Driven by decline in operating expenses, Wall Street banking giant Citigroup Inc. (C Quick QuoteC - Free Report) delivered a positive earnings surprise of nearly 15% in second-quarter 2016. The company’s earnings from continuing operations per share of $1.25 for the quarter outpaced the Zacks Consensus Estimate of $1.09. However, earnings compared unfavorably with the year-ago figure of $1.51 per share.

Income from continuing operations was $4.05 billion, down 17% from the prior-year quarter.

Though profitability was hit by decline in overall revenues, the company recorded higher fixed income markets revenues, driven by an improved trading environment and increase in corporate client activity in rates and currencies in the reported quarter. Further, Citigroup’s costs of credit for the second quarter were down 15% year over year to $1.41 billion mainly due to a decline in net credit losses.

Improved Trading Revenues & Continued Cost Reduction

Adjusted revenues of Citigroup decreased 8% year over year to $17.55 billion in second-quarter 2016. The decline reflected lower revenues at Citi Holdings while revenues at Citicorp remained stable year over year. The revenue figure missed the Zacks Consensus Estimate of $17.57 billion.

At Citicorp, adjusted revenues came in at $16.71 billion in the quarter, down 3% year over year. Revenues at Institutional Clients Group (ICG) increased 2% year over year. Notably, while investment banking revenues declined 6% year over year, revenues from fixed income markets and equity markets increased 14% and 21%, respectively.

Global Consumer Banking (GCB) revenues decreased 6% year over year.  However, Corporate/Other revenues declined significantly from the in the prior-year period.

Citi Holdings’ adjusted revenues of $843 million reflected a decrease of 57% year over year. The fall was primarily due to continued decline in the unit’s assets, and reduced gain on asset sales. However, Citi Holdings continued to report profitability.

Operating expenses at Citigroup expenses declined 5% year over year to $10.4 billion, reflecting declines in expenses in Citi Holdings, and benefit from foreign exchange translation, partially offset by continued investments in Citicorp.

Notably, legal and related expenses included in Citi Holdings were $116 million for the quarter, compared with $79 million in the prior-year period.

Stable Balance Sheet

At quarter end, Citigroup’s end of period assets was $1.82 trillion, down 1% year over year. The company’s loans remained relatively stable year over year at $634 billion. Deposits increased 3% year over year to $938 billion. Citi Holdings’ assets decreased 47% from the prior-year quarter level to $66 billion and represented just 4% of the company’s total assets at the quarter end.

Credit Quality Improves, Energy Headwinds Lingers

Citigroup’s credit quality was a mixed bag in the reported quarter. Total non-accrual assets declined 6% year over year to $6.3 billion. The company reported a decrease of 30% in consumer non-accrual loans to $3.7 billion. However, corporate non-accrual loans of $2.5 billion increased significantly from the prior year period, mainly related to energy-related loans in the ICG.

Citigroup’s total allowance for loan losses was $12.3 billion at quarter end, or 1.96% of total loans, down from $14.1 billion, or 2.25%, in the prior-year period.

Strong Capital Position

At the quarter end, Citigroup’s estimated Basel III Common Equity Tier 1 Capital ratio was 12.5%, increasing from 11.4% in the prior-year quarter. The company’s Supplementary Leverage Ratio for the second quarter stood at 7.5%, up from 6.7% in the prior-year quarter.

As of Jun 30, 2016, book value per share was $73.19 and tangible book value per share stood at $63.53, both up 7% from the prior-year period.

Our Viewpoint

The results certainly do not reflect a strong quarter for Citigroup, however restructuring efforts including streamlining moves should continue to ease its burden on the expense base, thereby supporting the company’s financials. One can consider a strong brand like Citigroup to be a sound investment option over the long term, given its global footprint and attractive core business.

Additionally, Citigroup exhibits capital strength as it successfully cleared the Fed stress test. Also, the company’s capital plan received the Federal Reserve’s approval which includes a threefold rise in its quarterly dividend and a share buyback program.

However, revenue pressure, several legal hassles and the thrust of new banking regulations will continue to be concerns for the company.

CITIGROUP INC Price, Consensus and EPS Surprise

CITIGROUP INC Price, Consensus and EPS Surprise | CITIGROUP INC Quote

Citigroup carries a Zacks Rank #4 (Sell).

Performance of Other Major Banks

Among major banks, JPMorgan Chase & Co. (JPM Quick QuoteJPM - Free Report) kick-started the second-quarter earnings season on a positive note. Driven by improved trading revenues, the company reported earnings of $1.55 per share that handily outpaced the Zacks Consensus Estimate of $1.43. Also, the figure reflects a 1% rise from the year-ago period. Notably, the results included a legal benefit of $430 million.

The PNC Financial Services Group, Inc.’s (PNC Quick QuotePNC - Free Report) second-quarter 2016 earnings per share of $1.82 handily beat the Zacks Consensus Estimate of $1.75. However, the bottom line declined 3% year over year. Better-than-expected results were aided by increased net interest income and relatively stable expenses, partially offset by lower non-interest income

Wells Fargo & Company (WFC Quick QuoteWFC - Free Report) came out with earnings per share of $1.01, missing the Zacks Consensus Estimate of $1.02. Higher expenses were primarily responsible for this earnings miss.

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