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Citigroup Exceeds Q2 Revenue Estimates and Reaches Settlement with DOJ

Citigroup recently posted their Q2 results, which were significantly higher than analysts’ estimates. Thus, the company generated revenues of $19.37 billion – not taking into account credit value adjustments or debt value adjustments—compared to analysts’ predictions of $18.93 billion. Citigroup posted an EPS of $1.24, which was also higher than analysts’ forecasts of $1.05. However, overall revenues declined by 4 percent from the previous quarter and also dropped from the same quarter a year ago, with an 8 percent difference.
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Furthermore, the bank reached a settlement with the Department of Justice of $7 billion in the lawsuit brought against them for the mortgage securities Citigroup sold during the GFC. The payment consists of a hard-dollar settlement of $4 billion, with the remaining $3 billion to be used as mortgage aid for people who own homes or will be put towards fixing up rundown neighborhoods. Note that the hard-dollar settlement was expected to be in the vicinity of $1.3 billion and not the $4 billion announced.

Citigroup recorded a net income of $181 million or $3.9 billion excluding CVA/DVA and the impact of the mortgage settlement, down from $4.2 billion in Q2 2013. Much of the decline in net income is due to the settlement Citigroup has to pay out for RMBS and CDO-associated claims.

Revenues from fixed income markets dropped by 12 percent, while Citigroup’s trading revenue saw a 15 percent contraction. Mortgage originations registered a 64 percent decline year over year but they did register a 19 percent increase from the previous quarter. Mortgage banking dropped by 3.5 percent year over year but reached $9.38 billion, signifying a 0.9 percent growth compared to the first quarter.
In terms of legal fees, the $7 billion settlement with the DOJ will affect Citigroup’s net margin for a while, an effect that will be difficult to get rid of. However, Citigroup is being granted a tax break for $3 billion, which will be deductible. Of the $3 billion in question, $500 million will go towards various state attorneys general and the FDIC, while the difference will be considered consumer relief.

Compensation and marketing costs were on par with expectations, but tech and telecom costs went up by 6 percent. The group’s internally expected their Basel III Tier 1 common ratio grew to 10.6 percent from 10 percent year over year, thanks mainly to earnings and the usage of deferred tax assets. Citigroup utilized approximately $1.1 billion in deferred tax assets in Q2, while YTD usage was $2.2 billion.

The group’s consumer loan revenues went up by 5.7 percent throughout the year, thanks to growth led by markets in China, exhibiting a 27.7 percent increase, in Singapore with a 10.3 percent increase, and in Brazil with a 7.9 percent rise. Latin American net credit losses increased over the past year to 9.13 percent of average loans. Citigroup reported a net release of reserves of $696 million, which doesn’t include the mortgage settlement.

Analysts feel Citigroup might experience a fall in share price due to factors like the slowdown of new markets, increased expenses, volatile currencies (specifically the Euro), not using their DTA effectively, deferred capital return and the seeming incapability to buy back shares. On the other hand, most of these issues can be counterbalanced by faster global growth, increase in market share and a lower level of card losses than expectations. Analysts are sticking to their “Overweight” rating for Citigroup, while their price target per share is $58. Citigroup’s shares were trading 3 percent higher. Stock closed at $48.42, which is 9 times analysts’ EPS estimates for 2014.

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