Citigroup Earnings Boosted by Inflation Spiked Credit Card Revenue

Citigroup ($C) reported stronger than expected third quarter earnings Friday before the market opened. The gains came from US personal banking with double digit revenue growth in both of our cards businesses CEO Jane Fraser said.

Second quarter earnings topped analysts’ estimates even though they saw a 46% drop in profit. Citi saw revenue drop in investment banking 46%, mirroring declines seen at JPMorgan Chase and Morgan Stanley releases yesterday. Citigroup’s shares are down 33% year-to-date and are down 41% over the last 5-years with a forward P/E of just 5.8. $C pays the largest dividend of money center banks with a yield of 4.8%.


Reporting also this week are JPMorgan Chase (JPM) PNC Bank (PNC), Morgan Stanley MS and Wells Fargo (WFC) along with BlackRock (BLK). The earnings came after red hot CPI and PPI.

Citigroup Earnings

Q3 2022 earnings release at 7:30 a.m. ET; conference call at 9:30 a.m. ET

  • EPS $1.63 (est $1.43)
  • Revenue $18.5B (est $18.25B)
  • FICC Sales & Trading Revenue $3.06B (est $3.17B)
  • Equities Sales & Trading Revenue $1.01B (est $0.995B)
  • Investment Banking Revenue $0.631B (est $1.07B)
  • Technology expenses and higher inflation sent costs up 8% to $12.7 billion.
  • $C pre-market $43.79 +0.84 (1.96%)

Citigroup Cards Business Boon

The branded-card unit includes the Double Cash and Custom Cash cards has been a boon for the bank. Revenue surged 10% in the quarter to $2.3 billion, topping analysts’ estimates. Spending on branded cards jumped 14%, while average loans jumped 12%. In comparison revenue from wealth management declined, hurt by operations in Asia.

“US personal banking further solidified its growth trajectory with double digit revenue growth in both of our cards businesses,” Chief Executive Officer Jane Fraser said in a statement.

Higher rates increase margins

The brighter outlook for bank profits coincides with higher Treasury yields. The benchmark 10-year Treasury yield has risen dramatically for the year-to-date, with higher interest rates boosting banks income from their core lending businesses.  The bank’s net interest margin, a measure of what it collects on loans minus what it pays for deposits rises with rates.

Credit Losses

Citigroup set aside more reserves for bad loans, sending the firm’s total cost of credit up to $1.4 billion in the quarter, in line with analysts’ estimates. That compares with a benefit of $192 million a year earlier, when the bank released reserves, it had taken during the pandemic.

Oversea Market Exits

Over the last year, the bank announced plans to exit 14 international markets and has made progress on either closing sales or winding down 10 of those businesses. Fraser on Friday announced the company will also wind down its institutional operations in Russia after it already announced a similar plan for consumer and commercial businesses there. |

However, the exits from Australia and South Korea have not been smooth and cost Citigroup nearly $1.7 billion before the Russian invasion of Ukraine. Russia is one of 13 consumer markets it was planning to exit.

“We continue to shrink our operations in and exposure to Russia and we will be ending nearly all of the institutional banking services we offer next quarter,” Fraser said.

Investment Banking Losses

Citigroup fees from investment banking plummeted 64% in the third quarter.,

JPMorgan President Daniel Pinto told investors last month that he expected the bank’s investment banking fees to fall between 45% and 50% in the third quarter.

Weakness has been exacerbated by a decline in large private-equity buyouts, dropping 54% to $716.62 billion in the third quarter from the same period last year, according to Dealogic data.

U.S. banks wrote down $1 billion on leveraged and bridge loans as rising interest rates made it tougher for them to offload high-risk debt onto investors and other lenders. Wall Street banks took combined losses of $700 million on the sale of $8.55 billion in loans and bonds backing the leveraged buyout of business software company Citrix Systems Inc, Reuters reported last month, citing a person familiar with the matter.

The Twitter takeover by Elon Musk has been reported to lead to $500 million dollar losses for the financing banks if the deal goes ahead.

“We are expecting further losses on these deals,” said Richard Ramsden, an analyst at Goldman Sachs who oversees research on large banks. “It’s going to vary quite a bit,” depending on where the transactions were initially priced and how much exposure remains, he said.

Accumulated Other Comprehensive Income or AOCI

With higher rates banks having parked park excess funds in government bonds and mortgage-backed securities the losses are pronounced. Both investments have fallen in value sharply this year, which means banks will have to mark down their portfolios accordingly. These losses are reported as changes to “accumulated other comprehensive income,” or AOCI, but the important thing is they draw down capital.

RBC Capital Markets analyst Gerard Cassidy said banks could suffer up to a 10% blow to their capital cushions due to AOCI changes. In itself that’s not so bad, but banks have been writing down their investment portfolios all year. At Citigroup, AOCI losses reduced tangible capital by 23% in the second quarter, according to Cassidy’s research. The third-quarter could deliver more pain because the yield on the 10-year bond rose to 3.83%.

KBW analyst David Konrad estimates JPMorgan could take a $6.7 billion AOCI hit in the third quarter and Citi $4.3 billion. At Citi, the write-down could sufficiently lower capital that the bank must raise cash, Konrad said. The bank may unload $45 billion worth of private equity loans.

Analysts Outlook on Banks

Oppenheimer issued a note generally positive on bank stocks due to cheap valuation. The firm noted that in in two of the last three recessions, bank stocks bottomed relative to the market either at the beginning or well before the recession began.

Oppenheimer’s favorite names are Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), Jefferies (JEF), Morgan Stanley (MS), and U.S. Bancorp (USB).

Citigroup predicts strong earnings beat and share price pop for JPMorgan Chase (JPM) off better-than-expected net interest income. The bank’s guidance for NII is expected to be revised higher as JPM is said to have been more disciplined than others on deploying cash, and now has the opportunity to extend duration at higher rates. The firm also upgraded Bank of New York Mellon (BNY) shares to a buy rating ahead of earnings because of the bank’s relatively lower exposure to loan losses and strong return outlook.

Morgan Stanley in a note warned that inflation plus QT is a recipe for volatility. “Throw in rapidly rising, higher for longer rates and higher capital requirements and you get an accelerating credit cycle” With defense seen as the best offense in the current backdrop, MS recommends leaning into M&T Bank (NYSE:MTB), Regions Financial (RF), Wells Fargo (WFC), and First Republic Bank (FRC).

Source: JPM, WFC, C, BLK,

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