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Citigroup (C) Gives Q4 Outlook, Robust Trading to Offset Weak IB

Citigroup Inc.’s C CEO, Jane Fraser, indicated at the Goldman Sachs financial conference that the bank expects its trading revenues to increase 10% year over year in the fourth quarter of 2022. However, because of the weak investment banking (IB) performance, IB fees will likely decline 60%.

The majority of the biggest U.S. banks have seen their trading revenues improve this year, driven by surprisingly robust trading activities.

However, because of the volatility in the capital markets, geopolitical tensions and risk-off sentiments, the global deal volume has declined drastically, which has been hurting IB revenues.

For the biggest U.S. bank (in terms of assets and market cap), JPMorgan JPM, its markets revenues (trading) of $6.8 billion in the third quarter increased 8% year over year (better than management’s guidance of almost 5% rise). But, equity and debt underwriting fees tanked 72% and 40%, respectively. Also, advisory fees were down 31%. Hence, IB fees plunged 47% from the prior-year quarter.

Likewise, Bank of America’s BAC, trading numbers were impressive in the last-reported quarter. Sales and trading revenues (excluding DVA) were up 13% from the prior-year quarter. A 27% jump in fixed-income trading fees offset a 4% decrease in equity trading income. However, IB fees of $1.2 billion tanked 46.2% year over year, reflecting the weak industry-wide performance of the underwriting business. Advisory fees plunged 34% to $432 million.

Notably, financial firms in the United States are bracing for a deteriorating economy next year as high inflation curtails consumer demand. The comments from top executives indicate uncertain times ahead in 2023.

Recently, JPM’s CEO, Jamie Dimon, in an interview with CNBC, noted that consumers and businesses are in good shape, but this isn’t going to last long as the economy gradually slows down and inflation hurts consumer spending. He further said, “Those things might very well derail the economy and cause this mild to hard recession that people are worried about.”

Likewise, Bank of America’s CEO, Brian Moynihan, stated that the bank’s research indicates “negative growth” in the first half of 2023, but the recession will likely be “mild.” He also provided a grim outlook for the IB business for fourth-quarter 2022, while noting trading will be a bright spot. BAC expects IB fees to decline 55-60% year over year while trading revenues will grow 10-15% (with major support from fixed-income trading).

As banks are bracing for a slowdown in the IB business, most of them are engaging in job cuts. In November, Citigroup announced job cuts as a near-crash in deal-making activity is expected to hurt its profits in the near term.

Citigroup has been emphasizing growth in core businesses through streamlining operations internationally. The bank will wind down its UK retail banking business and expand personal banking and wealth management businesses in the region. It also started winding down its consumer banking and commercial banking operations in Russia in third-quarter 2022, and will end nearly all of the institutional banking services by first-quarter 2023 end.

In January 2022, the company revealed plans to exit the consumer, small business and middle-market banking operations in Mexico. This is in addition to its major strategic action announced in April 2021 to exit the consumer banking business in 13 markets across Asia and EMEA, including Australia, Bahrain, China, India, Indonesia and Korea. Since then, Citigroup has signed deals to sell consumer businesses in Indonesia, Taiwan, Vietnam and India. It has also completed the sale of the Bahrain, Malaysia, Thailand, Australia and Philippines consumer businesses. These efforts will likely augment its profitability and efficiency over the long term.

Over the past year, shares of Citigroup have lost 28.1% compared with a decline of 20.9% of the industry.

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Currently, Citigroup carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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