Citigroup (C Quick QuoteC - Free Report) is scheduled to report third-quarter 2021 results on Oct 14, before market open. While its revenues are expected to have declined year over year, earnings are anticipated to have improved.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate on higher equity market revenues and reserve releases. However, lower revenues and loans were the undermining factors.

Over the trailing four quarters, the company’s earnings have surpassed the consensus estimate on all four occasions, the surprise being 44.9%, on average.

Factors at Play

Trading Revenues: Equity market volatility in September due to the Fed meeting has likely propelled equity trading activities in the quarter under review. Nonetheless, fixed-income trading has continued to normalize in the quarter, therefore, affecting trading revenues. Management expects the same to be down year over year “in the low to mid-teens”.

Investment Banking (IB) Fees: Global merger and acquisition (M&A) activity continued to impress in the third quarter as dealmakers across the globe were active during this period, with a rise in M&A deal numbers. This was primarily driven by robust macroeconomic expectations, companies deploying their cash reserves, appetite for improving scale and market share, and increasing confidence in the economic recovery. Low interest rates have offered cheap debt-financing opportunities, further fueling the shopping spree in the United States. This is expected to have had a positive impact on Citigroup’s IB fees.

Equity underwriting in the quarter under review is also expected to have remained robust, further supporting advisory revenues.

Net Interest Income (NII): The recovery in the lending scenario has been dampened in the third quarter due to lower utilization on account of supply-chain disruptions, labor shortages, attractive capital markets and excess liquidity with companies. Per the Fed’s latest data, commercial and industrial loan, and other consumer loan portfolios remained weak in July and August, while real estate, consumer loan, auto loan and card loan portfolios held ground.

High levels of pay downs and payoffs have also hindered Citigroup’s loan volumes in its cards business. This is likely to have affected its NII and net interest margin for the third quarter. The Zacks Consensus Estimate for NII of $10.3 billion suggests a 1.8% decline from the prior-year quarter’s reported figure.

Expenses: Management has been focused on transforming to revamp its underlying technology, risk management and internal controls as part of remediation highlighted by the Office of the Comptroller of the Currency and the Federal Reserve last year. The company has been investing in businesses like wealth management, IB, and treasury and trade solutions. The moves are anticipated to have increased Citigroup’s expenses.

Asset Quality: Card delinquency rates and commercial bankruptcies were low in third-quarter 2021. Given the backdrop of continued improvement in credit trends, Citigroup is expected to have witnessed additional reserve releases in the third quarter. The company’s second-quarter results were supercharged, with the impact of a $2.4-billion reserve release, backed by an improving economic environment. This is likely to have continued in the third quarter as well, albeit at a lower amount.

Key Developments During the Quarter

As part of its previously announced plan to exit the consumer banking business in 13 markets across Asia and EMEA, Citigroup entered a definitive sales agreement to sell its Australia consumer banking business on Aug 9.

The company said that it will report the business as held for sale in the third quarter of 2021, and will include estimated pretax and after-tax loss on sale of $670 million and $580 million, respectively, in its financial results.

Here is what our quantitative model predicts:

Citigroup does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Citigroup is -2.71%.

Zacks Rank: Citigroup currently carries a Zacks Rank of 3.

Prior to the third-quarter earnings release, the company is witnessing downward estimate revision, indicating the bearish sentiment of analysts. The Zacks Consensus Estimate for third-quarter earnings has been revised 1.7% downward to $1.73 over the past week. Nonetheless, the figure suggests a year-over-year improvement of 23.6%.

However, the Zacks Consensus Estimate for revenues of $17.2 billion indicates a marginal decline from the prior-year quarter’s reported figure.

Stocks That Warrant a Look

Here are a few bank stocks that you might want to consider as these have the right combination of elements to post an earnings beat in their upcoming releases, per our model.

The Earnings ESP for JPMorgan (JPM Quick QuoteJPM - Free Report) is +0.60% and the company carries a Zacks Rank #3 at present. It is slated to report third-quarter 2021 results on Oct 13. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Bank of America (BAC Quick QuoteBAC - Free Report) is scheduled to release third-quarter results on Oct 14. The company currently has a Zacks Rank #3 and an Earnings ESP of +0.30%.

U.S. Bancorp (USB Quick QuoteUSB - Free Report) is scheduled to release earnings on Oct 14. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +0.38%.