Earnings Preview: Citigroup

Citigroup Inc. (C) is scheduled to report its first quarter 2011 results before the market opens on Monday, April 18. The Zacks Consensus Estimate for the quarter is 9 cents per share, representing a decline of about 34% over the year-ago quarter. For FY2011 and FY2012, the estimate currently stands at 42 cents and 53 cents per share, respectively.

Going by the trends, Citi’s results could benefit from an improvement in credit metrics and reserve releases. JPMorgan Chase & Company (JPM) reported results substantially ahead of the Zacks Consensus Estimate on Wednesday, on the back of a significant slowdown in provision for credit losses.

However, the revenue headwind remains a concern. The shrinking of Citi’s business through assets sale, the CARD Act and the financial reform law continue to challenge revenue.

Yet, its international business is gaining momentum and should support earnings. Additionally, economic recovery, though at a tardy pace, is encouraging and lending activity is picking up.

Previous Quarter Performance

Citi’s fourth quarter 2010 earnings came in at 4 cents per share, lagging the Zacks Consensus Estimate of 8 cents. Full year 2010 earnings of 35 cents per share also fell short of the Zacks Consensus Estimate of 39 cents.

The lower-than-expected results were primarily due to a drop in revenues. Citi reported declines in both interest and non-interest revenues. The revenue figure included a negative Credit Value Adjustment (CVA) of $1.1 billion that resulted from tightened spreads. Additionally, there was also an escalation in expenses. However, the decrease in loan loss provisions, which was pretty much expected, was the bright spot.

The company reported net income of $1.3 billion compared with net loss of $7.6 billion in the prior-year quarter. For full year 2010, net income came in at $10.6 billion, compared with net loss of $1.6 billion in 2009.

Agreement of Estimate Revisions

Looking at the estimate revision trends, it becomes clear that the majority of analysts are in agreement with the lower first quarter earnings outlook for Citi. Of the 17 analysts covering the stock, 2 have lowered their estimates for the first quarter, while none moved in the opposite direction over the last 7 days.

For both FY2011 and FY2012, there was 1 downward estimate revision, while none moved north over the last 7 days.

Magnitude of Estimate Revisions

The Zacks Consensus Estimates for the first quarter moved down a cent to 9 cents per share while for FY2011 and FY2012 estimates remained unchanged over the last 7 days. This explains why investors should be neutral on Citi in the short run. The lack of any significant revision by the analysts suggests that, while retaining the share would be beneficial for investors, there may not be an entry point at this time.

Earnings Surprise

Citi’s performance has been overall stable in the trailing four quarters with respect to earnings surprises with a negative surprise only in the last quarter. The average earnings surprise was a positive 30%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Restructuring Continues at Citi

Citi is going for a public offering of 12 million shares of Primerica Inc.’s (PRI), an insurance company that Citi had spun off in the first half of 2010.This stake sale will fetch Citi approximately $273 million.

It has been priced at $22.75 per share for the public. Immediately following completion of this offering, Citi will own between approximately 20.7% and 23.1% of Primerica’s outstanding common stock, depending on whether or the extent to which underwriters exercise their over-allotment option. We believe that this planned sale out of Primeric’s common stock is a strategic fit for Citi.

Hurt by billions in losses and write-downs of problem loans and toxic assets, Citi had to ultimately resort to a bailout. It received $45 billion bailout during that period and went for a restructuring plan across its business.

It has termed CitiCorp as its core operating unit and Citi Holdings as its non-core unit and intends to dispose of (through sale and divestitures) the non core operations. Primerica happened to be a part of this non-core unit.

As a matter of fact, the company has already announced the sale of a number of its businesses within Citi Holdings. At the end of the fourth quarter 2010, Citi Holdings’ total assets have decreased by more than half from their peak in 2008 to $359 billion and stood at less than 20% of its balance sheet.

Holding Citi is Worthwhile

Citigroup 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. Going forward, the company looks forward to capitalizing on the enormous strength of this franchise, once the ongoing deleveraging is accomplished.

In March, Citi 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, 2011, 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 Citi.


The estimate revision trends and magnitude of revision do not reflect any clear directional pressure on the shares over the near term.

Citi 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 Citi, 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 Citi include Goldman Sachs Group Inc. (GS) on April 19, Wells Fargo & Company (WFC) on April 20 and Morgan Stanley (MS) on April 21.

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