By RTT News,
July 14, 2014, 09:53:00 AM EDT
(RTTNews.com) - Financial services giant Citigroup Inc. ( C ) said Monday that it has reached a deal to pay $7 billion to resolve a U.S. probe into the company's sale of mortgage-backed bonds before the 2008 financial crisis.
As per the terms of the settlement, Citigroup will pay a total of $4.5 billion in cash and provide $2.5 billion in consumer relief. The company took a charge of about $3.7 billion after-tax in the second quarter of 2014, in connection with the settlement.
Citigroup also reported a 96 percent decline in profit for the second quarter from last year, reflecting the mortgage-settlement charge and lower fixed-income trading as well as mortgage banking revenues. However, adjusted earnings per share for the quarter beat analysts' estimates.
During the latest quarter, the lender reduced the size of Citi Holdings, but reported a wider loss due to the mortgage settlement.
Citi Holdings assets of $111 billion declined 15 percent from the prior-year period and represented about 6 percent of total Citigroup assets at quarter-end.
Citigroup ended the second quarter with an estimated Basel III Tier 1 common ratio of 10.6 percent, up from 10 percent in the year-ago period. This was largely earnings and the utilization of deferred tax assets or DTA.
Citigroup's second-quarter net income fell to $181 million or $0.03 per share from $4.18 billion or $1.34 per share in the year-ago period.
The latest quarter's results included the impact of a charge of $3.7 billion after-tax to settle residential mortgage-backed securities or RMBS and collateralized debt obligations or CDO-related claims, which consisted of $3.7 billion in legal expenses and a $55 million loan loss reserve build, each recorded in Citi Holdings.
The latest quarter's results also include credit/debit valuation adjustments or CVA/DVA of negative $20 million after-tax. In the prior-year period, this was positive $293 million after-tax.
Excluding these items, adjusted net income for the latest quarter was $3.83 billion or $1.24 per share, compared to $3.88 billion or $1.25 per share in the same period last year.
On average, 23 analysts polled by Thomson Reuters expected the company to report earnings of $1.05 per share for the quarter. Analysts' estimates typically exclude special items.
Revenues for the quarter declined 6 percent to $19.34 billion from $20.49 billion in the previous-year quarter. Adjusted revenues for the quarter were $19.38 billion, compared to $20.01 billion in the year-ago period. Analysts' revenue consensus was $18.93 billion.
The decline in adjusted revenues was driven by a 5 percent decline in Citicorp revenues. This was primarily due to a decline in Fixed Income Markets revenues in Institutional Clients Group or ICG, and lower U.S. mortgage refinancing activity in North America Global Consumer Banking or GCB, partially offset by higher Citi Holdings revenues.
Net credit losses declined 16 percent from last year to $2.19 billion. Citigroup's cost of credit declined 15 percent to $1.73 billion, reflecting a $419 million improvement in net credit losses.
However, operating expenses rose 28 percent from the prior-year period to $15.52 billion. Excluding the impact of the mortgage settlement, operating expenses declined 3 percent to $11.8 billion, driven by continued efficiency savings, the overall decline in Citi Holdings assets and lower legal expenses.
Segment-wise, Citicorp revenues declined 8 percent from the previous-year period to $17.88 billion and included negative $20 million, after-tax, of CVA/DVA reported within the ICG business. Excluding CVA/DVA, revenues declined 5 percent to $17.91 billion.
Within the segment, Markets & Securities revenues declined 16 percent, or decreased 7 percent excluding CVA/DVA, to $4.08 billion.
However, investment banking revenues rose 16 percent, reflecting a 17 percent increase in debt underwriting revenues and 31 percent growth in equity underwriting revenues. This was partly offset by 10 percent decline in advisory revenues.
Global Consumer Banking revenues for the quarter declined 3 percent to $9.38 billion. Lower U.S. mortgage refinancing activity, regulatory changes, repositioning actions in certain markets and the continued impact of spread compression globally more than offset the impact of the Best Buy portfolio acquisition and ongoing volume growth in most international businesses.
Citigroup noted that its mortgage settlement agreement will resolve actual and potential civil claims by the U.S. Department of Justice, several state attorneys general, and the Federal Deposit Insurance Corporation or FDIC relating to residential mortgage-backed securities or RMBS and CDOs issued, structured or underwritten by Citi between 2003 and 2008.
The cash portion of the settlement consists of a $4 billion civil monetary payment to the DOJ and $500 million in compensatory payments to the State AGs and the FDIC.
C is currently trading at $48.62, up $1.62 or 3.45 percent on a volume of 8.83 million shares.
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