Corbat’s Citi takes a step backward

October 15, 2013

By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Mike Corbat’s Citigroup has taken a step backward. The mega-bank’s chief executive ends his first year in charge with third-quarter earnings below estimates and a meager 6.4 percent return on equity. Granted, markets over the summer were hardly amenable. But the breaks Citi got elsewhere make the bank’s overall performance look that much worse.

First of all, Citi Holdings is no longer a major drag on earnings. The unit, which houses the bank’s toxic and unwanted assets, lost just $104 million in the three months through September. That compares with $3.5 billion in the same period last year and $500 million in this year’s second quarter.

Meanwhile, expenses are falling, thanks to Corbat’s move early on to speed up previous boss Vikram Pandit’s cost-cutting plans. At almost $11.7 billion, running Citigroup is now some $570 million cheaper than it was in each of the first two quarters of this year.

Then factor in the effect of a much lower tax rate this time round. Citi had to hand over just 25 percent to various governments around the world, compared with 28.5 percent in the first quarter and 33.7 percent in the three months to June. That boosted the bottom line by as much as $400 million.

Some deterioration in the core businesses was to be expected, considering the spike in interest rates earlier in the summer and dashed expectations that the Federal Reserve would trim the amount of securities it purchases. So a fall in both the mortgage-lending and fixed-income trading businesses should be no surprise.

The sharp decline in the latter, though, looks a tad worrying. The 26 percent drop from the same period last year is way more than the 8 percent JPMorgan reported last week. If that ends up being the worst among Citi’s peers, it’ll suggest the bank is not on as strong a path as first-half results implied – though equities trading was up a solid 36 percent. Corbat needs to demonstrate that the overall disappointing third-quarter showing is a one-off.

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