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Why Is Citigroup (C) Up 2.1% Since Last Earnings Report?

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It has been about a month since the last earnings report for Citigroup (C - Free Report) . Shares have added about 2.1% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Citigroup due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Citigroup Q4 Earnings Reflected Cost Control, Revenues Down

Citigroup kick-started the earnings season and delivered a positive earnings surprise of 3.9% in fourth-quarter 2018, backed by expense control and lower cost of credit. Adjusted net income per share of $1.61 for the quarter handily outpaced the Zacks Consensus Estimate of $1.55. Also, adjusted earnings climbed 26% year over year.

Adjusted net income was $4.2 billion, up 14% year over year. Including the impact of tax reform, net income came in at $4.3 billion or $1.64 per share.

Citigroup displayed prudent expense management during the quarter. Moreover, higher equity market revenues, along with loan growth, were positives. However, investment banking revenues disappointed as strong advisory business were more than offset by lower underwriting fees on lower market activity.

Additionally, as expected, lower fixed income market revenues amid challenging trading environment and expanding credit spreads, mainly in December, was on the downside.

Citigroup’s costs of credit for the Dec-end quarter were down 7% year over year to $1.93 billion. This fall largely underlines reduced net credit losses of $1.8 billion and a credit reserve build of $111 million.

For full-year 2018, adjusted net income came in at $18 billion compared with $15.8 billion recorded in 2017.

Expenses Drop, Revenues Disappoint

For full-year 2018, the company reported revenues of $72.9 billion, up 1% year over year. Yet it lagged the Zacks Consensus Estimate of $73.3 billion.

Revenues were down 2% year over year to $17.1 billion in the reported quarter. The reported figure also missed the Zacks Consensus Estimate of $17.5 billion. Reduced revenues from Institutional Clients Group (ICG) and the wind-down of legacy assets in Corporate/Other segments were responsible for the downside.

In ICG, revenues came in at $8.2 billion in the quarter, down 1% year over year. Fixed income market revenues decreased 21% year over year, leading lower total markets and securities services revenues by 11%.  However, equity markets were up 18% and total banking revenues rose 5%, partly offset by lower investment banking revenues.

Global Consumer Banking (GCB) revenues declined slightly year over year to $8.4 billion. Higher revenues in North and Latin America were offset by lower revenues in Asia GCB.

Corporate/Other revenues came in at $470 million, slipping 37% from the prior-year quarter. The decline mainly underscores legacy assets runoff.

Operating expenses at Citigroup dipped 4% year over year to $9.9 billion. Lower compensation costs, efficiency savings and the winding-down of legacy assets muted the elevated volume-related expenses and ongoing investments.

Strong Balance Sheet

At the end of the quarter, Citigroup’s end of period assets was $1.92 trillion, slightly down sequentially. The company’s loans grew 1% sequentially to $684 billion. Deposits increased 1% sequentially to $1.01 trillion.

Credit Quality Improves

Total non-accrual assets decreased 24% year over year to $3.6 billion. The company reported a dip of 17% in consumer non-accrual loans to $2.2 billion. In addition, corporate non-accrual loans of $1.3 billion plunged 32% from the year-earlier period.

Citigroup’s total allowance for loan losses was $12.3 billion at the end of the quarter, or 1.81% of total loans, compared with $12.4 billion, or 1.86%, recorded in the year-ago period.

Solid Capital Position

At the end of the Oct-Dec period, Citigroup’s Common Equity Tier 1 Capital ratio was 11.9%, down from 12.4% in the prior-year quarter. The company’s supplementary leverage ratio for the quarter came in at 6.4%, down from 6.7% in the year-earlier quarter.

As of Dec 31, 2018, book value per share was $75.05, up 6% year over year, and tangible book value per share was $63.79, up 6% from the comparable period last year.

Capital Deployment

During 2018, Citigroup repurchased about 212 million of common stock. The company returned around $18.4 billion to common shareholders as common stock repurchases and dividends.

Notably, during fourth-quarter 2018, the company bought back about 74 million of common stock and returned around $5.8 billion to common shareholders as common stock repurchases and dividends.

Outlook

From a revenue perspective, for 2019, in addition to the good momentum ongoing in many of the businesses, management also pointed other revenue tailwinds, including the absence of the FDIC surcharge, as well as a smaller anticipated drag from the wind-down of legacy assets in Corp/Other.

Notably, management does not expect non-interest revenues to decline again in 2019, as the company has overcome the operating revenue headwinds in Consumer.

In addition, on the expense side, management noted that efficiency saving significantly outpaced incremental investments in the second half of 2018, realizing a net benefit to expenses of roughly $200 million. This amount is likely to increase to around $500-$600 million of net incremental savings in 2019, along with an additional $500- $600 million of net incremental benefits in 2020. These net savings should offset volume-driven expenses on ongoing investments in the business. Moreover, positive operating leverage the bank as a whole and for consumer and institutional businesses is anticipated in 2019.

Management targets efficiency ratio in the low 50% range. Moreover, the company’s primary goal is to sustainably improve the return on shareholders' equity from the roughly 11% achieved in 2018 to about 12% in 2019, and more than 13.5% in 2020.

Management continues to expect the net interest revenue percentage to improve further in 2019. As the mix of interest-earning balances continues to improve, underlying growth is expected to accelerate in 2019, resulting in modest reported growth, even considering the Hilton and Visa B gains recorded in 2018.

The medium-term expectations for Branded Cards are that it would operate in the range of 3% to 3.25% and Retail Services in the 5% to 5.25% specifically for 2019.

Continued year-over-year growth in accrual businesses is expected, including Treasury and Trade Solutions, Securities Services, Lending and the Private Bank.

Looking ahead, management still expects a modest pre-tax quarterly loss in Corporate/Other in 2019.

Tax rate is likely to be 23% for 2019.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Citigroup has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Citigroup has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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