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Will Citigroup (C) Miss Earnings this Season?

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Citigroup, Inc. (C - Free Report) is scheduled to report its second-quarter 2014 results before the opening bell on Monday, Jul 14. Too many questions linger in investors' minds this time around, given the tough industry backdrop and litigation hassles that the bank endured during the quarter.

Notably, Citigroup is in talks with the Department of Justice (DOJ) to pay more than $7 billion to resolve several litigations and probes related to its pre-crisis mortgage practices. The announcement of the deal is expected earlier next week.

In the last quarter, this banking giant delivered a 10.17% positive earnings surprise on the back of prudent expense management. Notably, results in the reported quarter were impacted by credit valuation adjustment (CVA) and debt valuation adjustment (DVA).

Will Citigroup impress again in the upcoming release after combating the challenges that the industry witnessed during the quarter? Let's see what factors might have influenced the earnings report this time around.

Factors to Influence Q2 Results    

Banks’ efforts to settle lawsuits related to shoddy pre-crisis mortgage practices remained the key trend in the quarter. This was accompanied by dumping unprofitable businesses and concentrating on those with strong potential.

Then again, continued expense control and stable balance sheets should act as tailwinds in the quarter. A favorable equity and asset market backdrop as well as encouraging macroeconomic factors – falling unemployment, a progressive housing sector and flexible monetary policy – are likely to have lent some support to the financials.

However, a set of dampeners - dreary consumer and corporate activities, soft trading volumes and sluggish mortgage banking activities - are likely to drag earnings. Further, uncertainty related to top-line growth looms as Citigroup expects second-quarter 2014 trading revenues to be down 20% to 25% year over year. We believe that the primary reason for the continued slump in market revenues is the downward trend witnessed in Fixed Income Markets.

A dearth of significant loan growth and pressure on net interest margins from the prolonged low rate environment were other nagging issues that continued. Moreover, litigation costs related to recent settlements and ongoing investigations of Mexican subsidiary fraud might drive down profitability.

Most importantly, this banking giant failed to impress analysts with its level of activities during the quarter. The weakness surrounding the industry and the company's highly sensitive financials to such negatives forced many analysts to significantly lower their earnings estimates. The Zacks Consensus Estimate has moved down by 3.6% to $1.08 per share over the last 7 days, as the tendency for a downward estimate revision was more obvious.

Earnings Whispers

Our proven model does not conclusively show that Citigroup is likely to beat the Zacks Consensus Estimate in the second quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 or 3 for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP:  The Earnings ESP for Citigroup is -0.93%. This is because the Most Accurate estimate is below the Zacks Consensus Estimate by 1 cent.

Zacks Rank: Citigroup’s Zacks Rank #3 (Hold), however, increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise call.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

The earnings ESP for The PNC Financial Services Group, Inc. (PNC - Free Report) is +0.57% and it carries a Zacks Rank #3 (Hold). The company is scheduled to release its second-quarter results on Jul 16.

Fifth Third Bancorp (FITB - Free Report) has an earnings ESP of +4.44% and carries a Zacks Rank #3 (Hold). It is scheduled to report its second-quarter results on Jul 17.

Capital One Financial Corporation (COF - Free Report) has an earnings ESP of +1.12% and carries a Zacks Rank #2 (Buy). It is expected to report its second-quarter results on Jul 17.

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