Citigroup's (C) reported mixed quarterly earnings results before Monday's opening bell and that has set an inauspicious tone to a week of bank earnings.
The company reported a beat on earnings per share of $1.61 per share against expectations of $1.55 per share, but missed on revenue with $17.1 billion against an expectation of $17.5 billion. The company also came in just under its expected efficiency ratio, reporting a number of 57.4 against a 57.6 analyst forecast for 2018.
The New York-based bank saw its stock stumble after the release but then recovered to near flat before the market open.
The company's revenue miss was largely driven by lower revenues in fixed income within the Institutional Clients Group and the wind-down of legacy assets in Corporate/Other segment, according to the release.
"Fixed Income Markets revenues of $1.9 billion in the fourth quarter 2018 decreased 21%, reflecting a challenging trading environment characterized by volatile market conditions and widening credit spreads, particularly in December," the company reported.
"A volatile fourth quarter impacted some of our market sensitive businesses, particularly Fixed Income. However, our ICG accrual businesses - Treasury and Trade Solutions, Securities Services, Private Bank and Corporate Lending - continued their strong performance," CEO Michael Corbat commented. "For 2019, we remain committed to delivering a 12% RoTCE and continuing to improve our operating efficiency during the year."
The challenging fixed income environment will of course carry over to the rest of the banking industry, as fixed income performance could be a key metric holding back earnings across the sector.
"CITI's earnings are particularly vulnerable as negative macro developments unfold," Societe Generale analyst Andrew Lim said, anticipating this weakness. "Together with a smaller buyback assumption, we see ROTE deteriorating [in 2019] from nearly 11% in 2018."
He set a $49 price target for 2019 based on his assessment, issuing a "Sell" rating for the stock just before earnings came in with a mixed result.
"The fourth quarter tends to be seasonally slower for trading revenue; quarter to date prices and activity levels suggest it's weaker than we had anticipated, in fixed income in particular," Credit Suisse analyst Susan Katzke added.
That said, management commentary was highlighted as a potential medicine to a shaky print.
"In light of the 2018 efficiency target miss, expect management's commentary to emphasize/affirm the bank's commitment to both expense management and investment to sustain organic growth," Katzke commented. "Rather than set another near-term efficiency target, we expect and prefer an articulated commitment to flattish expenses thru 2020."
The company did indeed credit lower expenses as a driver of its earnings beat, suggesting this could be an area of focus for management ahead of the earnings call on Monday morning.
The commentary, in her view, could do a great deal to assuage concerns of problems in the print related to fixed income and efficiency and led her to maintain an "Outperform" rating for the stock and a bullish $80 price target for the stock.
Analysts are hoping that management's agreement with activist investor ValueAct can help the company focus on returns and stock price improvement this year, and will likewise be highlighted by management.
The company has already acted to return capital to shareholders, something that management made sure to key in on in its initial commentary.
"During the year, we also grew loans and deposits, improved ROA, and carefully managed both our expenses and balance sheet. We also returned more than $18 billion of capital to common shareholders," Corbatt said.
Analysts have noted that his performance in returning capital to shareholders and protecting profitability in 2019 may be as important for his position as ever after reaching an agreement with activist investor ValueAct earlier this month.
"This means that some of the board and the CEO have one year to get it right or risk losing their jobs - the interests of the board and CEO are more aligned with shareholders more than any other time in recent history," Wells Fargo banking analyst Mike Mayo wrote. "This should help Citi to improve focus to meet targets, improve worst-in-class returns and efficiency, and most importantly, improve the stock price. This is our top 2019 selection."
To see if Citi is worthy of such a bullish selection, analysts will be listening intently to management's commentary at 10 a.m. ET.
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