Citigroup Has Its Best Quarter Since Early 2007

Citigroup, the battered banking giant, announced a first-quarter net profit on Friday after more than a year of staggering losses and three rescues from Washington.

The New York-based bank reported first-quarter net income of $1.6 billion, after posting a loss of $5.11 billion in the period a year earlier. Revenue was $24.8 billion, up 99 percent.

The earnings were helped by an accounting change that allowed the bank to post a one-time gain of $2.5 billion. Under the rule, companies are allowed to record any declines in the market value of their debt as an unrealized gain.

Citigroup announced a loss per share of 18 cents. On average, analysts polled by Thomson Reuters had expected a loss of 34 cents a share on revenue of $22.9 billion.

“We are pleased with our performance.,” the chief executive, Vikram Pandit, said in a statement. “With revenues of nearly $25 billion and net income of $1.6 billion, we had our best overall quarter since the second quarter of 2007.”

Citigroup also said Friday that its operating expenses fell 23 percent from the first quarter of 2008 and that it had reduced its work force by about 13,000, to 309,000, since the fourth quarter 2008.

Helped by government infusions of capital, the bank’s Tier 1 capital ratio, a measure of financial strength, was approximately 11.8 percent in the first quarter, compared with 7.7 percent a year earlier.

Just three short months ago, many of the biggest American banks were on life support.

Now, several showing glimpses of a recovery, aided by a tentative improvement in some corners of the economy and new business picked up from rivals that stumbled in the wake of the financial crisis.

On Thursday, JPMorgan Chase became the latest bank, after Goldman Sachs and Wells Fargo, to announce blockbuster profits in the first quarter.

JPMorgan Chase reported a $2.1 billion profit in the first quarter, beating analysts’ average forecasts. Revenue increased to $25 billion, up 45 percent from $16.9 billion in the period last year.

Banks are enjoying a fresh wave of profits from the government’s efforts to nurse the industry back to life.

Ultralow interest rates have led flocks of consumers to seek deals on mortgage loans. Investment banking and trading activities are enjoying a bounce from the billions of dollars spent to thaw frozen credit markets.

And even before the results of a new health test for the nation’s 19 largest banks are unveiled, those who can flaunt an improvement from their dismal recent performance are quickly trying to free themselves from government money.

On Tuesday, Goldman Sachs raised $5 billion of fresh capital in anticipation of repaying the government’s investment.

James Dimon, JPMorgan’s chairman and chief executive, was adamant on Thursday that his company would pay back $25 billion as soon as regulators allowed.

The reports fed a rally in financial stocks that began more than five weeks ago, when Citigroup and Bank of America, two of the banks hit hardest by the crisis, suggested the worst might already be over.

Shares in Citigroup closed in New York at $4.01 on Thursday, rallying steadily having fallen below a dollar in early March. Still, for the year to date that leaves them down 40 percent.

The reason for Citigroup’s loss per share was the issuance of preferred stock dividends and a resetting in January of the conversion price of $12.5 billion in convertible preferred stock issued in a year earlier.

This resulted in a reduction to income available to common shareholders of $1.3 billion or 24 cents a share. Without this, the bank said, earnings per share were positive.

The better results were not unexpected by analysts. In a memorandum sent to Citigroup employees last month, Mr. Pandit, the beleaguered chief, said that after more than a year of staggering losses and three rescues from Washington, the giant financial company was once again making money.

Citigroup, he said at the time, was on track for its strongest quarter since late 2007, when wave upon wave of bad loans and trading losses began to crash down on it.

Still, analysts speculated that Citigroup would continue to struggle under the mounting weight of exposure to consumer related loan defaults that are likely to increase as the recession continues and more Americans lose their jobs

“It’s very hard for me to foresee that one quarterly earnings report, or one announcement by Vikram Pandit that they are more profitable than they’ve been since the third quarter of 07, means all past things are forgiven,” Douglas Ciocca, a portfolio manager at Renaissance Financial Corporation in Leawood, Kan., told Bloomberg News. “There has to be demonstration of traction.”

Even the full might of the government does not seem enough to dispel investors’ worries over Citi. Insurance against default costs more than twice as much for Citigroup as it does for Bank of America, its struggling rival and another big aid recipient.

Also, millions of consumers continue to default on their mortgages, home equity and credit card loans. Corporate loan losses are just starting to pile up. And the residential housing crisis is seeping into commercial real estate with a vengeance.

“We are in the eye of the storm,” Gerard Cassidy, a banking analyst at RBC Capital Markets. “The worst is behind us for housing. For commercial real estate and corporate lending, there is still a big dark cloud.”

The findings of official stress test of banks, expected to be released on May 4, may help investors sort out the handful of banks that can generate enough earnings to absorb their losses if the economy worsens.

Their conclusions may bear little resemblance to banks’ first-quarter results because the stress test is taking a forward-looking view of the banks’ conditions over the next two years. Quarterly earnings reports, by their nature, look back.

Eric Dash in New York contributed reporting


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