Investors were not really surprised when Citigroup (NYSE:C) came out with soft performance figures for the third quarter of the year on Tuesday. Expectations for the country’s third largest banking group were already quite low for the period, which saw a marked decline in debt trading and mortgage activities even as retail banking operations struggle to make money in the prolonged low-interest rate environment.  Excluding the impact of accounting charges linked to the revaluation of its own debt, Citigroup’s total revenues fell 9% sequentially – representing a reduction of $1.8 billion in the top-line. And while revenues fell for every single one of its operating units, a big chunk of this decline ($1.3 billion to be exact) can be traced to the investment banking operations.
But beyond the largely anticipated revenue declines (see Will Citigroup’s International Retail Business Help Counter Its Q3 Trading Woes?), there are some promising trends that are visible in Citigroup’s figures for the quarter. Most notable is the large reduction in non-interest expenses for the bank, which fell by half a billion dollars compared to the previous quarter – a 4% improvement. Another great news is the continued strengthening in the bank’s Basel III Core Tier 1 Capital Ratio, which jumped up almost 40 basis points this quarter to 10.4% – well ahead of the other U.S. banking giants (see Citigroup Comfortably Leads U.S. Peers In Basel III Readiness). Add to this the fact that assets grouped under the ‘bad bank’ Citi Holdings are now down to $122 billion from the near-$900 billion figure in early 2008, with the corresponding quarterly loss at the lowest ever figure of just under $100 million.
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All things considered, while Citigroup’s bottom-line figures were certainly not great, there is quite a bit of good news to be found in the earnings release. Accordingly, we are leaving our $56 price estimate for Citigroup’s stock unchanged. This figure is roughly 10% ahead of the current market price.
Debt Trading Revenues Took A Hit
The importance of Citigroup’s trading operations to its overall business model becomes clear from the fact that they contribute roughly 20-25% of the bank’s total revenues, and as much as 40% of total earnings in any given period. This is why Sales & Trading figures as the most valuable business segment in our analysis for the bank as shown in the chart above – making up almost 36% of its total share value.
Citigroup reports its trading revenues as a part of its Securities & Banking division, which also houses its advisory, underwriting and private banking units. The division generated total revenues of $4.7 billion this quarter – a good 31% below the $6.8 billion figure for the previous quarter. Ignoring the accounting gains/charges related to CVA and DVA, the revenue figure was slightly below $5.1 billion, which is still 20% lower than the adjusted revenues for Q2. The reason for this was almost completely the fall in trading revenues from the sluggish equity market for the quarter, as well as the depressed debt trading activity in view of the Fed’s tapering plans.
Fixed-income trading, which can generates as much as two-thirds of the division’s total revenues, brought in less than $2.8 billion in trading revenues in Q3 – 17% lower than the $3.4 billion in revenues last quarter and 26% below the $3.7 billion figure for the same quarter last year.
But Cost Benefits Are Here To Stay
Since he took the reins of the bank late last year, CEO Michael Corbat has been focused on improving the bank’s profitability by doing away with unnecessary expenses (see How Citigroup’s Reorganization Can Lift Its Share Value). In what comes as proof of his commitment to “remain extraordinarily focused” on costs, Citigroup reported its lowest quarterly operating expense figure since Q2 2010. Saving roughly $500 million in non-interest expenses compared to the previous quarter, the bank looks set to achieve its target of saving $1.1 billion in recurring costs each year starting 2014.Notes: