From Mahnaz Yasmine and Saeed Azhar
(Reuters) – City Group Inc (NYSE 🙂 beat estimates for third-quarter earnings on Friday as its lending business benefited from a series of interest rate hikes by the Federal Reserve and offset weakness in other divisions such as investment banking and trading.
After dealing with years of near-zero interest rates, banks are seeing a huge jump in net interest income from increasing prime lending rates as the Fed tightens monetary policy to stem decades-high inflation.
However, the aggressive stance of the central bank has raised fears of a slowdown in the economy that will in turn halt investment banking activity, cause financial market turmoil, and prompt companies and households to suspend their borrowing plans.
“I don’t think there is a financial crisis coming … of anything close to the scale of what we saw,” Mark Mason, chief financial officer, said in a media call.
“We are prepared for what the environment looks like and are constantly running scenarios to ensure we are prepared to deal with that.”
Net interest income, or the difference banks can charge between the cost of borrowing and lending money, rose 18% to $12.6 billion from the previous quarter.
However, revenue from investment banking was down 64% to $631 million from a year earlier, when Citi had the best quarter in mergers and acquisitions and the second best quarter in the investment banking sector in a decade.
Revenue from the Markets division, which includes equity and fixed income trading units, also declined 24% during the quarter.
“Citi’s decline in trading returns has been worse than other banks, but we believe this is mostly due to their in-trade mix, rather than loss of market share,” said Jason Benowitz, senior portfolio manager at Roosevelt Investments.
Excluding items, Citi reported earnings of $1.5 per share, beating analyst estimates of $1.42 per share. Its revenue rose 6% to $18.5 billion.
Although Citi isn’t a big player in the leveraged financing market, it wrote off $110 million in the third quarter, as rising interest rates made it difficult to offload high-risk debt on investors and other lenders.
The deteriorating economic picture also led the bank to add $370 million to its loan loss reserves in the last quarter, compared to the release of $1.16 billion a year earlier.
The increase in reserves drove Citi’s total credit costs to $1.36 billion, the highest level in eight quarters since the third quarter of 2020.
The bank disclosed $7.9 billion in exposure to Russia, $500 million less than in the second quarter, and said it also plans to wind down nearly all of its institutional banking.
Under CEO Gene Fraser, the bank has exited key overseas markets as it struggles to keep pace with larger competitors in terms of stock valuations and profitability while working on its own risk controls.
It will likely take Citi “3-5 years to achieve more ‘normal’ profitability measures,” said Eric Compton, equity strategist at Morningstar.
Shares of the bank rose 2% to $43.78 in late morning trading.