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Citi Posts Biggest Quarterly Profit of Pandemic

Citigroup Inc. shares declined after the bank reported a jump in costs and warned it now expects a slower economic recovery.

Citi Posts Biggest Quarterly Profit of Pandemic
Signage is displayed in the window of a Citigroup Inc. Citibank branch in Chicago, Illinois, U.S. (Photographer: Daniel Acker/Bloomberg)

Citigroup Inc. shares declined after the bank reported a jump in costs and warned it now expects a slower economic recovery.

A regulatory penalty helped drive operating expenses to their highest level in more than three years, and Chief Executive Office Mike Corbat said addressing the regulatory concerns won’t be “quick or easy.” And the bank is now forecasting higher unemployment and a smaller recovery in gross domestic product for 2021 than it did three months ago.

Those outlooks overwhelmed profit that topped analysts’ estimates as the bank expressed more confidence in the resilience of its loan book. The firm set aside about $1.5 billion less for bad loans in the third quarter than what analysts had estimated.

Citigroup shares declined 3.4% to $44.30 at 10:24 a.m. in New York trading. They’ve fallen 45% this year.

Citi Posts Biggest Quarterly Profit of Pandemic

Total costs were elevated by a $400 million fine announced this month by the Office of the Comptroller of the Currency for the bank’s failure to fix longtime deficiencies in infrastructure and controls. The bank also entered into two consent orders with regulators that will require years of spending to overhaul its systems.

“This won’t be a quick or easy fix,” Corbat said on a conference call with analysts. “In hindsight, we should have done this faster and prevented it from coming to this.”

Citi Posts Biggest Quarterly Profit of Pandemic

The bank is now forecasting that unemployment will be at 6.4% at the end of next year, compared with its previous estimate of 5.9%, and believes gross domestic product is likely to grow only 3.3% next year, versus the 5.5% the bank previously expected.

Meanwhile, traders focusing on fixed income, currencies and commodities posted their best third quarter in eight years. While the trading boon came from a surge in client activity that’s helped Wall Street banks throughout the pandemic, Citigroup’s provisions for loan losses marked a shift.

After setting aside almost $15 billion in the year’s first half for problem loans, the firm stockpiled only $2.26 billion in the third quarter -- nearly returning to the year-earlier level. The bank’s bond traders boosted revenue 18% from a year earlier to $3.79 billion, while its stock traders saw a 15% increase to $875 million -- in both cases surpassing analysts’ estimates.

The company had offered relatively little guidance on loan provisions, leaving analysts guessing far too high. At an investor conference in September, Chief Financial Officer Mark Mason predicted “an additional increase in reserves, albeit meaningfully lower” than earlier this year.

Costs Elevated

The sanction by the OCC -- which some analysts anticipated would be booked later -- contributed to a 5% jump in expenses to $11 billion in the third quarter.

“We are committed to thoroughly addressing the issues contained in the consent orders,” Corbat said in a statement. “These investments will not only further enhance our safety and soundness, they will result in a digital infrastructure that will improve our ability to serve our clients and customers and make us more competitive.”

The consent orders won’t stop Citigroup from continuing to seek ways to expand its branch network in the U.S. The bank has been reviewing its massive card business to find locations where clusters of existing customers might be receptive to bringing more of their business to Citigroup were there a branch nearby.

“That remains part of the strategy,” Chief Financial Officer Mark Mason said on a conference call with journalists. “There’s nothing in the consent orders that prohibits us from growing with our clients.”

The firm’s early efforts to expand its retail-banking business seem to be working: Deposits in the third quarter surged 16% to $320 billion. In North America, where the bank has been building out its digital-banking capabilities, the improvement was even greater, with deposits climbing 19%.

Earlier Tuesday morning, competitor JPMorgan Chase & Co. posted a surprise increase in earnings, fueled by a 30% jump in markets revenue. The biggest U.S. bank also defied expectations by cutting its reserve for loan losses by $569 million, after adding $20 billion to the allowance in the first half.

Other key figures from Citigroup’s results:

  • Net income dropped 34% to $3.23 billion, or $1.40 a share, beating the 92-cent average of analyst estimates compiled by Bloomberg. That compares with $1.05 a share in the first quarter and 50 cents a share in the second.
  • Revenue from the firm’s sprawling consumer unit, led by CEO-elect Jane Fraser, dropped 13% to $7.17 billion. That still topped the $6.6 billion estimate of analysts as mortgage and wealth management units benefited from increased activity. Fraser is set to succeed Corbat in February.
  • Debt and equity underwriting pulled in $1.22 billion, surpassing analysts’ projections and helping boost total investment banking revenue 13% to $1.39 billion.

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