Citigroup (C) is scheduled to release its third quarter earnings report on Monday, October 15, and investors could be in for a positive or a negative surprise. That's because Citigroup is seen by some analysts as barely breaking even, because in mid-September, a filing revealed that the bank will take a one-time charge that could be as high as $2.9 billion on the value of its brokerage joint venture with Morgan Stanley (MS).
Likewise, and due to a downgrade from Moody's last summer, Citigroup has been forced to boost its capital by asset sales - but these efforts also mean it will be in better position to comply with strict new regulations coming from the EU and Basel III. Plus, it has strengthened the bank's capital and liquidity positions as the global economy remains uncertain.
The Numbers Wall Street Expects from Citigroup
According to the latest summary of analyst estimates from Yahoo Finance, the Wall Street consensus expects Citigroup to report a 17.70% drop in revenues to $17.14 billion along with an EPS of $0.98, verses $1.23 for the same period last year. The current EPS consensus estimate of $0.98 is up from the $0.96 consensus number three months ago.
For the year, the Wall Street consensus for Citigroup calls for a 5% fall in revenue to $74.42 billion while EPS is expected to rise from $3.63 to $4.09; and for next year, the Wall Street consensus expects a 4.90% revenue rise to $78.05 billion along with an EPS rise from $4.09 to $4.53. Nevertheless, investors should keep in mind that these revenue and EPS estimates for Citigroup could move in either direction going forward.
In addition, investors should also be aware that bank or investment banking stocks like Morgan Stanley will also report earnings on October 15th, Goldman Sachs (GS) will report earnings on Tuesday October 16th, U.S. Bancorp (USB) and Bank of America (BAC) will both report earnings on Wednesday October 17th, and HSBC (HBC) will report earnings on November 5th.
What Citigroup Reported Last Earnings Season
The last time Citigroup reported earnings, it reported a 9.5% year-over-year revenue decline to $18.64 billion and a 12% net income decline to $2.9 billion. However and if the impact of credit valuation adjustments (CVA) / Debt Valuation Adjustments (DVA) along with the loss from the Akbank sale are not included, Citigroup would have reported $18.8 Billion in revenue and a net income decline of just 1% to $3.1 billion.
Otherwise, it's worth noting that net income improved 14% in Citigroup's North American offices thanks to improved revenue within consumer banking and transaction services but Latin America and Asian profits fell sequentially and year-over-year on weakness at the retail banking level. Nevertheless, both regions saw growth in securities services (including investment banking).
On the investment banking front, investment banking revenues fell 21% year-over-year to $854 million but results for the securities unit (which also includes investment banking) were only down 4% to $2.8 billion thanks to a strong performance by the bank's fixed income desk with overall net income improving 16% to $1.3 billion.
What You Need to Listen For
For the upcoming earnings report, investors should be aware that Citigroup has been carrying a 49% stake in Morgan Stanley Smith Barney valued at $11.3 billion. However, Citigroup and Morgan Stanley have finally agreed to a $13.5 billion overall value in order to proceed with the latter's acquisition of the business unit. That means Citigroup will need to record a $4.7 billion pre-tax charge and a $2.9 billion after tax charge, but it's also worth remembering that the unit has been overvalued on the bank's books for some time. In addition, ratings group Fitch considers the deal to be a positive development for Morgan Stanley, and a more modest net positive for Citigroup.
It's also worth remembering that back in March, Citigroup was one of four banks out of a total of nineteen that failed Federal Reserve stress tests. The major reason for the failure was the fact that Citigroup gets much of its revenue from abroad, and the Fed viewed these types of loans as being more risky than domestic ones.
Since then, to ensure compliance with more stringent capital requirements, Citigroup has sold its $1.15 billion stake in Turkey's Akbank, along with its $1.9 billion stake in Indian Housing Development Finance Corp and its $668 million stake in Shanghai Pudong Development Bank. It sold $158 million worth of mortgages to Oaktree Capital Group LLC and Carrington Holding Co. Hence, the Morgan Stanley Smith Barney loss could end up being a wash when the final gains or losses are calculated. What's important is the fact that Citigroup is more flush with liquidity.
Moreover, for better or for worst, around two-thirds of Citigroup's revenue comes from outside of the USA, and its been focusing on growing lending in both the faster growing markets of Latin America and Asia as growth opportunities in the USA are more modest and the European economy is shrinking. On the other hand, trouble in developed markets appears to be spilling over into emerging markets and investors will need to keep an eye on how Citigroup performed last quarter in those markets to decide whether such a focus is actually a smart move strategically.
A Final Word About the Coming Citigroup Earnings Report
Citigroup's stock performance has not exactly kept pace with the share performance of its peers since the financial crisis when it almost went under. However, since late summer, Citigroup has rallied from the $26 level to the $34 level - almost to the level it was at before failing the stress tests. That means this coming earnings report is worth watching as the bank's share price could continue to rally upwards. On the other hand, there is also the chance that Citigroup's performance will be a disappointment - ending that two month rally for investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.