Citi Reiterated At Neutral - Analyst Blog

We have reiterated our Neutral rating for Citigroup Inc. (C) following the company’s earnings release. Our decision is based on the company’s fundamentals and the current economic scenario.

 

 

Citi reported second quarter earnings of 9 cents per share, ahead of the Zacks Consensus Estimate of 5 cents. Results were driven by lower loan loss provisions as the company experienced an improvement in credit quality, a trend that we expect to continue. However, market declines during the quarter led to a drop in revenues from its trading business.

 

Citi reported a net profit of $2.7 billion, compared with $4.4 billion in the prior quarter and $4.3 billion in the year-ago quarter.

 

Provisions of $6.7 billion for credit losses and for benefits and claims declined $2.0 billion or 23% sequentially. This represents the lowest level since the third quarter of 2007.

 

Total revenue was $22.1 billion, down from $25.4 billion in the prior quarter and $30.0 billion in the year-ago quarter. As expected, the company reported a drop in Securities and Banking and Special Asset Pool revenues. However, Consumer Banking revenues were good.

 

 

Following the earnings release, we observe an upward bias in estimate revisions by analysts covering the stock. However, the economic conditions and the financial reform law acts as a check on the enthusiastic response.

 

 

From the estimate revision trends, it becomes clear that a majority of the analysts anticipate a somewhat better 3Q10 and FY10 outlook for Citigroup earnings. Over the last 30 days, 7 analysts increased estimates for 3Q10 while 4 have pulled it down. For FY10, 11 analysts have raised estimates while only 4 have made downward revisions. Also, for FY11, 5 analysts have raised the estimates and 3 have moved in the opposite direction.

 

Clearly, an expected improvement in credit quality in line with the economic recovery has been one of the factors behind the upward revisions. Citi’s international business momentum is another positive attribute behind the upswing.

 

The downward revisions, though fewer, seem to arise out of the expected impact on its top line and bottom line from the CARD Act, financial reform regulations and the shrinking of its business through assets sale.

 

 

Taking a closer peek, we notice that over the last 30 days, estimates for 3Q10 increased a cent to 7 cents. For FY10, estimates have increased to 37 cents from 33 cents while estimates for FY11 moved a cent up to 46 cents. The magnitude of such revisions depicts a somewhat positive bias though a negative view cannot be completely ruled out.     

 

 

It becomes quite apparent from the estimate revision trends and their magnitude that there is lack of a strong and significant directional pressure on the shares over the near term, justifying its Zacks #3 Rank (Hold).

 

Considering the longer term scenario, we note that the financial reform regulation would restrict the proprietary trading of commercial banks. Additionally, dealing in derivatives would also be limited.

 

We expect these actions to have a significant impact on the profitability of a number of commercial banks. Besides Citi, other biggies are JPMorgan & Chase Co. (JPM), Goldman Sachs (GS), Bank of America (BAC), Wells Fargo (WFC) and Morgan Stanley (MS).

 

Though Citi’s restructuring efforts are welcome news, the sluggish rate of economic recovery and high level of unemployment would continue to somewhat restrict its earnings. We also believe that the shrinking of its business through assets sale, financial reform regulations and the CARD Act would prove earnings challenges. Nevertheless, the company’s core business, Citicorp, remains attractive. Its global footprint would help its earnings and make up for losses in other areas. However, the stake sale by the Treasury would provide short-term volatility to the stock price. Therefore, we have a long- term Neutral recommendation on the shares.