Citi Beats Estimates on Stronger Trading (Update 3)

  • First-quarter EPS of $1.23 beats the consensus estimate of $1.17.
  • Earnings excluding DVA were $1.29 a share.
  • Revenue of $20.5 billion beats estimate of $20.17 billion.
  • Excluding DVA, first-quarter revenue was $20.8 billion.
  • Recaptured $700 million in deferred tax assets.

Updated from 10.39 a.m. ET with market close information and commentary, as well as comments from Atlantic Equities analyst Richard Staite.

NEW YORK ( TheStreet) --- Citigroup ( C) on Monday reported a solid first quarter for fixed income and equity trading, as the company continued to strengthen its balance sheet.

The bank reported first-quarter earnings of $3.81 billion, or $1.23 a share, compared to earnings of $1.2 billion, or 38 cents a share, in the fourth quarter, and $2.93 billion, or 95 cents a share, in the first quarter of 2012.

The first-quarter results beat the consensus estimate of a profit of $1.17 a share, among analysts polled by Thomson Reuters.

The fourth-quarter results included $1 billion in pretax expenses tied to the company's major expense reduction initiative announced in December.

Citi's first-quarter revenue, excluding credit and debit valuation adjustments (CVA and DVA) and minority interests, totaled $20.81 billion, compared to $18.66 billion the previous quarter, and $20.22 billion a year earlier.

CEO Michael Corbat said Citigroup "benefited from seasonally strong results in our markets businesses, sustained momentum in investment banking, continued year-over-year growth in loans and deposits in Citicorp, and a more favorable credit environment."

Securities and Banking revenue within main subsidiary Citicorp totaled $6.978 billion, increasing from $4.362 billion in the fourth quarter, and $5.342 billion in the first quarter of 2012.

Excluding CVA and DVA, Securities and Banking revenue totaled $7.288 billion in the first quarter, increasing from $4.872 billion in the fourth quarter, $6.718 billion in the first quarter of 2012. Investment banking revenue was up 6% sequentially and 22% year-over-year, to $1.063 billion in the first quarter.

Equity trading revenue totaled $826 million in the first quarter, increasing 78% from the previous quarter, but declining 10% from a year earlier.

Fixed income trading during the first quarter totaled $4.623 billion, increasing from $2.741 million in the fourth quarter, but declining from $4.781 billion in the first quarter of 2012.

The first-quarter bottom line was boosted by the utilization of $700 million in deferred tax assets (DTA). The company's DTA arising from losses from the credit crisis and foreign tax credits disallowed from equity capital totaled $49.805 billion as of March 31. The potential release of the entire DTA could be a pivotal event for the company and investors, with some analysts foreseeing a huge capital return down the line.

The company's estimated Basel III Tier 1 common equity ratio increased to a strong 9.3% from 8.7%.

Credit quality continued to improve, allowing the company to release $652 million in loan loss reserves. The release included $350 million in mortgage loan loss reserves. The company's total allowance for loan losses declined to $23.7 billion as of March 31, from $29.0 billion a year earlier.

Corbat said the company "reduced the drag on earnings caused by Citi Holdings," which is Citigroup's runoff subsidiary, in keeping with former CEO Vikram Pandit's long-term "good bank/bad bank" strategy to right-size the company's balance sheet. Citi holdings had a net loss of $794 million in the first quarter, improving from losses of $1.049 billion in the fourth quarter, and $1.019 million in the first quarter of 2012. The runoff subsidiary's total assets were down 29% year-over-year to $149 billion as of March 31, or 8% of the firm's total assets.

Investors were pleased, sending Citigroup's shares up up slightly to close at $44.87, on an otherwise sharply down day for the market. The broad indexes were all saw 2% declines. The The KBW Bank Index ( I:BKX) was down over 2% to close at 54.90, with all 24 index components seeing declines, except for Citigroup. Also on Monday, gold prices plunged more than 9%, for their worst one-day showing in 30 years.

Wells Fargo analyst Matthew Burnell rates Citigroup "outperform," and in a note to clients after the earnings announcement called Citi's first quarter "an impressive result." According to the analyst, positive developments for the quarter included "1) Positive operating leverage in Citicorp driven by solid markets results; 2) Reserve release of $0.6B vs. our $0.1B estimate and $0.1B in 4Q 2012," and the increase in the company's Basel III capital ratio.

Burnell added that a 19% quarter-over-quarter decline in mortgage loan delinquencies and a 17% sequential decline in net credit losses were "bigger future reserve releases in Holdings."

Atlantic Equities analyst Richard Staite rates Citigroup "overweight," with a $54 price target, and said in a note to clients on Monday that "it was a low quality beat in that it was driven by trading revenues and reserve releases but other aspects of the results were positive," including the DTA recapture.

Staite was also impressed that Citigroup's estimated Basel III Tier 1 common equity ratio increased to 9.3% as of March 31 from 8.7% at the end of 2012.

Citigroup's shares have returned 13% year-to-date, following a 51% return during 2012. The shares trade for 0.9 times their reported March 31 tangible book value of $52.35, and for 8.6 times the consensus 2014 EPS estimate of $5.20 a share. The consensus 2013 EPS estimate is $4.61.

C Chart C data by YCharts

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.