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As noted earlier, Citigroup (NYSE:C) is one of the best positioned U.S. money center banks. The bank happens to have an unmatched global footprint combined with a robust capital base. The bank is scheduled to post its performance for the third quarter of the current year on October 15, 2012. We believe the bank will benefit from the modest recovery in the U.S. capital markets, recovering U.S. housing markets, and its extensive cost-cutting program.

Second Quarter Highlights:

During the second quarter of the current year, the bank produced an earnings surprise of over 6%, despite the revenues for the same quarter remaining 1% behind analyst expectations. Despite the fact that the results were mostly above expectations, they were still below results for the prior period. The performance for the most recent quarter was largely driven by an improvement in revenues from mortgage-related activities, its renewed cost-cutting initiatives, and the bank's global expansion. Owing to weak capital markets, the bank's revenues from its Securities and Banking Division that relate most to equity and fixed income markets, plunged 39% and 41%, respectively.

Third Quarter Earnings Preview:

We believe the net interest income and net interest margin will remain compressed; however, the bank will benefit from an improvement in credit quality. We also expect fees from investment banking to improve sequentially on a modest recovery in U.S. capital market activities. Trading volumes during the third quarter remained flat; however, strong investment-grade debt issuance has the potential to boost Citigroup's revenues significantly. Low borrowing rates and contracting spreads over the policy rate have been a reason for such an improvement in debt issuance.

The net income for the second quarter of the current year surged by 8% compared to the same quarter of the previous year. Part of the surge was associated with a higher gain on the sale of mortgages, which forms part of the bank's non-interest income. During the second quarter, the bank had a 3.8% market share in total mortgage originations. This is the fifth largest; however, it is the lowest among the largest U.S. banks. Despite a low exposure to the U.S. housing sector, we believe the bank will still benefit from a rebound in the sector.

As noted earlier, the ability to control expenses will be one of the key drivers of profitability in the third quarter. The bank has rolled out an extensive cost-cutting program through which the bank seeks to cut costs of up to $3 billion by the end of the current year. The bank aims to meet its cost-cutting targets partly by laying off some of its workers. By implementing this cost-cutting program, the bank aims to self fund new investment. At the end of the second quarter, the bank had a Tier 1 capital ratio of 14.5%, while Wells Fargo had a Tier 1 capital ratio of 11.69%.

Analysts have a mean earnings estimate of $0.96 per share against a revenue estimate of $18.74 billion. Earnings estimates for the third quarter of the current year have been revised down by 2% in the past 30 days from $0.98 per share. A total of 17 analysts cover the stock.

Valuations:

The stock, when compared to most of its peers among U.S. money center banks, has attractive valuations. Currently, the stock trades at a 44% discount to its book value, as opposed to a premium of 39% in the case of Wells Fargo (NYSE:WFC), and a discount of 14% in the case of JPMorgan (NYSE:JPM).

Disclosure: The article has been written by Qineqt's Financials Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article, no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 3 Reasons To Buy Citigroup On Upcoming Earnings