Introduction 

Citigroup Inc. (Citigroup or the Bank), the largest credit card issuer in the US, has reported Net Revenues of USD 17.3 billion and Net Profits of USD 2.2 billion during the turbulent 3rd quarter 2020 exceeding analysts' estimates. The Bank's profit fell 34% in the 3rd quarter due to weakness in its consumer banking division. The bank’s trading division once again offset a slump in profits driven by near-zero interest rates and reserve build-ups. Revenue fell 7% from the year-ago period as thriving trading desks fell short of offsetting a consumer banking slump. Increased loan-loss reserves led net income to tank 34% on Y-o-Y basis. The bank did set aside less money for potential bad loans in the latest quarter compared to earlier in the year, a sign that some of the economic strain from the coronavirus pandemic could be easing. Citigroup's provision for credit losses was USD2.26 billion in the third quarter compared to USD7.9 billion in the second quarter. Moreover, the Bank has offered forbearance on 2 million credit card accounts which represent 7% of the total credit card balance. 

Citigroup’s results come in the midst of a major management change for the third-biggest U.S. bank by assets. Last month, the bank announced that Corbat would be replaced by his deputy Jane Fraser in February, marking the first big Wall Street bank to have a female CEO. 

Let us get an insight of the latest earnings results. 

Earnings 

Citigroup Inc. has slightly surpassed analysts' estimate of revenue and net income in Q3 2020. The Bank has reported Net Revenues of USD 17.3 billion in the quarter compared to USD18.6 billion in the previous year. Revenues decreased primarily due to weakness in its consumer banking division. 

However, revenues of the Global Consumer Banking Segment have declined by 13% in Q3 2020 from the same period in previous year. The segment reported Net Revenues of USD 7.2 billion in Q3 2020 compared to USD 8.3 billion in Q3 2019. 

Net income (earnings) of Citigroup has exceeded analysts' expectation of 93 cents per share by 47 cents per share and reported net income of USD 3.2 billion from continuing operations in Q3 2020. Net income has declined in Q3 2020 compared to net income of USD 4.9 billion in Q3 2019. The decline in Net Income was driven by weakness in the consumer banking division. 

The Institutional Clients Group segment reported Net Profit of USD 2.9 billion in Q3 2020. The Global Consumer Banking and Corporate and Other segments haverecordedNet Profits of USD 1.1 billion and a Loss of USD 0.7 billion, respectively.

Profit Provisioned for Credit Losses

Citigroup reserved USD 2.2billion (36%) of its pre-provision profit for provision for credit losses. The Bank has provisioned 53% of Global Consumer Banking segment profit againstcredit losses followed by Institutional Clients Group segment with a provision of 18% of the pre-provision profit. Hence, this resulted in a decline in the 3rd quarter net profit.

Return-on-Equity (ROE) 

Citigroup reported ROE of 7.9% in Q3 2020, which has substantially increased from the previous quarter (ROE of 2.4%). Income generated by the Global Consumer Banking and Institutional Clients group has a huge impact on the group’s ROE(Return on Equity) in the 3rd quarter of 2020. 

 Balance Sheet Interest Rate Analysis 

Earning Assets 

The average interest rate of Citigroup's assets has declined in the Q3 2020. The total average rate of assets has declined from 4.20% in Q3 2019 to 2.57% in Q3 2020. The interest rate of trading assets has declined with the emergency rate cut by the Federal Government. 

Interest-Bearing Liabilities 

The average interest rate has declined in Q3 2020. The interest rate of deposits, including deposit insurance and FDIC agreements has declined from 1.50% in Q2 2019 to 0.50% in Q3 2020. The interest rate of securities loaned and sold under repurchase agreements has significantly declined from 3.70% in Q2 2019 to 0.54% in Q3 2020. Also, the interest rate of short-term borrowings has declined from 2.70% in Q2 2019 to 0.37% in Q3 2020. 

Liquidity Risk – High-Quality Liquid Assets (HQLA) 

Citigroup reported High-Quality Liquid Assets (average) of USD 522 billion in Q3 2020 compared to USD 423 billion in Q3 2019. The liquid assets are eligible for inclusion in the calculation of the Banks' consolidated Liquidity Coverage Ratio pursuant to the US LCR rules. The increase in liquid assets signifies long-term debt issuance and growth in deposits. While this deposit growth significantly increased the Bank's liquidity, a significant liquidity amount was not assumed to be transferable to other entities within Citigroup and is therefore not included in the consolidated HQLA. 

