We have downgraded our recommendation on Citigroup Inc. (C) to Neutral from Outperform, following its fourth quarter earnings release. The downgrade follows our evaluation of the company fundamentals.
Fourth Quarter and Full-Year 2010 Highlights
Citigroup’s fourth quarter 2010 earnings came in at 4 cents per share. Earnings fell short of the Zacks Consensus Estimate by 4 cents as the company reported a drop in revenues. Full-year 2010 earnings of 35 cents per share also missed the Zacks Consensus Estimate of 39 cents.
The lower-than-expected results at Citi were primarily due to a drop in both interest and non-interest revenues. The decline stemmed from lower Securities and Banking revenues and lesser gains on sale of available for sale securities.
The revenue figure includes a negative Credit Value Adjustment 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.
Citi reported net income of $1.3 billion in the fourth quarter compared with a 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 a net loss of $1.6 billion in 2009.
(Our full coverage on the earnings is available at: Citi Lags Estimates, Shares Slide)
Downgraded to Neutral
Citi’s soft revenue momentum and expectation for slightly higher expenses in 2011 led to this downward revision. While restructuring initiatives are encouraging, the shrinking of its business through assets sale, the CARD Act and the financial reform law continue to challenge revenue. We believe that solid earnings at Citigroup would remain elusive until its revenues experience a decent growth.
Though the repayment of TARP funds through the common stock offering has freed Citi from significant government interventions and pay restrictions, it has also resulted in significant earnings dilution. Additionally, management is aiming for a Tier 1 common ratio of 8% to 9% and currently expects to exceed these levels in 2012. A return of capital to shareholders is not expected until 2012.
Nevertheless, the company’s core business, Citicorp, remains attractive with its wide global footprint. The winding down of Citi Holdings is also progressing well and its assets stood at less than 20% of its balance sheet at the end of 2010. Additionally, an improvement in Citi’s credit quality is expected in 2011 and this is encouraging.
Unlike Citi, JPMorgan Chase & Co. (JPM) reported fourth quarter earnings of $1.12 per share, substantially ahead of the Zacks Consensus Estimate of $1.00 on higher non-interest revenue and a slowdown in provision for credit losses. On the other hand, U.S. Bancorp’s (USB) results were just in line with expectations of 46 cents per share for the fourth quarter as an increase in revenue and improvement in credit metrics were offset by an escalation in expenses.
Estimate Revision Trends
Following the fourth quarter and full-year 2010 earnings announcement, more than half the analysts covering Citi have made downward revisions to their estimates. Clearly, an earnings miss is discouraging and coupled with this the revenue headwinds have been a major concern.
Of the 17 analysts covering the stock, 5 lowered their estimates for the upcoming quarter while 2 revised them upward. For full-year 2011, 10 analysts have moved south while only one moved north. For full-year 2012, 5 analysts have cut their estimates while none made any upward revision.
Accordingly, over the past 30 days, the Zacks Consensus Estimate for Citi is down 3 cents for full-year 2011 at 43 cents while the full-year 2012 estimate is down a penny at 53 cents.
It is apparent that though the estimates moved down, the magnitude of such revisions is not a drastic one. Clearly, the analysts remain hopeful of an improvement in earnings in the upcoming quarters with an economic recovery, reduced credit costs and strengthened capital levels.
Currently, Citi shares have a Zacks #3 Rank, which translates into a short-term Hold recommendation.