July 17 (Bloomberg) — Citigroup Inc. posted a $4.28 billion profit, buoyed by gains from selling control of its Smith Barney brokerage and beating analysts’ estimates as the bank shed assets to compensate for loan losses.
Second-quarter earnings were 49 cents a share, compared with a loss of $2.5 billion, or 55 cents, a year earlier, New York-based Citigroup said today in a statement. Excluding the Smith Barney gain of $6.7 billion, Citigroup had an operating loss of about 27 cents a share. That was better than the 33-cent average loss estimate of 12 analysts in a Bloomberg survey.
Consumer and business loan delinquencies kept rising, giving Chief Executive Officer Vikram Pandit little relief from the financial crisis that forced him to take a $45 billion government bailout and unload some of his biggest units. The bank, once the nation’s largest by assets, now ranks third after Bank of America Corp. and JPMorgan Chase & Co.
“This company is going to be shrinking,” said Ed Najarian, an analyst at institutional brokerage International Strategy & Investment Group in New York. “You’ve got to factor that into your analysis of the ability to absorb losses over the next 18 months.”
Smith Barney, now part of a joint venture controlled by former Pandit employer Morgan Stanley, had $10.2 billion of revenue last year, or 19 percent of Citigroup’s total.
The company’s share price is down 95 percent from a December 2006 peak, even after jumping 17 percent this week amid signs the worst of the recession may be over. The stock closed at $3.03 in composite trading on the New York Stock Exchange yesterday and was at $3.09 at 8:41 a.m.
The businesses that Pandit plans to keep, grouped in a division called Citicorp, had a $3.06 billion profit in the quarter, down 11 percent from a year earlier. Stock-trading revenue fell 28 percent to $1.1 billion and private-banking revenue fell 20 percent to $477 million, overwhelming a 26 percent gain in fixed-income trading revenue to $5.57 billion. Debt underwriting climbed 14 percent to $751 million.
Citi Holdings, the division of businesses that Pandit is selling or winding down, including the Smith Barney results, had a $1.36 billion profit, compared with a $5.23 billion loss reported a year earlier. Absent the Smith Barney gain, the division had a $5.36 billion loss.
The bank’s costs for bad loans in the quarter jumped by 75 percent to $12.2 billion. Late credit card loans increased to 3 percent of the total, from 2.1 percent a year earlier.
“Our most significant challenge now remains consumer credit,” Pandit said in the statement. “Losses in our consumer businesses have been growing for some time, but we see some positive signs of moderation in those loss trends.”
Citigroup’s operating loss contrasted with profits posted by its biggest rivals. Charlotte, North Carolina-based Bank of America said today second-quarter profit was $3.22 billion. New York-based JPMorgan yesterday reported second-quarter earnings of $2.7 billion, up 36 percent. On July 14, Goldman Sachs Group Inc., which also has its headquarters in New York, posted a 65 percent increase in profit to $3.44 billion.
Citigroup plans to dilute current shareholders by 76 percent under a plan to convert $33 billion of preferred shares and $25 billion of the government’s bailout stake into common stock. Under that conversion, set to begin as soon as this month, the government would end up with a 34 percent stake.
Pandit, 52, who took over in December 2007 following the ouster of Charles O. “Chuck” Prince, has sold 23 businesses since then and cut jobs from a workforce that had ballooned to 375,000 employees.
The former hedge fund manager and Morgan Stanley investment banker now says he wants to cast off operations outside of branch banking, investment banking and trading to remake Citigroup as a one-of-a-kind financial institution able to serve consumers and multinational corporations in more than 100 countries.
Pandit said in a June 15 speech in Detroit that he expects slow U.S. economic growth in coming years because Americans are saving more and borrowing less. That means Citigroup must use profits from its global banking network, especially in emerging markets, to restore its health, he said.
“As every businessperson knows, the best way to repay debt is to earn your way out of it,” Pandit said.