Citigroup reported better than expected second quarter earnings Friday before the market open along with two of the largest U.S. lenders, JPMorgan Chase (JPM) and Wells Fargo (WFC). Citigroup was able to benefit from higher interest income from borrowers to partly counter from a slump in trading and investment banking. $C reported earnings of $2.92 billion, or $1.33 per share, in the three months to June 30, down 36%. The profit was weighed down by higher layoff costs and increased provisions for credit losses. Like JPMorgan set aside more money for credit losses preparing for a weaker economic backdrop.
On the positive side Citi again saw strong gains from resilient US consumers. Revenue from Citi’s retail credit card business rose 27% in the period, helping the bank’s overall profits beat Wall Street’s expectations. Citigroup is still working through its strategic transformation under Jane Fraser and the market will be looking for progress reports.
Notably the fall in Citi’s net income contrasted with higher profits at JPMorgan Chase (JPM) and at Wells Fargo (WFC).
Citigroup Q2 2023 Earnings
Q2 2023 earnings released at 8:00 a.m. ET; conference call at 11:00 a.m. ET via live webcast and teleconference.
Highlights
- Net income: $2.9bn, down from $4.5bn in the same period last year.
- Excluding one-off items, Citi earned $1.37 per share, topping the $1.30 expected by analysts, according to Refinitiv IBES
- Revenues dipped 1% to $19.4bn
- Revenue in cash management and payment processing unit was up just 15%, less than half the 32% growth in the same period last year.
- Revenue from corporate and investment banking fell 44%
- Fees from its markets business, trading stocks and bonds on behalf of clients fell 13%.
- Net Interest Income: Up 16% from a year ago to nearly $14bn
- Expenses rose by more than $1bn, mostly tied to the lay-offs of as many as 5,000 staff.
- Provision for loan losses rose nearly 40% to $1.8bn.
“The U.S. economy is proving to be quite resilient, with strong balance sheets both on the consumer side and the corporate side,” CFO Mark Mason said told reporters on a conference call.
C: Stock Market Reaction
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Net Interest Income Benefit
Citi benefited from net interest income and now has the opportunity to extend duration at higher rates. Net interest income hit a third straight record. Net interest income in the quarter rose 16 per cent from a year ago to nearly $14bn, compared with 44 per cent and 29 per cent at JPMorgan and Wells Fargo, respectively.
Citi said the average yield it was paying depositors rose to just over 3 per cent, up from about just over a half a per cent a year ago. Citi, unlike other banks, did not see an outflow of deposits in the quarter.
Higher Interest Rates Increase Revenue …. But at a Cost
With higher interest rates from the Federal Reserve’s aggressive rate hiking revenues rose from a year earlier. Net interest income (NII) widened as the net interest margin widened, simply the gap has widened the gap between what the big commercial banks pay depositors and what they earn lending money out.
Tighter bank lending will be compounded by a pullback in “private Credit” and other non-bank lenders. This is particularly problematic for earnings and loan quality for small and mid-sized banks that have operated so aggressively in real estate finance over recent years. Office buildings are an obvious trouble spot, but commercial real estate in general is vulnerable. Cracks are appearing in the booming nationwide apartment marketplace, and there are indications of waning institutional interest in residential housing.
Investment Banking
Citi was again hit by the sharp slowdown in dealmaking. Revenue from corporate and investment banking slipped another 44 per cent in the quarter while fees from its markets business, trading stocks and bonds on behalf of clients fell 13 per cent.
“In banking, the long-awaited rebound in investment banking has yet to materialize, making for a disappointing quarter,” Citi chief executive Jane Fraser said on Friday.
Credit Losses
Citi’s provision for loan losses in the quarter rose nearly 40 per cent to $1.8bn. Overall lending in the quarter was little changed from a year ago.
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.
Citigroup closed two more divestitures during the first quarter, including its consumer business in India to Axis Bank Limited that generated a gain on the sale. The deal was announced in March 2022. The sale includes retail banking, credit cards, wealth management and consumer loans, as well as the transfer of around 3,200 Citi employees. The transaction is anticipated to result in a regulatory capital release of $1.4 billion. Net income was down 19% year over year when excluding the impact of the sales.
Citigroup Last Quarter Earnings
Outlook
Citi raised its guidance on what it expects to make from interest income this year, but again less than rivals. Citi projected more than $46bn in interest income, up from an earlier forecast of $45bn.
Citi’s chief financial officer Mark Mason said on Friday that the bank was benefiting across its businesses from higher interest rates, but that Citi’s deposits, unlike rivals, is heavily weighted towards corporate accounts which are more likely to move their excess deposits in search of yield.
Citi was the only big bank told it needs to increase its capital buffer as a result of this year’s Fed stress tests, which were released earlier this month. Citi’s own stress test, unlike other banks, showed that it would do better in a downturn than the Fed predicted.
Mason said Citi had contacted the Fed to determine why regulators thought its market business would perform worse in a downturn than the bank projected, which was the source of the discrepancy.
“We are not contesting the results, but we do want to understand,” said Mason on Friday.
Source: Citigroup, TC, WSJ
From The TradersCommunity Research Desk