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Stock Analyst Update

Citigroup Remains Profitable in a Tough Second Quarter

While results aren’t pretty, they remain better than some peers, and most importantly, Citi’s capital levels are holding up as the common equity Tier 1 ratio improved to 11.5%.

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Narrow-moat-rated Citigroup (C) reported better-than-expected second quarter results, with net income of $1.3 billion, or $0.50 per diluted share, beating S&P Capital IQ consensus estimates. The bank reported a return on tangible common equity of 2.9% and delivered 5% year-over-year growth in tangible book value in spite of a challenging macroeconomic environment due to the coronavirus pandemic. While results aren’t pretty, they remain better than some peers, and most importantly, Citi’s capital levels are holding up as the common equity Tier 1 ratio improved to 11.5%. While lower payments volumes, lower rates, and lower card loan balances are all pressuring revenue, revenue still managed to increase to $19.8 billion, up 5% year over year while expenses declined 1% over the same period. Citi’s investment banking and trading operations are proving to be excellent cushions during an otherwise difficult environment. The decline in expenses came mainly due to lower advertising and marketing spend and lower “other” operating costs. Credit costs remain the key driver, and these costs increased 12% compared with the prior quarter as the bank sought another large reserve build to shore up against expected future loan losses. Even so, Citi remains profitable and able to support its dividend. Citi has now reserved for close to 70% of its anticipated losses under the company-run version of the stress test, and we hope that this quarter will be the high water mark for provisioning going forward. As we update our projections for these results, we expect new rate assumptions will have a slightly negative impact. We also plan to incorporate a 50% chance that Biden is elected and that his proposed corporate tax hikes are implemented, which will also have a negative effect. All in, we expect a low to mid-single-digit percentage decrease in our fair value estimate. 

 

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

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