Citi’s bond-trading windfall no match for surge in loan-loss provisions

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Citigroup bond traders just posted their best quarter in eight years — a feat that was no match for the tidal wave of souring loans that walloped the bank’s profits.

The deadly pandemic that sent global markets swooning helped the firm’s fixed-income, currencies and commodities traders generate $4.79 billion in the first quarter, trouncing analysts’ estimates by more than $1 billion. But the firm simultaneously set aside $7.03 billion to cover potential losses on loans and net income for the three-month period fell short of projections.

The divergence, mirroring trends at larger rival JPMorgan Chase, showed how unprecedented government efforts to contain the spread of COVID-19, often by locking down commerce, created a lucrative opportunity for Wall Street firms but may pose longer and deeper trouble for their lending operations. Citigroup’s figures show it’s bracing for an onslaught of defaults in its sprawling credit card business all the way up to the financing the firm provides to major corporations.

“COVID-19 is a public health crisis with severe economic ramifications,” Chief Executive Michael Corbat said in a news release Wednesday. Revenue held up, he said, but the “economic shocks caused by the pandemic weren’t felt until late in the quarter.”

Revenue from fixed-income trading surged 39% as the bank saw a strong performance in rates, currencies and commodities groups. Stock traders also posted better-than-expected revenue of $1.17 billion, helped by derivatives dealings.

Revenue from the bank’s consumer operations held up as the pandemic got underway. In the U.S., it increased slightly to $5.22 billion, topping analysts’ projections. Even in Asia, where the virus wreaked havoc for most of the quarter, the figure was in line with estimates.

Yet it’s the consumer division — housing the world’s largest credit-card portfolio — that braced most for the prospect that borrowers will struggle to repay. Companywide, Citigroup more than tripled provisions for loans, as it added $4.89 billion to reserves under a new accounting standard this year known as CECL, which requires banks to set aside money earlier when conditions worsen.

Customers spent $128 billion on cards during the quarter, relatively flat compared with the same period a year ago, as average loans from that business climbed 2.5% to $167 billion.

Corporate lending was a mixed picture. Revenue there dropped 40% to $448 million in the quarter, short of the $678 million analysts estimated. But the bank also posted a surprise gain of $816 million on loan hedges.

Here are other key numbers from the quarter:

  • Net income declined 46% to $2.52 billion, or $1.05 a share, missing the $1.44 average estimate of analysts.
  • The treasury and trade solutions unit, which handles payments and banking for multinational corporations, saw a 5% drop in revenue from a year earlier to $2.42 billion. The unit opened 1,000 new accounts digitally in March alone.
  • Companies drew down $25 billion from existing credit facilities during the quarter, and Citigroup approved $21 billion of new facilities for such clients.
Bloomberg News