Citi’s Trading Windfall No Match for Surge in Souring Loans

(Bloomberg) -- Citigroup Inc.’s bond traders just posted their best quarter in eight years -- a feat that was no match for the tidal wave of souring loans that walloped the bank’s profits.

The deadly pandemic that sent global markets swooning helped the firm’s fixed-income, currencies and commodities traders generate $4.79 billion, trouncing analysts’ estimates by more than $1 billion. But the firm simultaneously set aside $7.03 billion to cover potential losses on loans. Net income fell short of projections.

The divergence, mirroring trends at larger rival JPMorgan Chase & Co., showed how unprecedented government efforts to contain the spread of Covid-19, often by locking down commerce, created a lucrative opportunity for Wall Street firms but may pose longer and deeper trouble for their lending operations. Citigroup’s figures show it’s bracing for an onslaught of defaults in its sprawling credit card business all the way up to the financing the firm provides to major corporations.

“Covid-19 is a public health crisis with severe economic ramifications,” Chief Executive Officer Michael Corbat said in a statement on Wednesday. Revenue held up, he said, but the “economic shocks caused by the pandemic weren’t felt until late in the quarter.”

Citigroup shares dropped 3.3% to $43.91 at 9:45 a.m. in New York, the second-best performance in the 24-company KBW Bank Index. The stock has fallen 45% this year, compared with the 40% decline of the index.

Revenue from fixed-income trading surged 39% as the bank saw a strong performance in rates, currencies and commodities groups. Stock traders also posted better-than-expected revenue of $1.17 billion, helped by derivatives dealings.

Revenue from the bank’s consumer operations held up as the pandemic got underway. In the U.S., it increased slightly to $5.22 billion, topping analysts’ projections. Even in Asia, where the virus wreaked havoc for most of the quarter, the figure was in line with estimates.

Yet it’s the consumer division -- housing the world’s largest credit-card portfolio -- that braced most for the prospect that borrowers will struggle to repay. Companywide, Citigroup more than tripled provisions for loans. With the first-quarter provision and a separate addition related to CECL, the lender’s allowance for loan losses is now more than $8 billion higher than it was in December.

President Donald Trump announced on Tuesday that Corbat would be part of a task force to help revive the economy as the coronavirus pandemic shows signs of easing in some parts of the country. About 80% of Citigroup’s 201,000 employees are working remotely around the globe as part of the firm’s efforts to slow the spread of the deadly virus, the lender said on Wednesday.

Customers spent $128 billion on cards during the quarter, relatively flat compared with the same period a year ago, as average loans from that business climbed 2.5% to $167 billion. Still, Citigroup has begun to see rapid declines in spending on its cards and spending dropped as much as 30% in the last week of March, Chief Financial Officer Mark Mason said on a conference call.

“Particular categories you’d expect were impacted: travel was down roughly 75% while dining and entertainment were down 60%,” Mason said. “We’ve continued to see that pressure play through April. We also saw pressure in our commercial cards.”

Corporate lending was a mixed picture. Revenue there dropped 40% to $448 million in the quarter, short of the $678 million analysts estimated. But the bank also posted a surprise gain of $816 million on loan hedges.

Here are other key numbers from the quarter:

  • Net income declined 46% to $2.52 billion, or $1.05 a share, missing the $1.44 average estimate of analysts.
  • The treasury and trade solutions unit, which handles payments and banking for multinational corporations, saw a 5% drop in revenue from a year earlier to $2.42 billion. The unit opened 1,000 new accounts digitally in March alone.
  • Companies drew down $25 billion from existing credit facilities during the quarter, and Citigroup approved $21 billion of new facilities for such clients.

©2020 Bloomberg L.P.

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