Citigroup Inc. (NYSE:C)’s beat vs consensus (similar to JPMorgan Chase & Co. (NYSE:JPM))  was driven by lower legal costs, some (not lots) reserve releases and strong trading. Citigroup Inc. (NYSE:C) gave investors a little bit of everything they’d want from them (shares are trading up 3.13% to $46.19) as loans and deposits grew OK, the NIM was up a drop, the Investment Banking was strong, expense containment showed its head, credit costs still improved, there was some DTA utilization, capital ratios are strong and quickly building (the upside to a low payout), there was some reserve release in Holdings and some reduction in the earnings drag – not perfect, but a lot of issues moving in the right direction.

Citigroup Beats on Lower Legal Costs, Reserve Releases, Strong Trading

Strong FICC trading

Holdings reserve release drive beat The beat to estimates was driven by higher revenues on the aforementioned stronger-than-expected performance in securities and banking, and lower provisioning expenses, driven by the higher than-expected reserve release in Holdings of $1.4bn. Despite the 1Q reserve release, LLR stood at 3.7% at quarter-end, implying significant additional room for reserve release over the coming quarters.

Breaking $1bn Holdings run-rate could be big for stock Citigroup Inc. (NYSE:C)’s consolidated reserves came in at $24.9bn, – taking consolidated reserves down to 3.70% of loans vs. 3.92% at YE12. There remains plenty of room from credit leverage on a go-forward basis, despite 1Q’s reserve release in Holdings. Reserve release in Holdings was $1.4bn.

BAML believes Citigroup Inc. (NYSE:C)’s ‘reserve release could accelerate as management becomes more confident with regard to strengthening US housing trends and consistent improvement in asset-quality metrics. Holdings reserve stood at 8.7% vs. 9.3% at YE12.’

Citicorp revenues of $19.9bn vs. $19.1bn

Total Citicorp revenues beat estimates, driven by a stronger-than-expected showing in S&B, with total revenues of $7.3bn . FICC was the driver of the S&B revenue beat, with revenues up 71% QoQ, to $4.6bn down only 2.3% from a very strong 1Q12. IB fees came in better than expected, too, at $1.1bn up 22% on a YoY basis. S&B expenses were a tad higher than forecast, at $3.56bn.

RBC lists the positives and negatives for Citigroup Inc. (NYSE:C)

Positives in the Quarter

  1. Positive op lvg, on lower legal, repositioning, and provisioning costs; Citigroup Inc. (NYSE:C) revs +3% y/y, expenses +1% – Citicorp revs +6% y/y, expenses -2%;
  2. Solid IB revs with Ibanking +6% q/q, trading up FICC +69% q/q (-3% y/y), and equities 78% q/q (-10% y/y);
  3. Basel III T1C – 9.3%;
  4. NIM +1bps q/q;
  5. Expense control kicking in: core op exp -0.1% y/y, constant $ basis.
  6. Solid GTS: trade loans +20% y/y, avg deposits +20% y/y;
  7. Citicorp loans +5% y/y and deposits rose 3% y/y.
  8. Holdings continues to shrink -4% q/q to ~8% of total assets;
  9. TBV of $52.35/ book of $62.51.
  10. Net credit losses -3% q/q, and still 3.7% LLR ratio;
  11. Utilized $700mn of Deferred Tax Assets.

Issues in the Quarter

  1. Reserve release $652mn vs $86mn in 4Q.
  2. Int’l growth still there, but Asia slowing; Int’l GCB revs up 3% y/y (-1% q/q), Asia -1% y/y (-1% q/q), LatAm +6% y/y (+1% q/q) on a constant-dollar basis.
  3. Significant items (pre-tax): CVA/DVA ($319mn), repositioning ($148mn), legal ($710mn).

Positives and negatives from Deutsche Bank

Positives

  1. Capital markets revenue overall was better than expected. Ibanking fees rose 22% yoy, FICC was down just 3% (less than we had expected) and EQ trading dropped 10% (in line with our expectations);
  2. Reported expenses of $12.4b were in line with expectations, but were $0.4b lower than our assumption ex items noted above. FTEs have declined 2% over the past two quarters;
  3. Basel 3 Tier 1 common rose a larger than expected 60bps to 9.3% and we estimate another 30-40bp benefit in 2Q from the likely sale of the remaining portion of the MSSB wealth mgmt JV to Morgan Stanley. The 1Q capital build reflects solid earnings, a modest decline in DTA and a 3% decline in Basel 3 RWAs;
  4. Credit was better than expected, with the biggest positive a $375m release of reserves related to the North American mortgage book in Holdings. This was driven by a 19-20% decline in early/late stage delinquencies and a 6% drop in period end loans.

Negatives for Citigroup Inc. (NYSE:C)

  1. Net interest income declined 2% un-annualized given a modest decline in loans and a stable NIM. Period end loans in Citicorp were flattish.