After reporting disappointing results in the prior quarter, Citigroup Inc. (C) reported an impressive first-quarter 2013. Earnings per share came in at $1.29 for the quarter, beating the Zacks Consensus Estimate by 11 cents. Moreover, earnings were up 16% from the prior-year period on higher revenues and lower loan loss provisions.
Notably, results in the reported quarter were impacted by credit valuation adjustment (CVA) and debt valuation adjustment (DVA). Including CVA/DVA and repositioning charges, Citigroup reported earnings of $1.23 per share.
For the first quarter, Citigroup reported net income of $3.8 billion, up 31% from the prior-year quarter.
Total provisions for credit losses and benefits and claims for the first quarter at Citigroup were down 16% year over year at $2.5 billion. The improvement was primarily attributable to a 25% decline in net credit losses to $3.0 billion.
Performance in Detail
Revenues came in at $20.5 billion for the quarter, up 6% from the prior-year quarter. Excluding CVA/DVA, Citigroup revenues improved 3% from the prior-year period to $20.8 billion. Moreover, the figure was above the Zacks Consensus Estimate of $20.1 billion. The revenue increase was driven primarily by growth in Citicorp revenues and Citi Holdings revenues.
At Citicorp, revenues came in at $19.6 billion, up 6% year over year. Excluding CVA/DVA, revenues were $19.9 billion, up 2% from the prior-year quarter. Elevated revenues in the Securities and Banking business led to this rise. Yet, lower transaction services revenues were on the downside.
Further, Citi Holdings reported revenues of $901 million, up 2% year over year. Revenues were $910 million excluding CVA/DVA, up 15% from the prior-year quarter. The figure was pulled up primarily due to an upsurge in revenues in Brokerage and Asset Management, reflecting reduced funding costs due to decline in assets. Moreover, Special Asset Pool revenues increased, reflecting lower asset marks and lower funding costs.
Operating expenses at Citigroup were up 1% year over year at $12.4 billion. Increase in expenses reflected higher repositioning charges, partially offset by decreased legal and related costs and efficiency savings.
Credit Quality
Citigroup’s credit quality improved in the reported quarter. Total non-accrual assets dipped 9% year over year to $11.1 billion. The company reported a 16% fall in Corporate non-accrual loans and a decline of 5% was reported in consumer non-accrual loans.
Citigroup’s total allowance for loan losses was $23.7 billion at quarter end, or 3.7% of total loans, down from $29.0 billion, or 4.5%, in the prior-year period.
Capital Position
Citigroup continued to build up its capital levels. In its latest capital plan, Citigroup has received the Federal Reserve’s approval for $1.2 billion worth of share repurchases through the first quarter of 2014. However, the company did not request a change in its dividend levels and currently pays a quarterly common stock dividend of 1 cent per share with no share buyback plan.
As of Mar 31, 2013, the company’s Basel I Tier 1 Capital Ratio was 13.1% and its Basel I Tier 1 Common Ratio was 11.8%, both reflecting the U.S. market risk capital rules (Basel 2.5), having become effective from Jan 1, 2013. Moreover, Citigroup’s estimated Basel III Tier 1 Common Ratio was 9.3%, up from 8.7% in the prior quarter.
As of Mar 31, 2013, book value per share was $62.51 and tangible book value per share was $52.35, up 1% and 3%, respectively, from the prior-year period end.
At quarter end, Citigroup’s end of period assets was $1.88 trillion, down 3% year over year while deposits of $934 billion, were up 3% year over year. Citi Holdings’ assets decreased 29% from the prior-year quarter level to $149 billion and represented just 8% of the company’s total assets at first quarter end.
Our Viewpoint
Following volatile results in 2012, Citigroup’s first quarter results were encouraging. With the upsurge in revenues, on the whole, its profit level also surpassed expectations.
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.
The stress test results of 2013 are out, with Citigroup emerging triumphant. The company has not only managed to clear this year’s stress test but has outperformed other major banks including JPMorgan Chase & Co. (JPM) , Bank of America Corporation (BAC) and Wells Fargo & Company (WFC).
The clearing of the stress test shows that Citigroup’s efforts to streamline its operations are now bearing fruit. Over the past few years, the company has been restructuring its business, making several layoffs, selling assets and trimming costs.
The news will also strengthen the confidence of investors in the company. Citigroup has come a long way since 2008, when it had to take $45 billion as bail-out money to survive the economic downturn. Through the stress test the company has shown that its capital position has significantly improved from 2008.
However, despite having cleared the stress test, Citigroup should leave no room for complacency with its capital enhancement initiatives. The company should continue to strive for improvement in its balance sheet and capital ratios.
Further, 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. Moreover, Citigroup currently retains a Zacks Rank #3 (Hold).
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