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Citigroup Earnings Fall on Higher Credit Allowance, but It Beats Estimates

By Dave Kovaleski – Updated Jul 14, 2020 at 12:26PM

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The bank saw a big spike in trading revenue

Citigroup (C -0.93%) posted earnings of $1.3 billion in the second quarter, a drop of 73% from the second quarter of 2019 and 48% from Q1. Earnings per share fell 74% to $0.50. Despite the precipitous drop, the bank beat analysts' estimates with higher-than-expected trading revenue.

Overall, Citigroup generated $19.8 billion in revenue, an increase of 5% year over year. The revenue gains came primarily from the institutional clients group, which jumped 21% to $12.1 billion. Within that group, the fixed-income markets trading saw revenue spike 68% to $5.6 billion. Also, investment banking revenue was up 37% to $1.7 billion.

A man in a suit at a screen tracking investment performance.

Image source: Getty Images.

These gains were offset by revenue decreases in global consumer banking, which fell 10% to $7.3 billion. Retail banking revenue was down 11% to $2.8 billion, while the cards business was down 9% to $4.5 billion.

Earnings were hurt by a huge spike in allowance for credit losses (ACL), reflecting the company's deteriorating macroeconomic outlook and downgrades in the corporate loan portfolio due to the economic impact of the COVID-19 pandemic. Citigroup's total cost of credit in the second quarter was $7.9 billion, up from $2.1 billion in the second quarter of 2019 and $7 billion last quarter.

That includes a net ACL build of $5.6 billion, up from just $111 million year over year. But more relevantly, the ACL is up 15% from the first quarter. The reserve build includes a qualitative management adjustment to reflect the potential for a "higher level of stress" and slower economic recovery.

CEO Michael Corbat said: "We entered this crisis from a position of strength. During the quarter, our regulatory capital increased and our CET1 ratio improved to 11.5%, comfortably above our new regulatory minimum of 10%." 

The bank's efficiency ratio was down to 52.7% from 56% in Q2 2019.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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