Citigroup (NYSE: C) is scheduled to report its fiscal Q2 2021 results on Wednesday, July 14. We expect Citigroup to report mixed results, with revenues topping the consensus estimates and earnings missing the mark. The bank reported an earnings beat in the last quarter, although its revenues were lower than the year-ago period. This was due to a decline in net interest income (NII) and card volume. Further, the firm posted lower revenues in the FICC (fixed income, currency, and commodity) trading, partially offset by growth in investment banking and equities trading businesses. Additionally, Citigroup’s profitability figures received a major boost in the quarter due to a favorable reduction in provisions for credit losses. We expect the same trend to drive the second-quarter results.
Our forecast indicates that Citigroup’s valuation is around $82 per share, which is 23% more than the current market price of around $67. Look at our interactive dashboard analysis on Citigroup’s pre-earnings: What To Expect in Q2? for more details.
(1) Revenues expected to edge past the consensus estimates in Q2
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Trefis estimates Citigroup’s fiscal Q2 2021 revenues to be around $17.55 billion, just above the $17.46 billion consensus estimate. The bank is heavily dependent on its global consumer group segment, which contributes close to 40% of the total revenues. The segment revenues suffered in 2020 due to a lower interest rate environment and a drop in consumer demand, almost offsetting the growth in sales & trading and investment banking businesses. As a result, Citigroup’s revenues of $74.3 billion for the full year 2020 were at the same level as the 2019 figure. The interest rate headwinds continued to bother the bank’s top-line in the first quarter, as well. It reported total revenues of $19.3 billion – down 7% y-o-y, mainly due to a 12% decrease in the NII. On the flip side, the firm did post positive growth in equity trading and investment banking businesses. We expect the same trend to continue in the second quarter of FY2021, with sales & trading and investment banking pushing the revenues up and the lower net interest spread, hurting its top-line.
The unusually high trading volumes and underwriting deal volumes were responsible for the growth in sales & trading and investment banking revenues in 2020. However, with recovery in the economy, we expect the volumes to normalize in the subsequent quarters. Further, the interest rates are unlikely to recover to the pre-Covid-19 levels anytime soon. Both the above factors will likely restrict the bank’s revenues to $71.4 billion in FY2021. Our dashboard on Citigroup revenues offers more details on the company’s segments.
2) EPS likely to miss the consensus estimates
Citigroup’s Q2 2021 adjusted earnings per share (EPS) is expected to be $1.91 per Trefis analysis, almost 5% below the consensus estimate of $2.02. Due to the Covid-19 crisis and the economic slowdown, the loan repayment capability of the bank’s customers deteriorated in 2020. Hence, the firm increased its provisions for credit losses from $8.4 billion to 17.5 billion to neutralize the higher risk of loan defaults. This took a toll on its profitability figures – adjusted net income decreased 46% y-o-y. That said, Citigroup has reduced its provisions over the recent quarters, including a $3.9 billion release in reserve for credit losses in the last quarter. The move significantly boosted its profitability numbers in Q1, improving its net income figure by 213% y-o-y. We expect the provisions to see a further decrease in the second-quarter results.
Moving forward, the bank is likely to report an adjusted net income of $15.3 billion in 2021, almost 55% more than last year’s figure. Further, the bank has restarted its share repurchase program in the year, which will boost the shareholder returns. Overall, the EPS is expected to be around $7.84 in FY2021.
(3) Stock price estimate 23% more than current market price
Going by our Citigroup valuation, with an EPS estimate of around $7.84 and a P/E multiple of just below 11x in fiscal 2021, this translates into a price of $82, which is 23% above the current market price of around $67.
Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year
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