Like all of its peers, Citigroup (C 1.41%) is adjusting to the new Current Expected Credit Loss (CECL) framework and announced big provisions for future loan losses when it reported first-quarter earnings last week. Citi's incremental provision for loan losses was higher than most of its peers, and its current provision for loan losses is higher as well. Aside from the provisioning, Citi reported strong numbers to start the year, especially in the Institutional Group. But non-performing loan percentages are creeping up in the credit card portfolio.

Let's take a deeper dive into this banking giant's earnings and see what else they might show about financial performance over the course of 2020.

Hundred dollar bill with Ben Franklin wearing a mask

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Earnings fall, driven by an increase in provisioning

For the first quarter, Citi reported earnings per share of $1.05, compared to $2.15 in the fourth quarter and $1.87 in the first quarter last year. The decrease in EPS was driven primarily by the $4.9 billion in additional provisioning for loan losses Citi set aside to prepare for the adverse effects it expects from the COVID-19 pandemic. This incremental provision works out to be 0.22% of assets and 0.68% of loans, which was higher than most of Citi's peers. Total allowance for loan losses was 2.9% of loans, which is also higher than its peers.

Total assets increased to $2.2 trillion from $2 trillion at the end of 2019 and from the first quarter of 2019, driven partially by corporate clients drawing down lines of credit. Tier 1 common equity fell from 11.8% at the end of the year to 11.2%. Citi also withdrew its guidance for return on tangible common equity of 12%-13% this year. 

Trading was a standout as volatility helped volumes

The Institutional Clients Group (largely investment banking, treasury, and trading) had a good start to the year, in what is typically a strong quarter to begin with. Trading was strong as volatility boosted volume and increased bid / ask spreads. Treasury was negatively affected by lower interest rates and investment banking was flat. Overall, revenues in ICG increased 22% compared to a year ago.

Volatility in the markets tends to generate trading volumes and requests for hedging services, so as long as the markets remain volatile, trading should remain robust. Internationally, Asia is returning to normal, which is increasing demand for credit. 

Credit cards, commercial real estate are worries

Citi noted an increase in non-current credit card and store card loans in the quarter, which is a typical seasonal phenomenon. Generally speaking, these improve in the second half of the year; however, COVID-19 issues will probably prevent that.

Citi compared its current U.S. credit card portfolio to its pre-2008 financial crisis portfolio. Today's portfolio has much higher credit scores than the pre-financial crisis portfolio, which means expected losses under CECL are 25%-30% lower than they were during the Great Recession when Citi had to be rescued by the U.S. government.

Citi hasn't been known as a small business lender, but it will participate in the Payroll Protection Plan and offer Small Business Administration (SBA) loans. Note that some of the actions the government has taken to support retailers could offset some of the projected losses from the CECL assumptions. 

While increasing credit card losses are a worry, commercial real estate and leases, especially to retail, are the other fear. Malls are largely shut down, and retailers are not paying rent. Citi had $53 billion in commercial real estate loans and another $10 billion in lines of credit commitments. If the lockdown extends much further this year, these loans will become workout candidates. 

Investor takeaway

Overall, Citi remains a strong profitable bank with adequate capital. At $44 a share, it is trading at 5.5 times 2019 earnings and 12.4 times estimates for 2020. The dividend yield is 4.6%, and the Tier 1 capital ratio was 11.2%. While credit card and mortgage losses required a government bailout in the 2008 crisis, that doesn't seem to be in the cards this time.

COVID-19 is a public health crisis, not a financial one, and the banking system won't be going through a repeat of 2008-09. Investors in Citi should feel comfortable with the bank's longer-term prospects. That said, we could see further writedowns, especially in corporate real estate and credit cards, if the COVID crisis drags on.