It has been about a month since the last earnings report for Citigroup (C - Free Report) . Shares have lost about 3.8% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Citigroup due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Citigroup Q3 Earnings Reflected Cost Control and High Revenues
Driven by expense management, Citigroup delivered a positive earnings surprise of 4.8% in third-quarter 2018. Earnings from continuing operations per share of $1.74 for the quarter handily outpaced the Zacks Consensus Estimate of $1.66. Also, earnings climbed 22.5% year over year.
Net income came in at $4.6 billion or $1.73 per share compared with $4.1 billion or $1.42 reported in the prior-year quarter.
Higher consumer banking, equity markets and fixed income market revenues, along with loan growth were recorded. Though investment banking revenues disappointed as strong advisory business was more than offset by lower underwriting fees on low client activity, reduced expenses and credit costs acted as tailwinds.
Citigroup’s costs of credit for the Sep-end quarter were down 1% year over year to $1.97 billion. This fall largely underlines reduced net credit losses of $1.8 billion and a credit reserve build of $192 million.
Top Line Solid, Expenses Drop
Revenues were almost stable year over year at $18.4 billion in the reported quarter. Excluding the gain on sale of an asset management business in Mexico, along with the foreign exchange translation impact, revenues spiked 4%. The reported figure was almost in line with the Zacks Consensus Estimate.
In the Institutional Clients Group (ICG), revenues came in at $9.2 billion in the quarter, down 2% year over year. Though fixed income revenues increased 9%, equity markets were up 1% and securities services revenues climbed 11%, lower investment banking revenues (down 8%) fully offset this rise.
Global Consumer Banking (GCB) revenues increased 2% year over year to $8.7 billion, mainly driven by higher revenues in Latin America, partly offset by decreased revenues in North America and Asia GCB.
Corporate/Other revenues came in at $494 million, slipping 5% from the prior-year quarter. The decline mainly underscores legacy assets runoff.
Operating expenses at Citigroup edged down 1% year over year to $10.3 billion. Efficiency savings and the winding-down of legacy assets muted the elevated volume-related expenses and ongoing investments.
Strong Balance Sheet
At the end of the quarter, Citigroup’s end of period assets was $1.93 trillion, up 2% year over year. The company’s loans grew 3% year over year to $675 billion. Deposits increased 4% year over year to $1.01 trillion.
Credit Quality Improves
Total non-accrual assets decreased 19% year over year to $4 billion. The company reported a dip of 15% in consumer non-accrual loans to $2.4 billion. In addition, corporate non-accrual loans of $1.5 billion plunged 25% from the year-earlier period.
Citigroup’s total allowance for loan losses was $12.3 billion at quarter end, or 1.84% of total loans, compared with $12.4 billion, or 1.91%, recorded in the year-ago period.
Solid Capital Position
At the end of the Jul-Sep quarter, Citigroup’s Common Equity Tier 1 Capital ratio was 11.8%, down from 13% in the year-ago quarter. The company’s supplementary leverage ratio for the quarter came in at 6.5%, down from 7.1% in the year-earlier quarter.
As of Sep 30, 2018, book value per share was $72.88, down 8% year over year, and tangible book value per share was $61.91, down 10% from the comparable period last year.
During third-quarter 2018, Citigroup repurchased about 75 million of common stock. Notably, the company returned around $6.4 billion to common shareholders as common stock repurchases and dividends.
Management expects top-line revenue growth in the range of 4-5%, driven by consumer, institutional corporate revenue growth, along with increasing digitization in 2018.
On a full-year basis, management expects core accrual net interest revenues to be near about $3.7 billion in 2018. However, legacy asset-related net interest revenues are expected to be further down by $500 million in 2018 due to winding down of the portfolio. Additionally, trading-related net interest revenues will likely continue to face headwinds in a rising rate environment.
Management continues to expect the net interest revenue percentage to improve sequentially in the fourth quarter. This improvement is expected to continue into further year-over-year increase in the NIR percentage in 2019. As the mix of interest-earning balances continues to improve, underlying growth is expected to accelerate in 2019, resulting in modest reported growth next year.
For 2018, management continues to expect reported revenues in Branded Cards to be roughly flat and remains on track to achieve 2% underlying growth in total revenues. This underlying growth is expected to result in further growth in 2019, considering the Hilton and Visa B gains recorded earlier this year.
Retail services revenue growth rate is likely to accelerate over the next few quarters, highlighting the recent acquisition of the L.L. Bean card portfolio, which added $1.5 billion of high quality receivables at second-quarter end.
Citigroup expects NCL rate in the range of 300 basis points (bps) for 2018 and up to 325 bps, over the medium term. In retail services, NCL rate is projected at 500 bps for 2018, and up to 525 bps, over the medium term.
For the fourth quarter in ICG, equity and fixed income market revenues are expected to decline due to seasonality on a sequential basis. However, revenues are likely to be higher on a year-over-year basis.
Investment banking revenue are anticipated to reflect the overall environment, but given Citigroup’s current backlog, revenues are likely to be up both sequentially and year-over-year. Further, continued year-over-year growth in accrual businesses is expected, including Treasury and Trade Solutions, Securities Services, Lending and the Private Bank.
In consumer, in North America, management expects to see somewhat better growth in the retail banking, excluding mortgage as well as retail services. In U.S. Branded Cards, total revenues are expected continue to reflect the impact of the Hilton sale as well as partnership terms that went into effect earlier this year. However, the net interest revenue percentage should improve both sequentially and year-over-year and continued year-over-year revenue growth is expected in Asia and Mexico.
Cost of credit is likely to remain stable quarter over quarter. Citigroup remains on track to achieve around 100 basis points of efficiency improvement in 2018 achieving 57.3% efficiency ratio for the full year. Though revenues in fourth quarter are likely to experience some pressure sequentially given the normal seasonal decline in trading revenues, expenses are also expected to decline modestly on lower compensation costs and better efficiency savings. Furthermore, management expects further 400 bps by 2020 reaching low 50s is by 2020.
Nonetheless, expense savings expectations have been increased to $2.8 billion by 2020 from the prior $2.5 billion, aiding to achieve efficiency ratio target and giving flexibility for increased investments.
Tax rate is likely to be in the range of 24% to 25%. Further, tax rate has been anticipated to be less than 24% by 2020, from the previous target of 33%.
Management anticipates producing a return on tangible common equity of roughly 14% over time. Additionally, it targets at least a 10.5% ROTCE in 2018, including the tax-reform impact, with an expectation of exceeding the initial target of 10-12% as early as 2019. Further, based on these expectations, RoTCE of more than 13.5% by 2020 is expected, up 250 bps from the original target. Notably, write-down of DTA due to tax reform and better earnings projections reflects a 100-bps improvement.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
Currently, Citigroup has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Citigroup has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.