Citibank reports the Costco loan portfolio has grown to over $14 billion at the end of Q3, up from approximately $10.6 billion at acquisition. Fitch says Citi reported a 0.83% return on assets (ROA) in the third quarter, results which are lower on a sequential basis and from those reported a year ago.
Fitch noted a third of the loan loss reserve build was attributed to Costco given that the loans came over with no loan loss reserves, while another third reflected CFPB guidance on third party collections. The remaining reserve build was attributed to portfolio growth. While provision expenses increased 32% on a sequential basis, net charge-offs improved 3% in nominal terms.
Quarterly earnings included higher provision expenses on both a linked-quarter and year-ago basis and lower reported revenues from a year ago, which was partially offset by higher core revenues and well-controlled operating expenses.
The year-ago comparisons included two non-recurring items, a gain on a sale of merchant acquiring business in Mexico and the reversal of prime brokerage valuation adjustment. Excluding these two items, Citicorp revenues improved 2.4% from a year ago. Quarterly revenue comparisons were not impacted by any one-time gains and improved 1% on a linked-quarter basis in Citicorp.
Citi recently announced the sales of its retail operations in Argentina and Brazil reflecting the company’s ongoing strategy of shifting resources to higher returning areas. During the quarter, Citi announced it plans to invest more than $1 billion in its Mexican business, which was rebranded as Citibanamex.
In terms of North America Consumer Banking, net income declined on both a linked-quarter and year-ago basis. While the quarter’s results reflected a full quarter’s impact of the Costco portfolio, which was acquired on June 17, it also included higher provision and operating expenses, partially offset by higher revenues.
In Branded Cards, net credit losses declined to 225bps. However, excluding Costco, which did not incur any losses in 3Q/16, the NCO rate in Branded was approximately 280bps year-to-date. Citi expects this to be the run-rate for NCOs in 2017. For Retail Services, loan losses tend to be higher and were 410bps year-to-date. Citi expects them to modestly deteriorate in 2017, up to 435bps for the year, primarily reflecting seasoning and the aforementioned regulatory guidance.
Citi also disclosed that higher operating expenses were primarily driven by the addition of Costco, volume growth, and continued marketing investments.
Citi continues to reshape its retail banking footprint, focusing on its core six urban markets. The bank has begun to invest in additional growth, with improving digital and mobile capabilities, and additional dedicated CitiGold centers.
With regard to International Global Consumer Banking, net income improved 1% on a linked-quarter basis, but fell 15% from the prior year, in constant dollars. Year-ago comparisons include the aforementioned impact of the sale of Citi’s merchant acquiring business. Excluding this, revenues would have improved both from a year ago and a quarter ago. Similar to North America Consumer Banking, Citi reported loan loss reserve building Latin America.
In terms of the Institutional segment, fixed income revenues improved 35% from a year ago reflecting strength in both rates and currencies and spread products. This was partially offset by a decline of 34% from a year ago in Equity Markets (down 23% when excluding a prime finance adjustment reversal last year) due to lower client activity and by strong performance in Asia last year. Citi also reported continued progress in Banking, with solid performance in Investment Banking and Treasury & Trade Solutions.
With regard to credit, non-accrual balances declined 3% on a linked-quarter basis with improvements in both consumer and commercial. Early stage and late stage day delinquencies increased in nominal and percentage terms on a linked-quarter basis.
In terms of Citi’s exposure to energy in ICG, Citi reported a reduction in both funded and total exposure, with a still relatively high 74% of exposures rated investment grade.
Citi’s capital ratios continue to remain very good and generally above global peers. The company’s estimated Common Equity Tier 1 under Basel III on a fully phased-in basis increased again to an estimated 12.6%. The approximate 10 bps improvement from last quarter was due primarily to net income.