Citigroup: Earnings Winner

NEW YORK ( TheStreet) -- Citigroup ( C) was the big winner on Monday among the largest U.S. banks, with shares rising 5.5% to close at $36.66.

The broad indexes all rose 1% after the U.S. Department of Commerce announced that retail sales in September increased 1.1% from August and 5.4% from a year earlier, to an estimated $412.9 billion. While it is the smallest type of business listed among the broad categories in the Commerce Department's report, the category with the largest year-over-year improvement for sales during the first nine months of 2012 was furniture and home furnishing stores, with retail sales rising 8.8% to $70 billion. This is the latest of many indicators for a housing recovery.

The KBW Bank Index ( I:BKX) rose 1% to close at 50.50, with 16 of the 24 index components showing gains for the session.

Citigroup reported third-quarter earnings of $468 million, or 15 cents a share, declining from 95 cents during the second quarter, and $1.23 during the third quarter of 2012.

It was a messy quarter for Citi, including a $4.7 billion pre-tax loss on the company's sale of a 14% stake in the Morgan Stanley Smith Barney joint venture, and the write-down of its remaining stake in the joint venture, as well as a negative $776 million in debit valuation adjustments, as well as a $582 million tax benefit. Excluding these items, the company earned $3.3 billion, or $1.06 a share during the third quarter, beating the consensus estimate of 96 cents a share, among analysts polled by Thomson Reuters.

"We calculate this is equivalent to a return on tangible equity of 15% on core capital," said Atlantic Equities analyst Richard Staite, who rates Citigroup "Overweight" with a $44 price target. Staite was added that "key features were good net interest income growth with the net interest margin expanding 5bp plus good Investment bank results with fixed income, currency, and commodities trading up 31% QoQ." Meanwhile, the company's estimated Basel III Tier w common equity ratio "was also strong at 8.6% ahead of the 8.4% reported by JPM."

Citigroup's margin expansion was impressive, considering that most of the large banks are continuing to see margin pressure, with the Federal Reserve keeping its target federal funds rate between zero and 0.25% since the end of 2008, and the central bank in September increasing its purchases of long-term securities -- QE3 -- in an effort to hold long-term rates at their historically low levels.

Wells Fargo ( WFC) preannounced an expected significant decline in its net interest margin, although investors probably didn't expect the company's third-quarter margin by 25 basis points, which the company reported on Friday. For Wells Fargo, the margin decline was offset by efficiency improvements and continued strength in mortgage originations. The company's shares pulled back 1% on Monday, to close at $33.90.

JPMorgan Chase ( JPM) also saw its net interest margin contract. The company on Friday reported third-quarter earnings of $5.7 billion, or $1.40 a share, increasing from $5.0 billion, or $1.21 a share, during the second quarter(despite booking $4.4 billion trading losses from the widely publicized hedging activity in the company's Chief Investment Office), and $4..3 billion, or $1.02 a share, during the third quarter of 2011. The company reported third-quarter net interest income of $10.976 billion declining from $11.146 billion the previous quarter and $11.817 billion a year earlier, as the company's core net yield on interest-earning assets narrowed to 2.92% during the third quarter, from 3.00% during the second quarter, and 3.14% during the third quarter of 2011. JPM rose 2% on Monday, to close at $42.38.

Getting back to Citigroup, the company's regulatory capital kept growing, reflecting continued profits, as well as an increase in the among of deferred tax assets it was allowed to include in the capital ratio calculations, and because Citi Holdings continued to shrink, with total assets of $171 million as of Sept. 30, declining from 10% from the previous quarter, and 31% from a year earlier. Citi Holdings is the subsidiary in which run-off assets -- including Citigroup's stake in the Morgan Stanley Smith Barney joint venture -- have been place, as part of CEO Vikram Pandit's long-term strategy to exit non-core businesses, shrink the balance sheet and shore up capital.

Pandit on Monday said during the company's earnings conference call that "in the emerging markets, policy makers have been quick to act, and we expect growth there to substantially keep outpacing the developed markets. In light of these factors, we'll continue to manage our risk carefully, using the deep knowledge we have of the markets where we do business." During the third quarter, 58% of the company's revenue came from outside the United States, while 60% of net income was earned outside the U.S.

When ask to comment on the company's plan for a return of capital during 2013, in light of its strong and growing estimated Basel III Tier 1 common equity ratio, Pandit said "it's still early. We haven't even seen the scenario yet," that the Federal Reserve will use during the first quarter during its next round of stress tests," and that "as we look at that and then we'll decide what we will request from the regulators on capital."

"Obviously this is not a question of our ability to generate capital. As you know, we've shown you that," he said.

Citigroup's shares have now returned 39% year-to-date, following a 44% decline during 2011. The shares trade for 0.7 times their reported Sept. 30 tangible book value of $52.70, and for eight times the consensus 2013 EPS estimate of $4.55.

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