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Big Bank Earnings: Citigroup (C), Bank Of America (BAC) In Focus

 January 14, 2013 04:02 PM

(By Mani) Two banking heavyweights, namely Citigroup, Inc. (NYSE: C) and Bank of America Corp. (NYSE: BAC) are set to report their fourth-quarter numbers on Jan.17.

On one hand, Citigroup is expected to announce strong results for the October-December period, driven by improved results at capital markets. Moreover, this will be in the first quarterly earnings call under new CEO, Michael Corbat, and as such, there will be more attention on future strategic actions—including possible additional cost cutting measures.

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Wall Street expects Citi to earn 96 cents a share on revenue of $18.82 billion, according to analysts polled by Thomson Reuters. The consensus estimate implies earnings growth of 209 percent, with revenue estimated to increase 9.6 percent from last year, when it announced earnings of 31 cents a share on revenue of $17.17 billion.

During the past three months, the average earnings estimate has dropped from $1. In the last 60 days, three months ago, the average estimate moved down from $1.05.

New York-based Citigroup's earnings have managed to beat Street view in the past three quarters. During the past 30 days, eight analysts have reduced their profit estimate while two have raised it.

"Holdings to be less of a drag in 4Q q/q (we est. -$0.24 vs. -$1.18 in 3Q) given the absence of the 3Q MSSB charge. We expect the remaining $7-8b of MSSB assets will be sold in 2013," Deutsche Bank analyst Matt O'Connor said in a note to clients.

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Holdings assets should come down at a slower pace given the bulk of remaining Citi Holdings assets are US mortgages and will run down steadily over time.

"We expect NIM to decline 2bps q/q given additional asset runoff in Citi Holdings and some spread compression in the consumer retail business (e.g. in US and Asia)—mgmt expects 4Q NIM to be 2.84% +/- 2-3bps," O'Connor noted.

On the other hand, Charlotte, North Carolina-based Bank of America may report lower earnings due to litigation costs, narrowing of spreads, and lower trading and mortgage revenue.

Bank of America is expected to report earnings of 2 cents, a decrease of 87 percent from 15 cents it earned last year. Quarterly revenues are projected to fall 15.5 percent to $21.03 billion from $24.89 billion a year-ago.

The company's results would be hurt by $11.6 billion mortgage settlement with Fannie Mae over some of the mortgage issues that have lingered since the financial crisis. In the past 7 days, the consensus estimate has plunged from 19 cents. Bank of America's earnings managed to beat Street view in the past two quarters.

"We estimate trading revenue (ex-CVA/DVA) will decline 14% q/q, but rise sharply vs. a year ago," O'Connor wrote.

Net interest margins may record a slight uptick despite the ongoing low rate environment and pressure on asset yields. The bank is expected to report higher loan balances in the quarter, with commercial loan growth and some core consumer loan growth to be largely offset by ongoing loan runoff.

Peer, Wells Fargo reported fourth-quarter net income applicable to common stock of $4.86 billion or 91 cents per share, up from $3.89 billion or 73 cents per share in the prior-year quarter. Analysts expected earnings of 89 cents per share for the fourth quarter. California-based Wells Fargo's total revenue grew 7 percent to $21.95 billion and topped twenty-two Wall Street analysts' consensus estimate of $21.29 billion.

Meanwhile, Basel 3 capital ratio is expected to improve for both the banks in the fourth quarter, given earnings and mitigation of risk weighted assets.

"We expect higher Basel 3 Tier 1 common at 13 of the 17 banks. We see the largest increases in B3 Tier 1 common at MTB (to 6.4% vs. 5.9% at 9/30), PNC (to 7.5% vs. 7.2%), RF (to 9% vs. 8.6%), and STI (to 8.3% vs. 7.9%)," O'Connor added.



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