CVA boosts Citigroup Q3 earnings
Citigroup’s securities and banking revenues increase 20% to $6.7 billion in the third quarter, after a credit valuation adjustment (CVA).
Citigroup has posted a 20% year-on-year increase in securities and banking revenues in the third quarter, rising to $6.7 billion. The boost has provided buoyancy to its overall results, at a time when the group saw many divisions post drops in revenues.
However, third-quarter results for securities and banking revenues included $1.9 billion of positive CVA from a widening of Citi's credit spreads. If this had been excluded, its revenues here would have been down 12%, to $4.8 billion.
"Citi continues to navigate a challenging economic environment and delivered another quarter of solid operating results,” says Vikram Pandit, CEO at Citi. “We continued to manage our risk prudently while growing the businesses that are core to our strategy.
“We have reduced the size of Citi Holdings to 15% of our balance sheet and further improved our financial strength. We are very well positioned as we help our clients navigate the world's current trends and key opportunities."
CVA is the market value of counterparty credit risk, meaning that it is the differential between the risk-free portfolio and the true portfolio value.
Citigroup's net income increased 74% to $3.8 billion, compared to Q3 2010, reflecting the impact of CVA and a $2.6 billion improvement in the cost of credit, which was partially offset by an 8% – or $940 million – increase in operating expenses from the prior year period.
Total cost of credit during the quarter fell 43% to $3.4 billion. The improvement in credit costs was driven by a 41% decline in net credit losses to $4.5 billion, and a $1.4 billion release of credit reserves, reflecting a lower level of inherent losses remaining in the portfolio, says Citigroup.
Operating expenses increased by 8% from the prior year period to $12.5 billion, reflecting higher expenses from the impact of foreign exchange translation, higher legal and related expenses, and ongoing investment spending, which were partially offset by ongoing re-engineering benefits and lower expenses in Citi Holdings and securities and banking, adds the bank.
Citi Holdings revenues dropped 27% below the prior year period, as revenues were principally due to the continuing reduction in assets, which fell $132 billion, or 31%, from the prior year period. Its assets of $289 billion at the end of this third quarter represented approximately 15% of total Citigroup assets.
Check out the November issue of Euromoney, as we will analyze how continued pressure from the withdrawal of investors in the funding market impacts upon banks margins and is prompting radical changes to their business models.