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Mark Vickery

Citi Disappoints, Strong Top Line

C WFC GS

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After reporting impressive results in the prior quarter, Citigroup Inc. (C - Analyst Report) reported a disappointing fourth quarter 2012. Earnings per share came in at 69 cents for the quarter, significantly below the Zacks Consensus Estimate of 87 cents. However, earnings were up 68% from the prior-year period on higher revenues and lower loan loss provisions.

Notably, results in the reported quarter were impacted by credit valuation adjustment (CVA) and debt valuation adjustment (DVA) as well as repositioning charges. Including CVA/DVA and repositioning charges, Citigroup reported earnings of 38 cents per share.

For the fourth quarter, Citigroup reported net income of $1.2 billion, up 25% from the prior-year quarter.

For the full year 2012, net income was $7.5 billion compared with $11.1 billion in 2011. Excluding CVA/DVA and the impact of minority investments along with the repositioning charges in the fourth quarter of 2012 and the tax item in the third quarter of 2012, net income was $11.9 billion, up 18% year over year.

Total provisions for credit losses and benefits and claims for the fourth quarter at Citigroup were down 8% year over year at $3.2 billion. The improvement was primarily attributable to a 27% decline in net credit losses to $3.1 billion, coupled with a $142 million release of credit reserves.

Performance in Detail

Revenues came in at $18.2 billion for the quarter, up 6% from the prior-year quarter. Excluding CVA/DVA, Citigroup revenues improved 8% from the prior-year period to $18.7 billion. However, the figure was below the Zacks Consensus Estimate of $18.9 billion. The revenue increase was driven primarily by growth in Citicorp revenues, though partially offset by the decline in Citi Holdings revenues due to the continuing wind-down of those assets.

For full year 2012, the company reported revenues of $70.2 billion, down 10% year over year. Excluding CVA/DVA and the impact of minority investments, revenues were $77.1 billion, up 1% year over year.

At Citicorp, revenues came in at $17.1 billion, up 9% year over year. Excluding CVA/DVA, revenue was $17.6 billion, up 9% from the prior-year quarter. Higher revenues in Transaction Services coupled with elevated revenues in the Securities and Banking business and Global Consumer Banking led to this rise.

However, Citi Holdings reported revenues of $1.1 billion, down 3% year over year. Revenues were $1.0 billion excluding CVA/DVA, down 2% from the prior-year quarter. The figure was pulled down primarily due to a decline in revenues in Local Consumer Lending businesses driven by the ongoing drop in assets.

Operating expenses at Citigroup were up 5% year over year at $13.8 billion. Increase in expenses reflected higher repositioning charges and elevated legal and related costs, including a $305 million charge related to the agreement in principle reached with the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board related to the independent foreclosure review process.

Credit Quality

Citigroup’s credit quality was mixed in the reported quarter. Total non-accrual loans increased 4% year over year to $11.5 billion. The company reported a 28% fall in Corporate non-accrual loans, though a 17% increase was reported in consumer non-accrual loans. Citigroup’s total allowance for loan losses was $25.5 billion at quarter end, or 3.9% of total loans, down from $30.1 billion, or 4.7%, in the prior-year period.

Capital Position

Citigroup continued to build up its capital levels, with preliminary Tier 1 Common ratio at 12.7%. Notably, its estimated Basel III Tier 1 Common Ratio was 8.7%, up from 8.6% in the prior quarter. Tier 1 Capital Ratio was 14.1%, up from 13.9% in the prior quarter. As of Dec 31, 2012, book value per share was $61.57 and tangible book value per share was $51.19, up 1% and 3%, respectively, from the prior-year period end.

At quarter end, Citigroup’s end of period assets was $1.86 trillion, down 0.5% year over year while deposits of $930.6 billion, were up 7% year over year. Citi Holdings’ assets decreased 31% from the prior-year quarter level to $156 billion and represented just 8% of the company’s total assets at the fourth quarter end.

Peer Performance

Among its peers, The Goldman Sachs Group Inc. (GS - Analyst Report) reported its fourth-quarter 2012 earnings per share of $5.60, significantly surpassing the Zacks Consensus Estimate of $3.47. Moreover, the reported earnings outpaced the prior-year quarter earnings of $1.84 and prior-quarter earnings of $2.85 per share.

Amid challenging global markets and the European debt crisis, the results were driven by Goldman’s record revenues with an elevation in client activity. Yet, escalated operating expenses acted as a headwind for the quarter.

Moreover, Wells Fargo & Company (WFC - Analyst Report) has achieved the twelfth consecutive quarter of growth in earnings per share by reporting earnings of 92 cents per share in fourth quarter 2012. Results improved from earnings per share of 88 cents in the prior quarter and 73 cents in the year-ago quarter. Also, it beat the Zacks Consensus Estimate by 5 cents.

Results at Wells Fargo benefited from improvement in top line, aided by rise in all segments’ revenue. It also reported $250 million in reserve release (pre-tax), attributable to improved portfolio performance. However, the company experienced rise in non-interest expenses.

Our Viewpoint

Following stable results in the second quarter of 2012 and impressive results in the third quarter, Citigroup’s fourth quarter results were disappointing. Despite the upsurge in revenue, on the whole, its profit level was below expectations.

Citigroup’s underlying franchises of the consumer businesses have remained strong, but revenues have continuously been under pressure for the past several quarters. Considering the tepid economic recovery, we believe that robust top-line expansion will remain elusive in the near term.

Moreover, though Citigroup’s strategy to shrink non-core assets would improve the valuation over time, the trimmed Citi Holdings portfolio would result in revenue challenges, partially restricting the upside potential of the stock. Additionally, with the thrust of new banking regulations, there will be pressure on fees and loan growth could remain feeble.

Reduction in provisions for future losses and improved credit trends are expected to counter the negatives. One can consider a company like Citigroup as a value investment given its global footprint and attractive core business. It is also among the best reserved banks. Moreover, Citi currently retains a Zacks Rank #3 (Hold).

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