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Will Flattish Trading Dampen Citigroup’s (C) Q2 Earnings?


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

After impressive first-quarter 2018 results, driven by consumer banking business and higher equity markets, volatility-driven trading revenues are expected to have remained flat year over year in the second quarter. Though the April-June quarter witnessed uncertainty, mainly related to the U.S.-China trade war and some other geo-political tensions, it was insufficient to aid strong trading.

Per John Gerspach, chief financial officer (CFO) of Citigroup, "From a trading revenue point of view, at the end of the first quarter, what we've indicated was that we would expect a normal seasonal slowdown in the second quarter. I'd say that, that is exactly what we're seeing right now in the results. That should mean then that we'll basically have flattish trading revenues."

Notably, the equities business is expected to have remained strong in the quarter to be reported, whereas the fixed income business might have experienced a disappointing performance. Further, benefits of higher rates, decent loan growth and relatively better performance of the other segments — mainly consumer banking — are anticipated to have offset the negatives.

Other Factors to Influence Q2 Results

Consumer Banking Revenues to Exhibit Growth: In consumer, management expects continued revenue growth in U.S. retail banking, retail services, Mexico and Asia in 2018. In U.S.-branded cards, excluding Hilton, continued underlying revenue growth is anticipated as loan balances are maturing as estimated. However, this would be mostly offset by the impact of additional partnership terms that went into effect this January. Moreover, the Hilton portfolio sale will likely have a year-over-year impact.

Rising card revenues are expected to accelerate growth of overall Latin America Consumer revenues in 2018. Therefore, the to-be-reported quarter results are expected to reflect the trend.

Investment Banking Fees to Report Modest Results: Investment banking performance is anticipated to have been flat in the second quarter. A rise in equity issuances across the globe might have gotten a boost from IPOs and follow-on offerings. Therefore, equity underwriting fees are projected to improve slightly. Also, increasing M&As will likely support banks’ advisory fees to some extent. These are, however, expected to be more than offset by lower debt origination fees, as rising rates will limit corporates’ involvement in these activities. Thus, Citigroup is also likely to report a decent quarter.

Management expects market revenues to go along the overall operating environment. Nevertheless, a seasonal decline in trading revenues is predicted from the first quarter. Investment Banking revenues will likely have improved quarter over quarter, assuming favorable market conditions, and continued revenue growth in accrual businesses, TTS, Corporate Lending, Private Bank and Securities Services is anticipated on completion of targets across the global network.

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 have impacted 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 have perked up interest income.

Credit Costs Might Impact Negatively: Cost of credit is likely to have risen, quarter on quarter, driven by the normalization of credit costs in ICG. Net credit-card losses are likely to have worsened. 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 -1.7%. This is because the Most Accurate estimate of $1.53 comes in below the Zacks Consensus Estimate of $1.55.

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 $1.55 reflects a 22.1% rise on a year-over-year basis. Further, the Zacks Consensus Estimate for sales of $18.5 billion indicates 3.1% growth from the prior-year quarter.

Citigroup Inc. Price and EPS Surprise

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

Other 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.

Comerica CMA is slated to release results on Jul 17. The company has an Earnings ESP of +0.48% 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 +0.28% and the stock carries a Zacks Rank of 2. The company is scheduled to release results on Jul 18.

SunTrust Banks, Inc. STI has an Earnings ESP of +0.45% and carries a Zacks Rank of 3. It is slated to report results on Jul 20.

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