Though Citigroup Inc. had to swallow a $4.95 billion after-tax hit in the second quarter for its dealings with WorldCom, the period's results indicate the era of credit troubles is well behind Citi.
In corporate and consumer banking, in the United States and virtually every market abroad, Citigroup reported better credit quality and promising developments in delinquency rates. Chief executive Charles O. Prince called the credit environment "the best we have seen in years."
Credit trends were encouraging enough to induce a release of $562 million in loan reserves, including $350 million for corporate credit losses and $212 million for consumer losses. Todd Thomson, Citi's chief financial officer, concurred with Mr. Prince on the credit picture and said it "bodes well for the rest of the year."
Analysts said they were surprised by the magnitude of the improvement in credit quality, though some said the reserve release masked underlying earnings trends. Citi reported operating earnings per share of $1.02 (excluding the previously announced charge for the WorldCom settlement and anticipated litigation and a gain of $756 million from the sale of a stake in Samba Financial Corp.). The analyst consensus was 97 cents.
Net income of $1.14 billion was down 73% from last year's second quarter.
The reserve release and a gain of 4 cents per share from principal investing (which some analysts consider to be nonrecurring) weighed on Citi's stock Thursday. It closed down 2%.
"The biggest driver of the upside" in earnings per share "appeared to be the lower-than-expected loan-loss provision," Lehman Brothers' Jason Goldberg wrote in a research note.
Michael Mayo of Prudential Equity Group wrote that "the reserve releases make it look like a stretch to make this quarter's number on a core basis." After subtracting the boost from the reserve release, he estimated that Citi missed Wall Street's earnings target by 2 cents.
In corporate banking, the provision for credit losses declined by $562 million in the second quarter as a result of improving credit quality globally, Citi said. The allowance for corporate loan losses as a percentage of corporate loans was 3.54%, compared with 4.22% a year earlier.
Mr. Thomson said that if global credit trends remained favorable, he would expect further improvement in the portfolio, though he said he does not anticipate any similarly large releases of reserves.
Consumer bankruptcy trends improved in North America and elsewhere, Mr. Thomson said. In credit cards, net credit losses as a percentage of loans were 6.27%, against 6.69% in the first quarter; in consumer finance they were 3.52%, versus 3.57% in the first quarter.
Overall consumer loss rates were 3.21% on a managed basis, down 26 points from the first quarter. Mr. Thomson said consumer delinquency fell 25 points from the first quarter, to 1.94%.
"Credit quality was the biggest positive surprise," said Erin Caddell, an analyst at Blaylock & Partners in New York. It "improved in nearly every category" and Citi expects "additional credit leverage" in the near term.
The company said underlying dynamics of its various businesses were strong, with revenues advancing 9%, to $21.1 billion, despite lackluster capital markets activity in May and June.
Citigroup International profits rose 29%, to $2.07 billion, excluding the Samba sale. The results reflect better corporate credit quality in Mexico where $200 million of reserves were released, and strong gains in corporate banking in Asia linked to the acquisition of KorAm Bank. Consumer profits rose 41% in Asia, including cards, retail, and consumer finance.
In consumer banking globally, profits rose 20%, to $2.7 billion, excluding a $378 million gain credited to the group from the sale of the Samba stake.
Credit card income rose 34%, to $1 billion, helped by the additions of portfolios acquired from Sears and Home Depot. Consumer finance profits rose 14%, to $594 million. Retail banking, which includes branch banking, rose 15%, to $1.16 billion.
Citi continues to build branches abroad and is considering building in New York, California, Chicago, Florida, and other U.S. markets, Mr. Thomson said.
In corporate banking, profits excluding the WorldCom charge and the portion of the Samba stake sale credited to the group rose 31%, to $1.8 billion.
Profits from underwriting securities and lending rose 28%, to $1.50 billion though results were mixed. Underwriting profits were down and Mr. Thomson indicated that activity has remained muted in July. Advisory income was up as the company continued to win assignments.
Profits from private client services and global investment management rose 13% and 7% respectively. Mr. Thomson said results were dampened by lower consumer trading volume.
