Citigroup Beats the Street: Failure and Fraud, Be Damned

Source: Thinkstock

Source: Thinkstock

Shares of Citigroup (NYSE:C) climbed as much as 3.5 percent in early trading on Monday after the bank reported first-quarter earnings that were higher than analyst expectations. Net income of $3.9 billion, or $1.23 per share, was flat on the year but higher than the mean analyst estimate of $1.14 per share. Revenues of $20.1 billion were down fractionally on the year but also beat the mean analyst estimate of $19.37 billion.

“Despite a quarter that was difficult for our company, we delivered strong results,” said Chief Executive Officer Michael Corbat in the earnings release. “Both our consumer and institutional businesses performed well and we grew both loans and deposits while holding the line on our expenses. We reduced our deferred tax assets more than any other quarter since the crisis and drove Citi Holdings closer to break even.”

To those points, Citigroup reported a 7 percent increase in loans to $575 billion and a 3 percent increase in deposits to $966 billion. Net credit losses declined 15 percent on the year to $2.4 billion, and the firm reported a loan loss reserve release of $673 million, up from $650 million in the year-ago period. Citigroup’s total allowance for loan losses at the end of the quarter was $18.9 billion, or 2.87 percent of total loans.

Corbat isn’t simply placating investors by calling attention to the difficulties that the bank has faced recently. Citigroup — one of the 29 global systemically important banks (G-SIBs) identified by the Financial Stability Board — has faced challenges ranging from a fraud investigation in Mexico to legal action over interest-rate manipulation. Chief among its concerns is its failure to pass an annual stress test administered by the Federal Reserve.

The objective of the Fed’s stress tests wiss to determine whether “complex bank holding companies” (BHCs) like Citigroup and its G-SIB peers, JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC), would have, as the central bank put it in its 2014 report, “sufficient capital to continue lending to support real economic activity while meeting their financial obligations, even under stressful economic conditions” like those experienced during the late-2000s financial crisis.

Not only did the Fed’s assessment find that Citigroup, the third-largest U.S. bank by assets, had failed to sufficiently correct deficiencies it had pointed out after the 2012 test, but the central bank also took issue with the “reliability” of the Citi’s financial projections under the hypothetical economic conditions of the test. Specifically, the Fed said it had concerns about Citigroup’s “ability to project revenue and losses under a stressful scenario for material parts of the firm’s global operations.”

News of the failure drove shares lower and surprised executives at the bank, who were quickly berated by analysts and shareholders. The failure was a particularly hard blow to Corbat, who has been fighting an  uphill battle to restore the bank to its pre-crisis glory ever since he took office, in October 2012. The failure denied Citigroup the ability to increase its dividend, currently at just 0.1 percent, or repurchase additional shares.

The sting from this failure is agitated by the fact that peers like JPMorgan and Wells Fargo passed the test.

Both JPMorgan and Wells Fargo have already reported earnings, but the results were mixed. JPMorgan reported what the market interpreted as a grievous deceleration of business activity. Investors bid shares down as much as 3.7 percent after the bank reported net income of $5.3 billion, or $1.28 per share, a 19.5 percent decline on the year and 12 cents below the mean analyst estimate. Total net revenues fell 8.5 percent on the year to $22.99 billion, below the mean analyst estimate of $24.53 billion.

In an interview with Bloomberg following the earnings release, Josh Rosner, managing director at Graham Fisher, argued that “there’s not a lot of growth opportunity” for banks like JPMorgan and Wells Fargo, which beat earnings estimates and met revenue estimates; Rosner said that “both of them had kind of weak top line.”

Wells Fargo posted net income of $5.9 billion, or $1.05 per share, up 14 percent on the year and above the mean analyst estimate of 92 cents per share. Revenue fell about 3 percent to $20.3 billion, consistent with the mean analyst estimate.

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