Improved Trading Revenues Lift Citigroup’s Q1 Results

Citigroup (NYSE:C) surprised investors with its performance figures for the first quarter of the year on Monday, as the banking group beat expectations comfortably with a sequential 60% jump in net income. ((Citigroup Reports First Quarter 2014 Earnings per Share of $1.23; $1.30 Excluding CVA/DVA and Tax Item, Citigroup Press Releases, Apr 14 2014)) Investor sentiment towards Citigroup had been low since February after the bank’s Mexican unit was found to be involved in a multi-million dollar loan fraud, and the Federal Reserve’s unexpected rejection of its capital plan for 2014 late last month only made matters worse (see Why The Fed Rejected Citigroup’s Capital Plan). The ensuing investigations, as well as Citigroup’s $1.125 billion mortgage settlement with institutional investors last week, pointed to a lukewarm earnings report for this quarter – a notion that was only cemented by JPMorgan’s (NYSE:JPM) weaker-than-expected performance detailed last Friday, April 11. ((Citigroup Announces Agreement to Resolve Certain Private-Label Securitization Repurchase Claims, Citigroup Press Releases, Apr 7 2014))

But the Q1 results provided investors some comfort, as the bank’s earnings for the year were 4% higher than the same period last year – and one of the best for the bank since the economic downturn of 2008. Consequently, the bank’s shares gained 4.4% over trading following the results.

We have a $53 price estimate for Citigroup’s stock, which is roughly 10% ahead of the current market price.

See our full analysis for Citigroup

Trading Revenues Responsible For Carrying Citigroup’s Results

Citigroup generated revenues of $4.7 billion through its trading operations (fixed-income and equities taken together, adjusted for CVA/DVA) for the first quarter of the year. Although this figure is a good 15% below the $5.5 billion the bank reported for Q1 2013, there was a marked recovery compared to the previous quarter, when total trading revenues were only $2.9 billion.

It should be noted that low debt market activity over the latter half of 2013 hit trading revenues across investment banks for that period. Also, investment banks often report a peak in trading revenues for the first quarter. So the quarter-on-quarter improvement can be attributed largely to the cyclical nature of the industry, as well as the changes in overall macroeconomic conditions prevalent in the country between the two quarters. That said, trading operations 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 one-third of its total share value.

Positive Income Coming From Citi Holdings?

Citigroup’s Citi Holdings division, often termed the “bad bank,” was created in 2009 to house all the poor-performing and non-core assets that the group sought to dispose off over time. Since then, the bank has made significant progress managing this division, as it cut down total assets from roughly $900 billion at the peak of the economic crisis (more than 40% of Citigroup’s total asset size) to $114 billion by the end of Q1 2014 ( around 6% of total assets). In the process, the Citi Holdings division has incurred significant quarterly losses over the years.

However, losses for the division have remained below $500 million for each of the last three quarters, with the $283 million in losses for Q1 2014 being 34% lower than that for the previous quarter and 65% lower than the figure for Q1 2013. Should this improvement continue, the bank could actually report the first ever quarterly profit for its Citi Holdings business by the end of this year.

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