After reporting a mixed bag in the prior quarter, Citigroup Inc. (C) reported somewhat encouraging second quarter 2012 results. Earnings per share came in at 95 cents for the quarter, comfortably surpassing the Zacks Consensus Estimate of 88 cents on lower loan loss provisions, higher transaction services revenues and a drop in expenses.
In the year-ago quarter, Citigroup had reported earnings of $1.07 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 $424 million ($274 million after tax) from the 10.1% stake sale in Akbank T.A.S. Excluding CVA/DVA and the Akbank loss, Citigroup reported earnings of $1.00 per share.
Revenues came in at $18.6 billion for the quarter, down 10% from the prior-year quarter. Excluding both CVA/DVA and the loss on Akbank, Citigroup revenues fell 7% from the prior-year period. The figure also fell short of the Zacks Consensus Estimate of $19.1 billion. The wind-down of Citi Holdings was primarily responsible for the revenue decline as revenues at Citicorp were unchanged.
For the second quarter, Citigroup reported net income of $2.9 billion, down 12% from the prior-year quarter.
Second quarter total provisions for credit losses and benefits and claims at Citigroup were down 17% year over year at $2.8 billion. The improvement was primarily attributable to a 31% decline in net credit losses to $3.6 billion, coupled with a $991 million release of credit reserves.
Quarter in Detail
At Citicorp, revenues came in at $18.0 billion, flat year over year. Excluding CVA/DVA, revenue was $17.8 billion, which too was unchanged from the prior-year quarter. Higher revenues in Transaction Services were offset by lower revenues in the Securities and Banking business while that at Global Consumer Banking remained same year over year.
However, Citi Holdings revenues of $924 million were down 62% from the prior-year quarter. Revenues were $903 million excluding a positive CVA/DVA of $21 million, compared with $17 million in the prior-year period. The figure was pulled down primarily due to a decline in revenues in the Special Asset Pool and in Local Consumer Lending businesses as the company continued to wind down assets of this unit.
Also, the year-ago quarter results included gains from the sale of securities and other asset sales. The decrease was partly mitigated by higher Brokerage and Asset Management revenues.
Moreover, primarily due to the $424 loss from the Akbank stake sale as well as the absence of a $199 million gain from the sale of the Housing Development Finance Corporation Ltd. stake in the year-ago quarter, Corporate/Other revenues plummeted $528 million year over year to negative revenues of $265 million in the quarter.
Operating expenses at Citigroup were down 6% year over year at $12.1 billion. Ongoing expense control and reengineering measures drove a 3% year-over-year fall in operating expenses at Citicorp. On the other hand, overall decline in assets at Citi Holdings resulted in a 25% year-over-year drop in expenses in the division.
Citigroup’s asset quality continued to improve in the reported quarter with total non-accrual assets decreasing 22% year over year to $11.5 billion. The company reported a 47% fall in Corporate non-accrual loans and a 1% decline in consumer non-accrual loans. Citigroup’s total allowance for loan losses was $27.6 billion at quarter end, or 4.3% of total loans, down from $34.4 billion, or 5.4%, in the prior-year period.
Citigroup continued to build up its capital levels, with preliminary Tier 1 Common ratio improving to 12.7% from 12.5% in the prior quarter. Notably, its estimated Basel III Tier 1 Common Ratio was 7.9%. Tier 1 Capital Ratio also ascended to 14.4% from 14.26% in the prior quarter. As of June 30, 2012, book value per share was $62.61 and tangible book value per share was $51.81, up 4% and 6%, respectively, from the prior-year period end.
At quarter end, Citigroup’s end of period assets was $1.92 trillion, down 2% year over year while deposits of $914.3 billion, were up 6% year over year. Citi Holdings’ assets decreased 28% from the prior-year quarter level to $191 billion and represented just 10% of the company’s total asset at the second quarter end.
Following a disappointing 2011 fourth quarter and mixed results in the 2012 first quarter, Citigroup’s second quarter results were somewhat impressive. Though the company missed on the revenue front, on the whole, its profit level managed to emerge better than expected.
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 for 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.
In June, while resubmitting its capital plan to the Federal Reserve, Citigroup decided against any hike in its shareholders payout in 2012. Instead of boosting its capital payouts, the company intends to build its capital level and continue with efforts to trim its non-core assets.
Though this is a sort of setback for the shareholders in the near term, we believe that it is a wise decision on Citigroup’s part to strengthen its capital levels first and then ask for such payouts. That would serve as a long-term catalyst for the stock. Also, its trust preferred securities (TruPS) redemption is a strategic move to abide by the regulatory norms.
Citi currently retains a Zacks #3 Rank, which translates into a short-term Buy rating. Also, considering the fundamentals, we maintain a Neutral recommendation on the stock. Reflecting an upbeat sentiment post the release of the company’s results, the stock is trading at a premium.
Given Citigroup’s global footprint, we believe that its results give us a clue to the economic trends and the performance of the overall banking sector. Last Friday, JPMorgan reported earnings per share of $1.21, way ahead of the Zacks Consensus Estimate of 78 cents. Notably, its results included $4.4 billion in its Chief Investment Office's synthetic credit portfolio.
Excluding significant nonrecurring items, JPMorgan’s earnings came in at $1.20 per share. Similar to Citigroup, lower non-interest expenses and a substantial slowdown in provision for credit losses aided its results. However, the positives were partially offset by lower revenue.
Likewise, Wells Fargo, which achieved its tenth consecutive quarter of growth in earnings per share, reported earnings of 82 cents per share in the quarter. Results were a cent ahead of the Zacks Consensus Estimate as the company benefited from improvements in mortgage banking as well as credit quality. Lower non-interest expenses also attributed to the profit growth.
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