Will Citigroup (C) Q4 Earnings Disappoint On Trading Slump?

The expected fall in Citigroup Inc. (NYSE:C) trading revenues will likely have an adverse impact on fourth-quarter 2017 earnings given the significant dependence of its top line on this source. Nevertheless, this may not lead the company to report dismal results on Jan 16. Benefits of higher rates, decent loan growth and relatively better performance of the other segments — mainly consumer banking — are anticipated to offset the trading slump.

In 2017, several political and geopolitical developments, interest-rate hikes, tax act movements and absence of any significant progress on the regulatory reforms proposed by the Trump administration should have driven volatility. However, subdued inflation in the United States and marginal increase in long-term interest rates, along with absence of positive catalysts, have been on the downside.

Per John Gerspach, chief financial officer (CFO) of Citigroup, the low level of volatility in the fourth quarter, particularly compared to last year when market was reacting actively to the U.S. election, is likely to take a toll on trading revenues. He projects high-teens year-over-year decline in trading revenues. Fixed income and foreign exchange segments, on which the company depends significantly, are likely to have been affected the most.

Gerspach also said that he projects revenues from Citi-branded credit cards in North America to be relatively flat on a year-over-year basis. Pressure has been put on the revenues due to the company’s extensive marketing strategy.

Other Factors to Influence Q4 Results

Consumer Banking Revenues to Exhibit Growth: In consumer, management expects continued modest year-over-year revenue growth, and positive operating leverage in both North America and International Consumer in fourth-quarter 2017. In total, sequential growth in pre-tax earnings in Global Consumer banking is recorded for the last two quarters and is anticipated to continue into the fourth quarter as well.

Investment Banking Fees Might Escalate: Continued momentum in investment banking business is anticipated to support bottom-line numbers. Strong advisory and underwriting fees on the back of higher debt origination and equity issuances are likely to provide a boost to the top line. As the interest-rate hike is expected to continue, many U.S. companies have been raising fresh debt capital over the recent quarters to avoid higher interest rates later. Therefore, debt origination fees will lead to solid gains.

Also, despite being a seasonally weak quarter for equity issuances globally, the fourth quarter turned triumphant. Strong rally in the equity markets across the globe might have boosted IPOs and follow-on offerings. So, the related fees are projected to increase for banks. Thus, Citigroup is also likely to report an impressive quarter.

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On the institutional side, continued year-over-year revenue growth in accrual businesses, including TTS, the Private Bank, Corporate Lending and Securities Services are anticipated. Markets revenues are likely to reflect a normal seasonal decline from the third quarter.

Lesser scope of cost containment: As the majority of unnecessary expenses have already been cut by the bank, expense reduction might not be a major support. However, some legal settlements during the quarter might impact Citigroup’s earnings to an extent.

Rise in Net Interest Income: In addition to higher interest rates, a moderate improvement in lending — particularly in the consumer area — might perk up interest income.

Credit Costs Might Impact Negatively: Cost of credit is likely to be in line, quarter on quarter, driven by the normalization of credit costs in ICG, offset by lower reserve builds in consumer. Net credit-card losses are likely to worsen. Rate in the branded-cards business is expected to be 285 basis points (bps) in 2017 and expand about 10 bps in 2018. Also, in the retail-services business, rate is expected to be 470 bps in 2017 and increase to 500 bps in 2018.

Adverse impact of new tax code: The tax reform might result in elevated operating expenses from one-time bonus payments, higher charitable contributions and investment losses from securities portfolio restructurings. Notably, in early December 2017 (before the passage of the tax act), Citigroup executive had noted that the U.S. corporate tax overhaul will hurt earnings in the fourth quarter. The company had expected one-time charge of $16-$17 billion related to the write-down of deferred tax assets (DTAs) and charge related to cash repatriation to be around $3-$4 billion.

Here is what our quantitative model predicts:

Citigroup does not have the right combination of two key ingredients — a positive Zacks Investment Research

Written By: Zacks Investment Research