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Soft Loan Demand, High Cost to Ail Citigroup's (C) Q4 Earnings

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Citigroup (C - Free Report) is scheduled to report fourth-quarter and full-year 2023 results on Jan 12, before market open. While the bank’s quarterly earnings are expected to have witnessed a year-over-year decline, its revenues are likely to have increased.

In the last reported quarter, adjusted earnings per share surpassed the Zacks Consensus Estimate on higher revenues in the Institutional Clients Group as well as Personal Banking and Wealth Management segments. However, the higher cost of credit was a headwind.

C’s earnings surpassed the consensus estimate in three of the trailing four quarters and missed once, delivering an average surprise of 7.62%. 

Citigroup Inc. Price and EPS Surprise

Citigroup Inc. Price and EPS Surprise

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

Major Factors to Influence Q4 Results

Loans & NII: Per Fed’s latest data, demand for commercial real estate loans improved slightly in November from third-quarter 2023 level. However, consumer lending showed no signs of advancement throughout October and November. Moreover, demand for commercial and industrial loans weakened in the first two months of the quarter under review from third-quarter 2023 figures. Overall, we believe loan growth for Citigroup is likely to have taken a hit during the fourth quarter.

Also, while Federal Reserve paused interest rate hikes during fourth-quarter 2023, interest rates remained at a 22-year high of 5.25-5.5%.

Such high interest rates are expected to have kept borrowers on the sidelines, thereby affecting the company’s lending book. This is likely to have affected average interest earning assets during the quarter. In fact, the Zacks Consensus Estimate for average interest-earning assets is pegged at $2.19 trillion, indicating nearly 1% decrease from the prior quarter’s reported figure.

Moreover, high interest rates are likely to have increased funding costs to some extent. This, along with a decline in loan demand, is expected to have affected the bank’s net interest income (NII) and net interest margin (NIM) during the quarter.

The Zacks Consensus Estimate for NII of $13.39 billion suggests a 3.2% decrease from the prior quarter’s reported figure. We project NII to be $13.58 billion for the quarter.

The consensus estimate for NIM is pegged at 2.42%, indicating a decline from 2.49% reported in the prior quarter. We suggest NIM to be 2.48% for the quarter under review.

Fee Income: During the to-be-reported quarter, investment banking ("IB") business showed a turnaround from the discouraging performance in the prior three quarters. Green shoots were observed in capital markets and issuance activities. Notably, at Goldman Sachs’ U.S. Financial Services Conference held in early December, bank executives noted that global deal-making conditions have started to improve. The major factor driving a better picture was the stabilizing interest rate environment.

There have been quite a few initial public offerings during the quarter to be reported. These are likely to have positively impacted Citigroup’s IB revenue during the quarter. The company expects IB revenues to rise in the high-single-digit range sequentially in the fourth quarter.

We anticipate IB income to be $902.6 million for the quarter, indicating a rise from $844 million in the prior quarter.

Also, C’s chief financial officer at the conference stated that market volatility and client activity were subdued across a broad set of asset classes in the fourth quarter. Thus, management anticipates markets revenues to be down 15-20% from third-quarter 2023 levels. We suggest the metric to fall to $3.64 billion from $4.48 billion in the prior quarter.

The consensus estimate for income from commissions and fees of $2.12 billion suggests a 3.4% dip from the prior quarter’s reported figure. We project the metric to be $1.91 billion for the quarter.

The Zacks Consensus Estimate for administration and other fiduciary feesof $883 million indicates a 9.1% tumble on a sequential basis. We forecast the metric to be $829 million.

The consensus estimate for income from principal transactions of $2.39 billion suggests a 20.7% plunge from the prior quarter’s reported figure. We project the metric to be $2.55 billion for the quarter.

Overall, the Zacks Consensus Estimate for total non-interest income is pegged at $5.67 billion, indicating a sequential decline of 10.1%. We estimate the metric to be $5.27 billion for the quarter.

Expenses: Management has been focused on revamping its underlying technology, risk management and internal controls as part of remediation highlighted by Office of the Comptroller of the Currency and Federal Reserve. Also, increased spending, specifically on severance costs related to its organizational overhaul and divestiture expenses, are likely to inflate expenses and hamper bottom-line growth in fourth-quarter 2023. Notably, management stated that the company would record $1 billion of restructuring and severance costs in 2023. Of this, $600 million has been incurred during the first three quarters of 2023.

Also, in the quarter under discussion, Citigroup was levied a $25.9 million penalty by Consumer Financial Protection Bureau for intentionally discriminating against Armenian Americans when they applied for credit cards. This would have further increased C’s expense base.

Our estimate for non-interest expenses is pegged at $15.32 billion for the fourth quarter, implying a rise of around 14% on a sequential basis.

Management anticipates expenses in 2023 of approximately $54 billion (excluding 2023 FDIC special assessments of $1.65 billion and divestiture-related impacts), which indicates a rise from $51.3 billion in 2022.

Key Developments During the Quarter

In October 2023, Citigroup agreed to sell its China-based onshore consumer wealth portfolio to HSBC Holdings plc (HSBC). Completion of the deal is expected in the first half of 2024. As a result of the sale, C will transfer assets under management and deposits worth approximately $3.6 billion to HSBC. Further, it will retain its institutional businesses where it has a preeminent position.

Progressing with its global consumer banking exits, in November 2023, Citigroup announced completion of the sale and full migration of its Indonesia consumer businesses to UOB Indonesia. The sale includes retail banking, credit card and unsecured lending businesses, and transfer of employees. The transaction is expected to result in a modest regulatory capital benefit to the bank.

What Our Model Predicts

Our proven model does not predict an earnings beat for C this time around. This is because it does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — that increase 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 -49.83%.

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

Prior to fourth-quarter earnings release, the company’s earnings estimates have been revised downward, indicating bearish analyst sentiment. The Zacks Consensus Estimate for fourth-quarter earnings of $1.04 has been revised 13.3% lower over the past month. It suggests a 5.5% year-over-year decline.

Nonetheless, the Zacks Consensus Estimate for revenues of $19.1 billion implies a 6% rise from the year-ago level.

Management expects 2023 revenues (excluding 2023 divestiture related impacts) in the lower end of the $78-$79 billion band, up from $75.3 billion in 2022. It also expects NII (excluding markets) to be slightly above $47.5 billion. The guidance was increased from the prior forecast of $46 billion.

Stocks That Warrant a Look

Here are a couple of bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around.

The Earnings ESP for Citizens Financial Group, Inc. (CFG - Free Report) is +0.59% and it carries a Zacks Rank #3 at present. The company is slated to report fourth-quarter and full-year 2023 results on Jan 17.

Over the past month, Zacks Consensus Estimate for CFG’s quarterly earnings has moved 17.7% north.

First Horizon Corporation (FHN - Free Report) is scheduled to release fourth-quarter and full-year 2023 earnings on Jan 18. The company, which carries a Zacks Rank #2 (Buy) at present, has an Earnings ESP of +9.68%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

FHN’s quarterly earnings estimates have remained unchanged over the past 60 days.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

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