Citigroup's Bottom Line Needs a Housing Bottom
NEW YORK ( TheStreet) -- When Citigroup(C) reports its third-quarter results Monday, analysts and investors will be hoping to see early signs that the bank is benefiting from the nascent housing recovery.
Citigroup is no longer a big originator of mortgages in the U.S., with its North American residential real estate portfolio largely in run-off mode at its non-core Citi Holdings unit.
But the bank is likely to continue to benefit from improving credit quality trends.
A widespread rebound in home prices has helped over a million underwater borrowers recover equity in their homes in 2012, according to CoreLogic. If the trend continues, banks could see lower delinquency rates in the future, reducing the amount of profit they need to set aside as a cushion against future loan losses.
But some analysts point out that the market is underestimating how levered Citigroup is to a housing recovery.
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The report adds that better home prices should allow for the quicker rundown of Citi Holdings, reducing its drag on the bank's financials.
Merrill Lynch's Erika Penala believes improving credit could benefit Citigroup's earnings per share by 19%.
Citigroup is well reserved for loan losses at more than 4% of loans, allowing it room to "release" a substantial portion of its reserves as charge-offs and provisions for future loan losses decrease.
Barclays Capital analyst Jason Goldberg notes that Citigroup has $9.5bn of reserves (30 months of NCO coverage) currently held against $100bn of residential mortgages. Timing for a reserve release appears close, according to the analyst as "stabilizing price conditions have helped place a floor under future losses."
On Friday, JPMorgan Chase (JPM) beat expectations, helped in part by a $900-million mortgage loan-loss reserve release. Wells Fargo saw a reserve release of $200 million.
Besides offering earnings upside to Citigroup, Goldberg says reserve releases could increase tangible book and capital ratios, be a positive signal to the market and improve profitability at Citi Holdings, among other things.
While all this is grounds for optimism in the upcoming quarters, the third quarter for Citigroup is likely to be somewhat uninspiring.