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Will Citigroup (C) Q1 Earnings Benefit From Trading Rebound?


Citigroup C is scheduled to report first-quarter earnings, before the opening bell on Apr 13.

The expected rebound in Citigroup’s trading revenues will likely have a positive impact on first-quarter 2018 earnings given the significant dependence of its top line on this source. Further, benefits of higher rates, decent loan growth and relatively better performance of the other segments — mainly consumer banking — are anticipated to offset the negatives.

The quarter witnessed investors’ anxiety on uncertainty over the number of rate hikes on upbeat economic numbers and rising inflation, which pulled the benchmark 10-year Treasury bond yields down. This reversed the uptrend experienced by banks since last September. Moreover, Trump’s trade-tariff announcements on Chinese imports and a sharp sell-off in the tech sector affected the stock market rally in the quarter.

Therefore, after three straight quarters of muted activities, it appears that volatility is back in the markets, with extremity in February and March. This indicates higher trading activities and increased trading revenues.

Per John Gerspach, chief financial officer (CFO) of Citigroup, rising volatility at the very beginning of 2018 is expected to break the trading revenues’ slump. The bank expects first-quarter 2018 trading revenues to be up by a "low-to-mid" single digit on a year-over-year basis. Additionally, equities business is likely to record revenues of more than $1 billion in Q1, last recorded in 2015. However, management believes investment banking might go down as compared with the prior-year quarter.

Other Factors to Influence Q1 Results

Consumer Banking Revenues to Exhibit Growth: In consumer, management expects continued modest year-over-year revenue growth, and positive operating leverage in both North America and International Consumer in 2018. In total, sequential growth in pre-tax earnings in Global Consumer banking was recorded over the last three quarters and is anticipated to continue into the first quarter as well.

Acceleration in growth for overall Latin America Consumer revenues is expected in 2018 on rising card revenues.

Investment Banking Fees to Decline: The trend of earning solid advisory and underwriting fees for debt and equity issuance might reverse in the first quarter, as rising rates will limit corporates’ involvement in these activities. As debt origination fees typically account for about half of total investment banking fees, this could impact revenues of Citigroup.

However, a potential rise in fees from increasing M&As will likely help banks to partially offset the lost revenues. Also, strong equity issuances globally might have boosted IPOs and follow-on offerings. So, the related fees are projected to increase. Thus, Citigroup is also likely to report a decent quarter.

On the institutional side, continued year-over-year revenue growth in accrual businesses, including TTS, the Private Bank, Corporate Lending and Securities Services are anticipated.

Lesser scope of cost containment: As the majority of unnecessary expenses have already been cut by the bank, expense reduction might not be a major support. Nonetheless, some legal settlements during the quarter might impact Citigroup’s earnings to an extent.

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

Credit Costs Might Impact Negatively: Cost of credit is likely to rise, quarter on quarter, driven by the normalization of credit costs in ICG, offset by lower reserve builds in consumer. Net credit-card losses are likely to worsen. Citigroup expects NCL rate in the range of 300 basis points (bps) for 2018 and up to 325 bps over the medium term. In retail services, NCL rate is projected in the range of 500 bps for 2018 and up to 525 bps over the medium term.

Here is what our quantitative model predicts:

Citigroup does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

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

Zacks ESP: The Earnings ESP for Citigroup is -0.74%. This is because the Most Accurate estimate of $1.60 comes in below the Zacks Consensus Estimate of $1.62.

Zacks Rank: Citigroup carries a Zacks Rank #3, which increases the predictive power of ESP. But we also need to have a positive ESP to be confident of a positive earnings surprise.

The Zacks Consensus Estimate for earnings of $1.62 reflects a 19.12% rise on a year-over-year basis. Further, the Zacks Consensus Estimate for sales of $18.9 billion indicates 4.29% growth from the prior-year quarter.

Citigroup Inc. Price and EPS Surprise

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

Stocks That Warrant a Look

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

U.S. Bancorp USB is slated to release results on Apr 18. The company has an Earnings ESP of +0.56% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for M&T Bank MTB is +0.15% and it carries a Zacks Rank of 2. The company is scheduled to release results on Apr 16.

BB&T Corporation BBT has an Earnings ESP of +1.37% and carries a Zacks Rank of 3. It is slated to report results on Apr 19.

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