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Apr 14, 2022

Citi's trading results top estimates on frenzied March markets

U.S. bank earnings benefit from market volatility

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Citigroup Inc. delivered-better-than expected trading results amid volatility sparked by Russia’s invasion of Ukraine -- even as the same turmoil crimped the bank’s profits by nearly US$2 billion.

Revenue from trading stocks and fixed-income products slipped just 1.8 per cent to US$5.83 billion in the first quarter, an even smaller drop than Citigroup forecast just weeks ago as Russian President Vladimir Putin’s invasion rattled markets. The trading haul, helped by a 173 per cent increase in commodities-trading revenue, also topped the US$5.09 billion average of analyst estimates compiled by Bloomberg.

“When you think about the inflationary pressures, the supply-chain disruptions, the political tensions, those things led to increased volatility and really a conducive environment for market-making, and we took advantage of that,” Chief Financial Officer Mark Mason said on a conference call with journalists. 

Still, Citigroup’s stronger trading performance came as the bank was forced to set aside US$1.9 billion in reserves to cover souring loans tied to both its direct Russia exposure and industries that might be impacted from the war in Ukraine. That move -- combined with soaring expenses -- caused firmwide profits to slump 46 per cent to US$4.31 billion, according to a statement Thursday.

With more than 3,000 employees in the country, Citigroup had the biggest presence in Russia of any U.S. bank. Chief Executive Officer Jane Fraser announced last year that the company would seek to dispose of its retail-banking operations in the country, and has since vowed to also withdraw from its commercial-banking business in Russia following the invasion.

The bank whittled down its Russian exposure to US$7.8 billion at the end of March, compared with US$9.8 billion at the end of last year. Citigroup could now face US$2.5 billion to US$3 billion in losses tied to its holdings, less than the US$4.9 billion loss Mason warned last month could result from a severe stress scenario.

Citigroup is continuing to pay its employees in both Russia and Ukraine, Mason said. 

In all, New York-based Citigroup has been seeking to exit retail-banking operations in 14 countries around the world as part of its efforts to focus on wealth management and its U.S. credit-card business. As a result, the firm reorganized its divisions and created a new legacy franchises unit, which houses all the businesses Citigroup has tagged for disposal.

Revenue from the firm’s newly created personal-banking and wealth-management business dipped 1 per cent, despite a jump in spending on credit cards and an uptick in those customers’ borrowing. Net credit losses in the division dropped 30 per cent.

“We continue to see the health and resilience of the U.S. consumer through our cost of credit and their payment rates,” Fraser said in the statement. “We like where this business is headed.”

Shares of Citigroup rose 2 per cent to US$51.13 at 10:13 a.m. in New York. They’ve declined 15 per cent this year, more than the 11 per cent drop in the KBW Bank Index.

Citigroup’s revenue from trading products linked to rates and currencies jumped 7 per cent to US$3.23 billion in the first three months of the year. That helped counter a 19 per cent drop in revenue from trading spread products and other fixed-income instruments. 

“Obviously the Russia-Ukraine war drove significant volume in FX markets and some dislocations there,” Mason said. “We were able to take advantage of that and we were well-positioned to do so.”


RESERVES, EXPENSES

Citigroup joined rivals JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc. in bringing in better-than-expected trading revenue. Citigroup’s effort to beef up reserves follows a similar step by JPMorgan, which set aside US$902 million in reserves tied to Russia-associated exposure, the war in Ukraine and the probability of downside risks due to high inflation.

JPMorgan also outlined a US$524 million loss driven by “funding spread widening” and valuation adjustments for commodities as well as derivatives linked to Russia, it said in announcing first-quarter results Wednesday.

Citigroup’s firmwide expenses jumped 15 per cent to US$13.2 billion in the first three months of the year, including costs tied to the company’s retail-bank divestitures. The firm has also been investing in its underlying infrastructure to modernize its technology and satisfy a pair of consent orders regulators saddled it with in 2020.

“While we are making necessary investments in our infrastructure, risk and controls and our businesses, we remain committed to improving our returns,” Fraser said.