As expected, Citigroup C delivered an earnings surprise of 38.6% in third-quarter 2020 on robust market revenues. Earnings per share of $1.40 for the quarter handily outpaced the Zacks Consensus Estimate of $1.01. Results are, however, down significantly from the prior-year quarter.
The stock rallied more than 2% in pre-market trading, reflecting investors’ optimism with the results. Notably, the full-day trading session will display a clearer picture.
Citigroup recorded higher revenues on investment banking and market revenues during the reported quarter. Notably, equity market revenues (up 15%) were impressive on strong performance in cash equities and derivatives, partially offset by lower prime finance revenues, while fixed income revenues (up 18%) were also on an upswing, reflecting strength in spread products and commodities.
Moreover, investment banking revenues (up 13%) increased on a solid underwriting business, partly muted by lower advisory business. However, consumer banking disappointed due to the continued impact of pandemic. Moreover, elevated cost of credit and elevated expenses were major drags.
Net income was $3.2 billion compared with the $4.9 billion recorded in the prior-year quarter.
Revenues Decline, Expenses Escalate
Revenues were down 7% year over year to $17.3 billion in the third quarter. The reported figure came in line with the Zacks Consensus Estimate. Lower revenues from Global Consumer Banking (GCB) were on the downside, partly offset by higher revenues from Institutional Clients Group (ICG). Corporate/Other recorded negative revenues.
In the ICG segment, revenues came in at $10.4 billion in the quarter, up 5% year over year. Higher investment banking, along with fixed income and equity market revenues, led to this upsurge. These were partly muted by lower corporate lending.
GCB revenues decreased 13% year over year to $7.2 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 negative $224 million compared with the prior-year quarter’s $434 million. This downside stemmed from the wind-down of legacy assets and impact of low rates along with “marks on securities”.
Operating expenses at Citigroup flared up 5% year over year to $11 billion. Civil money penalty, infrastructure investments, risk management and controls, higher compensation and COVID-19 related expenses resulted in this upswing. These were partly negated by efficiency savings and reduction in marketing and other discretionary expenses.
Stable Balance Sheet
At the end of the July-September quarter, Citigroup’s end of period assets was $2.23 trillion, up slightly on a sequential basis. Deposits were up 2% sequentially to $1.26 trillion. The company’s loans decreased 3% sequentially to $667 billion.
Credit Quality: A Mixed Bag
Citigroup’s costs of credit for the September-end quarter were up 8% year over year to $2.3 billion. Remarkably, higher allowance for credit loss reserves (ACL) in the ICG segment mainly led to this upsurge. Cost of credit includes elevated net credit losses of $1.9 billion and a credit reserve build of $314 million, and other provisions of $29 million.
Total non-accrual assets jumped 40% year over year to $5.3 billion. The company reported a drop of 9% in consumer non-accrual loans to $1.7 billion. Nonetheless, corporate non-accrual loans of $3.6 billion surged 94% from the year-earlier period.
Citigroup’s total allowance for loan losses was $26.4 billion at the end of the reported quarter, or 4% 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 July-September period, Citigroup’s Common Equity Tier 1 Capital ratio was 11.8%, up from the prior-year quarter’s 11.6%. The company’s supplementary leverage ratio for the quarter came in at 6.8%, up from the year-earlier quarter’s 6.3%.
As of Sep 30, 2020, book value per share was $84.48, up 4% year over year, and tangible book value per share was $71.95, up 4% from the comparable period last year.
Citigroup delivered impressive results even this time around on solid underwriting business and market revenues, despite being unfavorably impacted by disappointing advisory business and lower consumer banking. The company displays capital strength, reflecting liquidity amid the coronavirus pandemic-impacted environment.
One can consider a strong brand like Citigroup to be a sound investment option for the long term, given its global footprint and attractive core business. Additionally, the company’s growth looks encouraging amid cost management.
Nevertheless, several legal hassles remain concerns for the bank. Furthermore, higher credit costs are another concern.
Citigroup Inc. Price, Consensus and EPS Surprise
At present, Citigroup carries a Zacks Rank #4 (Sell).
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