Citi's 3Q Results Reveal Lackluster Consumer Bank Prospects

Citigroup's (NYSE:C) consumer banking growth has been so lackluster lately that a credit card deal with electronics retailer Best Buy (BBY) turned out to be one of the brightest spots in its third-quarter results.

The country's third-largest bank on Tuesday reported quarterly earnings that fell short of estimates as bond-trading revenue slumped and its mortgages business suffered from an industrywide slowdown in refinancing activity. Chief Executive Michael Corbat said he was not satisfied with the results and told analysts that, absent meaningful revenue growth, Citi would look to improve its performance by further cutting costs and counting on in technology that could improve its efficiency.

While earnings clearly suffered from a 26% drop in fixed-income trading revenue, Citi's biggest area of concern is consumer banking.

Citigroup's revenue from its global consumer banking operations fell 7% in the third quarter from a year earlier, to $9.2 billion, and profit from that division fell 23%, to $1.6 billion. The biggest regional drop came from its North American consumer business, where profit fell 27%, to $932 million, as refi demand dried up following a rise in mortgage rates in late spring. Revenue at Citi's North American retail bank fell 35% year over year, to $1.1 billion, and Citi warned that lower mortgage originations and spread compression will continue to "negatively impact" revenue in the fourth quarter, and perhaps beyond.

"We expect continued headwinds in mortgages, although some of this pressure should be offset by additional revenues from the acquisition of the Best Buy portfolio," Citigroup Chief Financial Officer John Gerspach said during the call.

Indeed, what U.S. consumer loan growth there was came largely from Citigroup's September purchase of Best Buy's credit card portfolio, a deal that Corbat said he would be interested in replicating — under the right conditions. Even after adding Best Buy's $7 billion worth of credit card loans to its books, overall consumer loans at the bank's main Citicorp unit grew only 1% year over year, to $293 billion.

"We're absolutely open to more [credit card] portfolio purchases, but the portfolio purchases need to make sense from a yield perspective, from a returns perspective, from a resource deployment perspective," Corbat told analysts during a conference call Tuesday.

Citigroup announced its plans early this year to buy the credit card portfolio from Capital One (COF), for approximately its book value, and bank executives said they expect the acquisition to continue boosting results later this year.

Citigroup posted an overall net income of $3.23 billion, or $1.02 per share excluding one-time items. That was higher than its $468 million quarterly profit a year earlier, when the bank recognized a loss on its brokerage joint venture, but the results missed the $1.04-per-share average estimate of analysts surveyed by Bloomberg. Fixed-income trading suffered on investors' concerns over the pending government shutdown and the Federal Reserve's changing plans on interest rates.

"Although I think we performed relatively well in this challenging uneven environment, we cannot and are not satisfied with these results and will be focusing on areas where we need to continue to improve," Corbat told analysts.

Tuesday marked almost a year since he was abruptly promoted to CEO, replacing ousted predecessor Vikram Pandit. Corbat has focused on trimming down Citigroup's sprawling international businesses, cutting some 11,000 jobs and streamlining the bank's operations in major cities around the world. As Gerspach told reporters during a conference call earlier Tuesday, Citigroup is "looking for more creditworthy customers, with a focus in large cities. … you'll see a shift in our distribution base away from smaller markets."

Executives were also pragmatic about Citigroup's future results, telling analysts that they would continue trying to keep expenses down in the absence of strong revenue growth. Overall expenses fell 4% year over year, to $11.7 billion.

Citigroup is increasingly looking to technology to help it keep costs down. Gerspach repeatedly referred to its efforts to put all of its retail banking and card operations on one single technology platform, called Rainbow. That technology project is not yet completed, he said Tuesday.

Besides laying off staff and closing branches, banks can reduce costs by "being able to run your businesses more efficiently, by focusing on everything from mundane process work to where do you base your staff … including the introduction of improved technology, which is what we're trying to do now in the consumer business," Gerspach told reporters.