Increase in client activities and rise in market volatility on the prevalent coronavirus concerns are likely to have aided Citigroup’s C trading revenues (both equity and fixed-income), driving third-quarter 2020 earnings, slated for an Oct 13 release.
The coronavirus-pandemic-induced global economic slowdown raised investors’ concerns, while the Federal Reserve’s efforts and support from the government’s stimulus package acted as tailwinds. Thus, equity markets performed well during the quarter, with the fixed income markets witnessing a strong performance.
At a conference held last month, the company’s chief financial officer (CFO) Mark Mason said fixed income and equity revenues are likely to be up in the low double-digit range, year over year.
Other Factors at Play:
Low Consumer Banking Revenues: Citigroup is expected to have witnessed strained consumer banking revenues due to reduced levels of consumer activity. Global card fees might have been hurt considerably on lower consumer spending.
Decent Investment Banking (IB) Fees: Global M&A activity was impressive during the July-September quarter as dealmakers across the globe were active during this period with rising M&A deal value and volume. Therefore, this might have had a positive impact on Citigroup’s advisory fees.
Moreover, IPO activities were strong, and as companies tried to build liquidity to tide over the pandemic-induced crisis, there was a substantial rise in follow-up equity issuances.
Also, equity market performance was strong 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.
Overall, the consensus estimates for IB fees of $1.19 billion indicates an 11.9% fall from the previous quarter’s reported number.
At last month’s industry conference, CFO Mason also mentioned the expectations of subdued investment banking revenues.
Muted Net Interest Income (NII) Growth: The Federal Reserve’s move to lower interest rates to near-zero level in March in a bid to support the U.S. economy from the coronavirus pandemic-induced slowdown might have dampened the bank’s net interest margin.
Also, per the Fed’s latest data, the rise in loans might have been low during the quarter under review. Particularly, weakness in revolving home equity and consumer loans, along with commercial and industrial (C&I), are expected to have offset growth in commercial real estate loans. Apart from these, coronavirus concerns have hurt business sentiments across industries, which might have affected loan demand.
Therefore, a soft lending scenario is likely to have curtailed growth in Citigroup’s net interest income to some extent.
The Zacks Consensus Estimate for NII of $2.14 billion suggests an 18.9% decline from the year-ago quarter.
Rise in Expenses: Per Citigroup’s CFO, the bank would be accelerating investments in infrastructure and controls with $1 billion in additional investments intended for this year. Therefore, expenses are anticipated to be approximately flat to up slightly in the to-be-reported quarter compared with the prior quarter.
High Reserve Build: At a virtual conference last month, for the July-September quarter, Mason predicted additional reserves, though lower than the previous quarters, based on the prevailing macroeconomic concerns, including the sluggish pace of economic recovery.
Here is what ZAKS 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.
Earnings ESP: The Earnings ESP for Citigroup is +1.84%.
Zacks Rank: Citigroup currently carries a Zacks Rank of 4, which decreases the predictive power of ESP.
Citigroup Short (Sell)
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