Citigroup Q3 preview: Where next for C stock?

Market chart
Josh Warner
By :  ,  Market Analyst

When will Citigroup release Q3 earnings?

Citigroup will release third quarter earnings before markets open at 0800 ET on Friday October 14. A conference call will follow on the same day at 1100 ET.

 

Citigroup Q3 earnings consensus

Wall Street forecasts Citigroup will report a 6.6% increase in revenue to $18.3 billion in the third quarter and a 28% drop in EPS to $1.47. Net income is expected to be down 32% from last year at $3.2 billion.

 

Citigroup Q3 earnings preview

It is expected to be another tough quarter for US banks this season, with earnings set to fall across the board. You can read more about what to expect this season in our US Banks Q3 Earnings Preview.

Citigroup has plunged over 34% since the start of 2022, having significantly underperformed its rivals with the Dow Jones US Bank Index down 26% this year.

Citigroup and JPMorgan came out worst of the latest stress tests conducted by the Federal Reserve after they were both told to raise their capital buffers. That prompted both banks to temporarily suspend share buybacks and keep their latest dividends flat while peers continued to grow the amount of excess capital being returned to shareholders through both measures. That has removed some support in a volatile market, although Citigroup has said it will restart buybacks ‘as soon as it is prudent’ to do so.

Citigroup has an added weapon to help it build capital as it is in the process of exiting its retail banking operations outside of the US, which will raise funds that can help bolster its coffers. It has already struck several major deals and will have formally exited Australia, the Philippines, Thailand, Malaysia and Bahrain before the end of 2022 and will depart Indonesia, Vietnam, Taiwan and India in 2023.

In March, Citigroup outlined medium-term targets headlined by a goal to achieve a return on tangible common equity of 11% to 12%, something it achieved in the last quarter but lower than the 13.4% it delivered in 2021 when results were flattered by the release of reserves that had been set aside for potentially bad loans during the pandemic.

However, things look bleak for now. Jamie Dimon, the CEO of the largest US bank by assets JPMorgan, warned just this week that he expects the US economy to dip into a recession in the next six to nine months, painting a bleak picture as markets begin to consider what to expect in 2023. Dimon warned he believes this could see US stocks drop by up to another 20% when asked where the bottom is for the S&P 500 ahead of this earnings season, adding this would be ‘much more painful than the first’ drop we have seen this year. JPMorgan also releases results this Friday and you can find out what to expect in our JPMorgan Q3 Earnings Preview.

As a result, US banks including Citigroup are building their reserves for potentially bad loans once again as fears grow about the ability for individuals and businesses to repay their debts going forward. Citigroup is forecast to build its reserve (net ACL build) by $573.9 million in the third quarter, which will have a huge impact on earnings considering it bolstered its bottom-line by over $1.0 billion last year when it released reserves that had been set aside during the pandemic.

Markets were briefly expecting last week that the Federal Reserve would start to pivot towards a more dovish stance, but this was quickly dashed after the latest data showed rising rates are yet to feed through to the jobs market and several members of the central bank said rates would continue to rise to get inflation down. With that in mind, US inflation data on Thursday – the day before Citigroup reports – will be the next key set of numbers that markets will use to gauge the Fed’s mood, with FOMC meeting minutes also out on Wednesday. You can read more about these events, which could prove influential on the share price of US banks, in our Week Ahead.

Revenue is set to rise thanks to net interest income, which is forecast to rise 15% from last year thanks to higher interest rates and push its net interest margin up to 2.25% from 1.93%.

However, this will be partly countered by an 8.2% fall in non-interest income. Revenue from investment banking will continue to slide, this time by 44%, as fees for organising big financial deals fall because the IPO market has dried up and appetite for M&A or new financing has waned amid rising rates and an uncertain economic outlook. Plus, while fixed-income and equities trading countered this in the last quarter, revenue from these activities is also expected to fall over 3% this quarter. That will result in the Institutional Clients Group, its largest division, reporting a 1.4% dip in revenue to $9.85 billion in the third quarter, according to consensus, and a 20% fall in net income.

Meanwhile, its Personal Banking and Wealth Management is forecast to report 5.7% increase in revenue to $6.18 billion as continued strength from its cards and retail banking arm counters lower income from wealth management. Importantly, this is where the vast majority of the build in provisions is coming from, which means this is where most of the concern lies. Although analysts believe revenue from cards and retail banking, as well as deposits, will continue to grow in the third quarter they forecast that demand for loans will collapse 27% from last year – having grown over 3% in the last quarter. Investors will be looking out for how demand for loans is shaping up and the state of the US consumer. The unit’s net income is expected to collapse 56% this quarter as those provisions and rising costs eat away at the bottom-line.

Citigroup has said it is aiming to deliver low single digit growth in revenue in 2022, excluding the impact of divestures, which it said would be driven by ‘modest’ growth in both loans and deposits, rising fees and higher interest rates. Investors will want to see this reiterated as we head into the final quarter.

 

Where next for C stock?

Citigroup shares have dropped to their lowest level in two years today. It is now on the verge of testing the low seen back in October 2020 of $40.50. The RSI is on the cusp of entering oversold territory to suggest there is some support at this level. We have seen average trading volumes fall over 14% during the past five sessions compared to the 100-day average (and 11% versus the 10-day average) to suggest the current downward momentum is running out of steam.

A drop below that level would open the door to the $38.80, the low seen back in May 2020, which must hold to avoid opening the door to a potentially sharper fall toward the pandemic-induced 2020-low of $37.50.

If the stock can find support and head higher then it can first target the $45.50 level of support seen throughout the three months to July before bringing the 50-day moving average of $48.50, in-line with the ceiling seen in the second half of June, into the crosshairs.

Citigroup stock is trading at its lowest level in over two years

The 25 brokers that cover Citigroup see even greater upside potential with an average target price of $57.76, suggesting there is almost 42% potential upside from current levels. However, this has fallen from over $60 just one month ago as expectations have been curtailed.

 

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