Citigroup Inc. C is scheduled to report its third-quarter 2016 results on Friday, Oct 14, 2016.
Driven by a decline in operating expenses, Citigroup delivered a positive earnings surprise of nearly 15% in second-quarter 2016. However, earnings compared unfavorably with the year-ago figure. Though profitability was hit by a decline in overall revenues, the company recorded higher fixed income market revenues, driven by an improved trading environment and increase in corporate client activity in rates and currencies in the reported quarter.
Over the past three months, Citigroup has gained more than 15%.
CITIGROUP INC Price and EPS Surprise
Will the rally in stock price continue post third-quarter earnings release? It primarily depends on whether the firm is able to maintain its trend of beating earnings over the last four quarters.
However, our quantitative model doesn’t call for an earnings beat this time around. Here is why:
A stock needs to have the right combination of the two key criteria – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) – for increasing chances of an earnings beat. You can see the complete list of today’s Zacks #1 Rank stocks here.
Unfortunately, this is not the case here, as elaborated below.
Zacks ESP: The Earnings ESP for Citigroup is 0.00%. This is because both the Most Accurate Estimate and the Zacks Consensus Estimate stand at $1.15.
Zacks Rank: Citi’s Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of a positive earnings surprise
Factors to Influence Q3 Results
Improved Trading Revenues: Last month, at a conference in New York, Citigroup’s Chief Financial Officer, John Gerspach signaled improved trading income in third-quarter 2016. The company expects a mid-single digit rise in trading revenues in this quarter on a year-over-year basis, driven by strength in fixed income and currencies. However, trading income will be down on a sequential basis.
Regarding investment banking, Gerspach noted “it is a little lighter than we had estimated”. M&A revenues are expected to continue to recover on a sequential basis. However, the recovery momentum will not be significant enough to offset the comparison to a substantial strong second quarter in debt capital markets.
Overall, the company’s Institutional Clients Group is anticipated to exhibit favorable revenue trends, while the unit may record mark-to-market losses on its loan hedges in the third quarter due to spread tightening.
Consumer Banking Revenues May Exhibit Growth: In consumer banking, revenues in North America are expected to grow sequentially, driven by branded cards. This mostly reflects the impact of the Costco acquisition which should generate incremental revenues of roughly $200 million over the second quarter.
Notably, on Citigroup’s credit-card partnership, with Costco Wholesale Corporation, Gerspach had said it “continues to exceed our expectations for customer engagement and new account acquisitions, and revenue trends are above our expectations on an organic basis, driven by strong volumes on our existing U.S. card portfolios.”
Regarding the renewal of American Airlines partnership in Jul 2016, Citigroup expects reduced pre-tax earnings by about $50 million per quarter through the end of 2017. This is largely due to higher expenses, including the amortization of intangibles.
International consumer revenues are anticipated to grow modestly from the second quarter, resulting in year-over-year improvement in both Asia and Mexico as well as positive operating leverage in the regions.
Overall, the company continues to witness progress in “both North America cards and the international franchise”.
Expense to Trend Little Higher: On the cost front, Citigroup expects core expenses to be slightly higher from second-quarter 2016 in Citicorp. A rise is likely due to growth in cards and additional expenses resulting from the Costco conversion. However, expense savings from consistent repositioning actions are likely to help offset some pressure.
Costco Acquisition Likely to Ease Margin Pressure: As the Fed did not take any step in raising the interest rates further, the company is not likely to record improvement in its net interest margin (NIM) in the third quarter. However, management had noted that for second half of 2016, the company’s NIM is likely recover to around 290 bps or slightly higher, driven by a 3-basis-point improvement from Costco, as well as the normalization of average cash balances.
Benign Energy Headwinds: Given the rebound in oil prices that hit rock bottom in February, the provision to cover potential losses tied with energy portfolio should not be significant.
Stocks that Warrant a Look
Here are some stocks worth considering, as they have the right combination of elements to post an earnings beat this quarter.
Synovus Financial Corporation SNV has an Earnings ESP of +2.00% and carries a Zacks Rank #3. It is scheduled to report results on Oct 18.
BlackRock, Inc. BLK has an Earnings ESP of +0.79% and carries a Zacks Rank #2. The company is slated to release results on Oct 18.
Raymond James Financial, Inc. RJF has an Earnings ESP of +2.04% and carries a Zacks Rank #2. The company is slated to release results on Oct 26.
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