Not a great result, but not a disaster
Citigroup's result was pretty much in line with the rest of "the Street's" major banks. Revenue was down on the back of a tough quarter for investment banking and trading. There was a significant release from loan-loss reserves, but we are not seeing the extent of credit growth that we would expect to associate with a normal recovery. This is of course not a normal recovery and it is going to take some time for conditions to normalise. The market is very much focussed on top line growth and this aspect of the result was a disappointment, with sales falling to $22.07 billion for the quarter. This represents a 31.4% decline from the same period last year and a 13.2% decline from the opening three months of the year. We can at least take some comfort from the fact that the rate of decline is slowing.
"....one of the major positives is the improvement in the area of loan-losses, which clearly shows that the peak of the bad debt cycle is well in the past."
The bottom line came in at $2.7 billion or $0.09 on a per share basis. This was ahead of the market's expectations for something in the region of $0.05 per share. Beating expectations is always a good thing, but this doesn't count for much given that the bank's earnings are following its sales on a downward path. Net income fell from $0.15 per share in the first quarter and $0.49 per share during the 2009 second quarter.
There are a number of factors at play in the numbers, including the $11.1 billion gain from the sale of Smith Barney that benefited the 2009 result. The bank also paid a hefty $400 million to the UK's treasury in relation to its bonus tax. The comparative earnings decline isn't therefore as significant as it first appears. But the fact remains that neither sales nor earnings are yet trending as we would like.
Nevertheless, one of the major positives is the improvement in the area of loan-losses, which clearly shows that the peak of the bad debt cycle is well in the past. The bank's credit loss provisions were reduced by $2 billion to $6.7 billion, representing the lowest level of provisioning since the GFC began to unfold in the second half of 2007. The magnitude of the reserve release was significantly greater than the market had anticipated, which explains the higher than expected profit result.
The fact that management reduced credit loss provisions doesn't mean to say that the bank is no longer experiencing credit losses. Indeed, the bank absorbed $8 billion of loan losses during the quarter. This was however down 5% due to improvement across most consumer portfolios, which in turn reflects well for the broader recovery. The decline in credit losses continues a trend that has persisted for four consecutive quarters, since peaking at $11.5 billion in the 2009 second quarter.
From a valuation perspective, Citigroup trades at 10.8 times its consensus December 2010 earnings, while providing a negligible dividend yield of just 0.2%. Our investment thesis for Citigroup is not based on its yield, but the significant capital growth that the recovery could deliver. Sales and earnings are currently ay a cyclical low and it will be some time before the bank is once again firing on all four cylinders.
Nevertheless, 2010 will mark a return to profit for the bank and we would expect earnings to gain momentum through the years ahead. This should ensure a steady re-rating for the bankÕs stock price, albeit interspersed with interim periods of volatility such as the present.
Looking at the weekly chart of Citigroup we can see that the share price has broken its long term downtrend and is now forming a new uptrend, albeit from a low base. The weekly MACD is now flat lining sideways at the zero signal line and is not giving any definitive trend signal in either direction. Volume has increased considerably of late, now this is largely a function of the smaller unit share price but what is slightly concerning is the recent decline in volume which is divergent from the recent move higher.
Looking at the daily chart of Citigroup we can see the uptrend that is in place that is forming an ascending triangle pattern with resistance at $5. The daily RSI is rising but is still a good distance away from overbought territory. The price action is above both the 50 and 200 day moving averages with the 50 day recently crossing above the 200 day moving average forming what is known as a Ògolden crossÓ and is the bullish nemesis of the "death cross". We would ideally like to see a move higher confirmed with higher volume confirming accumulation of the stock. We would then target a move towards and hopefully through the $5 resistancelevel.
Accordingly, Citigroup will remain firmly held in the Fat Prophets portfolio.
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