Continuing the positive note,
) reported impressive second-quarter 2014 results. Adjusted
earnings per share came in at $1.24, outpacing the Zacks Consensus
Estimate of $1.08. However, earnings were below the year-ago figure
by a penny.
Notably, prior to the earnings release, Citigroup struck a deal
with the U.S. Department of Justice (DOJ), several state attorneys
general (State AGs) and the Federal Deposit Insurance Corporation
(the FDIC) worth $7 billion. The settlement will resolve the
charges imposed on the bank for allegedly selling or underwriting
residential mortgage-backed securities (RMBS) and collateralized
debt obligations (CDOs) to investors without disclosing the
associated risks between 2003 and 2008.
The banking giant will pay $2.5 billion of the total settlement
amount to provide consumer relief and the remaining amount will be
paid in cash as penalty to the regulatory authorities. Notably, $4
billion will be paid to the DOJ and $500 million as compensation to
the state AGs and the FDIC.
Results in the reported quarter were impacted by credit valuation
adjustment (CVA) and debt valuation adjustment (DVA). Moreover,
results included charges worth $3.8 billion ($3.7 billion
after-tax) related to the aforementioned deal. Including these,
Citigroup reported net income of $181 million or 3 cents per share
in the second quarter compared with $4.2 billion or $1.34 per share
in the prior-year quarter.
Following the mortgage settlement, investors have been bullish on
the results as shares of Citigroup jumped around 4% in the
pre-market session. The price reaction during the trading session
will give a better idea whether Citigroup has been able to meet
Adjusted costs of credit for the second quarter at Citigroup were
down 17% year over year to $1.73 billion. The improvement was
primarily attributable to a decline in net credit losses and
reduced provision for benefits and claims.
Performance in Detail
Revenues came in at $19.3 billion for the quarter, down 6% from the
prior-year quarter. Excluding CVA/DVA, Citigroup revenues declined
3% from the prior-year period to $19.4 billion. The revenue
decrease was primarily driven by a fall in Citicorp revenues.
However, the revenue figure was above the Zacks Consensus Estimate
of $18.8 billion.
At Citicorp, revenues came in at $17.8 billion, down 8% year over
year. Excluding CVA/DVA, revenues were $17.9 billion, down 5% from
the prior-year quarter. Decreased revenues in the Institutional
Clients Group and Global Consumer Banking led to this fall.
Yet, Citi Holdings reported revenues of $1.5 billion, up 33% year
over year. Revenues were up 35% year over year excluding CVA/DVA.
The figure was pulled up primarily due to the absence of repurchase
reserve builds for representation and warranty claims in the second
quarter of 2014, elevated levels of asset sale gains and reduced
Operating expenses at Citigroup were up 28% year over year at $15.5
billion, including charges related to the mortgage settlement.
Excluding such charges, expenses were down 3% to $11.8 billion.
Efficiency savings along with reduction in Citi Holdings assets and
legal expenses led to the fall. These positives were partially
mitigated by elevated regulatory and compliance costs along with
repositioning charges in the second quarter.
Citigroup's credit quality improved in the reported quarter. Total
non-accrual assets declined 18% year over year to $8.3 billion. The
company reported a 43% fall in corporate non-accrual loans and a
decline of 12% was reported in consumer non-accrual loans.
Citigroup's total allowance for loan losses was $17.9 billion at
quarter end, or 2.70% of total loans, down from $21.6 billion, or
3.38%, in the prior-year period.
At the quarter end, Citigroup's estimated Basel III Tier 1 Common
Ratio was 10.6%, up from 10.0% in the prior-year quarter, mainly
driven by retained earnings and deferred tax asset (DTA)
utilization. The company's estimated Basel III Supplementary
Leverage Ratio for second-quarter 2014 was 5.7%, up from 4.9% in
the prior-year quarter.
As of Jun 30, 2014, book value per share was $66.76 and tangible
book value per share was $56.89, up 6% and 7%, respectively, from
the prior-year period end.
At quarter end, Citicorp's end of period assets was $1.8 trillion,
up 3% year over year while deposits of $947 billion were up 8% year
over year. Citi Holdings' assets decreased 15% from the prior-year
quarter level to $111 billion and represented just 6% of the
company's total assets at second-quarter end.
Following the dismal second-half 2013 performance, Citigroup began
2014 on a positive note and reported impressive results in the
second quarter as well. Though revenues declined, on the whole, its
profit level outpaced expectations.
Citigroup's underlying franchises of the consumer businesses and
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
Higher legal costs drove down profitability in the reported quarter
as expected. Yet, such settlements bring relief to affected
investors and help resolve the bank's pre-crisis shoddy mortgage
practices to a large extent.
Moreover, reduction in provisions for future losses and improved
credit trends are expected to counter the negatives. One can
consider a strong brand like Citigroup to be a sound investment
option over the long term, given its global footprint and
attractive core business. Moreover, Citigroup currently carries a
Zacks Rank #3 (Hold).
The second-quarter earnings season kick-started with
Wells Fargo & Company
). Driven by prudent expense management, Wells Fargo earned $1.01
per share in second-quarter 2014, thereby surpassing 98 cents
earned in the year-ago quarter. However, the reported figure was in
line with the Zacks Consensus Estimate.
Among other big Wall Street firms,
JPMorgan Chase & Co.
) will report on Jul 15, while
) on Jul 17.
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