By David Henry and Anirban Sen
(Reuters) -Citigroup Inc management on Wednesday flagged a revival in consumer spending on the back of a roaring U.S. economy, predicting a recovery in loan growth by year end after quarterly profits comfortably beat estimates.
Citi's second-quarter profits were boosted by the bank's decision to take down $2.4 billion of funds set aside in the middle of the COVID-19 pandemic to cover loans that might sour. Those expected losses have not yet materialized.
An economic recovery fueled by vaccine rollouts and President Joe Biden's $1.9 trillion stimulus package has brightened the outlook for Wall Street's biggest banks, all of which have freed up funds set aside during the pandemic.
Consumers, flush with cash from stimulus checks, have started spending on travel and restaurants, while also paying down debt without taking on more loans. This has hurt interest income for large lenders, but bank executives expect that trend to reverse by the end of the year.
Chief Financial Officer Mark Mason said Citi expects more customers to go back to their pre-pandemic ways of carrying revolving balances and paying interest as government stimulus payments wind down.
"The good news is that we're continuing to see the recovery in spend and we're also returning to pre-COVID acquisition levels. We expect the growth in purchase sales to translate into loan growth by the end of the year as stimulus moderates, and consumers return to more normal payment patterns," Mason said.
Among positive signs during the quarter, spending on Citi credit cards in the United States jumped 40% from a year earlier. Yet the business was also a drag on earnings because more consumers paid off their monthly balances rather than pay Citigroup interest and loans on cards fell 4%. Revenue from those cards declined 12%.
Investment banking revenues rose slightly to $1.8 billion, as dealmakers capitalized on a record M&A boom. Advisory fees for deals surged 77%.
Equity underwriting revenue rose 11%, helped by higher fees from initial public offerings and special purpose acquisition companies (SPACs). Debt underwriting revenue, however, declined 21%.
"On a clean, core economic earnings basis ... results actually bettered expectations at $1.86/share. The beat came primarily from better-than-expected credit quality," Oppenheimer analyst Chris Kotowski said in a note to clients.
While bank results indicate a recovery is underway, analysts have said, it may not immediately translate into big profits because of low interest rates, weak loan demand and a big slowdown in trading activity.
For the quarter ended June 30, Citi's net income jumped to $6.19 billion, or $2.85 per share, from $1.06 billion, or 38 cents per share, a year earlier. Analysts on average had expected a profit of $1.96 per share, according to Refinitiv IBES data.
Reserve leases boosted profits, helping to offset a decline in credit card lending and trading.
Overall revenue plunged 12%, while loans were down 3%.
Global consumer revenue fell to $6.8 billion, down 7% from a year earlier, due in large part to lower card balances.
Trading revenue slumped to $4.8 billion, down 30% from a year earlier when unprecedented volatility in financial markets helped drive record trading volumes.
Revenue from fixed income trading, a strong suit for Citigroup, slumped 43% to $3.2 billion from a year earlier.
On Tuesday, both JPMorgan and Goldman Sachs reported big declines in bond trading revenue.
Expenses at Citigroup jumped by 7% during the quarter, led by spending to improve its risk and control systems to comply with demands from regulators.
Investors are concerned about expenses as the bank has been unable to say how much money and time it will take to meet the requirements of regulators and fix its systems.
The expenses are part of what Fraser has called the "transformation" of Citigroup and include technology improvements that she expects will ultimately bring down costs.
Citi's shares were trading down marginally after rising as much as 3% earlier on Wednesday.
(Reporting by Anirban Sen in Bengaluru and David Henry in New York; Editing by Sriraj Kalluvila and David Gregorio)