For those following the US bank earnings play by play (and you’re about to have a busy week), here’s an interesting take from Nomura on something specific to look for in Citi’s upcoming release at 8am EST:
A key differentiator for Citi is its emerging market exposure and its ability to show growth outside the US. Unlike the tepid US loan growth that is impeding US banks’ top lines, Citi continued to show positive international growth trends in 3Q11.
As of the end of 3Q11, retail bank loans in Asia, LATAM, and EMEA were up 12%, 22%, and 1%, respectively, on a constant dollar basis. In addition, while Citi is still investing for international growth, the firm was able to post positive operating leverage in Asia in 3Q11. Investors may be keen to see this trend continue in Asia and be looking for positive operating leverage in LATAM in 4Q11.
We think this trend is a key differentiator for Citi that should contribute to them earning above-average returns over time.
And click to enlarge these charts illustrating the contribution of emerging markets to its total revenues and its consumer banking business:
Excluding the CVA nonsense, Citi’s Q3 revenues totaled $18.9bn, of which $4.9bn came from international consumer banking abroad.
Revenues in this category — referred to as International Regional Consumer Banking, or International RBC — grew 10 per cent year-over-year in the third quarter. It was one of the few Citi business lines to have positive revenue growth in the quarter when excluding the CVA gains and the big release of loan loss reserves.
International RBC net income did decline by 12 per cent in the quarter, but it was mostly the result of a huge release of loan loss reserves in the category in the third quarter of 2010. There were also higher operating expenses, but they partly represented ongoing investments in these regions, which were expected. And as Nomura writes above, such investments paid for themselves in Asia last quarter, and investors will be keeping an eye on Latin America to see if the trend picks up in its other big growth region.
Citigroup’s overall Q4 earnings and revenues numbers might well turn out ugly — the CVA gains from Q3 should reverse, JP Morgan’s earnings last week pointed to big declines in trading and traditional Wall Street business lines, and if Wells Fargo analysts are correct there’s a possibility of multiple big one-time charges for Citi last quarter. Analysts have been bringing down their forecasts recently.
So the emerging markets category is best watched as a measure of how one of the bank’s big longer-term bets is paying off.
Related link:
Spreads and the Citi – FT Alphaville