Citigroup Inc made more money from trading in the third quarter, and its lending profitability rose, surprising investors and lifting the bank's shares 4.5 percent.
Profit dropped after the third-largest U.S. bank wrote down the value of its retail brokerage business by $4.7 billion, but mortgage lending profit rose, and results overall were better than analysts on average had expected.
A key element of the report was the profitability of the bank's loans, excluding credit losses, which rose as the bank found ways to cut its funding costs.
JPMorgan Chase & Co and Wells Fargo & Co both posted shrinking loan profitability last week, raising concerns about how low interest rates could wallop bank profits for some time. On a conference call with investors, John Gerspach, Citigroup's chief financial officer, cautioned that the bank's lending margins may contract slightly next quarter.
The global economy is tough for the biggest banks, as demand for many types of loans is sluggish, regulation crimps profits in many investment banking businesses, and low rates weigh on lending profits.
The environment is another headwind for Chief Executive Vikram Pandit, who is trying to fix Citigroup after it required three government rescues during the financial crisis. Pandit is now retooling Citigroup to focus on commercial and investment banking, transaction processing, and retail banking for relatively wealthy customers globally.
The bank's Citi Holdings unit, which houses businesses and assets the bank sought to shed after the crisis, continues to weigh on the bank. Citi Holdings lost $3.56 billion in the latest quarter with the brokerage writedown, compared with a loss of $1.22 billion a year earlier. But the unit is also shrinking -- it had $171 billion of assets in the third quarter, compared with $191 billion in the second quarter and $582 billion in the middle of 2009.
Including the brokerage unit writedown Citigroup overall posted third-quarter net income of $468 million, or 15 cents a share compared with $3.77 billion, or $1.23 a share, a year earlier.
Adjusted earnings, excluding the writedown of $2.9 billion after taxes announced last month, and accounting gains and losses, was $3.27 billion, or $1.06 a share, beating analysts' average estimate by 10 cents, according to Thomson Reuters I/B/E/S.
The bank's net interest margin, a measure of profit on loans that excludes credit losses, rose to 2.86 percent from 2.83 percent in the same quarter last year and 2.81 percent in the second quarter.
Citigroup said profits from commercial and investment banking increased 67 percent in the third quarter on stronger revenue from fixed income and equity markets and lower expenses. Retail banking revenues in North America grew 35 percent, primarily reflecting higher mortgage revenues.
The higher mortgage revenues were the result of wider profit margins on mortgage loans Citigroup made and sold to investors, Gerspach said on a conference call with reporters. Mortgage originations declined 15 percent to $14.5 billion, but the bank expects mortgage refinancing to be strong into next year, executives said on a call with investors.
Results outside the United States were generally weaker, with income from its continuing international consumer banking business down 3 percent, and profits in transaction services provided to businesses and governments outside North America down by single-digit percentages. Some of the weaker numbers abroad were the result of changes in foreign exchange rates.
Citigroup shares have soared in recent months, rising 27 percent since the end of June and gaining nearly three times as much as the KBW Banks Index.
In September Citigroup agreed to sell its 49 percent interest in the brokerage to Morgan Stanley at a price that valued the unit at $13.5 billion. At the time, it said it would take a charge to reduce its carrying value for the asset by about 40 percent.
The joint venture was created in the financial crisis in 2009 as a way for Citigroup to shrink by transferring its Smith Barney brokerage assets to Morgan Stanley.
(Reporting by David Henry in New York; Editing by John Wallace and Tim Dobbyn)