By David Henry and Tanya Agrawal
(Reuters) - Citigroup Inc <C.N> said on Monday its first-quarter profit jumped 30 percent, a stronger-than-expected increase, as the No. 3 U.S. bank generated more money from underwriting stock issues and advising companies on mergers.
Citigroup shares closed 0.2 percent higher after the results, which provided more evidence that a long-awaited turnaround might be under way at the bank six months after its board pushed out Vikram Pandit as chief executive and handed the reins to Michael Corbat.
Investors were encouraged by signs the bank was keeping a lid on expenses while bolstering revenue and reducing losses on bad assets. The bank's shares have risen more than 80 percent since last June, in part because of the improving economy and partly because of its own efforts to get its house in order.
"Citigroup has been so messed up for so many years, there's an opportunity for them," said Mark Mandell, portfolio manager at Dalton Investments in Santa Monica, California, which owns Citigroup shares.
"All they have to do is a get a little better and they can get back to a valuation closer to their competitors."
Citigroup's shares trade at a discount to their tangible book value, an accounting measure of their net worth, even as those of many competitors trade at a premium.
(For a graphic on Citigroup earnings, click on http://link.reuters.com/fuf47t)
The bank's biggest gains came from its investment bank, particularly in North America. Citigroup hired bankers about two years ago and those investments in staff paid off in the first quarter, said John Gerspach, chief financial officer, on a conference call with reporters.
For North American merger advisory, these hires helped the bank rise to a No. 5 from No. 14 ranking in the first quarter of 2012, Thomson Reuters data show.
SIGNS OF RECOVERY
First-quarter net income rose to $3.81 billion, or $1.23 a share, from $2.93 billion, or 95 cents a share, a year earlier.
Excluding accounting adjustments, earnings were $4.01 billion, or $1.29 a share, up from $3.42 billion, or $1.11 a share, a year earlier.
Analysts on average had forecast $1.17 a share before the accounting adjustments.
Profitability of its lending, known as its net interest margin, came in at 2.94 percent in the first quarter, up marginally from 2.93 percent in the fourth quarter. Margins at many of the bank's competitors are shrinking as persistently low lending rates cut into income. But Citigroup has other levers to press for its net interest margin, including the fact that its high liquidity allows it to buy back expensive debt. It also found that the cost of gaining deposits abroad grew cheaper.
Revenue rose 6 percent to $20.49 billion, while expenses came in at $12.40 billion, a bit higher than a year earlier, but down 10 percent from the 2012 fourth quarter, when Citigroup was saddled with new legal costs form related to consumer banking.
In December, the bank announced $900 million of planned annual expense savings from 11,000 layoffs and other cost-cutting moves. Much of those gains will likely be realized in the second half of the year, executives said on a call with investors, in part because cutting staff often requires giving a multi-month notice.
Annualized, first-quarter expenses amounted to $49.6 billion, compared with $50.5 billion of expenses for all of 2012. The increase compares with a 3 percent rise in total revenues, excluding certain accounting adjustments. That means the company enjoyed positive operating leverage.
"We still believe the results of all the repositioning actions will become evident as we go through the remaining three quarters of the year," Gerspach said.
INVESTMENT BANKING SETS PACE
Revenue from Citigroup's securities trading and investment banking business rose 31 percent to $6.98 billion in the first quarter. Excluding adjustments linked to changes in the value of the company's debt and to changes in trading partners' credit quality, revenue rose 8 percent to $7.29 billion.
The biggest change came from North America, where revenue jumped 48 percent to $3.07 billion, excluding the accounting adjustment. On a product basis, revenues in merger advisory rose 84 percent to $204 million, while equity underwriting revenue rose 45 percent to $225 million.
On underwriting, Citigroup participated in the $2.57 billion initial public stock offering of Zoetis Inc <ZTS.N>, Pfizer Inc's <PFE.N> animal health subsidiary.
One of the deals on which Citigroup served as an adviser was Lehman Brothers Holdings Inc's $6.5 billion sale of apartment buildings owned by Archstone Enterprise LP to Equity Residential <EQR.N> and AvalonBay Communities Inc <AVB.N>.
CITI HOLDINGS IMPROVES
At Citi Holdings, the unit formed to house the company's problem assets, the net loss narrowed to $794 million from $1.0 billion. Revenues rose 15 percent and the cost of credit dropped 44 percent, but expenses increased 23 percent.
The bank's overall first-quarter profit contributed to an increase in Citigroup's Basel III Tier 1 common equity ratio, an important regulatory measure of capital, to 9.3 percent at the end of March from 8.7 percent three months earlier, the company said.
Citigroup's book value per share rose 1 percent to $62.51 and its tangible book value per share rose to 3 percent to $52.35.
Citigroup's shares closed 9 cents up at $44.87 early Monday afternoon on the New York Stock Exchange, have reflected the sign of recovery at the bank. Their 16 percent increase this year compares with the KBW Bank index's 9.6 percent <.BKX> rise and the Standard & Poor's 500 11.4 percent. <.SPX.>
Last month, Citigroup received Federal Reserve approval to buy back $1.2 billion of its shares.
That was a reversal from last year, when the bank failed to win Fed approval to distribute more capital to shareholders, which proved an embarrassment to Pandit. The episode helped weaken his standing with the board of directors and he resigned last October.
Even with an increase in Citigroup's net worth during the quarter, the market on Monday morning still valued the stock at only 0.88 times tangible book value per share, while shares of JPMorgan chase traded 1.24 times tangible book.
(Reporting by David Henry in New York and Tanya Agrawal in Bangalore; Editing by Supriya Kurane, John Wallace and Bernard Orr)