ii view: Citi results overshadowed by operational challenges

Shares of this major US bank rose and then fell following quarterly results. Here’s why:

Third-quarter results to 30 September 2020

Chief executive Michael Corbat said:

“We continue to navigate the effects of the Covid-19 pandemic extremely well. Credit costs have stabilized; deposits continued to increase; and revenues are up 3% year-to-date.

“Our capital position strengthened during the quarter with our Common Equity Tier 1 ratio increasing to 11.8% and our Tangible Book Value per share increasing to $71.95. We remain committed to returning capital to our shareholders, subject to the industry-wide approach determined by the Federal Reserve.

“We are committed to thoroughly addressing the issues contained in the Consent Orders we entered into last week with the Federal Reserve and the Office of the Comptroller of the Currency. These investments will not only further enhance our safety and soundness, they will result in a digital infrastructure that will improve our ability to serve our clients and customers and make us more competitive.”

ii round-up:

US bank Citigroup (NYSE:C) reported better-than-expected earnings, pushed higher by both reduced loan loss provisions and elevated trading levels under pandemic volatility.

Earnings of $1.40 per share beat analyst forecasts nearer to $0.90 and marked a significant improvement from prior second-quarter earnings of $0.50 per share. But operational issues and a recent $400 million fine left investors questioning the oversight of the bank’s current chief executive. 

Having risen initially by over 1% in pre-market trading, Citi shares finished Tuesday down nearly 5%. For the year-to-date its shares are down around 45% compared to a near one-quarter fall at rival JPMorgan (NYSE:JPM). 

Operational difficulties and resulting fines shaved $0.15 per share off reported third-quarter earnings. The pace at which group IT systems are being overhauled remains under the spotlight. 

Last month, Citi announced the February replacement of current CEO Michael Corbat by his deputy Jane Fraser. 

Loan or net credit losses of $1.9 billion fell from the $2.2 billion made in the prior second quarter. A 5% increase in revenues to $10.3 billion at the bank’s institutional client division, given ongoing market volatility, helped offset a 13% revenue fall across its consumer banking division to $7.2 billion.

Under the shadow of pandemic job uncertainty and reduced loan demand, Citi profits year-over-year fell 34% to $3.26 billion. In July, the bank declared a second-quarter dividend of 51 cents per share, unchanged from the previous four quarters and leaving the shares sat on a historic yield of over 4%.  

ii view:

A more global bank than rival JP Morgan, with less than half of its revenue generated in the US and more than a third coming from Asia and Latin America, Citigroup offers investors a smaller and structurally simpler alternative to its Dow Jones constituent rival.

Its Institutional Client division provides cash management and trade solutions to around 90% of Global Fortune 500 companies. Global consumer banking serves more than 110 million clients in over 15 countries.

For investors, given the fallout and subsequent rebuilding of balance sheets from the financial crisis, US banks have generally come into this crisis in good shape. A jump in earnings from the pandemic-affected second quarter offers some optimism, while a dividend yield of over 4% (not guaranteed) is attractive in an era of ultra-low interest rates. But with operational challenges and fines leaving the current CEO under the spotlight, understandable caution may leave investors for now, looking elsewhere in the sector.   

Positives: 

• Geographical diversity
• Attractive dividend payment (not guaranteed)

Negatives:

• Suffering operational challenges and fines
• Lower interest rates are broadly bad for bank profitability

The average rating of stock market analysts:

Buy