Citigroup Avoids Q4 Loss As Trading Slump, Legal Charges Hurt Results
Citigroup (NYSE:C) saw its shares tank nearly 4% over trading on Thursday, January 15, after the globally diversified banking group failed to meet the already low expectations investors had for its Q4 results. [1] Facing a string of legal action for its alleged role in manipulating benchmark interest rates and foreign exchange rates, and for its anti-money laundering controls at Mexican subsidiary Banamex, Citigroup had announced plans to set aside $2.7 billion to cover various settlement costs in December. [2] Investors had already factored this legal charge as well as an additional $800 million in one-time restructuring costs into the bank’s Q4 results. While investors also expected a poor showing by the bank’s fixed income trading desk, the actual performance turned out to be much worse than anticipated. [3] To make things worse, Citigroup’s top line was also hit by unfavorable exchange rate movements, which dragged down an otherwise strong operating performance by its global consumer banking arm.
It wasn’t all bad news for Citigroup though, as the bank continued to leverage its global presence to report an increase in net interest margin (NIM) figures for the second consecutive quarter even as its U.S.-focused peers struggle to keep interest revenues up in the prevailing low interest rate environment. Also, the bank’s for-sale units housed under Citi Holdings reported a quarterly profit for a second consecutive quarter in Q4 2014, with the total size of these non-core assets falling below $100 billion for the first time since the division was formed in early 2009.
We maintain our $56 price estimate for Citigroup’s stock. This figure is about 15% ahead of the current market price.
See our full analysis for Citigroup
Both Debt and Equity Trading Desks Had A Poor Q4
The importance of Citigroup’s trading operations to its business model is evidenced by 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 and Trading figures as the most valuable business segment in our analysis for the bank, making up more than 30% of its total share value.
Citigroup reports its trading revenues as a part of its Institutional Clients Group (ICG) division, which also houses its advisory, underwriting, private banking, treasury as well as security services units. ICG revenues (adjusted for any accounting charge/gain from a revaluation of the bank’s own debt) were just under $7.2 billion for Q4 2014 – 17% below the $8.7 billion figure for the previous quarter and also slightly below the figure for the same period last year. The reason for the sequential decline is demonstrated by the fact that trading revenues fell a good 34% from $3.7 billion in Q3 2014 to under $2.5 billion in Q4 2014.
While debt trading activity is weakest in the last quarter of the year, as many companies defer decisions to buy or sell debt securities to the first quarter of a year, Q4 2014 trading volumes were hit in particular due to the sharp increase in debt market volatility in December 2014. As a result, Citigroup made just under $2 billion in debt trading revenues for the period – the lowest since Q4 2011, and only the third time since the economic downturn of 2009 that the debt trading desk generated less than $2 billion (the other instance being Q4 2010).
Citi Holdings No Longer A Burden
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 of 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 $98 billion by the end of Q4 2014 (around 5% of total assets). Over the years, the Citi Holdings division has incurred significant quarterly losses – that pre-tax losses for the division were almost $60 billion in 2008 and just under $16 billion in 2009.
However, Citi Holdings reported its first quarterly profit in Q3 2014, and followed it up with another one in Q4 2014. The division incurred a pre-tax loss of $3.2 billion for full-year 2014, though, as a consequence of Citigroup’s $7 billion settlement with federal and state regulators over its mortgage-related misgivings in Q2. [4] With nearly all its legacy legal issues behind it, we expect Citi Holdings to continue its profitable run in the future – allowing it to churn out its first full-year profit in 2015.
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- Citigroup Reports Fourth Quarter 2014 Earnings per Share of $0.06, Citigroup Press Releases, Jan 15 2015 [↩]
- Citigroup hit by extra $3.5bn in charges, Financial Times, Dec 9 2014 [↩]
- BofA, Citi expect lower trading revenue in fourth quarter, Reuters, Dec 9 2014 [↩]
- Citigroup Announces Comprehensive Settlement with Residential Mortgage-Backed Securities Working Group, Citigroup Press Releases, July 14 2014 [↩]