The financial disclosures of the aforementioned banks lead me to think that the US housing market is really on the rebound and that the Fed might be encouraged to think about an early exit from the MBS markets. This article will feature an earnings review of Citigroup in light with a competitor analysis. We will also attempt to determine whether the prevailing macroeconomic environment will present more challenges to the US banking sector.
Following the trend
Citigroup Inc (NYSE:C) followed the trend of beating both earning per share, or EPS, and revenue estimates when it disclosed its second quarter performance. Excluding the debt value adjustments, the bottom line of $1.25 per share was $0.07 per share ahead of the estimate, while the top line of $20.0 billion remained $330 million ahead. Profits surged 42% over the prior year, driven largely by stronger home prices, improved capital-markets and loan demand from emerging markets.
Highlights
Among other highlights of the latest financial disclosures by Citigroup Inc (NYSE:C) include a decline in loan losses with a moderate spread compression of 3 basis points. Besides, the bank was able to increase both its book value and tangible book value amid concerns raised by Credit Suisse that Citigroup would be among the banks that will post a book value decline. It also increased its loans portfolio by 3% over the prior year despite significantly higher interest rates. The bank also made use of its deferred tax assets to trim down its tax bill. So, it was an all round impressive performance.
Headwinds ahead
While the second quarter performance was truly impressive, you should keep an eye on the headwinds coming ahead for the bank. As Reuters puts it, a decline in the debt underwriting volumes due to rising bond yields and lesser profits from the emerging markets due to slowing growth in these economies are among the risks faced by Citigroup Inc (NYSE:C) in the coming quarters. In a previous article on Citigroup, I also noted that beside the slowing growth in the emerging markets, there is a significant factor of currency risk translation for Citigroup Inc (NYSE:C).
Competition
Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM) happen to be the largest and the second largest home lenders in the US. While both impressed analysts when they reported revenues and earnings above their respective estimates, only Wells Fargo’s results were a real positive surprise in my opinion.
While the top and bottom line beats demonstrated strength in the performance, Wells Fargo reported some impressive figures related to its book value. In contrast to widely circulated views that Wells Fargo & Co (NYSE:WFC) is the most equity sensitive bank, it reported a relatively flat book value for the second quarter, compared to the first quarter of the current year.
The bank also reported a nearly 4% surge in its loans portfolio, while it also reported the lowest loan losses since the second quarter of 2006. A combination of these reflects signs of an improving economy. Wells Fargo was also able to report higher mortgage originations despite expectations of a slowdown. However, the future of its mortgage banking will face rough times as its mortgage application pipeline declined 15%.
Apparently, JPMorgan Chase & Co. (NYSE:JPM)’s results also remained impressive. However, the bank was not able to extract all the benefit of the rising interest rates as imagined. The bank’s CEO declared that its positioned to grow the top line by $2 billion if the yield on 10-year Treasury increased 100 basis points. While the 10-year Treasury yield jumped 66 basis points during the quarter, the bank was only able to generate $110 million in additional revenue.
Besides, its net interest margin plunged 17 basis points over the prior quarter, which is much higher than the decline in Wells Fargo’s net interest margin. On the positive side, the bank increased its mortgage originations by 7%, while investment banking profit jumped 9% over the same time period.
Conclusion
Improvement in mortgage origination volumes, growth in the loans portfolio and an improvement in the loan losses all signal towards a healthy economy. I believe unwinding of the QE is in sight if the Fed picks up these healthy signals. In such a scenario, the rate will rise further, while volatility in rates will also increase. Therefore, the future is rough for the aforementioned banks. However, I believe Citigroup Inc (NYSE:C) has been able to resolve its long standing management issues and would be focused to produce core business growth in the coming quarters. Therefore, I am bullish on Citigroup.
The article Citigroup: Getting the House in Order originally appeared on Fool.com and is written by Adnan Khan.
Adnan Khan has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Citigroup Inc, JPMorgan Chase & Co (NYSE:JPM), and Wells Fargo. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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