Citi fixed-income trading slumps 21% in bad omen for Wall Street

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Citigroup Inc. gave investors the first look at how Wall Street banks fared during the violent market swings at the end of 2018 — and it’s grim.

Revenue from fixed-income trading, the lender’s largest securities business, plunged 21% in the fourth quarter to the lowest in seven years after wild markets kept clients on the sidelines. Combined revenue from stock and bond underwriting dropped more than analysts estimated. And the company missed a full-year profitability target by an even wider margin than it signaled just five weeks ago.

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

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 Index since 2009. Analysts including Barclays PLC’s Jason Goldberg had cautioned clients that Citigroup’s most recent guidance came in early December, before the storm worsened.

Citigroup fell 1.7% in early trading at 8:02 a.m. in New York. The shares climbed 8.9% this month before Monday, after a 30% plunge in 2018.

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

Just three months ago, things were looking brighter for the fixed-income division, which handles bonds, commodities and currencies. In mid-October the bank disclosed that the business had snapped five straight quarters of declining revenue. When news of the turnaround broke, it helped send the stock up as much as 4.2% that day.

But by early December, Chief Financial Officer John Gerspach said the momentum was fading, particularly in Group of 10 rates trading. On Monday, the bank also blamed widening credit spreads.

Revenue from Citigroup’s sprawling credit card unit, the largest in the world, increased 1% to almost $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 better than the prior year. The company had been aiming to shave 100 basis points from that measure last year, but Gerspach said in December the move might be closer to a 90-basis-point decline.

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

Net income amounted to $4.3 billion, or $1.64 a share, after a loss in the same quarter a year ago, when the company booked a $22.6 billion tax-related charge. Excluding an additional one-time tax-related gain, Citigroup posted per-share profits of $1.61 a share, topping the $1.55 average of analyst estimates compiled by Bloomberg.

The bank’s total revenue of $17.1 billion missed analysts’ estimates of about $17.5 billion. The bank’s equity traders posted $668 million in revenue, an 18% increase from a year earlier.

Last year’s fourth quarter suffered from a $130 million loss tied to the embattled South African retailer Steinhoff International Holdings NV.

Revenue from bond underwriting fell 13% to $634 million, a smaller drop than analysts predicted, while stock underwriting slumped 28% to $181 million. That was worse than what analysts anticipated, bringing total underwriting below their estimates as well.

The cost of credit within the consumer banking unit climbed 1% during the quarter, driven by an increase in net credit losses in the unit, which the bank blamed on higher use of its North American credit cards.

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Earnings Commercial banking Fixed income Citigroup
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