Citigroup Reins In Costs To Report Its Best Quarterly Performance Since The Recession

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Citigroup‘s (NYSE:C) investors were pleasantly surprised on Thursday, April 17, when the geographically diversified banking giant reported better-than-expected results for the first quarter of the year. [1] Although the bank fell short of revenue expectations, it more than made up for this by reporting operating expenses below $11 billion for the first time since Q2 2005. In fact, the expense figure for this quarter ($10.88 billion) is actually lower than what the bank reported nearly 10 years ago in Q2 2005 ($10.97 billion) – highlighting the extent to which the financial behemoth has slashed its business model since the economic downturn.

We maintain our $58 price estimate for Citigroup’s stock, as the reported performance was largely in line with our estimates. This price target is roughly 10% ahead of the current market price.

See our full analysis for Citigroup


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Trading Revenues Did Not Match Up To Those Reported By Peers

Citigroup generated revenues of $4.36 billion through its trading operations (fixed-income and equities taken together, adjusted for CVA/DVA) for the first quarter of the year. Although this figure is a good 78% higher than the $2.55 billion figure the bank reported for Q4 2014, it is 10.5% below the performance for the year-ago period. Almost the entire decline can be traced to the 11% fall in FICC (fixed income, currencies and commodities) trading revenues for Citigroup, which fell to $3.5 billion in Q1 2015 from $3.9 billion in Q1 2014. This is in sharp contrast to the year-on-year gains in FICC trading revenues reported by rivals JPMorgan (NYSE:JPM) as well as Goldman Sachs (NYSE:GS). The discrepancy can be explained by the fact that Citigroup focuses its trading efforts on spread products like mortgage-backed securities and corporate bonds, which did not witness the kind of gains which rates and currency products recorded for the period. Moreover, Citigroup ended up with millions in losses from the Swiss central bank’s unexpected decision to remove the cap on the Swiss franc – a situation that almost all its rivals made a notable profit from.

Consumer Banking Business Streamlining Structure

As we have pointed out in the past, Citigroup’s biggest strength is its extensive global presence. That, combined with the fact that Citigroup is a leader in financial services ranging from traditional loan-deposit offerings to investment banking services, allows the bank to benefit from diversified revenue streams that are not subject to the restrictions faced by its peers that are largely focused on U.S. markets. Citigroup’s strong retail banking presence across the globe and in emerging markets gives it access to cheap funds in the form of low interest rate deposits from the regions in which it operates, allowing it to achieve better net interest margins. As the bank caters to the demand for loans globally, its interest income is not overly dependent on the interest rate environment prevalent in any single country. The table below summarizes Citigroup’s reported net interest margin (NIM) figures for each of the last thirteen quarters:

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015
2.90% 2.81% 2.86% 2.93% 2.88% 2.85% 2.81% 2.88% 2.90% 2.87% 2.91% 2.92% 2.92%

As is evident, the interest margin has remained largely around the 2.9% mark over the last three years, in sharp contrast to peers like Wells Fargo that have seen a reduction in this figure by more than 100 basis points (1% point) over the same period.

At the same time, the bank’s efforts to cut down on operating costs have improved the division’s overall profitability. Citigroup reported an efficiency ratio (defined by the bank as the ratio of total operating expenses to total revenues) of just over 52% for the consumer banking division – the lowest since Q1 2012. No doubt, the bank’s decision to get rid of its retail banking units in 11 low profit regions announced late last year was an important factor behind this improvement. The impact of reducing retail banking operating expenses on Citigroup’s share value can be understood by making changes to the chart below.

Restated Citi Holdings Asset Base Continues To Shrink Steadily

Citigroup’s Citi Holdings division, often termed the “bad bank,” was created in 2009 to house all the poor-performing and non-core assets that the group sought to dispose off over time. Since then, the bank has made significant progress managing this division, as it cut down total assets from roughly $900 billion at the peak of the economic crisis (more than 40% of Citigroup’s total asset size) to $122 billion by the end of Q1 2015 ( around 5% of total assets). It must be noted here that Citigroup moved the retail banking units it is looking to shutter in the near future under Citi Holding this quarter, which is why the final figure for the period is higher than the $98 billion figure it reported at the end of 2014. The restated figures for previous quarters shows that Citigroup actually shrunk non-core assets by $7 billion over the first three months of the year. More importantly, Citi Holdings remained profitable for the third consecutive quarter – not posing a burden to the bank’s overall results in the anner it has done every quarter since the downturn.

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Notes:
  1. Citigroup Reports First Quarter 2015 Earnings per Share of $1.51; $1.52 Excluding CVA/DVA, Citigroup Press Releases, Apr 16 2015 []