After reporting a mixed bag in the prior quarter,
) reported somewhat encouraging second quarter 2012 results.
Earnings per share came in at 95 cents for the quarter, comfortably
surpassing the Zacks Consensus Estimate of 88 cents on lower loan
loss provisions, higher transaction services revenues and a drop in
In the year-ago quarter, Citigroup had reported earnings of
$1.07 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
$424 million ($274 million after tax) from the 10.1% stake sale in
Akbank T.A.S. Excluding CVA/DVA and the Akbank loss, Citigroup
reported earnings of $1.00 per share.
Revenues came in at $18.6 billion for the quarter, down 10% from
the prior-year quarter. Excluding both CVA/DVA and the loss on
Akbank, Citigroup revenues fell 7% from the prior-year period. The
figure also fell short of the Zacks Consensus Estimate of $19.1
billion. The wind-down of Citi Holdings was primarily responsible
for the revenue decline as revenues at Citicorp were unchanged.
For the second quarter, Citigroup reported net income of $2.9
billion, down 12% from the prior-year quarter.
Second quarter total provisions for credit losses and benefits
and claims at Citigroup were down 17% year over year at $2.8
billion. The improvement was primarily attributable to a 31%
decline in net credit losses to $3.6 billion, coupled with a $991
million release of credit reserves.
Quarter in Detail
At Citicorp, revenues came in at $18.0 billion, flat year over
year. Excluding CVA/DVA, revenue was $17.8 billion, which too was
unchanged from the prior-year quarter. Higher revenues in
Transaction Services were offset by lower revenues in the
Securities and Banking business while that at Global Consumer
Banking remained same year over year.
However, Citi Holdings revenues of $924 million were down 62%
from the prior-year quarter. Revenues were $903 million excluding a
positive CVA/DVA of $21 million, compared with $17 million in the
prior-year period. The figure was pulled down primarily due to a
decline in revenues in the Special Asset Pool and in Local Consumer
Lending businesses as the company continued to wind down assets of
Also, the year-ago quarter results included gains from the sale
of securities and other asset sales. The decrease was partly
mitigated by higher Brokerage and Asset Management revenues.
Moreover, primarily due to the $424 loss from the Akbank stake
sale as well as the absence of a $199 million gain from the sale of
the Housing Development Finance Corporation Ltd. stake in the
year-ago quarter, Corporate/Other revenues plummeted $528 million
year over year to negative revenues of $265 million in the
Operating expenses at Citigroup were down 6% year over year at
$12.1 billion. Ongoing expense control and reengineering measures
drove a 3% year-over-year fall in operating expenses at Citicorp.
On the other hand, overall decline in assets at Citi Holdings
resulted in a 25% year-over-year drop in expenses in the
Citigroup's asset quality continued to improve in the reported
quarter with total non-accrual assets decreasing 22% year over year
to $11.5 billion. The company reported a 47% fall in Corporate
non-accrual loans and a 1% decline in consumer non-accrual loans.
Citigroup's total allowance for loan losses was $27.6 billion at
quarter end, or 4.3% of total loans, down from $34.4 billion, or
5.4%, in the prior-year period.
Citigroup continued to build up its capital levels, with
preliminary Tier 1 Common ratio improving to 12.7% from 12.5% in
the prior quarter. Notably, its estimated Basel III Tier 1 Common
Ratio was 7.9%. Tier 1 Capital Ratio also ascended to 14.4% from
14.26% in the prior quarter. As of June 30, 2012, book value per
share was $62.61 and tangible book value per share was $51.81, up
4% and 6%, respectively, from the prior-year period end.
At quarter end, Citigroup's end of period assets was $1.92
trillion, down 2% year over year while deposits of $914.3 billion,
were up 6% year over year. Citi Holdings' assets decreased 28% from
the prior-year quarter level to $191 billion and represented just
10% of the company's total asset at the second quarter end.
Following a disappointing 2011 fourth quarter and mixed results
in the 2012 first quarter, Citigroup's second quarter results were
somewhat impressive. Though the company missed on the revenue
front, on the whole, its profit level managed to emerge better than
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 for
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.
In June, while resubmitting its capital plan to the Federal
Reserve, Citigroup decided against any hike in its shareholders
payout in 2012. Instead of boosting its capital payouts, the
company intends to build its capital level and continue with
efforts to trim its non-core assets.
Though this is a sort of setback for the shareholders in the
near term, we believe that it is a wise decision on Citigroup's
part to strengthen its capital levels first and then ask for such
payouts. That would serve as a long-term catalyst for the stock.
Also, its trust preferred securities (TruPS) redemption is a
strategic move to abide by the regulatory norms.
Citi currently retains a Zacks #3 Rank, which translates into a
short-term Buy rating. Also, considering the fundamentals, we
maintain a Neutral recommendation on the stock. Reflecting an
upbeat sentiment post the release of the company's results, the
stock is trading at a premium.
Given Citigroup's global footprint, we believe that its results
give us a clue to the economic trends and the performance of the
overall banking sector. Last Friday, JPMorgan reported earnings per
share of $1.21, way ahead of the Zacks Consensus Estimate of 78
cents. Notably, its results included $4.4 billion in its Chief
Investment Office's synthetic credit portfolio.
Excluding significant nonrecurring items, JPMorgan's earnings
came in at $1.20 per share. Similar to Citigroup, lower
non-interest expenses and a substantial slowdown in provision for
credit losses aided its results. However, the positives were
partially offset by lower revenue.
Likewise, Wells Fargo, which achieved its tenth consecutive
quarter of growth in earnings per share, reported earnings of 82
cents per share in the quarter. Results were a cent ahead of the
Zacks Consensus Estimate as the company benefited from improvements
in mortgage banking as well as credit quality. Lower non-interest
expenses also attributed to the profit growth.
Next, we look forward to the results of
Goldman Sachs Group Inc.
) on July 17 and
Bank of America Corporation
) on July 18.
BANK OF AMER CP (BAC): Free Stock Analysis
CITIGROUP INC (C): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis
WELLS FARGO-NEW (WFC): Free Stock Analysis
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