Low Consumer Banking Revenues to Ail Citigroup (C) Q2 Earnings

Citigroup C is scheduled to report second-quarter 2021 results on Jul 14, before market open. While its revenues are expected to have declined year over year, earnings are anticipated to have improved.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate on higher equity market revenues and reserve releases. However, lower revenues and loans were the undermining factors.

Over the trailing four quarters, the company’s earnings have surpassed the consensus estimate on all four occasions, the surprise being 34.9%, on average.

Citigroup Inc. Price and EPS Surprise

Citigroup Inc. price-eps-surprise | Citigroup Inc. Quote

Factors at Play

Consumer Banking Revenues Low: Citigroup is expected to have witnessed a decline in consumer banking revenues. While delinquency rates have been stable in the second quarter, the company has been seeing lower credit card loans as credit-cardholders pay back their loans at faster rates, supported by abundant liquidity and government aid. This is expected to have hindered lending volumes.

Management’s commentary on its North America consumer banking business indicates unimpressive second-quarter performance. For second-quarter 2021, North America consumer banking revenues are “likely to be down at similar level to what they were in the first quarter in terms of the year-over-year performance”, per management. In first-quarter 2021, the company reported revenues of $4,428 million, witnessing a year-over-year decline of 15%.

Overall, the consensus mark for first-quarter 2021 revenues from global consumer banking is pinned at $6.8 billion, indicating a year-over-year decline of 7.9%.

Trading Revenues to Decline: After enjoying significant trading activity in 2020 and first-quarter 2021, Citigroup is expected to have faced high year-over-year trading comps. This along with the normalization of capital market activities is likely to have dented trading revenues in the quarter under review.

Management projected year-over-year trading revenue decline “in the low 30s percent” for second-quarter 2021. While equity market revenues are likely to have been strong, backed by the decent performance of the overall equity market, lower fixed-income revenues are anticipated to have been an undermining factor.

Investment Banking (IB) Fees Decent: Global M&A activity continued to impress in the second quarter as dealmakers across the globe were active during this period, with a rise in M&A deal numbers. This is expected to have had a positive impact on Citigroup’s advisory fees.

However, a decline in equity and debt underwriting in the quarter under review is expected to have resulted in a decline in investment banking revenues. Management expects investment banking revenues to decline “in the low to mid-single digit range.”

Net Interest Income (NII) to Decline: The lending scenario has been dismal in the second quarter, with weakness in commercial and industrial loans, revolving home equity, and residential activities. Nonetheless, consumer loans and auto loans are expected to have offered some support, per the Fed’s latest data.

This along with the flattening of the yield curve is anticipated to have hindered Citigroup’s NII to some extent. The Zacks Consensus Estimate for NII of $10.1 billion suggests a 9% decline from the prior-year quarter’s reported figure.

Expenses Rise: Management has been focused on transforming to revamp its underlying technology, risk management and internal controls as part of remediation highlighted by the Office of the Comptroller of the Currency and the Federal Reserve last year. The company has been investing in businesses like wealth management, IB, and treasury and trade solutions.

At a conference held mid-June, the company indicated that higher investments in such an overhaul might inflate expenses. Citigroup informed investors regarding its expectations that second-quarter expenses will likely increase to “somewhere in the middle” of $11.2 billion and $11.6 billion.

Asset Quality to Improve: With continued improvement in the macroeconomic condition in the second quarter, increased vaccination rates and support from stimulus packages, we expect another quarter of reserve releases for Citigroup.

In a mid-June conference, the company noted that it witnessed stable delinquencies, and expects reserve releases for the second quarter of 2021, albeit at a lower magnitude relative to the first quarter.

Here is what our quantitative model predicts:

Citigroup does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Citigroup is -2.71%.

Zacks Rank: Citigroup currently carries a Zacks Rank of 3.

Over the past month, the Zacks Consensus Estimate for earnings has been unrevised. Also, the consensus mark of $1.98 suggests a significant surge from the year-ago reported number.

However, the Zacks Consensus Estimate for revenues of $17.6 billion indicates an 11.1% decline from the prior-year quarter’s reported figure.

Stocks That Warrant a Look

Here are some bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:

The Earnings ESP for Bank of America Corporation BAC is +0.65% and it carries a Zacks Rank of 3 at present. The company is scheduled to report quarterly numbers on Jul 14.

The Bank Of New York Mellon BK is slated to report quarterly results on Jul 15. The company currently has an Earnings ESP of +2.27% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BankUnited, Inc. BKU is scheduled to release earnings numbers on Jul 22. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +1.04%.

Breakout Biotech Stocks with Triple-Digit Profit Potential

The biotech sector is projected to surge beyond $775 billion by 2024 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.

Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Our recent biotech recommendations have produced gains of +50%, +83% and +164% in as little as 2 months. The stocks in this report could perform even better.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.