Citigroup Expects Bleak Q2 Revenues - Analyst Blog

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At the Deutsche Bank 2014 Global Financial Services Investor Conference on Tuesday, Citigroup Inc. C came up with its latest outlook. The bank expects a second-quarter 2014 revenue drop or stability in various segments, impacted by global political issues, an uncertain macro environment and low price volatility.

Broadly, Citigroup anticipates total trading revenues to be down 20% to 25% year over year, while institutional revenues are expected to decline following lower trading activity compared with both the prior quarter and the prior-year quarter. Notably, to date client activity has remained low in the quarter, which might change over the remaining period of the quarter thereby the expected trading results may vary.

Further, consumer revenues are projected to be flat sequentially at around $9.3 billion, while treasury and trade solutions revenues are expected to remain approximately flat. However, investment banking revenues are anticipated to trend higher on a sequential basis.

We believe that the primary reason for the continued slump in market revenues is the downward trend being witnessed in Fixed Income Markets (down 18% in the first quarter). Moreover, the Federal Reserve's decision to taper bond buying is pushing market revenues down.

On the expense front, Citigroup expects core expenses, excluding legal and repositioning costs to trend below the level of $11 billion recorded in first-quarter 2014. The fall is expected to be driven by reduced compensation expense in the institutional business and slight sequential improvement in the consumer business.

Notably, legal and repositioning costs are expected to be stable at $1.1 billion reported in the prior quarter. Further, Citigroup's Chief Financial Officer – John Gerspach expects no further expenses related to receivables loan fraud in the bank's Mexican subsidiary.

On the capital plan front, Gerspach confirmed that Citigroup is not expecting to resubmit its 2014 Capital Plan, rejected by Federal Reserve in March based on certain ‘qualitative reasons'. However, the bank is working to improvise the loopholes of the plan and is focusing on the 2015 Capital Plan.

Earlier this month, another mega bank – JPMorgan Chase & Co. JPM – in its quarterly filings with the Securities and Exchange Commission (SEC), provided its expectation of reduced second-quarter 2014 market revenues by approximately 20% year over year.

These banks' assumption of a continued slump in market revenues sounds a warning bell for other banks. Though market revenue results have varied as an outcome of different component mixes, almost all other major banks including Bank of America Corp. BAC, The Goldman Sachs Group Inc. GS and Morgan Stanley have been facing a steady pressure as well.

We expect Citigroup to remain continually pressurized by lackluster fixed-income trading activities and sluggish mortgage banking in the near term. Though cost containment efforts are noticeable, Citigroup's underlying franchises of the consumer businesses and 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.

Currently, Citigroup carries a Zack Rank #3 (Hold).


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