Key Takeaways:

  • Recent uptick in rates might spell better times ahead for banks
  • Credit loss provisions still expected to weigh, but cost-cutting has likely helped
  • Housing market seen aiding Wells, while Citigroup’s
    C
    credit card business stays in focus

A lethal combination of ultra-low interest rates, credit worries, a steep economic slowdown, and tough government regulations ganged up on big banks this year. Despite that, expectations for the group’s Q3 earnings performance are on the rise.

Granted, the numbers don’t look like something to throw a party over, with research firm FactSet predicting cumulative Financial earnings to fall 19.4% from a year ago. The good news is that those expectations look a lot sunnier than where analysts were back in June, when they predicted a Financials Q3 earnings cratering of 34.4%.

Why the improvement? For one thing, many banks benefit from the energetic capital markets and the trading revenue they provide. Second, low rates have their good side, encouraging more loan activity.

Some of the big banks leading the upward earnings expectations meter include JP Morgan Chase
JPM
(JPM) and Wells Fargo
WFC
(WFC), FactSet reported. It appears likely they both could have relatively positive Q3 results despite all the headwinds they’ve faced and continue to face in this rough 2020.

The same goes for Citigroup (C), which, like JPM, is expected to report Q3 earnings early tomorrow. Those will be followed Wednesday morning by WFC.

Before zeroing in on individual banks, let’s scroll back for a broader view. Big banks haven’t performed well in the market this year, but they’ve generally done a great job setting aside money for possible credit losses and cutting costs. This could position most of them pretty nicely for any economic rebound once the pandemic passes.

That said, the credit

  • On Wednesday, US regulators announced $400 million in fines against Citigroup for “related to deficiencies in enterprise-wide risk management, compliance risk management, data governance, and internal controls.”
  • It’s the latest in what has been a volatile few weeks for the global bank, which announced a change in leadership in September.
  • Business Insider has previously reported on issues regulators had with Citi’s inability to fix risk, compliance, and tech systems.  
  • Visit Business Insider’s homepage for more stories.

It’s been a complicated month for Citigroup.

The third-biggest US bank by assets shocked Wall Street in September when it announced Michael Corbat, Citi’s chief executive, would be retiring in February.

Jane Fraser, the bank’s president and CEO of its consumer banking division, was named Corbat’s successor, making her the first woman to serve as the chief executive of a major US bank.

However, it wasn’t the selection of Fraser, who had been seen by many as Corbat’s eventual successor after she was promoted to president of the bank last fall, that turned heads.

Instead, it was the timing of the announcement that raised questions. Corbat was only 60, leading some to believe he would remain at the helm of Citi longer. Analysts said the timing of the announcement was surprising and unexpected. The bank was also only a few months removed from an erroneous $900 million wire. 

jane fraser

Jane Fraser, Citi’s president and CEO of its consumer banking division

Julian Restrepo/Citigroup via AP


On Wednesday, less than a month after the announcement of Corbat’s retirement, the Federal Reserve Board and Office of the Comptroller of the Currency announced $400 million in fines levied against Citi “related to deficiencies in enterprise-wide risk management, compliance risk management, data governance, and internal controls,” according to the OCC. 

In addition to the fine, Citigroup needs to check with

Despite decent performance of the overall Finance sector in the third quarter, Citigroup C disappointed investors as reflected by its price performance. Shares of the company depreciated 15.6% in the July-September period compared with the industry’s 2.1% decline. The stock also lagged the S&P 500’s rally of 8.5% in the same time frame.

Like many other companies, performance of Citigroup has been affected by the pandemic. However, recent developments regarding faults in the company’s risk management systems, CFO’s comments on disappointing revenue performance in third-quarter 2020 and other legal issues pulled the stock even lower.

Price Performance

Factors in Detail

Citigroup witnessed a major setback when in mid-September The Wall Street Journal reported that the bank may have to face a public rebuke from The Office of the Comptroller of the Currency and the Federal Reserve. This was due to its failure to improve its risk management systems and procedures.

Notably, Citigroup was expected to face a consent order that would make it necessary for the company to take some immediate action and improve its faulty controlling systems.

Further, the stock met with investors’ pessimism when CFO Mark Mason said that he expects additional reserves to be created in the third quarter. Also, overall revenues are expected to decline in the high single-digit range on a year-over-year basis due to the impact of lower rates and reduced levels of business activities due to COVID-19.

The company’s legal encounters during the quarter were another key reason for the stock ending in red. In August, Citigroup had accidently transferred about $900 million to the creditors of renowned cosmetic company, Revlon. The lender was able to recover some of the amount and stated that it was a clerical error.

Further, at the end of September, Citigroup agreed to pay $4.5 million in fine