Citigroup Inc. (NYSE:C) will release 2Q13 results on Monday, July 15 at 8:00 a.m. The company will host a conference call at 10:00 a.m. Analysts expect core revenue to decrease on a linked-quarter (LQ) basis as non-interest income declines from a seasonally strong first quarter, but increase 6.6% y/y. Analysts expect net interest income to increase LQ and y/y, as balance sheet growth offsets a modest decline in the net interest margin (NIM). However, many expect only a small decline in the NIM as positive balance sheet moves made in the quarter mitigate the low interest rate environment. Additionally, Citi is expected to gain from its win in the lawsuit Federal National Mortgage Association (OTCBB:FNMA) AKA Fannie Mae.
Read More: Citigroup Inc. (C) Q2 Earnings Preview
Anthony Polini of Raymond James expects a LQ decrease in revenue will likely be driven by a seasonal slowdown in Securities & Banking (S&B) within the Institutional Clients Group (ICG), partially offset by increases in Transaction Services (TS) (also within ICG), and Global Consumer Banking (GCB). TruPS redemptions negatively impacted its Basel I Tier 1 ratio by 9 bp, but did not affect its estimated Basel III Tier 1 Common ratio, which was 9.3% at March 31, 2013. says
Moshe Orenbuch of Credit Suisse recently Boosted his Estimates for Citigroup noting:
We update our 2013 and 2014 EPS estimates (to $4.86 and $5.46, respectively) as well as historical financial data to reflect the company’s reclassification of its Credicard unit into discontinued operations, which was announced on June 28, 2013. Aside from this reclassification, nothing else has changed.
Credicard:
Credicard is Citigroup Inc. (NYSE:C)’s non-banking credit card and consumer finance business in Brazil. Citigroup entered into a definitive agreement to sell the unit and has reclassified the financial data from this unit into discontinued operations.
Fannie Mae Settlement:
On July 1, 2013, Citigroup Inc. (NYSE:C) announced a $968 million settlement with Fannie Mae on future mortgage repurchase claims on 3.7 million residential first mortgages sold to Fannie Mae – Federal National Mortgage Association (OTCBB:FNMA) that were originated between 2000 and 2012. This agreement substantially resolves all claims from Fannie Mae for loans originated during that period. The company will utilize its repurchase reserve to cover most of the settlement and plans to build its reserve by $245 million in 2Q13, which is in line with prior reserve builds in the prior quarters. As such, we do not view this announcement as having a material impact on earnings.
At the time of the settlement Moshe Orenbuch noted regarding Fannie Mae:
Citigroup Inc. (NYSE:C) will record a $245mm repurchase reserve addition in 2Q which is consistent with its reserve build in recent qtrs ($232mm in 1Q). Refer to Exhibit 1. The repurchase reserve of $1.4Bn as of 1Q could end 2Q at approx. $692mm—which exists predominantly for claims from Freddie Mac – Federal Home Loan Mortgage Corp (OTCBB:FMCC), although some for private label claims (though most is dealt with through litigation expense). Given existing reserves and Citigroup’s mortgage sales were largely to FNM, we estimate that reserve additions will likely slow in future qtrs.
See Fairholme Fund Sues For Fannie Mae, Freddie Mac
Overall, we do not view put back claims as a big risk to Citigroup Inc. (NYSE:C) given its smaller origination volume relative to the industry, we would note that chunkier losses could come from private label securitization claims. In 1Q’13, Citigroup reclassified $244mm to litigation reserve related to private label deals.
Settlement Terms
The settlement covers 3.7mm residential first mortgage loans sold to Fannie Mae – Federal National Mortgage Association (OTCBB:FNMA) and originated from 2000-12. The settlement does not release Citigroup Inc. (NYSE:C)’s liability related to its servicing or other ongoing contractual obligations. It also does not cover 12k loans originated from 2000-12 with certain characteristics (e.g., performance guaranty or credit enhancements).
