Citigroup Earnings Point to a Slowing Asian Economy

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We are following up in further detail on earnings from Citigroup. Being one of the biggest banks in the country, Citigroup Inc. (NYSE:C), is an important bellwether for the entire financial industry. JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Company (NYSE:WFC), two other banks vital to the economy, posted earnings on Friday. Citigroup had some interesting comments about Asia, which we note below. In summary, it seems that growth is slowing in countries such as Japan.

Citigroup Earnings Point to a Slowing Asian Economy

Citigroup Inc. (NYSE:C) reported $0.15 of GAAP EPS, or $1.23 ex. noncore items (DVA, MSSB charge of $4.7 billion, tax benefits, etc.), ahead of consensus est of $0.96. Headline EPS number was 0.99%.

A closer look at the good, the bad and the okay.

Citigroup would not comment at all about Libor, other than stating ‘ we’re cooperating with the authorities that have asked for information and we’ll work on their time line.’


Loan loss release $1.5B vs. $0.9B in Q2, reducing reserve to 4.0% of loans (5.6% coverage of Corp consumer loans). 11% higher NCOs Q/Q and higher delinquency rates in NA and LatAm a negative. Net funded+unfunded GIIPS exposure $16.5B 8% Q/Q.
NIM AND CAPITAL STRONGER IN Q3 (this is one of the most important metrics)

NIM of 2.86% up 5 bps and above the 2.76% estimate on higher other earning assets and lower LT debt cost. Average loans up 1% (Corp up 2%), deposits up 6%. Basel III T1C up to 8.6% (+70 bps Q/Q). TBV/share rose 2% sequentially to $52.70. Holdings now 9% of assets ($171B), down 10% Q/Q.


Strength in No. Amer. and LatAm, with net income up 9% and 23%, respectively. NA Consumer Banking revenue rose 5% Q/Q and 6% Y/Y as Citi benefits from the refi boom. Regulatory headwinds (Korea) and weaker economic activity remain issues in Asia.  Int’l GCB revs up 3% y/y (+2% q/q), Asia -2% y/y (flat q/q), LatAm +7% y/y (+3% q/q) on a constant-dollar basis. Asia growth is slowing, Asia growth is slowing so we look further at the conference call for some clarity, on whether this is company specific or further signs of a slow-down in the region.

John Gerspach – Citigroup Inc. – CFO, Citigroup on the conference call states:

Asia, however, had negative operating leverage for the quarter with revenues down 2% and expenses up 8% in constant dollars, which I’ll discuss more in a minute.

Despite some headwinds, most drivers for International Consumer Banking continued to grow in the third quarter, both year-over-year and sequentially. Average loans grew 10% from last year and 2% sequentially. Average deposits grew 4% year-over-year and 1% sequentially. And both card purchase sales and investment sales also grew versus the prior periods. Credit costs were $722 million in the third quarter, up 8% from last year as net credit losses grew 6% due to loan growth and there was no material loan loss reserve release this quarter. Earnings before tax, excluding the impact of loan loss reserves, were nearly flat year-over-year at $1.1 billion.

First, on revenues. Investment sales revenues recovered from the second quarter, however, they remained modestly lower than last year and our total deposit and lending revenues, including cards, are down modestly from both periods. Similar to last quarter, most of the pressure on our retail banking business continued to be seen in Korea and Japan. Korea, in particular, reflects the continued impact of regulatory changes, including rate caps and other initiatives intended to slow the growth of consumer credit in that market. At the same time, spreads in several countries have compressed, reflecting a decline in market interest rates.

Despite these headwinds, our franchise in Asia remains strong and we continued to grow volumes in the third quarter, including average deposits, average retail loans, and average card loans. The costs associated with sustaining this volume growth drove a significant portion of the expense increase in the business, both year-over-year and versus last quarter. Third quarter expenses also included nearly $20 million of repositioning charges in he Korea, as we began to rationalize our distribution network and refocus our client segmentation. While these changes were prompted by the new regulatory environment in Korea, they also simplify the business and align our Korea franchise more closely with the urban-based
global strategy we employ in most other markets. We expect to incur additional repositioning charges in the fourth quarter, to complete this effort. Importantly, our overall outlook for Asia remains positive and we currently believe that in this environment, we can grow revenues from our third quarter base at an annual rate of 4% to 6% with a return to positive operating leverage in 2013.

Vikram Pandit – Citigroup Inc. – CEO, Citigroup added:

When you get to Asia, as John said, for us there really have been two issues. One is the regulatory changes in Korea which have driven the restructuring of the business and the charge we took there, and I think that’s something that’s going to continue over the next quarter, at least as John said. And that business is going to grow in line with Korea growing beyond that. But more generally speaking, when you look at the underlying drivers in our consumer businesses, they continue to do well and they continue to do well in our businesses across Hong Kong, Singapore, India, southeast
Asia, all across there. And so based on all the policy decisions that we’ve seen being taken in these countries, and based on my having been there now multiple times in the last couple months, and based on what we’re seeing in our own volumes, we think that it’s going to lead to revenue growth just the way that John talked about it for next year. From here, about 4% to 6%, that’s our current thinking. So we’re very much aligned with that growth pattern.

Mike Mayo – Credit Agricole Securities – asked about Asia:
Okay. And then switching gears again. Back to the theory, the theory says slowing economies, therefore more credit concerns and to the extent that Asia is slowing, wouldn’t you have more concerns there and you saw a little tick-up in your Citicorp international credit. Not a big deal. The other metrics are fine. As you look ahead are you starting to take some extra precaution?

Vikram Pandit – Citigroup Inc. – CEO, Citigroup Inc. (NYSE:C)
I would tell you again the quality of our portfolio is very strong. We are an urban lender. We have a more afluent portfolio. It’s diversified and, yes, there are questions about what rate the growth’s going to be at, but the rates are still very significant out there. And so as we look at the situation in Asia, the question to us really is more about what’s the rate of revenue growth, not so much issues about the quality of the book that we have.

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

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