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Citigroup, Bank of America Profit Cut by Fixed Income (Update6)

Citigroup, Bank of America Profit Cut by Fixed Income

July 18 (Bloomberg) -- Citigroup Inc. and Bank of America Corp., the two biggest U.S. banks, reported second-quarter profits that disappointed investors after the firms made wrong bets on the bond market. Shares of both companies dropped.

Citigroup today said second-quarter net income climbed to $5.07 billion, falling short of analyst estimates for the first time in more than three years. Bank of America's earnings rose 12 percent to $4.3 billion. The Charlotte, North Carolina-based company's profit was hurt by a 77 percent slump in revenue from fixed-income trading.

Charles Prince, Citigroup's chief executive officer, said ``the capital markets environment was one of the worst we have seen in years.'' Morgan Stanley and Goldman Sachs Group Inc. also reported declines, as the companies misjudged the direction of interest rates. JPMorgan Chase & Co. President James Dimon said June 1 that the fixed-income trading results were ``terrible'' in the first two months of the quarter.

``The trends were clearly difficult, but they appeared to be worse for Citigroup,'' said Mark Batty, who helps manage $50 billion at Philadelphia-based PNC Advisors, which holds shares of both banks.

Citigroup's stock fell 3.1 percent, the biggest slide in ten months. The company denied a report on the CNBC television network that Chairman Sanford Weill plans to step down. Shares of Bank of America declined 1.9 percent.

JPMorgan, the third-biggest U.S. bank, is scheduled to report second-quarter earnings on July 20, a day after Wachovia Corp., the No. 4 bank, and Wells Fargo, the No. 5 lender.

Missing Estimates

New York-based Citigroup earned 97 cents a share, up from 22 cents a year earlier, when net income was depressed by $5 billion of legal reserves. The bank was expected to earn $1.02, according to the average estimate of eight analysts surveyed by Thomson Financial. It was the first quarter in at least six that Citigroup's profit fell short of analyst estimates.

Chief Financial Officer Sallie Krawcheck said on a conference call with analysts and investors that ``we weren't positioned for the decline in long-term rates and the flattening of the yield curve.''

The yield on the benchmark 10-year U.S. Treasury note slipped to 3.9 percent on June 30 from about 4.5 percent at the quarter's start. In the same three-month period, the Federal Reserve twice increased its overnight lending rate target, raising it to 3.25 percent from 2.75 percent.

Citigroup said revenue from buying and selling debt fell 28 percent to $1.83 billion.

Wall Street Woes

Profit at Citigroup's corporate and investment-banking unit, which includes the former Salomon Inc., the world's biggest bond trader, fell 22 percent to $1.37 billion.

Earnings at the consumer bank, which accounts for more than half of Citigroup's revenue, rose 6 percent to $2.9 billion. The consumer bank includes credit cards, retail branches and loans to individuals and small businesses.

Bank of America reported second-quarter net income of $1.06 a share, up from 93 cents a year earlier. Profit was $1.08 a share, excluding merger-related costs, 7 cents above the average estimate of 25 analysts surveyed by Thomson Financial.

Fixed-income trading revenue tumbled to $107 million from $456 million a year earlier.

`Some Hits'

``We took some hits in the second quarter because of the widening credit spreads,'' CFO Marc Oken said in a phone interview. ``We'd like to think we could have avoided it and differentiated ourselves, but we couldn't and we're disappointed about that.''

U.S. Treasuries rallied after General Motors Corp.'s ratings were cut to junk by Standard & Poor's as investors sought the safety of government debt. The yield on the benchmark 10-year note declined to as low as 3.8 percent on June 3 from 4.16 percent before the rating cut.

Bank of America signed up more debit- and credit-card customers and squeezed costs out of FleetBoston Financial Corp. by combining the banks' online accounts, reducing marketing expenses and cutting jobs.

Chief Executive Officer Kenneth Lewis is looking to parlay momentum in credit cards to increase earnings. Bank of America announced plans last month to buy MBNA Corp. for $35 billion.

24 Percent

Income from the bank's cards increased 24 percent from a year earlier, helped by the $1.4 billion acquisition of National Processing Inc. in October. Credit-card balances outstanding at the end of the quarter rose to $59.3 billion from $52 billion.

Merger and acquisition costs totaled $121 million on a pretax basis, and reduced net income by 2 cents a share in the quarter, the company said. The results are the first that fully reflect the 2004 acquisition of FleetBoston.

Lewis has focused on reducing costs since the FleetBoston takeover by eliminating 17,000 jobs and taking steps such as moving all online accounts onto a single system. That helped the company lower its non-interest expense by 3 percent in the quarter to $7.02 billion.

MBNA today said second-quarter net income dropped 4.3 percent to $632.1 million, or 50 cents a share, because of restructuring-related costs. The Wilmington, Delaware-based company in April said a plan to trim its workforce and sell assets would cost $767.6 million.

Citigroup fell $1.42 to $45 and Bank of America fell 90 cents to $45.08 in New York Stock Exchange composite trading.

To contact the reporter on this story:
Justin Baer in New York at [e-mail];
Will Edwards in New York at [e-mail].


LINK: http://www.bloomberg.com/apps/news?pid=10000103&sid=afADp9X5vDCQ&refer=us