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Citigroup Posts Dismal Q3 Earnings

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After reporting impressive results in the prior quarter, Citigroup Inc. (C - Free Report) reported a disappointing third-quarter 2013. Earnings per share came in at $1.02 for the quarter, lagging the Zacks Consensus Estimate by 4 cents. Moreover, earnings were down 4% from the prior-year period on lower revenues.

Notably, results in the reported quarter were impacted by credit valuation adjustment (CVA) and debt valuation adjustment (DVA). Including CVA/DVA and the tax benefit, Citigroup reported earnings of $1.00 per share. For the third quarter, Citigroup reported net income of $3.2 billion, substantially up from the prior-year quarter.

Total cost of credit for the third quarter at Citigroup was down 25% year over year at $2.0 billion. The improvement was primarily attributable to a 38% decline in net credit losses to $2.4 billion.

Performance in Detail

Revenues came in at $17.9 billion for the quarter, up 30% from the prior-year quarter. Excluding CVA/DVA and loss on the Morgan Stanley Smith Barney joint venture (MSSB), Citigroup revenues declined 5% from the prior-year period to $18.2 billion. Moreover, the figure was below the Zacks Consensus Estimate of $18.5 billion. The revenue decrease was driven primarily by a fall in Citicorp revenues.

At Citicorp, revenues came in at $16.6 billion, down 4% year over year. Excluding CVA/DVA, revenues were $17.0 billion, down 7% from the prior-year quarter. Decreased revenues in the Securities and Banking business along with lower Global Consumer Banking revenues led to this fall.

Further, Citi Holdings reported revenues of $1.25 billion, substantially up from negative revenues in the prior-year quarter. Revenues were $1.26 billion excluding CVA/DVA and loss on the MSSB venture, up 28% from the prior-year quarter. The figure was pulled up primarily due to the absence of repurchase reserve builds for representation and warranty claims in the third quarter of 2013.

Operating expenses at Citigroup were down 4% year over year at $11.7 billion.

Credit Quality

Citigroup’s credit quality improved in the reported quarter. Total non-accrual assets declined 23% year over year to $9.8 billion. The company reported a 10% fall in Corporate non-accrual loans and a decline of 26% was reported in consumer non-accrual loans.

Citigroup’s total allowance for loan losses was $20.6 billion at quarter end, or 3.2% of total loans, down from $25.9 billion, or 4.0%, in the prior-year period.

Capital Position

Citigroup continued to build its capital levels. As of Sep 30, 2013, the company’s Basel I Tier 1 Capital Ratio was 13.6% and its Basel I Tier 1 Common Ratio was 12.6%, as compared with 13.9% and 12.7%, respectively, in the prior-year quarter. Moreover, Citigroup’s estimated Basel III Tier 1 Common Ratio was 10.4%. Citigroup’s estimated Basel III Supplementary Leverage Ratio for third-quarter 2013 was 5.1%.

As of Sep 30, 2013, book value per share was $64.49 and tangible book value per share was $54.52, up 1% and 3%, respectively, from the prior-year period end.

At quarter end, Citicorp’s end of period assets was $1.78 trillion, up 1% year over year while deposits of $914 billion, were up 4% year over year. Citi Holdings’ assets decreased 29% from the prior-year quarter level to $122 billion and represented just 6% of the company’s total assets at third-quarter end.

Our Viewpoint

Following the volatile 2012 results, Citigroup began 2013 on a positive note and continued its impressive results into the first two quarters, but disappointed in the third quarter. With the fall in revenues, on the whole, its profit level also lagged expectations.

Citigroup’s underlying franchises of the consumer businesses and 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.

The clearing of the stress test this year shows that Citigroup’s efforts to streamline its operations are now bearing fruit. Over the past few years, the company has been restructuring its business, making several layoffs, selling assets and trimming costs.

Citigroup has come a long way since 2008, when it had to take $45 billion as bail-out money to survive the economic downturn. Through the stress test clearance and these restructuring initiatives, the company has shown the improvement in its capital position since 2008.

However, complacency regarding its capital enhancement initiatives could act as a negative for Citigroup. The company should continue to strive for improvement in its balance sheet and capital ratios.

Further, reduction in provisions for future losses and improved credit trends are expected to counter the negatives. One can consider a strong brand like Citigroup to be a sound investment option, given its global footprint and attractive core business. It is also among the best reserved banks. Moreover, Citigroup currently carries a Zacks Rank #3 (Hold).

Performances of Other Large Wall Street Firms

The third-quarter earnings season kick started with Wall Street biggies such as Wells Fargo & Company (WFC - Free Report) and JPMorgan Chase & Co. (JPM - Free Report) . Wells Fargo achieved the fifteenth consecutive quarter of earnings growth by reporting earnings of 99 cents per share. Results improved from 98 cents earned in the prior quarter and 88 cents in the year-ago quarter. Also, the results beat the Zacks Consensus Estimate by 2 cents.

However, reversing its trend of beating earnings estimates for the past six quarters, JPMorgan came out with a loss in the third quarter. As expected, the banking giant surrendered its strong earnings run to deal with the legal issues against it and reported a loss of 17 cents per share, widely missing the Zacks Consensus Estimate of an earnings of $1.28 and deteriorating from the year-ago earnings of $1.40.

Among other Wall Street big banks, Bank of America Corp. (BAC - Free Report) will report third-quarter earnings on Oct 16.

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