Citigroup's Profit Rises 42%

Citigroup Inc. reported second-quarter profit on Monday of $4.2

billion, up 42% from a year earlier, beating analyst estimates as

securities underwriting and trading revenue and loan demand from

emerging markets improved.

The results show progress in the bank's efforts to expand abroad and

to shrink the businesses it no longer sees as fitting into its global

strategy. Revenue rose strongly in capital markets—where underwriting

and trading revenue is generated—while consumer revenue continued its

strong growth from Latin America, even as Citi said it is expecting

emerging markets to grow more slowly than it had expected.



Second-quarter revenue rose 12%, to $20.5 billion from a year earlier,

more than analysts had expected. And per-share earnings of $1.25 beat

average analyst estimates of $1.17 as tracked by Thomson Reuters, even

excluding a $477 million gain for a valuation adjustment on Citi's own

debt.

Citi's shares rose 1% in late-morning trading to $51.32. The stock,

which lost much of its value during the financial crisis, has risen

almost 30% this year as of the close of trading Friday.



Citi's main strategic focus has been on overseas expansion,

particularly in emerging markets. But China's slowing economic growth

could ripple through Asia, where Citi is generating significant

revenue. Investors have been worried that slower economic growth in

emerging markets could challenge Citi's revenue and profit.



"The uncertainty about international economic growth in the second

half of the second quarter has weighed on shares of Citigroup," Keefe,

Bruyette & Woods analyst Frederick Cannon wrote in a research note

before Citi reported earnings.

Higher legal costs continue to reflect the impact of the financial

crisis, and Citi battled falling loan yields resulting from low

interest rates, falling revenue from its U.S. mortgage business and

volatile currencies around the world. Despite turmoil in emerging

markets, Citi showed firm footing, with revenue rising in Asia and

Latin America.



"We certainly adjusted expectations down" for economic growth in

emerging markets, Chief Financial Officer John Gerspach said. Economic

growth in Mexico, for example, is much slower than the bank expected.

Still, Mr. Gerspach reiterated that emerging-markets economies, even

at a slower growth pace, will expand faster than Europe and the U.S.



Capital markets, however, did best in Europe, the Middle East and

Africa in the second quarter, as the company recovered somewhat from

the impact of Europe's slow growth on last year's capital-markets

results.



Revenue in that region rose 34% in the second quarter from a year

earlier and 16% from the first quarter, to $2.2 billion, and its

profit there more than doubled from a year earlier and rose 77% from

the first quarter, to $787 million.



Overall, capital-market revenue, which also includes lending to large

corporations, rose 25% from a year earlier but fell 2% from a strong

first quarter, to $6.8 billion. Consumer-banking revenue rose 2% from

a year earlier, to $9.7 billion, and remained flat from the first

quarter. Headwinds from the U.S. mortgage business, and from falling

loan yields, are expected to continue, Mr. Gerspach said during a

conference call with the media.



Citi also is shrinking, through the sale of businesses that no longer

fit its strategy. The bank shed $18 billion worth of assets in the

second quarter, including $4 billion of sales that boosted revenue. In

June, it also sold the rest of its Morgan Stanley Smith Barney

brokerage joint venture to Morgan Stanley.



In addition, expenses remain a key focus for most investors, and Chief

Executive Michael Corbat announced late last year the bank will cut

11,000 jobs as one way to reduce costs.



Citi's operating expenses rose 1% from a year earlier and fell 1% from

the first quarter, to $12.1 billion. Mr. Gerspach said the bank is on

track to deliver the promised cost saves.