Analyzing Citigroup (C)

By Douglas A. McIntyre Published Jan 23, 4:14AM EST

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By Yaser Anwar, CSC of Equity Investment Ideas

Citi reported 4Q EPS of $1.03. One time items included charges for Japan Consumer Finance down $0.10 or $489 mil and gain from the sale of Avantel of $0.03 or $334 mil. Proforma EPS of $1.10 was better than Street estimates of $1.05, due to $0.04 or approximately $200 mil of better than expected private equity gains.

The Street is encouraged by Citi’s 15% revenue growth. Credit quality remains solid, although the auto loan and mortgage business showed some weakness. C further expects credit headwinds in ’07 from the international consumer. Also, there will be significant cost-cutting.

Chuck Prince talked about the urgency of producing better growth dynamics in a business which represents as much of the company as US Consumer does. For now, though, just the fact that expense growth was managed in line with revenue was helpful in offsetting less favorable trends elsewhere.

In an industry dominated by big 3, BAC- JPM- C, business mix continues to be the answer to sustainable operating profits. Citi needs to make its business model more flexible to take advantage of accelerating economic activity as well as increased equity and debt underwriting, M&A and brokerage business. Continued globalization and expansion into China will also offer opportunities for growth.

Smith Barney results were strong for the 2nd Q, with earnings growth of 4% QoQ to $305m. Solid top-line growth was attributed to a continued shift toward fee-based products, with 6.5% growth in client fee-based AUM.

US card net income was $1 billion, down 8% from the 3Q. Credit card loans were up only 2% from a year ago and The Street is seeing some normalization of credit as the credit card loss ratio was 4.35% 4Q vs 4.26% 3Q. Net income from US retail banking was $463 million 4Q vs. $481 million 3Q because of spread compression and higher expenses.

The International Consumer business is the general focus of the Citi’s growth expectations but was also the main point of weakness this quarter with net revenue rising just 2% YoY and expenses and credit costs up 24% and 34%, respectively.

Beyond the Japanese Consumer Finance business (the net cost of the Japan CF troubles in the Q was $415mn and caused the net interest margin was down 2.45% in Q4 vs 2.63% in 3Q), ICF had solid revenue growth of 27%, as the effect of considerable expansion in distribution over the past few years continued, on loan growth of 23%; but the expansion spending continued, such that net actually dropped.

Citi repurchased 1 bil shares vs. 2 bil in Q3during the quarter. Furthermore Citi also announced a 10% dividend increased to $0.55, which makes its yield 4% with a 50% payout ratio. That being said, investors need to keep in mind that the yield curve continues to invert and achieving revenue growth will continue to be. Also, in this Q, like past ones, expenses were up 17% QoQ.

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About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.