Craig Ruttle
Citigroup was already under plenty of pressure to turn things around, but JPMorgan Chase's blowout earnings performance in the third quarter didn't make things any easier.
Citi's third-quarter results are due before Thursday's opening bell. The two companies are similar in many ways -- Citi is probably more globally oriented than JPMorgan, at least in it consumer businesses -- but Wall Street is expecting a very different outcome. The current average estimate of analysts polled by Thomson Reuters is for a loss of 38 cents a share (U.S.) from Citi in the September period with revenue projected at $20 billion.
The recipient of $45 billion in government funds, Citi has undertaken a host of management and business restructurings in its efforts to fix its struggling businesses. The company is likely to post strong investment banking results in the quarter, as did JPMorgan, but the consumer businesses are likely to remain a sore spot.
At the same time, Citi has been selling off a number of assets -- including several profitable ones, like the joint venture agreement between its Smith Barney operations and Morgan Stanley as well as the divestiture of its Nikko businesses -- in order to shrink its balance sheet. That will, obviously, cut into the company's revenue generating abilities.
Wall Street had a mixed opinion of the company ahead of the report. Of the 20 analysts covering Citi, nine had the stock rated at hold, while 6 ranked it as a buy. The other five ratings were spread between buy (2), sell (2) and underperform (1).
JPMorgan Chase remained cautious about the outlook for the credit environment, with executives saying it was too early to say a recovery was underway, despite some encouraging trends. The company added $2 billion to its consumer reserve levels, roughly the same amount as it did in the prior quarter.
Citi CEO Vikram Pandit acknowledged during second quarter earnings that credit costs in cards and mortgage businesses are a major focus for the company. "In our consumer businesses, the story is very simple," Pandit said on the company's earnings call in July. "Our credit card and mortgage losses are elevated because of where we are in the cycle." "Cards and mortgage are what we need to work through and we are very focused on this," Mr. Pandit said.
Consumer credit will clearly be the largest determining factor for Citi's earnings. The key factor will be just how much the company increases its reserves against loan losses. Here are a few things to watch out for while reading the company's earnings report tomorrow:
- Citi's continued losses on toxic assets held in Citi's bad bank, Citi Holdings, while elevated will likely decrease from the second quarter
- Continued lower expenses as the company exits non-core businesses
- Don't forget one-time charges associated with the company's preferred-to-common stock exchange
- Analysts will also be listening for any discussion the company gives regarding eventually paying back TARP funds. So far the company has been vague about its plans to return the money
Shares of Citi have risen more than 60 per cent since the company reported earnings in mid-July, but much of that boost was due to the company's completion of a preferred-to-common-stock exchange this summer. Any positive surprise in core earnings that Citi can eke out would go a long way for the stock, which has languished below $5 for much of this year.
Shares of the company were rising 3.5% on Wednesday to $5.00. Goldman Sachs also is set to report earnings Thursday, followed by Bank of America on Friday.