Mounting credit concerns and lethargic profit margins will plague “weak” Citigroup earnings over the next two years, said one Wall Street research firm.

Societe Generale reduced its rating on Citigroup shares to sell from hold Monday, citing deteriorating credit trends and increased loan loss provisions as detailed in the bank’s most recent earnings report.

“Although revenues were 2 percent ahead of consensus, boosted mainly by capital markets revenues, it is more worrisome that the credit quality of North American cards deteriorated and net interest margin was flat again despite the recent Fed fund rate increase,” wrote analyst Andrew Lim. “Earnings momentum is weak.”

Citigroup earnings beat Wall Street expectations last Thursday, but shares of Citi have fallen more than 3 percent since the report. Group loan loss provisions were $2 billion, 7 percent worse than consensus and 15 percent higher year-over-year, according to Lim. A loan loss provision is an expense that is reserved for defaulted loans or credit.

Higher loan loss provisions not only eat into earnings, but may also suggest mediocre debtors or poor credit.

“Although part of the uptick in provisions is due to seasonal effects and one-offs like hurricanes,” conceded Lim, “we are concerned about the deteriorating trend over several quarters in North America and have adjusted our forecasts accordingly.”

The analyst cut his fiscal year 2018 earnings estimate by 0.2 percent, but slashed his 2019 estimate by a significant 11.1 percent, to $6.80. He also reduced his 12-month price target to $65, which is 10 percent below Friday’s closing price. His old price target was $70.

Citigroup’s net margin also underwhelmed Societe Generale’s analyst. That is the difference between what a bank pays in interest on deposits and what it earns on assets like loans.

“Despite the recent 25-basis point increase in the Fed funds rate, Citi’s net interest margin was static at 2.72 percent,” added Lim. “The weak net interest margin trajectory is disappointing and completely at odds with management’s guidance that there should be some positive sensitivity to rising short rates.”

Lim isn’t alone in his critical appraisal of Citigroup. Vertical Group’s equity research analyst Dick Bove told CNBC’s “The Rundown” last week that Citigroup failed on multiple fronts. Bove also cited Citi’s disappointing loan book as well as its inability to capitalize on rising rates.


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