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Muted Market Revenues to Hurt Citigroup’s (C) Q4 Earnings


Citigroup C is scheduled to kick-start the fourth-quarter earnings season, before the opening bell on Jan 14.

After impressive third-quarter 2018 results, driven by consumer banking business, volatility-driven fixed income market revenues are likely to be low on a year-over-year basis in the Dec-end quarter. However, Citigroup’s equity business is on an upswing.

"We had anticipated we would actually see year-over-year revenue growth in fixed income and equity markets," John Gerspach, chief financial officer (CFO) of Citigroup said. "But while we've maintained, I'd say, good engagement with the clients, we just haven't seen that transition into transaction activity at the rate at which we had hoped," Gerspach further noted.

Moreover, strained market-sensitive revenues are likely to affect the bank’s aim of accomplishing its efficiency targets, per Gerspach. "The tight timeframe of having the ability to react could put us just a little bit short," he said.

Additionally, Gerspach expects investment banking revenues to decline slightly year over year.

Other Factors to Influence Q4 Results

Consumer Banking Revenues to Exhibit Growth: In consumer, in North America, management expects to witness somewhat better growth in retail banking, excluding mortgage as well as retail services. In U.S. Branded Cards, total revenues will likely reflect the impact of the Hilton sale as well as partnership terms that went into effect earlier last year. However, the net interest revenue percentage should improve both sequentially and year over year, and continued year-over-year revenue growth is projected in Asia and Mexico.

For 2018, management continues to expect reported revenues in Branded Cards to be roughly flat and remains on track to achieve 2% underlying growth in total revenues. Therefore, the to-be-reported quarter results are anticipated to display this trend.

Investment Banking Fees to Disappoint: Investment banking performance is anticipated to disappoint in the fourth 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. In addition, lower debt origination fees are predicted, as rising rates will limit corporates’ involvement in these activities. Moreover, solid pipeline of M&As in the previous quarters lost momentum in the fourth quarter on volatile stock markets and higher borrowing costs.

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: Flattening and sometimes, even inversion of the yield curve during the fourth quarter, is expected to negatively impact banks’ net interest margin. However, per the Federal Reserve’s latest data, loans are predicted to improve on a sequential basis in the to-be-reported quarter. Particularly, weakness in revolving home equity loans is expected to be offset by significant growth in commercial and industrial (C&I) and consumer loans.

Management continues to expect the net interest revenue percentage to improve sequentially, during the fourth quarter.

Credit Costs to Remain Stable: Cost of credit is likely to remain stable quarter over quarter. Citigroup expects NCL rate 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 -1.54%.

Zacks Rank: Citigroup currently carries a Zacks Rank #4, which further decreases the predictive power of ESP.

The Zacks Consensus Estimate for earnings of $1.57 reflects a 22.7% rise on a year-over-year basis. Further, the Zacks Consensus Estimate for sales of $17.7 billion indicates 2.3% 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.

U.S. Bancorp USB is slated to release results on Jan 16. The company has an Earnings ESP of +0.15% 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 +1.03% and the stock carries a Zacks Rank of 3. The company is scheduled to release results on Jan 17.

BB&T Corporation BBT has an Earnings ESP of +0.64% and carries a Zacks Rank of 3. It is slated to report results on Jan 17.

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