Citigroup beats estimates, vows turnaround

Citigroup Inc. finally had some good news as earnings beat analysts’ expectations for the quarter. But reporters had many different takes on the overall story.

Michael Corkery had this story for the New York Times:

Investors and analysts feared the worst from Citigroup, the global bank that has been besieged for months by regulatory problems and an industrywide trading slump.

But Citigroup managed to beat Wall Street expectations on Monday, with a 4 percent increase in first-quarter profits, compared with a year earlier.

The positive results come after a string of recent stumbles, including Citigroup’s failure to pass the Federal Reserve’s stress test and a costly fraud in its Mexican unit that has spawnedmultiple criminal investigations and broader questions about whether the bank is too large to manage effectively.

“We came into this worrying everything else was going to get worse,” said Moshe Orenbuch, a banking analyst at Credit Suisse. “It was not the case.”

Citigroup’s surprisingly good profit drove its shares up 4.4 percent, as investors expressed relief that the results were not as bad as expected.

Still, the results reflected little broad improvement in the bank’s ability to expand its fundamental businesses.

The Wall Street Journal story by Christina Rexrode and Saabira Chaudhuri focused on CEO Michael Corbet’s promise to deal with the bank’s the regulatory issues:

Citigroup Inc. Chief Executive Michael Corbat vowed to find an “industrial-strength” solution to the regulatory problems dogging the bank

Speaking after Citigroup reported better-than-expected first-quarter earnings Monday, Mr. Corbat faced more than a dozen questions from analysts on the bank’s recent failure to win regulatory approval to return capital to shareholders.

“Is the Fed denial a wake-up call for Citi or not?” CLSA analyst Michael Mayo asked. “We’re wide awake,” Mr. Corbat replied after declaring earlier, “I want, and I know shareholders deserve, an industrial-strength, permanent solution that paves the way for sustainable capital return over time.”

Mr. Mayo has a “buy” rating on Citigroup.

The nearly two-hour analyst call, coming less than three weeks after the Federal Reserve rejected the bank’s capital plan last month, was dominated by questions over the so-called stress tests.

By contrast, the third-largest U.S. lender by assets fielded only two questions on mortgage lending and one on fixed-income trading, two of the most pressing concerns on Wall Street.

While Corbat might have faced his toughest questions about regulation, Reuters reporter David Henry decided to lead with expense cutting, another focus for the bank:

At a meeting with 300 senior Citigroup officials in the first week of February, Chief Executive Michael Corbat said the bank needed to focus on two things above all else this year: expenses and efficiency.

The bank’s first quarter results on Monday showed just how much work Citigroup executives have ahead of them in those areas.

In Citigroup’s main businesses, revenue fell 3.5 percent in the quarter while operating expenses eased only 1.5 percent compared with a year earlier, the bank said. It still needs to cut another 3.5 percent, or $1.5 billion, from its annual operating expenses to meet its own 2015 targets for efficiency, according to Reuters calculations.

The company’s expenses are too high given its weak revenues, said Gary Townsend, a longtime bank stock investor who owns Citigroup shares and formerly ran Hill-Townsend Capital.

High costs have bedeviled Citigroup for a decade. For years, the bank’s problems were mainly linked to its failure to fully integrate businesses built up over years of acquisitions.

That integration is mostly done. But now the bank, like other major American banks, is struggling to cut costs as it seeks to cope with the expense of complying with a welter of new laws and regulations following the financial crisis.

Executives at Citigroup, which had to be rescued by the U.S. government three times during that crisis, in the past 18 months have already eliminated $2.8 billion from the company’s overall annual expense base through layoffs and assorted reorganization and productivity steps, Chief Financial Officer John Gerspach said on a conference call with analysts. A big chunk of that stems from the company’s December 2012 announcement that it was eliminating more than 11,000 jobs.

Dakin Campbell wrote for Bloomberg that Corbat was taking responsibility for the company’s shortcomings in the stress test:

The bank will focus on preparing for the 2015 stress test rather than requesting additional buybacks or dividend increases this year, Corbat said today on a conference call with analysts.

The stress-test rejection means “it’s hard to imagine” a scenario in which the company can meet its 2015 goal of reaching a 10 percent return on tangible common equity, Chief Financial Officer John Gerspach said today on a conference call with journalists.

Corbat said his conversations with regulators lead him to conclude they aren’t opposed to the bank’s business model or strategy. The CEO said he expects the board to hold him responsible for the stress-test failure.

“I’m accountable,” Corbat said on the call. “It is something I’m sure the board will hold me accountable for in 2014 when they reflect upon the year.”

I’m sure the board will hold him accountable and likely so will investors. Citigroup has had a tough time since the financial crisis and its latest regulatory problems. Maybe Corbat can turn it around and maybe not, but the profit is a good start.