Citigroup (C) earnings reported Monday were hardly a thing of beauty — not after agreeing to pay a $7 billion fine — but better-than-expected trading revenue helped adjusted profit beat Wall Street forecasts, and that boosted Citigroup stock in early trading.
As widely expected, Citigroup came to a settlement with the Department of Justice over the mortgage backed securities it peddled before the financial crisis. Although the fine was larger than some analysts expected, it was well below the $12 billion the DoJ was gunning for.
Getting a government settlement done for a more-than-manageable sum would have been good news for Citigroup stock in any case.
Better-than-expected earnings only added to the upside.
The numbers weren’t good, mind you, but they were far better than Citigroup had telegraphed, and that counts as a big win for the both the bank and Citigroup stock.
For the most recent quarter, charges related to the fine caused Citigroup earnings to fall 96% to $181 million, or 3 cents a share, from $4.18 billion, or $1.34 a share, in the year-ago period.
However, after stripping out special charges (as analysts do), Citigroup earnings came to $1.24 a share, well ahead of analysts’ estimate of $1.05. That’s a big earnings beat. Revenue likewise declined by less than the Street forecast. On an adjusted basis, Citigroup revenue fell 3.2% to $19.3 billion, vs. estimates of $18.93 billion.
The top- and bottom-line beats in the Citigroup earnings report were reason enough to give C stock a lift.
But the way in which Citigroup did so was even more encouraging.
Citigroup Earnings Bode Well for Other Big Banks
The main reason the market applauded Citigroup earnings was that trading revenue wasn’t nearly as bad as the bank forecast.
Back in May, Citigroup warned that trading revenue could plunge anywhere from 20% to 25%. The actual decline came to just 16%, comprised of a 12% drop in fixed-income trading and 26% retreat in equities trading.
Given how trading has been weighing on investment banking earnings, those steep declines were a victory. Trading revenue for all Wall Street investment banks has been evaporating for some time, especially in the highly lucrative areas of fixed income, currencies and commodities.
Indeed, new financial regulations that curb or eliminate certain types of trading, low interest rates and the absence of volatility have made fixed income a weak spot for everyone from Citigroup to Goldman Sachs (GS).
Other bright spots in the Citigroup earnings report included expense reductions, lower cost of credit, and growth in the investment bank’s business of underwriting equities and debt.
The Bottom Line
Citigroup earnings were about as messy as a bank can deliver (outside of a financial crisis), but beneath it all the company is showing signs of real operational improvement. Citigroup still has plenty of work to do — it failed the Federal Reserve stress test — but it’s no longer a joke. So if earnings can maintain this track, Citigroup stock might be worth taking a look at.
For now, however, less-bad is the best the bank can deliver, and the upside surprise has was already been traded away.
That makes Citigroup stock still a hold at best.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.