Citigroup reported a better-than-expected quarterly profit Monday as credit losses slowed, but revenue fell short of estimates and analysts questioned whether the foreclosure crisis could further dampen future results.
The bank said it believes its methods for documenting mortgages are sound, but it also said it is looking at the home loans it bundled into bonds and sold to investors to make sure the paperwork is in order. So far, it has not found any problems.
Investors in such mortgage bonds may be legally entitled to sell bad loans back to banks at face value because of documentation issues. U.S. banks could be left holding billions of bad loans.
"Citigroup will have to give some indication that the problem is one that is easily handled, and they can define when it will be over," said Mike Holland who oversees more than $4 billion of assets at Holland & Co in New York.
"I doubt they can do that, but that's what the investors would like to hear," he said.
Citigroup's third-quarter revenue rose slightly from a year earlier but fell from the second quarter, and the bank dipped into reserves to cover bad loans. The bank said revenues were hit by a slump in fixed income trading and losses on credit derivative hedges.
Like stronger rival JPMorgan, Citigroup beat earnings expectations in part by releasing money it had set aside to cover bad loans.
Analysts, who tend to discount earnings powered by reserve releases as "low-quality," have questioned how bank profits can keep growing if a sluggish economy results in low loan demand and relatively high credit losses.
"It's a problem for all the banks now—they have trouble raising revenues," said Matt McCormick, portfolio manager, Bahl & Gaynor Investment Counsel.
"Reducing loan loss reserves is not something you can do indefinitely — eventually, they'll get to the point where they'll say, 'We can't keep going down this path."'
Consumer Loans Drop
Citigroup's outstanding loans, after subtracting money set aside to cover losses, fell 5.5 percent as consumer loans dropped. Corporate loans edged higher.
"We're not seeing the same shrinkage" in loan portfolios as before, Chief Financial Officer John Gerspach said on a conference call with reporters.
Citigroup shares were up over 3 percent in early trading, taking the stock price above $4.00.
The third-largest U.S. bank by assets posted a third-quarter profit of $2.2 billion, or 7 cents per share, compared with a year-earlier loss to shareholders of $3.2 billion, or 27 cents per share.
Analysts on average had expected a profit of 6 cents a share, according to Thomson Reuters.
On an ongoing basis, excluding an $800 million pre-tax loss on the sale of its student lending operations, Citigroup earned $2.6 billion, or 8 cents per share.
Revenue was the lowest of any quarter this year at $20.7 billion.
Citigroup, which is still 12 percent owned by the U.S. government, has recovered from the worst of the losses that forced it to take three bailouts in 2008 and 2009. But like its rivals, it has struggled to make new loans this year.
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