CITIGROUP’S earnings were hailed as a sign that a US banking recovery is taking hold yesterday, as the bank revealed a sharp drop in the losses it expects to take on bad loans.
Analysts said that the bank’s figures showed a “healthy improvement” in credit quality among the core bank’s bread and butter customers – American consumers – and were surprised by a strong surge in its investment bank’s bond-trading business, where revenues more than doubled to $3.7bn (£2.3bn) compared to a dismal fourth quarter of 2011.
The positive results follow better-than-expected earnings from JP Morgan on Friday, after two weeks that analysts have spent upgrading their price targets for Wall Street banks – including for Goldman Sachs, which reports today.
But US research firm Bernstein warned there is still a question as to “the sustainability of improved [investment] bank revenues”, despite expectations that they should show a far better picture this week than at the end of a turbulent 2011.
American retail banking appears to show a slower but steadier improvement. Citi’s net credit losses – those incurred from borrowers not paying back their loans – dropped by 37 per cent to $4bn versus the same period last year. Much of that was due to a 31 per cent fall in US retail.
The improvement allowed the bank to adjust its model of how much it will need to put aside against future losses, so that provisions fell by 67 per cent to $1.1bn. This allows it to devote more cash towards investment and lending.
The trend was different at Citi’s “non-core” division earmarked for disposal: the bank booked a $370m hit mostly from mortgage-related lending in the division, Citi Holdings, but said that it had already accounted for those losses.
For the first time, Citi also revealed that its current tier one common equity ratio would be 7.2 per cent under Basel III rules – just over the seven per cent minimum, although lower than the 10 per cent threshold European regulators could impose.
But under the Basel I regime, which American banks still use, the ratio is 12.4 per cent. The bank said its aim is to get to eight per cent under Basel III by the end of this year.
Capital is a sensitive issue for Citi because its plans to raise its dividend payment were recently rebuffed by US regulators following the latest round of stress tests. Pandit told analysts that he is still waiting for “clarity” from US authorities before giving any update on the dividend.