Citigroup announced slightly lower revenues for the first few months of the year on Monday as the bank worked to shed its “too-big-to-fail” image and convince federal regulators it remains among the strongest banks in the US.
Citigroup said it collected revenue of $20.1bn between January and March, a small drop compared to the same time a year ago. CEO Michael Corbat called it a “difficult quarter”. Still, that translated to modestly higher profit of $4.1bn, a 4% improvement on last year. Citigroup created the boost, in part, by taking $673m it had previously set aside to cover the costs of bad loans, and counting that money as profit.
While Citigroup’s revenues were reasonably consistent with last year, they did not assuage the concerns of analysts who wondered why the bank has made no progress in passing the Federal Reserve’s “stress tests,” which are designed to predict the strength of US banks in a financial crisis.
Citigroup had hoped to pay dividends of $6.4bn to shareholders, but regulators thwarted the bank last month. The Federal Reserve has ruled, in two of the past three years, that Citigroup is not strong enough to return money to shareholders and still remain strong enough to withstand another financial crisis.
Citigroup’s failure is not due to a lack of trying. Chief financial officer John Gerspach said Citi has devoted 2,000 staffers – an enormous number – to the stress tests. About 500 of those employees spend 50% of their time working on the tests, he said, and the 1,500 others have some form of involvement.
Several analysts quizzed executives about the failure during the company’s 101-minute conference call about earnings, taking Corbat to task.
“For shareholders, it’s been two lost decades,” said Mike Mayo, an outspoken analyst with CLSA who has previously criticized Citigroup.
Mayo asked Corbat who would be accountable for the bank’s inability to pass the stress tests.
“I am,” Corbat replied. “It is something for which I am sure the board will hold me accountable when they reflect upon the year. I am accountable for it and I am accountable for fixing it.”
Mayo pressed on: “Is the Fed denial a wake-up call for Citi, or not?”
“This obviously came as a disappointment,” Corbat said. “We are not sitting here without a sense of urgency, and if anybody feels that way, they should not feel that way.”
Corbat only released one detail, when asked, in effect, whether Citigroup should “simplify” – with the implication being that the bank is still too big to fail and should be broken up.
“The conversations [with the Fed] have not been about the business model or the strategy,” Corbat said.
Citigroup executives frequently talked about the bank’s relationship with the Federal Reserve as if they were in counseling.
"We've started to get a much better understanding of their concerns,” Gerspach told journalists about the bank’s relationship with federal regulators today. He also advised reporters today not to focus on the past.
“We’re focused on the process,” Corbat said. “We’ve got several months of work to do here and we’ve got a lot to deliver in terms of earnings and quality of earnings.”
Regulators, in particular the Federal Reserve, remember all too clearly that Citigroup required nearly $350bn in accumulated taxpayer support during the financial crisis, including a $20bn emergency infusion, a $25bn direct investment, and $300bn in backing for Citi’s troubled assets. They have been careful not to let Citigroup – or other banks – get ahead of themselves.
The bank recently cut 200-300 jobs, according to a report in the Wall Street Journal, and its headcount hovered around 251,000 employees at the end of the year compared to 323,000 at the end of 2008.
Citigroup’s results were mixed in different businesses this quarter.
The traditional Wall Street business of markets dropped overall by 12% compared to a year ago. Bond trading, the biggest part of Citigroup’s markets business, weakened by 18%, bringing it to $3.85 billion; the bank attributed the drop to global “uncertainty.” Equity trading, or the stock business, accounted for a smaller portion of Citigroup’s profits but grew 13% to $883 million.
Citigroup saw strength in other businesses, however, particularly those affecting Main Street. The bank grew deposits by 3% to $988 billion, showing that consumers are keeping more money with Citigroup. Citicorp, which lends money to corporations and businesses, grew its loans by 7% to $575 billion.
Citi Holdings, the part of the bank that presides over bad loans, mostly those held over from the mortgage crisis, decreased its credit losses by 44%, or $411m, compared to last year. That means that the division narrowed its loss to $284m in the first quarter, compared to $804m the year before.
Still, the mortgage business does not appear to be improving much. Revenues in the bank’s retail business fell by nearly one-quarter due to fewer homeowners eager to refinance.
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