Citigroup Inc. C is scheduled to report its third-quarter 2015 results on Thursday, Oct 15, 2015, before the opening bell.
The New York based-banking giant’s second-quarter 2015 adjusted earnings beat the Zacks Consensus Estimate. Results were aided by lower expenses while revenues remained relatively stable. Also, the quarter experienced continued improvement in credit quality and exhibited a strong capital position.
Will Citigroup be able to sustain its profitability this quarter? Let’s see how things have shaped up.
Factors to Influence Q3 Results
Overall, the banking industry continued to operate in a challenging environment during the third-quarter 2015, facing a number of headwinds including concerns over the Chinese economy, the still low oil prices that pushed banks to limit their exposure in the energy sector, the persistent low rate environment and the litigation overhang. Amid such backdrop, we do not expect Citigroup to report impressive results this time.
Last month at the Barclays Global Financial Services Conference, Citigroup’s Chief Financial Officer – John Gerspach hinted at lower trading revenues for the quarter.
Gerspach stated that, revenues for fixed income and equity markets are expected to decline around 5% year over year amid elevated volatility. The turmoil in the China market in August created anxiety among investors, but Citigroup steered away as it witnessed solid client activity in the later part of August across its markets franchise. However, he also noted that the company was witnessing higher impact of market volatility on underwriting activity worldwide.
Further, North America cards revenue is expected to remain under pressure as it will take some time for the incremental investment spend to boost the top line. Hence, overall North America consumer revenues are expected to be relatively stable with the prior quarter.
In International consumer, the company expects subdued growth in revenues on a year-over-year basis in constant dollars, reflecting persistent slow economic growth and pressure on investment sales revenues in Asia.
Regarding Citi Holdings, the company expects the unit to remain marginally profitable in the third quarter, even with reduced level of gains on sale compared to the second quarter.
Amid the persistent low interest rate environment, we do not expect substantial growth in Citigroup’s net interest revenue. Notably, net interest margin is expected to scale around the current level of 291 basis points in the third quarter.
However, on a positive note, investment banking revenue might get a lift from increasing M&A activities in the quarter that should drive advisory revenues while lower equity underwriting revenues may somewhat offset the gain. Also, the company is likely to exhibit a slight increase in its mortgage origination revenue due to continued refinancing activity.
Overall, we expect the bank to deliver a stable to modest growth in revenues.
Regarding expenses, we believe Citigroup’s continued efficiency in savings will ease some pressure on its expense base. Further, as repositioning charges are expected to decline gradually, we believe overall expenses may trend downwards.
Though the company expects higher cost of credit on a sequential basis owing to additional loan loss reserves, the company does not anticipate rise in net credit losses.
The quarter witnessed Citigroup’s continued streamlining operations with its announcement of exit from several global markets including Egypt and Hungary. Also, during the quarter, the company reached agreements with the U.S. authorities, over loopholes in anti-money laundering program in its unit– Banamex USA. Further, the company reached settlements with authorities to resolve regulatory reviews of billing and marketing practices related to certain credit card add-on products. However, the third-quarter earnings will not be impacted as these settlement amounts are covered by existing legal reserves.
Activities of Citigroup during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter decreased 3.7% to $1.29 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 upcoming release. 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 0.00%. This is because both the Most Accurate Estimate and the Zacks Consensus Estimate stand at $1.29.
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 M&T Bank Corporation MTB has an earnings ESP of +1.52% and carries a Zacks Rank #3. It is expected to report its third-quarter results on Oct 16.
The earnings ESP for The Bank of New York Mellon Corporation BK is +1.39% and it carries a Zacks Rank #3. The company is scheduled to release its third-quarter results on Oct 20.
Capital One Financial Corporation COF has an earnings ESP of +3.14% and carries a Zacks Rank #3. It is expected to report its third-quarter results on Oct 22.
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