Citigroup Inc C-N reported a 21 per cent fall in quarterly profit on Friday, missing forecasts, as the bank increased provisions to prepare for a worsening economy and investment banking revenue declined due to a sharp drop in deal making activity.
Fears of a potential recession prompted Citi to add $640-million to its reserves in the fourth quarter, compared with a release of $1.37-billion from its reserves in 2021 when pandemic-related loan losses failed to materialize.
“We continue to see the U.S. entering into a mild recession in the second part of the year,” Chief Executive Officer Jane Fraser said in a call with analysts. The bank sees consumer and corporate balance sheets remaining strong, and “very sticky” core inflation.
On an adjusted basis, Citi earned $1.10 per share for the fourth quarter ended Dec. 31, below estimates of $1.14 a share, according to Refinitiv.
The U.S. Federal Reserve last year raised its interest rate by 425 basis points from the near-zero level to tame inflation, raising fears of an economic downturn, and thus forcing many firms to forecast slower growth in revenue and profit.
The Fed’s tightening helped Citi post a 61 per cent surge in net interest income by charging higher interest on loans to customers.
Still, the U.S. central bank’s aggressive stance, coupled with the war in Ukraine and growing economic uncertainties, roiled financial markets and slowed deal making activity last year. This saw Citi’s investment banking revenue plunge 58 per cent.
Chief Financial Officer Mark Mason indicated that overall the bank continues hiring but it is also slowing down head count additions in some areas.
Meanwhile, elevated market volatility led traders to reposition their portfolios, helping Citi’s markets business and driving a 6 per cent rise in the bank’s revenue to $18-billion.
Under Fraser, the bank exited some overseas markets to boost its stock valuation and profitability versus peers, while improving its risk controls as required by regulators.
“Citi achieved its target of 13.0 per cent Tier 1 common equity faster than expected, as the bank had guided to reach this target in the middle of 2023,” said Jason Benowitz, associate partner and senior portfolio manager at CI Roosevelt.
Still, share buybacks will remain on pause, the CFO said.
Despite the recessionary environment, Citi on Friday said it expects its 2023 revenue to grow up to 6 per cent, to $79-billion, minus divestitures.
“Our business will close out 2023 competitively stronger,” the CEO said.
Its net interest income, which reflects how much money the bank makes from charging interest to customers, is seen growing at a slower pace, to $45-billion from $43.5-billion, excluding markets.
Expenses, however, are likely to rise by roughly 5 per cent this year, to $54-billion, as Citi ramps up investments to address regulatory consent orders, modernize infrastructure and simplify the business.
“The expense impact was more significant,” said Benowitz. “While the 2023 expense guidance implies a slower pace than the 8 per cent growth excluding divestiture impacts reported in 2022, we believe investors were expecting a more material slowdown.”
Analysts have long worried that soaring expenses at Citi, while necessary, depress near-term results, but Citi pacified those fearful of a slowdown next year.
“We now expect to bend the curve on expenses toward the end of 2024,” Mason said.
Mason said the exit of Citi’s Mexican retail bank Banamex is “well under way,” although he is unable to forecast when the deal will be concluded. Citi is trying to sell the unit, while also considering a potential initial public offering (IPO).
Shares in Citi were up 1.1 per cent in afternoon trading.