Citigroup Inc.’s (C) second quarter 2011 earnings per share of $1.09 outpaced the Zacks Consensus Estimate of 96 cents. The result also improved from the prior quarter's 99 cents and last year's 90 cents.
The better-than-expected result was driven by a drop in provisions for credit losses. While the top-line headwind at Citigroup continued with revenue dropping from the prior-year period, the figure managed to exceed the Zacks Consensus Estimate. Expenses also increased year over year.
Citigroup reported net income of $3.3 billion, compared with $3.0 billion in the prior quarter and $2.7 billion in the prior-year quarter.
Revenues came in at $20.6 billion, down 7% year over year. The revenue figure however exceeded the Zacks Consensus Estimate of $19.7 billion. The year-over-year decrease resulted from a decline in net interest revenues but was partially offset by an increase in non-interest revenues.
However, total provisions for credit losses and for benefits and claims at Citigroup plunged 49% year over year to $3.4 billion. The improvement was attributable to a 35% decline in net credit losses to $5.1 billion, coupled with a $2.0 billion release of credit reserves.
Behind the Headline Numbers
Segment wise, though revenues at Citicorp declined just 1%, the same at Citi Holdings and Corporate/Other plummeted 18% and 60% year over year, respectively.
At Citicorp, an improvement in revenues in international Regional Consumer Banking (RCB) businesses and in Transaction Services were more than offset by deteriorating revenues in Securities and Banking and North America RCB.
A decrease in revenues at Citi Holdings reflected the company’s continuing efforts to reduce this segment’s assets. On the other hand, lower revenues from hedging activities and reduced investment yields pulled down Corporate/Other revenues.
Operating expenses at Citigroup ascended 9% year over year to $12.9 billion. The uptick was due to higher legal and related costs, foreign exchange impact and continued investment spending as well as increased business volumes. This increase was partially offset by a decline in expenses at Citi Holdings.
Credit Quality
Citigroup’s credit quality metrics improved in the quarter. Non-accrual loans of $13.2 billion decreased 47% from the prior year quarter, reflecting a 56% decline in corporate non-accrual loans and a 39% drop in consumer non-accrual loans.
Citigroup's total allowance for loan losses was $34.4 billion at quarter-end, or 5.35% of total loans, down from $46.2 billion, or 6.72%, in the prior year period. Net release of credit reserves was 37% higher year over year with over half of it being attributable to Citi Holdings. Asset sales, lower non-accrual loans, and overall improvement in credit quality in Citigroup's loan portfolio drove the improvement.
Capital Ratios
Citigroup continued to improve its capital strength, with Tier 1 Capital ratio and Tier 1 Common ratio improving to 13.60% and 11.60%, respectively, from 13.26% and 11.34% in the prior quarter.
Book Value per share moved up to $60.34 from $58.46 in the prior quarter and $53.32 in the year-ago quarter. Tangible Book Value per share increased to $48.75 from $46.87 in the prior quarter and $41.86 in the year-ago quarter.
At quarter end, Citigroup’s end of period assets were $1.96 trillion, up 1% year over year while deposits were $866.3 billion, up 6% year over year. Citi Holdings’ assets declined 34% from the year-ago period to $308 billion at the end of second quarter 2011.
Outlook
Management at Citigroup remains somewhat confident of returning meaningful capital to shareholders next year, finishing up that year with Tier 1 Common Capital Ratio of around 8%-9% under Basel III. Citigroup's risk-weighted assets under Basel III at the end of 2012 are projected to be in the range of 135% of what they would be under Basel I.
Reverse Stock Split and Dividend Reinstatement
On March 21, Citigroup announced a 1-for-10 reverse stock split. The reverse split became effective after the close of trading on May 6, and reduced the share count to 2.9 billion from 29.1 billion. Following the reverse stock split, the company also reinstated its common stock dividend of 1 cent per share, which was paid on June 17 to stockholders of record as of May 27.
Our Take
JPMorgan Chase & Company (JPM) yesterday reported second quarter earnings per share of $1.34, substantially ahead of the Zacks Consensus Estimate of $1.21.
Similar to Citigroup, the stellar numbers at JPMorgan were primarily supported by a significant slowdown in provision for credit losses and higher-than-expected net revenue, which more than offset an increase in non-interest expense and lower net interest income.
With both the Wall Street biggies posting better-than-expected results, the overall market remains in an upbeat mood. Following the announcement of second quarter results, Citigroup stock is trading at a premium.
While a favorable result at Citigroup is encouraging, we find that the company still has way to go in improving its top line. The tardy economic recovery and escalating expenses are somewhat limiting its earnings growth. However, in the long term, we believe that such investment will help in garnering a solid market share and support its earnings.
Citigroup shares are maintaining a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the company’s business model and fundamentals, we have a long-term Neutral recommendation on the stock.
With a global footprint like that of Citigroup, its results give us a clue about the economic indicators and their trends . The other major Wall Street biggies reporting after Citigroup include Bank of America Corporation (BAC), Goldman Sachs Group Inc. (GS) and Wells Fargo & Company (WFC) on July 19, and Morgan Stanley (MS) on July 21.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
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