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What is in the Offing for Citigroup (C) in Q4 Earnings?

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Citigroup (C - Free Report) is scheduled to report fourth-quarter and 2021 results on Jan 14, before market open. While its earnings are expected to have declined year over year, revenues are anticipated to have improved.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate on strong results in the investment banking (IB) segment and equity markets in addition to strong fee growth in Treasury and Trade Solutions. However, normalization in market activity across rates and spread products in the Fixed Income Markets within the Institutional Clients Group (ICG) marred results.

Over the trailing four quarters, the company’s earnings have surpassed the consensus estimate on all four occasions, the surprise being 42.9%, on average.

Citigroup Inc. Price and EPS Surprise


Citigroup Inc. Price and EPS Surprise

Citigroup Inc. price-eps-surprise | Citigroup Inc. Quote

Factors at Play

Trading Revenues: Equity market volatility and increased client activities in the fourth quarter have likely propelled equity trading activities in the quarter under review. Nonetheless, fixed-income trading has continued to normalize in the quarter, therefore, affecting trading revenues. Management expects the same to be flat to modestly down in fourth-quarter 2021 from the fourth-quarter 2019 reported levels.

IB Fees: While IB volumes decelerated in December, global merger and acquisition (M&A) activity continued to impress in the fourth quarter as dealmakers across the globe were active during this period, with a rise in M&A deal numbers. This was primarily driven by robust macroeconomic expectations, companies deploying their cash reserves, appetite for improving scale and market share, and increasing confidence in the economic recovery. Low interest rates have offered cheap debt-financing opportunities, further fueling the shopping spree in the United States. This is expected to have had a positive impact on Citigroup’s IB fees.

Underwriting volumes were also high, especially in the IPOs and leveraged loan space. This is further expected to have supported advisory revenues for the fourth quarter.

Net Interest Income (NII): In the fourth quarter, which is typically a seasonally-strong quarter for loan growth, lending activity witnessed decent acceleration sequentially. Per the Fed’s latest data, commercial and industrial loans, real estate loans, and consumer loan portfolios remained strong in October and November.

However, high levels of pay downs and payoffs, and stiff loan pricing competition have hindered Citigroup’s loan volumes. This is likely to have affected its NII and net interest margin for the fourth quarter. The Zacks Consensus Estimate for NII of $10.4 billion suggests a marginal decline from the prior-year quarter’s reported figure.

Also, stimulus-driven liquidity injected in the banking system remained high, with expanding deposit balances. Against a backdrop of low rates and excess deposits on banks balance sheets invested in low interest-earning avenues, NIMs are expected to have been pressured.

Also, the company projects consumer revenues to increase sequentially in the fourth quarter but fall in the mid-single digits on a year-over-year basis.

Expenses: Management has been focused on transforming to revamp its underlying technology, risk management and internal controls as part of remediation highlighted by the Office of the Comptroller of the Currency and the Federal Reserve last year. The company has been investing in businesses like wealth management, IB, and treasury and trade solutions.

Also, as part of its efforts to wind down the consumer banking business in South Korea, the company is expected to have incurred cash charges pertaining to voluntary termination benefits for employees and other related expenses in the fourth quarter.

The moves are anticipated to have increased Citigroup’s expenses and hindered bottom-line growth.In the December-end quarter, the bank expects to incur $1.2 billion of expenses related to Asia divestitures, with the majority of expenses related to the winding down of its Korea consumer banking unit. For 2021, management expects expenses to increase in the mid-single digits, excluding any divestiture-related impacts.

Asset Quality: Improved economic outlook and positive credit migration in the fourth quarter are expected to have driven reserve releases in the fourth quarter. Given the backdrop of continued improvement in credit trends, Citigroup is expected to have witnessed additional reserve releases in the fourth quarter. Such reserve releases are expected to have driven substantial bottom-line growth.

Capital Deployment: While the company continued to pay dividends in the fourth quarter, its stock repurchase was paused in anticipation of the impacts of the new capital rule — Standardized Approach for Counterparty Credit Risk (SACCR) rule — related to derivatives risks. The rule is expected to increase Citigroup’s risk-weighted assets by $60-$65 billion and affect its Common Equity Tier 1 capital ratio by 50-60 basis points.

Key Developments During the Quarter

Citigroup announced the sale of its consumer banking franchise in the Philippines. It also plans to wind down South Korea’s consumer banking business.

The company’s impending exit from South Korea’s consumer banking business is expected to result in cash charges of $1.2-$1.5 billion. These charges, pertaining to voluntary termination benefits for employees and other related expenses, are recognized in the fourth quarter of 2021 through 2022.

The sale of Citigroup’s consumer banking franchise in the Philippines to UnionBank of the Philippines will free up approximately $300 million of allocated tangible common equity and increase tangible common equity by nearly $500 million.

Here is what our quantitative model predicts:

Citigroup does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Citigroup is -7.94%.

Zacks Rank: Citigroup currently carries a Zacks Rank of 3.

Prior to the fourth-quarter earnings release, the company is witnessing downward estimate revisions, indicating the bearish sentiments of analysts. The Zacks Consensus Estimate for fourth-quarter earnings has been revised 8.7% downward to $1.68 over the past week. Nonetheless, the figure suggests a year-over-year decline of 18.8%.

Nonetheless, the Zacks Consensus Estimate for revenues of $17 billion indicates 3.1% growth from the prior-year quarter’s reported figure.

Stocks That Warrant a Look

Fifth Third Bancorp (FITB - Free Report) , Citizens Financial Group, Inc. (CFG - Free Report) and Huntington Bancshares Incorporated (HBAN - Free Report) are a few stocks that you might want to consider as these have the right combination of elements to post earnings beat in their upcoming releases, per our model.

The Earnings ESP for Fifth Third is +0.27% and it carries a Zacks Rank #3 at present. FITB is slated to report the fourth-quarter 2021 results on Jan 20.

The Zacks Consensus Estimate for FITB’s fourth-quarter earnings has been unchanged over the past 30 days.

Citizens Financial is scheduled to release the fourth-quarter results on Jan 19. CFG currently carries a Zacks Rank #3 and has an Earnings ESP of +0.12%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Citizens Financial’s fourth-quarter earnings has been unchanged over the past 30 days.

Huntington Bancshares is scheduled to release earnings on Jan 21. HBAN, which carries a Zacks Rank #3 at present, has an Earnings ESP of +0.20%.

The Zacks Consensus Estimate for Huntington Bancshares’ fourth-quarter earnings has been revised 2.1% downward over the past 30 days.