Recent Citigroup Rally Is Not Reason To Buy

Oct.20.12 | About: Citigroup Inc. (C)

Citigroup Inc. (NYSE:C) is a diversified financial services holding company, providing a range of financial products and services to consumers, corporations, governments, and institutions worldwide. Citigroup, headquartered in New York City, New York, has a market cap of $112.7 billion. Its stock price is at around $38.

On October 15, Citigroup reported its third quarter earnings. Citigroup reported revenues of $13.9 billion, a 49% decrease from the third quarter of 2011. Net income was $468 million, which was $3.3 million less than the third quarter of 2011. Earnings per share were $0.16, a decrease of $1.07 from the third quarter of 2011.

The bank's earnings were down as it wrote off the remaining interest of its investment in the Morgan Stanley Smith Barney brokerage unit. The write off totaled about $2.9 billion. Excluding the one-time accounting charge, the bank reported a profit of $3.27 billion or $1.06 per share.

The good news to be taken from Citigroup's earnings is that after the write-off, the bank's earnings beat year-over-year third quarter earnings by $700 million or $0.22 per share. The results also beat analyst expectations, which called for earnings of $0.96 per share. The increase in earnings was highlighted by the 67% increase in profit from the bank's investment banking unit.

Citigroup's CFO John Gerspach said, "We continue to gain market share in investment banking," due to "improved market share in every investment product." Equity trading in Citigroup's investment bank soared 76% from the same period a year earlier.

Citigroup was also successful at raising its deposits. Citigroup's YTD Cumulative Deposit growth was $48.4B (5.65%) versus JPMorgan Chase's (NYSE:JPM) $12B decline (-1.06%). Citigroup was also successful at increasing its net interest margins, which were up 5 bps to 2.86% versus expectations of -11 bps.

The bad news to be taken from the third quarter earnings report is that year-over-year revenues were down by $7 billion from $20.9 billion to $13.9 billion in the third quarter of 2012. This was a 49% reduction in revenues, and the third time that revenues were down in the last four quarters. The primary reason for the bank's reduced revenues paring of its $100 billion consumer home mortgage portfolio. This seems reasonable as the bank was hurt badly during the 2008 subprime mortgage crisis.

The bank's reserve for loan losses is down by 5.1% to $25.9 billion. The bank's third quarter loan loss provision was down 5.1% to $2.51 billion from $3.05 billion in the third quarter of 2011. It should be noted that competitors such as JPMorgan, Wells Fargo (NYSE:WFC), and Bank of America (NYSE:BAC) have increased their mortgage loan business. Record low interest rates have driven up the U.S. housing market and helped to increase loan originations.

Recent News on Citigroup

On October 17, Citigroup declared $0.01/share quarterly dividend, in line with previous forward yield 0.10%. For shareholders of record, November 05 will be payable November 21. The ex-dividend date is November 01.

On October 17, Citigroup got a multi-notch upgrade to Buy from longtime management critic Mike Mayo, who cites a "more proactive board." He also raises his price target from $31 to $43.

On October 16, the chance of sales of individual units of Citigroup likely rose with Pandit's departure, says Sterne Agee's Todd Hagerman.

On October 16, it was also reported that Citigroup looks to have missed the housing rebound, and it may be the reason Pandit was forced out, writes Stephen Gandel. U.S. mortgage revenue growth of just 6% in Q3 stands against faster numbers at Wells Fargo and JPMorgan.

On October 16, Vikram Pandit tells the WSJ "It was my decision," as he and the board - anonymously or otherwise - rush to get their version out on the issues surrounding his abrupt resignation from Citigroup. The board has reportedly had ousting Pandit on its agenda for months, as they were upset by setbacks, including the rejection of the bank's dividend plan and the $2.9B writedown on Smith Barney.

On October 15, it was announced that Vikram Pandit steps down as CEO of Citigroup.

On October 15, the net interest margin actually increased 5 bps to 2.86% vs. expectations of 11 bps.

Friday's reports from JPMorgan and Wells Fargo both showed slimming margins, particularly at the latter, where they dropped 25 bps.

Conclusion

Citigroup's recent firing of its longtime CEO Vikram Pandit was shocking. After all, the company seemed to be rebounding from the 2008 financial crisis and had been posting quarterly profits. Also, the stock was up by about 16% over the last 52 weeks.

However, when Mr. Pandit announced his resignation (firing), the stock price took off. Over the last three days, the stock price is up by 10.6%. There are other factors that could have influenced the stock rally (such as the earnings beating analyst estimates, or analyst upgrades), but I think that Mr. Pandit's leaving was the primary reason for the rally.

If Mr. Pandit's leaving is the primary reason for the rally, then I think the rally will be short-lived. After all, Mr. Pandit's replacement, Michael Corbat is a 29-year Citigroup insider. It seems unlikely that he will really change the culture. In addition, Citigroup is suffering from declining revenues, which is a problem that will probably get worse because it is on the wrong side of the rebound in the U. S. housing market. I would not recommend buying Citigroup's stock at this time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.