As of Sept 30, 2020, Citigroup has approximately USD965 billion of available liquidity resources, to support its clients, business needs including closing HQLA assets, additional unencumbered securities, including excess liquidity held at bank entities that are non-transferable to other entities within Citigroup; and available assets not already accounted for within the Citigroup's HQLA to support Federal Home Loan Bank (FHLB) and Federal Reserve Bank discount window borrowing capacity. 

Corporate Credit Exposure – Institutional Clients group 

Citigroup's corporate credit portfolio within Institutional Clients Group stood at USD 774 billion in Q3 2020. The direct outstanding amount reported at USD 344 billion in Q3 2020.

Citigroup's corporate credit portfolio is diverse across geography and counterparty. The Bank has the highest exposure in North America, with 57% of total credit exposure. 

Citigroup's credit portfolio is diversified across a wide range of industries. Citigroup has the highest credit exposure in the 'Transportation and Industrials'segment, followed by the 'Private Bank'sector'Consumer Retail', and 'Technology, Media And Telecom' Sector.

As of Sep 30th 2020, the total credit exposure of Citigroup stood at USD 774 billion out of which USD 344 billion credit has been funded. Citigroup's total exposure in the Transportation and Industrials sector stood at USD 147.06 billion in Q3 2020, out of which Auto's, Transportation, and Industrials constituted USD 50.3 billion, USD 27 billion and USD 69.66 billion, respectively. The total credit exposure of Private Bank stood at USD 107.4 billion in Q3 2020, which excludes USD 43.2 billion and USD 6.3 billion of funded and unfunded delinquency-managed private bank exposure. 

Loan Delinquency Rate 

The 30-89-day loan delinquency rate of Citigroup Consumer Banking Segment is reported at 0.93% in Q3 2020. The loan delinquency rate has declined from the previous year rate of 1.10% as well as the previous quarterly rate of 0.99% despite a rise in the unemployment rate. 

The loan delinquency rate of 90+ days or more has also declined to 0.81% in the 3rd quarter of 2020 from its previous quarter (0.99%). It has alsodeclined from its previous year levelof 0.93%.

Decline in delinquency rates during the period when the global pandemic has had an extraordinary impact on the worldwide economy leading to a sharp rise in unemployment level is quite hard to believe. While looking more in-depth, we have found that Citigroup has offered a wide range of programs for different types of products, providing short-term as well as medium-term relief to customers in response to the pandemic. The relief provided has been mainly in the form of payment deferrals or fee waivers provided to Global Consumer Banking customers, with a small portion of customers reported within Corporate/Other. During the 3rd quarter 2020, consumer relief programs had ~4.6 million loan modifications with approximately USD 23.6 billion of associated enrollment balances, excluding TDRs, representing around 2% of Citigroup's total consumer loan balances. 

To derive the actual delinquent amount, we have added the USD 23.6 billion to the reported delinquent amount. After adding back, the actual 30-89 days loan delinquency rate stood at 9.36% compared to a reported loan delinquency rate of 0.81% in Q3 2020. 

The actual 30-89 days delinquency amount stood at USD 26.3 billion compared to the reported loan delinquency amount of USD 2.6 billion in Q3 2020. Hence, the reported loan delinquency amount portrays a somewhat misleading picture. 

The Bank has stashed away USD 26.4 billion againstallowance for loan losses in Q2 2020 which is 111% of the previous year level(USD 12.5 billion) to prepare for possible defaults in the coming days as the economy heads towards one of the worst recession in the last decades.

Conclusion 

Citigroup has edged out analyst estimates and reported Revenues of USD 17.3 billion and Net earnings of USD 2.2 billion in Q3 2020. The surge in Net Revenues was primarily due to an increase in Revenue in fixed-income trading and investment banking segments, both under the Institutional Clients Group segment. The Bank has provisioned USD 2.26 billion of pre-profit to prepare for possible defaults in the coming quarters. The Bank's ROE (Return-on-Equity) has substantially increased in the 3rd quarter of 2020 to 7.9% from 10.4% in Q3 2019.  

However, the Bank's loan delinquency rates for 30-89 days past due and 90 or more days past due has declined from the previous quarter levels. This was primarily because the Bank has provided moratorium relief to its consumer banking customers of approximately USD 20 billion, which represents approx. 7% of the Bank's total consumer loan balances. When the deferred amount is added back, the 30-89 days delinquency rate increased to 7.96% from 0.81% (as reported) in the 3rd quarter.