Can Citigroup Earnings Defy the Mortgage Slowdown?

Citigroup (NYSE: C  ) will release its quarterly report next Monday, and chief among the fears of investors in the big bank is how the recent rise in interest rates will affect Citigroup earnings and revenue. Between slowing mortgage activity and the potential damage to the company's investment portfolios, Citi faces the prospect of having to revamp its business model in order to find new sources of profitable revenue.

Despite those concerns, Citigroup's stock remains near its highest levels since before the financial crisis. Can the bank live up to the high hopes that long-term investors have? Let's take an early look at what's been happening with Citigroup over the past quarter and what we're likely to see in its quarterly report.

Stats on Citigroup

Analyst EPS Estimate

$1.18

Change From Year-Ago EPS

18%

Revenue Estimate

$19.79 billion

Change From Year-Ago Revenue

6.2%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

How will Citigroup earnings fare this quarter?
In recent months, analysts have gotten more optimistic about Citigroup's earnings prospects. They've raised their June-quarter estimates by a nickel per share, and they've boosted full-year 2013 and 2014 consensus figures by an even larger $0.12 and $0.25, respectively. That's helped keep Citi's share price high, having risen 14% since early April.

Bank investors have been looking closely at the rising interest rate environment to assess its impact on earnings. In particular, Wells Fargo (NYSE: WFC  ) and JPMorgan Chase (NYSE: JPM  ) seem vulnerable to drops in mortgage activity, as JPMorgan managed to see increased origination activity in the first quarter even as Wells saw modest declines. But for its part, Citigroup has said that mortgages aren't a high priority, as it sees better opportunities in other areas that have higher potential profits and less cutthroat competition.

Instead, Citi has focused its attention on wealth management, wooing high-wealth clients from around the world. In particular, the company has done well in the Middle East and in Asia, giving the company's private banking unit a clientele that includes a third of the world's billionaires. The international wealth-management market is an area where rival Bank of America (NYSE: BAC  ) has actually reined in its presence, as it has sold off much of its international operations in an effort to streamline its operations and focus on the U.S. market.

One new problem that Citigroup faces is dealing with the new leverage-ratio standards under Basel III and the combined regulatory authority of the Fed and the FDIC. Earlier this week, U.S. regulators proposed a rule raising minimum leverage buffer ratios above their current 3% level, requiring banks that fail to exceed 5% to face limits on bonus payments and capital distributions, and setting the standard for well-capitalized, systemically significant banks at an even higher 6%. With Citi coming in at about 4.5% currently, it will take further action for the bank to reach those higher levels, although the proposed effective date of the regulations would give Citi until 2018 to get there.

In Citigroup's earnings report, watch for how CEO Michael Corbat continues to make his mark on the bank. As successor to ousted CEO Vikram Pandit, Corbat's background is in the Europe/Middle East/Africa region, suggesting that he might well continue to emphasize international growth over domestic considerations. Given the regulatory environment that's taking shape in the U.S., that might be the smartest direction for Citigroup's future strategic plans to take and the one most likely to produce gains in Citigroup earnings in the long run. 

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