A month has gone by since the last earnings report for Citigroup (C - Free Report) . Shares have lost about 9.1% 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 drivers.
Citigroup's Q2 Earnings & Revenues Beat Estimates
Citigroup delivered a positive earnings surprise of 2.8% in second-quarter 2019, backed by expense control. Adjusted earnings per share of $1.83 for the quarter handily outpaced the Zacks Consensus Estimate of $1.78. Also, earnings climbed 12% year over year.
Including one-time gain, net income was $4.8 billion or $1.95 per share compared with $4.5 billion or $1.63 per share recorded in the prior-year quarter.
Citigroup displayed prudent expense management and higher revenues riding on consumer banking during the reported quarter. Further, loan and deposit growth were positives. However, fixed income revenues, excluding the Tradeweb gain, disappointing investment banking revenues on lower advisory business and reduced equity underwriting, partly offset by higher debt underwriting fees were on the downside.
In addition, lower equity market revenues amid challenging trading environment reflect reduced volumes and client activity levels.
Citigroup’s costs of credit for the June-end quarter were up 16% year over year to $2.1 billion. This upswing largely underlines elevated net credit losses of $2 billion and a credit reserve build of $111 million, and provision for benefits and claims of $19 million.
Expenses Drop, Revenues Escalate
Revenues were up 2% year over year to $18.8 billion in the second quarter. The reported figure also outpaced the Zacks Consensus Estimate of $18.3 billion. Higher revenues from Global Consumer Banking (GCB) and pre-tax gain on Citigroup’s investment in Tradeweb mainly led to the upside.
GCB revenues increased 3% year over year to $8.5 billion. Higher revenues in North, Latin America and Asia GCB led to this upsurge. Notably, both retail banking and card revenues escalated.
In the Institutional Clients Group (ICG) segment, revenues came in at $9.7 billion in the quarter, almost unchanged year over year. Investment banking, corporate lending, equity market revenues and fixed income market revenues disappointed.
Corporate/Other revenues came in at $532 million, inching up 1% from the prior-year quarter. This upside stemmed from elevated treasury revenues and gains, mostly underscored by wind-down of legacy assets.
Operating expenses at Citigroup dipped 2% year over year to $10.5 billion. Efficiency savings and the winding-down of legacy assets muted the ongoing investments.
Strong Balance Sheet
At the end of the April-June quarter, Citigroup’s end of period assets was $1.99 trillion, up 2% sequentially. The company’s loans inched up 1% sequentially to $689 billion. Deposits were up 1% sequentially to $1.05 trillion.
Credit Quality Improves
Total non-accrual assets decreased 9% year over year to $3.7 billion. The company reported a drop of 7% in consumer non-accrual loans to $2.2 billion. Furthermore, corporate non-accrual loans of $1.4 billion slipped 13% from the year-earlier period.
Citigroup’s total allowance for loan losses was $12.5 billion at the end of the quarter, or 1.82% of total loans, compared with $12.1 billion, or 1.81%, recorded in the year-ago period.
Solid Capital Position
At the end of the April-June period, Citigroup’s Common Equity Tier 1 Capital ratio was 11.9%, down from the prior-year quarter’s 12.1%. The company’s supplementary leverage ratio for the quarter came in at 6.4%, down from the year-earlier quarter’s 6.6%.
As of Jun 30, 2019, book value per share was $79.40, up 10% year over year, and tangible book value per share was $67.64, up 3% from the comparable period last year.
During the second quarter, the company bought back about 54 million of common stock and returned around $4.6 billion to common shareholders as common stock repurchases and dividends.
Looking forward, management expects the NIR percent to remain at the level recorded in the third quarter as management expects to maintain current mix of interest-earning to non-interest-earning balances.
In ICG, in the third quarter, management expects continued year-over-year growth in accrual businesses as Citigroup continues to serve target clients globally. Further, performance of markets and investment banking revenues depend on the overall market environment.
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, organic growth across the rest of accrual and consumer businesses is expected, and a favorable comparison in markets revenues in the fourth quarter is likely to occur even if investor client activity remains muted as witnessed year-to-date. However, gain on the sale of asset management business in Mexico in the third-quarter 2018 might act as a headwind in year-over-year comparison of results, though continued steady growth in pretax earnings is anticipated.
In the third quarter, expenses are likely to decline sequentially, and cost of credit to continue to grow modestly year-over-year, reflecting volume growth and continued normalization in ICG.
In 2019, management expects to record modest year-over-year revenue growth, attributed to continued growth in net interest revenue and more stable trends in non-interest revenue.
Management estimate expenses in the second half of 2019 to be lower on a sequential basis.
On a full year basis, management expects to generate at least $2 billion of growth in net interest revenue year over year. Further, it estimated that each 25 basis point cut in U.S. rates impacts revenues by roughly $50 million on a quarterly basis, depending on the competitive environment for deposits and other factors. Additionally, total non-interest revenue is expected to remain flat year over year.
For the remainder of 2019, management projects a modest pre-tax quarterly loss in Corporate Other segment.
Management expects loan growth to trend higher similar to recent levels in the second half of 2019.
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 first half of 2019, realizing a net benefit to expenses of roughly $300 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 between 22% & 23% in the second half of 2019.
During the second quarter, on approval of Capital Plan 2019 from the Federal Reserve, Citigroup is likely to meet the goal set at Investor Day to return at least $60 billion in capital over 3 CCAR cycles.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
Currently, Citigroup has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly 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.