Citigroup Inc. C is slated to report third-quarter 2024 results on Oct. 15, before the opening bell.
Among Citigroup’s close peers, JPMorgan JPM is slated to announce its quarterly numbers on Oct. 11, while Bank of America BAC will release its quarterly numbers on Oct. 15.
Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.
In the second quarter, C witnessed a rise in total loans and non-interest income. However, non-interest income (NII) and total deposits declined on a year-over-year basis.
This globally diversified financial services holding company is expected to register a bottom-and a top-line decline in the to-be-reported quarter. Rising provisions for credit losses and escalating spending on technology and transformation expenses are likely to have hampered Citigroup’s performance in the to-be-reported quarter.
The Zacks Consensus Estimate for third-quarter revenues is pegged at $19.89 billion, suggesting a 1.3% year-over-year decline.
In the past month, the consensus estimate for earnings for the to-be-reported quarter has been revised lower to $1.38. The figure indicates a 9.2% decline from the prior-year quarter’s tally.
Estimate Revision Trend
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Nonetheless, Citigroup has an impressive earnings surprise history. Its earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 21.02%.
Earnings Surprise History
Image Source: Zacks Investment Research
Trends Leading Up to C’s Q3 Results
Loans & NII: The clarity on the Fed’s rate cut path and the stabilizing macroeconomic backdrop are likely to have provided support to the lending scenario. Per the Fed’s latest data, the demand for commercial and industrial and consumer loans was modest in the first two months of the quarter.
This is likely to have driven the company’s lending activities, thereby improving the average interest-earning assets balance. The Zacks Consensus Estimate for average interest-earning assets is pegged at $2.28 trillion, indicating a 3.2% increase from the prior-year quarter’s reported figure.
On Sept. 18, the Federal Reserve cut the interest rates by 50 basis points to 4.75-5% for the first time since March 2020. The development is not expected to have much impact on Citigroup’s NII during the third quarter.
Also, relatively higher rates might have hurt NII growth prospects because of elevated funding/deposit costs and an inverted yield curve during the major part of the quarter.
The Zacks Consensus Estimate for NII of $13.52 billion suggests a 2.2% decline from the prior-year quarter’s levels.
Fee Income: Global mergers and acquisitions (M&As) showed signs of improvement in the third quarter of 2024, after subdued performances in 2023 and 2022. Both deal value and volume were decent during the quarter, driven by solid financial performance, higher chances of a soft landing of the U.S. economy, buoyant markets and interest rate cuts. Yet, tough scrutiny by antitrust regulators and lingering geopolitical issues were headwinds.
At the 2024 Barclays Global Financial Services Conference in early September, Citigroup's Chief Financial Officer, Mark Mason, stated that the company’s investment banking (IB) fees are anticipated to increase 20% in the third quarter of 2024 from the year-ago period’s levels. The projections of upbeat activity across debt capital markets and M&As were reasons behind the optimistic view.
Client activity was decent in the third quarter. The expectations of a soft landing of the U.S. economy, cooling inflation and easing monetary policy drove the client activity. Also, volatility was decent in the equity markets and other asset classes, including commodities, bonds and foreign exchange. C expects market revenues to decline nearly 4% in the to-be-reported quarter compared with last year’s relatively strong third quarter.
The Zacks Consensus Estimate for income from commissions and fees of $2.53 billion suggests a 15.2% increase on a year-over-year basis.
The Zacks Consensus Estimate for administration and other fiduciary fees of $913 million indicates a 0.4% drop.
Also, the Zacks Consensus Estimate for income from principal transactions of $2.81 billion suggests a 6.5% fall.
Expenses: Management is focused on revamping its underlying technology, risk management and internal controls as part of remediation highlighted by the Office of the Comptroller of the Currency and the Fed.
Also, increased spending, specifically on severance costs related to its organizational overhaul and divestiture expenses, is likely to have flared expenses in the third quarter of 2024.
Asset Quality: Citigroup is likely to have set aside a substantial amount of money for potential delinquent loans, given the expectations of an economic slowdown.
The Zacks Consensus Estimate for non-accrual loans is pegged at $3.58 billion, indicating an increase of 9.3% from the prior year’s reported figure.
What Our Model Unveils for Citigroup
Our proven model does not conclusively predict an earnings beat for Citigroup this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. This is not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Citigroup has an Earnings ESP of -3.13% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Citigroup’s Price Performance & Valuation
Citigroup was among the top five performing banks on the S&P 500 Index in the first nine months of 2024. The stock outperformed the S&P 500 Index. JPM and BAC also outperformed the index in the same time frame.
Price Performance
Image Source: Zacks Investment Research
Now, let’s look at the value Citigroup offers investors at current levels.
Currently, C is trading at 9.12X forward 12-month earnings, below the industry’s forward earnings multiple of 11.52X. The company’s valuation looks somewhat cheaper compared with the industry average.
Price-to-Earnings (forward 12 Months)
Image Source: Zacks Investment Research
Investment Thesis on Citigroup
Citigroup is well poised to benefit from its efforts to simplify operations via organizational restructuring. The company remains on track to exit the consumer banking business in international markets and focus on growth in the wealth management and commercial banking space.
The Fed’s vice-chair of supervision, Michael Barr, on Sept. 10, outlined proposed Basel regulations. If approved, it would nearly halve the additional capital that big banks would need to maintain to safeguard them in the event of a financial crisis. The new plan requires banks to hold 9% of additional capital instead of the 19% proposed in the initial plan.
The toned-down capital requirements, if approved, will be beneficial for Citigroup. It will help the company allocate the remaining amount to other initiatives or to increase lending activities. This will lead to increased profitability.
The company is witnessing a rise in credit losses. At the Barclays conference, Mason stated that Citigroup’s credit losses are rising as U.S. consumers shift spending to basic needs and away from purchases that aren’t vital. It is witnessing a pickup in revolving credit while payment rates have started to come down a bit.
Final Thoughts on Citigroup
As Citigroup prepares to announce its third-quarter 2024 earnings, the resurgence of capital markets business (especially IB business), and decent loan demand paint a favorable picture for the bank.
C’s organizational realignment to simplify its governance structure and emphasize growth in core businesses by divesting noncore units provides a solid foundation for growth. Moreover, the Fed’s recent rate cut might provide much-needed support to the bank’s financials in the upcoming period.
However, the increased expenses, heightened regulatory scrutiny, and credit losses justify a neutral stance on its investment potential. Investors should closely monitor the company's ability to navigate these challenges and capitalize on emerging opportunities to assess its long-term viability. We suggest investors wait for a more appropriate entry point. Those who already own the stock can hold on to it because it is less likely to disappoint over the long term.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
