Citigroup's (C) Q2 Earnings Beat Estimates, Expenses Drop

First bank to report among Wall Street biggies, Citigroup (NYSE:C) delivered a positive earnings surprise of 2.8% in second-quarter 2019, backed by expense control. Adjusted earnings per share of $1.83 for the quarter handily outpaced the Zacks Consensus Estimate of $1.78. Also, earnings climbed 12% year over year.

The stock rose nearly 1% in pre-market trading, indicating that investors have taken the results in their stride. Notably, the full-day trading session will depict a better picture.

Including one-time gain, net income was $4.8 billion or $1.95 per share compared with $4.5 billion or $1.63 per share recorded in the prior-year quarter.

Citigroup displayed prudent expense management and higher revenues riding on consumer banking during the reported quarter. Further, loan and deposit growth were positives. However, fixed income revenues, excluding the Tradeweb gain, disappointing investment banking revenues on lower advisory business and reduced equity underwriting, partly offset by higher debt underwriting fees were on the downside.

In addition, lower equity market revenues amid challenging trading environment reflect reduced volumes and client activity levels.

Citigroup’s costs of credit for the June-end quarter were up 16% year over year to $2.1 billion. This upswing largely underlines elevated net credit losses of $2 billion and a credit reserve build of $111 million, and provision for benefits and claims of $19 million.

Expenses Drop, Revenues Escalate

Revenues were up 2% year over year to $18.8 billion in the second quarter. The reported figure also outpaced the Zacks Consensus Estimate of $18.3 billion. Higher revenues from Global Consumer Banking (GCB) and pre-tax gain on Citigroup’s investment in Tradeweb mainly led to the upside.

GCB revenues increased 3% year over year to $8.5 billion. Higher revenues in North, Latin America and Asia GCB led to this upsurge. Notably, both retail banking and card revenues escalated.

In the Institutional Clients Group (ICG) segment, revenues came in at $9.7 billion in the quarter, almost unchanged year over year. Investment banking, corporate lending, equity market revenues and fixed income market revenues disappointed.

Corporate/Other revenues came in at $532 million, inching up 1% from the prior-year quarter. This upside stemmed from elevated treasury revenues and gains, mostly underscored by wind-down of legacy assets.

Operating expenses at Citigroup dipped 2% year over year to $10.5 billion. Efficiency savings and the winding-down of legacy assets muted the ongoing investments.

Strong Balance Sheet

At the end of the April-June quarter, Citigroup’s end of period assets was $1.99 trillion, up 2% sequentially. The company’s loans inched up 1% sequentially to $689 billion. Deposits were up 1% sequentially to $1.05 trillion.

Credit Quality Improves

Total non-accrual assets decreased 9% year over year to $3.7 billion. The company reported a drop of 7% in consumer non-accrual loans to $2.2 billion. Furthermore, corporate non-accrual loans of $1.4 billion slipped 13% from the year-earlier period.

Citigroup’s total allowance for loan losses was $12.5 billion at the end of the quarter, or 1.82% of total loans, compared with $12.1 billion, or 1.81%, recorded in the year-ago period.

Solid Capital Position

At the end of the April-June period, Citigroup’s Common Equity Tier 1 Capital ratio was 11.9%, down from the prior-year quarter’s 12.1%. The company’s supplementary leverage ratio for the quarter came in at 6.4%, down from the year-earlier quarter’s 6.6%.

As of Jun 30, 2019, book value per share was $79.40, up 10% year over year, and tangible book value per share was $67.64, up 3% from the comparable period last year.

Capital Deployment

During the second quarter, the company bought back about 54 million of common stock and returned around $4.6 billion to common shareholders as common stock repurchases and dividends.

Our Viewpoint

Citigroup reported impressive results even this time around, despite being unfavorably impacted by lower equity market revenues and a challenging trading environment. The company exhibits capital strength which continues to support its dividend and share-buyback program. In addition, decline in expenses reflects prudent expense management.

One can consider a strong brand like Citigroup to be a sound investment option over the long term, given its global footprint and attractive core business. Additionally, the company’s growth looks encouraging amid rising revenues, as well as anticipated ease of regulations.

Nevertheless, several legal hassles remain concerns for the company. Furthermore, higher credit costs are another concern.