Citigroup report second quarter earnings Friday before the market open along with three of the largest U.S. lenders, JPMorgan Chase (JPM), Wells Fargo (WFC) and State Street (STT). The higher interest rate environment continues to drive NII however the expected slowdown in loan growth, higher deposit costs, and continued weakness in investment banking income puts earnings under pressure. The focus will also be on deposit levels and any guidance. Citi is dragging through its strategic transformation under Jane Fraser and the market will be looking for progress reports. Updates on the BanaMex IPO would also be helpful.
Citigroup Earnings Preview
Q2 2023 earnings release at 8:00 a.m. ET; conference call at 11:00 a.m. ET via live webcast and teleconference.
- Projected EPS: $1.34 a share in Q2, a significant decline on a year-over-year and sequential basis due to higher expenses.
- Projected revenue: $19.48 billion in Q2, lower than Q1 revenues of $21.45 billion.
Citigroup Cards Business
Analysts will be looking if Citi had similar strong results from its cards business. Citi has had strong results from its cards business, the branded-card unit including the Double Cash and Custom Cash cards.
Morningstar Note by – Eric Compton, CFA Apr 5, 2023
Citi’s Cheap but Will Require Patience
Citigroup was our top pick in 2022, and it has held up better over the past year than any bank we cover except for JPMorgan JPM. Even so, it is still trading at one of the largest discounts to fair value in our coverage. We see the risk of deposit outflows as minimal, given that Citi is a global systemically important bank. Citigroup has some of the lowest unrealized losses on securities relative to overall capital in our coverage, and it has some idiosyncratic catalysts—finishing the Mexico sale, selling off the rest of its noncore business units, providing expense guidance for 2024, and moving beyond regulatory hurdles—that we think can help it break the overall correlation with the banking sector over time. We also wonder if the recent turmoil in the European banking sector could open up additional opportunities for growth for Citigroup in the near to medium term.
While we like Citigroup’s valuation, investors should understand what they are getting into with the bank, which we view as a deep-value turnaround play with a multiyear time horizon. Also, a recession might uniquely pressure Citigroup, which has larger proportional credit card exposure relative to its peers. Still, we think long-term investors are being more than adequately compensated to bear these risks, and we see material upside to the current stock price.
Citigroup Last Quarter Earnings
Higher Interest Rates Increase Revenue …. But at a Cost
Understandably there is a crisis of confidence in banks sparked off by the collapse of Silicon Valley Bank. We warned last year higher interest rates from the Federal Reserve’s aggressive rate hiking revenues are expected to rise from a year earlier. To that we warned of the downside, what we didn’t know is how poorly the regional banks were managed. Silicon Valley and Signature Banks will be taught in economic classes along with Enron, South Sea Bubble and Worldcom in business and economic classes.
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. The Federal Deposit Insurance Corp said the margin increased the most on a quarterly basis in the third quarter, and in Q4 banks continued to grow their loan books, particularly commercial and industrial and credit-card loans. It is expected that NII continued to be the primary driver of performance.
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.
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 plummet and continue to dry up. Weakness has been exacerbated by a decline in large private-equity buyouts.
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.
About Citigroup
Citigroup Inc. or citi is an American multinational investment bank and financial services corporation headquartered in New York City. The company was formed by the merger of banking giant Citicorp and financial conglomerate Travelers Group in 1998. Citigroup is the third largest banking institution in the United States; alongside JPMorgan Chase, Bank of America, and Wells Fargo, it is one of the Big Four banking institutions of the United States. Citigroup is ranked 30th on the Fortune 500 as of 2019. Citigroup has over 200 million customer accounts and does business in more than 160 countries. It has 204,000 employees.
Source: C, TC, WSJ
From The TradersCommunity Research Desk