Citigroup Earnings Outlook with AOCI Hits from Rising Rates

Citigroup ($C) third quarter earnings are due Friday before the market open. 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 Preview

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

  • Projected EPS: $1.57
  • Projected revenue: $18.32 billion

Investment Banking Losses

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).

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.

Citigroup Q2 2022 Recap

Q22022 earnings before the open; conference call at 11 a.m. ET Friday

  • Adjusted earnings of $2.19 a share on revenue of $19.6 billion, exceeding projections by analysts surveyed by FactSet who expected Citigroup to earn $1.68 a share on revenue of $18.4 billion.
  • Net income totaled $4.5 billion, marking a 27% decline from last year.
  • In the year-ago quarter, Citigroup earned $2.85 a share on $17.5 billion in revenue
  • In Citi’s institutional clients group, which contains its investment bank and serves corporate clients, revenue rose 20% and profit rose 16%.
  • The bank was boosted by a strong trading quarter amid market turmoil, with markets revenue up 25% on a 31% increase in fixed-income trading, the dominant business for Citi’s results.
  • Revenue rose 28% in the services and treasury and trade businesses that help big companies manage and move money around the globe.
  • Gains there were offset by a 46% drop in fees from investment banking. Deal making slowed, along with stock and bond sales.
  • Revenue in the consumer bank and wealth management operations rose 6% while its profit dropped 69% on the loan-loss reserves.
  • Consumer spending on Citi-issued credit cards rose 16% in the quarter and balances they carried increased.
  • Expenses at the bank rose 8% to $12.4 billion. Citigroup is under regulatory orders to improve its vast systems that monitor risks for the bank and its clients, a multiyear project that requires heavy spending.
  • Return on tangible common equity, a closely watched profitability metric, hit 11.2%, far higher than the 8.8% analysts had predicted.
  • The bank’s profitability on lending increased thanks to the Federal Reserve’s interest rate increases. Net interest margin, a gauge on lending profits, rose to 2.24% from 2.05% in the first quarter.

Last quarter Citigroup had its first investor day in five years and unveiled medium-term financial targets and spoke of efforts it is making to improve internal controls and streamline its operations. As part of its turnaround efforts, Citigroup is looking to develop its wealth management and treasury and trade solutions businesses while shedding non-core assets. Friday’s results indicated that the bank may be on the right course.

““Treasury and trade solutions fired on all cylinders as clients took advantage of our global network, leading to the best quarter this business has had in a decade,” Jane Fraser, chief executive at Citigroup, said Friday.

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. The bank said Friday that it was weighing all options of its Russia business after previously seeking a sale.

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. With Russia’s invasion of Ukraine, the bank warned last quarter it lost a range of $2.5 billion to $3 billion, reflecting efforts the bank has taken over the last few months to minimize risks.

Source: JPM, WFC, C, BLK,

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