* Q3 adjusted profit $1.02/shr vs Street view $1.04
* Bond trading revenue falls 26 pct
* Shares fractionally higher at midday
* Citi Holdings losses fall to $104 mln from $3.55 bln
(Adds investor comment, comment from analyst call, detail on
tranasction services business and deferred tax assets)
By David Henry
Oct 15 (Reuters) - Citigroup Inc posted
weaker-than-expected third-quarter earnings on Tuesday as bond
market trading volume dropped, hurting revenue at the No. 3 U.S.
bank and across Wall Street.
The bank's bond trading revenue dropped 26 percent, or $956
million, excluding an accounting adjustment, and revenue at most
of its major businesses dropped.
The fall in fixed-income revenue could spell trouble for
investment banks Goldman Sachs Group Inc and Morgan
Stanley, which post results later this week. Volumes
dropped after the Federal Reserve said it plans to continue its
bond buying stimulus program, giving assurance to investors that
they can hold onto their bonds for a little longer.
Late in the quarter, investors also grew increasingly
concerned about the government's fiscal impasse, which made many
reluctant to trade.
"I don't think anybody wanted to get in front of that," said
Diane Jaffee, who oversees about $6.5 billion of relative value
mutual funds for TCW, and counts Citigroup among her top 10
holdings. The budget and debt ceiling crises continue to weigh
on trading volumes in the fourth quarter, analysts said.
Investors pointed to Citi's efforts to control costs as the
most positive part of the quarterly earnings. Similar moves
could be imminent at other banks, especially as Wall Street
bonus season - typically a huge part of their budgets -
In last year's third quarter Citigroup took a $4.7 billion
charge before taxes, related to selling its Smith Barney
brokerage business. For the bank's board, that hit was the last
straw in a series of perceived missteps that ended up costing
Vikram Pandit, then the bank's chief executive, his job.
Pandit's successor, Michael Corbat, has struggled to improve
Citigroup's fortunes in an environment where client business is
tepid and new regulations are raising banks' expenses. Those
regulations are designed to make the banking system safer after
the financial crisis, which forced Citigroup to seek government
rescues three times.
'UNEVEN' BUSINESS CONDITIONS
Corbat told analysts in a conference call that business
conditions would remain "uneven" for the rest of the year.
"While many of the factors which influence our revenues are
not within our full control, we certainly can control our costs,
and I am pleased with our expense discipline and improved
efficiency year-to-date," Corbat said in a statement.
The bank's expenses fell nearly $500 million from the second
quarter to $11.66 billion as performance-based compensation and
transaction costs fell, partly reflecting a weak revenue
environment, Chief Financial Officer John Gerspach told
Citigroup, which has said it was aiming to reduce costs by
$1.2 billion annually, said on Tuesday it plans to cut areas
like marketing expenses in the fourth quarter. But Gerspach said
that no major new expense reduction plans are expected in the
Investors said that from the outside, it is hard to evaluate
how the bank's cost-cutting is affecting its daily operations.
"All these banks are doing a lot on that front (cost
cutting), including Citigroup, but it's hard to see from the
outside what is happening," said David Ellison, portfolio
manager in Boston at Hennessy Funds, which has about $4 billion
under management and owns Citigroup shares.
"There's a dumpster in the driveway, but all the activity is
in the house, and you can't tell what's happening inside."
CUSTOMER TRADING SLOWDOWN
The third quarter is typically a slow one for bond trading,
a state that was only exacerbated by the Fed announcement,
according to analysts.
Under generally accepted accounting principles, Citigroup's
net income rose to $3.23 billion, or $1.00 per share, from $468
million, or 15 cents per share, a year earlier.
Excluding the Smith Barney charge, as well as the impact of
tax benefits and changes in the value of Citigroup debts and
those of trading partners, third-quarter earnings slipped to
$3.26 billion, or $1.02 per share, from $3.27 billion, or $1.06
per share, a year earlier. On that basis, revenue fell 5 percent
to $18.22 billion.
Analysts on average expected earnings of $1.04 a share,
according to Thomson Reuters I/B/E/S. A spokeswoman for the bank
said that estimate was comparable to the adjusted earnings of
$1.02 per share.
Citigroup shares were up 14 cents to $49.74 in midday
On some fronts, Corbat is making progress. Citigroup has
winnowed down the assets it is looking to shed, known as Citi
Holdings, to $122 billion, down 29 percent from a year earlier
and down 7 percent from the second quarter. Citi Holdings now
accounts for a little more than 6 percent of the bank's overall
assets, compared with about 9 percent in last year's third
But results were weak at many businesses at Citicorp, the
bank's main operations. Revenue for its retail banking business
fell 7 percent to $9.24 billion, and revenue for its securities
and banking business fell 2 percent to $4.75 billion.
Revenue at its transaction services business was $2.613
billion, about $6 million below the same quarter last year. The
bank's transaction services business, long a key driver of
profitability, is facing intense competition now.
The bank earned enough taxable income in the United States
to use about $500 million of its deferred tax assets, which
amount to tax credits and other benefits that Citigroup can only
use when it earns enough money domestically. The bank had about
$54 billion of deferred tax assets at the end of June, most of
which relate to U.S. taxes.
(Reporting by David Henry in New York; Additional reporting by
Tanya Agrawal in Bangalore; Editing by John Wallace and Andrew