Financial giant Citigroup Inc. reported higher net income, amid terrible capital capital market conditions, in the second quarter. However, results fell short of analyst expectations.

The firm reported Q2 net income of US$5.07 billion, an increase from US$1.14 billion in the second quarter 2004. Income from continuing operations was US$4.73 billion, up from $916 million. Analysts expected a US$5.3 billion profit number.

“Our businesses faced challenging conditions during the quarter,” said Charles Prince, CEO of Citigroup. “The capital markets environment was one of the worst we have seen in years, and combined with a flattening yield curve, led to a significant decline in our fixed income markets revenues.”

Excluding the second quarter 2004 after-tax charge of US$4.95 billion for a WorldCom class action settlement and increased litigation reserves and an after-tax gain of US$756 million on the sale of a stake in Samba Financial Group, revenues increased 2%, and net income and earnings per share from continuing operations declined 7% and 6%, respectively.

“Rising short-term interest rates and a flattening yield curve resulted in spread compression across several businesses. New bankruptcy legislation caused a short-term spike in bankruptcy filings, adding approximately US$175 million to our credit costs in North America cards. Despite these challenges, our diversified business platform generated strong profitability,” Prince said

“In our international consumer businesses, strong growth in customer balances drove 10% revenue growth. We saw particularly strong performance in our equity markets business, where we have been investing to expand our product capabilities, with revenues increasing 40%. In transaction services, we achieved record revenues and strong net income growth, with increases of 21% and 10%, respectively,” Prince added.

Prince noted that it is continuing to focus its business, by selling its asset management business in the quarter, and closing the sale of its life insurance and annuities business on July 1. “We expect to significantly enhance our private client business with the addition of Legg Mason’s brokerage business and announced an important credit card partnership with Federated,” he said.

“We also made significant progress resolving pending legal and regulatory matters. We agreed to settle the Enron class action litigation, significantly reducing the amount of claims outstanding for Enron matters. We concluded a settlement with the UK Financial Services Authority relating to the Eurozone bond trade, and we concluded a settlement with the U.S. Securities and Exchange Commission relating to transfer agent matters. We believe resolution of these matters is clearly in the best interest of Citigroup and its owners,” said Prince.

In North American retail banking, average deposits and loans grew 6% and 20%, respectively. Retail banking revenue increased 6% including a 16% increase in Mexico revenue. Transaction services revenues increased 21% to record levels. Growth in these businesses was partially offset by a 12% decline in capital markets and banking revenues. This included a 28% decrease in fixed income markets, reflecting difficult capital markets conditions and a flattening yield curve, which led to lower trading results in interest rate and credit products. In North America cards, net credit margin increased 7%, as a 3% decline in revenues was offset by lower credit costs.

Its Smith Barney subsidiary saw a 12% increase in fee-based revenues, partially offset by a 5% decline in transactional revenues due to lower client trading activity. Assets under fee-based management increased 10%, to US$245 billion.