to the bank’s allowance for loan losses and a 12% jump in net write-offs to $2.2 billion.

Costs fell 1% to $10.4 billion in the second quarter. Mason said the company hopes to keep expenses flat for the full year, even with plans to invest in its digital capabilities and better infrastructure and controls.

“In the midst of this crisis, we are obviously facing headwinds as it relates to expenditures,” Mason said. “Everything from the impact of some of these relief programs to building out our collections capabilities to the sanitization of the buildings to all the equipment for people to operate remotely.”

Here are other highlights:

  • Earnings per share fell 74% to 50 cents, topping the 49-cent average estimate of analysts tracked by Bloomberg.
  • Equities trading revenue fell 2.5% to $770 million, short of analysts’ estimates. Advisory revenue dropped 1.3% to $229 million, beating projections. Capital markets teams also topped expectations, bringing in revenue of $1.5 billion.
  • The firm’s treasury and trade solutions unit, which helps large corporations move money and pay suppliers, saw revenue drop 11% to $2.3 billion.

©2020 Bloomberg L.P.

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