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Why Is Citigroup (C) Down 2.4% Since Last Earnings Report?

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A month has gone by since the last earnings report for Citigroup (C). Shares have lost about 2.4% 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 drivers.

Citigroup Q4 Earnings Beat Estimates, Revenues Escalate

Citigroup delivered a positive earnings surprise of 4.4% in fourth-quarter 2019, backed by revenue strength. Adjusted earnings per share of $1.90 for the quarter handily outpaced the Zacks Consensus Estimate of $1.82.

Including one-time gain, net income was $5 billion or $2.15 per share compared with the $4.3 billion or $1.64 per share recorded in the prior-year quarter.

Citigroup recorded higher revenues riding on consumer banking, investment banking and market revenues during the reported quarter. Though equity market revenues disappointed on a more challenging environment in derivatives, fixed income revenues were on an upswing. Moreover, investment banking revenues increased on strong underwriting business, partly muted by lower advisory business. Further, loans escalated.

However, rise in expenses was on the downside. Moreover, cost of credit soared.

For full-year 2019, net income came in at $19.4 billion compared with the $18 billion recorded in 2018.

Expenses Flare Up, Revenues Improve

For full-year 2019, the company reported revenues of $74.3 billion, up 2% year over year. Moreover, it outpaced the Zacks Consensus Estimate of $73.7 billion.

Revenues were up 7% year over year to $18.4 billion in the fourth quarter. The reported figure also beat the Zacks Consensus Estimate of $17.7 billion. Higher revenues, both from Global Consumer Banking (GCB) and Institutional Clients Group (ICG), mainly led to this upside.

GCB revenues increased 5% year over year to $8.5 billion. Higher revenues in North, Latin America and Asia GCB resulted in this upsurge. Notably, both retail banking and card revenues escalated.

In the Institutional Clients Group (ICG) segment, revenues came in at $9.4 billion in the quarter, up 10% year over year. Higher investment banking and fixed income market revenues were partly offset by lower equity market revenues.

Corporate/Other revenues came in at $542 million, up 8% from the prior-year quarter. This upside stemmed from gains on investments, partly underscored by the wind-down of legacy assets.

Operating expenses at Citigroup escalated 6% year over year to $10.5 billion. Rise in compensation and volume-related expenses, along with continued investments in the franchise, were on the downside. These were partly negated by efficiency savings and the winding-down of legacy assets.

Stable Balance Sheet

At the end of the October-December quarter, Citigroup’s end of period assets was $1.95 trillion, down 3% sequentially. The company’s loans inched up 1% sequentially to $689 billion. Deposits were down 2% sequentially to $1.07 trillion.

Credit Quality: A Mixed Bag

Citigroup’s costs of credit for the December-end quarter were up 15% year over year to $2.2 billion. This upswing largely underlines the elevated net credit losses of $1.9 billion and a credit reserve build of $253 million, and provision for benefits and claims of $25 million.

Total non-accrual assets increased 12% year over year to $4.1 billion. The company reported a drop of 10% in consumer non-accrual loans to $1.8 billion. Yet, corporate non-accrual loans of $2.2 billion surged 45% from the year-earlier period.

Citigroup’s total allowance for loan losses was $12.8 billion at the end of the reported quarter, or 1.84% of total loans, compared with the $12.3 billion, or 1.81%, recorded in the year-ago period.

Solid Capital Position

At the end of the October-December period, Citigroup’s Common Equity Tier 1 Capital ratio was 11.7%, down from the prior-year quarter’s 11.9%. The company’s supplementary leverage ratio for the quarter came in at 6.2%, down from the year-earlier quarter’s 6.4%.

As of Dec 31, 2019, book value per share was $82.90, up 10% year over year, and tangible book value per share was $70.39, up 10% from the comparable period last year.

Capital Deployment

During 2019, Citigroup repurchased about 264 million of common stock. The company returned around $22.3 billion to common shareholders as common stock repurchases and dividends.

Notably, during the fourth quarter, the company bought back about 69 million of common stock and returned around $6.2 billion to common shareholders as common stock repurchases and dividends.

Outlook

In 2020, management expects to record modest year-over-year revenue growth, attributed to continued growth in net interest revenue despite low rates (three rate cuts in 2019), backed by loan growth and mix and continued fee growth across both consumer and institutional businesses. Notably, management assumed 1 additional rate cut of about 25 basis points in the second half of 2020.

In consumer, continued year-over-year revenue growth is projected across all regions, driven by execution of the company’s consumer strategy, as well as deeper penetration of the card customers and development of new value propositions.

In ICG, good underlying metrics with the institutional clients, particularly in TTS, is anticipated. Therefore, continued momentum, deposit volumes and engagement with both new and existing clients on the institutional side and in TTS is expected. Overall, top-line growth of a couple of percentage points and a constructive capital markets environment with flat expenses is likely to be recorded.

Further, flat expenses are predicted and cost of credit is likely to remain manageable. Management expects a tax rate of around 22% in 2020, excluding any discrete tax items.

ROTCE is expected in the range of 12% to 13% for 2020.

For 2020, management projects a pre-tax loss of around $250 million in Corporate Other segment, with continued investment in infrastructure and controls, impact from lower rates and reduced level of gains.

For U.S. Branded Cards, NCL rate is anticipated to be at the higher end of the range of 300 basis points to 325 basis points, and 500 to 525 basis points for retail services for the year.

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 increased to around $500-$600 million of net incremental savings in 2019 and an additional $500-$600 million of net incremental benefits is expected in 2020. These net savings will offset volume-driven expenses on ongoing investments in the business.

Management targets efficiency ratio in the mid 50% range.

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 three CCAR cycles.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month.

VGM Scores

At this time, Citigroup has a poor Growth Score of F, 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 second quintile 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.

Outlook

Citigroup has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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