Citi Misses Across The Board On Plunge In Mortgage Banking, Trading Revenues Despite $675MM Reserve Release

First we had JPM confirming what we all knew about the third quarter: it was a disaster for anyone who originates mortgages, whose balance sheet relies on Net Interest Margin, and whose income statement is dependent on trading volumes. Now, it is Citi's turn. Moments ago the bank reported uberadjusted EPS of $1.02 missing expectations of $1.04, unchanged from a year ago, and revenues, ex CVA/DVA, of $18.2 billion, down 5% from Q3 2012, and missing expectations $18.71 billion, by over $500 million. Citi EPS also included the now traditional fudge factor of $675MM in loan loss reserve releases, although well below the $1.502BN from a year ago, offset by $204MM in benefit and claims provisions and some $635MM in incremental mortgage charge offs.

Looking specifically at the factors for this miss, we see the same ones as in the case of JPM: a mortgage origination plunge, a drop in the Net Interest Margin as well as a crunch in securities and banking (trading):

To wit on mortgages:

  • Global Consumer Banking revenues of $9.2 billion declined 7% from the prior year period, as significantly lower U.S. mortgage refinancing activity and continued spread compression globally more than offset the ongoing volume growth in most international businesses.  Revenues declined 12% in North America GCB to $4.7 billion, while international GCB revenues declined 1% to $4.5 billion on a reported basis (grew 2% on a constant dollar basis).
  • North America GCB revenues declined 12% to $4.7 billion versus the prior year period driven mainly by the lower retail banking revenues, with total cards revenues (Citi-branded cards and Citi retail services) remaining roughly flat.   Retail banking revenues are expected to continue to be negatively impacted by lower mortgage origination revenues and spread compression.

And then securities and banking, which as Jefferies prewarned everyone, would be a disaster. Sure enough:

  • Investment Banking revenues of $839 million were 10% below the prior year period, driven primarily by declines in debt underwriting and advisory revenues, partially offset by growth in equity underwriting.
  • Fixed Income revenues of $2.8 billion in the third quarter 2013 (excluding a negative $287 million of CVA/DVA) decreased 26% from the prior year period, reflecting lower volumes and a more uncertain macro environment.
  • Securities and Banking net income was $989 million in the third quarter 2013, down 16% from the prior year period. Excluding CVA/DVA, net income declined 29% to $1.2 billion from the prior year period, primarily reflecting the lower revenues and higher credit costs, driven by loan loss reserve builds, partially offset by a 3% decline in operating expenses, reflecting the impact of headcount reductions and lower performance-based compensation.

The variances visually:

Just securities and banking: the collapse in Fixed Income Markets sticks out like a sore thumb:

So much for yet another bank's expectations of a NIM bounce:

Citi's fake earnings, aka Loan Loss Reserve Releases:

The reason why Citi did not build any Reps and Warrants reserves in Q3: it believes it is out of the woods when it comes to future R&W claims:

the message is clear: with banks, that 20% component of the S&P500 total earnings a big disappointment in Q3 (and likely Q4), one thing is certain: the time to slash 2013 forward earnings is here.

Full Q3 earnings supplement below: