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Citi gets Q3 boost from global consumer, investment bank

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Citi gets Q3 boost from global consumer, investment bank

Citigroup Inc. said it made headway in its consumer bank on top of a healthy contribution from its investment banking operation, pushing up third-quarter revenue and helping the New York-based company improve its bottom line.

Citi on Oct. 12 reported third-quarter net income applicable to common shareholders of $3.86 billion, or $1.42 per share, up from $3.62 billion, or $1.24 per share, a year earlier and better than the S&P Capital IQ consensus EPS estimate of $1.30.

Revenue rose to $18.17 billion from $17.76 billion a year earlier, helped by Citi's Global Consumer Banking and Institutional Clients Group businesses.

Consumer banking revenue climbed 3% from a year earlier to $8.43 billion, boosted by a 10% advance in its Latin America operation, which includes its large Mexico business, and a 6% gain in its Asia operation. Those gains helped offset a modest 1% bump in its North America segment.

"The international footprint, that's the differentiator for Citi and it helps to explain the rapid upward move in the stock recently," Gary Townsend, a Citi investor and founder of GBT Capital Management, said in an interview.

While Citi's stock fell along with bank stocks broadly after the company posted earnings, its shares year-to-date through Oct. 11 were up about 26%, more than double the percentage gain made by the SNL U.S. Bank index.

CEO Michael Corbat, speaking with analysts during a call to discuss earnings, said the economies of many emerging markets are growing faster than those of developed countries, explaining the relatively strong advances in Asia and Latin America.

But, he noted, geopolitical pressures — including escalating nuclear arsenal tensions between the U.S. and North Korea — hover as potential threats to global operations. At the same time, he said the possibility of U.S. corporate tax cuts — the White House proposed cutting the rate from 35% to 20% — along with an increasingly pro-business posture on banking regulation in Washington could prove positives for domestic growth in coming quarters.

Those possibilities noted, the "macro environment remains a largely positive one. Growth, while not as high as we would like, remains consistent and we don't see too many economies in distress," Corbat said. "And while tax reform remains a question mark, we do like the direction the administration is going in terms of regulation, which we see as adjusting course to accommodate higher growth rather than a full-scale regulatory repeal agenda."

Within the Institutional Clients Group, where revenue jumped 9% from a year earlier to $9.23 billion, Citi's third-quarter investment banking revenue climbed 14% from a year earlier to $1.23 billion. The investment bank moved ahead on income from its advising work on capital raises and M&A. Revenue from Citi's private bank also advanced notably, up 15%.

As widely expected across Wall Street, Citi's overall trading revenue took a hit amid low market volatility in the third quarter. It declined 11% to about $3.6 billion, dragged lower by a 16% drop in fixed-income services. But the overall trading decline was not as steep as the company had previously forecast — 15% — and it was better than the 21% trading drop that rival JPMorgan Chase & Co. posted.

"For Citi, that was encouraging to see," Jeffery Harte, an analyst at Sandler O'Neill & Partners who covers Citi, said in an interview.

Harte also cited as positive a 2% decline in Citi's operating expenses in the third quarter and an improved efficiency ratio, which declined to 56% from 59% the previous quarter.

He noted, however, that costs tied to credit quality rose, presenting a hint of possible trouble. Net credit losses increased 4% during the third quarter, and Citi also built up its reserves for possible future loan losses during the quarter.

"Everything still looks strong on credit, but some metrics look a little weaker than I thought they would," Harte said.

Executives said much of the rise in credit losses simply reflected overall increases in its volume of business with customers, while the reserve build followed a series of natural disasters — several hurricanes that hit the U.S. and earthquakes in Mexico — that were developments beyond Citi's control.

Corbat also said that, while natural disasters devastate affected populations in the near term, rebuilding efforts, fueled by insurance payments and government aid, tend to drive economic growth in the longer term. Following past disasters, businesses have borrowed from banks to invest in growth alongside the recoveries of local economies.

"As we have seen historically, in some ways, those actually end up being a stimulus," Corbat said. "And that's our expectation, that we would probably see that occur again."