By Mehnaz Yasmin and David Henry
(Reuters) -Citigroup Inc shares surged more than 10% on Friday after the third-largest U.S. bank posted a smaller-than-expected 27% drop in quarterly profit on unusual strength in its treasury services business and its trading desks cashed in on market volatility, cushioning a slump in investment banking.
The Treasury and Trade Solutions (TTS) business, Citi's crown jewel, posted a 33% jump in revenue to $3 billion on the back of higher net interest income and fee growth, the best performance in a decade, the bank said.
Markets revenue, meanwhile, jumped by 25% to $5.3 billion, thanks to volatility in the commodities and foreign exchange markets -- a particularly strong segment for the bank.
Investors and analysts hailed the quarter as a long-awaited sign that Chief Executive Officer Jane Fraser's ambitious plan to restructure the bank and bring its share price and profitability in line with peers was paying off.
"The results we saw from Citi today show that the turnaround plan is on track. Trading and interest income offset the industry-wide weakness in investment banking," Thomas Hayes, chairman and managing member at Great Hill Capital LLC, wrote on Friday. "This is the cheapest large ... bank with the highest upside potential."
The bank's profit fell to $4.5 billion, or $2.19 a share, in the quarter ended June 30, from $6.2 billion, or $2.85 a share, a year earlier. Excluding items, Citi earned $2.30 per share, according to Refinitiv calculations, beating the average analyst estimate of $1.68 per share.
The profit decline also reflected a $375 million increase in reserves for potential loan losses as the economic outlook darkens. A year earlier exceptional government stimulus and the economy's recovery from the pandemic had allowed it to release $2.4 billion of reserves.
That increase in reserves pushed up Citi's overall credit costs to $1.3 billion, a sharp contrast to the $1.07 billion benefit it enjoyed a year earlier.
Putting aside the reserve build, the stronger-than-expected results suggest Citi's core operating businesses are performing well, said analysts and investors.
"Citigroup appears to be one of the highlights of the bank earnings season so far," said David Wagner, a portfolio manager at Aptus Capital Advisors, adding that the treasury and trade solutions business was "firing on all cylinders, insulating all of the losses from the investment banking segment."
Revenue at TTS, which handles international business payments and cash management, surged on a 42% increase in net interest income from higher rates and deposits, as well as a 17% rise in fees, Citi said.
As with its peers, trading also emerged as a bright spot this quarter for Citi as investors rebalanced their portfolios in the face of geopolitical tension, surging inflation and fears that aggressive Federal Reserve policy tightening could plunge the economy into a recession.
That helped offset a 46% decline in investment banking revenue to $805 million as the volatility dried up underwriting and advisory fees for investment bankers whose deals drove Wall Street's profit during the depths of COVID-19.
Despite the strong underlying results, Citi will suspend share buybacks in the face of threats to the economy and the need to build up a key regulatory capital ratio, which is increasing, Chief Financial Officer Mark Mason told reporters.
The buyback pause confirmed expectations of analysts and followed a similar move by JPMorgan Chase & Co on Thursday.
For Citi, stopping buybacks carries unusual pain because its shares have been trading for about half of the company's net worth as shown on its balance sheet - far cheaper than other big banks.
The bank, which disclosed an exposure of $8.4 billion to Russia as of the second quarter, said it was exploring all options to exit its consumer and commercial banking business in the country. Major U.S. banks and securities firms are exiting their Russia businesses as they work to comply with U.S. sanctions imposed after the invasion of Ukraine.
Credit card marketing also showed signs of paying off, with Citi-branded card revenue increasing 10% on higher loan balances, an 18% rise in new accounts and higher interest rates. Mason said the bank had not relaxed its credit standards and that it has not seen signs of more card loans going bad.
"Signs of growth for card balances and fee growth as well as personal banking and wealth management, will be key metrics we will be watching as expected pressure within investment banking plays out," wrote David Sekera, U.S. market strategist at Morningstar.
"Overall, we thought the bank performed well on all of these metrics this quarter."
(Reporting by Mehnaz Yasmin and Niket Nishant in Bengaluru and David Henry and Saeed Azhar in New York; Editing by Aditya Soni, Jonathan Oatis, Nick Zieminski and Michelle Price)