Citigroup beats profit estimates, but shares fall on expense concerns

Citigroup beat estimates with second-quarter profit, driven by a surge in investment banking revenue and growth within its services division.

The stock fell at the open as investors fretted over an uptick in costs and how the lender would boost market share.

The $1.52 a share profit topped the $1.39 analysts had forecast for the firm, according to LSEG data.

Those were strong results, but one analyst from Moody's Ratings said Citi still has some ways to go before it hits its stated profitability goal of 11 per cent-12 per cent, up from the 7.2 per cent return on equity it generated in the second quarter, Warren Kornfeld said.

The bank needs to gain market share and cut costs in areas where it is over-staffed, Kornfeld said:

These results come shortly after US regulators fined Citigroup $136 million for not doing enough to rectify identified data management concerns from 2020.

The bank has already charged off an amount to be used for these fines and further remediation efforts for data management.

Citigroup CEO Jane Fraser is leading through the most sweeping revamp of the bank to improve performance, cut costs, and slim down its operations.

As part of the turnarounds, the bank targets reducing the workforce by 20,000 employees in a minimum period of two years.

Its total revenue for the second quarter came in at $20.1 billion, up 4 per cent year-over-year, boosted by a one-time $400 million gain related to the sale of Visa stock.

Similar to what Fraser has been doing in an attempt to enhance transparency and accountability, Citigroup is now disclosing earnings separately for the following five business segments: services, markets, banking, US personal banking, and wealth management.

Investment banking revenue soared 60 per cent to $853 million in the quarter, which is a long-awaited sign of recovery from the industry dealmaking slump.

Such a surge fed a 38 per cent increase in overall banking revenue to $1.6 billion.

As CFO Mark Mason notes, Citigroup looks forward to continued bounty from the markets, which include a strong debt issuance and probably mergers and acquisitions playing a larger role later in the year.

In 2022, Citigroup appointed industry veteran Viswas Raghavan as the president of its banking operations.

It is Fraser's gamble to know that Raghavan will breathe new life into the unit focused on serving multinationals.

Revenue in the services segment, which includes Citigroup's crown jewel treasury and trade solutions business, increased 3 per cent to $4.7 billion.

The business processes trillions of dollars in payments daily for multinational corporations across the globe.

The strategic importance of this business was highlighted by Fraser recently at an investor day.

Markets revenue increased 6 per cent to $5.1 billion on the back of a massive spike in equities trading revenue.

Though operating expenses dropped 2 per cent to $13.4 billion thanks to the bank's restructuring efforts, these savings were compensated for by fines and connected investments in data remediation.

Citigroup now projects full-year expenses to come in at the high end of its prior forecast range, excluding the regulatory penalties.

It has yet to post any recognisable growth in one of its key growth areas: wealth management.

Revenue was up a bare 2 per cent this quarter. In contrast, the US personal banking division of the group generated a 6 per cent revenue increase to $4.9 billion, driven by branded card growth.

Analysts have billed 2024 as a bridge year for Citigroup as Fraser implements her turnaround plan. Investors have cheered on those efforts, sending the bank's stock 28 per cent higher so far this year, dramatically outperforming rivals.

Those regulatory headaches remain a reason investors are still approaching Citigroup with caution, even as the market cheers on its overhaul: Regulators recently dubbed the bank's plan for winding down in bankruptcy "deficient."

(With inputs from Reuters)