Citigroup profit beats estimates on investment banking surge

By Tatiana Bautzer and Manya Saini

(Reuters) -Citigroup posted a smaller-than-expected drop in profit for the third quarter thanks to gains in investment banking, particularly in debt underwriting.

The third-largest U.S. lender's dealmakers joined rivals at JPMorgan Chase and Wells Fargo in benefiting from a rebound in capital markets as corporate clients issued more debt and equity.

Investment banking was a bright spot for the second straight quarter, as revenue jumped 31% to $934 million. Wall Street executives are optimistic that the Federal Reserve's interest-rate cut last month will pave the way for more deals and initial public offerings.

"You've heard me talk for a number of quarters about the pipeline and announced deal volume being strong," Chief Financial Officer Mark Mason said in a call with reporters.

The bank has "always been strong in debt capital markets" and continues to benefit from investment grade issuance as clients look to get back into the market, he said.

Citi's total operating expenses declined 2% in the third quarter.

The bank increased its total allowance for potential credit losses by about $1.9 billion, driving down net income to $3.2 billion, or $1.51 per share, from $3.5 billion, or $1.63 per share, a year earlier.

It still handily beat analysts' average expectations of $1.31 per share, according to estimates compiled by LSEG.

Lower-income consumers are facing pressures, and middle-income consumers are being more selective with their spending, Mason said. The highest-earning consumers are driving most of the spending growth, focused on experiences and essentials, he added.

"The consumer in our portfolio is really continuing to perform as expected, and they've returned, frankly, to familiar, seasonal patterns," Mason said.

Citi shares were last down 1.5% in morning trading, after rising as much as 2% before the bell.

Services revenue climbed 8% to $5 billion, fueled by a 24% surge in revenue for securities services to $1.4 billion.

A stock-market rally at the end of the quarter propelled equities trading revenue up 32% to $1.2 billion, lifting overall markets revenue 1%.

But bond trading revenue lagged, falling 6% to $3.6 billion.

In the U.S. retail banking division, revenue climbed 3% to $5 billion, buoyed by 8% growth in credit card revenue to $2.7 billion.

Meanwhile, retail banking revenues fell 8%, and in the retail services arm handling credit card partnerships, revenue slipped 1%.

In the retail services unit that houses credit card partnerships, "it's really about, how do we improve the returns, repricing and in some instances, exiting those partnerships", Mason said. He cited good returns on a credit card launched this year with retailer Dillard's, and said the bank was looking carefully at return levels when it renews card agreements.

Its wealth management division, a key part of Fraser's growth strategy, posted revenue growth of 9% in the quarter to $2 billion.

On Friday, Bank of America's profit in the third quarter fell on the back of lower interest income. Earnings at rival JPMorgan Chase and Wells Fargo beat estimates last week, underpinned by strong consumer finances.

REGULATORY EFFORTS

CEO Jane Fraser has sought to grow profits, simplify the company and fix its longstanding regulatory problems.

In 2020, the Office of the Comptroller of the Currency and the Federal Reserve fined Citi $400 million and ordered the bank to fix persistent risk management and data governance failures.

"We are still hiring, particularly in areas around transformation and around risk and controls to ensure we've got the appropriate level of resources to get after those things the way we need to," Mason said.

Earlier on Tuesday, Reuters reported that Citi has struggled to adequately train employees in risk, compliance and data roles, citing the bank's own assessment, shedding light on why it was taking years to fix regulatory issues even as billions are spent on an overhaul.

The regulators again fined Citi in July for failing to make enough headway on those problems. It got some relief when the Federal Reserve terminated a 2013 enforcement action on the bank's anti-money laundering programs earlier this month.

"In a pivotal year, this quarter contains multiple proof points that we are moving in the right direction and that our strategy is gaining traction," Fraser said in a statement.

The bank has tasked technology head Tim Ryan to work alongside Chief Operating Officer Anand Selva in fixing the bank's longstanding data management issues. The bank has also added a section to quarterly filings to address its work on its consent orders, or regulatory penalties.

Citi shares have gained 28% so far this year, while an index tracking large-cap banks is up 25% and the S&P 500 index has climbed 23% over the same period.

(Reporting by Tatiana Bautzer in New York and Manya Saini in Bengaluru, editing by Lananh Nguyen and Devika Syamnath)