Dogged by its failure to pass the Federal Reserve’s latest stress test and investigations of fraud at its Mexican unit, Citigroup reported some good news Monday: first-quarter profit that beat analysts’ expectations.
Citigroup said adjusted quarterly profit rose about 4percent, to $4.1 billion, or earnings per share of $1.30, from the period a year earlier. Financial analysts polled by Bloomberg News had been expecting earnings per share of about $1.13.
The profit numbers are adjusted for one-time events, such as adjustments to its debt values and tax charges.
Despite exceeding profit expectations, adjusted revenue fell 2 percent, to $20.1 billion, from the year-earlier period, but topped estimates of $19.4 billion for the quarter.
Excluding one-time items, Citigroup’s profit rose 3.54 percent, to $3.9 billion, or $1.23 a share, on revenue of $20.12 billion.
Even as the bank’s global business results brightened in the quarter, Citigroup said Monday that it had found an additional case of fraud in its Mexican unit. Citigroup said it had uncovered a second instance of issues in its accounts receivable program involving a supplier to the Mexican oil monopoly Pemex.
Chief Financial Officer John Gerspach would not disclose the name of the supplier but said the fraud involved less than $30 million in costs to the bank. Gerspach said the supplier was in the process of paying back Citigroup, and the bank expected “full restitution.”
As for its quarterly results, Citigroup’s latest decline in revenue reflected industry challenges in both investment and consumer banking.
Strict-er regulations and low interest rates are weighing on the trading operation, which once generated large profits for Wall Street banks like Citigroup. At the same time, lending to consumers and businesses is rebounding but hasn’t been roaring back since the financial crisis, as economic growth remains slow.
“Despite a quarter that was difficult for our company, we delivered strong results,” Michael Corbat, Citigroup’s chief executive officer, said in a statement. “Both our consumer and institutional businesses performed well and we grew both loans and deposits while holding the line on our expenses.”
Still, in the first quarter, Citigroup seemed to weather a bit of that storm better than some rivals.
Revenue in the bank’s fixed-income trading business fell 18 percent, but the decline was not as steep as JP Morgan Chase’s 26 percent drop, which was reported Friday. Citigroup also had solid growth in its Latin American and Asian consumer businesses, even as regulatory scrutiny grows over the bank’s ability to manage its global operations.
Citigroup said its deposits increased 3 percent, to $966 billion, from the period a year earlier, while loans in the bank’s Citicorp unit increased 7 percent, to $575 billion.
Another big driver of Citigroup’s profit was a 20 percent decline in the cost of credit from a year ago, reflecting how improving economic conditions were allowing the bank to hold less capital to make loans as borrowers’ financial conditions improve.
Citigroup’s results represent a reversal of fortune for a bank that has been hurt in recent months by a string of prominent stumbles, including fraud in its Banamex unit and the Fed’s rebuke of its plan to increase dividends and share repurchases.
In February, Citigroup said it had discovered a $400 million fraud involving Oceanografia, which supplies oil services to Pemex. The FBI and authorities in Mexico are investigating the breach.
Part of the focus of those inquiries is whether Citigroup had the proper controls in place to prevent such a costly fraud. Federal authorities are also investigating anti-money laundering issues related to Banamex and the transfer of money between accounts in the United States and Mexico.
As part of its accounts receivable program, Citigroup advanced money to Oceanografia and then expected to be paid back by Pemex. But the bank discovered that the invoices for the work Oceanografia supposedly was completing for Pemex were falsified.
Gerspach said Monday that the bank had reviewed its accounts receivable program involving 1,100 companies worldwide and found only two cases of fraud, both related to suppliers to Pemex in Mexico. He declined to explain the nature of the latest fraud or whether it had led to a criminal inquiry in Mexico or the United States, saying the loss was too small to warrant providing any additional details.
“When you compare the magnitude of the losses, this is much smaller by comparison,” he told reporters during a conference call Monday.
For investors, perhaps the most serious stumble came last month when the Fed rejected Citigroup’s capital plan, citing concerns about the reliability of the financial projections that the bank submitted as part of the annual stress test. The rejection came despite Citigroup’s building of a comfortable capital cushion, even under the most stressful economic scenario tested by the Fed.
The bank has not detailed whether it plans to resubmit its capital plan.
Shares of Citigroup surged $1.99, or 4.4 percent, to close Monday at $47.67.
Business, Pages 25 on 04/15/2014