Citigroup Inc. (C) reported first quarter 2011 earnings of 10 cents per share, a penny ahead of the Zacks Consensus Estimate. The result also improved from the prior quarter earnings of 4 cents but fell short 14 cents earned in the year-ago quarter.
The slightly better-than-expected result was driven by a fall in provisions for credit losses as well as benefits and claims. Yet the top-line headwind at Citigroup continued, with revenue dropping from the prior-year period and falling behind the Zacks Consensus Estimate. Expenses also increased year over year.
Citigroup reported net income of $3.0 billion, which more than doubled from $1.3 billion in the prior quarter. However, net income came in below the prior-year quarter’s income of $4.4 billion.
Revenues came in at $19.7 billion, down 22% year over year. The revenue figure also fell short of the Zacks Consensus Estimate of $20.8 billion. The year-over-year decrease resulted from a decline in both interest and non-interest revenues.
However, total provisions for credit losses and for benefits and claims at Citigroup plunged 63% year over year to $3.2 billion. Net release of allowance for loan losses and unfunded lending commitments was $3.3 billion, compared to $53 million in the prior-year quarter.
Behind the Headline Numbers
Citigroup’s net interest revenues were $12.2 billion, down 16% from the prior-year period. The decrease stemmed from a fall in loan balances in the Local Consumer Lending division. Moreover, a $245 million pre-tax charge to increase reserves related to customer refunds in Japan Consumer Finance were also included in the net interest revenue figure.
Net interest margin fell 6 basis points sequentially and 43 basis points year over year to 2.91% as loan balances and yields declined and for a higher reserve build related to Japan Consumer Finance.
Citigroup’s non-interest revenues fell 31% year over year to $7.5 billion, primarily due to lower Securities and Banking division’s revenues, negative Credit Value Adjustment (CVA), as well as for net charge resulting from the asset transfer in Special Asset Pool.
Expenses at Citigroup ascended 7% year over year to $12.3 billion. The uptick was due to higher legal and related costs, foreign exchange impact and continued investment spending as well as increased business volumes. This increase was partially offset by a decline in expenses at Citi Holdings as well as productivity savings across the firm.
Credit Quality
Citigroup’s credit quality metrics improved in the quarter. Non-accrual loans of $14.8 billion decreased 48% from the prior year quarter, primarily due to the recapitalization of Maltby Acquisitions Limited, the holding company that controls EMI Group Ltd., during the first quarter 2011.
Citigroup’s total allowance for loan losses was $36.6 billion at quarter-end, or 5.79% of total loans, down from $48.7 billion, or 6.80%, in the prior year period. Asset sales, lower non-accrual loans, and overall improvement in credit quality in Citigroup’s loan portfolio drove the improvement.
Capital Ratios
Citigroup continued to improve its capital strength, with Tier 1 Capital ratio and Tier 1 Common ratio improving to 13.3% and 11.3% from 12.9% and 10.7%, respectively. Book Value per share moved up to $5.85 from $5.61 in the prior quarter and $5.28 in the year ago quarter. Tangible Book Value per share increased to $4.69 from $4.45 in the prior quarter and $4.09 in the year ago quarter.
At quarter end, Citigroup’s end of period assets were $1.95 trillion, down 3% year over year while deposits were $866 billion, up 5% year over year, driven by a 28% increase in non-interest bearing deposits.
Winding Down of Citi Holdings
Citi Holdings’ assets declined 33% year over year to $337 billion at the end of first quarter 2011. Its assets stand at approximately 17% of total Citigroup assets at the end of the first quarter 2011.
Competitor’s Performance
Similar to Citigroup, JPMorgan Chase & Company (JPM) reported results substantially ahead of the Zacks Consensus Estimate last Wednesday, on the back of a significant slowdown in provision for credit losses. While Bank of America Corporation’s (BAC) results disappointed us, the company benefited from credit quality improvement. We believe this trend of lower credit costs will continue in the first quarter results.
Holding Citigroup is Worthwhile
Citigroup’s international business is gaining momentum and should support earnings. The company has a global footprint with operations in over 160 countries and jurisdictions, helping corporate clients and consumers with their local and global needs. The company’s significant presence in the emerging markets enables it to offer clients access, exposure and insight into the highest growth areas of the world.
Citigroup’s core business, Citicorp, remains very attractive and its unique franchise allows clients to access high growth foreign markets. The segment has reported consistent revenues, despite the financial turmoil in the past two years.
Citicorp generated 62% of its revenues and 72% of its net income from its international operations in the first quarter of 2011. Going forward, the company looks forward to capitalizing on the enormous strength of this franchise, once the ongoing deleveraging is accomplished.
However, the revenue headwind remains a concern. The shrinking of Citigroup’s business through assets sale, the CARD Act and the financial reform law continue to challenge revenue.
In March, Citigroup announced a 1-for-10 reverse stock split as well as a 1 cent quarterly dividend reinstatement in the second quarter of 2011. The reverse split, which will be effective after the close of trading on May 6, will reduce the share count to 2.9 billion from 29.1 billion. A ten-fold increase in the stock price with the reverse split may attract investors focus again on Citigroup.
Citigroup shares are maintaining a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the company’s business model and fundamentals, we have a long-term Neutral recommendation on the stock.
With a global footprint like that of Citigroup, its results give us a cue about the economic indicators and their trends and hence its results would be analyzed thoroughly. The other major Wall Street biggies reporting after Citigroup include Goldman Sachs Group Inc. (GS) on April 19, Wells Fargo & Company (WFC) on April 20 and Morgan Stanley (MS) on April 21.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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