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Will Industry Seasonality Dampen Citigroup’s (C) Q3 Earnings?


Citigroup C is scheduled to report third-quarter earnings, before the opening bell on Oct 12.

After impressive second-quarter 2018 results, driven by consumer banking business, volatility-driven fixed income and equity trading revenues are likely to have remained flat to slightly higher on a year-over-year basis in the third quarter.

Per John Gerspach, chief financial officer (CFO) of Citigroup, the third quarter may have been partly negatively impacted by seasonal slowdown due to the summer months. Moreover, based on overall market developments and anticipated closure of some deals in the fourth quarter, investment banking revenues will likely be down year over year.

However, strong client engagement being experienced during the to-be-reported quarter indicates continued growth in accrual businesses across both consumer and institutional.

Other Factors to Influence Q3 Results

Consumer Banking Revenues to Exhibit Growth: In consumer, management expects continued revenue growth to be reflected by the U.S. retail banking and retail services, including a full-quarter contribution from L.L. Bean. U.S. Branded Cards growth continued to be impacted by the Hilton sale on a year-over-year basis in the quarter. However, the net interest revenue percentage is likely to have improved sequentially, beginning in the third quarter as loan mix continues to improve. Asia and Mexico will likely reflect continued year-over-year revenue growth. In addition, a gain of about $250 million on the sale of Asset Management business in Mexico is expected.

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

Investment Banking Fees to Disappoint: Investment banking performance is anticipated to disappoint in the third quarter on seasonal nature of the industry, as well as significant reduction in equity underwriting volumes globally. A fall in equity issuances across the globe might have resulted from reduced IPOs and follow-on offerings. Therefore, equity underwriting fees are projected to decline slightly. Moreover, lower debt origination fees are expected, as rising rates will limit corporates’ involvement in these activities. Yet, strong pipeline of M&As in the previous quarters is likely to offset slowdown of these activities in the to-be-reported quarter to some extent.

For the Sep-end quarter in Institutional Clients Group, Markets and Investment Banking revenues are projected to reflect the overall market environment. Nonetheless, seasonally slower activity on a sequential basis is expected. Continued year-over-year growth in accrual businesses is 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 have impacted Citigroup’s earnings to some extent.

Rise in Net Interest Income: In addition to benefits from rising interest rates, a moderate improvement in lending will likely energize interest income for banks. Per the Federal Reserve’s latest data, loans might have improved slightly in the to-be-reported quarter. Particularly, weakness in revolving home equity loans might have offset growth in commercial and industrial, and consumer loans, to some extent.

Management continues to expect the net interest revenue percentage to improve sequentially, beginning the third quarter.

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.

Earnings ESP: The Earnings ESP for Citigroup is -0.04%.

Zacks Rank: Citigroup currently 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 $1.67 reflects a 17.6% rise on a year-over-year basis. Further, the Zacks Consensus Estimate for sales of $18.5 billion indicates 1.6% growth from the prior-year quarter.

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 Oct 16. The company has an Earnings ESP of +0.49% 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 +0.41% and the stock carries a Zacks Rank of 3. The company is scheduled to release results on Oct 17.

State Street Corporation STT has an Earnings ESP of +0.25% and carries a Zacks Rank of 3. It is slated to report results on Oct 19.

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