A month has gone by since the last earnings report for Citigroup (C). Shares have added about 2.9% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Citigroup due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Citigroup Q2 Earnings Beat Estimates, Revenues Escalate
Citigroup delivered an earnings surprise of 6.4% in second-quarter 2020 on robust revenue strength. Earnings per share of 50 cents for the quarter handily outpaced the Zacks Consensus Estimate of 47 cents. Results were, however, down significantly from the prior-year quarter.
Citigroup recorded higher revenues on investment banking and market revenues during the reported quarter. Though equity market revenues disappointed on a more challenging environment in derivatives, and prime finance and securities services revenues declined, fixed income revenues were on an upswing reflecting strength in rates and currencies, spread products and commodities. Moreover, investment banking revenues increased on solid underwriting business, partly muted by lower advisory business.
Additionally, fall in expenses was on the upside. However, elevated cost of credit due to the pandemic is a major drag.
Net income was $1.3 billion compared with the $4.8 billion recorded in the prior-year quarter.
Revenues Improve, Expenses Down
Revenues were up 5% year over year to $19.8 billion in the second quarter. The reported figure also beat the Zacks Consensus Estimate of $19.2 billion. Higher revenues from Institutional Clients Group mainly led to this upside, partly offset by lower revenues from Global Consumer Banking and Corporate/Other.
In ICG segment, revenues came in at $12.1 billion in the quarter, up 21% year over year. Higher investment banking and fixed income market revenues were partly muted by lower equity market revenues and corporate lending.
GCB revenues decreased 10% year over year to $7.3 billion. Lower revenues in North, Latin America and Asia GCB due to the pandemic resulted in this decline. Notably, both retail banking and card revenues witnessed declines.
Corporate/Other revenues came in at $290 million, plunging 49% from the prior-year quarter. This downside stemmed from the wind-down of legacy assets and impact of low rates, partly mitigated by AFS gains.
Operating expenses at Citigroup edged down 1% year over year to $10.4 billion. Efficiency savings and reduction in marketing and other discretionary expenses resulted in this decline. These were mostly negated by rise in compensation expenses, along with continued investments in the franchise and coronavirus related costs.
Stable Balance Sheet
At the end of the April-June quarter, Citigroup’s end of period assets was $2.23 trillion, up 1% sequentially. Deposits were up 4% sequentially to $1.23 trillion. The company’s loans decreased 5% sequentially to $685 billion.
Credit Quality: A Mixed Bag
Citigroup’s costs of credit for the June-end quarter were up significantly year over year to $7.9 billion. Notably, higher allowance for credit loss reserves (ACL), the corporate loan downgrades and the qualitative management adjustment mainly led to this upsurge. Cost of credit includes elevated net credit losses of $2.2 billion and a credit reserve build of $5.6 billion, and other provisions of $94 million.
Total non-accrual assets jumped 58% year over year to $5.9 billion. The company reported a drop of 7% in consumer non-accrual loans to $1.8 billion. Nonetheless, corporate non-accrual loans of $4 billion more than doubled from the year-earlier period.
Citigroup’s total allowance for loan losses was $26.4 billion at the end of the reported quarter, or 3.89% of total loans, compared with the $12.5 billion, or 1.82%, recorded in the year-ago period.
Solid Capital Position
At the end of the April-June period, Citigroup’s Common Equity Tier 1 Capital ratio was 11.5%, down from the prior-year quarter’s 11.9%. The company’s supplementary leverage ratio for the quarter came in at 6.7%, up from the year-earlier quarter’s 6.4%.
As of Jun 30, 2020, book value per share was $83.41, up 5% year over year, and tangible book value per share was $71.15, up 5% from the comparable period last year.
Looking forward to the third quarter and the remaining of 2020, management expects the environment to be challenging and uncertain. On the top line, it expects to see continued pressure in consumer, reflecting the impact of rates and lower levels of activity related to the pandemic. Also, the low-rate environment is likely to keep hurting accrual businesses in ICG.
Markets and Investment Banking businesses are expected to reflect broader industry trends. Therefore, management projects normalization relative to the first half of 2020. Further, it anticipates these headwinds in the second half of the year to result in full-year revenues that are flat to down slightly, with the decline in net interest revenues more or less offset by non-interest revenues on a full-year basis.
On the expense side, management remains focused on protecting employees and supporting customers. And we continue to feel good about the investments we are making, particularly in our digital capabilities, and infrastructure and control. Therefore, it continues to explore all opportunities to operate more efficiently to fund investments made in digital capabilities and infrastructure and control and offset headwinds induced by the pandemic. Overall, expenses are likely to be flat to down slightly for 2020.
Management expects a higher level of losses in the days to come given the current outlook, offset by the release of existing reserves. The overall level of reserves in the second half of the year is dependent on the environment relative to the current outlook.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
At this time, Citigroup has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Citigroup has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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