Citigroup shares surge after profit beats expectations

Trading has emerged as a bright spot for Wall Street banks this quarter as clients look to rebalance their portfolios in the face of geopolitical tension, surging inflation and fears that aggressive Federal Reserve policy tightening could plunge the economy into a recession. The bank's profit fell to $4.5 billion, or $2.19 a share, in the quarter ended June 30, from $6.2 billion, or $2.85 a share, a year earlier.

Citigroup Inc shares surged on Friday after the third-largest U.S. bank posted a smaller-than-expected 27% drop in quarterly profit on usual strength in its treasury services business and its trading desks cashed in on market volatility, cushioning a slump in investment banking. Citi shares rose more than 10% in mid-morning trading in New York.

Revenue at the markets business jumped by a quarter to $5.3 billion, thanks to volatility in the commodities and foreign exchange markets -- a particularly strong segment for the bank. Trading has emerged as a bright spot for Wall Street banks this quarter as clients look to rebalance their portfolios in the face of geopolitical tension, surging inflation and fears that aggressive Federal Reserve policy tightening could plunge the economy into a recession.

The bank's profit fell to $4.5 billion, or $2.19 a share, in the quarter ended June 30, from $6.2 billion, or $2.85 a share, a year earlier. Excluding items, Citi earned $2.30 per share, according to Refinitiv calculations, beating the average analyst estimate of $1.68 per share.

The profit drop also reflected a $375 million increase in reserves for potentially sour loss loans as the economic outlook darkens. A year earlier, exceptional government stimulus and the economy's recovery from the pandemic had allowed it to release $2.4 billion of reserves. That pushed up credit costs to $1.3 billion, a sharp contrast to the $1.07 billion benefit a year earlier.

Aside from the reserve build, the stronger-than-expected results "seem driven by core operating fundamentals," analyst Chris Kotowski of Oppenheimer said in a note. The Treasury and Trade Solutions (TTS) business - Citi's crown jewel - posted a 33% jump in revenue to $3 billion on the back of higher net interest income and fee growth.

The performance of TTS was "the best in a decade," Citigroup said. "This business line was firing on all cylinders," said David Wagner, a portfolio manager at Aptus Capital Advisors.

Revenue at TTS, which handles international business payments and cash management, surged on a 42% increase in net interest income from higher rates and deposits, as well as a 17% rise in fees, Citi said. Citigroup, however, will suspend share buybacks in the face of threats to the economy and the need to build up a key regulatory capital ratio, which is increasing, Chief Financial Officer Mark Mason told reporters.

The buyback pause confirmed expectations of analysts and followed a similar move by JPMorgan Chase & Co on Thursday. For Citi, stopping buybacks carries unusual pain because its shares have been trading for about half of the company's net worth as shown on its balance sheet - far cheaper than other big banks.

Investment banking revenue fell 46% to $805 million as the volatility in markets dried up underwriting and advisory fees for investment bankers who drove Wall Street's profit during the depths of COVID-19. The bank, which disclosed an exposure of $8.4 billion to Russia as of the second quarter, said it was mulling options to exit its consumer and commercial banking business in the country.

Major U.S. banks and securities firms are intent on exiting their Russia businesses as they work to comply with U.S. sanctions imposed after the invasion of Ukraine.