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.
Strong FICC trading
Roubaix Composite February 2021 Net Return +7.87%; YTD Net Return +11.34%
The February 2021 monthly tearsheet for the Roubaix Fund Composite, a fundamental long/short equity strategy focused on small and mid cap U.S. stocks. Q4 2020 hedge fund letters, conferences and more Roubaix Composite Performance Roubaix generated a net return of +7.87% in February relative to the long-only benchmark Russell 2000 Index total return of +6.23% Read More
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
- 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%;
- 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);
- Basel III T1C – 9.3%;
- NIM +1bps q/q;
- Expense control kicking in: core op exp -0.1% y/y, constant $ basis.
- Solid GTS: trade loans +20% y/y, avg deposits +20% y/y;
- Citicorp loans +5% y/y and deposits rose 3% y/y.
- Holdings continues to shrink -4% q/q to ~8% of total assets;
- TBV of $52.35/ book of $62.51.
- Net credit losses -3% q/q, and still 3.7% LLR ratio;
- Utilized $700mn of Deferred Tax Assets.
Issues in the Quarter
- Reserve release $652mn vs $86mn in 4Q.
- 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.
- Significant items (pre-tax): CVA/DVA ($319mn), repositioning ($148mn), legal ($710mn).
Positives and negatives from Deutsche Bank
- 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);
- 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;
- 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;
- 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)
- Net interest income declined 2% un-annualized given a modest decline in loans and a stable NIM. Period end loans in Citicorp were flattish.