Citigroup Inc. (C) reported third quarter 2010 earnings of 7 cents per share, ahead of the Zacks Consensus Estimate of 5 cents. Excluding the pre-tax loss of $800 million ($435 million after-tax) related to the sale of The Student Loan Corporation, net income came in at $2.6 billion or 8 cents per share.

Though the results were below the prior quarter earnings of 9 cents, they compared favorably with the loss of 27 cents per share during the same quarter last year.

Third quarter 2010 results reflect an improvement in the credit quality and lower loan loss provisions. However, revenues remained pressured and reported a drop. Revenues came in at $20.7 billion, down 6% from the prior quarter and also below the Zacks Consensus Estimate of 21.0 billion.

The decrease was primarily due to a drop in revenues from Local Consumer Lending and Securities and Banking business. Though revenues at Citicorp Latin America and Asia advanced 7% and 1%, respectively, revenues at North America and EMEA were down 6% and 2%, respectively, from the prior quarter.

However, provisions for credit losses and for benefits and claims continued to decrease to $5.9 billion, down 11% sequentially. This represents the lowest level since the second quarter of 2007. Net release of reserves for loan losses and unfunded lending commitments were $2.0 billion, compared with $1.5 billion in the prior quarter.

Credit Quality

Credit quality metrics improved in the quarter. Citi's non-accrual loans were $22.4 billion, down 10% from the prior quarter. Total allowance for loan losses was $43.7 billion or 6.73% of loans, compared with $46.2 billion or 6.72% of loans in the prior quarter.

Behind the Headline Numbers

Net interest revenue for the quarter was down 6% from the prior quarter to $13.2 billion. Net interest margin dropped to 3.07% from 3.15% in the prior quarter as a result of lower investment yields reflecting the company’s liquidity position. Non-interest income was $7.5 billion, down 7% from the prior quarter.

Expenses were $11.5 billion, down 3% from the prior quarter. However, excluding the prior quarter impact of the U.K. bonus tax, expenses were up 1%, as the company continued to invest in Citicorp. This was partially offset by lower expenses at Citi Holdings.

Capital Ratios

Citi's capital ratios improved in the quarter. Tier 1 Capital ratio was 12.5%, compared with 11.99% in the prior quarter. Tier 1 Common ratio was 10.3%, up from 9.71% in the previous quarter. Book Value per share was $5.60, up from $5.33 in the prior quarter. Tangible Book Value per share was $4.44, up from $4.19 in the prior quarter. End of period assets increased 2% sequentially to $1.98 trillion at the end of the third quarter.

Competitor Performance

Last week, JPMorgan Chase & Company (JPM) reported its third quarter results. Earnings came in at $1.01 per share, substantially ahead of the Zacks Consensus Estimate of 91 cents. Similar to Citi, JPMorgan’s earnings were primarily supported by a slowdown in provision for credit losses. This more than offset a pressure on trading revenues, investment banking revenues and non-interest income.

The other biggies in the banking business have yet to report their earnings. However, we will see some major banks reporting this week: both Bank of America Corporation (BAC) and Goldman Sachs (GS) are scheduled to report on October 19, and Morgan Stanley (MS) and Wells Fargo (WFC) report on October 20.

Our Take

Citi’s earnings beat driven by the improvement in credit quality is encouraging and the market is reacting positively. The company’s restructuring initiatives are progressing well. However, we believe that the shrinking of its business through assets sale, the CARD Act and the recent financial reform law would prove revenue challenges. Nevertheless, the company’s core business, Citicorp, remains attractive and its global footprint is impressive. With an expectation for an improved economic environment in the upcoming quarters, we expect Citi to post stronger earnings.

Citi shares are maintaining a Zacks #3 Rank, which translates into a short-term Hold recommendation. We have a long-term Neutral recommendation on the stock.


CITIGROUP INC (C): Free Stock Analysis Report