Citi Needs a New Plan B

Citigroup Inc. is not alone in struggling to make money these days, but the bank is caught between a rock and a hard place in looking for U.S. profits.

The third largest U.S. bank by assets said Monday that its revenue slumped during the third quarter, as its investment bank struggled with a Wall Street slowdown. Citigroup boosted its results with a $1.9 billion gain tied to an accounting change — but excluding that gain its revenue fell 8% from both a year earlier and the second quarter, to $18.9 billion.

Chief executive Vikram Pandit called the bank's results "solid" during a conference call with analysts, but said that the sovereign debt crisis in Europe and other political and regulatory uncertainties were dampening some of Citigroup's business.

Citigroup's results partially mirrored those of stronger rival JPMorgan Chase & Co., which last week blamed the volatile trading environment for its drop in third-quarter profit. But JPMorgan Chase was able to fall back on its retail banking operations, which slightly boosted its revenues.

Unlike its larger competitor, Citigroup cannot turn to a robust U.S. consumer bank during a trading slump. The bank, which needed $45 billion in U.S. government bailout funds to survive the financial crisis, has largely abandoned the mass-market U.S. consumer, focusing instead on emerging markets and wealthy, international, tech-savvy customers in the United States.

That strategy worked in the aftermath of the financial crisis, when U.S. banks relied on trading operations to overcome lackluster consumer demand for new loans. But now that investment banking revenues have hit a rough patch, Citigroup has limited options in its U.S. unit. North American consumer bank revenue fell 9% from a year earlier, to $3.4 billion, as the bank reported lower average balances on its credit cards and lower gains on sale in mortgages.

Without the ongoing economic uncertainty, "you'd likely have loans growing and the economy growing at a faster rate than we're seeing currently. … This is not a robust recovery that we're having by any stretch of the imagination," Chief Financial Officer John Gerspach told reporters during a conference call on Monday.

The bank's efforts to expand abroad are paying off to some degree and helped cushion its results. International consumer bank revenue grew 10% to $4.9 billion, as Citigroup reaped the benefits of expansion in Asia and Latin America.

But the New York-based bank still has to face comparisons with its U.S. rivals, which have many more branches and bigger U.S. consumer operations. Mortgage revenues in Citigroup's main North American banking unit fell, though Gerspach said the bank had started to see a surge in refinancing activity late in the quarter.

Citigroup also took one step to reverse its U.S. consumer slimdown, formally taking its retailer credit card business off the sale block. The bank put that unit up for sale in 2009, as Pandit started selling or closing down assets that the bank no longer considered part of its core banking operations.

But it became increasingly clear that Citigroup could not find a buyer willing to pay the price it wanted for its $45 billion portfolio, and several reports since last year said that Citigroup would eventually reclassify the retail-partner cards unit as part of its core operations.

"It's not necessarily that there's a lack of buyers just per se. Like most portfolios, it's a combination of buyers and their ability to finance large portfolios. … Something on the magnitude of retail-partner cards is a bit daunting in the current environment," Gerspach said.

Citigroup has overhauled the unit, which makes credit card loans on behalf of retailers including Sears, Home Depot and Macy's. Gerspach said that customers' average FICO scores are now in "excess of 700."

"It's a markedly different portfolio than what it was back in 2008 and 2009," he said, adding that consumers are now once again more willing to make payments on private-label credit cards.

Such loans became toxic more quickly than general-purpose credit card loans during the financial crisis, because consumers were more likely to pay off a card that they used for everyday expenses than a card that they could only use at one store. But now, according to Gerspach, consumers are again willing to put big-ticket purchases onto a retailer's specific credit card, which frees up their general-purpose credit lines for other spending.

"There's been a shift in behavior now among consumers … To the extent that they're making large purchases, they want to hold [general] credit lines for other type purchases," he said.