Home Equity Performance Weakens, But Citi Remains Strong
Financial services behemoth Citigroup posted second quarter earnings that were up 18% from a year earlier, but the company's consumer banking division wasn't one of the drivers of that increase.
Citi's global consumer banking division posted earnings of $2.7 billion in net income for the second quarter of 2007, down 15% from the year earlier period. Within U.S. consumer banking, Citi said it anticipates higher losses on second mortgages.
Citigroup's U.S. consumer division, which includes mortgage lending, saw credit costs rise $183 million compared with the year earlier. That resulted in a net charge of $245 million to increase loss reserves. In the year earlier period, Citi benefited from a release from its loss provision.
But while Citi reported lower net income from its U.S. consumer division in the second quarter, it also said that revenue from the group was up from a year earlier. Citi cited an increase in net interest revenue and loan servicing revenue for the growth in revenue. The acquisition of ABN Amro Mortgage Group in March of this year also generated higher revenue. Citi said the increase in loss provision primarily reflected higher delinquencies in second mortgages, a change in the estimate of loan losses related to credit cards, and portfolio growth.
Citigroup, in a presentation to investors and analysts, stressed that the company's exposure to subprime mortgages is limited. The company said that 15% of its $147 billion first mortgage portfolio consists of loans to borrowers with FICO sores below 620, and another 13% have scores between 620 and 660.
Citi said none of its home $69 billion second mortgage portfolio consists of loans to borrowers below a FICO score of 620. Overall, Citi reported record income from continuing operations of $6.2 billion, up 18% from the year earlier period. Earnings per share were $1.24, also up 18%. The company generated record revenue of $26.6 billion, up 20%. Citi said that investment banking, wealth management and alternative investments showed the largest increases in revenue.
Analysts at CreditSights said Citi benefited from strong performance in its international operations during the second quarter, but noted that credit costs are rising in the United States.
Citi addressed its exposure to subprime mortgages and leveraged loan securities, saying that subprime securities only represented about 2% if its 2006 securities and banking revenue. The company said it has reduced its subprime secured lending exposure to about $13 billion, from about $20 billion in the first quarter and $24 billion at the end of 2006. "How the run-off continues hinges on market conditions, so negative marks on the portfolio remain a concern given skittish markets of late," CreditSights said in a report.
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