Citi barely ekes out a second quarter profit of $181 million thanks to a $3.8 billion charge to help pay its settlement over mortgage backed securities sold before the financial crisis.
Keith Bedford / Reuters
Citigroup is the latest megabank to get slammed by a large settlement for its mortgage-backed securities sales before the financial crisis, but unlike JPMorgan Chase in the third quarter of last year, it still managed to post a quarterly profit, if only barely.
The bank's net income for the second quarter was $181 million, or 3 cents a share, well short of the $1.05-a-share and $3.22 billion analysts expected.
The mortgage settlement knocked off $1.21 a share from earnings, the company said, meaning that besides the payout, Citi's core operations performed better than expected: some $1.24-a-share and $3.9 in adjusted profit. The bank's revenues of $19.3 billion comfortably exceeded analysts' expectations of $18.8 billion.
Wall Street cheered the bank's financial and legal performance: in pre-market trading, the bank's shares were up some 4% to $48.87.
Citi was also able to avoid as big as bloodbath in its equity and fixed income division as some feared.
Citi's chief financial officer John Gerspach was the first major banker to publicly project trading pain in the second quarter. In a presentation at a conference in May, he said that he expected revenue from equity and fixed income trading "to be down in the range of 20% to 25% year over year."
The two units brought in $3.66 billion in revenue, still well down from $4.3 billion in the second quarter last year, but only a 15% drop. Fixed income revenues, which many analysts expect to drop massively across Wall Street thanks to low volatility in the markets, saw $3 billion in revenue for Citi, down from $3.4 billion in the second quarter of last year, a 12% decline. Citi's far smaller equity trading revenues of $659 million were down 26% from last year's $885 million. The company in a presentation said the poor results were "impacted by low volatility and ongoing macro-uncertainty."
The bank's results were also aided by $696 million worth of releases from reserves for losses on loans, despite having to aid $75 million to reserves for its international consumer banking unit.
Goldman Sachs president Gary Cohn also promised more equity and fixed income trading pain in a presentation in May, as did JPMorgan Chase in a earlier regulatory filing. Citi is the first megabank with a large capital markets operations to report and may be seen as a bellwether for the rest of Wall Street as the four largest banks with large investment banking divisions — Morgan Stanley, Goldman Sachs, and Bank of America — report earnings for the second quarter.
The $7 billion settlement announced this morning by the Justice Department covered Citi's sale and underwriting of mortgage-backed securities and securities derived from mortgage-backed securities from 2003 to 2008. As part of the deal, which settles a civil investigation into Citi's behavior by both federal authorities and several states, the bank will pay $4.5 billion in cash and another $2.5 billion in consumer relief.
Of the cash payment, $4 billion will go to the Justice Department, and $500 million to the Federal Deposit Insurance Corporation and several states also investigating Citigroup, including California. Citi said that it would take a $3.8 billion pre-tax charge on its second quarter earnings. "We believe that this settlement is in the best interests of our shareholders, and allows us to move forward and to focus on the future, not the past," Citi chief executive officer Michael Corbat said in a statement
Although the headline number is smaller than the $13 billion its rival JPMorgan paid to settle the Justice Department's investigation of its mortgage-backed securities sales last year, Citi had a much smaller share of the mortgage-backed market, while JPMorgan settled for both its own sales, as well as Bear Stearns and Washington Mutual, which the bank acquired in 2008.
While Citi is able to (expensively) put one legal and regulatory problem behind it, it still faces two more. First is cleaning up its large Mexico unit, Banamex. Several employees have been fired from Citi's Mexican operations after the company discovered fraudulent billings that allowed a client, oil services company Oceanografía, obtain hundreds of millions worth of loans based on services it was allegedly providing to Mexico's state oil company. The bank said earlier this year that it had lost as much as $400 million in what Corbat described as a "galling crime."
Citi is also reeling from its failure to win approval from the Federal Reserve to raise its dividend and buyback. In March, the Fed rejected Citi's bid to increase its quarterly divided from one cents to five cents and its buyback from $1.2 billion to $6.4 billion, citing "a number of deficiencies in its capital planning practices" as well as an inability to adequately project how its revenue would be affected by an economic downturn across its sprawling global operations.
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