By David Henry
NEW YORK - Mike Corbat, Citigroup Inc's new
CEO, used his earnings debut to temper investor expectations for a
turnaround at the company, delivering subdued profits and saying the
bank still had a lot left to clean up.
Corbat, who took over as chief executive in October
after the board abruptly ousted Vikram Pandit, promised investors the
third-largest U.S. bank will do a better job for shareholders during his
tenure. But he warned that the environment remained challenging and it
would take time.
Citigroup's fourth-quarter profit missed Wall Street's
expectations by a wide margin, even though earnings were up from a year
earlier as trading revenue rebounded. The bank's shares fell 2.9 percent
for the day.
The bank took $2.32 billion of charges for layoffs and
lawsuits in the fourth quarter. It also declined to release loan loss
reserves just yet, a step which would have boosted profits.
Pandit was still in the job when the fourth quarter
started, and some analysts said that by not releasing reserves Corbat
may have understated financial results.
"It may be that the new CEO is holding back," said Gary
Townsend, president of hedge fund Hill-Townsend Capital LLC. "There's
no reason that the quarter when Pandit left and (Corbat) came in should
be great."
Citigroup declined to comment on whether that was its strategy.
But analysts on the conference call repeatedly
challenged Chief Financial Officer John Gerspach on why the company did
not draw down more of its loan loss reserves, particularly those for
mortgage assets, whose value is being lifted by the stronger housing
market.
Gerspach said that while the housing and mortgage loss
trends are good, the company had first wanted to make sure the U.S.
government got past the so-called "fiscal cliff" threat to the economy
and the damage that might have done to housing.
"What we would like to see now is how the U.S. deals with the ongoing debt ceiling debate," Gerspach said.
He eventually allowed that if the economy proves
resilient to prolonged debates in Washington over government debt,
"maybe that will give us the basis then to make some other decisions."
Such a cautious approach to the reserves may well set
up Corbat to report higher earnings later in his tenure, according to
RBC Capital Markets analyst Gerard Cassidy.
NOT SATISFIED
Corbat said Citi's various businesses were combating
competitive and regulatory problems, as well as issues dating to the
financial crisis that continue to plague the bank.
Citi shares rose in Corbat's first three months as CEO,
outpacing peers, as some investors welcomed Pandit's replacement and
anticipated changes in the bank's structure.
Corbat, however, seemed in no hurry to immediately
deliver on those expectations. He said he was not yet ready to release
new performance benchmarks for investors to judge the ability of his
team to meet their goals.
"We've got to get to a point where we stop destroying
our shareholders' capital," Corbat said. "We are not satisfied with
these bottom-line earnings."
That left some disappointed. "It was a stay-tuned type
of message," said Tom Lewandowski, an analyst at brokerage Edward Jones
who recommends Citi stock.
"I expected to hear more than we got," particularly in the way of goals for company performance, Lewandowski said.
RBC Capital's Cassidy said most investors are still
willing to wait for changes. "Traditionally, six months is a fair amount
of time for new management to get their arms around the situation."
While Citigroup's stock is up more than 40 percent in
the past 12 months, investors still see the company as an enterprise on a
difficult mission to shrink its way to prosperity, Townsend said.
The skepticism shows in the company's stock price.
Citigroup's shares trade for only 0.8 of its tangible book value, or its
net worth. JPMorgan Chase & Co, which on Wednesday announced its
third-consecutive year of record profits, trades for 1.2 times its
tangible book value, while Wells Fargo & Co trades for about 1.6
times.
PROFIT MISSES
On Thursday there was relatively little in the way of
2013 outlook from the bank, though CFO Gerspach did tell analysts that
Citi expects interest margins to be steady in 2013 relative to 2012.
Bank investors have had a close eye on margins lately.
Fourth-quarter net income was $1.2 billion, or 38 cents
a share, compared with $956 million, or 31 cents a share, in the same
quarter of 2011.
Revenue from fixed income markets increased 58 percent,
driving Citi's Securities and Banking segment back to profitability.
Company-wide revenue, adjusted for certain items, increased 8 percent,
while operating expenses were unchanged.
Results were reduced by new legal costs of $1.29
billion, or 27 cents a share, and a previously announced corporate
restructuring charge of $1.03 billion, or 21 cents a share.
Gerspach said $500 million of the new legal costs came
from what he called a variety of issues in the ongoing U.S. consumer
banking business. He later said he expects legal costs to remain
"somewhat elevated."
Expenses recorded for changes in the value of some of
the bank's debt and obligations of derivatives counterparties were 10
cents a share, compared with 1 cent a year earlier.
Excluding the many one-time items, Citi said it earned
69 cents per share. On that basis, analysts polled by Thomson Reuters
I/B/E/S on average expected 96 cents per share.
The operating earnings were 15 cents below the lowest
of the 22 estimates that comprised the consensus forecast. It is the
third year in a row that the bank's fourth-quarter results have missed
Wall Street forecasts by at least 20 percent, according to Thomson
Reuters data.
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