ON OCTOBERBER 15th Citigroup announced its third-quarter earnings. At first glance the figures looked pleasing. Net income rose between July and September this year to $3.2 billion, up from $468m last year. But break down Citi's earnings and the picture was worse.
Stripping out credit valuation adjustments, adjusted earnings per share in fact fell from $1.06 last year to $1.02 this year. And it seems that the drop in profitability of 19% at Citi’s core operations has been masked by an improvement in its portfolio of non-core assets. Consumer-banking profit fell 23% because of increases in long-term interest rates since April.
Profit also decreased, by 15%, in its investment banking and securities division, caused primarily by a fall in investment-banking fees and bond-trading revenues. Most of the growth in revenues and profits came from Citi Holdings, a pool of non-core assets currently being run down or sold off. Losses in this part of the bank fell to just $98m.
Citi's chief executive, Michael Corbat, claimed that the bank has been through a tough macroeconomic environment, accounting for the disappointing picture. But the bad results come a year after Vikram Pandit resigned (or was ousted, many say) as chief executive in reaction to shareholder dissatisfaction with the bank’s low profitability. Mr Corbat's appointment, markets hoped, would accelerate cost cutting, smooth relations with regulators and boost profitability. Under Mr Pandit, Citi’s share price had fallen 89% and it was hoped his successor would accelerate the return to better times.
Markets have been persuaded by this change. Citi’s share price has risen more than 30% since Mr Corbat took the reins (it has easily rebounded from a small dip after Citi's earnings release). But its quarterly report has left some analysts wondering whether last year’s sudden change in management has done any good. Although Mr Corbat sped up plans to cut jobs, announcing last December that 11,000 jobs would go, the blueprint for this had already been laid out by his predecessor.
Mr Corbat has also inherited a gilded legacy in other ways. Mr Pandit’s enthusiasm for writing down bad loans depressed headline profits, but it made the bank slimmer and better positioned for the future. Now, declared write-downs (net credit losses) have fallen by 38% compared to the third quarter of last year, possibly indicating that long-term structural reform may be being sacrificed in favour of raising short-term headline profits. Just like its recent earnings, last year’s management changes may also go down in history as not as good as they first seemed.