Citigroup: Q4 Results Promising

Citigroup (C) reported 4Q EPS of $1.03. One time items included charges for Japan Consumer Finance down $0.10 or $489 mil and gain from the sale of Avantel of $0.03 or $334 mil. Proforma EPS of $1.10 was better than Street estimates of $1.05, due to $0.04 or approximately $200 mil of better than expected private equity gains.

The Street is encouraged by Citi's 15% revenue growth. Credit quality remains solid, although the auto loan and mortgage business showed some weakness. C further expects credit headwinds in '07 from the international consumer. Also, there will be significant cost-cutting.

Chuck Prince discussed the urgency of producing better growth dynamics in a business which represents as much of the company as US Consumer does. For now, though, just the fact that expense growth was managed in line with revenue was helpful in offsetting less favorable trends elsewhere.

In an industry dominated by the Big Three (Bank of America (BAC). JPMorgan (JPM) and Citigroup), business mix continues to be the answer to sustainable operating profits. Citi needs to make its business model more flexible to take advantage of accelerating economic activity as well as increased equity and debt underwriting, M&A and brokerage business. Continued globalization and expansion into China will also offer opportunities for growth.

Smith Barney results were strong for the 2nd Q, with earnings growth of 4% QoQ to $305m. Solid top-line growth was attributed to a continued shift toward fee-based products, with 6.5% growth in client fee-based AUM.

US card net income was $1 billion, down 8% from the 3Q. Credit card loans were up only 2% from a year ago and The Street is seeing some normalization of credit as the credit card loss ratio was 4.35% 4Q vs 4.26% 3Q. Net income from US retail banking was $463 million 4Q vs. $481 million 3Q because of spread compression and higher expenses.

The International Consumer business is the general focus of the Citi's growth expectations, but was also the main point of weakness this quarter with net revenue rising just 2% YoY and expenses and credit costs up 24% and 34%, respectively.

Beyond the Japanese Consumer Finance business (the net cost of the Japan CF troubles in the Q was $415mn and caused the net interest margin was down 2.45% in Q4 vs 2.63% in 3Q), International Consumer Finance had solid revenue growth of 27%, as the effect of considerable expansion in distribution over the past few years continued, on loan growth of 23%; but the expansion spending continued, such that net actually dropped.

Citi repurchased 1 billion shares (vs. 2 billion in Q3) during the quarter. Furthermore Citi also announced a 10% dividend increased to $0.55, which makes its yield 4% with a 50% payout ratio. That being said, investors need to keep in mind that the yield curve continues to invert and achieving revenue growth will continue to be. Also, in this Q, like past ones, expenses were up 17% QoQ.

C 1-yr chart