Citi Says Trading Environment Improved From 2018's Rough End

(Bloomberg) -- 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 almost 4 percent, the most in the S&P 500 Index, after Chief Financial Officer John Gerspach said the trading environment was starting to improve this month. The brighter outlook came after the lender reported revenue from fixed-income trading, its largest securities business, plunged 21 percent 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 percent to $10.3 billion, led by a 6 percent decline in compensation expenses. That, along with a lower-than-expected tax rate, helped the lender top earnings estimates. The company forecast its tax rate for 2019 at 23 percent. Keefe Bruyette & Woods said in a note that it had been predicting 24 percent, and the lower level would add 10 cents a share to earnings.

On the investment-banking outlook, Gerspach said the pipeline “remains very, very strong and client dialogue remains strong, and we have a very healthy backlog going into 2019.”

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

The positive forecasts were welcome news for a stock that was hammered during the last few months of 2018, including a 27 percent plunge in the fourth quarter. Citigroup climbed to $58.93 at the close of regular New York trading, bringing its advance this month to 13 percent.

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 since 2009.

Citigroup’s combined revenue from stock and bond underwriting 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,” Corbat said Monday in a statement disclosing results. The firm will focus on improving profitability this year, he said.

Citi Says Trading Environment Improved From 2018's Rough End

In early December, Gerspach said trading 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 percent to almost $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 percent in 2019, up from 10.9 percent last year.

The bank’s efficiency ratio, a measure of how much it costs to produce a dollar of revenue, dropped to 57.4 percent 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.

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