Citigroup Stock: Earnings Bolster Bull Case for C Stock

Advertisement

Citigroup (C) beat Wall Street estimates by a comfortable margin in a bleak season for bank earnings, lending support to the bull case on once beleaguered C Stock.

Citigroup Stock: Earnings Bolster Bull Case for C StockBank revenue and profits are under assault from multiple sides these days. Near-zero interest rates are compressing net interest margins and lowering yields on assets held on bank balance sheets.

Among the obstacles banks face, uncertainty over the timing of an Federal Reserve rate hike has tamped down trading volume in the lucrative fixed income, currency and commodities markets.

Additionally, new federal regulations are crimping the profitability of once high-margin activities like mortgage underwriting.

Banks are responding to these revenue headwinds by slashing costs, and no firm did a better job of it last quarter than Citigroup. That was mainly due to a plunge in legal costs as the bank puts the fallout of the financial crisis and other scandals behind it.

The nation’s No. 3 bank by assets said year-over-year profit rose by more than half, to $4.29 billion, or $1.35 a share. A year ago, Citigroup had earnings of $2.84 billion, or 88 cents a share.

However, on an adjusted basis — which is all the market and analysts care about — Citigroup earnings came to $1.31 a share, according to a survey by Thomson Reuters. That beat the Street’s average estimate by 3 cents.

Citigroup Shrugs off a Top-Line Decline

Like its peers, Citigroup suffered a drop in the top line. Revenue declined to $18.69 billion from $19.69 billion a year ago. On an adjusted basis, revenue came in at $18.5 billion, which matched analysts’ average forecast.

As expected, soft trading volume — an industry-wide bugaboo for some time now — weighed heavily on revenue. In total, adjusted trading revenue fell 7% to $3.57 billion year-over-year.

Bond, currency and commodity trading volumes were the culprits: Trading revenue from those markets dropped 16% to $2.58 billion. Heightened volatility in equities partially offset that decline, as stock trading revenue rose 31% to $996 million.

Thankfully for anyone holding Citigroup stocks, other core businesses fared much better year-over-year. The segment that includes the bank’s global consumer and corporate banking divisions saw profit rise 62% to $4.26 billion.

Even Citi Holdings — where Citigroup stashes its ugly assets — reported a profit for a fifth consecutive reporting period.

But the star of the quarter was expense reduction. Costs declined 18% to $10.67 billion, led by a steep drop in legal expenses.

True, CEO Michael Corbat issued a pretty much a boilerplate statement, but it’s nonetheless true:

“The quarter had more than its fair share of volatility and our results speak to the resilience of our franchise globally. And despite revenue headwinds, we once again proved our ability to manage our risk, our expenses and our capital.”

This is the second straight quarter in which Citigroup proved that its turnaround is working. The broader market may not be cooperating, but at some point it should reward Citigroup stock with a higher multiple.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/10/citigroup-stock-c/.

©2024 InvestorPlace Media, LLC