Citigroup report first quarter earnings Friday before the market open along with three of the largest U.S. lenders, JPMorgan Chase (JPM), Wells Fargo (WFC) and PNC (PNC). The focus may be on deposit levels and any guidance. Citigroup earnings are seen by analysts falling 16% as investment banking operations continue to struggle. Citi is dragging through its strategic transformation under Jane Fraser and the market will be looking for progress reports. Perhaps appropriately embattled California-focused First Republic Bank (FRC) kicks off bank earnings on Thursday. First Republic received $100 billion in Fed loans and emergency deposits in March.
Citigroup Earnings Preview
Q1 2023 earnings release at 8:00 a.m. ET; conference call at 11:00 a.m. ET via live webcast and teleconference.
- Projected EPS: $1.70 a share
- Projected revenue: $20.10 billion
Dividend Declared
Citigroup on April 3, 2023, declared a regular quarterly dividend of $0.51 per share ($2.04 annualized). Previously, the company paid $0.51 per share. Shares must be purchased before the ex-div date of April 28, 2023, to qualify for the dividend. Shareholders of record as of May 1, 2023 will receive the payment on May 26, 2023.
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 Cards Business
Analysts will be looking if Citi had similar strong results from its cards business. Last quarter 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%.
Citigroup Last Quarter Earnings
Higher Interest Rates Increase Revenue …. But at a Cost
Understandably there is a crisis of confidence in regional banks sparked off by last month’s collapse of Silicon Valley Bank. We warned last quarter 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.
“US bank lending contracted by the most on record in the last two weeks of March, indicating a substantial tightening of credit conditions in the wake of several high-profile bank collapses… Commercial bank lending dropped nearly $105 billion in the two weeks ended March 29, the most in Federal Reserve data back to 1973. The more than $45 billion decrease in the latest week was primarily due to a drop in loans by small banks… Friday’s report also showed commercial bank deposits dropped $64.7 billion in the latest week, marking the 10th-straight decrease that mainly reflected a decline at large firms… The Fed’s report showed that by bank size, lending decreased $23.5 billion at the 25 largest domestically chartered banks in the latest two weeks, and plunged $73.6 billion at smaller commercial banks over the same period.” April 7 – Bloomberg (Alexandre Tanzi)
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 during last year’s fourth quarter.
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.
Credit Losses
Last quarter 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.
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.
Analysts Outlook on Banks
KBW
KBW reduced its earnings estimates for banks across the board by 8% for 2023 and 11% in 2024,
“Bank stock performance around 1Q23 earnings will likely be dictated by relative balance sheet performance (deposits, liquidity and capital),” KBW said.
Morningstar – Eric Compton, CFA Apr 5, 2023
“Although we believe the U.S. banking sector as a whole is currently undervalued, the three banks that we think most deserve investor focus in the lead-up to first-quarter earnings are Comerica CMA, U.S. Bancorp USB, and Citigroup C. Each has its own risk/reward setup.
We believe the biggest risks to our top picks would be negative surprises on deposit bases or funding costs, or the realization of a recession in the near term. While we think the U.S. banks are already trading at recessionary valuations, an actual recession would be unlikely to help valuations in the short term.”
Piper Sandler
Signs of asset quality deterioration are a risk for PNC Financial Services Group (PNC US), Piper Sandler analysts warn. Consensus sees the bank setting aside an additional $308 million in loan-loss provisions in the first quarter, compared to the $208 million released in the same period a year ago.
Yet PNC is expected to hold up well to heightened scrutiny over bank deposits; according to data compiled by Bloomberg, the rate of funds leaving PNC’s balance sheet quarter-on-quarter is expected to slow to less than a percentage point, compared to about 1.5% a year ago. PNC’s ability to rein in expenses will also be assessed in its pre-open earnings report, with consensus seeing non-interest costs rise by about 6% from a year ago, the first increase in three quarters.
Wedbush
“1Q earnings will likely be pressured, in our view, as we see banks shift towards a more defensive and conservative stance, and we anticipate a slew of downward revisions to guidance,” Wedbush analysts said in a March 29 research note. “We expect loan growth to slow from the strong pace over the prior few quarters as demand cools in light of higher rates and the uncertain economic environment.”
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