Citi tops targets but cites 'challenging' economy

@CNNMoney October 17, 2011: 2:34 PM ET

NEW YORK (CNNMoney) -- Citigroup Chief Executive Vikram Pandit said the firm 'continues to navigate a challenging economic environment' as the firm reported earnings and revenue that topped forecasts.

Citi (C, Fortune 500)'s better-than-expected performance in the latest quarter came from an unusual accounting quirk, known as credit value adjustment (CVA). What that does is allow the bank to book gains from increases in credit spreads.

As credit spreads widen and investors bet on an increase in Citigroup's credit risk, the bank actually reports higher gains.

Still even when backing the so-called CVA, the bank still beat expectations. Citigroup reported third-quarter net income of $3.8 billion, or $1.23 a share, up 74% from a year ago. Excluding the CVA adjustments, Citi earned 84 cents a share. Analysts had expected 81 cents a share.

Revenue rose to $20.8 billion in the quarter. Excluding the adjustments, revenue was 8% lower from a year earlier at $18.9 billion. Analysts had expected Citi to report revenue of $19.2 billion.

During an investor call, Pandit reiterated his plan to return value to shareholders in 2012, either through a dividend or a stock buybacks.

Citigroup also said that it would not be selling its credit card division that services large retail customers, citing increased demand and less competition.

That initially helped give the stock a boost in the early going but by mid-afternoon, shares of Citi wre down 1%, along with the broader market. Bank stocks have gotten hammered this year. Shares of Citi are down roughly 40% from the start of the year.

The housing market continues to present ongoing challenges for many banks, including Citi.

Pandit sounded alarm bells on the residential mortgage market, noting that the financial services firm has seen a surprising uptick in re-defaults on modified home loans.

"We believe mortgages are the biggest risks," he said.

In Asia, where Citigroup holds a significant portion of its mortgage portfolio, banks have more leeway to recover losses. There, home mortgage lenders can take a non-paying homeowners house as well as sue them in court. Most Asian countries set lower limits on how much homeowners can borrow against their home.

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"It was encouraging to hear that it's a more lender-friendly mortgage market in Asia than the U.S.," said Jeff Harte, a banking analyst at Sandler O'Neill.

Throughout the conference call, Pandit emphasized Citigroup's position in emerging markets as a big growth driver.

Like other Wall Street firms, Citigroup's investment banking and bond trading divisions took a big hit, but those units only account for a minority of Citigroup's business so the effect was somewhat less hurtful.

The story may be different for other Wall Street firms. For example, investment banking and trading make up the majority of earnings at Morgan Stanley (MS, Fortune 500) and Goldman Sachs (GS, Fortune 500), which report later this week.

August and September's volatile markets took a big toll on those businesses, which slowed considerably as merger and acquisition activity, initial public offerings and corporate debt deals to skid to a near standstill.

Citi is the third of the big Wall Street firms to report. Last week, JPMorgan Chase (JPM, Fortune 500) issued a cautious statement as it reported solid results.

Shares of Wells Fargo (WFC, Fortune 500) dropped 8% after it released third-quarter earnings and revenue that fell short of analysts' predictions.

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Wells Fargo reported third-quarter net income of $4.1 billion, up 21% from a year ago. Excluding certain credit adjustments, Wells Fargo earned 72 cents a share. Analysts had expected 73 cents a share.

Revenue fell 6% to $19.6 billion in the quarter. Analysts had expected Wells Fargo to post revenue of $20.3 billion.

Bank of America (BAC, Fortune 500) is also due to report later this week.

-- CNNMoney Markets Editor Catherine Tymkiw contributed to this report. To top of page

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