By David Henry
(Reuters) - The European debt crisis interrupted the plans of Citigroup Inc Chief Executive Vikram Pandit to rebuild the bank, which reported an 11 percent drop in quarterly profit and disappointed Wall Street amid lackluster investment banking and trading business.
Citigroup shares fell more than 8 percent on Tuesday. The European crisis battered capital markets in the latter part of last year, hurting Citigroup's trading revenue and discouraging clients from doing deals that could have generated fees.
"Market activity was down significantly and our clients reduced their risk," Pandit told analysts. He added that Citigroup, too, had backed away from the markets at the expense of missed profit opportunities and higher costs for protection against losses.
Citigroup, he said, "prudently derisked and hedged our exposures, actions which have further impacted our revenues."
Citi's results show how investment banking units are dragging down profits for large Wall Street companies and portend a tough fourth quarter for others such as Goldman Sachs Group Inc and Morgan Stanley, which report their results later this week.
In contrast, banks that focus more on business and consumer lending are doing better as the U.S. economy shows signs of recovery. Wells Fargo & Co beat analysts' earnings estimates on Tuesday, helped by improving credit quality and loan growth.
This trend was also reflected last week in the results of JPMorgan Chase & Co.
The results also show that Citigroup, which had to be bailed out by the U.S. government during the financial crisis, still has a long way to go and the global economy and regulatory environment are not helping, even though the New York-based bank has recovered from much of the worst damage that financial institutions suffered at the time.
Citigroup has repaid the U.S. government's bailout investments. Later this year, the company is also scheduled to satisfy the last $38 billion of obligations guaranteed by the Federal Deposit Insurance Corporation.
Its Citi Holdings portfolio, which includes troubled U.S. mortgage operations and other assets the company is shedding, is down to 12 percent of its balance sheet.
Citi Holdings had $269 billion in assets at the end of the fourth quarter, down about $90 billion from a year earlier. With the shrinkage, Citigroup's capital strength has improved.
But the crisis in Europe is slowing Citi's recovery. After trying for months to sell its consumer finance unit, OneMain, Citigroup had to pull it off the market because weak capital markets were not supportive of potential buyers. John Gerspach, chief financial officer, told reporters Citi still intends to sell OneMain.
The trouble Citigroup had coping with the impact of the European crisis seemed to cast doubt, too, on Pandit's ambition to profitably build its consumer banking business in emerging markets. Citi's brand name is relatively strong in those markets, which have been growing faster than have the United States and Europe.
In his conference call with analysts, Pandit was pushed to show that he will do enough cost-cutting to support profits while building up the emerging markets businesses.
He said that after investing last year to rebuild the company's foundation for growth, profits in those markets are poised to grow this year.
Pandit said the bank expects to reduce expenses by between $2.5 billion and $3 billion in 2012 from the $50.7 billion it posted for all of 2011.
The bank took a charge of about $400 million in the fourth quarter for severance costs as it cuts some 5,000 jobs, Pandit said. The bank, which has about 266,000 employees, said in December that it would cut 4,500 jobs and take that charge.
"We are focused on keeping our expense base as low as possible," said Pandit. He added that the company is still cautious about risks to its balance sheet "because we do continue to see a lot of issues out there, particularly in Europe."
The world's major banks have announced more than 133,000 layoffs since mid-2011 as euro zone woes take their toll on trading income and investment banking.
NET INCOME FALLS
Citi, the third-largest U.S. bank by assets, reported net income of $1.16 billion, or 38 cents per share, down from $1.31 billion, or 43 cents per share, a year earlier.
Analysts, on average, expected a profit of 49 cents a share, according to Thomson Reuters I/B/E/S. Estimates were high as 76 cents a share two weeks ago.
In the company's ongoing businesses known as Citicorp, pre-tax profits, adjusted for the debt accounting, fell to $2.7 billion, the lowest in more than two years.
The profit drop came despite a lower provision for bad loans: down 41 percent to $2.9 billion.
Money manager Jeffrey Sica, president of SICA Wealth Management, an independent wealth manager based in Morristown, New Jersey, which has bet against a basket of bank stocks, said Citi's earnings miss was "horrendous" in light of how much estimates had come down.
Revenue in Citigroup's securities and banking segment fell 29 percent from a year earlier, excluding the accounting impact of changes in the value of the bank's debt, the company said.
In contrast, consumer banking revenue, powered by additional business in Latin America and Asia, increased 1 percent in the same period.
Joe Terril of Terril & Co., a wealth management firm in St. Louis, Missouri, with $500 million under management, including stakes in Citi and other bank stocks, said, "Citi is doing all the correct steps to right-size the business, right-size the expenses.
"The overall world economy, in Citi's case for banking, is not a good environment," he said.
(Reporting by David Henry in New York; Additional reporting by Lauren LaCapra; Editing by John Wallace, Paritosh Bansal and Steve Orlofsky)