Citigroup (NYSE:C) gave investors a welcome surprise Monday by reporting a strong improvement in net income for the first quarter of the year, backed by better-than-expected revenue figures.  The globally diversified financial giant bucked the trend set by competitors JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) last Friday of reporting a decline in revenues for the quarter, something it was able to achieve thanks to solid revenue growth for its international units.
While Citigroup’s securities business bolstered the top line, the positive impact of the large-scale cost-cutting measures (see How Citigroup’s Reorganization Can Lift Its Share Value) boosted earnings, with operating expenses falling 10%, compared to the previous quarter. The bank’s efforts to dispose of assets grouped under the ‘bad bank’ Citi Holdings also continue with decreasing asset size to under $150 billion by the end of Q1 2013. That’s a marked improvement from the near-$900 billion in assets Citi Holdings, reported in early 2008.
Better than anticipated improvements to operating expenses, as well as strong recoveries in consumer banking performance in Asia and Latin America prompted us to revise our price estimate for Citigroup’s stock upwards from $46 to $50. It must be mentioned here that the current market price for the bank’s shares of around $45 apiece is about 28% below its book value of $62.51.
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Plain Vanilla Banking Business In The Spotlight
As we have pointed out on numerous occasions in the past, Citigroup’s biggest strength is its extensive global presence. That combined with the fact that Citigroup is a leader in all financial services, ranging from traditional loan-deposit offerings to investment banking services, to custody banking solutions allows the bank to benefit from truly diversified revenue streams that are not subject to the restrictions its U.S.-focused peers face.
The most important aspect here is the bank’s net interest margin (NIM). Citigroup’s interest income does not remain dependent on the interest rate environment prevalent in a single country – specifically the U.S. The bank also has access to funds in the form of low interest rate deposits from all the regions in which it operates, allowing it to achieve better net interest margins.
In Q1 2013, Citigroup recorded NIM figures of 2.94%, showing sequential improvements since the 2.81% figure reported in Q2 2012. Over the same period, competitors like Wells Fargo and JPMorgan were dealing with lower NIM figures, which also dragged down their top line numbers.
Volatile Investment Banking Revenues Generate Huge Revenues
Citigroup’s Securities & Banking division, which houses its advisory, underwriting, trading and private banking units, generated total revenues of $7.3 billion for the quarter, excluding a $310 accounting charge from a revaluation of its own debt. This is a near-50% leap from revenues adjusted of around $5 billion in each of the preceding three quarters. In fact, these revenues were the highest since the record $7.7 billion that the division churned out a good three years ago in Q1 2010.
A broad-based recovery in global markets was largely responsible for the steep growth with nearly two-thirds of the figure ($4.6 billion to be exact) coming from fixed-income trading, which benefited from increasing demand for debt and other unconventional securities among investors over recent months.Notes:
- Citigroup Reports First Quarter 2013 Earnings per Share of $1.23; $1.29 Excluding CVA/DVA, Citigroup Press Releases, Apr 15 2013 [↩]