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Will Weak Trading Revenues Impact Citigroup (C) Q3 Earnings?


Citigroup Inc. C is scheduled to report third-quarter 2017 results on Oct 12, before the opening bell. Its earnings and revenues are likely to improve year over year.

Citigroup delivered a positive earnings surprise of nearly 5% last quarter, driven by higher revenues. The company recorded solid banking revenues. However, expenses and costs of credit surged.

This earnings beat translated into improved price movement for the company. Over the last three months, shares of Citigroup gained 12.8% compared with 3.9% growth recorded by the industry.

Will the rally in stock price continue post third-quarter earnings release? It mostly depends on whether the firm is able to maintain its trend of beating earnings for the last four quarters.

Citigroup Inc. Price and EPS Surprise

Citigroup Inc. Price and EPS Surprise | Citigroup Inc. Quote

However, our quantitative model doesn’t call for an earnings beat this time around. 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 the odds of an earnings beat.

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 $1.30. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Citigroup’s Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings beat.

Factors to Influence Q3 Results

Trading Revenues to Descend: Trading business is expected to be down in the third quarter as indicated by Citigroup’s chief financial officer, John Gerspach, with his projection of about a 15% year-over-year decline in trading revenues. The bank projects weak trading revenues to continue on subdued volatility in markets.

Consumer Banking Revenues to Exhibit Growth: In consumer, in North America, revenue growth in the third quarter is expected in retail banking, excluding mortgage as well as modest organic growth in cards as full rate balances rise. In International consumer, continuous revenue growth is anticipated.

Expense to Trend Lower: Citigroup continues to execute on its investment plans in Mexico, modernizing branches and ATMs, enhancing digital capabilities, and upgrading core operating platforms. These infrastructure investments will likely improve operating efficiency and returns over time. Therefore, management anticipates maintaining positive operating leverage each year throughout the investment period, including current year.

Rise in Net Interest Income: In addition to higher interest rates, a moderate improvement in lending — particularly, in the areas of commercial and industrial as well as consumer — might perk up interest income.

Investment Banking Fees Might Escalate: Global investment banking fees have been on an upswing, with more than half the contribution from North America. The U.S. banks topped the league tables. Improving U.S. economy data, along with gaining market share, helped record higher investment banking fees. Moreover, as the interest rate hike is expected to continue, many U.S. companies have been raising fresh debt capital over recent quarters to avoid higher interest rates later. As debt origination fees account for about half of total investment banking fees, this has been leading to strong gains. Thus, Citigroup is also likely to report an impressive quarter.

In Institutional business, consistent year-over-year revenue growth is projected in accrual businesses, including PPS, security services, and the private bank. Market revenues are likely to reflect a normal modest seasonal decline sequentially and investment banking revenues are expected to be a level closer to the first quarter, perhaps a little lower, assuming a seasonal slowdown in the third-quarter underwriting activity.

Credit Costs to Rise: Cost of credit is likely to be higher, quarter on quarter, driven by the normalization of credit cost in Corp/Other as well as continued volume growth in consumer. Management estimates the full-year NCL rate to be around 285 basis points (bps) in branded cards and 470 bps in Retail Services for 2017, with some quarterly variability.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as according to our model they have the right combination of elements to post an earnings beat this quarter.

Synovus Financial Corp. SNV is slated to report third-quarter 2017 results on Oct 17. It has an Earnings ESP of +0.94% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP for T. Rowe Price Group, Inc. TROW is +4.22% and it carries a Zacks Rank #2. The company is scheduled to release third-quarter results on Oct 26.

BancFirst Corporation BANF has an Earnings ESP of +4.72% and a Zacks Rank #2. It is slated to report the September-quarter results on Oct 19.

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