After delivering positive earnings surprises in the prior three quarters, Citigroup Inc. (C) failed to keep the winning streak alive. Adjusted earnings per share for fourth-quarter 2014 came in at 6 cents, missing the Zacks Consensus Estimate of 9 cents. Further, earnings came significantly below the year-ago figure of 82 cents per share.
Including the impact of credit valuation adjustment (CVA) and debt valuation adjustment (DVA), Citigroup reported net income of $350 million which was significantly down from $2.5 billion reported in the prior-year quarter.
Following the earnings release, investors have been bearish on the results as shares of Citigroup fell 2.7% in the beginning of the trading session. However, the price reaction during the full trading session will give a better idea.
For the year ended 2014, adjusted earnings per share came in at $3.55, beating the Zacks Consensus Estimate of $2.20. However, it compared unfavorably with the prior year figure of $4.37 per share.
Adjusted costs of credit for the fourth quarter at Citigroup were down 3% year over year to $2.0 billion. The improvement was primarily attributable to a decline in net credit losses, partially offset by lower net release of loan loss reserves.
Performance in Detail
Adjusted revenues of Citigroup came slightly lower than the prior-year quarter to $17.8 billion. Also, the revenue figure missed the Zacks Consensus Estimate of $18.7 billion.
Excluding CVA/DVA, Citigroup revenues decreased 1% from the prior-year period to $17.8 billion. The decrease reflected a 1% decline in revenues of Citicorp, which was partially offset by a slight rise in revenues of Citi Holdings.
Adjusted revenues for the year ended 2014 were $77.3 billion, up 1% year over year. However, it came below the Zacks Consensus Estimate of $77.9 billion.
At Citicorp, adjusted revenues came in at $16.5 billion, down 1% year over year. Excluding CVA/DVA, revenues were stable from the prior-year quarter. While revenues of Corporate/Other declined, revenues in the Institutional Clients Group (ICG) and GCB remained stable year over year.
Further, Citi Holdings reported adjusted revenues of $1.3 billion, up 1% year over year. Excluding CVA/DVA, revenues exhibited slight growth year over year, reflecting increased gains on asset sales and lower cost of funds. Notably, since its formation, Citi Holdings reported full-year profit for the first time.
Operating expenses at Citigroup were up 21% year over year to $14.4 billion. The rise was primarily owing to increased legal and related costs and repositioning charges and elevated regulatory and compliance costs. These were partially offset by continued cost reduction efforts and impact of foreign exchange translation.
Notably, in the fourth quarter operating expenses included legal and related expenses of $2.9 billion, up from $809 million in the prior-year-quarter, and $655 million of repositioning charges, up from $234 million in the prior-year-quarter.
At quarter end, Citigroup’s end of period assets was $1.9 trillion, up 2% year over year. The company’s loans decreased 3% year over year to $645 billion and deposits decreased 7% to $899 billion, respectively. Citi Holdings’ assets decreased 16% from the prior-year quarter level to $98 billion and represented just 5% of the company’s total assets at third-quarter end.
Credit Quality
Citigroup’s credit quality improved in the reported quarter. Total non-accrual assets declined 22% year over year to $7.4 billion. The company reported a 38% fall in corporate non-accrual loans and a decline of 17% was reported in consumer non-accrual loans.
Citigroup’s total allowance for loan losses was $16.0 billion at quarter end, or 2.50% of total loans, down from $19.6 billion, or 2.97%, in the prior-year period.
Capital Position
At the quarter end, Citigroup’s estimated Basel III Common Equity Tier 1 Capital ratio was 10.5%, increasing from 10.1% in the prior-year quarter. The company’s estimated Basel III Supplementary Leverage Ratio for fourth-quarter 2014 was 6.0%, up from 5.4% in the prior-year quarter.
As of Dec 31, 2014, book value per share was $66.16 and tangible book value per share was $56.83, up 1% and 3%, respectively, from the prior-year period end.
Our Viewpoint
Citigroup’s underlying franchises of the consumer businesses and revenues have continuously been under pressure for the past several quarters. While we believe that robust top-line expansion will remain elusive in the near term given the tepid economic recovery, we remain encouraged by the company’s continuous restructuring efforts.
Moreover, improving credit trends are expected to counter the negatives. One can consider a strong brand like Citigroup to be a sound investment option over the long term, given its global footprint and attractive core business. However, amid rising expenses along with the thrust of new banking regulations, there will be pressure on fees and loan growth.
Citigroup currently carries a Zacks Rank #3 (Hold).
Among other Wall Street giants, Wells Fargo & Company’s (WFC) fourth-quarter 2014 earnings met expectations. The financial major came out with earnings per share of $1.02, meeting the Zacks Consensus Estimate. Also the reported figure came above the year-ago figure of $1.00.
The PNC Financial Services Group, Inc. (PNC) and The Goldman Sachs Group, Inc. (GS) are set to report results on Jan 16.
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