Citigroup results show that restructuring has its costs

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By David Henry and Niket Nishant

(Reuters) – Citigroup Inc has displayed some of the financial bruising needed for its ongoing restructuring as it reported a 26% drop in fourth-quarter profit on Friday.

The bank said results were depressed by $1.1 billion in after-tax spending for its pending divestments of consumer banking businesses outside the United States.

The lender ditched the last of its non-U.S. consumer businesses as part of a “strategy refresh” launched by chief executive Jane Fraser, who took the helm in March.

Operating expenses were up 18% year over year with expenses, but still up 8% for its ongoing operations.

It has also spent more in recent quarters to fix problems identified by regulators in its control systems, leading investors to wonder how much money and how long the fixes will take.

The bank said this week it would wind down its huge consumer bank in Mexico and earlier on Friday announced the sale of its retail branches in Indonesia, Malaysia, Thailand and Vietnam to the Singapore-based lender. United Overseas Bank.

Fraser said the decision on the Mexican business is the last major move to come in the new strategy that will focus more closely on Citigroup’s institutional business.

She said the Mexican business is “a gem,” but for someone else. [L1N2TU28H]

“Our vision for Citi is to be the preeminent bank for institutions with cross-border needs,” Fraser told analysts, adding that it also aims to be “a global wealth leader, payments and loans to consumers in the internal market.

“It’s simplified, more focused,” she said.

Citigroup’s costs also rose due to a battle for talent on Wall Street that prompted global banks to offer perks like higher salaries and bonuses.

“We’ve seen some pressure on what you have to pay to attract talent,” chief financial officer Mark Mason said in a post-earnings call with reporters.

Rising costs caused the bank’s profit to drop to $3.2 billion, or $1.46 per share, in the quarter ended Dec. 31, from $4.3 billion, or $1.92 per share, a year earlier.

Lower earnings had sent the company’s shares down as much as 3.5% in early trading, but they pared losses after chief financial officer Mason confirmed the company would resume share buybacks as planned.

The stock closed down 1.2% on Friday.

Citi had suspended redemptions in the fourth quarter to build capital ahead of accusations of shutting down its Korean consumer business and the impact of a new capital rule for derivatives risk.

Excluding the impact of divestments in Asia, the bank earned $1.99 per share. Analysts on average had expected earnings of $1.38 per share, according to data from Refinitiv IBES.

Its global personal banking revenue fell 6% as Citi-branded credit cardholders in North America paid off their card balances, denying it interest income.

“Spending rates have increased, which is good, but we need to see that materialize into average interest-earning balances, which means payment rates need to normalize,” Mason said.

Treasury and Trade Solutions revenue, generally considered Citigroup’s strongest corporate business, fell 1% due to low interest rates.

The bank’s overall net interest income (NII) was flat year-over-year at $10.82 billion as corporate borrowings remained flat. But the NII for the bank’s core lending activity outside the markets rose 0.6%.

Net interest margin, which measures the difference between what Citigroup pays for cash and what loans and securities earn, fell to 1.98% from 2.06% a year earlier.

A bright spot in the quarter was the bank’s investment banking business, which saw a 43% increase in revenue.

Total revenue increased 1% year over year to $17 billion.

Wall Street peers JPMorgan Chase & Co and Wells Fargo & Co also reported results Friday, with earnings comfortably beating consensus estimates.

(Reporting by Niket Nishant in Bengaluru and David Henry in New YorkEditing by Aditya Soni and Matthew Lewis)

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