After reporting decent results in the prior quarter,
) reported somewhat encouraging third quarter 2012 results.
Earnings per share came in at $1.06 for the quarter, comfortably
surpassing the Zacks Consensus Estimate of 98 cents on lower loan
loss provisions, higher Global Consumer Banking revenues and a drop
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In the year-ago quarter, Citigroup had reported earnings of 84
cents per share from continuing operations. Notably, results in the
reported quarter were impacted by credit valuation adjustment (CVA)
and debt valuation adjustment (DVA) as well as by a net loss of
$4.7 billion ($2.9 billion after tax) from the sale of 14% stake
and other-than-temporary impairment of the carrying value of Citi's
remaining 35% interest in the Morgan Stanley Smith Barney (MSSB)
Additionally, results included tax benefit worth $582 million
associated with the resolution of certain tax audit items.
Including CVA/DVA, the loss on MSSB and the tax benefit, Citigroup
reported earnings of 15 cents per share.
Revenues came in at $14.0 billion for the quarter, down 33% from
the prior-year quarter. Excluding both CVA/DVA and the loss on
MSSB, Citigroup revenues improved 3% from the prior-year period to
$19.4 billion. The figure also outpaced the Zacks Consensus
Estimate of $16.6 billion. The revenue increase was driven
primarily by growth in Citicorp revenues, though partially offset
by the decline in Citi Holdings revenues due to the continuing
wind-down of those assets.
For the third quarter, Citigroup reported net income of $468
million, down 88% from the prior-year quarter.
Third quarter total provisions for credit losses and benefits and
claims at Citigroup were down 20% year over year at $2.7 billion.
The improvement was primarily attributable to a 12% decline in net
credit losses to $4.0 billion, coupled with a $1.5 billion release
of credit reserves.
Quarter in Detail
At Citicorp, revenues came in at $17.6 billion, down 9% year over
year. Excluding CVA/DVA, revenue was $18.4 billion, up 5% from the
prior-year quarter. Lower revenues in Transaction Services coupled
with reduced revenues in the Securities and Banking business offset
the higher revenue at Global Consumer Banking on a year-over-year
However, Citi Holdings reported negative revenues of $3.7 billion
compared with positive revenues of $1.1 billion in the prior-year
quarter. Revenues were $971 million excluding CVA/DVA and the loss
on MSSB, compared with $1.1 billion in the prior-year period. The
figure was pulled down primarily due to a decline in revenues in
Local Consumer Lending businesses driven by decline in average
Moreover, primarily due to the impact of hedging activities and
reduced investment yield, Corporate/Other revenues plummeted $267
million year over year to $33 million in the quarter.
Operating expenses at Citigroup were down 2% year over year at
$12.2 billion. Ongoing expense control and reengineering measures
drove a 2% year-over-year fall in operating expenses at Citicorp.
On the other hand, overall decline in assets at Citi Holdings
resulted in a 21% year-over-year drop in expenses in the division.
Citigroup's asset quality continued to improve in the reported
quarter with total non-accrual assets decreasing 5% year over year
to $12.7 billion. The company reported a 42% fall in Corporate
non-accrual loans, though a 25% increase was reported in consumer
non-accrual loans. Citigroup's total allowance for loan losses was
$25.9 billion at quarter end, or 4.0% of total loans, down from
$32.1 billion, or 5.1%, in the prior-year period.
Citigroup continued to build up its capital levels, with
preliminary Tier 1 Common ratio at 12.7%. Notably, its estimated
Basel III Tier 1 Common Ratio was 8.6%, up from 7.9% in the prior
quarter. Tier 1 Capital Ratio was 13.9%, down from 14.4% in the
prior quarter. As of September 30, 2012, book value per share was
$63.59 and tangible book value per share was $52.70, up 5% and 6%,
respectively, from the prior-year period end.
At quarter end, Citigroup's end of period assets was $1.93
trillion, down 0.5% year over year while deposits of $944.6
billion, were up 11% year over year. Citi Holdings' assets
decreased 31% from the prior-year quarter level to $171 billion and
represented just 9% of the company's total assets at the third
Following mixed results in the 2012 first quarter and stable
results in second quarter, Citigroup's third quarter results were
somewhat impressive. With the upsurge in revenue, on the whole, its
profit level also managed to emerge above expectations.
After impressive results by the other banking giants such as
JPMorgan Chase & Company
Wells Fargo & Company
), which reported last Friday, the market was looking forward to
some upbeat numbers from Citigroup.
Citigroup's underlying franchises of the consumer businesses have
remained strong, but revenues have continuously been under pressure
for the past several quarters. Considering the tepid economic
recovery, we believe that robust top-line expansion will remain
elusive in the near term.
Moreover, though Citigroup's strategy to shrink non-core assets
would improve the valuation over time, the trimmed Citi Holdings
portfolio would result in revenue challenges, partially restricting
the upside potential of the stock. Additionally, with the thrust of
new banking regulations, there will be pressure on fees and loan
growth could remain feeble.
However, investments and efficiency savings would help Citigroup in
garnering a solid market share and this is quite evident from its
recent quarter results. Reduction in provisions for future losses
and improved credit trends are expected to counter the negatives.
One can consider a company like Citigroup as a value investment
given its global footprint and attractive core business. It is also
among the best reserved banks.
Citi currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating. Considering the fundamentals, we also
maintain our Neutral recommendation on the stock.
Given Citigroup's global footprint, we believe that its results
give us an insight into the economic trends and the performance of
the overall banking sector. Last Friday, JPMorgan reported earnings
per share of $1.40, beating the Zacks Consensus Estimate of $1.20
as well as prior-year quarter's earnings of $1.02 per share.
Despite the impact of a number of legal and regulatory issues as
well as fundamental pressures like low interest rate and sluggish
loan demand, JPMorgan's earnings surprise of almost 16% signals a
good start for the sector. A marked improvement in capital market
activity and healthy mortgage business, which helped JPMorgan
overcome its difficulties to a great extent, should also lift the
results of other mega banks during the quarter.
Likewise, Wells Fargo, which achieved its eleventh consecutive
quarter of growth in earnings per share, reported earnings of 88
cents per share in third quarter 2012. Results improved from
earnings per share of 82 cents in the prior quarter and 72 cents in
the year-ago quarter. Also, it beat the Zacks Consensus Estimate by
a penny. Results at Wells Fargo benefited from improvements in
non-interest income as well as cost control measures.
Ensuing this, we look forward to the results of
The Goldman Sachs Group Inc.
) on October 16 and
Bank of America Corporation
) on October 17.