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What we thought about Citigroup’s earnings
Citigroup C’s third quarter results were middling, with profits of $3.2 billion, or $1.51 per share, down 7% from $1.63 a year earlier. Although fee income was strong due to strong performance in investment banking and principal transaction revenues, net interest income continued to decline. The bank reported a net interest margin of 2.33% for the quarter, down from 2.41% in the previous quarter and 2.49% in the year-ago period. While the services sector remains the company’s strength, other sectors such as markets, banking, wealth management and personal banking continue to underperform.
The third-quarter numbers showed the bank’s return on tangible equity of 7%, well below its medium-term target of 11% to 12%. The company’s overall performance has been lackluster given a range of tailwinds, including rising asset valuations, above-average trading returns, and a rebound in investment banking fees. There are some signs of progress on spending, but the pace is slow and implementation remains highly uncertain. After factoring in this result, our fair value estimate remains $70 per share.
Fee income for the quarter was supported by a 7% year-over-year increase in principal transaction income and a 31% increase in investment banking income, due in part to higher investment grade corporate debt issuance. Overall Services revenue increased 8% year over year due to approximately 8% increase in cross-border transaction value in Treasury and Trade Solutions, 22% increase in assets under management in Security Services, and increase in assets under management in Security Services. Increased. The impact of Argentina’s currency devaluation is small. Services segment profit grew 23.0% year-on-year due to operating leverage, with a strong ROTE of 26.4%.
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