Citi says trading environment improved from 2018’s rough end

NEW YORK • Citigroup Inc offered some hope that the worst is over for its bond-trading business after the toughest quarter for that unit in seven years.

The lender’s shares jumped almost 4%, the most in the S&P 500 Index, after CFO John Gerspach said the trading environment was starting to improve this month. The brighter outlook came after the lender reported revenue from fixed-income trading, its largest securities business, plunged 21% in the fourth quarter (4Q) as wild markets kept clients on the sidelines.

“Volatility has somewhat mode-rated and both equity prices and yields have shown signs of stabilisation,” Gerspach said on a call with reporters. “But, again, it’s really early and market conditions — even though there have been improvements — they have yet to fully recover at this point.”

To combat the trading weakness, the bank cut costs by 4% to US$10.3 billion (RM42.23 billion), led by a 6% decline in compensation expenses. That, along with a lower than expected tax rate, helped the lender top earnings estimates. The company forecast its tax rate for 2019 at 23%. Keefe Bruyette & Woods said in a note that it had been predicting 24%, and the lower level would add 10 cents a share to earnings.

On the investment-banking outlook, Gerspach said the pipeline “remains very, very strong and client dialogue remains strong, and we have a very healthy backlog going into 2019”.

Other bright spots included a 47% jump in revenue from advising on mergers and acquisitions, which reached US$463 million. The bank’s treasury and trade solutions business, which helps corporations move money around the world, boosted revenue 7% to US$2.4 billion — surpassing the firm’s fixed-income traders for the first time. They generated only US$1.94 billion — falling below US$2 billion for the first time since the final quarter of 2011. It was their worst performance under CEO Michael Corbat.

The positive forecasts were welcome news for a stock that was hammered during the last few months of 2018, including a 27% plunge in the 4Q. Citigroup climbed to US$58.93 at the close of regular New York trading, bringing its advance this month to 13%.

Bank shareholders have been in the dark for weeks, eager to learn whether traders and dealmakers were able to navigate global market swings including the biggest monthly drop in the S&P 500 since 2009.

Citigroup’s combined revenue from stock and bond underwriting dropped more than analysts estimated in the 4Q. And the company missed a full-year profitability target by an even wider margin than it signalled just five weeks ago.

“A volatile 4Q impacted some of our market-sensitive businesses, particularly fixed income,” Corbat said on Monday in a statement disclosing results. The firm will focus on improving profitability this year, he said.

In early December, Gerspach said trading momentum was fading, particularly in Group of 10 rates trading. Asked on Monday what other pro-ducts were affected by volatility, the CFO joked “everything”, but he pointed in particular to foreign- exchange and spread products.

Revenue from Citigroup’s sprawling credit-card unit, the largest in the world, increased 1% to almost US$5.1 billion during the quarter. Investors have grown increasingly worried about the business as rising interest rates have tempered consumers’ demand for such loans. Citigroup has been curtailing its promotional offers while encouraging existing customers to maintain balances on their cards.

The lender said it still believes it can achieve a return on tangible common equity of 12% in 2019, up from 10.9% last year.

The bank’s efficiency ratio, a measure of how much it costs to produce a dollar of revenue, dropped to 57.4% last year, 86 basis points (bps) better than the prior year. The company had been aiming to shave 100bps from that measure last year, but Gerspach said in December the move might be closer to a 90bps decline.

JPMorgan Chase & Co and Wells Fargo & Co were set to report quarterly results yesterday, with Bank of America Corp, Goldman Sachs Group Inc and Morgan Stanley due later in the week. — Bloomberg