Summary
- Citi adds $1.9 bln of reserves for the Ukraine crisis
- Investment banking revenue slumps on SPAC slowdown
- Bank returns $4 bln to shareholders
- Shares gain 1.4%
While reporting a near halving of its first-quarter profit, Citigroup Inc (C.N) said on April 14 that it could lose as much as $3 billion from its Russia exposures, $2 billion less than previously forecast.
The bank said it would now lose no more than $3 billion in a severely adverse scenario, down from the nearly $5 billion estimated last month, having reduced its total disclosure to Russia since December by $2 billion to $7.8 billion.
As Citi – the most global of the U.S. banks – prepared for losses from the economic impact of the Ukraine war and direct exposures in Russia by adding $1.9 billion to its reserves in the quarter, the disclosure came up.
That propelled credit costs to $755 million, a contrast with the $2.1 billion benefit a year ago when it released loss reserves built during the COVID-19 pandemic.
The turn was a principal factor in steering net income down 46% from a year earlier. Nevertheless, the resulting earnings per share of $2.02 per share topped the $1.55 estimate from analysts who had feared for worse.
Shares of Citi climbed on the report and were up 1.4% in afternoon trading. Patrick Kaser, a portfolio manager at Brandywine Global Investment Management and a long-term investor in the bank said he was pleasantly surprised by this announcement. He added:
“This was in line with our hopes for what we would see.”
The minimized Russia exposure was a bonus. Kaser said:
“They appear to have navigated and managed down their risk.”
Revenue dropped to $19.2 billion, or 2%, less than some analysts had predicted.
Seeing that last year’s rush of deals involving blank-check companies tapered off, dwindling underwriting fees, a slump in investment banking revenue by 43% was a key factor. A 78% fall was seen in equity underwriting revenue.
Due to higher net interest income and fee growth, revenue from Treasury and Trade Solutions – Citi’s crown jewel business – rose 18%.
In the results announcement, Chief Executive Officer Jane Fraser said:
“While the geopolitical and macro environment has become more volatile, we are executing the strategy we announced at our recent Investor Day.”
Fraser later told analysts that when she had what she called “a brief encounter with COVID”, she had personally felt the added challenge of the pandemic.
Fraser is steering an overhaul restructuring of Citi, which has to execute orders from U.S. banking regulators to fix its risk and compliance systems and lags behind the financial performance of peers.
With expenses rising 10% in the quarter excluding those for divestitures of the Asia consumer business, her push has, nonetheless, driven up costs.
BUYBACKS
Citi has been using excess capital to mainly buy back its shares from the market. Its stock trades at a discount to its net worth, unlike other big banks, making buybacks attractive. In the last quarter, the bank gave back $4 billion to shareholders, including $1 billion in dividends, and its share count was 6% lower than a year earlier.
After the bank posted results, Chief Financial Officer Mark Mason told reporters that in the second quarter Citigroup expects to do a “modest” level of buybacks that would be less than the $3 billion in the first quarter.
Just as unrealized losses on securities as a result of the recent rise in interest rates hurt Citi’s capital account, the first quarter repurchases came in.
Compared with 12.2% in December, its Common Equity Tier 1 capital ratio fell to 11.4%. Since earnings add to its capital, Mason said the bank expects to have the ratio back up to 12% by year-end.
Mason also told analysts that for Citi to meet that goal it needs around $7 billion and as it closes previously announced sales of consumer banking businesses in Asia, it expects almost $4 billion to come.
On April 13, JPMorgan Chase & Co (JPM.N) reported a similar, but worse, capital ratio decline, heightening concerns among investors that bank buybacks would be regulated this year. Citigroup expects the sales of its consumer businesses outside of the United States will be a source of additional capital.
Fraser told analysts that the bank is noticing “significant interest” from potential buyers of its Citibanamex franchise in Mexico. She said it could still take “a few quarters” to sell the asset.
