Weaker Trading Revenues, Higher Loan Provisions Likely To Weigh On Citigroup’s Q2 Results

by Trefis Team
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Citigroup (NYSE: C) will report its Q2 2019 results on Monday, 15th July. Consensus figures point to negligible change in revenues for the geographically diversified banking giant compared to the year-ago period, although the EPS is expected to jump 12% year-on-year. Per Trefis, Citigroup’s stock has a fair value of $78, which is 10% higher than the current market price. We have analyzed how Citigroup’s revenues & expenses have changed over recent quarters in an interactive dashboard along with our expectations for full-year 2019. You can modify Trefis forecasts to see the impact of changes on Citigroup’s valuation. Additionally, you can see more Trefis data for financial services companies here.

A Quick Look At Citigroup’s Revenue Sources

Citigroup reported $72.85 billion in Total Revenues in FY 2018. This included 3 revenue streams.

  • Global Consumer Banking: $33.8 billion in FY 2018 (46% of Total Revenues) – This segment includes Consumer Banking (traditional banking services like deposits, loans etc.) and Citi Cards (Citi-branded credit and debit cards).
  • Institutional Clients Group: $37.0 billion in FY 2018 (51% of Total Revenues) – It consists of three subdivisions:
    • Sales & Trading – deals in sales, trading and structuring of financial market products like bonds, equities, derivative etc.
    • Advisory & Underwriting – provides financial advisory and capital raising services in debt and equity capital markets
    • Treasury & Trade Solutions – delivers commercial banking products and services like Cash Management, Trade Finance, Securities and Fund Services (SFS)
  • Corporate/Other: $2.1 billion in FY 2018 (3% of Total Revenues) – This primarily represents Citigroup’s Corporate operations, which provide support functions to the bank’s other operating divisions.

How Have Citigroup’s Revenues & Expenses Changed Over Recent Quarters?

  • In Q1 2019, Citigroup reported Total Revenues of $18.6 billion, down by 2% y-o-y. This decline was mainly caused by a 2% decline in Institutional Client Group (ICG) revenues coupled with a 27% reduction in Corporate/other revenues, partially offset by a small increase in North America Global Consumer Banking revenues.
  • Although ICG revenues shrank in the first quarter, Investment Banking fees grew 20% y-o-y and is expected to drive Citigroup’s growth in 2019.
  • Total Operating expenses in the first quarter were down 3% y-o-y on the back of efficiency savings and lower compensation costs, partially offset by higher investment in Technology & Communications compared to the previous year.
  • However, provisions for credit losses swelled 7% y-o-y due to growth in outstanding card loans.

Citigroup’s Key Revenue Drivers

M&A Advisory Fees: In Q1 2019, Citigroup reported M&A Advisory fees of $378 million which was 76% higher than the figure for the previous year. The primary reason for this increase was an improvement in Global M&A deal volumes, which is expected to continue in subsequent quarters.

Debt Underwriting Fees: It is a key driver of underwriting revenues in Institutional Client Group (ICG). In Q1 2019, it grew by 15% y-o-y to $804 million and is likely to continue the same trend in subsequent quarters. We expect it to increase by 10% y-o-y in 2019 as global debt capital market activity improves from the weak levels seen in the second half of 2018. However, a decrease in Fees as % of Debt Origination Volumes could mitigate the impact of higher volumes on Citigroup’s top line.

Security Trading Revenues: It is the major constituent of Institutional Client Group (ICG) markets revenues and has trended lower in the last few quarters due to a widening credit spread, weaker equity valuations and lower activity levels. In Q1 2019, security trading revenues dropped by 5% y-o-y primarily due to a 24% decrease in equities trading compared to the previous year – although there was a slight tick in FICC (Fixed Income, Currency & Commodity) trading.

Citigroup’s Outlook For Full Year 2019

  • We expect Citigroup to report $74 billion in Total Revenues for 2019, which is 1.5% higher than the figure for 2018.
  • Global Consumer Banking (GCB) is expected to have a 3.3% growth in revenues due to increase in Net Interest Income across both Consumer Banking and Citi Cards segments. However, expected decline of 10% in Corporate/Other segment would partially offset the impact on top line.
  • Although Sales & Trading revenues are expected to drop by 1.3% y-o-y in 2019, growth in Advisory & Underwriting revenues (3%) and Treasury & Trade Solution Revenues (2.5%) will help Institutional Client Group (ICG) revenues remain largely at the same level as 2018.
  • Total Expenses are expected to increase by 1.9% y-o-y to $50.3 billion, driven by a 6% jump in loan loss provisions.
  • However, Net Income would remain at the same level as the previous year as we do not expect any significant change in tax rate and Earnings Before Tax (EBT) compared to 2018.
  • Citigroup is expected to have repurchased shares worth $3.6 billion in the second quarter. We expect the trend to continue in subsequent quarters and help its EPS figure reach $7.24 for FY 2019.
  • The EPS of $7.24 coupled with our P/E multiple of 10.8x works out to a price estimate of $78 for Citigroup’s stock – representing a potential upside of 10% for the bank’s stock.

Do not agree with our forecast? Create your own forecast for Citigroup by changing the base inputs (blue dots) on our interactive dashboard.

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