Chillin' out till it needs to be funded
The second quarter at Citi followed the pattern established in Q1 and the bank was unable to break the revenue ceiling under Mike Corbat with another $20bln+ revenue quarter maintaining new 20% year/year growth in revenues without any growth in the linked quarter from Q1. Operating expense control is the highlight of the tight ship under the new CEO with $12.1bln in Operating expenses streamlined and Citi holdings assets down to $131 Bln. However the bank continues to struggle with over $2 Bln in credit losses taking away all the gains in efficiency to a $4Bln income for the quarter. Also the 10% Basel II Tier I equity is diluting earnings of $1.33 per share the bank having liquidated its T-DES into 100 mln new shares this quarter. Profits do manage to show a sequential (linked) growth of 8% and Leverage ratio is a good under 8% in the new laws even as the lawmakers struggle between the 5% cap from the Treasury and the Basel requirement of 6% plus new surcharges proposed for G Sifi institutions, with Citi’s Basel Ii NPR based Tier I leverage is already 4.9% as at JPM.
The rest of the analysis will extend this piece after the bank conference at 10 am ET. Citi Holdings RWA is a good $270 B and residential mortgages delinquency improved 1 in 6 is still a hemorrhaging 5.5%
Profits in North America, Asia and EMEA all grew 17-20% even as the bank lost growth momentum because of Latin America and exited businesses in Turkey, Romania, Brazil and Uruguay Overall the bank added $2B in revenues from year ago gain but credit losses remained above $2 Bln and improvements in credit quality failed to improve margins per se; gains coming from investment banking in EMEA and Securities and Banking client desks
Net Interest Income at the bank was $11.6 Bln constant over quarter. Credit costs dropped 21% in North America in Cards (by nearly $500mln) which is 70% of ts revenues in NA but made on impact on the bottomline of $1.1 Bln as interest margins kept dropping to 3.29% in the American retail business
Mexico, Aussie and Singapore include other important consumer credit markets all afflicted by the ram p of post crisis loss rates yet not receded to efficient levels despite early improvements in international markets
The Bank managed to repeat the $1 Bln mark in investment banking fees and advisory while trading income at $4.3 Bln was back to a competitive clip after lagging behind Wall street peers, equities business bouncing to $940 Mln. The bank’s share in EMEA markets at $1.6 Bln from Trading and Investment Banking together seems significant compared to competitors and growing 77% from Q1. The bank also claims imrovement in local FX ddesk business in Asia
The bank’s Transaction Banking revenues from global corporations and International trade though not growing significantly top pace with HSBC, StanChart or Deutsche Bank remains a significant $2.7bln and is well sread globally giving the bank effective risk diversification with $808 mln in profits
Loan Loss reserves contribution to profits has dropped by a third and may be negligible in the same quarter next year. Asia remains 16% of H1 revenues and 20% of the profit, contributing less than half the bank’s Emerging Markets footprint
important note on DTA: While the Citi analysts (analysts covering Citi include John MacDonald of Sanford Bernstein and Matt O Connor at Deutsche Bank) attending the call were mostly swayed by details of Deferred Tax Assets stock and were suitably assuaged and motivated by the CEO and CFO during the call, it does seem that including the recent purchase of $7.1 Bln in Credit Card Assets from Capital One(US:COF) and sales of some of its Latin American Businesses , we feel the bank may be adding a significant business risk factor in pursuing the greedy strategy. Deferred Tax assets currently worth $55 Bln cover only 2 in 5 of Citi’s Profit dollars as the rest is earned by the bank outside the US. While speculations of bringing the money back from offshore to bump the RoE for the bank have not fructified immediately, the bank continues to look for all such net opportunities vis-a-vis business growth The Deferred tax assets have grown from the Citi holdings credit losses over the crisis and are available for tax shelter for the block of 5 years necessitating some to consider that asset sales by the bank may be too fast in light of trying to use the most of these DTA. As of Q2, the bank may have shown that it is maximizing this ‘unique’ strategy without undue pressure on its business growth but we would be carefully watching the bank accordingly.