Citi Lags Estimates, Shares Slide - Analyst Blog

Citigroup Inc.'s (C) fourth quarter 2010 earnings came in at 4 cents per share, lagging the Zacks Consensus Estimate of 8 cents. Full year 2010 earnings of 35 cents per share also fell short of the Zacks Consensus Estimate of 39 cents.

The lower-than-expected results were primarily due to a drop in revenues. Citi reported a decrease in both interest and non-interest revenues. The revenue figure includes a negative Credit Value Adjustment (CVA) of $1.1 billion that resulted from tightened spreads. Additionally, there was also an escalation in expenses. However, the decrease in loan loss provisions, which was pretty much expected, was the bright spot.

Citi reported net income of $1.3 billion compared with a net loss of $7.6 billion in the prior-year quarter. For full year 2010, net income came in at $10.6 billion, compared with a net loss of $1.6 billion in 2009.

For the fourth quarter of 2010, Citi reported revenues of $18.4 billion, down 11% from the prior quarter and also below the Zacks Consensus Estimate of $20.5 billion. The decrease primarily reflects the inclusion of negative CVA of $1.1 billion. Excluding CVA, revenues came in at $19.5 billion, down 6% from the prior quarter. The drop stemmed from lower Securities and Banking revenues and lower gains on sale of available for sale securities.

However, Citi's provisions for credit losses and for benefits and claims decreased 18% sequentially to $4.8 billion. This represents the lowest level since the second quarter of 2007. Net release of allowance for loan losses and unfunded lending commitments was $2.3 billion, compared with $2.0 billion in the prior quarter.

Behind the Headline Numbers

Net interest revenue for the quarter fell 3% from the prior quarter to $12.8 billion. Net interest margin dropped to 2.97% from 3.09% in the prior quarter as a result of the reserve building related to customer refunds in Japan Consumer Finance, lower investment yields reflecting the company's liquidity position and a decline in loan balances in Citi Holdings.

Non-interest revenue reported a massive 26% sequential decline to $5.6 billion, primarily due to reduced Securities and Banking revenues and the negative $1.1 billion of CVA.

Expenses were $12.5 billion, up 8% from the prior quarter. The increase stemmed from higher legal and related expenses, severance, higher volumes in certain businesses, investments in Citicorp businesses and the foreign exchange impact.

Credit Quality

Credit quality metrics improved in the quarter. Citi's non-accrual loans were $19.4 billion, down 13% sequentially and 39% year over year. Total allowance for loan losses was $40.7 billion at quarter end, or 6.31% of total loans, down from $43.7 billion, or 6.73%, in the prior quarter, partly due to asset sales and lower non-accrual loans.

Capital Ratios

Citi's capital strength improved slightly in the quarter as a result of the winding down of its non-core unit, Citi Holdings. Net losses at Citi Holdings were 11% less from the prior quarter. Citi's Tier 1 Capital ratio and Tier 1 Common ratio improved to 12.9% and 10.7%, compared with 12.5% and 10.3%, respectively. Book Value per share was $5.61, compared with $5.60 in the prior quarter. Tangible Book Value per share was $4.45, compared with $4.44 in the prior quarter.

At quarter end, Citi's assets were $1.91 trillion, down 3% sequentially. Deposits were $845 billion, down 1% sequentially. The decline was largely due to a fall in corporate deposits, partially offset by growth in consumer deposits.

Winding Down of Citi Holdings

Citi continued to wind down Citi Holdings in the quarter. As a matter of fact, Citi has already announced the sale of a number of its businesses within Citi Holdings. The company announced that it closed the sale of its subsidiary, The Student Loan Corp., on December 31, 2010, to Discover Financial and Sallie Mae.

Citi Holdings' assets were reduced by $128 billion in 2010 alone. Citi Holdings' total assets have decreased by more than half from their peak in 2008 to $359 billion and now stand at less than 20% of its balance sheet.

Competitor Performance

Unlike Citi, JPMorgan Chase & Co. (JPM) reported fourth quarter earnings of $1.12 per share, substantially ahead of the Zacks Consensus Estimate of $1.00. The better-than-expected fourth quarter earnings resulted from higher non-interest revenue and a slowdown in provision for credit losses. Following Citi, we have Goldman Sachs (GS) and Morgan Stanley (MS) reporting on January 19 and 20, respectively.

Our Take

Citi's earnings miss is definitely disappointing. The shares have slid 4% in pre-market trading. Though restructuring initiatives are encouraging, the revenue headwinds remain an overhang. The shrinking of its business through assets sale, the CARD Act and the recent financial reform law continue to remain challenges to revenue. We believe that solid earnings at Citi would remain elusive until its revenues see a decent growth.

Nevertheless, the company's core business, Citicorp, remains attractive and its global footprint is impressive. With the expectation for an improved economic environment in the upcoming quarters, we expect Citi to post stronger earnings.

Citi shares maintain a Zacks #3 Rank, which translates into a short-term Hold recommendation.

 
CITIGROUP INC (C): Free Stock Analysis Report
 
GOLDMAN SACHS (GS): Free Stock Analysis Report
 
JPMORGAN CHASE (JPM): Free Stock Analysis Report
 
MORGAN STANLEY (MS): Free Stock Analysis Report
 
Zacks Investment Research