Citigroup Did What in the Fourth Quarter?

It may surprise you, but in Citigroup's  (NYSE: C  ) earnings report, we saw the New York banking Goliath do something few other banks managed during the fourth quarter: It expanded its net interest margin.

The net interest margin is that happy place in between banks' loan income and funding costs that they get to keep as profit. The fact that this spread has been falling for pretty much every bank is a big deal for investors because it means less profit... and investors, from what I'm told, prefer more profit.

Citi bucked this trend, though. During the fourth quarter, the bank managed a net interest margin of 2.93%. That's up from 2.86% in the previous quarter, and 2.9% from the fourth quarter of last year. This wasn't just a one-quarter thing, though. For all of 2012, Citi delivered a NIM of 2.88% against 2.86% in 2011.

How'd this unloved banking giant manage this magical feat? What it wasn't able to do was find some outpost of high interest rates that other banks have missed out on. The average yield on Citi's interest-earning assets in fourth quarter was 4.04%, down from 4.26% in Q4 of 2011. Funding costs, however, fell more than enough to offset that decline. The average cost of Citi's funding was 1.34% against 1.59% last year as it upped its ultra-low-cost funding (deposits) and shed higher-cost funding (long-term debt).

To be sure, Citi hasn't figured something out that nobody else has (imagine that!). Pretty much every other bank is doing the same thing to fight the squeeze on interest margins. An optimist could say that Citi has done it more aggressively, but a realist might say that Citi just had more levers to pull because of its cruddier starting point. And there's good reason to side with the realists, here -- while Citi's NIM may have climbed to 2.93% for the fourth quarter, US Bancorp's (NYSE: USB  ) finished out at 3.55%. USB investors didn't seem to be overjoyed with the bank's quarter, but I'm sure they wouldn't want to trade the bank's fatter margins for Citi's directional improvement.

So if Citi investors were looking for something to cheer in the wake of a disappointing earnings report, higher net interest margins should make that list. But there's still plenty more work ahead for Mike Corbat and his team.

One quarter, of course, is rarely enough to base an investment decision on. To get the full picture of whether Citigroup is right for your portfolio, I invite you to check out the Fool's in-depth research on the bank. We'll fill you in on both reasons to buy and reasons to sell Citigroup, and what areas that Citigroup investors need to watch going forward. Click here now for instant access to this report.


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