Citigroup Inc. swung to a second-quarter profit on a $6.7 billion gain related to the combination of its Smith Barney brokerage operations with those of Morgan Stanley.
The results masked a 7% revenue drop at its securities and investment-banking operations, while deposits rose 6% during the quarter and operating costs dropped 21% as Citigroup continues its effort to streamline its operations long criticized as bloated. Headcount fell 30,000, or 9.7%, during the quarter.
The bank is still roiling from its mortgage-related securities and the credit crisis. Investors had started to believe the worst was over as losses narrowed last year and the company posted its first profit in 18 months for the first quarter. But woes at Citgroup, which was a leader in creating and marketing some of the exotic securities that have been at the heart of the credit crunch, appear to be far from over.
Investors are getting their first look at the future shape of Citi, which recently segregated its worst assets and units into subsidiary Citi Holdings. The state of those bad assets will nevertheless be a major factor in coming quarters, as they will continue to affect the bank's bottom line.
Shares were recently up 3 cents at $3.06 in premarket trading. The stock is off 55% so far this year and 83% in the last 12 months.
The company, which will soon be 34% owned by the U.S. government, posted income of $4.28 billion, or 49 cents a share, compared with a year-earlier loss of $2.5 billion, or 55 cents a share. Revenue jumped 71% to $29.97 billion, driven by the Smith Barney gain. Analysts' estimates didn't include the gain, and Citigroup didn't provide results excluding it.
Citicorp, the retail banking and commercial and investment banking business, saw revenue fall 11% to $14.96 billion and posted an 11% drop in profit to $3.06 billion. The company said results were hurt by the impact of foreign-currency translation and greater credit losses in North America. Investment-banking revenue fell 13% as the company said the prior year was driven by stronger merger-and-acquisition and equity volume.
Citi Holdings includes the consumer-finance brands that don't generate deposits such as CitiFinancial, Primerica and CitiMortgage, along with "toxic" loans and securities. It saw results soar amid the Smith Barney gain.
Last week, Citi released historical financial data to show investors how the separation would play out. At first sight, the numbers show why Citi decided to separate the businesses it considers core from those it wants to sell or shrink. But looking back at the results since the first quarter of 2007, the core businesses have been profitable but their results have been strikingly volatile, especially in investment banking.