Citigroup Inc, the fourth-biggest US bank by assets, beat expectations for third-quarter net profit yesterday after trading revenue surged 35%.
The resurgence, which was echoed at rival JPMorgan, is a boost for Chief Executive Michael Corbat, who has stuck with the bank’s trading business while shrinking large parts of its consumer banking business in overseas markets.
While net income fell 11% to $3.84bn, or $1.24 per share, it exceeded the average estimate of $1.16 per share, according to Thomson Reuters I/B/E/S.
Total adjusted revenue fell 4% to $17.76bn, again beating the average estimate of $17.36bn.
Citigroup’s shares rose 2.2% to $49.58 in early trading, similar to gains at rivals JPMorgan, Wells Fargo, Goldman Sachs and Morgan Stanley, as investors lauded a solid start to the US bank earnings season.
Wells Fargo beat third-quarter profit forecasts yesterday. Bank of America reports results on Monday, followed by Goldman Sachs and Morgan Stanley later next week.
Revenue at Citi’s institutional clients group, which includes trading and investment banking, rose 13%, boosted by volatility in fixed income markets.
That volatility and greater activity were spurred by Britain’s June vote to leave the European Union, changing expectations for monetary policy in the United States, Europe and Japan, and money market reforms.
However, equity market revenue fell about 34% as political uncertainty discouraged companies from initial public offerings and share offers.
Citi’s global consumer banking division had a less stellar performance. Net income fell by nearly a quarter due to a higher cost of credit and higher operating expenses.
Part of those expenses were due to the cost of becoming the lender behind retailer Costco Wholesale Corp’s co-branded credit cards this year from American Express Co.
Citigroup said revenue from its North American branded card business grew 15% to $2.2bn, reflecting the addition of the Costco portfolio as well as modest organic growth driven by higher volumes.
The business accounts for about a quarter of its total net income and a third of profit from its global consumer franchises.
Citigroup executives have said the branded card business is expected to generate a 2.3% return on assets, more than double the profitability of the entire company. Overall operating expenses fell 2.5% to $10.40bn.
Despite the solid performance in investment banking, Corbat fell further behind in his quest to reach a 10% return on tangible common equity, a key measure of profitability.
It fell to 7.8% from 8.9% a year earlier. Corbat had set the target of reaching a 10% return on equity by 2015 shortly after taking the reins in 2012. But the bank has found it hard to hit the target as its earnings are squeezed by low interest rates and the US Federal Reserve’s requirement that banks retain more capital.
JPMorgan
JPMorgan Chase & Co beat forecasts for revenues and profits yesterday as global bond and currency markets roared back to life in the third quarter following Britain’s vote to leave the European Union.
Brexit-inspired volatility along with changing expectations for monetary policy in the United States, Europe and Japan as well as money market reforms boosted trading revenue by 21% for JPMorgan, the biggest US bank by assets, prompting pretax profit to jump by one-third.
JPMorgan’s aftertax income dropped 7.6% after recording a tax expense, compared with a rare tax benefit of $2.2bn a year earlier.
Both revenues and profits topped analysts’ estimates.
Earnings per share fell to $1.58 from $1.68 a year ago. Analysts, on average, expected $1.39, according to Thomson Reuters I/B/E/S.
JPMorgan is the first big US bank to report third-quarter results and its performance gave Wall Street a shot in the arm.
The bank’s shares were up 1.6% at $68.84 in pre-market trading while markets-focused rivals, including Goldman Sachs, Morgan Stanley and Citi also rose. In addition to a fillip from Brexit, banks got a boost from a rise in the London interbank offered rate, or Libor, a benchmark for more than $300tn worth of financial products worldwide.
Libor moved to a seven-year high during the third quarter as US money market funds scaled back holdings in short-term bank debt in advance of new regulations.
JPMorgan’s total revenue rose 8% to $25.51bn, beating the average estimate of $23.99bn.
With interest rates at record lows, the banking sector has relied on growing its loan book to boost income. However, total provisions for bad loans rose 86.4% to $1.27bn. JPMorgan posted higher provisions for losses as it added loans and recorded charge-offs for oil and gas loans. Core loans in its commercial banking business grew 14%.
JPMorgan expects income from lending to be up modestly in the fourth quarter.
The Fed last raised rates in December, by 0.25 percentage points, after keeping them near zero for almost a decade. At the start of the year, further rate hikes were widely expected, but now Wall Street expects just one increase in December and possibly one more in 2017. JPMorgan’s return on tangible common equity, a key performance measure, was 13% in the latest quarter, compared with the bank’s longer-term target of about 15%.
Software AG
Germany’s Software AG urged investors to look beyond its quarterly figures to the value of its strategic partnerships after its announcement of a drop in licence revenue sent the software company’s shares to a three-month low.
