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Citi's Corbat tempers investor expectations in debut

A traffic light is pictured in front of a Citibank branch in Singapore February 23, 2009. REUTERS/Vivek Prakash
A traffic light is pictured in front of a Citibank branch in Singapore February 23, 2009. REUTERS/Vivek Prakash

By David Henry

NEW YORK (Reuters) - Mike Corbat, Citigroup Inc's new CEO, used his earnings debut to temper investor expectations for a turnaround at the company, delivering subdued profits and saying the bank still had a lot left to clean up.

Corbat, who took over as chief executive in October after the board abruptly ousted Vikram Pandit, promised investors the third-largest U.S. bank will do a better job for shareholders during his tenure. But he warned that the environment remained challenging and it would take time.

Citigroup's fourth-quarter profit missed Wall Street's expectations by a wide margin, even though earnings were up from a year earlier as trading revenue rebounded. The bank's shares fell 2.9 percent for the day.

The bank took $2.32 billion of charges for layoffs and lawsuits in the fourth quarter. It also declined to release loan loss reserves just yet, a step which would have boosted profits.

Pandit was still in the job when the fourth quarter started, and some analysts said that by not releasing reserves Corbat may have understated financial results.

"It may be that the new CEO is holding back," said Gary Townsend, president of hedge fund Hill-Townsend Capital LLC. "There's no reason that the quarter when Pandit left and (Corbat) came in should be great."

Citigroup declined to comment on whether that was its strategy.

But analysts on the conference call repeatedly challenged Chief Financial Officer John Gerspach on why the company did not draw down more of its loan loss reserves, particularly those for mortgage assets, whose value is being lifted by the stronger housing market.

Gerspach said that while the housing and mortgage loss trends are good, the company had first wanted to make sure the U.S. government got past the so-called "fiscal cliff" threat to the economy and the damage that might have done to housing.

"What we would like to see now is how the U.S. deals with the ongoing debt ceiling debate," Gerspach said.

He eventually allowed that if the economy proves resilient to prolonged debates in Washington over government debt, "maybe that will give us the basis then to make some other decisions."

Such a cautious approach to the reserves may well set up Corbat to report higher earnings later in his tenure, according to RBC Capital Markets analyst Gerard Cassidy.

NOT SATISFIED

Corbat said Citi's various businesses were combating competitive and regulatory problems, as well as issues dating to the financial crisis that continue to plague the bank.

Citi shares rose in Corbat's first three months as CEO, outpacing peers, as some investors welcomed Pandit's replacement and anticipated changes in the bank's structure.

Corbat, however, seemed in no hurry to immediately deliver on those expectations. He said he was not yet ready to release new performance benchmarks for investors to judge the ability of his team to meet their goals.

"We've got to get to a point where we stop destroying our shareholders' capital," Corbat said. "We are not satisfied with these bottom-line earnings."

That left some disappointed. "It was a stay-tuned type of message," said Tom Lewandowski, an analyst at brokerage Edward Jones who recommends Citi stock.

"I expected to hear more than we got," particularly in the way of goals for company performance, Lewandowski said.

RBC Capital's Cassidy said most investors are still willing to wait for changes. "Traditionally, six months is a fair amount of time for new management to get their arms around the situation."

While Citigroup's stock is up more than 40 percent in the past 12 months, investors still see the company as an enterprise on a difficult mission to shrink its way to prosperity, Townsend said.

The skepticism shows in the company's stock price. Citigroup's shares trade for only 0.8 of its tangible book value, or its net worth. JPMorgan Chase & Co, which on Wednesday announced its third-consecutive year of record profits, trades for 1.2 times its tangible book value, while Wells Fargo & Co trades for about 1.6 times.

PROFIT MISSES

On Thursday there was relatively little in the way of 2013 outlook from the bank, though CFO Gerspach did tell analysts that Citi expects interest margins to be steady in 2013 relative to 2012. Bank investors have had a close eye on margins lately.

Fourth-quarter net income was $1.2 billion, or 38 cents a share, compared with $956 million, or 31 cents a share, in the same quarter of 2011.

Revenue from fixed income markets increased 58 percent, driving Citi's Securities and Banking segment back to profitability. Company-wide revenue, adjusted for certain items, increased 8 percent, while operating expenses were unchanged.

Results were reduced by new legal costs of $1.29 billion, or 27 cents a share, and a previously announced corporate restructuring charge of $1.03 billion, or 21 cents a share.

Gerspach said $500 million of the new legal costs came from what he called a variety of issues in the ongoing U.S. consumer banking business. He later said he expects legal costs to remain "somewhat elevated."

Expenses recorded for changes in the value of some of the bank's debt and obligations of derivatives counterparties were 10 cents a share, compared with 1 cent a year earlier.

Excluding the many one-time items, Citi said it earned 69 cents per share. On that basis, analysts polled by Thomson Reuters I/B/E/S on average expected 96 cents per share.

The operating earnings were 15 cents below the lowest of the 22 estimates that comprised the consensus forecast. It is the third year in a row that the bank's fourth-quarter results have missed Wall Street forecasts by at least 20 percent, according to Thomson Reuters data.

(Reporting by David Henry and Lauren Tara LaCapra in New York; Writing by Ben Berkowitz; Editing by John Wallace and Tim Dobbyn)

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