The funk in the financial services space has resumed, if not gotten just a bit worse. Without quite the same historic-level support from the institutional segment experienced in the second quarter of the year, Citigroup (C) delivered third-quarter results that fell short of impressive – even if slightly ahead of consensus estimates. The stock was down an uncomfortable 5% on Tuesday and 46% from the 52-week peak reached in the second week of 2020.
Revenues of $17.3 billion dipped YOY by nearly 7%, which was about 65 bps better than expected. EPS of $1.40 was well ahead of analysts’ projections. However, the beat can be probably best explained by lower-than-forecasted credit loss provision that tends to be unpredictable in the current environment.
(Image Credit: Citi.com)
A look at the results
Citi’s consumer business looked soft, as one should have expected. Global consumer banking revenues dipped 12% YOY, driven in part by a 10% drop in both card sales and loan balances. As bad as these numbers looked, they were not much worse than peer JPMorgan‘s (JPM), which released its own third-quarter earnings report in the same morning. Lower interest rates across all regions also helped to put a lid on Citi’s top line performance – net interest margin of 2.0% was substantially lower than early last year’s 2.7%.
Also in line with JPMorgan, Citi’s results in the consumer segment were aided by higher deposit volumes, both in North America and elsewhere around the world. This dynamic of reduced spending, lower debt accumulation and higher savings rate speaks to general consumer behavior amid a lingering COVID-19 crisis and lack of confidence in an imminent recovery.
(Source: DM Martins Research, data from multiple reports)
Not unlike last time, the institutional side of the business saved Citi from posting disastrous results. However, compared to peer JPMorgan (other banks have yet to release their third-quarter numbers), Citi generally lagged. (See bar chart above.)
Institutional banking revenues, in fact, decreased 2% YOY. Nothing looked particularly worrisome with debt and equity underwriting, which was up 13% but accounted for only 8% of total company revenues. However, treasury and trading solutions took a hit from lower rates and commercial card revenues. On markets and securities services, double-digit revenue growth was encouraging, just nowhere near as good as JPMorgan’s metrics or even Citi’s own numbers posted in the second quarter.
A look at the stock
In the current environment of low interest rates and wobbly consumer spending, Citi finds itself stuck in a corner. Among the Big Bank peer group, the company is the most exposed to the consumer segment and interest income business model, as the charts below from pre-pandemic levels suggest. And so far this year, even best-of-breed players have been unable to sidestep the macro-level headwinds on the consumer side of the equation, as is the case with JPMorgan.
(Source: DM Martins Research, data from multiple company reports)
It is no surprise to me, therefore, that Citi stock trades at a next-year earnings multiple of only 7.2x, which had been by far a sector-wide low even before the pandemic. The bank itself may not be dealing with serious company-specific issues, as its competitor Wells Fargo (WFC) has for years. Still, the unfavorable macroeconomic factors are enough to justify skepticism and caution from the market, in my opinion.
I would not be opposed to buying Citi stock and tucking it inside a diversified portfolio for the long haul. However, were I to do that, I would need to (1) allocate a small amount of the portfolio to the stock in order to avoid potentially sizable losses and nerve-wrecking volatility, and (2) be willing to hold on to shares at the very least until we have cleared the COVID-19 crisis and ensuing recession. Rather than doing this, however, I would feel much more comfortable buying a higher-quality bank stock that is not at the whims of the economy and the markets to the same extent, as seems to be the case with JPM.
Beating the market by a mile
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in JPM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.