It has been about a month since the last earnings report for Citigroup (C - Free Report) . Shares have lost about 5.8% 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 the most recent earnings report in order to get a better handle on the important catalysts.
Citigroup Q1 Earnings Beat Estimates on Lower Expenses
Citigroup delivered a positive earnings surprise of 5.1% in first-quarter 2019, backed by expense control. Earnings per share of $1.87 for the quarter handily outpaced the Zacks Consensus Estimate of $1.78. Also, earnings climbed 11% year over year.
Adjusted net income was $4.7 billion, up 2% year over year.
Citigroup displayed prudent expense management during the reported quarter. Moreover, higher fixed income revenues, along with loan growth, were positives. Further, investment banking revenues escalated on strong advisory business and higher debt underwriting, partly offset by lower equity underwriting fees.
In addition, lower equity market revenues amid challenging trading environment reflect reduced volumes and client activity levels.
Citigroup’s costs of credit for the Mar-end quarter were up 7% year over year to $1.98 billion. This upside largely underlines elevated net credit losses of $1.9 billion and a credit reserve build of $20 million, and provision for benefits and claims of $12 million.
Expenses Drop, Revenues Disappoint
Revenues were down 2% year over year to $18.6 billion in the first quarter. The reported figure also missed the Zacks Consensus Estimate of $18.8 billion. Lower revenues from Institutional Clients Group (ICG) and the wind-down of legacy assets in Corporate/Other segment were responsible for the downside.
In the ICG segment, revenues came in at $9.7 billion in the quarter, down 2% year over year. Equity market revenues decreased 24% year over year, contributing to lower total markets and securities services revenues (down 6%). However, fixed income market revenues were up 1% and total banking revenues rose 8%, aided by strong advisory business.
GCB revenues increased slightly year over year to $8.5 billion. Higher revenues in North and Latin America were offset by lower revenues in Asia GCB.
Corporate/Other revenues came in at $431 million, slipping 27% from the prior-year quarter. The decline mainly underscores wind-down of legacy assets.
Operating expenses at Citigroup dipped 3% year over year to $10.6 billion. Efficiency savings and the winding-down of legacy assets muted the ongoing investments.
Strong Balance Sheet
At the end of the quarter, Citigroup’s end of period assets was $1.96 trillion, up 2% sequentially. The company’s loans inched up 1% sequentially to $682 billion. Deposits increased 3% sequentially to $1.03 trillion.
Credit Quality Improves
Total non-accrual assets decreased 13% year over year to $3.8 billion. The company reported a dip of 14% in consumer non-accrual loans to $2.2 billion. In addition, corporate non-accrual loans of $1.5 billion slipped 11% from the year-earlier period.
Citigroup’s total allowance for loan losses was $12.3 billion at the end of the quarter, or 1.82% of total loans, compared with $12.4 billion, or 1.85%, recorded in the year-ago period.
Solid Capital Position
At the end of the Jan-Mar period, Citigroup’s Common Equity Tier 1 Capital ratio was 11.9%, down from 12.1% in the prior-year quarter. The company’s supplementary leverage ratio for the quarter came in at 6.4%, down from 6.7% in the year-earlier quarter.
As of Mar 31, 2019, book value per share was $77.09, up 8% year over year, and tangible book value per share was $65.55, up 7% from the comparable period last year.
During first-quarter 2019, the company bought back about 66 million of common stock and returned around $5.1 billion to common shareholders as common stock repurchases and dividends.
In second-quarter 2019, management expects to return to year-over-year revenue growth.
In ICG, in the fixed income and equity markets, given the slower start to the year, same magnitude of seasonal decline in revenues as witnessed in the prior years, in the second quarter on a sequential basis, is unlikely.
Investment Banking revenues are expected to trend down year-over-year. Nevertheless, continued year-over-year growth in core businesses across TTS, Security Services, Corporate Lending and the Private Bank are anticipated on global network of clients.
On the consumer side, in North America, continued year-over-year revenue growth with US Branded Cards is likely to occur. In Asia, year-over-year revenue growth is expected to improve on continued growth in accrual businesses and reduced headwinds from investment revenues. Further, in Mexico, year-over-year revenue growth is likely to be subdued given strong growth and performance in the second-quarter 2018, although continued growth in pre-tax earnings is anticipated.
Management estimates expenses in the second quarter to be roughly flattish on a year-over-year basis, and cost of credit will continue to reflect loan growth and normal portfolio seasoning.
For 2019, management continues to expect modest revenue growth, flattish expenses and higher but manageable cost of credit, along with continued balance sheet and capital optimization, to drive improved returns for shareholders.
Looking forward, management expects the NIR percent to decline in the second quarter, based on seasonality, and for 2019, spreads are expected to remain at a level similar to or slightly higher than fourth-quarter 2018.
For the remainder of 2019, management projects a modest pre-tax quarterly loss in Corporate Other segment.
On a full year basis, management expects to generate at least $2 billion of growth in net interest revenue year over year. Though no mid-year rate increase in 2019 is assumed, the anticipated benefit from the rate hike was relatively lower, at less than $100 million of incremental revenues. Further, total non-interest revenue is expected to remain flat year over year.
Management expects loan growth to trend higher similar to recent levels in the second quarter.
For U.S. Branded Cards, NCL rate is anticipated in the range of 300 to 325 basis points for 2019. NCL rate for Retail Services are expected in the range of 500 basis points to 525 basis points.
Full-year RoTCE of 12% is targeted for 2019 and more than 13.5% for 2020.
In addition, on the expense side, management noted that efficiency saving significantly outpaced incremental investments in the second half of 2018, realizing a net benefit to expenses of roughly $200 million. This amount is likely to increase to around $500-$600 million of net incremental savings in 2019, along with an additional $500- $600 million of net incremental benefits in 2020. These net savings should offset volume-driven expenses on ongoing investments in the business. Moreover, positive operating leverage the bank as a whole and for consumer and institutional businesses is anticipated in 2019.
Management targets efficiency ratio in the low 50% range. In addition, the company’s primary goal is to sustainably improve the return on shareholders' equity from the roughly 11% achieved in 2018 to about 12% in the current year, and more than 13.5% in 2020.
Tax rate is likely to be 23% this year.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
At this time, Citigroup has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. 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. Notably, Citigroup has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.