After it reported results that bested analysts' expectations in the prior quarter, Citigroup (C), reported a dismal third-quarter financials yesterday citing a ''challenging'' banking environment as being responsible for the missed expectations. Really, the Q3 earnings season for the U.S. big banks started with Wells Fargo & Company (WFC) a few days ago and it was followed by JPMorgan Chase (JPM) on the same day. While Wells Fargo reported a 13% jump in its profits for the Q3 20133 fiscal year, JPMorgan declared a rare Q3 loss citing high legal expenses it incurred while settling a series of high-profile legal issues slammed on the bank by regulatory agencies. JPMorgan grossed $23.12 billion as revenues during the quarter but a charge of $9.15 billion for legal costs resulted in a net loss of $380 million on the earnings of the highly capitalized bank.
Citigroup's Q3 2013 Results at a Glance
Citigroup's net income for the third quarter came in at $3.2 billion which is an increase of $468 million over its net income reported for the corresponding period in 2012. The holding bank reported $17.9 billion revenues which translate to 30% increase over the figure reported a year ago. However, the revenues reported fell short of the $18.7 billion estimates for the quarter. Also, revenues for the holding bank fell 13% compared to the figure posted in the second quarter results. The decrease was largely linked to a fall in the revenues of Citicorp due to a decline in the trading and investment concerns of the company.
Citigroup's earnings per share (EPS) for the quarter came in at $1.00 which is an increase of 15 cents when compared the Q32012 EPS. When adjusted for tax benefit and CVA/DVA (credit valuation adjustment/debt valuation adjustment), which is the derivative asset valuation on the basis of risk, earnings per share rose to $1.02 which is still below the analysts' estimate of $1.04 per share. However, one positive thing about this Q3 results is the decline in the company's operating costs. Operating expenses fell by 4% which is an equivalent of $11.7 billion year over year.
Despite the missed results, Michael Corbat, Citi's CEO, gleefully said; "We performed relatively well in this challenging, uneven macro environment…. While many of the factors which influence our revenues are not within our full control, we certainly can control our costs, and I am pleased with our expense discipline and improved efficiency year-to-date." But such statements won't appease investors as the stock of the company fell by 1.2% in the pre-market trading session.
Citigroup's Evaluation and Prospects
Citigroup has come a long way having survived the financial turbulence that made it take the $45 billion bailout funds in 2008 which has since been paid back. Though this disappointing Q3 result is capable of puncturing the confidence of investors in the holding bank further yet there are some strong points value investors should look at in Citigroup. Firstly, Citigroup has been restructuring its business by trimming costs, selling off some assets that are not core to its business and downsizing the workforce in the last few years. Secondly, the holding bank's capital position has improved tremendously since 2008 and the bank has received stress test clearance. Therefore, I believe that once the company continues to improve its balance sheet and its capital adequacy ratios, the negatives should be countered leading to more robust results in subsequent quarters. Thirdly, the credit quality of the holding bank continues to improve every quarter including this quarter when the total non-accrual assets declined to $9.8 billion this quarter. That represent 23% year over year. Also, the holding bank's allowance for loan losses declined from $25.9 billion the previous quarter to $20.6 billion this quarter and the company is now highly capitalized to the tune of about $2 trillion. All these positive considerations made analysts to continue to place a buy recommendation on Citigroup.
However, there is a caveat for investors who might be looking at buying Citigroup now but do not have a healthy risk appetite. Such investors may wait until the market has absorbed all the effects of the missed expectations on the Q3 results before making any purchases of Citigroup shares. In addition, Fed's recent decision to regulate the nation's banking sector further may yield new banking regulations that might put more pressure on fees and loan growth of the holding bank.