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Citigroup Inc reported a 21% fall in quarterly profit on Friday, missing forecasts, as the bank increased provisions to prepare for a worsening economy and investment banking revenue declined due to a sharp drop in dealmaking activity.

Fears of a potential recession prompted Citi to add $640 million to its reserves in the fourth quarter, compared with a release of $1.37 billion from its reserves in 2021 when pandemic-related loan losses failed to materialize.

“Our base case is still a mild recession in the latter part of 2023,” Chief Financial Officer Mark Mason said on a media call, adding consumer and corporate balance sheets remain strong and core inflation “appears to be very sticky.”

On an adjusted basis, Citi earned $1.10 per share for the fourth quarter ended Dec. 31, falling below estimates of $1.14 a share, according to Refinitiv.

The U.S. Federal Reserve last year raised its interest rate by 425 basis points from the near-zero level to tame inflation, raising fears of an economic downturn, and thus, forcing many firms to forecast slower growth in revenue and profit.

The Fed’s tightening helped Citi post a 61% surge in net interest income by charging higher interests on loans to customers.

Still, the U.S. central bank’s aggressive stance, coupled with the war in Ukraine and growing economic uncertainties, roiled financial markets and slowed dealmaking activity last year. This saw Citi’s investment banking revenue plunge 58%.

Citi cuts India current account deficit forecast to below 3% of GDP

CFO Mason indicated that overall the bank continues hiring, but it is also slowing down headcount additions in some areas. “We’re also repacing (hiring) where it makes sense in light of the environment that we’re in,” he said, adding bonuses in investment banking are likely to reflect a slowdown in deals.

Meanwhile, elevated market volatility led traders reposition their portfolios, helping Citi’s markets business and driving a 6% rise in the bank’s revenue to $18 billion.

“Markets had the best fourth quarter in recent memory,” said Citi Chief Executive Officer Jane Fraser.

Under Fraser, the bank exited some overseas markets to boost its stock valuation and profitability versus peers, while improving its risk controls as required by regulators.

“Citi achieved its target of 13.0% Tier 1 common equity faster than expected, as the bank had guided to reach this target in the middle of 2023,” said Jason Benowitz, associate partner and senior portfolio manager at CI Roosevelt.

He said they believe the faster-than-expected achievement of Tier 1 common equity target may enable the bank resume its share repurchase program earlier, which would be a positive catalyst for Citi shares.

Mason said the exit of Citigroup’s Mexican retail bank Banamex is “well underway,” although he is unable to forecast when the deal will be concluded. Citi is trying to sell the unit, while also considering a potential initial public offering (IPO).

Shares in Citigroup were down 0.7% in morning trading.

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