Citigroup Earnings Preview: What Could go Wrong or Right

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Citigroup Inc. (NYSE:C) will release 1Q13 results on Monday, April 15 at 8:00 a.m. The company will host a conference call at 11:00 a.m. The street expects the bank to report EPS of $1.17 on revenue of $20.17 billion. The earnings from Citigroup Inc. (NYSE:C) comes on the heels of recent earnings results from Wells Fargo and JPMorgan Chase & Co.

Citigroup Earnings Preview: What Could go Wrong or Right

S&B Revenues

Excluding CVA/DVA, analysts are forecasting core Securities and Banking revenues of $6.4Bn or down 4% y/y.  Core trading revenue forecast of $5.0Bn (down 13% y/y) excludes $150mm of estimates of negative CVA given credit spread tightening. The street is forecasting $954mm investment banking fees; up 10% y/y given equity underwriting (+20% y/y), debt underwriting (+10% y/y) offset by weaker advisory revenues (-2% y/y). Consensus sees lending fees of $100mm in 1Q.

Credit Quality

Many sell side analysts see $3.0Bn of credit losses, down 24% y/y driven primarily by US credit losses. This included about $150 million of reserve release, representing $0.04 per share compared to reserve bleed of $133mm in 4Q’12 ($0.05/shr). Forecasts call for a reserve rate to 3.8%, down from 3.9% at the end of December. Additionally, forecasts have more material reserve decreases in 2H’13.

Expenses

Analysts predict operating expenses of $12.5Bn or flat q/q. Estimated reported expenses of $12.6Bn include $100mm related to the restructuring.

Capital

Analysts are forecasting TBV to increase 2% q/q to $52.13.

For the fiscal year ended 31 December 2012, Citigroup Inc. (NYSE:C) interest income decreased 6% to $68.14B. Net interest income after loan loss provision increased less than 1% to $36.76B. Net income applicable to common stockholders excluding extraordinary items decreased 30% to $7.5B. Net interest income after loan loss provision reflects Institutional Clients Group segment increase of 4% to $15.55B, Unallocated segment increase of 6% to $13.24B.

Raymond James expects noninterest income to be a highlight as seasonality contributes to high levels of market-related revenue. They expect a substantial linked-quarter (LQ) increase in revenue, driven by Securities & Banking (S&B) within the Institutional Clients Group (ICG), partially offset by slight declines in Transaction Services (TS) (also within ICG), and Global Consumer Banking (GCB).

What could go right? Raymond James expects market-related revenue to drive positive results. They have modeled a 7.8% LQ increase in core revenue, and have modeled a substantial LQ increase in principal transactions to $1.8 billion in 1Q13. Additionally, credit quality will likely remain a highlight, and look for a provision of $2.7 billion and net charge-offs (NCOs) of $2.9 billion, down from $3.2 billion and $3.1 billion, respectively, in 4Q12. Estimates are for nonaccrual loans to decrease 4.6% LQ. A 3.3% LQ decrease in noninterest expense from a notably high level in 4Q12.

What could go wrong? Loan growth could disappoint in 1Q13. Although they have modeled a 1.0% LQ increase in loans at the holding company level (assuming growth in Citicorp slightly outpaces the runoff in Citi Holdings), recent commentary around the Street has indicated growth could disappoint following a strong 4Q12. While they expect the low interest rate environment to have a modestly negative impact on the net interest margin (NIM), they have only modeled a 1 bp LQ decline.

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