Citigroup (fwd)

July 17, 2006 Citigroup Posts Profit Gain, but Sees Challenges By ERIC DASH Citigroup reported a 4 percent rise in its second-quarter earnings today, but it said it faced a .challenging. operating environment as global market turbulence continues and the American economy slows. Strong results from its international consumer and trading and advisory groups once again offset weaker performance from its domestic consumer businesses as interest rates rise. But in his first quarter since succeeding Sanford I. Weill as chairman, Citigroup.s chief executive, Charles O. Prince III, cautiously celebrated the growth in earnings and revenue. .We are also pleased with the momentum we are building from our organic growth,. Mr. Prince said on conference call with investors and analysts before noting the .challenging capital market conditions.. The company reported that its net income rose to $5.27 billion, or $1.05 a share, in the second quarter, from $5.07 billion, or 91 cents a share, in the comparable quarter of 2005. The earnings in the latest quarter missed analyst expectations for the fourth time in five quarters. Revenue increased to $22.2 billion in the second quarter, up 10 percent from $20.2 billion a year earlier. Over the past year, Mr. Prince, 56, has led a major overhaul of Citigroup.s strategy, pushing for greater expansion overseas and a focus on internal growth instead of acquisitions. He has encouraged more cooperation between the bank.s different business units and ramped up investment in its retail operations, opening more than 500 new branches worldwide in the past six months and introducing a new high-yield savings account online. And Mr. Prince has gradually put his own stamp on the company, tightening internal controls as part of a bold plan to resolve Citigroup.s run-ins with regulators as well as more subtle efforts to update its brand image and install his own management team. But Wall Street has yet to embrace all the changes. Citigroup.s stock has been essentially flat since Mr. Prince took over as chief executive as well as for the first six months of this year. Citigroup.s shares were trading down about 2 percent this afternoon. The underlying financial results have similarly been mixed. While today.s earnings showed glimmers of good news, they hinted at the challenges brewing. Citigroup.s corporate and investing businesses posted profits of $1.7 billion, 26 percent above the second-quarter level of last year, and revenue of $6.8 billion, a gain of 31 percent. The early spring.s tidal wave of trading revenues in both the global fixed-income and equity markets, as well as the steady flow of advisory fees, led the business to generate near-record revenues, even as investors pulled back from the market in late May and June. .This quarter was our second-best quarter despite the challenging conditions coming out of the emerging markets,. Mr. Prince said on the conference call. But with market volatility still up and trading volumes still down, Citigroup.s chief financial officer, Sallie Krawcheck, acknowledged the challenges ahead. While the investment bank.s deal .pipeline is at record levels,. she said, any rate volatility or uncertainty will have a .measurable impact. on results. Trading could also be negatively affected. .There will be opportunity to make money on volatility, but clearly if there is lower volume, it is difficult to make money,. she added. The same is true for Citigroup.s consumer businesses. Once again, the international consumer businesses generated double-digit increases in revenue and profits. Net income rose to $1.2 billion, up 10 percent over the second quarter in 2005. Meanwhile, Citigroup.s United States consumer businesses posted $2.1 billion in second-quarter profits, a 11 percent increase from 2005. But much of that rise was from the $132 million pretax gain related to the sale of its upstate New York retail banking branches. The increase was also bolstered by he release of $160 million pretax in loan loss reserves, which raised credit card profits even as revenue remained flat. Consumer lending profits were down 7 percent, as higher interest rates put pressure on revenues and profit margins. And the full impact of Citigroup.s retail branch-building effort, an expensive endeavor, will not be realized for some time. .We thought we saw baby steps this quarter,. Ms. Krawcheck said in a news briefing. .Before you start to grow, you have to stop shrinking. And after a fourth quarter and first quarter that were very tough, we feel better. By no means are we doing back flips down the halls.. Profits from Citigroup.s investment management division rose to $347 million, up 8 percent. But while a 29 percent increase Smith Barney revenue was driven in part by customer volume, individual investor activity may be lighter next quarter if the turbulence persists. Citigroup.s alternative investments profits fell to $257 million, down 33 percent because of poor private equity results. Citigroup repurchased about $2 billion worth of company stock as part of a previously announced buyback program. -- ------------------------------ * * Dr. James Lee Ellingson, Adjunct Professor jellings(a)me.umn.edu * * University of Minnesota, tel: 651/645-0753 fax 651 XXX XXXX * * Great Lakes Brewing News, 1569 Laurel Ave., St. Paul, MN 55104 *