Analyst Note| Eric Compton, CFA |
Narrow-moat rated Citigroup reported better-than-expected earnings in third quarter 2020, with normalized EPS coming in at $1.40, compared with S&P Market Intelligence consensus of $0.87. Results were mixed, and unsurprisingly, a number of the questions on the earnings call were related to Citi’s recent consent order. The return on tangible common equity in the quarter was roughly 8%. Given Citi’s higher exposure to the card business, and also the commercial business’ sensitivity to rates and commercial card volumes, revenues were unsurprisingly under pressure during the quarter. Revenue was down 7% year over year, as net interest income was down 10% and fees slipped 2%. Investment banking and trading operations had another exceptional quarter, with investment banking revenue up 13% year over year, and revenue for the markets and securities segment up 16%. We would expect these segments to continue to trend toward a more normalized run rate in the fourth quarter and into 2021. While credit trends are generally holding up well for the consumer business, payments volumes and rates are not, and as a result, revenue for the consumer banking segment was down 12%. Expenses for consumer were only down 2%, and as a result, even with manageable credit costs, net income for the segment was down almost 30%. We expect these trends to continue to play out, as lower economic activity, lower payments volumes, and lower rates all weigh on Citi’s results going forward. Citigroup will be tied to the economic recovery and payment volumes recovery in the U.S., Mexico, and in Asia. We’re hoping we reach a bottom for net interest income in the fourth quarter. There is still a high degree of uncertainty with regard to future economic developments and future credit costs, and we are leaving our uncertainty rating of very high in place. After updating our projections for the latest quarterly results, we decrease our fair value estimate to $68 per share from $71 per share.