Citigroup Inc (C): Getting the House in Order

Citigroup Inc (NYSE:C) becomes the third money center bank to report its performance for the second quarter, after JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC). Citigroup Inc (NYSE:C) is also the third largest bank by assets in the US, and it was bailed out thrice during the last financial crisis.

The financial disclosures of the aforementioned banks lead me to think that the US housing market is really on the rebound and that the Fed might be encouraged to think about an early exit from the MBS markets. This article will feature an earnings review of Citigroup in light with a competitor analysis. We will also attempt to determine whether the prevailing macroeconomic environment will present more challenges to the US banking sector.

Following the trend

Citigroup Inc (NYSE:C) followed the trend of beating both earning per share, or EPS, and revenue estimates when it disclosed its second quarter performance. Excluding the debt value adjustments, the bottom line of $1.25 per share was $0.07 per share ahead of the estimate, while the top line of $20.0 billion remained $330 million ahead. Profits surged 42% over the prior year, driven largely by stronger home prices, improved capital-markets and loan demand from emerging markets.

Highlights

Among other highlights of the latest financial disclosures by Citigroup Inc (NYSE:C) include a decline in loan losses with a moderate spread compression of 3 basis points. Besides, the bank was able to increase both its book value and tangible book value amid concerns raised by Credit Suisse that Citigroup would be among the banks that will post a book value decline. It also increased its loans portfolio by 3% over the prior year despite significantly higher interest rates. The bank also made use of its deferred tax assets to trim down its tax bill. So, it was an all round impressive performance.

Headwinds ahead

While the second quarter performance was truly impressive, you should keep an eye on the headwinds coming ahead for the bank. As Reuters puts it, a decline in the debt underwriting volumes due to rising bond yields and lesser profits from the emerging markets due to slowing growth in these economies are among the risks faced by Citigroup Inc (NYSE:C) in the coming quarters. In a previous article on Citigroup, I also noted that beside the slowing growth in the emerging markets, there is a significant factor of currency risk translation for Citigroup Inc (NYSE:C).

Competition

Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM) happen to be the largest and the second largest home lenders in the US. While both impressed analysts when they reported revenues and earnings above their respective estimates, only Wells Fargo’s results were a real positive surprise in my opinion.

While the top and bottom line beats demonstrated strength in the performance, Wells Fargo reported some impressive figures related to its book value. In contrast to widely circulated views that Wells Fargo & Co (NYSE:WFC) is the most equity sensitive bank, it reported a relatively flat book value for the second quarter, compared to the first quarter of the current year.