Citigroup Inc. (NYSE:C) reported 3Q operating EPS of $1.06, ex. CVA/DVA and one-timers, beating $0.97 consensus estimates. The beat was driven by stronger than expected revenues, up 3% sequentially to $19.4bn vs. $18.7bn estimates on back of better than expected capital markets revenues, at $5.6bn vs. $4.9bn estimates. The company took a $4.7 billion write-down on the Morgan Stanley (NYSE:MS) Smith Barney (MSSB) fiasco.


FICC trading volume was especially strong at $3.7bn, up 31% QoQ vs. our -2% estimate. Net interest margin expanded 7bp, vs. -4bp we expected, to 2.86%, translating into spread revenues of $11.9bn vs. $11.8bn consensus estimates.

Analysts expect the focus of Citigroup Inc. (NYSE:C)’s 11am ET earnings call to be on: 1) capital return expectations post ’13 CCAR (stress test) and timeline for Basel 3 compliance, which clearly should improve after today; 2) outlook of credit leverage from Holdings given improving US housing metrics; and 3) more color on this Q’s strength in FICC (e.g., how much of the FICC strength is related to a pick-up in volume vs. positive inventory marks), given that FICC trading volumes at JPM were up just 7% QoQ in 3Q12.

Citigroup Inc. (NYSE:C) builds B3 tier 1 common to 8.6%: Major positive for stock

Citigroup Inc. (NYSE:C) built Basel 3 tier 1 common +70bp to 8.6% (vs. our +20bp est.), and Bank of America Analysts (BAML) are out with a report this morning and state that they believe this will be viewed as a big positive by the market. The stronger-than-expected capital build significantly supports our assertion to C could begin to return capital more meaningfully next year, post the 2013 stress test. Given that Citigroup Inc. (NYSE:C) is coming into the 2013 stress test with stronger capital ratios and pre-credit earnings power than last year, the focus on the today’s call regarding this matter will be on how conservative C will be on the “ask”, given this year’s objection. They estimate that C will pay out $4bn in capital in ’13, although our forecast could prove to be conservative given the significantly faster than expected B3 capital build this quarter.

The negatives

1) Equity trading declined 7% vs. an already sluggish 2Q level (due to lower cash volumes), and equity issuance revenues declined 15%. These revenues combined represent a modest 5% of total revenue for Citi; 2) Credit card balances and sales volumes remain sluggish; 3) Non US charge-offs rose—as C has indicated was likely to occur as recent loan growth seasons.

Special/lumpy items

Hits: $4.7b loss related to the MSSB brokerage JV, $776m of CVA/DVA losses, $529m of legal costs, $252m of loan hedge losses, $200m mortgage repurchase hits and $95m of repositioning charges. There were also $635m of charge-offs due to an accounting change (only $35m impacted earnings).

JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Company (NYSE:WFC) reported earnings last week, which slightly beat estimates.

Shares of Citigroup Inc. (NYSE:C) are up this morning to $35.79, or 3%. Shares of JPM are up 1.15% and shares of WFC are down 0.91%.

Disclosure: Long WFC, no other positions in any securities mentioned