Citigroup Inc. (C) is scheduled to report its third-quarter 2014 results before the opening bell on Tuesday, Oct 14.
Including the impact of credit valuation adjustment (CVA) and debt valuation adjustment (DVA) and charges worth $3.8 billion ($3.7 billion after-tax) related to a mortgage settlement deal, the company reported net income of $181 million or $0.03 per share in second-quarter 2014 compared with $4.2 billion or $1.34 per share in the prior-year quarter.
Amid a tough industry backdrop and litigation hassles, Citigroup managed to deliver a positive earnings surprise in the last quarter, which marked the second consecutive quarter of earnings beat. Adjusted earnings per share came in at $1.24, outpacing the Zacks Consensus Estimate of $1.08.
Will Citigroup miss on earnings this quarter? Let’s see how things have shaped up.
Factors to Influence Q3 Results
The overall banking sector did not witness any significant change in the third quarter from the second. While soft trading volumes, high legal costs, lower fixed income were on the downside, the quarter was characterized by increased mergers and acquisitions (M&A) and IPOs, aggressive cost control measures, and a favorable equity and asset market backdrop.
On Sep 8, 2014, at the Barclays Global Financial Services Conference in New York, Citigroup chief financial officer (CFO) John Gerspach came up with the latest outlook for the third quarter and priorities to be worked upon by the bank.
Management expects weakness in total trading revenues to recoup on a year-over-year basis. Further, fixed-income and equities-trading revenues are expected to remain flat compared with the prior-year quarter. Quarterly investment banking revenues are projected to grow on a year-over-year basis, though seasonal decline in underwriting volumes might lead to a drop in revenues on a sequential basis.
Consumer revenues are expected to exhibit a slight increase both on a year-over-year and sequential basis, while treasury and trade-solutions revenues are anticipated to move up from the prior-year quarter. As per Gerspach, owing to low trading activities in August as compared with July, trading in September will reflect the actual position of revenues. Notably, trading was anticipated to exhibit improvement in September.
Further, in continuation of Citigroup’s strategy to streamline its international operations, in June the company inked two deals to offload its consumer banking business in Spain and Greece. Per the company’s 10Q for second-quarter 2014, the company expects to realize after-tax gains in the third quarter through each of these deals. We believe such gains will support earnings this season.
On the expense front, core expenses are expected to rise in the quarter on a sequential basis for incorporating costs related to stress test preparation.
Activities of Citigroup during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter has remained stable at $1.12 per share over the last 7 days.
Earnings Whispers
Our proven model does not conclusively show that Citigroup is likely to beat the Zacks Consensus Estimate in the second 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 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at $1.12.
Zacks Rank: Citigroup’s Zacks Rank #3 (Hold) increases the predictive power of ESP. But we also need to have a positive ESP to be confident of an earnings surprise call.
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:
BB&T Corporation (BBT) has an earnings ESP of +1.41% and carries a Zacks Rank #3. It is scheduled to report results on Oct 16.
Capital One Financial Corporation (COF) has an earnings ESP of +2.08% and carries a Zacks Rank #2. It is scheduled to report results on Oct 16.
CIT Group Inc. (CIT) has an earnings ESP of +3.37% and a Zacks Rank #3. It is slated to report results on Oct 28.
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