After reporting decent results in the prior quarter, Citigroup Inc. (C) reported somewhat encouraging third quarter 2012 results. Earnings per share came in at $1.06 for the quarter, comfortably surpassing the Zacks Consensus Estimate of 98 cents on lower loan loss provisions, higher Global Consumer Banking revenues and a drop in expenses.
In the year-ago quarter, Citigroup had reported earnings of 84 cents per share from continuing operations. Notably, results in the reported quarter were impacted by credit valuation adjustment (CVA) and debt valuation adjustment (DVA) as well as by a net loss of $4.7 billion ($2.9 billion after tax) from the sale of 14% stake and other-than-temporary impairment of the carrying value of Citi’s remaining 35% interest in the Morgan Stanley Smith Barney (MSSB) joint venture.
Additionally, results included tax benefit worth $582 million associated with the resolution of certain tax audit items. Including CVA/DVA, the loss on MSSB and the tax benefit, Citigroup reported earnings of 15 cents per share.
Revenues came in at $14.0 billion for the quarter, down 33% from the prior-year quarter. Excluding both CVA/DVA and the loss on MSSB, Citigroup revenues improved 3% from the prior-year period to $19.4 billion. The figure also outpaced the Zacks Consensus Estimate of $16.6 billion. The revenue increase was driven primarily by growth in Citicorp revenues, though partially offset by the decline in Citi Holdings revenues due to the continuing wind-down of those assets.
For the third quarter, Citigroup reported net income of $468 million, down 88% from the prior-year quarter.
Third quarter total provisions for credit losses and benefits and claims at Citigroup were down 20% year over year at $2.7 billion. The improvement was primarily attributable to a 12% decline in net credit losses to $4.0 billion, coupled with a $1.5 billion release of credit reserves.
Quarter in Detail
At Citicorp, revenues came in at $17.6 billion, down 9% year over year. Excluding CVA/DVA, revenue was $18.4 billion, up 5% from the prior-year quarter. Lower revenues in Transaction Services coupled with reduced revenues in the Securities and Banking business offset the higher revenue at Global Consumer Banking on a year-over-year basis.
However, Citi Holdings reported negative revenues of $3.7 billion compared with positive revenues of $1.1 billion in the prior-year quarter. Revenues were $971 million excluding CVA/DVA and the loss on MSSB, compared with $1.1 billion in the prior-year period. The figure was pulled down primarily due to a decline in revenues in Local Consumer Lending businesses driven by decline in average assets.
Moreover, primarily due to the impact of hedging activities and reduced investment yield, Corporate/Other revenues plummeted $267 million year over year to $33 million in the quarter.
Operating expenses at Citigroup were down 2% year over year at $12.2 billion. Ongoing expense control and reengineering measures drove a 2% year-over-year fall in operating expenses at Citicorp. On the other hand, overall decline in assets at Citi Holdings resulted in a 21% year-over-year drop in expenses in the division.
Credit Quality
Citigroup’s asset quality continued to improve in the reported quarter with total non-accrual assets decreasing 5% year over year to $12.7 billion. The company reported a 42% fall in Corporate non-accrual loans, though a 25% increase was reported in consumer non-accrual loans. Citigroup’s total allowance for loan losses was $25.9 billion at quarter end, or 4.0% of total loans, down from $32.1 billion, or 5.1%, in the prior-year period.
Capital Position
Citigroup continued to build up its capital levels, with preliminary Tier 1 Common ratio at 12.7%. Notably, its estimated Basel III Tier 1 Common Ratio was 8.6%, up from 7.9% in the prior quarter. Tier 1 Capital Ratio was 13.9%, down from 14.4% in the prior quarter. As of September 30, 2012, book value per share was $63.59 and tangible book value per share was $52.70, up 5% and 6%, respectively, from the prior-year period end.
At quarter end, Citigroup’s end of period assets was $1.93 trillion, down 0.5% year over year while deposits of $944.6 billion, were up 11% year over year. Citi Holdings’ assets decreased 31% from the prior-year quarter level to $171 billion and represented just 9% of the company’s total assets at the third quarter end.
Our Viewpoint
Following mixed results in the 2012 first quarter and stable results in second quarter, Citigroup’s third quarter results were somewhat impressive. With the upsurge in revenue, on the whole, its profit level also managed to emerge above expectations.
After impressive results by the other banking giants such as JPMorgan Chase & Company (JPM) and Wells Fargo & Company (WFC), which reported last Friday, the market was looking forward to some upbeat numbers from Citigroup.
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.
However, investments and efficiency savings would help Citigroup in garnering a solid market share and this is quite evident from its recent quarter results. 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.
Citi currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain our Neutral recommendation on the stock.
Given Citigroup’s global footprint, we believe that its results give us an insight into the economic trends and the performance of the overall banking sector. Last Friday, JPMorgan reported earnings per share of $1.40, beating the Zacks Consensus Estimate of $1.20 as well as prior-year quarter’s earnings of $1.02 per share.
Despite the impact of a number of legal and regulatory issues as well as fundamental pressures like low interest rate and sluggish loan demand, JPMorgan’s earnings surprise of almost 16% signals a good start for the sector. A marked improvement in capital market activity and healthy mortgage business, which helped JPMorgan overcome its difficulties to a great extent, should also lift the results of other mega banks during the quarter.
Likewise, Wells Fargo, which achieved its eleventh consecutive quarter of growth in earnings per share, reported earnings of 88 cents per share in third quarter 2012. Results improved from earnings per share of 82 cents in the prior quarter and 72 cents in the year-ago quarter. Also, it beat the Zacks Consensus Estimate by a penny. Results at Wells Fargo benefited from improvements in non-interest income as well as cost control measures.
Ensuing this, we look forward to the results of The Goldman Sachs Group Inc. (GS) on October 16 and Bank of America Corporation (BAC) on October 17.
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
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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