Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Citigroup (C) rose 5.5% in Monday's trading session. Citigroup is the third large US bank to report its third quarter results. On Friday, J.P. Morgan (JPM) and Wells Fargo (WFC) already opened their books.

Third Quarter Results

Citigroup reported adjusted third quarter revenues of $19.4, up 3% on the year. Including one-time factors, revenues fell 33% to $14.0 billion. Adjusted net revenues came in ahead of analysts expectations of $18.7 billion.

The bank reported a net profit of $468 million, down 88% compared to a profit of $3.77 billion last year. Earnings per share fell from $1.23 per diluted share to just $0.15 per share. Excluding one-time items, earnings per share rose 26% to $1.06 per diluted share. Adjusted earnings per share beat analysts consensus of $0.97 per share. Adjusted earnings came in at $3.27 billion.

Revenues and earnings were impacted by a pre-tax loss of $4.7 billion on its 49% stake in Morgan Stanley Smith Barney. Citigroup announced to sell a 14% stake in the business, and takes an impairment on the valuation of the remaining 35% stake. Revenues and earnings were also impacted by a negative credit valuation adjustment of $776 million, on the back of improved credit spreads.

CEO Vikram Pandit commented on the results, "Our core business showed momentum during the quarter as we increased lending and generated higher operating revenues. These earnings highlight the strength of Citicorp and its diversification by product and region. For the third straight quarter, we had positive operating leverage in each of our three core businesses. Citigroup in total also had positive operating leverage as Citi Holdings had a smaller impact on our overall results."

Segmental Information

Global Consumer Banking

Consumer banking revenues rose 2% to $10.2 billion as a result of volume growth, offset by ongoing spread compression. A rebound in the US mortgage business resulted in 6% revenue growth in the US to $5.4 billion. International revenues fell 2% to $4.8 billion as a result of a strong dollar. In constant currencies, international revenues rose 4%.

Net income rose by 7% to $2.2 billion on the back of revenue growth and lower credit losses. Expenses remained stable on the back of increased efficiency.

Securities and Banking

The securities and banking division reported a 29% decline in revenues to $4.8 billion. Excluding the impact of CVA, revenues rose 15% to $5.6 billion. Investment banking revenues rose 26% to $926 million, driven by a strong increase in debt and equity underwriting fees. Advisory revenues rose by a mere 5% to $194 million.

Fixed income revenues rose by 63% to $3.7 billion on the back of higher trading revenues in credit-related and securitized products, as well as a good performance in interest rates and currencies.

Transaction Services

Revenues for the transaction services division were down 2% to $2.7 billion. Revenues rose by 2% in Treasury and Trade Solutions to $2.0 billion. Securities and Fund Service revenues fell 13% to $667 million. Lower settlement volumes impacted the revenues of the Securities and Fund Service business, given the lower trading volumes.

Net income fell 4% to $843 million on the back of lower revenues and an increase in credit costs.

Valuation

Citigroup ended its third quarter with total assets of $1.93 trillion, unchanged from the third quarter last year. The bank boosted its capital position to $197.3 billion. The Tier-1 Common Ratio rose by 1% point to 12.7%. Under Basel-III conventions, the bank reported a Tier-1 Common Ratio of 8.6%.

For the first nine months of 2012, Citigroup reported revenues of $52.0 billion. Revenues were impacted by one-time losses on the stake in Morgan Stanley Smith Barney and DVA adjustments. The bank reported a net profit of $6.3 billion, or $2.06 per diluted share.

At this rate, the bank could report revenues of $66-$70 billion for 2012. The bank could earn $7-$9 billion, or $2.75 per diluted share at the midpoint of that range.

After Monday's jump, the market values Citigroup at $107 billion. This values the firm at 1.6 times annual revenues, and 13 times annual earnings. Based on Citigroup's tangible book value of $52.70, the market values the firm at 0.7 times its tangible book value.

Currently, Citigroup pays a symbolic quarterly dividend of $0.01 per share, for an annual dividend yield of 0.1%.

Investment Thesis

Year to date, shares of Citigroup have already risen 40%. Shares quickly advanced from $28 in January to $38 in March. Shares fell back to $25 during the summer months on the back of fears of slower economic growth, and the Eurozone crisis. Shares steadily recovered to $37 at the moment.

After a 10-for-1 stock split, shares have lost over 90% of their value over the past five years. Shareholders have seen extreme dilution of their holdings as a result of the financial crisis. The bank reported a massive net loss of $27.7 billion in 2008. Despite the fact that the company has been profitable since 2010, cumulative profits were not sufficient to make up for the astonishing loss.

Investors are looking into the future, and are waiting for Citigroup to pay dividends again. The quarterly dividend of a penny at the moment is negligible. Investors are hopeful that the bank managed to boost its Tier-1 Capital ratio under Basel III conventions to 8.6%. As such, many commentators are hopeful that the bank can increase its payout as soon as early in 2013.

A disappointing factor was the $4.7 billion pre-tax loss which the company took on its 49% stake in Morgan Stanley Smith Barney. It was widely anticipated that Citigroup was forced to take a loss on its stake in the business, and investors are happy that the bank is cleaning up, and looking towards the future.

The operational performance during the quarter was solid. The bank demonstrated good expense control, and benefited from improved trading conditions. The $3.7 billion revenues generated in the FICC division came in far ahead of analysts estimates of $3.0 billion. Furthermore, underwriting activity was solid and mortgage activity picked up in the US.

While Citigroup had a decent quarter, It remains my least favorite bank. The bank trades at just 0.7 times tangible book value, a clear sign that investors still don't trust the bank's accounting. If I would like to invest in banks, there are better alternatives. J.P. Morgan's investment banking division has proven its superiority during the financial crisis, while Wells Fargo has excellent traditional banking activities. Furthermore, both banks trade at appealing valuations and pay a decent dividend yield.

Source: Citigroup - Strong Operational Performance And Increased Capital Position Increases Chances For Dividends