Citigroup Inc reported a 48 % increase in third-quarter profit, handily beating market expectations, as the firm released loan loss reserves and profited from equity underwriting and investment banking advice fees.
As cash-flush customers paid down loans, resulting in decreased interest income for the bank, the reserve release and boost from M&A countered reductions at its consumer bank.
Customers have been paying down debt to lower interest payments or avoid late penalties while locked at home during the pandemic. Lenders with significant consumer businesses have suffered as a result of this.
There were, however, some encouraging indicators for the bank. Purchases of cards increased by 20% as consumer spending increased during the quarter. Consumers have begun to show signs of taking on additional debt, while their cash levels are dwindling, according to executives at other prominent U.S. banks.
"While solid consumer balance sheets have had an impact on lending, we are witnessing stronger consumer spending across all of our card products," said Jane Fraser, CEO.
Net income increased by 48 % to $4.6 billion, or $2.15 per share, in the three months ended Sept. 30, compared to $3.1 billion, or $1.36 per share, a year earlier. According to RBC Capital Markets, analysts predicted a profit of $1.65 per share on average.
Following the announcement, Citi's stock jumped about 1%.
The bank depleted $1.16 billion in loss reserves set up during the pandemic to cover possibly bad loans that never occurred. Citigroup increased its reserves by $436 million a year ago.
Bank of America, JPMorgan Chase, and Wells Fargo have also released monies kept aside during the pandemic.
Citigroup's investment banking revenue jumped 39 % to $1.9 billion, helping to offset a 16 % drop in fixed-income revenue from a year ago when markets were experiencing extraordinary volatility.
The results were also hampered by higher expenses and lower net interest revenue.
Net interest revenue fell 1% year over year, but was up 2% year over year, indicating an end to the declining trend that began when the pandemic broke out and the Federal Reserve slashed interest rates to near zero, causing many borrowers to pay down their loan balances.
Lower interest rates also impacted Citigroup's Treasury and Trade Solutions unit, which saw revenue fall 4% despite increased fees and trading growth.
In North America, revenue from Citi-branded cards dipped 1%, while revenue from cards issued to merchants plummeted 6%.
The impact of a loss on the previously announced sale of its Australia consumer banking unit was included in the results. Revenue grew 3%, excluding the loss on the sale, thanks to the institutional business.
Operating expenses grew 5% to $11.5 billion as the corporation increased spending on technology and employees to upgrade its control systems in response to regulatory requests made a year ago.
Investors are particularly concerned about Citigroup's costs because the bank has not stated how much money and time it will need to meet regulators' requirements and repair its systems.
The bank is also increasing its investment in wealth management and corporate transaction services.
The increased spending, according to Fraser, will help Citigroup's "transformation" into a more efficient and focused corporation that can achieve returns comparable to its peers.
The cost of marketing credit cards has been growing at Citigroup and other card issuers. As the pandemic eases, JPMorgan said on Wednesday that it will likely spend more on card marketing to get clients to spend.
For more than a decade, Citigroup has delivered poorer returns on equity than competitors, and the stock market values the business at a lower level than its balance sheet.