Citigroup: Balance Sheet Improvement Winner

NEW YORK ( TheStreet) -- Citigroup ( C) was the winner among major banking names on Monday, with shares rising slightly to close at $44.87.

The broad indexes all saw 2% declines. The broad market has been quite strong this year, with the S&P 500 ( SPX.X) hitting a record high last week, but investors were disappointed by a slower than expected economic growth rate in China and reported decline in confidence among home builders in the United States.

The National Bureau of Statistics of China said that its preliminary estimate for the country's GDP growth rate for 12 months through the end of the first quarter was 7.7%, which was a decline from a 7.9% growth rate for the previous quarter. The consensus among analysts polled by Thomson Reuters was for China's GDP growth rate at the end of the first quarter to be 8.0%.

Commodity prices plunged on Monday, Gold for June delivery on the COMEX dropping $140.30, or 9.3%, to $1,361.10 an ounce, with the China GDP number contributing to a hostile technical trading environment. Monday's epic slide followed a 5% drop for gold prices on Friday. Gold prices have declined by over $200 over the past two trading sessions. Monday's decline was the largest on a percentage basis since Feb. 28, 1983, when the price dropped 12.1%, according to Bloomberg data.

Please see TheStreet's Gold Page for continuing coverage of this story.

The continuing narrative of the U.S. housing recovery has led to a very strong overall market this year, especially for bank stocks, following a very solid 2012 for the banks. But on Monday, the National Association of Home Builders said that "increasing costs for building materials and rising concerns about the supply of developed lots and labor," were leading to a decline in confidence among home builders.

The NAHB/Wells Fargo Housing Market Index reading for April was 42, declining from 44 in March and coming in below the level of 45 expected by economists. An index reading below 50 indicates that a majority of builders consider market conditions to be poor.

Also on Monday, the Federal Reserve Bank of New York said that its April Empire State Manufacturing Survey showed that "conditions for New York manufacturers improved slightly. "The general business conditions index fell six points but, at 3.1, remained positive for a third consecutive month," the bank said. Economists had expected the general business conditions index for New York manufacturing for April to come in at a reading of 7.

The Federal Reserve Bank of New York said that "indexes for the six-month outlook pointed to a moderate degree of optimism about future conditions." Responses among manufacturers to an annual set of supplemental questions about hiring conditions yielded some interesting results. As one might expect, manufacturers said they were continuing to have difficulty finding enough workers with advanced computer skills. But the bank added that "a skill set that has reportedly grown harder to find is punctuality and reliability."

The KBW Bank Index ( I:BKX) was down over 2% to close at 54.90, with all 24 index components down for the session, except for Citigroup.

Citi Continues to Strengthen

Citigroup on Monday 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 fourth-quarter results were significantly lower because they included $1 billion in pretax expenses tied to incoming CEO Michael Corbat'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.

First-quarter highlights included a seasonal increase in fixed income and equity trading, a continued increase in investment banking revenue, and the utilization of $700 million in deferred tax assets (DTA). Citi'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. As the bank continues its profit streak and the strengthening of its balance sheet, investors over the long haul view the potential release of the entire DTA as the catalyst for a very large return of capital to shareholders.

Another highlight for Citigroup was the continued improvement of credit quality, which led to a $652 million reserve release during the first quarter, including $350 million in mortgage loan loss reserves.

Please see TheStreet's earnings coverage for full details on Citigroup's first quarter results, including the mortgage credit quality improvement within Citi Holdings, which is the company's runoff subsidiary.

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.

In an interview on TheStreet, Jim Cramer said that "Citi has a tremendous advantage in that it's a worldwide bank. If the world economy comes back, Citi's the best chit."

Margin Pressure

Citigroup reported that its net interest margin (NIM) -- the difference between the yield on loans and investments and the average cost for deposits and borrowings -- widened to 2.94% during the first quarter, from 2.95% the previous quarter. While a one basis point improvement in the margin is quite small, it runs counter to the trend for the large banks that have reported their first-quarter results so far.

Wells Fargo ( WFC) on Friday reported record earnings, but also said that its NIM narrowed to 3.48% in the first quarter from 3.56% in the fourth quarter. Staite on Monday said in a report that he expected Wells Fargo to show "further NIM pressure" beyond the second quarter. The analyst has a neutral rating on Wells Fargo, and wrote that "with revenue under pressure and with increasingly few cost levers to pull we expect EPS growth will stall during H2 2013 and in 2014."

Wells Fargo's stock was down 2% to close at $36.57.

JPMorgan Chase ( JPM) also reported record earnings on Friday, but said that its deposit margin narrowed to 2.36% in the first quarter from 2.44% the previous quarter.

JPMorgan's shares were also down 2% to close at $47.93.

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

>Contact by Email.


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 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.

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