Citigroup Record Fixed Income Sales & Trading Revenue Cushion Earnings

Citigroup reported Beter than expected fourth quarter earnings Friday before the market open along with three of the largest U.S. lenders, JPMorgan Chase (JPM), Wells Fargo (WFC) and Bank of America (BAC). Citigroup profit fell by 21% in the fourth quarter of 2022, and like JPMorgan set aside more money for credit losses preparing for a weaker economic backdrop. On the positive side fixed income trading posted record fourth-quarter revenue. $C again saw strong gains from US personal banking with solid revenue growth in both cards businesses. Citigroup is still working through its strategic transformation under Jane Fraser and the market will be looking for progress reports.

Citigroup

Citigroup Q4 2022 Earnings

Q4 2022 earnings released at 8:00 a.m. ET; conference call at 11:00 a.m. ET via live webcast and teleconference.

Highlights

  • Net income: $2.5 billion versus $3.2 billion a year ago.
  • Profit fell 21% to $2.51 billion, or $1.16 per share. Projected EPS: $1.21 cents
  • Revenue rose 6% to $18 billion. Projected revenue: $17.85 billion
  • Net Interest Income: $13.27 billion, above 12.7 billion expected
  • Fixed Income Sales & Trading Revenue $3.16 billion, above expectations of $2.81 billion.
  • Equities Trading Revenue was $789 million, below expectations.
  • Private bank revenues up 5%
  • U.S. personal bank revenues up 10%.
  • Retail banking revenues fell 3% due to lower mortgage volumes.
  • Provision for credit losses: $1.85 billion compared to $1.79 billion expected
  • On Track to Reach Medium-Term Return Targets

“With their revenues up 32%, Services delivered another excellent quarter, and we have gained significant share in both Treasury and Trade Solutions and Securities Services,” CEO Jane Fraser said in a press release. “Markets had the best fourth quarter in recent memory, driven by a 31% increase in Fixed Income, while Banking and Wealth Management were impacted by the same market conditions they faced throughout the year.”

C: Stock Market Reaction

  • 49.385 +0.295 (0.60%) Morning
  • 49.385 +3.605 (7.87%) YTD
  • 49.385 -18.395 (27.14%) Over year
  • 49.385 -25.145 (33.74%) Over 5 years
  • 52wk High $66.96
  • 52wk Low $39.55

Citigroup Cards Business

Citi had strong results from its cards business, the branded-card unit including the Double Cash and Custom Cash cards.

Revenues in services increased 32%.

Higher Interest Rates Increase Revenue …. But at a Cost

The Federal Reserve’s rate-boosting campaign, producing more revenue as rates rise, allowing banks to generate more profit from their core activities of taking in deposits and making loans. With higher interest rates from the Federal Reserve’s aggressive rate hiking revenues are expected to rise 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.

However, there is a price for this, the clearest is the housing market which with the collapse in affordability through higher rates and inflation has dropped off dramatically ion activity. For banks this means the fee income from home lending has fallen right off.

Rising rates have also had another big impact for Banks, and Central banks alike, the higher rates have seen huge losses on the bond paper they hold. When interest rates go up, bond prices go down, meaning there are significant unrealized losses at current prices. JPMorgan took a loss of almost $1 billion from selling Treasurys and mortgage-backed securities in the third quarter.

FactSet expects the negatives to outweigh the positives and expect the big banks post $28 billion in fourth-quarter profits, which is down 15% from a year earlier.

Credit Losses

The bank said it set aside more money for credit losses going forward, increasing provisions 35% from the previous quarter to $1.85 billion. This build included $640 million for unfunded commitments due to loan growth in the private bank.

Last quarter 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.

Investment Banking Losses

Citigroup fees from investment banking plummeted 64% in the third quarter. and continues to dry up. 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.

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.

Citigroup Last Quarter Earnings

Analysts Outlook on Banks

RBC Capital MarketsGerard Cassidy

NII will continue to be the “primary driver of performance” during last year’s fourth quarter. Large banks are expected to report NII growth average above 30% during the quarter. In 2023, if the Fed pauses rate hikes, NII will slow from an “unsustainable pace” in 2022 to “what we think will be 10% to 12%,” Cassidy said. “Net interest income growth is going to be the talk amongst investors for the quarter and the year.”

Combined total revenue, net interest and noninterest income should “not be materially different” next year, even though NII “will come down meaningfully.” “The reason being is that you’re going to see fee revenues go from a negative year-over-year comparison, we think, to a positive one”.

Higher loan-loss provisions could be likely for two reasons. One is that “it’s very hard to see around corners,” he said. “The forecast is saying you’ve got to build up reserves.” “If you’re a bank, why not assume the worst and jack up reserves in the fourth quarter?”

“Throw in a much bigger number than you need, then go light on provisioning next year and show better earnings growth than your peers.”

Wedbush

Banks are likely to report “solid” but “moderating” NII growth and net interest margins. Predict “generally weaker” fee income during the fourth quarter, contributing to a 6.8% decline in noninterest income for regional banks compared to the same period in 2021,

“Peak loan growth in the current cycle could be behind us.” Fourth-quarter results are likely to show loan growth at a “solid” but moderated” pace. “Particularly concerned” about the slowing pace of CRE. Noted it typically takes around a year after the Fed begins a rate-hike cycle for loans to “begin rolling over.”

Loan growth could go two ways: either momentum builds in higher-yielding segments alongside increasing commercial utilization rates, or “cautious corporates and a weaker consumer” causes “loan growth [to] grind to a halt.”

“While loans have been growing, deposits have been shrinking,” “Depositors are waking up and starting to demand yield on their cash”.

Barclays

Expect “more modest” bank revenue alongside similar NII growth throughout the year. 2023 will bring “loan-loss normalization” if the Fed pauses rate hikes. Asset-sensitive business groups such as lower-end consumer and commercial real estate to be “less constructive” and areas where “loan losses will adjust the fastest.”

Source: C, TC, WSJ

From The TradersCommunity Research Desk