Wednesday, October 19, 2022

Citigroup ($C) filed its third-quarter 2022 earnings release last week, and the data therein gives financial analysts plenty to think about.

Like most large banks, Citi has two primary revenue streams: revenue generated from interest collected from customers, known as interest revenue; and everything else, lumped together in one “non-interest revenue” line item.

Interest-based revenue is (no pun intended) an interesting disclosure these days because interest rates are rising so quickly. That means banks see more interest revenue, but they also pay more interest expense — and the difference between the two, reported as net interest income, is what matters.

Figure 1, below, shows the spread between Citi’s interest income and interest expense, as well as net interest income, from the start of 2020 (when the Fed cut interest rates to zero as part of its response to the Covid-19 pandemic) through Q3 2022.

Nothing terribly surprising here. As interest rates rose throughout the course of 2022, Citi’s interest expense and interest revenue rose at relatively the same pace. Net interest income hasn’t accelerated quite as much yet for various reasons, although it is clearly drifting upward.

That’s the good news for Citi’s income statement. The bad news is non-interest income, which comes from activities such as M&A deals, asset management, mortgage fees, and the like. Figure 2, below, shows Citi’s quarterly trend for non-interest income compared to net interest income.

Citi’s non-interest income is clearly going downhill faster than its net interest income is going uphill. At an abstract level that’s not a surprise; it’s how most large banks would fare in volatile economic circumstances like we see today.

For example, JPMorgan Chase ($JPM) also filed its Q3 earnings statement last week. Its comparison of net interest income to non-interest revenue looks rather different, but that same divergence appears in 2022. See Figure 3, below.

The difference is that for much of the last several years, JPMorgan’s non-interest revenue was greater than net interest income; at Citi, non-interest revenue never exceeded net interest income. But as interest rates rise — and the Fed seems gung ho to keep raising rates for the foreseeable future — net interest income seems likely to keep going up.

What happens to non-interest revenue? Well, that’s an issue for the management earnings call, the footnotes, and your own modeling and gut instinct.

FREE Calcbench Premium
Two Week Trial

Research financial & accounting data like never before. Get features designed for better insights. Try our enhanced Excel Add-in. Sign up now to try the Premium Suite.