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What to Expect From Citigroup Earnings

NEW YORK (TheStreet) -- Citigroup (C - Get Report) is due to report earnings for the fourth quarter on Thursday.

Analysts expect Citigroup to earn a profit of $3 billion or 96 cents per share on revenue of $18.18 billion for the quarter. Most analysts exclude accounting gains and losses from changes in the valuation of Citigroup bonds from their core estimates.

In the year-ago quarter, the bank earned a net income of $2.2 billion or 69 cents per share, excluding non-core items, on adjusted revenue of $18.7 billion.

Expectations are low ahead of the bank's earnings. As evident from earnings reports from JPMorgan (JPM - Get Report) and Wells Fargo (WFC), fee income will likely be weak. The bank has also indicated that the pace of loan loss reserve releases will slow in the fourth quarter, partly due to the acquisition of a card portfolio from Best Buy (BBY). Reserve releases have been a crutch that many banks have used to prop up earnings.

Must Read: Goldman Sachs Earnings: Here's How to Read Them

It also said legal expenses will remain elevated and that repositioning expenses in the fourth quarter would be somewhat higher than previous quarters.

Here's what will be in focus.

Core Expenses: Citigroup is in the middle of a massive $1.1 billion restructuring plan that it announced in late 2012. The bank is exiting unprofitable markets, refocusing its operations in many markets and reducing headcount in its institutional clients business, among other steps to boost efficiency.

Analysts have noted that the bank has made considerable progress. The efficiency ratio (operating expenses as a percentage of revenues) at Citicorp, its core banking arm, has declined from 63% in 2011 to 59% as of the 12 months ending Sept.2013. The bank has set a target efficiency ratio of the mid 50s by 2015.

Core expenses exclude repositioning charges. But legal expenses continue to be a wildcard. Like its other too-big-to-fail peers, the bank faces a number of legal challenges, including a probe into alleged currency manipulation practices.

Reuters reported Wednesday that regulators from the Office of the Comptroller of the Currency and the New York Federal Reserve visited the London office of Citigroup this week in connection with the currency probe.

The report follows news that the bank fired the head of European spot forex trading last week.

Citi Holdings Drag: Citi Holdings, the bank's non-core arm which houses assets that are either up for sale or are in run-off mode, is now a much smaller portion of the overall bank. Assets at $122 billion account for only 6% of total Citigroup assets, compared to over 40% in 2008.

Losses from Citi Holdings have also been steadily declining, with credit quality improving.

Reducing both the size of Citi Holdings measured by assets as well as the earnings drag is key in order to be able to meet the bank's profitability targets.

Citi is targeting a return on tangible common equity of 10% or higher, compared to 8.3% generated over the past 12 months. But Citi Holdings losses were a drag of 1.6% on ROTCE in the past 12 months.

Similarly, if the bank has to achieve the low end of its target Return on Assets, or ROA, of 90 basis points to 110 basis points by 2015, it would have to earn $17 billion in profit in 2015, assuming assets stay at this level. Citicorp, the core arm, already generates $16 billion. So it is clear that if losses from holdings reduce, the bank will be able to meet its targets sooner.

Capital Returns: Citigroup is now one of the most well-capitalized banks with a Basel II Tier I Common Ratio of 10.5%. The bank is required to hold a minimum of 9%. It still has sizeable deferred tax assets which if utilized would free up substantial capital.

Citi shares have been bid up in the past years on expectations that the bank will eventually be in a position to return substantial capital to shareholders. So far, the bank has chosen to proceed cautiously, preferring to prove to regulators that it has sufficient capital to deal with severe economic conditions.

Analysts will be looking for guidance on what the bank expects from the upcoming Federal Reserve stress tests. Investors are certainly hoping that the bank will finally raise its annual dividend from a measly 4 cents per share.

Shares of Citigroup were rising 1.8% Wednesday. 26 out of 32 analysts rate the stock a buy or outperform.

-- Written by Shanthi Bharatwaj in New York

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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