Earnings Scorecard: Citigroup

Citigroup Inc. (C) reported first quarter 2011 earnings of 10 cents per share on April 18 that was a penny ahead of the Zacks Consensus Estimate.The slightly better-than-expected result was driven by a fall in provisions for credit losses as well as benefits and claims.

Following the earnings release, the market had sufficient time to absorb the news. Below, we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Citi stock’s Zacks ratings for the short and long terms.

Earnings Report Review

Citi’s first quarter 2011 earnings of 10 cents per share improved from the prior quarter earnings of 4 cents but was lower than 14 cents earned in the year-ago quarter. Net income of $3.0 billion more than doubled from $1.3 billion in the prior quarter but came in below the prior-year quarter’s income of $4.4 billion.

Top line remained pressured at Citi 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 with a fall in loan balances in the Local Consumer Lending division as well as lower revenues from the Securities and Banking division. The uptick in expenses also seemed discouraging with an increase in legal and related costs.

(Our full coverage on the earnings is available at: Citi Scrapes Through, Misses Revs)

Agreement of Estimate Revisions

While an earnings beat is a welcome, the magnitude of the beat is equally important. Citi’s earnings, which could only surpass the Zacks Consensus Estimate by a cent, could not create enough excitement among the analysts.

In fact, top line concerns remain a drag on the company’s earnings outlook. Yet an improvement in credit quality as well as reserve releases and emerging market presence are on the upside, though these positives could not sufficiently mitigate top-line issues. This raises for caution over the intermediate term.

Of the 21 analysts covering the stock, 6 have lowered their estimates for the upcoming quarter while only one has moved in the opposite direction. For full-year 2011, nine analysts have revised in the southward direction while only three have moved north. Clearly, a dull outlook for 2011 is predicted by the analysts.

Though substantial reserve release and a strong presence in the emerging markets remain impressive, top-line stress could weigh on the stock. Lower revenue assumptions due to weak trading and lending business as well as pressure on interest margin bother the analysts. A fall in revenue from local consumer lending in Citi Holdings is projected as a result of lower lending balances and continued asset sales.

However, the analysts seem to believe that the company would experience some improvement in 2012 and therefore only 5 analysts have reduced their estimates while 3 moved up.

Magnitude of Estimate Revisions

Looking at the magnitude of estimate revisions we find that the full-year 2011 estimate have moved down by a penny to 42 cents. However, the full-year 2012 estimate has moved up to 54 cents from 53 cents in the last 30 days.

While the top-line headwind continues at Citi, a return of excess capital to shareholders is anticipated in 2012. Moreover, the continuation of the run down of its legacy problem assets would free up capital for the company and help invest in its core business. Lesser exposure to private-label mortgage put-back risk and an improvement in the overall economy seems to be the driving factor for 2012 expectations.

Citi in Neutral Lane

Following the earnings release, the downward trend in estimates revisions is a clear reflection of the pessimistic view on Citi shares. However, the magnitude of estimate revisions suggest that though the stock may remain pressured, an entry point may be missing right now and there is a lack of significant upside potential, retaining the stock in the investors’ kitty may pay off in the days ahead.

Additionally, we note that 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 Citi.

Though many of the Wall Street companies such as JPMorgan Chase & Company (JPM), Wells Fargo & Co.(WFC) and U.S. Bancorp (USB) have increased their dividend substantially in the recent past, the same at Citi still remains elusive, putting the company in the backyard. A meaningful return of excess capital to shareholders is likely a 2012 event.

Nevertheless, Citi’s core business, Citicorp, remains alluring and its unique franchise allows clients to access high growth foreign markets. 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, an intent we find encouraging.

Citi shares therefore maintain a Zacks #3 Rank, which translates to a short-term Hold recommendation. Our long-term recommendation for the stock is also reiterated at Neutral.

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