By David Henry and Sweta Singh
(Reuters) - Citigroup is betting on U.S. consumers and multi-national corporate clients to navigate lower interest rates after a rebound in trading helped it beat Wall Street's subdued expectations for the second quarter.
A burst in client demand for currencies and bonds in the wake of Britain's vote to leave the European Union, along with a drop in the amount of money set aside to cover soured loans, meant Citi reported a 14 percent fall in net profit, far less than the 25 percent slide Chief Executive Officer Michael Corbat had warned of in early June.
The slip in earnings reflects U.S. banks' struggle with low U.S. interest rates, which hamper their ability to profit from lending.
After raising rates in December for the first time in almost a decade, the U.S. Federal Reserve was widely expected to do so at least twice again this year. But Wall Street is now uncertain there will be any rate hikes in 2016, especially with a volatile race for the White House.
"While the U.K. has a new leader, the US is still in the midst of a unique presidential campaign," Corbat said on a call with analysts on Friday. "And such geopolitical and economic uncertainty doesn't create a clear picture of potential interest rate increases."
Citigroup's net interest margin, a key measure of lending profitability, shrank to 2.86 percent from 2.95 percent a year earlier. Chief Financial Officer John Gerspach said it would only rebound to about 2.90 percent the rest of the year and be less beneficial than the company expected at the start of 2016.
To navigate the lower interest rates, Corbat is banking on growth in its U.S. credit card business, where it launched a co-branded card with retailer Costco Wholesale Corp last month, as well as the marketing of its 2 percent cash-back card.
The bank expects revenues in U.S. consumer banking to grow in this quarter from the second quarter and sees modest growth in international consumer revenues due to improvements in Asia and Mexico.
Citigroup's business providing corporations with cash management and trade finance will deliver more revenue than a year earlier on new contracts, Gerspach said.
Earnings per share slid to $1.24 from $1.45 but beat analysts' average estimate of $1.10, according to Thomson Reuters I/B/E/S.
The outperformance mirrored larger rival JPMorgan Chase & Co, which also beat forecasts with the help of more-robust trading in bonds and currencies.
Citi's bad debt charges fell in the quarter, unlike rival Wells Fargo & Co, which reported a 3.5 percent dip in quarterly profit on Friday after it set aside more money to cover potential loan losses.
Citi's shares were down 0.6 percent in afternoon trading after gaining 2.5 percent on JPMorgan's results on Thursday.
Corbat has worked hard to shed the reputational and operational damage from the financial crisis, when Citi had to tap taxpayers for more than $45 billion in bailouts.
To raise shareholders' returns, he has narrowed the bank’s focus on profitable consumer markets, cutting in half the number of countries where Citi operates to 19 and overhauling its internal controls to appease regulators.
Corbat said he would put out new performance goals for the bank later this year, updating targets he set in 2013 for efficiency and return on assets and capital.
Citi investors got a boost this year when the bank passed the latest U.S. stress tests after failing twice, enabling Corbat to triple dividends and spend more capital on buybacks. Corbat pledged Friday to continue to boost payouts.
He has also managed to use $10 billion of deferred tax assets, one fifth of the peak level in 2012. The assets are tax breaks from losses Citi suffered in the crisis and the bank has to hold extra capital against them, making it more difficult to meet profitability targets.
The bank earned a return on equity of 7 percent in the second quarter, below its theoretical cost of capital of 10 percent and behind rivals JPMorgan and Wells Fargo, which earned 10 percent and 11.7 percent respectively.
The most international of the large U.S. banks, Citi's overseas consumer banking business held up well, with a 7 percent increase in net profit, adjusted for changes in exchange rates.
Corbat reaffirmed Citi's commitment to Banamex, its consumer business in Mexico, which is often mentioned as a possible spin-off candidate to boost returns.
But profit overall at its consumer bank fell 18 percent, with the biggest drop at its North American consumer business, where net income dropped 22 percent as revenue fell 3 percent and expenses rose.
Overall, Citi's operating expenses declined 5 percent to $10.37 billion, helped by a change in foreign exchange rates, but revenue fell more, dropping 8 percent.
The bank's institutional business, which includes the investment banking division, reported a 2 percent rise in net income, benefiting from a 14 percent increase in revenues from trading bonds, currencies and commodities.
(Additional reporting by Olivia Oran. Writing by Carmel Crimmins; Editing by Kirti Pandey and Andrew Hay)