Zacks_Analysts' Blog : Earnings Preview: Citigroup Inc. - Analyst Blog

Citigroup Inc. (C) is scheduled to report its fourth quarter and full year 2011 results before the market opens on Tuesday, January 17. The Zacks Consensus Estimate for the quarter is 50 cents per share, representing an estimated year-over-year growth of about 25%. For the full year, the Zacks Consensus Estimate is $3.83 per share, up about 9% from the previous year.

With the weakness in the economy at large and fundamental stress on the banking sector in particular, we don’t expect Citigroup to report stellar earnings figures. We also expect a significant improvement in the top line to remain elusive due to weak performance at Citi Holdings.

The tardy economic recovery and escalating expenses are somewhat limiting the company’s earnings growth. Though we believe that investments and efficiency savings will help in garnering a solid market share, volatile equity markets, weak loan demand, low liquidity and a tough regulatory environment remains our major concern.

In addition, Citigroup has failed to significantly enhance shareholder value following the financial crisis and this somewhat weakened its competitive position. Yet, reduction in reserves for future losses and improved credit trends are expected to counter the negatives.

Previous Quarter Performance

Citigroup’s third-quarter 2011 earnings per share of $1.23 outpaced the Zacks Consensus Estimate of 81 cents per share. The result also improved from the prior quarter's $1.09 and last year's 72 cents per share. Notably, credit valuation adjustment (CVA) increased third-quarter earnings by 39 cents per share.

The better-than-expected result was driven by a drop in provisions for credit losses. Moreover, the top-line headwind at Citigroup was slightly relaxed with revenue increasing 1% from the prior quarter, and also managed to exceed the Zacks Consensus Estimate. Yet, bottom-line deteriorated with expenses increasing year over year.

Citigroup reported net income of $3.8 billion compared with $3.3 billion in the prior quarter and $2.2 billion in the prior-year quarter.

Revenues came in at $20.8 billion, up 1% sequentially and flat year over year. The revenue figure also exceeded the Zacks Consensus Estimate of $19.4 billion. The surge in revenue resulted from increased revenues at Citicorp. Revenues included $1.9 billion of CVA, reflecting the expansion of Citi’s credit spreads during the third quarter.

Moreover, total provisions for credit losses and benefits and claims at Citigroup plunged 43% year over year to $3.4 billion. The improvement was attributable to a 41% decline in net credit losses to $4.5 billion, coupled with a $1.5 billion release of credit reserves.

Earnings Estimate Revisions – Overview

Ahead of the earnings release, the Zacks Consensus Estimates for the fourth quarter and full year have been revised down. A significant downward trend in estimate revision is also palpable, making the weakness in the stock more obvious.

We will now discuss the details of earnings estimate revisions to substantiate why short-term investors should not be buoyant on this stock.

Agreement of Estimate Revisions

The estimate revision trend confirms that the majority of analysts are apprehending weak fourth quarter earnings for Citigroup. Of the 16 analysts covering the stock, 4 have lowered their estimates for the fourth quarter, while none has moved in the opposite direction over the last 7 days.

Also, for full-year 2011, there were 2 downward estimate revisions and 1 upward movement. For full-year 2012, 3 downward revisions were witnessed again while none moved north over the last 7 days.

Magnitude of Estimate Revisions

The Zacks Consensus Estimates for the fourth quarter and full-year 2011 headed south over the last 7 days. The Zacks Consensus Estimate for the fourth quarter dropped from earnings per share of 56 cents to 50 cents. For full-year 2011, the estimate also fell 5 cents to $3.83 per share. In addition to this, the Zacks Consensus Estimates for full-year 2012 declined 3 cents to $4.32 per share over the last 7 days.

Earnings Surprise

Citigroup’s performance has been somewhat stable over the trailing four quarters with respect to earnings surprises. The average earnings surprise was a positive 6.6%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Our Viewpoint

Though the estimate revision trend indicates that fresh investment in this stock will not be a good decision, at least in the short run, one can consider a company like Citigroup as value investment given its global footprint and attractive core business. It is also among the best reserved banks. Last quarter, the company also moved retail partner cards and a vast majority of its assets from Citi Holdings into Citicorp.

However, investors are widely speculating about the amount of money that the Wall Street biggies including Citigroup will be allowed by the Fed to return to their shareholders this year.

Besides, due to the lack of growth momentum within the company, Citi also needs to go for capital built-up for the regulatory requirements. Citigroup only declared 1 cent per share as dividend last year and hence its investors would be particularly interested for news on that front and a positive one will surely result in an upward movement in the stock price in the near term.

Citigroup aims at de-leveraging Citi Holdings through a number of steps that include joint ventures, dispositions and asset run-offs. As a matter of fact, the company has already announced the sale of a number of its businesses within this segment. Though this 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.

Notably, of late, Citigroup’s effort to sell its OneMain consumer-lending unit has hit a roadblock. The company was in talks with a number of private equity buyers but a sale agreement could not be reached, according to a Wall Street Journal report. The turmoil in the credit markets in the midst of the European sovereign debt crisis as well as increasing qualms regarding a global economic slowdown has been cited for the failure to reach an agreement.

Although Citigroup’s underlying franchises of the consumer businesses have remained strong, revenues have continuously been under pressure for the past several quarters. Considering the protracted economic recovery, top line is expected to remain suppressed in the upcoming quarters.

With the thrust of new banking regulations, there will be pressure on fees and loan growth could remain feeble. Additionally, expenses are projected to increase, thus depressing its bottom-line figures. In addition, there are increasing concerns related to the European economy.

Conclusion

Going by estimate revision trends and the magnitude of revision, there is admittedly a downward pressure, though slight, on the shares over the near term. Citigroup shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. However, after reviewing the company’s business model and fundamentals, we have a long-term “Underperform” recommendation on the stock.

Among Citigroup’s peers, JPMorgan Chase & Company (JPM) came up with its fourth quarter earnings release last Friday. Earnings per share of 90 cents marginally missed the Zacks Consensus Estimate of 92 cents. Results were worse than $1.12 earned in the prior-year quarter.

With a global footprint, Citigroup’s results give us a cue about the economic indicators and their trends and hence needs to be analyzed thoroughly. Concurrent with Citigroup, WellsFargo & Company (WFC) is scheduled to report on January 17, while Goldman Sachs Group Inc. (GS) will report on January 18 and Bank of America Corporation (BAC) on January 19.