Thursday, October 11, 2007

Citi Earnings Preview

In July Citi (C) reported net income for Q2 of $6.23 billion, or $1.24 per share, both up 18%. International revenues and net income were a record, up 34% and 35%, respectively and ROE was 20.1%.

Charles Prince, Citi Chairman and Chief Executive Officer said at the time,"We have very clear priorities to drive growth and we are executing on all of them. We generated record revenues, up 20%, and record earnings from continuing operations, up 18%, both driven by our record international results,".

He continued: "We continued to generate revenue and volume growth in our U.S. consumer franchise, while making excellent progress in re-weighting Citi toward our other businesses, especially our international franchises, where revenues and net income increased over 30%. Our capital markets-driven businesses performed extremely well and international consumer revenues and volumes grew at a double-digit pace."

"We made excellent progress in expanding our business through targeted acquisitions, completing three international transactions, including an increase in our ownership of Nikko Cordial Corporation in Japan to 68%."

Revenue increases were led by 34% growth in international revenues. International markets & banking revenues grew 50%, international consumer revenues increased 16%, and wealth management revenues more than doubled.

Fast forward to earlier this month. Citi, which currently gets 40% of earnings from international operations came out and warned the credit market disruptions will effect earnings by about 60% in Q3. They joined the parade of institutions (Merrill (MER), Lehman (LEH), Morgan Stanley (MS), Washington Mutual (WM) and Bear Sterns (BSC)to name just a few) writing down the values of mortgage based assets.

Here is what is happening. The banks are using this situation to "come clean". They are going to jam all the bad news and write-downs into this quarter. This means that the return to normalcy in the credit markets and asset reduction overkill in Q3 can't help but make Q4 a very strong quarter.

Expect this to be very dismal, about 43 cents from last years $1.06 a share. That being said, the only thing that matters here is Q4's outlook. All the bad news has been let out so there should not be any more skeletons in the closet (if there are, heads will roll). Another item worth watching is the percentage of income from international operations. If the US does slow down a bit, this segment should be able to take up the slack.

CEO Prince has promise a "strong Q4". He has to deliver in order to keep his job.

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