This week should kick-off more earnings. There's a few out this week that I felt warranted a quick briefing, a good few days for you to think about:
A) Citigroup (Jan. 19, 2007): For the investment banks, 2006 was another great year, while GS was able to top off expectations with their earnings, and so everyone is the best with the others. Focus will be on 2007's guidance after a consensus that there should be a general economic slow-down, which will inevitably hit the banking industry. But the question really is, how much of a slow-down? Citigroup is interesting, their stocks have been performing fairly well, coming up from about $50 since December. But there has been quite a few disappoints with this mega-giant banking group, especially with their operations in Japan. Apparently one of Citigroup's strongest partners and allies in there Japanese business is investment bank Nikko Cordial, which is now accused of filing false financials. This news hit both companies hard as Japanese regulators have started to launch investigations. At the same time, one of Citigroup's strongest emphasis that led to an impressive increase in their share prices was the aggressive investment in consumer business within Japan. And now, management comes out to say that they're planning to close over 80% of their consumer finance branches. Japan's consumer business accounts for about 80% of their non-US consumer banking. This will have an impact on their guidance for 2007 and 2008 performance.
Their Global Consumer, which is about 60% of their business, earned $3.2 billion in their third quarter. I think there's a good chance this number should be higher for their forth quarter, from ongoing growth in loans and their credit card business in domestic US, meanwhile, continued expansion internationally from overseas growth. Credit quality has remained well together with lower bankruptcy rates.
Their Global Corporate and Investment Banking, which is another 34%, earned $1.7 billion last quarter. Again, a good chance on another increase here, and if I'm right, should be just over $1.8 billion for their forth quarter. There was a reported increase in both their underwriting and M&A arm, being about 40% and 20%, respectively. Beside, looking at the big picture of the industry as a whole, for the forth quarter, underwriting on equity, debt and M&A were all up impressive numbers.
Their Global Wealth Management, which is about their remaining 6%, not very significant, but should be the business that will dip a slight big this quarter. There hasn't been much emphasis and problems with Japan should start to have an impact.
Overall, I expect for C to report an increase in earnings at about $1.03-0.04 EPS. A growth anywhere between 4-6%, but what will really hit their price is how their guidance will be for the remainder of the year, which to me, will lead to a drop in their share prices.
B) Merrill Lynch (Jan. 18, 2007): Merrill's sell of their MLIM business to BlackRock gave them a pretty good earning during their third quarter. And this should create a bit of a blur for their quarter four results. Not going to get too much into Merrill, but to summarize this one up, their Global Markets should be up 9-10%, from impressive performance on both their equities and fixed income. Global Investment Banking, should be up about 15-17%, also from good deal flows from underwriting and M&A. Their Global Private Clients will also get a nice boost by 10%. All-in-all growth in all business lines. One downside I do see will be their 2007 impact on the bankruptcy of Ownit, that will hit Merrill's books sometime this coming year, only a one-time charge of about US$90 million or so. However, I do see an increase in earnings above their previous guidance which should lead to a rise in their share prices.
Of the two financial banks, I'd place my chips on with Merrill's earnings. More to come on other earnings later. Look out for Intel tomorrow, Apple, American Airlines and Contintental Airlines.