Citi turns weak on y-o-y decline in Q3 earnings

The shares of banking giant Citigroup Inc (NYSE: C) continue to gain ground for the past three weeks. Last Thursday, the stock touched a high of $50.63, which is close to the maximum target price of $51 suggested on October 4 for the call option trade.

The main reason for the increase in the share price is the fiscal 2016 third-quarter results that beat the analysts’ estimates. While the financial health of the bank is improving, we believe that the share price would undergo a correction in the short-term due to the reasons mentioned underneath. Citigroup closed Tuesday’s trading session at $48.94.

The New York-based company reported third-quarter revenues of $17.76 billion, compared to $18.69 billion in the corresponding quarter of 2015. The Q3 revenues were higher than the Zacks estimates of $17.36 billion, but 5% below the prior year revenues.

Likewise, the adjusted net income of $3.84 billion, or $1.24 per share, for the third-quarter 2016 was lower than the adjusted net income of $4.164 billion, or $1.31 per share, reported in the third-quarter of 2015. However, the Q3 2016 net income topped the analysts’ estimates of $1.16 per share. It can be noted that both the third-quarter revenue and earnings were lower than the comparable period last year.

Citi

The bank continues to see a decline in earnings from the mortgage division. During the quarter ended September, the mortgage division’s earnings declined 9% q-o-q to $15 million. During the Q3 2015, the bank recorded earnings of $21.4 million from the mortgage division. On the other hand, Wells Fargo and JP Morgan Chase have reported strong mortgage numbers in the third-quarter.

Trading revenue, excluding charges, grew 16% to $4.13 billion, from $3.57 billion last year. Even though it was much better than the guidance issued by the bank last month, still, it is way lower than the 33% gain reported by its peer JP Morgan.

The bank’s loans grew 2% y-o-y to $638 billion, while the deposits increased 4% y-o-y to $940 billion. Again, it lags behind its peers such as the Bank of America and Wells Fargo, which have respectively recorded a 6% and 5% increase in the deposits. The financial health remains strong with a CET 1 ratio of 12.7%. However, from an investor’s point of view, there are banks which are performing better than Citigroup as of now. So, the investors would be naturally inclined to buy the shares of banks which are performing better. Due to this, we believe that the share price of Citigroup would remain range bound during the current quarter.

The historic price chart shows an established support at 47. The resistance for the stock can be expected between 51 and 54. The stochastic oscillator is descending from the overbought territory. The negative reading of the Chaikin Money Flow indicator suggests that money is flowing out of the stock. Thus, there is a high probability of a price correction.

So, purchasing a one touch put option looks to be a smart decision. A target level of $47 should be selected for the put option. Likewise, the binary trader should allow a time period of at least one month for the contract to expire.

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