(Bloomberg) -- Citigroup Inc. posted a surprise jump in first-quarter profit after its fixed-income traders delivered a windfall large enough to cover the rising cost of the bank’s souring loans.

Revenue from fixed-income, currencies and commodities trading unexpectedly rose 4% to $4.5 billion in the first quarter, as clients reacted to changing interest rates, the bank said. That helped defy analyst predictions of a drop in profits.

Investors have been watching for signs of stress in US banking as rising interest rates boost funding costs, erode the value of balance-sheet assets and threaten to slow the economy, potentially hampering the ability of borrowers to repay debts. At Citigroup, provisions for loan losses more than doubled to $2 billion, the highest since 2020, while deposits were unchanged at $1.33 trillion.

Still, the rate moves that toppled some regional US banks last month also provided opportunities for Wall Street traders.

“Citi delivered strong operating performance, showing good revenue growth and expense discipline despite the tumultuous environment for banks,” Chief Executive Officer Jane Fraser said in a statement. The firm’s fixed-income traders chalked their third-best performance in a decade, she said.

Citigroup shares jumped 4.4% to $49.38 at 9:59 a.m. in New York. The shares had risen 4.6% through the close of trading Thursday, compared with the 5% decline for the S&P 500 Financials Index. 

Steadier Revenue

Net income rose 7% in the quarter to $4.6 billion. On an adjusted basis, per-share profits amounted to $1.86, compared with the $1.65 estimated by analysts in a Bloomberg survey.

Under Fraser, Citigroup has focused on expanding businesses handling cash and investments for companies and financial firms — seen as a steadier source of revenue than more volatile businesses such as trading and investment banking.

The firm’s treasury unit, led by Shahmir Khaliq, boosted revenue 31% to $3.4 billion from a year earlier. The business, which offers cash management and other services to some of the world’s largest companies, saw deposits and fee income grow. Securities services, which offers custody and other back-office functions to asset managers, banks and broker-dealers, increased revenue 23% to $1.1 billion.

The firm’s consumer division also posted better-than-expected revenue of $6.4 billion. That included a $2.5 billion haul from its branded cards business, where an increase in both spending and borrowing boosted results. Revenue from retail banking rose 3%, with Citigroup pointing to better results in mortgages and installment lending.

Still, the higher-than-expected provisions included a 49% increase in net credit losses as the firm saw the ratio of credit card loans going bad soar. While the company expected losses to return to more normal levels, Citigroup has begun to tighten underwriting standards, Chief Financial Officer Mark Mason warned on a conference call with journalists. 

“We have tightened credit standards specifically as a result of the current market environment,” Mason said. “In cards, we continue to calibrate our credit underwriting based on what we’re seeing with macroeconomic trends and the underlying performance.”

The firm is also closely monitoring its exposure to US regional banks, commercial real estate and leveraged lending, he added.

Silent on Banamex

Citigroup’s so-called legacy franchises division, where it houses units tagged for disposal, saw revenue jump 48% to $2.9 billion. Results included a gain from the sale of consumer businesses in India and Vietnam.

The company’s announcement didn’t provide an update on the push to exit Banamex, a unit focusing on consumer, small-business and middle-market banking in Mexico. That process, which Citigroup has said could take the form of a sale or an initial public offering, has hindered efforts to restart share buybacks in recent quarters.

“We closed the sale of two consumer franchises, which contributed to our healthy pace of capital generation,” Fraser said in the statement. “We are committed to increasing the amount of excess capital we return over time.”

--With assistance from Dan Reichl.

(Updates shares in sixth paragraph, provision data starting in 11th.)

©2023 Bloomberg L.P.