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Citigroup Beats Q3 Expectations On Top and Bottom Lines

Posted: Wednesday, October 14th, 2020

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The Q3 earnings season started, and Citigroup was one of the companies reporting yesterday. It took the market by surprise as it delivered stronger than expected results on almost all metrics.

Perhaps the most important of them all was the provisions for losses. Just like its rival J.P. Morgan, Citigroup announced fewer provisions for credit losses than anticipated. Coupled with Morgan’s similar announcement, it brings hopes that the financial services sector is not that affected by the pandemic as many would have sought.

Fixed income and equity markets trading increased substantially in the quarter by 18% Y/Y, respectively 15% Y/T. The results offer some relief for Citigroup’s share price. Lately, it was one of the worse performers in the last three months in the financial XLF sector.


Details on Citigroup Q3 Earnings

Despite the difficult macroenvironment, Citi posted a decent report, to say the least. The company managed to improve the CET 1 (Common Equity Tier) to 11.8% while the liquidity coverage ratio reached 118%. Maintaining a strong capital and liquidity position remains paramount for the company, given the uncertainty of the economic times we live in.

The Q3 GAAP EPS of $1.40 beats expectations by $0.49 – a strong performance driven by the growth in fixed income markets and investment banking, among others. This is a dividend-paying company with a five-year dividend growth rate of 116.89% and a payout ratio of almost 60%.

Moving forward, the main challenge for Citigroup comes from its recent regulatory problems. It was fined $400 million by the Fed on the company falling short of regulator’s expectations. Citi agreed to the payment. Moreover, it pledged to invest around a billion dollars in fixing its risk management issues.

Therefore, infrastructure investments to support the risk and control environment are a top priority moving forward – new governance design, a deepening culture of risk management, remediation programs, etc. are only a few features. Also, failing to comply with the requirements represents the biggest threat for investors.

Despite the challenges faced, the company managed to increased reserves to approximately $11 billion. Also, it holds significant earnings power having approximately $7 billion of net income.

The Q3 earnings season just started, and the financial sector’s resilience is encouraging. Despite lower interest rates and the pledge of central banks to keep the rates close to the lower boundary, and against the challenges posed by the pandemic, the big U.S. financials outperformed in the quarter. It represents a good sign in the economic recovery and shows the improved financial system when compared to the 2008-2009 Great Financial Crisis.

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