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Citi profit disappoints as bond trading revenue drops

The Citibank logo is seen at branch in Washington April 18, 2011. REUTERS/Larry Downing
The Citibank logo is seen at branch in Washington April 18, 2011. REUTERS/Larry Downing

By David Henry and Tanya Agrawal

(Reuters) - Citigroup Inc posted weaker-than-expected quarterly results on Thursday, as lackluster bond-trading results weighed on overall revenue.

The third-largest U.S. bank said its fixed-income revenue fell 15 percent to $2.33 billion in the fourth quarter from the same quarter last year, in what it called a "challenging trading environment." The bond trading results lagged rivals' including Bank of America Corp and JPMorgan Chase & Co.

The bank still posted rising profit, helped by cost-cutting, but the size of the decline in bond trading revenue surprised many analysts. Much of the drop came from falling client activity in corporate bonds and secured debt, said Jon Gerspach, chief financial officer, on a conference call with reporters. Rising bond yields have cut into demand for issuing and trading corporate debt.

"We just saw a fall-off in client volumes," Gerspach said. When asked if there was any explanation, he responded, "No, it's just what we saw."

Citigroup's fourth-quarter adjusted net income rose to $2.60 billion, or 82 cents per share, from $2.15 billion, or 69 cents per share, a year earlier, the bank said. The adjusted results strip out items including costs associated with layoffs and restructuring, and accounting adjustments linked to changes in the value of the company's debt.

Analysts on average expected earnings of 95 cents per share, according to Thomson Reuters I/B/E/S. The average estimate came down 10 cents in the last two weeks, partly in expectation of weak fixed-income market revenue.

"Although we didn't finish the year as strongly as we would have liked, we made substantial progress toward our key priorities in 2013," Chief Executive Michael Corbat said in a statement.

The results reflect the difficulties that Corbat faces as he tries to turn around the third largest U.S. bank. He took the reins of the bank in October 2012, after directors pushed out Vikram Pandit, and has been trying to lower costs while boosting revenue.

Corbat has had more luck with costs than revenue. Operating expenses fell 13 percent to $11.93 billion during the quarter, while revenue fell 1 percent to $17.78 billion.

Citigroup's operating expenses in the quarter included $809 million in legal and related expenses, down from $1.3 billion a year earlier, as the bank worked to leave behind legal troubles that stemmed mainly from the mortgage crisis.

But its legal troubles might not be over. A source told Reuters on Wednesday that U.S. regulators sent investigators to its London headquarters as part of an international investigation into alleged manipulation of the global currency market.

Citigroup drew down loan loss reserves by $670 million, compared with $91 million a year earlier.

Unadjusted net income rose to $2.69 billion, or 85 cents per share, from $1.20 billion, or 38 cents per share, a year earlier.

Citigroup shares were down 3.6 percent at $52.99 on the New York Stock Exchange on Thursday morning. The stock rose 32 percent in 2013, slightly less than the 35 percent rise of the KBW Bank Index <.BKX>.

SHEDDING BAD ASSETS

Citigroup said late on Wednesday that it is selling mortgage servicing rights of $10.3 billion Fannie Mae residential first mortgage loans as it looks to reduce assets and expenses within its Citi Holdings division.

Citi Holdings houses the portfolio of troubled mortgage assets the bank is winding down after they led to huge losses since the financial crisis.

Citi Holdings' assets, which totaled $117 billion, or about 6 percent of the company's total assets at the end of December, have long been a drag on the company, tying up capital and generating losses. They once accounted for about 40 percent of total assets. Assets in Citi Holdings fell 4 percent from the third quarter to the fourth quarter.

While Corbat has said that dealing with Citi Holdings is a priority, he has warned that there is no practical way to quickly get rid of the rest of those troubled assets.

Citigroup's global consumer banking revenue fell 5 percent to $9.47 billion.

(Reporting by David Henry in New York and Tanya Agrawal in Bangalore. Additional reporting by Peter Rudegeair in New York.; Editing by Saumyadeb Chakrabarty, Joyjeet Das and Rosalind Russell)

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