Q3 Preview: Citi (C) May Have Profitable Quarter, But Investment Banking Faces Headwinds

Citigroup (NYSE: C) shares are finishing Friday strong, up 1.4 percent, heading into its third-quarter earnings report.

Before the market opens Monday, October 17th, Citi is expected to report earnings of 82 cents per share on revenue of $19.59 billion. Earnings would be a 25 percent dip from $1.09 reported last quarter, and a significant gain from the 8 cents per share reported in the same quarter last year.

Citi shares fell 39 percent through the quarter and are 41 percent lower so far in 2011.

The stock currently trades for 5.9x next years earnings, compared with 5.5x for Bank of America Corp (NYSE: BAC), and 7.9x for Wells Fargo (NYSE: WFC).

Data from Bloomberg has 21 analysts with a Buy rating, seven at Hold, and just three suggesting to Sell. The price target average is $47.30, with a low of $28 and high of $69.

Analyst Commentary

• J.P. Morgan (JPM) sees EPS of $1.09 for Citi. The firm says Citi makes an attractive target trading below tangible book value, strong capital levels, sizeable amount of loan loss reserves, and potential for faster growth from emerging markets. "Citi also has better revenue growth drivers led by its emerging markets business and should benefit from slowing, albeit still high, credit losses, and continued shrinkage of Citi Holdings. Citi is also well positioned to return excess capital to shareholders, but likely in 2012 with its strong capital position. Citi recently reinstated its quarterly dividend (albeit a very small one) which is a positive as it signals to the market that it remains on track to return capital to shareholders in 2012."
  
  
• Wells Fargo is modeling for earnings of 85 cents per share, seeing challenging capital market conditions. "While investment banking fees and trading results are likely to be incrementally worse than we had envisioned in mid-September, we now estimate that Citi will benefit from DVA/CVA gains of approximately $1.2 billion due to credit spread widening during the quarter." The firm is modeling investment banking fees down 53 percent sequentially due to a broad-based plunge in deal completions, saying, "most notable in equity capital markets (down 68% Q/Q) due to turbulent market conditions. While trading results were likely incrementally weaker despite relatively healthy volumes (particularly in equity-related products), we estimate that the firm will record a $1.2B DVA gain from credit spread widening, helping to cushion the blow from adverse market movements."

Stay tuned to StreetInsider.com's EPS Insider section to see our analysis of the highly-anticipated quarterly results within seconds of the release. You can also check out Citi's past performance at Streetinsider's Citi Income Statement.

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