Earnings Report Preview | "Difficult on both ends" of income and expenses, Citigroup Q4 profits may decline

Zhitong App has learned that Citigroup (C.US) will announce its fourth quarter and full-year 2023 earnings on Friday, January 12th. While the bank's quarterly profits are expected to decline year-on-year, its revenue may show some growth. In the previous quarter's report, adjusted earnings per share exceeded Zacks' consensus expectations due to increased revenue from the Institutional Clients Group, as well as the Personal Banking and Wealth Management divisions. However, higher credit costs have been a disadvantage. In the past four quarters, Citigroup has exceeded market expectations in three quarters and fell short in one quarter, with an average outperformance of 7.62%.

The main factors affecting fourth quarter performance are as follows:

Net Interest Income (NII)

According to the latest data from the Federal Reserve, demand for commercial real estate loans improved slightly in November compared to the third quarter of 2023. However, there were no signs of growth in consumer loans throughout October and November. In addition, commercial and industrial loan demand weakened in the first two months of the fourth quarter compared to the third quarter of 2023. Overall, we believe that Citigroup's loan demand growth may be impacted in the fourth quarter.

Furthermore, although the Federal Reserve paused rate hikes in the fourth quarter of 2023, interest rates remained at a 22-year high of 5.25-5.5%. Such high rates are expected to squeeze loan demand, thereby affecting the bank's loan portfolio. This may have an impact on the average interest-earning assets for this quarter. In fact, Zacks' consensus estimate for average interest-earning assets is $2.19 trillion, a decrease of nearly 1% from the previous quarter's report.

In addition, the high interest rates may increase financing costs to some extent. Together with the decline in loan demand, this is expected to affect the bank's net interest income and net interest margin (NIM) in the fourth quarter. Zacks' consensus expectation for net interest income is $13.39 billion, a decrease of 3.2% from the previous quarter's report. The market's general expectation for NIM is 2.42%, a decrease from 2.49% in the previous quarter.

Investment Banking Fees

In the upcoming quarter to be reported, the investment banking business has shown signs of improvement after a disappointing performance in the previous three quarters. Capital markets and issuance activities have shown signs of recovery. It is worth noting that at the Goldman Sachs U.S. Financial Services Conference held in early December, bank executives pointed out that the global trading environment has begun to improve. The main factor driving the improvement is a stable interest rate environment.

In the upcoming quarter to be reported, a considerable number of companies have conducted initial public offerings. These may have a positive impact on Citigroup's investment banking revenue for this quarter. The company expects investment banking revenue to grow in the high single digits for the fourth quarter. Zacks' consensus expectation for IB revenue this quarter is $902.6 million, higher than the previous quarter's $844 million.

In addition, the CFO of Citigroup stated at the conference that market volatility and client activity in the fourth quarter were subdued across a wide range of asset classes. Therefore, management expects market revenue to decline by 15-20% compared to the third quarter of 2023. According to the Zacks consensus estimate, it is expected that the project's revenue will decrease from $4.48 billion in the previous quarter to $3.64 billion. The market generally expects second-quarter commission and fee income to be $2.12 billion, a decrease of 3.4% from the previous quarter.

In addition, the Zacks consensus estimate for management and other trust expenses is $883 million, a decrease of 9.1% compared to the previous quarter. The market's general expectation for primary trading revenue is $2.39 billion, a decrease of 20.7% from the previous quarter's report. Overall, the Zacks consensus estimate for non-interest income is $5.67 billion, a decrease of 10.1% compared to the previous quarter.

Costs and Expenses

Management has been focused on improving its underlying technology, risk management, and internal controls, which are part of the remedial measures emphasized by the US Currency Supervision Agency and the Federal Reserve. In addition, increased expenses, particularly severance costs related to organizational restructuring and divestiture expenses, may increase expenses and hinder profit growth in the fourth quarter of 2023. In particular, management has stated that $1 billion in restructuring and severance costs will be recorded in 2023, of which $600 million occurred in the first three quarters of 2023.

Furthermore, during the quarter under discussion, Citigroup was fined $25.9 million by the Consumer Financial Protection Bureau for intentionally discriminating against Armenian-American applicants for credit cards. This will further increase Citigroup's expense base. Management expects expenses for 2023 to be approximately $54 billion (excluding the $1.65 billion special assessment from the FDIC in 2023 and the impact of divestitures), indicating expenses of $51.3 billion for 2022. Zacks expects fourth-quarter non-interest expenses to be $15.32 billion, an increase of approximately 14% compared to the previous quarter.

Key Developments in the Fourth Quarter

In October 2023, Citigroup agreed to sell its consumer wealth investment portfolio in China to HSBC Holdings (HSBC.US). The transaction is expected to be completed in the first half of 2024. As a result of the sale, Citigroup will transfer assets and deposits worth approximately $3.6 billion to HSBC. In addition, it will retain its competitive position in institutional business.

With its exit from the global consumer banking business, Citigroup announced in November 2023 that it has completed the sale of its consumer business in Indonesia and fully migrated to Bank Danamon Indonesia. The sale includes retail banking, credit card, and unsecured loan businesses, as well as employee transfers. This transaction is expected to bring moderate regulatory capital gains to the bank.