NEW YORK — Citigroup Inc. on Monday led two other top-10 ranked U.S. banks in reporting higher first-quarter earnings, showing that banks can offset the impact of higher interest rates through diversified businesses.
Citigroup, the nation's largest financial institution, said its profit rose 4 percent in the January-March period, buoyed by record investment banking results and a solid performance by its international business. The bank topped Wall Street projections, despite a slowdown in revenue at its consumer banking operations.
Wachovia Corp., the nation's fourth-largest bank, matched analyst expectations with a 7 percent increase in first-quarter profit. SunTrust Banks Inc., the seventh-largest U.S. bank, beat expectations with an 8 percent gain in profit.
"I think it's clear that the banks that are more tied to the retail sector are going to have a much tougher quarter compared to those with diversified positions," said Richard X. Bove, an analyst with Hoefer & Arnett. "The banks in the retail sector have to deal with interest rate compression, loan volume will be tougher, and they don't have the trading or investment banking that are hot now."
He said the outlook for the banking sector — and the impact rising interest rates have had — will become more clear as others report earnings. On tap to release results this week are Wells Fargo & Co., Washington Mutual Inc., JPMorgan Chase & Co. and Bank of America Corp.
Citigroup reported a profit of $5.64 billion, or $1.12 per share, for the January-March period, up from $5.44 billion, or $1.04 per share, a year earlier. Earnings from continuing operations rose 13 percent to $1.11 per share — beating Wall Street projections for a profit of $1.02 per share, according to analysts polled by Thomson Financial.
Driving results from the New York-based financial services conglomerate was record revenue at its securities unit and its international bank, which helped lift revenue from continuing operations to $22.18 billion from $21.20 billion a year ago. Revenue from consumer banking overseas and investment banking offset a U.S. slowdown, where rising interest rates dented profit margins in its lending business.
Wachovia reported its general banking business earnings soared 21 percent, while its capital management business earnings rose 24 percent. The Charlotte, N.C.-based bank's corporate and investment banking earnings increased 3 percent, but its wealth management business dropped 5 percent as higher expenses outpaced revenue growth.
Overall earnings increased to $1.73 billion, or $1.09 per share, up from $1.62 billion, or $1.01 per share, a year earlier. Excluding merger-related costs, the company would have reported earnings of $1.12 per share — matching Wall Street projec- tions. Revenue rose 9 percent to $7.06 billion from $6.47 billion in the year-ago period.
Atlanta-based SunTrust reported net income of $531.5 million, or $1.46 per share, versus a prior-year profit of $492.3 million, or $1.36 per share. Wall Street had forecast a profit of $1.43 per share. Fully taxable-equivalent revenue rose 9 percent to $2.05 billion.
Citigroup shares rose 30 cents to $48.35 on the New York Stock Exchange, where it has traded in a 52-week range of $42.91 to $49.76. Wachovia shares fell 80 cents to $55.05 on the NYSE; it has traded in a range of $46.30 to $57.86.
SunTrust shares fell 21 cents to $73.60 on the NYSE; it has ranged from $65.32 to $76.75.
Citigroup Chief Financial Officer Sallie Krawcheck said there could be some relief ahead for retail banks. She said the recent rise in long-term interest rates would help Citigroup weather the recent flattening of the yield curve, in which the gap between short- and long-term rates narrows.
The change in the yield curve cut profit margins on loans throughout the banking industry during the first quarter. This was one of the main reasons Citi — like Wachovia and SunTrust — realized sluggish growth from its U.S. retail operations.
Declining short-term rates would help boost Citi's consumer division, though the Federal Reserve — which has raised interest rates 15 consecutive times — is not expected to change its policy in the near future. But rising, or, as Krawchuck put it, steepening, long-term rates would help Citi. Higher rates makes it more profitable to lend money for the long term.
"I wouldn't say that the interest rate people are doing backflips down the hall at this stage," Krawcheck said. "But if and as it continues to steepen, and on the whole we would expect to see some additional steepening, that would provide some opportunity for us."