Impressive Q1 Earnings for Citigroup on Lower Expenses - Analyst Blog

Following a disappointing second-half 2013, Citigroup Inc. C reported impressive first-quarter 2014 results. Driven by prudent expense management, earnings per share came in at $1.30, outpacing the Zacks Consensus Estimate of $1.18. Moreover, earnings surpassed the prior-year period earnings by a penny.

Shares of Citigroup jumped around 3.7% in the pre-market session, indicating that investors have been bullish on the results. The price reaction during the trading session will give a better idea whether Citigroup has been able to meet expectations.

Notably, results in the reported quarter were impacted by credit valuation adjustment CVA and debt valuation adjustment DVA. Including CVA/DVA and the impact of tax charge associated with corporate tax reforms enacted in two states in the reported quarter, Citigroup reported net income of $3.9 billion or $1.23 per share compared with $3.8 billion or $1.23 per share in the prior-year quarter.

Total costs of credit for the first quarter at Citigroup were down 20% year over year to $1.97 billion. The improvement was primarily attributable to a decline in net credit losses and reduced provision for benefits and claims.

Performance in Detail

Revenues came in at $20.12 billion for the quarter, down 1% from the prior-year quarter. Excluding CVA/DVA and other items, Citigroup revenues declined 2% from the prior-year period to $20.11 billion. The revenue decrease was driven primarily by a fall in Citicorp revenues. However, the revenue figure was above the Zacks Consensus Estimate of $19.6 billion.

At Citicorp, revenues came in at $18.67 billion, down 3% year over year. Excluding CVA/DVA and other certain items, revenues were $18.68 billion, down 5% from the prior-year quarter. Decreased revenues in the Institutional Clients Group and Global Consumer Banking led to this fall.

Further, Citi Holdings reported revenues of $1.46 billion, up 61% year over year. Revenues were up 58% year over year excluding CVA/DVA and other certain other items. The figure was pulled up primarily due to the absence of repurchase reserve builds for representation and warranty claims in the first quarter of 2014, elevated levels of mark-to-market gains and reduced funding costs.

Operating expenses at Citigroup were down 1% year over year at $12.1 billion. Efficiency savings and reduction in Citi Holdings assets led to the fall. These positives were partially mitigated by elevated legal and related expenses, regulatory and compliance costs along with repositioning charges in the first quarter.

Credit Quality

Citigroup's credit quality improved in the reported quarter. Total non-accrual assets declined 19% year over year to $9 billion. The company reported a 35% fall in corporate non-accrual loans and a decline of 14% was reported in consumer non-accrual loans.

Citigroup's total allowance for loan losses was $18.9 billion at quarter end, or 2.87% of total loans, down from $23.7 billion, or 3.70%, in the prior-year period.

Capital Position

Though Citigroup continued to build its capital levels, the company's capital plan was rejected by the Federal Reserve under 2014 Comprehensive Capital Analysis and Review (CCAR). Citigroup satisfied the stress test requirements, but the Fed objected to its plan to deploy capital to shareholders based on certain “qualitative” reasons. As a result, Citigroup will need to submit a revised capital plan to the Fed later this year.

Citigroup's 2014 plan included a request for approval of a $6.4 billion common stock repurchase program through the first quarter of 2015 and a hike in quarterly common stock dividend to 5 cents per share. However, the bank has been allowed to continue with its existing $1.2 billion common stock repurchase program and payment of 1 cent per share as quarterly common stock dividend.

At the quarter end, Citigroup's estimated Basel III Tier 1 Common Ratio was 10.4%, up from 9.3% in the prior-year quarter, mainly driven by retained earnings and deferred tax asset (DTA) utilization. These positives were partially offset by higher risk-weighted assets. Citigroup's estimated Basel III Supplementary Leverage Ratio for first-quarter 2014 was 5.6%.

As of Mar 31, 2014, book value per share was $66.25 and tangible book value per share was $56.40, up 6% and 8%, respectively, from the prior-year period end.

At quarter end, Citicorp's end of period assets was $1.78 trillion, up 3% year over year while deposits of $937 billion were up 8% year over year. Citi Holdings' assets decreased 23% from the prior-year quarter level to $114 billion and represented just 6% of the company's total assets at first-quarter end.

Our Viewpoint

Following the dismal second-half 2013 performance, Citigroup began 2014 on a positive note and reported encouraging results in the first quarter. Though revenues declined, on the whole, its profit level outpaced expectations.

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.

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.

Citigroup has come a long way since 2008, when it had to take $45 billion as bail-out money to survive the economic downturn. Through the stress test clearance and these restructuring initiatives, the company has shown an improvement in its capital position since 2008, but exhibited incompetence in projecting revenue and losses in a severely adverse scenario for major parts of its business, which led to rejection to its 2014 capital plan.

These factors along with other reasons raise questions about the bank's capital-planning process. Recently, Citigroup reported a loss of around $400 million in its Banamex unit, following the detection of fraud in its Mexico-based subsidiary, which raised suspicion over the internal controls of the bank. Michael Corbat, Citigroup's Chief Executive Officer offered fully cooperation to the Fed and is working hard to meet the Fed's expectations and clear the doubts over the bank's capital planning process.

Yet, reduction in provisions for future losses and improved 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. Moreover, Citigroup currently carries a Zacks Rank #3 (Hold).

Performances of Other Large Wall Street Firms

The first-quarter earnings season kick started with big-time Wall Street firms such as Wells Fargo & Co. WFC and JPMorgan Chase & Co. JPM. Wells Fargo achieved its seventeenth consecutive quarter of earnings growth by reporting earnings of $1.05 per share. Results improved from $1.00 earned in the prior quarter and 92 cents in the year-ago quarter. Also, the results beat the Zacks Consensus Estimate by 8 cents.

However, JPMorgan failed to override the tough backdrop that banks have been enduring since the year started and delivered a negative earnings surprise of 9.2%. The banking giant came out with earnings of $1.28 per share, missing the Zacks Consensus Estimate of $1.41 by a wide margin. This is also a massive deterioration from the year-ago number of $1.59.

Among other big names on Wall Street, Morgan Stanley MS will report on Apr 17.