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Consumer Banking to Support Citigroup's (C) Q4 Earnings

Zacks Equity Research

Citigroup C is scheduled to report fourth-quarter 2019 results, before the opening bell on Jan 14.

Results are likely to display an improvement, backed by consumer banking revenue growth owing to pickup in Branded Cards’ demand and rise in deposits thanks to its digital efforts.

Though several lingering concerns, including uncertainties related to the U.S.-China trade war, and Brexit might have had adverse impacted trading activities in the quarter, positive developments in the same toward the end of the period and improving domestic economy are believed to have provided respite, resulting in an upswing in market revenues.

At an industry conference held last month, Citigroup’s CFO Mark Mason stated “We expect to continue to take share,” though wallets are declining. Mason anticipates markets revenues to be up in the high teens.

Other Factors at Play

Growth in Consumer Banking Revenues: In consumer banking, the company has likely witnessed continued strength in Mexico and Asia, lending support to revenues. Further, U.S. Branded Cards is likely to have witnessed revenue growth in North America.

Though for 2019, other revenue tailwinds included the absence of the FDIC surcharge, for the fourth quarter of 2019, management projects a pre-tax loss of around $100-$150 million in the Corporate Other segment, with continued investment in infrastructure and controls. The to-be-reported quarter results will likely reflect these.

Soft Investment Banking: Trade concerns and fears of global economic slowdown have hurt investment banking revenues. While dealmakers across the globe were active during the fourth quarter, M&A deal value and volume witnessed a fall due to several geopolitical concerns as the companies became more risk-averse. Therefore, this might have had an adverse impact on Citigroup’s advisory fees.

Yet, equity market performance was decent and overall debt issuances were on an upswing given the lower interest rates. Thus, equity underwriting and debt origination fees are expected to have gone up in the quarter under consideration.

At last month’s industry conference, CFO Mason also mentioned the expectations of investment banking revenues to be flat to slightly down from the prior-year quarter.

Controlled Costs: Citigroup accelerated some of its cost-cut plans by restructuring and improving internal processes during the December-end period. Management noted that efficiency saving significantly outpaced incremental investments in the first half of 2019, realizing a net benefit to expenses of roughly $300 million. This amount is likely to have increased to around $500-$600 million of net incremental savings in 2019, along with an additional $500- $600 million of net incremental benefits for 2020. These net savings might have offset volume-driven expenses on ongoing investments in the business. Moreover, management predicts positive operating leverage for the bank, as a whole, and for consumer and institutional businesses for 2019.

Muted Net Interest Income Growth: Low interest rates during the October-December quarter might have dampened banks’ net interest margin. Also, per the Fed’s latest data, rise in loans may have remained low for the quarter. Particularly, weakness in revolving home equity loans and commercial and industrial (C&I) are expected to have offset growth in consumer and commercial real estate loans. Also, trade-war concerns, though subsided to an extent, have hurt business sentiments across the industries, which might had an adverse impact on loan demand.

Therefore, a soft lending scenario is predicted to have curtailed growth in net interest income to an extent.

Credit Costs Stable: Cost of credit is likely to have remained unaltered quarter over quarter. Citigroup expects NCL rate of 300-325 basis points (bps) for 2019 for U.S. branded cards. In retail services, NCL rate is projected at 500-525 bps for the year.

Here is what our quantitative model predicts:

Citigroup does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Citigroup is -0.04%.

Zacks Rank: Citigroup currently carries a Zacks Rank of 3, which increases the predictive power of ESP. But we also need to have a positive ESP to be confident of a positive earnings surprise

The Zacks Consensus Estimate for earnings of $1.82 reflects a 13% rise on a year-over-year basis. Further, the Zacks Consensus Estimate for sales of $17.7 billion indicates 3.4% growth from the prior-year quarter.

 

Citigroup Inc. Price and EPS Surprise

Citigroup Inc. Price and EPS Surprise

Citigroup Inc. price-eps-surprise | Citigroup Inc. Quote

Stocks That Warrant a Look

Here are some other stocks you may want to consider, as according to our model these have the right combination of elements to post an earnings beat this quarter.

The PNC Financial Services Group, Inc PNC is set to report earnings on Jan 15. The company has an Earnings ESP of +0.55% and carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for M&T Bank MTB is +0.38% and the stock carries a Zacks Rank of 3. The company is scheduled to release quarterly figures on Jan 23.

State Street Corporation STT has an Earnings ESP of +0.27% and sports a Zacks Rank of 1. It is slated to report results on Jan 17.

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Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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