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Soft Trading Activities to Hurt Citigroup's (C) Q1 Earnings

Zacks Equity Research

Citigroup’s C first-quarter 2019 earnings, slated on Apr 15, before the opening bell, are likely to be affected by the challenging trading environment.

Concerns over global economic slowdown, trade war fears and the government shutdown likely resulted in a sluggish environment for trading activities. Further, during the Investors Day conference in March, CFO Mark Mason projected a disappointing trading scenario.

The company expects markets revenues to fall in the "high single digits" percentage against an unusually strong quarter a year ago. "We've started to see markets stabilize and trade higher, but we haven't yet seen a full recovery from a year ago," Mason said.

Other Factors to Influence Q1 Results

Consumer Banking Revenues to Witness Growth: In consumer banking, the company expects to see continued strength in Mexico and Asia, lending support to revenues. Also, the net interest revenue percentage should improve both sequentially and year over year. Further, U.S. Branded Cards business saw a pickup in late-2018, which is likely to have continued in the first quarter.

Further, for 2019, management pointed other revenue tailwinds, including the absence of the FDIC surcharge, and a smaller expected drag from the winding down of legacy assets in Corp/Other. The to-be-reported quarter results should reflect these benefits.

Muted Investment Banking Fees: Slowdown in Investment banking performance was witnessed in the first quarter on the Fed’s dovish monetary policy, government shutdown and fears of economic slowdown. Thus, equity underwriting and debt origination fees are projected to decline slightly. Moreover, global M&A deal value and volume witnessed a decline owing to increase in borrowing costs and several geopolitical concerns, thereby hurting advisory fees.

However, Citigroup expects investment banking business to be on an upswing. Investment Banking revenues are estimated to rise in the first quarter on a year-over-year basis as M&As and debt issuance activities gained strength.

Lesser Scope of Cost Containment: As majority of unnecessary expenses have already been cut by the bank, expense reduction might not be a major support. Nonetheless, some legal settlements during the quarter might have affected Citigroup’s earnings to some extent.

Rise in Net Interest Income: Flattening and even inversion of the yield curve during the first quarter might negatively impact banks’ net interest margin, while December 2018 rate hike may lend some support. Also, per the Fed ’s latest data, loans are predicted to improve on a sequential basis. Particularly, weakness in revolving home equity loans is expected to be offset by significant growth in commercial and industrial and consumer loans.

Management expects net interest revenue percentage to improve sequentially during the first quarter.

Here is what our quantitative model predicts:

According to our model, chances of Citigroup beating the Zacks Consensus Estimate in the first quarter are low. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESPand Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Citigroup is +0.42%.

Zacks Rank: Citigroup currently carries a Zacks Rank #4 (Sell), which decreases the predictive power of ESP.

The Zacks Consensus Estimate for earnings of $1.78 reflects a 6% year-over-year rise. However, the consensus estimate for sales of $18.7 billion indicates nearly 1% decline.

Citigroup Inc. Price and EPS Surprise

Citigroup Inc. Price and EPS Surprise | Citigroup Inc. Quote

Stocks That Warrant a Look

Here are some stocks you may want to consider, as according to our model these have the right combination of elements to post an earnings beat this quarter.

Comerica Incorporated CMA is scheduled to release results on Apr 16. It has an Earnings ESP of +0.52% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Bank of New York Mellon Corporation BK is scheduled to release results on Apr 17. The company, which carries a Zacks Rank of 3, has an Earnings ESP of +0.63%.

The Earnings ESP for First Republic Bank FRC is +1.27% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Apr 12.

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