US banking giant Citigroup Thursday reported earnings that missed expectations by a large margin as an executive said it was too soon to say the US housing market has truly recovered.
The bank's fourth-quarter profits came in at $1.2 billion, or 38 cents per share, far below the average analyst forecast of 96 cents per share.
Revenue came in at $18.2 billion, below expectations of $18.8 billion.
A year earlier, the bank earned 31 cents a share on $956 million in net profits.
Excluding accounting effects and a previously-announced $1 billion reorganization, Citigroup said earnings were 69 cents per share in the quarter.
Citigroup blamed the fall in part on $1.3 billion in legal and legal-related expenses, far more than expected. That included about $300 million of the litigation costs that were related to a settlement announced between several banks and the US Comptroller of the Currency and Federal Reserve over foreclosure processes.
Also, the bank opted to release a smaller-than-expected sum from bad-loan reserves. Whereas Citigroup in the year-ago quarter released $1.5 billion, it released this time only $86 million.
Total loan loss reserves stood at $25.5 billion at the end of 2012.
The small writeback of loss reserves reflected Citi's caution over the turnaround in the US housing market.
Chief financial officer John Gerspach said that while there were some positive indicators in housing, it is too soon to say the market has recovered in a "sustainable" fashion.
The bank said its fourth quarter numbers were also hit by a $485 million credit valuation adjustment, which assesses the risk of counterparty default in the bank's derivatives trade. Analysts generally discount this category in their earnings estimates.
It was the bank's first earnings report under chief executive Michael Corbat, who was named to lead the bank after his predecessor Vikram Pandit was forced to resign last October, one day after the third quarter earnings release.
Pandit was blamed for the bank's continuing poor performance, lagging its rivals in rebounding from the financial crisis.
Shares in Citigroup were down 3.4 percent in afternoon trade to $41.04.
A Bank of America research note called Citi's earnings a "big miss."
Key questions include whether more cost-cutting initiatives are planned, the outlook for the bank's credit leverage as the US housing market improves, and if Citi has any plans for returning capital to shareholders, Bank of America said.
A note released Thursday by Deutsche Bank characterized the results as a "a bit weak," but said the company had good earnings "momentum into 2013." The major factors behind Thursday's report shouldn't impact future earnings, Deutsche said.
Gerspach suggested that there could still me more costs from the legal shakeout arising from the housing market collapse.
"The entire industry is still looking at some additional settlements that are yet to appear," Gerspach said.
A key question is how policy makers in Washington resolve their fights over the debt ceiling and looming spending cuts.
After these Washington debates are settled, the market will know whether "some of those positive trends we're seeing in the housing market really are sustainable," Gerspach said.
Corbat alluded to an environment that "remains challenging", with banks working through the issues of "putting legacy issues behind us."
"It will take some time to work through the challenges of the current environment, but realizing our core earnings potential, as well as improving our returns on assets and tangible equity, are critical goals going forward," Corbat said in a statement.