Citigroup (C) sees spike in loan losses due to pandemic; bets on stimulus for recovery

Leading banks reported their financial results this week, kicking off one of the most keenly awaited earnings seasons. The market is looking for updates from top executives about the impact of COVID-19 outbreak on the economy. The numbers unveiled so far by major banks have given a sense of what to expect in the coming months.

Citigroup (NYSE: C) this week reported a sharp fall in first-quarter earnings despite practicing “financial discipline” and recording decent revenue growth. CEO Michael Corbat attributed the weakness in bottom-line performance to the impact of the pandemic on operations towards the end of the quarter. Citi raised its loan loss reserve by a whopping $5 billion in view of the uncertain credit scenario, which weighed on profitability in the first three months of 2020.

Defaults

Others like Goldman Sachs (GS) and Bank of America (BOA), who reported earnings this week, also reserved huge amounts to deal with a potential surge in loan losses. Both the banks reported double-digit decline in first-quarter profit. Though hectic trading activity during the crisis days have helped the trading segments of banks in generating strong revenues, the benefits might be offset by potential loan defaults going forward.

“Although we did have good revenue performance this quarter, we exited the quarter in a dramatically different environment. While we’ve built significant loan loss reserves, no one knows what the severity or longevity of the virus’s impact on the global economy will be.”

Michael Corbat, CEO of Citigroup

CEO Michael Corbat said the pandemic is a public health issue with severe economic ramifications, rather than a financial crisis.

Bleak Outlook

Though Citi claimed it has sufficient resources to serve customers in the coming quarters, it might not help much as several of its institutional clients would have suffered heavy losses. The emerging scenario suggests that there is a strong likelihood of the bank’s performance getting affected by fiscal crunch in the coming months.

After last year’s three consecutive rate cuts, the Federal Reserve is expected to maintain the dovish stance in view of the volatile atmosphere, which in turn will add to the burden of financial service providers.

Stock Remains Low

The unimpressive numbers spurred a selloff and Citi’s stock lost sharply following the announcement earlier this week, reversing most of the recent gains. The stock has been in a downward spiral since the coronavirus crisis triggered market selloff a couple of months ago. The stock has remained low since then.

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Leveraging its investments in technology and digital tools, the bank managed to open a significantly higher number of accounts digitally during the lockdown period, compared to last year. Also, there was strong growth in the mobile and CitiDirect users – a trend that can prove beneficial for the business in the long term.

Withdraws Guidance

As expected, the management no longer expects to achieve the 12%-13% RoTCE it had predicted for fiscal 2020 earlier, due to the persistent uncertainty. The downtrend in revenue performance due to reduced activity, mainly in banking and consumer franchise, is expected to continue throughout the second quarter. While the outlook for the rest of the year is still evolving, one thing is certain that high credit losses would eat into profitability.

According to CFO Michael Corbat, the extent of credit loss would depend a lot on macroeconomic trends including unemployment, as well as distribution of the stimulus package announced by the Federal Reserve and treasury. Responding to analysts’ queries at the conference call, Corbat said it is difficult to fully assess the impact on customers and the scale of defaults in markets outside the US, especially Asia, as it would depend on policies adopted by the regional governments.

All Eyes on Stimulus

At about $21 billion, Citi’s first-quarter revenues were up 12% from last year, mainly reflecting higher trading revenues. Earnings, meanwhile, plunged 44% to $1.056 per share but topped the Street view.

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Earlier, the Senate approved a $2-trillion stimulus plan to help citizens and businesses affected by the coronavirus-linked disruptions. The package includes direct payments to the public and loans to businesses, which is expected to ease the economic toll on the system.