Citigroup Inc. (C) is scheduled to report its second quarter 2010 results before the market opens on Friday, July 16. The Zacks Consensus Estimate for the second quarter is 5 cents per share.

Ahead of the earnings release, analysts have made downward estimate revisions. Though Citigroup’s restructuring efforts are appreciable, the trading revenues of the company seem to be the current concern. The volatility and market declines are expected to have a dampening impact on Citigroup’s trading revenues for the quarter.

There also remain concerns related to the impact of the upcoming financial reform bill. Investors would also be eager to know the loan loss provisions at Citigroup as, being one of the world’s largest banks, its results give an insight into the broader economy.

Additionally, in an effort to wind down its stake in Citigroup, the U.S. Treasury recently announced the sale of 1.1 billion shares in the company. The sale also marks the completion of its second trading plan to shed Citigroup shares, where Morgan Stanley (MS) was the sales agent. Following the sale, the Treasury has around 5.1 billion shares or a 17.5% stake in Citigroup still left. The Treasury plans to wrap up the sale by this year end.

Previous Quarter Performance

Citigroup reported first quarter 2010 earnings from continuing operations of 14 cents per share, well ahead of the Zacks Consensus Estimate of a break-even quarter. Strong trading revenues coupled with an improvement in loan loss provisions have attributed to this result. The company achieved a reduction in expenses as well.

Citigroup reported a net profit of $4.4 billion compared with a loss of $7.8 billion in the prior quarter and a loss of $696 million a year earlier. Total revenues were $25.4 billion, up 4% year over year and significantly above the $5.4 billion reported in the prior quarter.

Agreement of Analysts

From the estimate revision trends, it becomes clear that a majority of the analysts are in agreement with the lower 2Q10 and FY10 outlook for Citigroup earnings. The following table shows that over the last 30 days, 7 analysts lowered estimates for 2Q10 while only 1 analyst has revised upward. For FY10, 6 analysts have lowered estimates while only 2 analysts have made upward revisions.

Also, for FY11, 3 analysts have lowered the estimates and none have moved in the opposite direction.
Clearly, the concern related to the company’s trading business has played a negative catalyst. Additionally, concerns over the credit quality in the backdrop of a slowly recovering economy have tempered the estimate revision movements. The higher number of downward estimate revisions indicate a likelihood of downward pressure on the performance of the stock in the near term.

Magnitude of Estimate Revisions

Estimates for 2Q10 fell a cent to 5 cents over the last 30 days. For FY10, estimates remain unchanged at 33 cents while estimates for FY11 moved a cent down to 45 cents.

Our Take

Though we notice that a number of analysts have made downward revisions, the magnitude of such downward revisions fail to provide any significant directional pressure on the shares over the near term, justifying its Zacks #3 Rank (Hold).

While Citigroup’s results in the first quarter significantly benefited from strong trading revenues, we expect the market declines to negatively impact the revenues from its trading business.

Though Citigroup’s restructuring efforts are welcome, the sluggish rate of economic recovery and the high level of unemployment are expected to be a drag on its earnings in the upcoming quarters. Though we expect an improvement in the credit quality and loan loss provisions, we still expect high levels of delinquencies and nonperforming assets in the upcoming quarters, reflecting the protracted economic recovery.

In its core business, Citicorp remains attractive. However, the obscurity around the valuation of Citi Holdings will be a headwind in the near term. Therefore, we have a long-term Neutral recommendation on the shares.
Read the full analyst report on “C”
Read the full analyst report on “MS”
Zacks Investment Research