Citigroup beats earnings estimates as rate hikes bolster lending business


Oct 14 (Reuters) – Citigroup Inc (CN) beat third-quarter profit estimates on Friday as its lending business benefited from a series of interest rate hikes by the Federal Reserve and offset weakness elsewhere divisions such as investment banking and trading.

After facing years of near-zero interest rates, banks are seeing a sharp rise in net interest income on the back of higher policy rates as the Fed tightens monetary policy to stamp out high inflation for the past decades.

The central bank’s aggressive stance, however, raised fears of a slowing economy which in turn paralyzed investment banking activity, rattled financial markets and prompted businesses and households to put investment plans on hold. loan.

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“I don’t think there’s a financial crisis coming…from anything close to the magnitude of what we’ve seen,” Chief Financial Officer Mark Mason said on a media call.

“We’re prepared for whatever the environment looks like and we’re constantly running scenarios to make sure we’re ready for it.”

Net interest income, or the difference banks can charge between the cost of borrowing funds and lending them, rose 18% to $12.6 billion for the quarter versus the year former.

Investment banking revenue, however, fell 64% to $631 million from a year earlier, when Citi had its best M&A quarter and second-best investment banking quarter in a row. decade.

Revenue for the markets division, which houses the fixed income and equity trading units, also fell 24% for the quarter.

“Citi’s decline in trading revenue was worse than that of other banks, but we believe this is primarily attributable to its business mix in trading, rather than a loss of market share,” said Jason Benowitz, senior portfolio manager at Roosevelt Investments.

Excluding items, Citi reported earnings of $1.5 per share, beating analysts’ estimate of $1.42 per share. Its revenue increased 6% to $18.5 billion.

Citi, while not a big player in the leveraged finance market, suffered a $110 million writedown in the third quarter as rising interest rates made it harder for it to offload high-risk debt to investors and other lenders. Read more

The deteriorating economic situation also led the bank to add $370 million to its loan loss reserves in the last quarter, compared with a release of $1.16 billion a year earlier.

The increase in reserves pushed Citi’s overall borrowing costs to $1.36 billion, the highest in eight quarters since the third quarter of 2020.

The bank disclosed exposure to Russia of $7.9 billion, down $500 million from the second quarter, and said it also plans to cut nearly all institutional banking.

Under chief executive Jane Fraser, the bank has exited major overseas markets as it struggles to keep pace with larger rivals in share valuation and profitability while working on its controls on risks.

Citi will likely take “3 to 5 years to reach more ‘normalized’ measures of profitability,” said Eric Compton, equity strategist at Morningstar.

Shares of the bank rose 2% to $43.78 by late morning trading.

Citigroup is the most undervalued banking stock among major US banks Citigroup is the most undervalued banking stock among major US banks

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Reporting by Mehnaz Yasmin in Bengaluru and Saeed Azhar in New York; Editing by Anil D’Silva

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