Citigroup provides upside surprise and stock rally while Wells Fargo misses

Citigroup Inc. on Friday delivered better-than-expected profit and revenue but its earnings still fell along with Wells Fargo & Co. amid more difficult market conditions than a year ago.

The results helped spark a rally in bank shares a day after earnings misses from JPMorgan Chase & Co.
JPM,
+4.58%
and Morgan Stanley
MS,
+4.50%
pushed stocks down.

Citigroup
C,
+13.23%
shares rose 11% after the bank said its second-quarter earnings fell to $4.55 billion, or $2.19 a share, from $6.19 billion, or $2.85 a share, in the year-ago quarter.

The 27% drop in net income was driven by a higher cost of credit and higher expenses, the firm said.

Revenue increased by 11% to $19.64 billion from $17.75 billion.

Analysts expected Citigroup to report earnings of $1.68 a share on revenue of $18.4 billion, according to a FactSet survey.

CEO Jane Fraser said the bank managed to execute its strategy with “discipline and urgency” in a challenging macroeconomic and geopolitical environment.

“Our team delivered solid results and we are in a strong position to weather uncertain times, given our liquidity, credit quality and reserve levels,” CEO Jane Fraser said.

The bright spots for Citigroup included its bond trading and other trade solutions units, which turned in its best quarter in a decade “as clients took advantage of our global network”, she said.

Citi’s markets unit booked a 25% boost in revenue, but its investment banking and wealth management units struggled amid lower deal flow.

The company repurchased $250 million in stock and paid out $1 billion in dividends during the quarter.

CFRA analyst Kenneth Leon reiterated a buy rating on Citi, lowered his price target on the stock to $62 from $76, and said the bank’s turnaround under CEO Fraser appears to be on track.

“We stay the course on C’s transformation plan even though geopolitical risks do impact growth,” he said.

Meanwhile, Wells Fargo & Co
WFC,
+6.17%
rallied 7% despite posting weaker-than-expected earnings.

The bank did hike its 2022 outlook for net interest income to increase by about 20%, which would translate to about $43 billion, ahead of the analyst estimate of $42.57 billion.

Wells Fargo said its second-quarter net income declined to $3.12 billion, or 74 cents a share, from $6.04 billion, or $1.38 a share in the year-ago quarter.

Excluding an impairment of 8 cents a share for its venture capital business and other items, earnings were 82 cents a share in the latest quarter.

Second-quarter revenue dropped to $17.02 billion from $20.27 billion.

Analysts expected Wells Fargo to earn 80 cents a share on revenue of $17.48 billion, according to FactSet estimates.

“Looking ahead, our results should continue to benefit from the rising interest rate environment with growth in net interest income expected to more than offset any further near-term pressure on noninterest income,” CEO Charlie Scharf said. “We do expect credit losses to increase from these incredibly low levels, but we have yet to see any meaningful deterioration in either our consumer or commercial portfolios.”

Citi analyst Keith Horowitz reiterated a buy rating on Wells Fargo and said the company turned in a good quarter overall.

“We see very attractive value here,” Horowitz said.

While profits remain robust overall, this year’s second quarter ran up against particularly strong year-ago comparisons during the bull market of 2021.

The quarter ending June 30 marked a period of falling stock prices, big inflation numbers and rising interest rates, which took a bite out of mortgage lending. A drop in initial public offerings and other underwriting activity in the investment banking business also impacted the big banks.

Banks also set aside more capital for their stress test requirements and strengthened their balance sheets for potential loan losses if the economy cools.

Bank stocks have been weaker than the broad market this year, amid a difficult market environment.

Including Friday’s trades, Citigroup shares are down 19.3% year-to-date, while Wells Fargo has retreated by 13.8%.

The Financial Select SPDR ETF
XLF,
+3.38%
has lost 19,1% in 2022 and the KBW Nasdaq Bank Index
BKX,
+5.76%
is down by 22.3%.

By comparison, the S&P 500
SPX,
+1.92%
has fallen 19.1% and the Dow Jones Industrial Average
DJIA,
+2.15%
is off by 14%.

Citigroup and Wells Fargo reported earnings a day after JPMorgan Chase
JPM,
+4.58%
and Morgan Stanley
MS,
+4.50%
fell short of their profit targets. JPMorgan stock ended Thursday’s session lower by 3.5% after the bank said it would temporarily suspend dividend payments as it bulked up its balance sheet. Morgan Stanley shares dropped 0.4%.

Summing up the current environment, Morgan Stanley CEO said it’s “complicated,” with inflation, political change, rising interest rates, inflation and volatility all in the mix, along with the weakest first half in the equities market in decades.

Citigroup, Wells Fargo, JPMorgan and Morgan Stanley marked the first four of the six megabanks to report second-quarter earnings.

Goldman Sachs
GS,
+4.36%
and Bank of America Corp.
BAC,
+7.04%
are scheduled to report second-quarter results on Monday.

Analysts expect Goldman Sachs to earn $6.56 a share on revenue of $10.78 billion.

Bank of America’s second-quarter earnings target is 75 cents a share on revenue of $22.7 billion.

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