NEW YORK – Citigroup Inc. (C) on Monday reported second-quarter profit that missed analyst forecasts, as fixed-income trading revenue plunged and higher U.S. bankruptcies hurt credit cards.
Citigroup shares were the biggest drag on the Dow Jones Industrial average (search), falling $1.42, or 3.1 percent, to $45.00, their lowest close since April 5. The shares briefly fell to $44.90 after CNBC television said Sanford "Sandy" Weill, the bank's chairman, would retire to start a private equity fund. Citigroup said that report was wrong.
The world's largest financial services company said revenue from the trading of debt and derivatives declined as the gap between short- and long-term interest rates shrank. Chief Executive Charles Prince called the market environment "one of the worst we have seen in years."
Citigroup also said North American credit card revenue fell 3 percent as more U.S. customers filed for bankruptcy protection ahead of changes in bankruptcy laws.
Steve Roukis, managing director at Matrix Asset Advisors Inc. in New York, said, "It was tough to trade because the yield curve flattened, and credit spreads widened. This business goes up and down -- that's the nature of the beast."
Citigroup appeared more affected by rates than Bank of America Corp. (BAC). The No. 2 U.S. bank on Monday said second-quarter profit rose 12 percent, beating forecasts, helped by cost cutting and growth in credit card fees, though it fixed-income-trading revenue sank 77 percent.
Quarterly net income for New York-based Citigroup more than quadrupled to $5.07 billion, or 97 cents per share, from $1.14 billion, or 22 cents. Analysts polled by Reuters Estimates on average had forecast $1.01 per share.
Revenue fell 3 percent to $20.2 billion, compared with analysts' average estimate of $21.08 billion.
The 2004 quarter included legal costs related to WorldCom Inc. (search) , Enron Corp. (search) and other corporate scandals, and a gain from selling a stake in a Saudi Arabia bank. Excluding these items, profit fell 5 percent.
Asked if Citigroup can increase revenue faster than costs this year, Prince replied in a conference call, "I still feel that is a goal that we can reach."
Capital markets and banking profit fell 31 percent to $1.04 billion. Fixed-income revenue declined 28 percent, including trading declines of 55 percent in interest-rate products and 57 percent in credit products.
"The business was not well positioned" for rate changes, Chief Financial Officer Sallie Krawcheck (search) said on the call.
Rivals hurt by similar weakness include Goldman Sachs Group Inc. (GS) and Morgan Stanley (MWD). JPMorgan Chase & Co. (JPM), which reports results on Wednesday, has also warned of expected trading weakness.
Investment banking revenue fell 1 percent, hurt by lower underwriting fees from junk bonds.
Citigroup's return on equity was 18.4 percent.
Prince has been trying to rid Citigroup of underperforming businesses and improve the company's ethics.
Citigroup recently sold Travelers Life & Annuity and most of its international insurance business for $11.8 billion to MetLife Inc. (MET). In June, it agreed to swap most of its asset management unit for Legg Mason Inc.'s (LM) brokerage business in a $3.7 billion transaction.
Excluding the year-ago impact of the Saudi bank sale, consumer banking profit rose 6 percent to $2.9 billion, including increases of 4 percent in retail banking, 5 percent in cards and 9 percent in consumer finance.
Profit from corporate and investment banking totaled $1.37 billion, rose 38 percent to $385 million in alternative investments, and fell 11 percent to $322 million in wealth management. It declined in all major non-U.S. regions outside Latin America. Assets rose 11 percent to $1.55 trillion.