Strong Trading Revenues Should Help Citigroup Overcome Seasonally Slow Retail Banking Performance In Q1

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Citigroup (NYSE:C) joins its peers JPMorgan and Wells Fargo in reporting first quarter results on Friday, April 13. We expect the bank to report earnings of about $1.64 a share on revenues of $18.8 billion for the quarter, based on our detailed interactive model for Citigroup’s revenues and expenses for the quarter. This compares to consensus estimates of $1.61 for Citigroup’s EPS and $18.9 billion for its revenues. The three key trends that contribute to our forecast results are a modest increase in net interest margin as well as interest earning assets, strong securities trading gains and elevated operating costs.

It should be noted that the first quarter of a year is seasonally a strong period for investment banking operations, but is a slow period for retail and commercial banking. With Citigroup’s business model relying almost equally on investment banking and traditional banking services, Q1 2018 should have been an overall good quarter for the bank.

We maintain a $85 price estimate for Citigroup’s stock, which is roughly 20% ahead of its current share price.

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Key Expectation #1: Modest Increase In Net Interest Margin, Asset Base

The Fed’s ongoing rate hike process has helped interest margins across the banking sector improve over recent years. However, net interest margin (NIM) gains for Citigroup have been muted compared to its peers due to a majority of its operations being outside the U.S. While this geographical diversification helped Citigroup’s NIM figure remain largely unaffected over 2010-14 when record-low interest rates hurt its peers, the bank will now see limited upside from the Fed’s rate hikes.

However, Citigroup’s net interest income for Q1 2018 likely gained from decent loan growth globally. We expect the bank’s net interest income to increase to $11.35 billion for the quarter – up from $11.2 billion in the previous quarter, and much better than the (one-off low) figure of $10.9 billion a year ago.

Key Expectation #2: Increase In Securities Trading Revenues Due To Higher Volatility

Securities trading revenues for investment banks globally rose considerably over the first half of 2017 due to an upbeat economic outlook, before falling sharply over the second half. This was primarily because volatility in global capital markets fell to all-time lows – weighing on the demand for security trading services. However, the fear of a trade war (between the U.S. and China in particular) over recent months has led to a spike in volatility, especially in global equity markets. This is good news for Citigroup’s securities trading unit, which is expected to report a single-digit increase in revenues compared to the already elevated level a year ago.

Key Expectation #3: Seasonally High Compensation Costs, Weaker U.S. Dollar Will Weigh On Operating Margin

Banks report seasonally high compensation expenses for the first quarter of the year, as they generally hand out annual bonuses in this period. While this likely weighed on Citigroup’s bottom line this time around, the impact was likely exacerbated by the fact that the U.S. Dollar slid in value against other major currencies over the first quarter. As Citigroup reports its results in USD, the weaker forex conversion rate would have added to operating costs for the period. We expect Citigroup’s compensation expenses for Q1 2018 to increase to $5.6 billion from $5.5 billion a year ago, and well above the figure of $4.9 billion in Q4 2017

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