The shares fell almost 12% yesterday after Software reported a 25% slump in operating income and an 8% slide in total sales – including a fall at its professed growth business.
The company said major deals with customers including automotive parts giant Bosch had slipped into the fourth quarter.
The second-biggest German software company behind SAP is betting on playing a key role in the so-called fourth industrial revolution as manufacturers seek to capitalise on vast amounts of data captured from ever smarter machines.
It urged investors to focus on the strategic value of partnerships with Bosch, and Italian insurance telematics provider Octo signed at the start of the fourth quarter, and confirmed its full-year sales and profit outlook.
“It’s a very strong signal for follow-up business in future,” Chief Financial Officer Arnd Zinnhardt told Reuters in a telephone interview.
Software shares partially recovered to trade 7.7% lower yesterday but were still the leading decliners in the German technology index, which was up 0.5%. At the company’s digital business platform (DBP) unit, where its industrial Internet activities are concentrated, licence revenues – the driver of future service and maintenance streams – fell by 9%. “While the 3Q16 licence miss is a negative, we are encouraged by the early signing of DBP licence deals worth €7.2mn in 4Q16 that were originally expected to close in 3Q16,” Baader Bank analyst Knut Woller wrote, keeping his “buy” rating on the stock.
Software is trying to carve out a place in the fast-growing market for software that helps businesses capture and analyse streams of data gathered by networked sensors attached to objects, and turn them into operationally useful information.
Germany, Software’s biggest market after the United States, is at the forefront of this trend, and Bosch – which also has a strategic partnership with SAP – is a leading player.
Infosys
Indian software giant Infosys cut its annual earnings outlook for the second time in just three months yesterday, sending shares down almost 3%, as cautious clients rein in spending.
The Bangalore-based IT services exporter reported a 6.1% rise in quarterly net profits year-on-year but revised down its sales forecast for the financial year, citing an “uncertain” future.
Infosys shares slumped 2.57% on the Mumbai Stock Exchange in morning trade as a sluggish global economy hits India’s outsourcing industry hard with companies inclined to think twice before rushing to sign contracts.
“Considering our performance in the first half of the year and the near-term uncertain business outlook, we are revising our revenue guidance,” CEO Vishal Sikka said in a statement.
In July, Infosys reduced its growth projection in US dollar terms for the fiscal year 2016-17 from between 11.8% and 13.8% to between 10.8 and 12.3%.
Infosys and rival Tata Consultancy Services benefited as India became a back office to the world with companies taking advantage of the country’s skilled English-speaking workforce by subcontracting work. The companies are seen as the bellwether of India’s flagship outsourcing industry but a recent tightening of the purse strings has put pressure on profits with contracts being postponed and in some cases cancelled.
Infosys said consolidated net profit for the three months to September 30 was Rs36.06bn ($542mn) compared with Rs33.98bn for the same period last year. Revenues were Rs173.10bn, slightly above a prediction of Rs171.8bn by a survey of analysts done by Bloomberg News.
Wells Fargo
Wells Fargo & Co’s profit dropped for the fourth straight quarter as it set aside funds for potential legal costs from a bogus account scandal that cost former Chief Executive and Chairman John Stumpf his job. The bank still posted net income that topped analyst estimates, helped in part by lower-than-expected loan-loss provisions.
Revenue rose 2% to $22.33bn in the third quarter ended September 30, while non-interest income fell 0.4% to $10.37bn.
Net income applicable to shareholders fell 3.7% to $5.24bn, or $1.03 per share, from $5.44bn, or $1.05 per share, a year earlier.
Analysts on average had expected the No 3 US bank by assets to report earnings of $1.01 per share and revenue of $22.21bn, according to Thomson Reuters I/B/E/S. The cross-sell ratio in Wells Fargo’s retail banking unit was 6.25, compared to 6.27 in the second quarter and 6.33 a year ago.
Wells Fargo, which needs to reassure investors that it can keep its profit engine humming while changing its sales culture, still reported a metric that tallies the number of accounts that employees in its retail banking unit were able to “cross-sell” to customers. Long the crux of Wells Fargo’s strategy, cross-selling has been at the centre of the scandal, since regulators said the pressure to hit sales targets drove employees to create unauthorised accounts.
Stumpf, under pressure from lawmakers and other critics, stepped down on Wednesday after 34 years with the bank, handing over the CEO role to Timothy Sloan, who had been chief operating officer, and the chairmanship to lead director Stephen Sanger.
“I am deeply committed to restoring the trust of all of our stakeholders, including our customers, shareholders and community partners,” Sloan said in a statement yesterday.
CITI
