Citigroup (NYSE:C) is set to announce its third quarter earnings on Tuesday, October 15, and overall expectations are not very high for the diversified banking group. Things are not very bright to begin with, as the prolonged low interest environment continues to squeeze net interest margins for banks, and the marked decline in mortgage banking activity is only expected to put additional pressure on top line figures. To make things worse, the quarter was also particularly bad for trading operations with a string of banking giants like Deutsche Bank (NYSE:DB), Barclays (NYSE:BCS) and Credit Suisse (NYSE:CS) announcing significantly lower revenues from fixed-income and currency markets – both of which are major sources of value for Citigroup.
But things are not all bad for Citigroup this time around. With the recently announced settlement with Freddie Mac, Citigroup became the first bank to put to rest all mortgage-related issues with FHFA, Fannie Mae and Freddie Mac (see Citigroup Settles All Mortgage-Related Grudges With Freddie Mac For $395 Million). The bank will not incur any charges this quarter from the settlement as it was covered completely by existing legal reserves. Also, Citigroup’s considerable geographical diversification has been a source of strength in the past and should help performance figures this time too. What remains to be seen is how much the international retail business actually contributes to the earnings given the rather steep exchange rate fluctuations seen in Q3 for developing countries like India, which form an important part of the group’s overseas business.
We maintain a $56 price estimate for Citigroup’s stock, which is about 15% above its current market price.
Depressed Trading Revenues Biggest Source Of Concern
A glance at the chart above makes it clear at once why a poor quarterly performance by Citigroup’s trading desk can weigh heavily on its overall results. While contributing roughly 20-25% of the bank’s total revenue figure for a quarter, the Securities & Banking segment accounts for as much as 40% of Citi’s earnings for the same period thanks to the considerably higher margins in the business.
Citigroup’s trading revenues last quarter, as well as in the third quarter of 2012, were $4.3 billion (excluding DVA changes), with the fixed income, currencies and commodities (FICC) trading desk contributing in excess of 80% of this figure each time. With investors expecting a significant decline in this figure, total trading revenues are likely to be less than $3.8 billion for the quarter – making it one of the worst quarters for trading since the dismal second half of 2011, when Europe’s debt woes hit capital markets across the globe. 
Advantages Of Developing Market Focus Could Also Be Muted
Citigroup’s geographical diversification – especially its retail banking operations in developing Asian and African countries – has been a major driving force behind its revenue figures in recent years. However, the Chinese economy remained in a state of flux in the beginning of the quarter and India struggled with a considerable devaluation of its currency for the larger part of the quarter – likely resulting in a lukewarm performance for Citigroup’s operations in both of these countries.Notes: