We have reaffirmed our recommendation on Citigroup Inc. (C) following a detailed analysis of its second quarter 2011 earnings results in light of the current economic environment.
Citigroup’s second quarter earnings per share of $1.09 outpaced the Zacks Consensus Estimate of 96 cents. Results also improved from the prior quarter’s earnings of 99 cents and the year-ago figure of 90 cents.
Better-than-expected results were driven by a fall in provisions for credit losses. While the top-line headwind at Citigroup continued with revenue dropping from the prior-year period, the figure managed to exceed the Zacks Consensus Estimate. Expenses also increased year over year.
A favorable result of the company is encouraging; yet, we find that it still has a long way to go in improving its top line. Shrinking revenue base and regulatory issues remain dampeners. Moreover, the tardy economic recovery and escalating expenses are somewhat limiting its earnings growth.
Regulatory issues also remain an overhang on the company. While a number of Wall Street companies have increased their dividends and announced share buybacks, any meaningful return of capital to shareholders still remains elusive at Citigroup, and this puts the company in the backyard.
Besides, with the lack of a growth momentum, Citigroup also needs to go in for capital built-up for regulatory requirements. Hence, meaningful return of capital to shareholders is not expected until 2012.
Yet, Citigroup’s global footprint is encouraging. It has operations in over 160 countries and jurisdictions, and helps corporate clients and consumers with their local and global needs.
The core business at Citicorp remains attractive, and its unique franchise allows clients to access high growth foreign markets. Its long-term strategy to shrink non-core assets and increase its fee-based business mix would also improve the valuation over time.The company remains on track for the run-down of Citi Holdings, its legacy problem assets portfolio. This run-off ultimately reduces the company’s risk profile and frees up capital that the company continues to invest in its core businesses. In the long term, we believe investments in core franchise will help garner a solid market share and support its earnings.
Going forward, Citigroup is also expected to benefit from an overall improvement in the credit quality, given the current economic environment as well as a reduction in overall problem assets, particularly at Citi Holdings. It also has comparatively less exposure to mortgage-related problems than many of its peers.
Therefore, the risk and reward profile seems somewhat balanced for Citigroup and we reiterate our Neutral recommendation.
Citigroup shares are maintaining a Zacks #3 Rank, which translates into a short-term Hold recommendation. Its closest peers, JPMorgan Chase & Company (JPM) and Wells Fargo & Company (WFC) also retain a Zacks #3 Rank.
