) --


(C) - Get Report

is slated to report third-quarter earnings results on October 18th, and the results are likely to be very different than the institution's earnings a year earlier.

CEO Vikram Pandit and members of Citi's management have been working hard to restructure the company into a smaller,

more internationally-focused banking institution

. While it still has hundreds of billions worth of assets that need to be sold via CitiHoldings, the bank is arguably making headway in recreating itself.

Last year at this time, Citi was still in recovery mode. In the third quarter, Citi and the U.S. government completed a $58 billion preferred-to-common stock exchange.

Pandit called the quarter "important" and that the completion of the exchange offers was a major part in the building of "a strong foundation" that had strong capital, liquidity and franchise value, according to his 2009 third-quarter earnings statement.

He was also talking about achieving "sustainable profitability," something that the company was still struggling with then, as the consumer credit environment still remained in significant distress.

But as the credit crisis simmers down, with clear signs now of improvement across the industry in banks' credit metrics, a main question going forward is who will be a winner given the tougher U.S. banking environment.

For the third quarter specifically, Citi will struggle with similar issues as other large commercial and investment banks, primarily weaker trading in the investment bank during the quarter. The other big banks report as follows:

JPMorgan Chase

(JPM) - Get Report

is set to kick off third-quarter earnings on October 13;

Bank of America

(BAC) - Get Report

on October 19; and

Wells Fargo

(WFC) - Get Report

on October 20.

But whereas once investors and the industry at large didn't know if Citigroup would be among the big banks that came out of the financial crisis, now the bank has some of its main competitors riding on its shirttails in order to scramble for a larger presence abroad.

Going forward, this once "financial supermarket" may just have the answer already in its pocket to the future of the industry.


Last year,

Citi reported a loss of 27 cents a share

for the three months ending in September 2009, partially due to its completed exchange offer, which hit earnings by about 18 cents a share. This year analysts on average are expected the big bank to report a profit of 7 cents a share for the quarter, according to

Thomson Reuters


This would be the third consecutive quarter of profit for the bank that received $45 billion in aid from the government in 2008 and is still waiting for the government to finish selling the rest of its common equity stake this year.

Loan loss reserving and potential releases will be a major factor in determining earnings this quarter, not only for Citi but for the rest of the bank industry. Credit Suisse analyst Moshe Orenbuch estimates Citi's credit losses for the quarter to be about $7.6 billion, down 4% sequentially. He estimates reserve releases of approximatley $1.2 billion for the quarter, equaling 3 cents a share, he writes in a note.

But don't forget that due to Citi's impending sale of

Student Loan Corp. (STU) to Discover (DFS) - Get Report

, it will take an after-tax charge in the quarter of about $500 million.


Analysts on average expect Citigroup to produce revenue of $21.23 billion, according to

Thomson Reuters

, down about 4% sequentially.

Citigroup will struggle with similar issues as other large investment banks - mainly having to do with significantly weaker trading in the quarter. However as a universal bank, Citi's business mix within capital markets and credit improvement will help offset the slowdown, according to Guy Moszkowski, an analyst at Bank of America Merrill Lynch.

Third-Quarter Bank Earnings Preview

Moszkowski cut his trading revenue estimates for both Citi's fixed income and equity trading businesses. He made similar revisions to JPMorgan's estimates.

"We believe

Citi benefited from higher activity levels in July vs. May/June, but magnified seasonal weakness in August and muted pickup in activity in September limit further upside to our trading forecasts," the analyst wrote in a note to clients.

On the other hand, Moszkowski is forecasting a 27% improvement in investment banking revenues, particularly from debt underwriting and M&A advisory fees, as deal flow began to pick up in recent months. He added that equity underwriting was weak.

"While improvement in debt underwriting is certainly a positive, we remain cautious in declaring an inflection point as much of the issuance continues to appear 'tactical' in nature given the high level of rate compression in 3Q," Moszkowski wrote. "We also expect M&A activity will likely remain muted until there is better clarity on the global macro outlook."

Stock Performance:

Citi remains a top pick, along with

SunTrust Banks

(STI) - Get Report

, for Deutsche Bank analyst Matt O'Connor.

"Citi remains our top large cap bank stock given likely continued positive EPS, strong capital/reserves, further improvement in credit and an attractive valuation (trading about in line on current tangible book and at a 15-20% discount to our estimate of year-end 2011 tangible book of

approximately $5)," O'Connor writes in a note to clients Tuesday.

"Additionally, Citi has more top-line growth to our potential from emerging markets/international businesses. And with over 50% of the 7.7 billion government share stake sold, the related overhang could dissipate soon," he writes.

According to Moshe Orenbuch of Credit Suisse, the U.S. Treasury Department has sold 4.1 billion of common stock at an average price of $4 a share, bringing the government's ownership down to 12.4% from 26.6% at the end of 2009. Treasury is currently in a blackout period until Citi's third-quarter earnings are reported.

Still Citi's median one-year target price is $5.29, according to

Yahoo! Finance

. Citi's stock has managed to stay above the $4 range as the fourth quarter gets going, but for much of the year its stock has remained trapped under that threshold, despite continuing to be the most actively traded stock on the

New York Stock Exchange

, even with the dramatically lower shares trading these days.

Citi shares are up 25% for the year vs. 12% for the KBW Bank Index, but the stock has dropped significantly below its 52-week-high of $5.07 reached on April 15th.

Management Commentary:

With credit quality improving and banks taking on somewhat more positive outlooks, despite remaining challenges, investors will clearly for significant progress on Citi's asset divestitures within Citi Holdings as well as the continuous slog through its troubled loan portfolio.

To be sure, Citi has been busy this year selling assets, such the recent deal to sell Student Loan Corp. to Discover.

Early in the year, it completed an initial public offering of


(PRI) - Get Report

. The bank is also in the process of restructuring its consumer finance business in preparation for a sale.

Most recently,

Citi announced the sale of a $1.6 billion credit card portfolio from its Retail Partner Cards to General Electric


David Hilder of Susquehanna Financial Group has a 12-month price target of $4, which represents a multiple of 10 times his 2012 EPS estimate of 50 cents, discounted back one year at a rate of 20%, according to a September 27 note.

"Although we expect a bank with a unique global franchise that has demonstrated superior revenue and earnings growth to its more local peers to win a premium multiple, we believe Citigroup is a long way from doing so," according to Hilder's investment thesis on Citi.

"Similarly, we have used a higher than average discount rate because of greater uncertainties about Citigroup's ability to execute its strategy, given the problems of the last three years and the very large divestitures ahead."

--Written by Laurie Kulikowski in New York.

To contact the writer of this article, click here:

Laurie Kulikowski


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