Citigroup: Wait For Earnings To Stabilize
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Citigroup (NYSE: C) released its third quarter earnings, and in an entirely predictable manner had yet another quarter filled with one-time factors. Questionable valuations of the company further buttress the notion that Citibank is able to assign valuations to items, aka “cook their books,” to reach a desired level of earnings.
On a non-GAAP basis, Citigroup reported earnings of $3.27 billion, or $1.06 per share. This was a penny more than I was expecting, and $0.09 more than Wall Street analysts had expected. GAAP results included a credit of $582 million stemming from a tax benefit. It also included a previously disclosed loss from being forced to mark to market its investment in the Smith Barney brokerage for a loss of $4.7 billion, or $2.9 billion after tax. It also included a negative CVA/DVA adjustment of negative. All told, GAAP earnings were $468 million, or $0.15 per share.
The quarterly report contained a large number of positive, albeit isolated, highlights. Book value, for instance, increased in the quarter to $63.59 per share. Excluding goodwill, tangible book increased to $52.70 per share. Overall the loan portfolio grew 3% to $658 billion, and deposits increased 11% to $945 billion. The bank continued winding down its Citi Holdings portfolio, as its asset value at the close of the third quarter fell to $171 billion, down 31% from the year ago level.
Of course the long-term future of Citigroup is anyone's guess after the unexpected departure of long-term CEO Vikram Pandit and the ascension of Citigroup lifer Michael Corbat. Corbat declared that Citigroup was “on the right track.” Whether or not that means Corbat is fully invested in Vikram's strategy of focusing on emerging markets at the expense of North America is anyone's guess.
I had written earlier that I would be a big believer in Citigroup if it could come up with a “clean” quarter. In addition to the one-time adjustments, what troubled me about the “core earnings” is the manipulation of Citigroup's loan reserves. The overall provision fell from $32.1 billion a year earlier to $25.9 billion as of Sept. 20. Included in that decline was a $1.5 billion release of loan reserves back into earnings in the third quarter. So, core earnings, from my perspective, were quite miserable.
The bank still failed to demonstrate that traditional revenue generation from sources like net interest margin, fees, and trading profits can provide revenues and profits of the $17 billion per year or more in after tax profits that a bank of Citigroup's size should be able to generate. Citigroup's asset levels have been roughly steady at about $1.9 trillion for several years, and it is foreseeable that, for what it is worth, it will shrink from the country's largest bank in 2008 to the nation's fourth largest bank within the next few years.
In my view, Citigroup has taken a step backwards. I would wait for the dust to settle (both from a management perspective, and from a stabilized earnings perspective) before investing.
Goldman Sachs (NYSE: GS), the nation's largest investment bank, had a moderately successful quarter from a long-term perspective, and a terrific quarter from a near-term point of view. After all, after recording a big loss a year ago, any sort of profit would look good by comparison. Revenue came to $8.4 billion, compared to $3.6 billion a year ago, and beat analysts' expectations of $7.2 billion. Earnings came to $1.5 billion, or $2.85 per share. Analysts had been expecting $2.19 per share. So, with earnings and revenue so far above expectations, one wonders, perhaps, why the stock sank 1% the day of the earnings release.
The investment banking industry is the height of cyclicity, and management made comments during the earnings call suggesting that things looked rough going forward. Chiefly, there is little reason to suggest a pickup in investment banking activity in Europe, a historically important profit center for Goldman Sachs. The bank's employee headcount has declined by 1,600 since the same point in 2011, and most other areas of discretionary spending were also lower.
Investment banks, largely due to their high Beta's and low income persistence, do not interest me personally. I am a fan of banks, and other companies, that are more in tune with a buy and hold philosophy. In three years, Goldman Sachs shares may be worth twice as much, or half as much, what what they are as I write this. No one knows for sure, and that is the problem for me.
A more traditional top ten bank by assets, PNC Financial (NYSE: PNC), also announced earnings. The bank made $925 million in revenue, or $1.64 per share. This represented an annualized 1.23% return on assets, and was both 6% better than the $1.55 in last year's third quarter, and slightly above the $1.60 per share analysts were forecasting. But the profit was derived from some non-recurring gains. The bank booked a pretax gain of about $137 million by selling about 22% of its stake of Visa's Class B shares. PNC also set aside just $37 million for agency mortgage clawbacks, compared to $438 million in the second quarter of 2012.
PNC made a substantial acquisition of RBC's domestic banking system in the first quarter of this year. That led to annual growth of 18% in loans outstanding, bringing the total to $182 billion. But the pace of growth on a sequential quarter basis was just 1%, the slowest rate of quarterly loan growth in over a year. The bank's net interest margin remained above average at 3.82%.
Going forward, I would like to see more loan growth from PNC. In addition, with its efficiency ratio of 0.65, there are costs that should be reduced. On balance, this is a bank that needs a more vigorous economy to meaningfully grow its profits. In the meantime, I see it pretty much treading water for the next few quarters, and would not consider this an appropriate investment for most individuals.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Citigroup Inc and PNC Financial Services. Motley Fool newsletter services recommend Goldman Sachs Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.