By Elizabeth Frasier-Nelson – elizabethfnelson@internationalbanker.com
Citi failed to impress the Wall Street with its dismal fourth quarter earnings in 2013
The common consensus of the speculation pre announcement was expectation of adjusted earnings of 95 cents per share against the reported earnings of 82 cents. This is the second consecutive quarterly results that failed to impress investors. The Citigroup Inc. shares have declined by 5.70% since January 16th indicating the bearish investor mood after the fourth quarter results.
Key Facts from Citigroup fourth quarter results
- Net Income: $2.7 Billion
- Revenue: $17.8 Billion
- Net Credit Loss: $2.5 Billion
- Deferred Tax Assets Usage: $600 Million
- Basel III Tier 1 Common ratio: 10.5%
- Basel III Supplementary Leverage Ratio: 5.4%
- Deposits: $968 Billion (4% growth as per last year)
- Loans: $575 Billion (7% growth as per last year)
- Holding Assets: $117 Billion (25% decline as per last year)
Citigroup Inc.: Brief Overview of the performance
Citigroup reported revenues of $17.8 Billion for the fourth quarter of 2013, which is 1 percent down from the previous years quarter. The experts were hoping for a revenue consensus of $18.25 billion. Citigroup held low fixed income market results responsible for the sudden drop in revenue.
Overall, Citigroup had a net income of $13.9 Billion in 2013 with revenues of $76.4 Billion. Although not as per the expectation, Citigroup did better than the net income of $7.5 Billion in 2012 with revenues of $69.1 Billion. The company posted a growth of over 15% when compared with the revenues and earnings of the previous year.
Citicorp recorded revenues of $16.5 Billion, which was 2% below the YOY standards. With the revenues of $16.6 Billion (excluding CVA/DVA and similar items), the group experienced a 4% decline in its revenue from the previous years quarter. Some important reasons behind these results include lower security and banking revenues along with slower Global Consumer Banking growth.
Citi Holdings reported revenues of $1.3 Billion for the fourth quarter of 2013 with an increase of 22% YOY. The main reasons behind this increase include limited repurchase reserve builds for warranty claims and representation in the quarter. Citigroup managed to bring down its operating expenses to $11.9 Billion with a 6% YOY decline and 13% lower than 2012. Some of the primary reasons behind this decline include reduced assets in Citi Holdings, fewer legal expenses, and efficiency savings.
Capital Position of Citigroup
When it comes to the capital position, Citigroup did managed to build and solidify its capital foundations in fourth quarter of 2013. Some of the highlights are:
- Basel I Tier 1 Capital Ratio: 13.6%
- Basel I Tier 1 Common Ratio: 12.6%
- Basel III Tier 1 Common ratio: 10.5%
- Basel III Supplementary Leverage Ratio: 5.4%
Some of the primary reasons behind Basel III Tier 1 Common Ratio include deferred tax asset usage and retention of earnings.
- Book Value Per Share: $65.31
- Tangible Book Value Per Share: $55.38
- End of Period Assets (Citicorp): $1.76 Trillion
- Deposits (Citicorp): $932 Billion
Global Consumer Banking Performance
The fourth quarter was not quite pleasing for the Global Consumer Banking and its net revenue fell 5% YOY to $9.5 Billion. According to the GCB officials, lower mortgage refinancing in the U.S. market was one of the major reasons behind this decline. Some major facts concerning the performance of GCB in fourth quarter of 2013 are:
- GCB Net Income: $1.6 Billion (5% decline from last year)
- GCB Operating Expenses: $5.2 Billion (10% decline from last year)
North America GCB
- Revenues: $4.9 Billion (8% decline from last year)
- Net income: $898 Million (8% decline from last year)
- Operating Expenses: $2.4 Billion (10% decline from last year)
International GCB
- Revenues: $4.6 Billion (1% decline from last year)
- Net income: $734 Million
- Operating Expenses: $2.8 Billion (6% decline from last year)
Securities and Banking
- Net Revenue: $4.5 Billion
- Net Income: $960 Million
Transaction Services
- Net Revenue: $2.6 Billion
- Net Income: $778 Million (1% decline from last year)
- Assets under custody: $14.5 Trillion (10% increase from last year)
Primary Reasons Behind Dismal Fourth Quarter Results 2013 for Citigroup
There are several reasons that lead to these quarterly results including mediocre bond-trading figures and lower U.S. Mortgage refinancing activities.
Drop in bond trading revenue, fixed income market, and mortgage refinancing
One of the major concerns was the huge drop in bond trading revenue for Citigroup in the fourth quarter of 2013. Citigroup called it a “challenging trading environment” and its bond trading revenue declined by 15% to $2.33 Billion for the fourth quarter. Most economists are questioning the delay in the proper pruning of the bond trading activities of the bank.
The fixed income revenues have been affected by the macroeconomic uncertainty and volume declines. Its impact are quite evident with the declining net income of the Global Consumer Banking division. The primary reasons behind this drop include decline in mortgage revenues, high credit cost and spread compression continuing in the fourth quarter.
A streamlined approach for bond trading is crucial in the current trading environment, especially after the Basel III Global Rules and Dodd-Frank financial reforms that are enforcing tighter regulations. It is certain that a decline in bond trading revenue is often considered as a sign of discipline. However, it has become equally important for the Citigroup to cover for revenue drop with other sectors, especially during these reforms.
Lower fixed income trading revenues are quite common throughout the industry after the economic slowdown in 2008-09. Some institutions are waiting for the competition to step out of bond trading and hoping to regain profits with lesser competition.
Bright Spots in Fourth Quarter 2013
- Increase in Net Income: Citigroup could not impress Wall Street with its fourth quarter results; however, its net income for 2013 rose to $13.9 Billion with revenues of $76.4 Billion against $7.5 Billion with revenues of $69.1 Billion in 2012. In short, the bank’s net income increased by 15%, which is highest after the economic slowdown.
- Lower Operating Expenses: Citigroup was successful in lowering its operating expenses in fourth quarter of 2013 to $11.9 Billion, which was 13% lower than the fourth quarter of 2012.
- Declining assets in Citi Holdings: Citi Holdings comprises of troubled mortgage assets with a net worth of $117 Billion. The assets were reduced by 25% in the fourth quarter indicating a positive trend for the Citigroup. The company is planning to roll down the assets of Citi Holdings in an efficient manner.
In 2013 Citigroup started in an impressive manner with a successful first half, but its performance lagged in the second half. In addition to it, the global consumer businesses have been experiencing pressure in the last several quarters. The current strategy is to shrink non-assets, which might have an impact over the net revenue, although it is an excellent approach for the long-term valuation of the company.
Despite of all of these factors, Citigroup’s efforts to streamline its business areas have started giving positive results. The performance was satisfactory considering the economic stress and regulatory changes throughout the year. If the company can improve its capital ratio in the future and continue with its global banking expansion, there are chances that it will offer better returns in the years to come.