Citigroup Stays In Line


Citigroup reported net income of $4.2 billion, or $1.34 per share, for the second quarter. The bank’s results were broadly in line with expectations, but  expected to increase the $45 fair value slightly in the near future as a result of the time value of money since our last update and some minor increases in  non-interest income expectations. Most importantly, Citigroup’s capital ratios remain solid given the still-changing regulatory environment.

The company’s internally estimated Basel III Tier 1 common ratio stood at 10% at the end of the quarter, while its estimated Basel III Supplementary Leverage ratio was just under holding company minimums during the quarter. Although Citigroup admittedly has a variety of risk exposures around the world, the company’s securities are much more attractive when the bank is leveraged less than 13 times on a tangible basis (as it is now) than they were when assets totaled nearly 79 times equity by the same calculation (as was the case at the end of 2008). Furthermore, the bank’s global exposures provide opportunities as well as risk. Emerging markets provided 49% of pre-tax earnings through the first half of 2013 and about two-thirds of revenue growth over the past year.

The potential for economic and credit growth in developing markets should remain a tailwind for Citigroup as compared to peers for years to come, and the company’s restored capital levels should enable it to handle volatility. That said, Citigroup has not experienced much credit deterioration as some emerging economies have slowed recently. Consumer delinquencies and charge-offs have remained fairly stable over the past few quarters. Citigroup’s non-interest expenses totaled $12.1 billion during the quarter, including $832 million in legal expenses.

Management has done a good job keeping a lid on core expenses, which were effectively flat from the first quarter of 2013 and the second quarter of 2012. At this time,  expenses will rise along with revenue if performance continues to improve ( note that performance-based expenses rose during the quarter, as did volume-linked expenses in the transaction services business). Further improvements in efficiency point to upside. Finally, the tailwind associated with Citi Holdings and other legacy issues is continuing to recede.

Citi Holdings now makes up only 7% of company assets, more than half of which are North American mortgages. At the same time, only $5.5 billion of these mortgages and home equity loans are past due, limiting future losses. Indeed, credit losses associated with this portfolio in the second quarter totaled $553 million, about half the level realized two years ago. Overall, Citigroup’s results reflect the transfer of global economic power from the U.S. consumer to individuals and corporations in the rest of the world, and expect the bank’s performance to keep improving as this trend continues.

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