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Stock Analyst Update

Citi Mixed Q4, Most Revenue Still Not Going Bank's Way

Narrow-moat Citigroup reported mixed fourth-quarter earnings, with EPS of $2.08 handily beating the Factset consensus estimate of $1.34 per share.

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Narrow-moat Citigroup (C) reported mixed fourth-quarter earnings, with EPS of $2.08 handily beating the Factset consensus estimate of $1.34 per share. This equated to a return on tangible common equity of 11.4%. As with several peers, the biggest swing factor, one we have highlighted in the past, was provisioning for credit losses. In the current quarter, Citigroup was able to release almost $1.5 billion in reserves compared with net charge-offs of just under $1.5 billion, resulting in provisioning of close to zero. Compared with credit costs of roughly $2.4 billion last quarter, this was a swing of roughly $0.93 in EPS, assuming a 20% tax rate. The possibility of reserve releases occurring had been talked about prior to the beginning of the fourth quarter, but it is nice to see it actually occurring as it signals that the banks are likely well reserved, which has been our thesis all along. Citigroup isn't the only bank seeing this trend, as JPMorgan and PNC reported positive reserve development as well today.

Net interest income, or NII, surprised us to the upside, as we'd expected more pressure to emerge. Citigroup was able to hold NII roughly flat compared to third quarter. Even with commissions and fees coming in a bit below where we projected, the beat on NII more than made up for it, with full-year revenue finishing roughly flat with 2019 levels. Within fees, trading income continued to do well, while most other items remained under pressure. On a segment and product level basis, most revenue streams were down year over year, with the exception of trading-related items and private banking in the institution clients group. Meanwhile, expense control was decent as costs were up 2% year over year and were 1% below our projections. To summarize, the year over year revenue picture wasn’t pretty, but it appears that NII is bottoming out. As we more fully incorporate these results, we don't expect to materially change our fair value estimate of $68 for Citigroup. 

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Eric Compton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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