Citigroup Inc. (C) is scheduled to report its fourth-quarter and full-year 2014 results before the opening bell on Thursday, Jan 15.
Excluding the impact of credit valuation adjustment (CVA) and debt valuation adjustment (DVA), adjusted earnings per share for third-quarter 2014 came in at $1.15, outpacing the Zacks Consensus Estimate of $1.12. Further, earnings compared favorably with the year-ago figure of $1.02 per share.
However, on Oct 30, 2014, Citigroup restated its third-quarter 2014 earnings, giving effect to additional legal charges worth $600 million. Adjusted earnings per share declined to 95 cents per share. Also, the company lowered net income for the quarter to $2.8 billion or 88 cents per share from the previously stated figures of $3.4 billion or $1.07 per share.
Will Citigroup miss on earnings this quarter? Let’s see how things have shaped up.
Factors to Influence Fourth-Quarter Results
Legal issues in the banking sector continued to dominate headlines in the fourth quarter as well . This was accompanied by dumping unprofitable businesses and concentrating on those with strong potential.
Given the ongoing regulatory inquiries and investigations, Citigroup expects legal and related costs of about $2.7 billion to be recorded in the fourth-quarter results, thereby impacting profits of the bank. Moreover, repositioning costs of about $800 million are expected.
Notably, after giving effect to such costs, marginal profit is anticipated in the fourth quarter. Citigroup expects to incur litigation charges related to recent foreign exchange investigations, LIBOR-related investigations along with anti-money laundering and related compliance investigations. Further, repositioning costs, which are expected to trend higher, are on additional cost cutting including headcount reductions.
Recently, it came to light that Citigroup has cut its bonus pool for fixed-income and equity market traders by 5% to 10% from the 2013 level owing to the divisions’ disappointing performance in the final weeks of 2014.
Notably, in a recent conference, the company mentioned that trading revenues are expected to decline around 5% in the fourth quarter on a year-over-year basis owing to challenges in the trading environment.
Revenues in Consumer Banking is expected to exhibit growth in the quarter while the company remains focused on maintaining positive operating leverage on a year-over-year basis. Given the sale of loans in the Spain and Greece franchises, Citigroup expects net interest margin (NIM) to decline 1–2 basis points in the quarter.
Management also expects overall improved credit quality with some reserve releases in quarter.
Citigroup in its third-quarter earning release announced “strategic actions”. In line with the strategy to focus on markets where it has strong presence and long-term growth prospects, the company proposes to exit from the consumer banking business in 11 markets. The global footprint will now cover 24 markets that represent more than 95% of GCB’s current revenues. In this context, in Dec 2014, the bank inked a deal to vend its retail banking operations in Japan to Sumitomo Mitsui Financial Group, Inc. The deal is expected to close this year.
Activities of Citigroup during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter declined 7.1% to 13 cents per share over the last seven days.
Earnings Whispers
Our proven model does not conclusively show that Citigroup is likely to beat the Zacks Consensus Estimate in the fourth quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.
Zacks ESP: The Earnings ESP for Citigroup is -23.08%. This is because the Most Accurate estimate of 10 cents is lower than the Zacks Consensus Estimate of 13 cents.
Zacks Rank: Citigroup’s Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise.
Stocks That Warrant a Look
Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:
The PNC Financial Services Group, Inc. (PNC) has an earnings ESP of +0.57% and carries a Zacks Rank #3. It is scheduled to report results on Jan 16.
BancorpSouth, Inc. (BXS) has an earnings ESP of +3.23% and carries a Zacks Rank #2. It is scheduled to report results on Jan 21.
BOK Financial Corporation (BOKF) has an earnings ESP of +0.94% and a Zacks Rank #3. It is slated to report results on Jan 28.
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