Q2 2017 Bank Earnings Outlook


Q2 2017 Bank Earnings Outlook

Thanks to a subscriber for this article by R. Christopher Whalen for theinstutionalriskanalyst.com. Here is a section on Citigroup:

Finally we come to the least valued US large bank, Citigroup (NYSE:C), which currently trades at 0.80x book on a beta of 1.6.  C has an “A” bank stress index rating from Total Bank Solutions.  Like JPM, C’s business model puts equal emphasis on lending, trading and investing activities, resulting in a lower RAROC at 1% vs a nominal equity return of a bit shy of 7%.

Keep in mind that C has lower asset returns and higher credit costs than other large banks, begging the question as to whether the Fed should really be allowing the bank to increase payouts to equity investors.  If you look at Page 3 of C’s Y-9 performance report, you’ll see that C’s yield on loans is 2% higher than the large bank peer group, yet the bank has a spread on earning assets half a point lower than other large banks. The Street has C’s revenue down in Q2 2017 but magically up 1.5% for the full year.  Earnings are also expected to be down this quarter, but then will rise an astounding 9.5% for the full year.  Despite the market bump following the release of the stress test results, which will result in returning more capital to investors than C actually earns in profits, like BAC the C common still trades at a discount to book.

Unlike names like JPM, C does not have a significant asset management business and also announced an exit from residential mortgage origination and servicing earlier this year.  This may turn out to be a blessing in disguise.  C is up 58% over the past twelve months vs 13% for the S&P 500, so like JPM we’d say that the risk is on the downside for this much maligned stock.   

Will C hit its revenue and earnings numbers for Q2 2017?  Probably, especially now that they’ve jettisoned the mortgage business.   But the larger question is why does C still exist?  In the wake of the 2008 financial crisis, C has been struggling to redefine itself in a way that makes sense to investors.

But having sold the asset management business to Morgan Stanley (NYSE:MS) and the mortgage business to New Residential (NYSE:NRZ) and Cenlar FSB, there is not much left besides the consumer lending book and the payments business.  As we’ve noted in previous comments, C’s board ought to consider selling the payments business for a premium price, spin the proceeds to shareholders, then dispose of the other assets for whatever they can get before turning off the lights.


Eoin Treacy's view

Consumer lending and credit cards is not a bad market to be in considering the relative performance of companies like PayPal and Visa relative to traditional banking. With the steady march of online retail and instant gratification consumer credit remains a growth market.


Market Darling India Has Issues as Inflation Hits Record Low

This article by Anirban Nag and Archana Chaudhary for Bloomberg may be of interest to subscribers. Here is a section:

While bond markets are rallying as investors wager the data will trigger a rate cut from the Reserve Bank of India, the figures signal the economy faces hurdles even as the stock market surges to a record, the rupee rallies and the world’s major economies head into an era of higher borrowing costs.

There’s a realistic chance of a 25-basis point rate reduction in August, Indranil Pan, chief economist at IDFC Bank Ltd., said. “It could be a very close call as the RBI is expected to remain cautious of the international rhetoric of tighter monetary policy and unwinding of quantitative easing," Pan said in a note.

Some of the pessimism stems from the fact that is India is still recovering from a cash ban that interrupted employment for millions, forced farmers into fire sales of agricultural produce and bogged down the manufacturing sector. The introduction of a goods and services tax on July 1 only added to the confusion while a glut of bad loans means businesses are not borrowing to invest in Asia’s third-largest economy.

Bank credit to industry contracted in the year to May, while deposits surged following the ban of high-denomination notes in November, leaving the banking system grappling with surplus cash.

Data on Wednesday showed headline consumer price inflation fell to 1.5 percent in the year to June from an annual 2.2 percent a month ago and below forecasts for a 1.6 percent reading. That’s below the RBI’s medium term target of 4 percent and through the bottom of its 2 percent projection for the first-half. Core inflation, which strips out volatile food and fuel items, also slipped below 4 percent.


Eoin Treacy's view

For long suffering investors who forced themselves to accept India’s persistently high inflation, weak currency and lumpy growth, the last year must feel like a blessing. The prospect of RBI rate cuts is gaining credence and that is being reflected in the outperformance of the stock market.


Email of the day on rare earth metals

Rare earths are in increasing demand in several fields of high tech.  Lynas Corporation, the world’s biggest rare earths producer outside China, has had a chequered life but under new management appears poised to benefit substantially.  It may be of interest.  A copy of its Quarterly Activities Report taken from the company’s web site ( https://www.lynascorp.com ) is attached.

Needless to say, I am long this stock.


Eoin Treacy's view

Back in 2010 China made sure everyone knew it is in command of the global rare earth metals market, when it restricted supply to Japan, in particular, but also to a number of other importers. The result was a surge in metal prices as supply was constrained and considerable investment in additional supply outside China.

Lynas was one of the companies that IPOED to secure capital to bring Australian supply to market. It is also one of the few that survived when the market crashed as China reversed course and flooded the market with supply.


Email of the day on David's recovery and industrial automation:

I hope you are well and that David is recovering / progressing well.

I was just thinking about your theme of cheap local robotic manufacturing and our Brexit.

It another thing to our advantage as we will become less reliant on German and EU manufactured goods. Plus long term, it will effect Germany quite a bit, won't it?


Eoin Treacy's view

Thank you for your well wishes on David’s behalf and this question which may be of interest to subscribers.

I was in contact with David today and he is recovering following the heart related issues he needed to have ablation for last week. He picked up a secondary infection while in hospital which has put a dampener on his recovery but is home and looking forward to making a full recovery. He is less than impressed by what he calls the "factory farming" nature of the medical system but is otherwise is good spirits.

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