As harsh as it may sound, I don’t believe there was much more for Citigroup (C) to celebrate regarding its 2Q18 numbers than much lower tax expenses. This is not to say that results were disastrous, far from it. But considering the favorable macro environment and the much more impressive quarter delivered by peer JPMorgan (JPM) early this Friday, Citi’s minor revenue miss and very modest 2% reported top-line growth looked rather disappointing, in my opinion.
Credit: NY Post
If I could summarize Citigroup’s quarter, I would describe it as a mixed bag of just about as many negatives (e.g. unimpressive non-interest income within consumer, soft fixed income business) as there were positives (e.g. improved efficiency helping to push margins up).
On the Global Consumer side, net revenues were up 3% YOY on a constant currency basis, roughly in line with the increase in the retail banking’s average loan balances. While the loan portfolio seems to be growing on par with the industry average and with the economy in general, I was disappointed to see non-interest revenue drop rather sharply YOY to tap the breaks on total revenue growth, a phenomenon that seems to have been largely contained within North America and probably associated in great part with the struggling mortgage business. More encouraging were delinquency rates that stayed just an inch above flat YOY (see graphs below), easing my concerns over a potential long-term deterioration in consumers’ ability to service their rising debt balances – at least for now.
Source: company’s earnings slides
On the Institutional Clients side of the equation, fixed income markets once again failed to produce the same robust results that peer JPMorgan managed to deliver in the second quarter – disappointingly so, considering the return of market volatility earlier this year had made me more optimistic about a pick up in trading activity. Even though equities were up a noticeable 19% YOY, the sub-segment is too small to have caused much of an impact on the division’s overall performance. Investment banking was down in the high single digits once again, but I try not to be too critical of the sub-segment’s performance in any given quarter considering the traditional lumpiness of the deal flow.
My thoughts on C
In the past, I have called C a good alternative to my favorite banking stock, Bank of America (BAC). In part supporting my interest in this particular name was the stock’s trailing-twelve month under-performance that could suggest a more pronounced rebound in share price, should valuations recover back to the average of the Big Four U.S.-based peer group (see forward P/E graph below).
After contrasting the 2Q18 performance of Citi and JPMorgan, however, I feel more compelled to give the latter my nod of approval within the diversified financial institution space. Given similar exposure to the same macro forces, it looks to me like the New York City-based bank is executing more competently, which could very well justify the stock’s small valuation premium.
Still, I reiterate my caution about over-allocating toward a sector that seems to be going through a macro cycle peak. But within the context of a diversified portfolio, BAC and JPM look compelling to me, while C deserves a bit more skepticism on my part.
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Disclosure: I am/we are long BAC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.