Citi's Big Problem Expenses, Not Revenue

Citibank logo on a sign
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Citibank logo on a sign

While lower-than-expected trading revenue took the focus of Citigroup’s earnings call Tuesday, it’s the company’s problems with expenses that could hamper it going forward.

Lost in the discussion about the bank’s missed expectations, and the subsequent drop of its stock below the $5 demarcation line, was that the company was about 9 percent over the forecast line in expenses.

That number came in at $9.8 billion against a $9 billion expectation, which also represented an 11 percent increase over the previous quarter.

“Although the revenue miss can largely be attributed to trading, a volatile category, it is the higher expenses in the quarter that is likely to weigh on consensus estimates,” analysts at Keefe, Bruyette & Woods said in a research note.

KBW slashed its 2012 estimates for Citi to basically half of consensus —27 cents a share, from the original 30 cents, compared to expectations of 54 cents. It also took down its 2013 view, cutting 10 cents to put the new estimate at 45 cents a share compared to consensus of 61 cents.

More bad news: Even as other TARP bailout banks are starting to talk dividend releases for 2011, KBW figures Citi won’t give it up until well into 2012, with no share buybacks until the following year. The analysts importantly point out that the 4-cent per-share profit was achieved primarily by reserve releases.

KBW is keeping Citi at a “market perform” rating but said investors will get better near-term returns by looking elsewhere, particularly to JPMorgan Chase and Goldman Sachs .

Both banks beat their numbers though their shares have been wobbly over the past couple of sessions as investors try to figure out what to make of banks this year. So far it’s been another quarter of bottom-line beats and a mixed bag on the top line, something not likely to be tolerated as post-crisis expectations take hold.


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