Citi posts higher earnings but warns on growth

(Reuters) - Citigroup Inc reported higher quarterly earnings, helped by an accounting gain, but warned that developed markets could face weak growth for years, and the bank's shares fell.

Stripping out the accounting gain, third-quarter earnings were better than expected, and Citi's stock rallied initially. But shares later weakened after senior bank executives sounded cautious notes on the economy and lending margins.

Like its rivals, Citigroup was hit by the European debt crisis and the sluggish U.S. economy. Investment banking fees dropped and its loan book fell 2 percent. Operating expenses rose, in part because of investments made to boost its business.

Chief Executive Vikram Pandit is trying to turn the bank around after the financial crisis by focusing on emerging markets, where economies are still growing relatively quickly. The weak U.S. economy also weighed on results at JPMorgan Chase & Co

"In the developed markets, growth is likely to be slow for years," Pandit said in a conference call with analysts.

He also said the U.S. housing market remains the "greatest risk" that domestic banks face.

Chief Financial Officer John Gerspach said the bank's net interest margin is expected to decline by "a couple of basis points" in upcoming quarters, absent a significant portfolio sale.

Overseas growth has helped Citigroup in recent quarters, but there are early signs of difficulties in its emerging markets business. For example, retail loan volume in Latin America dropped 7 percent in the third quarter from the second quarter.

Citigroup, the third-largest U.S. bank by assets, reported net income of $3.77 billion, or $1.23 per share, up from $2.17 billion, or 72 cents per share, a year earlier.

The latest results included a pretax gain of $1.9 billion, or 39 cents per share after taxes, due to the bank's widening credit spreads during the quarter. When a bank's debt weakens relative to U.S. Treasuries, it can record an accounting gain because it could profit from buying back debt.

Excluding that gain, Citi earned $2.6 billion, or 84 cents per share. Analysts' average forecast was 81 cents per share, according to Thomson Reuters I/B/E/S.

In afternoon trading, Citi shares were down 29 cents, or 1 percent, to $28.11. They rose as high as $29.48 in morning dealings.

INVESTMENT BANKING HIT

Like JPMorgan, Citigroup's investment banking business was hurt when European market turmoil made companies reluctant to buy competitors or issue securities.

Revenue at Citi's continuing securities and banking business fell 12 percent excluding the debt value adjustment, to $4.84 billion.

Overall operating expenses rose 8 percent from a year earlier. Operating expenses were $12.46 billion and have been hovering around that level since the fourth quarter of 2010. From the beginning of 2009 through the third quarter of 2010, quarterly operating expenses were typically closer to $11.9 billion.

Citi, which received three U.S. government rescues at the height of the financial crisis, is seeing its problem loan portfolio shrink.

Nonaccrual loans fell to $7.95 billion in the third quarter from $12.46 billion a year earlier.

The bank's share price has fallen about 40 percent this year, in line with declines for other large banks.

(Reporting by Joe Rauch in Charlotte, N.C.; editing by Gerald E. McCormick and John Wallace)