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Citi (C) Beats Q1 Earnings, Results Show Industry Challenges

A fall in operating expenses drove Wall Street banking giant Citigroup Inc. C to deliver a positive earnings surprise of more than 6% in first-quarter 2016. The company’s earnings from continuing operations per share of $1.11 for the quarter outpaced the Zacks Consensus Estimate of $1.04. However, earnings declined 26% on a year over basis.

 

Following the earnings release, Citigroup gained over 2% at the beginning of the trading session. This is perhaps due to the earnings beat which came on the back of pretty conservative estimates and lower than expected expenses. However, since the fundamentals remain weak, we will get a fair idea about price reaction following the completion of today’s trading session.

Income from continuing operations stood at $3.51 billion, down 27% from the prior year quarter. The decline, though significant, reflected the tough environment faced by banks during the quarter amid a number of issues including concerns over the Chinese economic slowdown, continued stress in energy sector and the low, sometimes even negative interest rates environment.

Notably, Citigroup’s investment banking revenues fell 27% year over year mainly due to lower industry-wide activity in the reported quarter. Also, fixed income markets revenues decreased 11%, mirroring lower activity levels as well as a less favorable environment in securitized products and commodities. Further, due to impact of lower volumes in cash equities along with weaker performance in derivatives, equity markets revenues decreased 19%.

Citigroup’s costs of credit for the fourth quarter were up 7% year over year to $2.04 billion. The rise was primarily due to a net loan loss reserve build of $233 million, mainly tied with energy-related loans, compared to a net loan loss reserve release of $239 million in the prior year quarter. This was partially offset by lower net credit losses.

Performance in Detail

Adjusted revenues of Citigroup decreased 11% year over year to $17.56 billion in first-quarter 2016. The decline reflected lower revenues at Citi Holdings as well as Citicorp. Including credit valuation adjustment (CVA) and debt valuation adjustment (DVA), Citigroup revenues also came in at $17.56 billion. The revenue figure missed the Zacks Consensus Estimate of $17.79 billion.

At Citicorp, adjusted revenues came in at $16.08 billion in the quarter, down 9% year over year. Revenues at Institutional Clients Group (ICG) decreased 11% year over year while Global Consumer Banking (GCB) revenues decreased 6% year over year.  However, revenues at Corporate/Other increased 29% year over year.

Citi Holdings’ adjusted revenues of $1.48 billion reflected a decrease of 31% year over year. The fall was primarily due to continued decline in the unit’s assets, which was partially offset by a net gain on asset sales. However, Citi Holdings continued to report profitability.

Operating expenses at Citigroup declined 3% year over year to $10.52 billion, reflecting declines in expenses in Citi Holdings, legal and related expenses and included the impact of foreign exchange translation.

Notably, legal and related expenses stood at $166 million, significantly down from $388 million in the prior year quarter. However, repositioning charges were $491 million, increasing considerably from just $16 million in the prior year quarter.

At quarter end, Citigroup’s end of period assets was $1.80 trillion, down 2% year over year. The company’s loans remained relatively stable year over year at $619 billion. Deposits increased 4% year over year to $908 billion. Citi Holdings’ assets decreased 44% from the prior-year quarter level to $73 billion and represented just 4% of the company’s total assets at the quarter end.

Credit Quality

Citigroup’s credit quality was a mixed bag in the reported quarter. Total non-accrual assets declined 13% year over year to $6.1 billion. The company reported a decrease of 35% in consumer non-accrual loans to $3.6 billion. However, corporate non-accrual loans of $2.3 billion soared 97% from the prior year period, mainly related to energy-related loans in the ICG.

Citigroup’s total allowance for loan losses was $12.7 billion at quarter end, or 2.07% of total loans, down from $14.6 billion, or 2.38%, in the prior-year period.

Capital Position

At the quarter end, Citigroup’s estimated Basel III Common Equity Tier 1 Capital ratio was 12.3%, increasing from 11.06% in the prior-year quarter. The company’s Supplementary Leverage Ratio for the first quarter stood at 7.4%, up from 6.44% in the prior-year quarter.

As of Mar 31, 2016, book value per share was $71.47 and tangible book value per share stood at $62.58, up 7% and 9%, respectively, from the prior-year period.

Our Viewpoint

The results certainly do not reflect a strong quarter for Citigroup, however restructuring efforts including streamlining moves should continue to ease its burden on the expense base, thereby supporting the company’s financials. One can consider a strong brand like Citigroup to be a sound investment option over the long term, given its global footprint and attractive core business. Also, the company’s capital deployment activities should continue to boost investors’ confidence in the stock.

However, revenue pressure, several legal hassles and the thrust of new banking regulations will continue to be concerns for the company.

Citigroup carries a Zacks Rank #4 (hold).

Performance of Other Major Banks

JPMorgan Chase & Co. JPM kick-started the first-quarter earnings season on a positive note. Earnings of $1.35 per share beat the Zacks Consensus Estimate of $1.26, which was pretty conservative after a number of downward revisions lately. The figure shows a 7% improvement decline from the year-ago period, indicating the impact of challenging market conditions.

Wells Fargo & Company’s WFC first-quarter 2016 earnings recorded a positive surprise of about 1%. Earnings of 99 cents per share beat the Zacks Consensus Estimate by a penny. However, it compared unfavorably with the prior-year quarter’s earnings of $1.04 per share.

Lower trading revenues as well as a rise in credit costs led Bank of America Corporation’s BAC first-quarter 2016 earnings of 21 cents per share, which lagged the Zacks Consensus Estimate by a penny. Further, the bottom line witnessed a 16% year-over-year decline.

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