Citi Saves Stocks

Citi to the rescue, apparently.

I, for one, didn’t have “Citi saves stocks” on this week’s bingo card, but at a time when seemingly every “surprise” is a negative development, any news that doesn’t immediately precipitate a selloff counts as clemency.

Shares of Citi took off Friday (figure below) in a rally I (wrongly) assumed would fade. Instead, it gathered momentum. The catalyst was, of course, a well-received second quarter report that boasted top- and bottom-line beats despite considerable drag from a near 70% sequential increase in the cost of credit. YoY comparisons aren’t possible — this time last year, banks, including Citi, were still benefitting from reserve releases.

“We did have a slight build in reserves given the increasing possibility of a recession [but] we are operating from a position of strength,” Jane Fraser told analysts, while predicting “choppy waters on the horizon.”

Investment banking results were underwhelming, but in Citi’s case, at least, investors were more than willing to look through a big IB miss, perhaps desensitized after spending Thursday cringing at similar shortfalls from JPMorgan and Morgan Stanley.

Citi’s traders showed up for Fraser. FICC revenue of $4.08 billion was up 31% YoY, and easily cleared the bar, while equities revenue of $1.24 billion rose 8%, matching estimates.

Fraser thanked volatility for “creat[ing] strong corporate client activity,” and later stated the obvious: The tumult is primarily the result of “where we are in the current cycle rather than a new baseline in markets.”

As nice as the overall 25% increase in markets revenue was, Fraser was particularly pleased with a 28% jump in services, where a sharp rise in net interest income for the bank’s money-moving business drove revenues of $3 billion (figure below).

“Treasury and Trade Solutions fired on all cylinders,” Fraser beamed. It was the best quarter in a decade.

“We continue to see healthy underlying drivers in TTS that indicate continued strong client activity, with US dollar clearing volumes up 2%, cross-border flows up 17% and commercial card volumes up 61%,” CFO Mark Mason said on the call.

To be sure, it wasn’t all good news, although Fraser and Mason made a strong case for the bank’s capacity to weather any storms that may be “right out there, down the road,” as Jamie Dimon put it. “While volatility can be an opportunity for our trading desks, lower asset prices are a headwind for wealth management,” Fraser said, adding that the “same environment continues to put a great deal of pressure on the Investment Banking wallet.”

And then there’s Russia. In the second quarter, the bank cut its exposure by more than $3 billion in local currency terms, but ruble appreciation negated that — and then some. Mason said the bank could incur a $2 billion hit in a “severe” scenario, down from last quarter’s estimate of $2.5 billion to $3 billion.

Finally, Citi followed JPMorgan in suspending buybacks. “We know how important buybacks are to shareholder value creation, in particular when we are trading at these levels, and are committed to restarting them as soon as it is prudent to do so,” Fraser remarked.

All of that said, and “choppy waters” notwithstanding, Fraser was overtly (and, some might argue, overly) optimistic about the US economy, even as she expressed consternation about Europe and Asia.

“Higher rates and QT will keep volatility high [but] little of the data I see tells me the US is on the cusp of a recession,” she said Friday, citing solid consumer spending, elevated household savings and a tight jobs market. “Our corporate clients see robust demand and healthy balance sheets with revenue softness attributed to supply chain constraints so far,” she added, noting that although a recession “could indeed take place over the next two years in the US,” any downturn is “highly unlikely” to be singularly deep.

SocGen’s Andrew Lim pressed Fraser to reconcile her view, which is generally shared by Dimon and James Gorman, with that of investors, who Lim described as “obviously quite negative.”

“Look, the current macro environment is kind of shaped by the three Rs: Russia, rates and recession. It depends where in the world you are as to which one is prevailing,” Fraser told Lim. Citi, she said, is “absolutely ready” for anything.