Citigroup Begins Fourth Quarter Earnings Season With A Revenue Miss

This morning Citigroup (C) kicked off earnings season for the big banks and stocks in general with a report that first, argued that the banking sector hasn’t fixed its big problem–no toppling revenue growth–and, second, that those traders and investors who are leery of disappointing revenues in this quarter’s reports from stocks in other sectors may indeed have a point.

The big bank announced adjusted earnings of $1.61 a share, above Wall Street’s forecast of $1.54, and revenue of $17.12 billion. The revenue number was below estimates of $17.55 billion and represents a 2% drop from revenue in the fourth quarter of 2017. (The adjusted earnings figure excludes a 3 cents a share tax benefit.)

The bank reported that fixed income revenue fell 21% year over year. Fixed income revenue has been a problem for the big banks back into 2017 and it looks like it will continue to plague results this quarter. Watch the JPMorgan Chase (JPM) report tomorrow is see how big a problem it will be across the sector.

But the plunge in fixed income revenue was just one of the disappointments below the headline. Revenue from mortgages fell as originations continued to decline and costs of funding those mortgages in the financial markets rose. Deposits declined by 1% year over year. And the company forecast the net interest income was unlikely to increase in 2019 as the Federal Reserve slowed its schedule for interest rate increases.

So where did the earnings beat come from in the absence of revenue growth? A good portion, continuing the pattern of recent quarters, came from cost cutting. Operating expenses fell by 4% driven, the bank said, by lower compensations costs, savings from gains in efficiency, and the wind-down of legacy assets that had weighed on the bank’s profits.

Despite what I’m characterizing as a litany of negative news, shares of Citigroup closed up 3.95% today. The banking sector as a whole was higher with the Financial Sector Select ETF (XLF) head 0.69%. Big banks JPMorgan Chase, Wells Fargo (WFC) and Bank of America (BAC) ended up 1.03%, 1.15%, and 1.31%, respectively.

Your certainly entitled to ask why. And here’s my answer. Citigroup noted that it returned $18 billion in capital to shareholders of its common shares in the form of dividends and share buybacks in the full 2018 year. That amounted to 110% of net income. In the first half of 2019 the bank expects to return an additional $9.8 billion in capital to common shareholders. Besides the effect of buy backs–which supports the price of shares and pushes up earnings per share (since earnings are spread over fewer shares with an 8% drop in shares outstanding from the fourth quarter of 2017), the return of capital gives Citigroup a dividend yield of 3.19%. That’s attractive these days and a commitment to keep returning cash to investors at this rate–even if at 110% of net income it does raise questions of how sustainable that yield is in the long run–certainly has its value.