Citigroup Earnings: What to Watch For
It's that glorious time of year again: earnings season. While we're still at the beginning of the quarterly ritual, investors have already heard from two of the four largest banks in the country, JPMorgan Chase (NYS: JPM) and Wells Fargo (NYS: WFC) , both of which announced record earnings on Friday. Next up is Citigroup (NYS: C) , the nation's third largest bank by assets and, arguably, the most opaque.
While Wall Street analysts are typically obsessed with the top-line figures, like revenue and net income, both of which are unquestionably important, to truly understand how Citigroup's quarter went ,you'll need to watch for the following three things.
3 things to watch
The first is the net interest margin. At its core, the business model of your typical bank is very simple. They borrow money from depositors and other financial institutions at very low interest rates, and then lend that money out to businesses and consumers at higher rates. Roughly speaking, the difference between the two is the net interest margin.
While banks can manipulate this spread by holding assets of varying maturities, the single most important influence on it is the Federal Reserve, which has been driving down longer-term interest rates via so-called quantitative easing. In the last two years, for example, Citigroup's net interest margin has gone from above 3% down to 2.8% last quarter. This is particularly important given the fact that Wells Fargo got skewered by traders after reporting a 25 basis point decrease in its third quarter NIM.
The second thing to watch for is credit quality. As I've discussed previously, Citigroup is sitting on a whopping $100 billion in questionable loans dating back to the financial crisis, all of which are cordoned off in its Citi Holdings division. In the second quarter, due to the ongoing winding down of these assets, Citi Holdings' revenue dropped by a staggering 62%, bringing the entire bank's revenue down along with it. Consequently, any improvement or further deterioration in this little-loved division has an oversized impact on the bank's future profitability.
The final thing to watch for are expenses related to legal and/or regulatory matters. Over the last few months, the financial industry has seemingly been under assault for its previous misdeeds. There is, of course, the wide-ranging Libor scandal. JPMorgan has its London Whale. Bank of America (NYS: BAC) has its albatross involving repurchase claims from Fannie Mae and Freddie Mac. And even stodgy old Wells Fargo was recently sued for malfeasance related to mortgage origination. Each of these instances have, or could, cost the respective institutions billions of dollars in legal fees and settlements. Consequently, any rumor that Citigroup has any new issues hidden under its hood could send shares down sharply.
Foolish bottom line
Citigroup is set to report its earnings before the markets on Monday and Bank of America follows on Wednesday. To see why our in-house banking analyst Anand Chokkavelu thinks that the latter could "double or triple" in the next five years, download our new in-depth report on the lender by clicking here now.
The article Citigroup Earnings: What to Watch For originally appeared on Fool.com.John Maxfield owns shares of Bank of America. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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