ii view: Citigroup beats forecasts

Investors have been cautious regarding US banks. Has anything changed with these results?

Second-quarter results to the end of June 2019

• Revenue up 2% to $18.8 billion
• Net income of $4.8 Billion, up 7% 
• Earnings per share up 20% to $1.95
• Operating expenses down 2% to $10.5 billion

Chief executive Michael Corbat said:

"We navigated an uncertain environment successfully by executing our strategy, and by showing disciplined expense, credit and risk management. We have good momentum and solid growth across our consumer franchise, particularly in the US, while in the ICG [Institutional Clients Group], our industry leading Treasury and Trade Solutions business continues to perform well, and we gained share in market-sensitive products such as Investment Banking."

ii round-up:

Citigroup Inc (NYSE:C) is a global financial services company. It works in over 100 countries, dividing operations between consumer and institutional segments.  

With a strategic focus in the US, Mexico and Asia, the Global Consumer Bank (GCB) serves around 110 million clients in 19 countries. ICG provides wholesale banking products. Approximately $4 trillion of client money passes through its infrastructures and facilitates daily. 

Second-quarter results at the New York-based bank included gains from the sale of its electronic bond trading platform Tradeweb and cost savings assisted performance. 

Strip out Tradeweb and earnings per share increased 12% to $1.83, mostly driven by a 10% reduction in average diluted shares outstanding and lower effective tax rate. Analysts had expected just $1.80 a share. 

The consumer franchise (GCB) traded well, particularly in the US. Divisional revenues grew by 3%, with 3% growth for its important North American business. Some promotional zero-interest-rate card offers lapsed, improving revenue. 

For the institutional business, revenue was flat at $9.7 billion. Revenue for investment banking and equity markets fell by 10% and 9% respectively, hit by lower M&A volumes and lower client activity in cash equities. 

ii view:

The direction of US interest rates, and the negative impact which lower rates can have on lending margins, underwrite current investor nervousness around the banking sector as a whole. Over the past 12 months, US bank stocks have trailed the S&P 500 index by around 14%. 

And the rate situation in the US is a tough call. Cutting rates could give a slowing economy a welcome boost and keep the stock market bull run going for longer. But banks typically make more money from traditional banking when interest rates are higher, which seem less and less likely now.  

Thanks to the 2008 financial crisis and following a great deal of pain, the balance sheet strength of banks is much improved. Citi, along with its peers, recently passed the Federal Reserve's latest stress test. For Citi, specifically, exposure to the relatively buoyant US and Asian consumer and a lack of European operations may also help it stand out from the crowd.

A with the sector broadly, delivering regular growth, as opposed to cost cutting and share buybacks, remains a challenge. However, Citi is a class act that responds well to buoyant stock market conditions, demonstrated by a 40% rally during the wider market's seven-month long post-Christmas rally. 

Positives: 

• Cost cuts above expectation 
• Interest rate cuts may extend the economic cycle 
• Citi passed the US Federal Reserve's latest stress test

Negatives:

• Rate cuts reduce margins between deposits and lending 
• Investment Banking revenue down 10%
• Markets and securities services revenue down 4%

The average rating of stock market analysts:

Buy