What to Expect from Citigroup Earnings

Citigroup report 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). Last quarter Citi saw strong gains came from US personal banking with double digit revenue growth in both of cards businesses. Citigroup is halfway through its strategic transformation under Jane Fraser and the market will be looking for progress reports.

Citigroup

Citigroup Earnings Preview

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

  • Projected EPS: $1.21 cents
  • Projected revenue: $17.85 billion

Citigroup Cards Business

Analysts will be looking if Citi had similar strong results from its cards business. Last quarter the branded-card unit including the Double Cash and Custom Cash cards saw revenue surge 10% in the quarter to $2.3 billion, topping analysts’ estimates. Spending on branded cards jumped 14%, while average loans jumped 12%. In comparison revenue from wealth management declined, hurt by operations in Asia.

“US personal banking further solidified its growth trajectory with double digit revenue growth in both of our cards businesses,” Chief Executive Officer Jane Fraser said in a statement.

Citigroup Last Quarter Earnings

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

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.

“We continue to shrink our operations in and exposure to Russia and we will be ending nearly all of the institutional banking services we offer next quarter,” Fraser said.

Investment Banking Losses

Citigroup fees from investment banking plummeted 64% 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.

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

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