Citigroup's (C) Cost Plunge Aids Solid Q3 Earnings

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Reduced expenses drove Wall Street banking giant Citigroup Inc.C to deliver a positive earnings surprise of 1.6% in third-quarter 2015. The company's adjusted earnings per share of $1.31 for the quarter outpaced the Zacks Consensus Estimate of $1.29. Further, earnings compared favorably with the year-ago figure of 95 cents per share.

Following the earnings release, investors have been bullish on the results as shares of Citigroup gained over 2% in the beginning of the trading session. However, the price reaction during the full trading session will give a better idea.

Significant decline in legal and repositioning costs aided Citigroup to overcome revenue pressure. Further the New York-based bank continued to exhibit improving credit quality and a strong capital position.

As expected, trading revenues declined, with higher equity markets revenue more than offset by a fall in fixed income markets revenue. Further the quarter witnessed decline in loan and deposit balances.

Adjusted net income jumped 36% year over year to $4.16 billion in the quarter.

Including the impact of credit valuation adjustment (CVA) and debt valuation adjustment (DVA), Citigroup reported net income of $4.29 billion, increasing a whopping 51% year over year.

Citigroup's costs of credit for the third quarter were up 5% year over year to $1.84 billion. Reduced net loan loss reserve release was partially offset by lower net credit losses.

Performance in Detail

Adjusted revenues of Citigroup declined 8% year over year to $18.50 billion. The decrease reflected lower revenues at Citicorp as well as Citi Holdings. Including CVA/DVA, Citigroup revenues came in at $18.69, down 5% year over year. Also, the revenue figure missed the Zacks Consensus Estimate of $18.76 billion.

At Citicorp, adjusted revenues came in at $17.05 billion, down 5% year over year. Revenues at Institutional Clients Group (ICG) and Global Consumer Banking (GCB) decreased 3% and 8% year over year, respectively. Revenues at Corporate/Other increased substantially year over year.

Further, Citi Holdings reported adjusted revenues of $1.44 billion, down 32% year over year. Including CVA/DVA, revenues also declined 32% year over year, reflecting overall wind-down of the portfolio and reduced level of net gains on asset sales. Notably, Citi Holdings continued to report profitability.

Operating expenses at Citigroup declined 18% year over year to $10.66 billion, reflecting significant declines in legal and repositioning costs. Notably, legal and related expenses stood at $376 million, significantly down from $1.6 billion in the prior-year quarter. Further, repositioning charges were $81 million, considerably declining from $382 million in the prior-year quarter.

At quarter end, Citigroup's end of period assets was $1.81 trillion, down 4% year over year. The company's loans declined 5% year over year to $622 billion. Deposits decreased 4% year over year to $904 billion. Citi Holdings' assets decreased 20% from the prior-year quarter level to $110 billion and represented just 6% of the company's total assets at the quarter end.

Credit Quality

Citigroup's credit quality improved in the reported quarter. Total non-accrual assets declined 17% year over year to $6.6 billion. The company reported a 15% fall in corporate non-accrual loans and a decline of 23% was reported in consumer non-accrual loans.

Citigroup's total allowance for loan losses was $13.6 billion at quarter end, or 2.21% of total loans, down from $16.9 billion, or 2.60%, in the prior-year period.

Capital Position

At the quarter end, Citigroup's estimated Basel III Common Equity Tier 1 Capital ratio was 11.6%, increasing from 10.6% in the prior-year quarter. The company's Supplementary Leverage Ratio for third-quarter 2015 stood at 6.8%, up from 6.0% in the prior-year quarter.

As of Sep 30, 2015, book value per share was $69.03 and tangible book value per share was $60.07, up 3% and 5%, respectively, from the prior-year period.

Our Viewpoint

The results reflect a decent quarter for Citigroup. Restructuring efforts including streamlining moves should continue to ease its burden on the expense base, thereby supporting the company's financials. 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. Also, the company's capital deployment activities should continue to boost investors' confidence in the stock.

However, several legal hassles, the low rate environment and the thrust of new banking regulations will continue to be concerns for the company.

Citigroup carries a Zacks Rank #3 (hold).

Performance of Other Major Banks

JPMorgan Chase & Co. JPM , which kick-started third-quarter earnings season, missed the Zacks Consensus Estimate. The bank came up with adjusted earnings of $1.32 per share, delivering a negative surprise of 4.3%. The bottom line also declined 2.9% from the year-ago earnings of $1.36 per share. Weak trading activities primarily led to a decline in the overall profit for JPMorgan this time around. Revenues from trading fixed income, currencies and commodities fell 23%to $2.93 billion.

Driven by top-line growth, Wells Fargo & Company's WFC earnings of $1.05 per share in third-quarter 2015 beat the Zacks Consensus Estimate by a penny. Moreover, results were above the year-ago quarter earnings of $1.02 per share. The company reflected organic growth aided by higher revenues along with strong loans and deposit balances. Moreover, a strong capital position and returns on assets and equity acted as the positives. However, higher non-interest expenses and provisions were a concern.

Lower operating expenses and negligible legal costs drove Bank of America Corporation BAC third-quarter 2015 earnings of 37 cents per share, surpassing the Zacks Consensus Estimate of 34 cents. Further, the bottom line witnessed a significant improvement from net loss of 4 cents incurred in the prior-year quarter.

Weakness in fixed income trading and lower equity investment income were the undermining factors. Also, a rise in provision for loan losses added to the concerns. Nevertheless, the company benefitted from lower expenses and a rise in mortgage banking income, asset management fees and card fees.

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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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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