Fears of rising interest rates hit Citigroup and Bank of America

Buoyant consumer lending fuelled by low interest rates boosted first quarter results posted yesterday by Citigroup and Bank of America, although the two US financial services giants saw their shares drift lower amid fears the cost of borrowing may be about to rise.

Citigroup, which is the world's largest financials company, registered a 5 per cent increase in first quarter earnings of $3.86bn (£2.68bn) after taking $858m exceptional charges relating to the economic crisis in Argentina.

Adding back the $1.1bn gain for the partial spinning off of the Travelers Property Casualty insurance operations, earnings were up 25 per cent at $4.84bn.

The figures, which fell short of analysts' expectations, showed the net interest margin widening amid continued growth in Citigroup's mortgage and credit cards business, despite a weakening in credit quality. Overall, the consumer business enjoyed income growth of 26 per cent on revenues 20 per cent higher.

However, there was a sharp divergence in the geographical performance, with the consumer banking operations enjoying a 21 per cent uplift in developed markets, but 15 per cent in emerging markets including Argentina. Aggregate losses to date in Argentina exceeded $2bn, Citigroup said.

Profits fell 4 per cent at Citigroup's investment and corporate banking operations, which include Schroder Salomon Smith Barney, amid a continuing dearth of mergers and acquisitions work and weakness in securities trading. Investment banking revenues declined by 14 per cent, with completed mergers and acquisitions down 65 per cent. "Our businesses once again delivered exceptional results in the face of difficult economic conditions," said Sandy Weill, the group's chairman and chief executive. Mr Weill has pushed into consumer banking with acquisitions exceeding $46b over the last two years.

Citigroup shares fell almost 3 per cent, to $45.80, dragging down the rest of the banking sector. "Citigroup is a bellwether and it wasn't a particularly strong performance," said one Wall Street analyst. "There wasn't anything that particularly surprised me positively."

Bank of America, which is the number three US bank after Citigroup and JP Morgan Chase, posted quarterly profits up 14 per cent year-on-year at $2.2bn, towards the top end of analysts' expectations. Again, there was a strong showing in its consumer franchise offsetting weakening in corporate and investment banking. BoA suffered fewer-than-expected bad debts and won plaudits for holding costs.

Net interest income was up 11 per cent at $5.25bn as lower borrowing costs, now at their cheapest in 40 years, and higher deposit levels offset a smaller value of commercial loans. Non-interest income fell 9 per cent, to $3.44b, amid the prevailing poor equity market conditions.

Kenneth Lewis, BoA's chief executive since January last year, said has recruited 200 bankers, traders and analysts this year alone from firms including JP Morgan Chase, Credit Suisse First Boston and Morgan Stanley Dean Witter.