Tuesday, April 24, 2012

Citigroup Earnings Rebound on Adequate Results

By Citigroup standards, Q1 financial results held the line and included a sigh of relief. CEO Vikram Pandit was able to stand on the parapet without being shot off again. Q1 earnings per share were slightly below estimates, but rebounded significantly QoQ from the multi-quarter lows of Q4 2011. EPS was down slightly YoY instead of the projected flat line. Financial performance was somewhat mixed: containing some good, some bad, mostly adequate.

The good is earnings per share, net revenues, operating income, net income, operating margin, and net margin rebounded strongly QoQ. Operating expenses decreased. The capital ratio decreased slightly, mostly the result of an increase in deposits.

The bad is foremost the wild card and game-changer: CVA/DVA1 was a -$1.3 billion loss, resulting from the tightening of credit spreads. Citigroup goes through the meaningless exercise of releasing schedules and qualifying statements with this  valuation adjustment excluded.  That's like showing a what-if box score excluding the other team's 5 home runs.

Other concerns are Citigroup is slightly below year-ago performance and lost a small piece of ground. This can however be regained in one stronger quarter. The asset mix is negatively trending, net loans are decreasing while cash & investments are increasing in proportion to total assets. Return on assets is flat. Credit losses and claims are historically low, but slightly increased after last quarter's multi-year low.

Citigroup Income Statement Q1 2012 Citigroup financial performance rebounded with net revenues of $19.41 billion, net income of $2.93 billion, and earnings per share of $0.95. From the prior quarter Q4 2011, these were +13%, +207%, and +206%, respectively. From the prior year Q1 2011, these were -2%, -2%, and -4%, respectively. Both the operating margin and net margin increased QoQ but decreased slightly YoY to 20.96% and 15.10%, respectively. The operating expense ratio dipped to 49% and is near the historical average.

Citigroup Balance Sheet Q1 2012 Citigroup total assets increased to $1.94 trillion. Return on assets was steady at +0.57%, which is low but adequate. The capital to assets ratio decreased slightly 9.45%. The regulatory Tier 1 capital ratio is 14.2% and the Tier 1 common ratio is 12.4%. All the capital ratios are adequate.

1 Credit valuation adjustment (CVA) on derivatives, net of hedges, and debt valuation adjustment (DVA) on Citigroup's fair value option debt.

Seeking Alpha