Citigroup & JPMorgan Q1 Earnings Preview: What Market Expects

Even as the banking sector moves toward a period where core earnings growth should be as good as it’s been in years (helped by rates and loan growth), the large bank sector has been hit hard recently, with major banks around 20% from their highs. Several factors have contributed to this, including weaker capital markets, rising global macro uncertainty after Russia’s invasion, ongoing worries about inflation, and yield curve inversion, to say nothing of growing chatter about a recession within 18 months.

Neither Citigroup (NYSE:C) nor JPMorgan (NYSE:JPM) have been spared from this weakness, with both on the weakest end of the performance curve year to date, but both continue to look undervalued going into this first quarter reporting period. What follows is a comparison of these two large-cap banks, as well as some trends worth watching.

First, A Quick Look Back At Citigroup And JPMorgan

Citi and JPMorgan entered 2022 on fundamentally different footings. Citi is still very much in a rebuilding and restructuring mode, with management exiting much of the company’s non-U.S. footprint and looking to restructure such that it can generate double-digit returns on tangible common equity (or ROTCE) on an ongoing core basis. Meanwhile, JPMorgan is facing the not-inconsiderable challenge of maintaining a very high level of execution and positioning the bank for the next leg of growth.

Over the last three years there has been a clear separation in performance between the two banks across a range of metrics. Simply put, JPMorgan has outgrown and outperformed Citi on every major metric, even if not on a year-by-year basis. This performance track record also goes toward explaining the differences in valuations – JPMorgan enjoys higher multiples on the back of better growth and profitability metrics (not just versus Citi, but the sector as a whole), while Citi’s valuation suffers from its comparative lack of profitability.

	2019		2020		2021
	C	JPM	C	JPM	C	JPM
Revenue Growth	1.9%	6.3%	0.4%	3.7%	-2.7%	1.9%
Efficiency Ratio	56.4	55.1	58.0	54.2	64.6	56.9
Pre-Provision Profit Growth	3.9%	10.4%	-3.3%	5.8%	-18.0%	-4.1%
Loan Growth	2.0%	3.1%	0.2%	3.2%	-2.5%	3.0%
Deposit Growth	6.4%	4.6%	16.8%	25.0%	8.5%	23.0%
ROTCE	12.0%	18.2%	6.6%	14.5%	14.3%	23.0%
TBVPS Growth	10.4%	8.3%	4.8%	8.4%	7.7%	8.2%

	C	JPM
Current Forward P/E	7.6	12.0
10-Yr Avg Forward P/E	10	12.6
LT Large Bank Avg Forward P/E	11.4	11.4
Current Bank Sector Avg Forward P/E	10.9	10.9

What The Markets Are Expecting From Citi And JPM

Both Citi and JPMorgan have seen downward revisions in earnings expectations leading into the first quarter reporting cycle. For Citi, the average EPS estimate for the first quarter has fallen by 19% over the last 90 days and 12% over the last 30% days, while the FY’22 EPS estimate has fallen by 12% and 5%, respectively. For JPMorgan the revisions have been more modest, with a 4% and 1% drop over the last 90 days (and similar drops over the last 30 days).

The markets expect both banks to see weaker capital markets results, with the IPO market in particular seeing notable weakness. Trading activity is tougher to predict, but the general consensus is that the entire sector will see weaker results, with JPMorgan likely to be a bit weaker.

Mark-to-market losses on securities holdings will also likely increase, though most analysts exclude this from core results. JPMorgan in particular could see larger mark-to-market losses from its commodity operations, as it was exposed to the exceptional recent volatility in nickel prices.

Both banks should see higher loan growth in the quarter, with expectations for JPMorgan to see something on the order of mid-single-digit growth versus low single-digit growth for Citi. Both banks are also set to benefit from healthy consumer spending through their card operations – although Fed data shows a slight decline in card loans from the end of Q4’21, card spending has accelerated throughout the quarter (from up 15% over 2019 levels in January to up 25% in March).

Drivers To Watch

Both Citi and JPMorgan are heavily leveraged to the overall health and growth of the economy, both on the commercial and consumer sides of the market. Both are actively seeking to expand middle-market commercial lending, as well as capture more low-cost consumer deposits and card revenue. Credit risk should be modest at this stage in the cycle, though both banks will likely start seeing charge-offs on credit cards rise and reserving on commercial loans could be more conservative given the rising macro uncertainty.

Specific to Citi, the major driver to monitor is the company’s progress with its comprehensive restructuring program. The bank has already announced the sale of multiple overseas operations, but there are still more disposals left. The bank recently provided a target of low double-digit ROTCE over the next three to five years – a level that would still be below its large peers, but would nevertheless be a step up from recent trends on a core basis (reported 2021 ROTCE was boosted by reserve releases).

There’s more to monitor with JPMorgan. For starters, the company spooked the Street with its guidance during the Q4’21 conference call for substantially higher opex spending. I believe this is prudent spending intended to position the bank for ongoing leadership and above-average performance, but spending programs like this are always controversial, as the spending will assuredly happen, but the benefits are far less certain.

JPMorgan is also likely looking at higher capital requirements, something that will create a headwind to growth and capital returns to shareholders. Additional management commentary on this issue will likely garner significant attention in the upcoming earnings call.

The Bottom Line

I continue to believe that both Citi and JPMorgan are fundamentally undervalued today, but they offer very different investment characteristics. I would refer readers to my prior articles on JPMorgan and Citi for more information about my modeling and valuation assumptions.

At JPMorgan, the challenge is about maintaining and extending leadership amid high performance expectations. For Citi, the challenge is in delivering tangible evidence that this latest restructuring program is fixing the issues that have weighed on performance for years and that there is truly a credible path forward to double-digit ROTCE and better earnings. While this phase of the cycle is likely to favor “Main Street” banks more than “Wall Street” banks, I believe both Citi and JPMorgan can generate attractive long-term returns from current levels.