Citigroup Inc, RMBS Settlement Won’t Impact Its Quarterly EPS [CREDIT SUISSE]

By Mani
Updated on

Citigroup Inc (NYSE:C)’s settlement to pay $1.125 billion to settle legacy and other claims would be a positive, note Credit Suisse analysts.

Moshe Orenbuch and Jill Glaser Shea of Credit Suisse in their Equity Research report dated April 7, 2014 note Citigroup’s recent settlement is a positive in that it puts another legal issue behind the company.

Citigroup’s settlement

Citigroup Inc (NYSE:C) said Monday it would pay $1.12 billion in cash to settle legacy securities and other claims and incur a related charge of $100 million in the first quarter. Citigroup reached the agreement with 18 institutional investors and said the settlement had resolved significant issues left over from the financial crisis.

Settlement won’t impact Citi’s EPS

The Credit Suisse analysts point out that under the agreement, Citigroup Inc (NYSE:C) will only take an additional charge of approximately $100 million in 1Q14 above existing litigation reserves.

Since the analysts’ 1QEPS estimate already includes total litigation expenses of $800 million, they leave their quarterly EPS of $1.11 unchanged at this time.

The analysts also point out that Citigroup Inc (NYSE:C) already posted total litigation expenses of $3.0 billion in 2013 with a portion of the accrued litigation reserves attributable to this private label mortgage issue. The analysts too have embedded an additional $3 billion of legal expenses in their 2014 EPS estimate.

However, the analysts believe the largest remaining legal issue for the bank to be a potential settlement with the DOJ/FIRREA related to mortgage practices. Though it would be difficult to estimate a potential settlement, the analysts note that JPMorgan Chase & Co. (NYSE:JPM) settled for $4 billion. The analysts anticipate that a potential settlement for Citigroup could be in the $1-2 billion range.

Interestingly, in the recent case of Bank of America Corp (NYSE:BAC)’s settlement with FHFA, the Credit Suisse analysts noted that the mortgage charges and litigation expenses could continue to interrupt BofA’s path towards more normalized earnings growth. They noted that BofA could potentially face an additional penalty related to the DOJ, state AGs and RMBS Working Group investigations and such additional penalty / fine may not be fully reserved for.

The bank has offered the settlement to the 68 Citi-sponsored mortgage securitization trusts that participated in the $59.4 billion residential mortgage-backed securities. These residential mortgage-backed security trusts were established by Citi’s legacy securities and banking business during 2005-2008.

In yesterday’s report, the Credit Suisse analysts note that beyond mortgage issues, legal issues surrounding LIBOR and FX investigations could lead to additional fines / penalties at Citigroup Inc (NYSE:C). However, they anticipate that at some point the current run-rate of legal expenses would warrant a lower quarterly run-rate of legal expenses, thereby alleviating some pressure on expenses.

The analysts have assigned an Outperform rating on Citigroup Inc (NYSE:C) and pegged the target price at $62.00.

The following table captures Credit Suisse’s quarterly EPS estimates for Citigroup:

Citigroup Inc, RMBS Settlement Won’t Impact Its Quarterly EPS [CREDIT SUISSE]

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