Did This Bank Make the Cut With Its Fourth-Quarter Earnings?

This morning was our first look at the Citigroup (NYSE: C  ) earnings release for the fourth quarter. Last week, I highlighted three areas investors should watch in the bank's release. These areas are key indicators of the bank's continued move forward, so let's see how it did.

Capitalization
The recent announcement of relaxed banking rules for capitalization requirements was a huge win for banks. But with the news not coming before year-end, the banks' capital balances should have continued to rise in the fourth quarter. At last check, Citigroup had a Tier-1 capital ratio of 8.6% and was in the No. 2 spot when ranking the country's five largest banks.

Bank

Tier I
Capital Balance

Capital Ratio
Under Basel III

Bank of America (NYSE: BAC  )

$128.6 billion

9.25%  

Citigroup

$105 billion

8.7%  

JPMorgan (NYSE: JPM  )

$144 billion

8.7%  

Wells Fargo (NYSE: WFC  )

$113.9 billion

8.18%  

US Bancorp (NYSE: USB  )

$24.9 billion

8.1%  

Source: Company Q4 2012 earning presentations.

So Citi is still sitting pretty in the second spot, even though JPMorgan (NYSE: JPM  ) made a 0.3% jump and is now tied with it. And while I warned that a reduction in the bank's capital balance would be suspicious, the $1 billion drop in tier-1 capital was offset by $4 billion reduction in Citi's risk-weighted assets , a good sign for the bank. On the other hand, Bank of America, Wells Fargo and US Bancorp all had much more significant reductions in their capital reserves.

Credit trends
Citi loan portfolio continues to strengthen. The bank's overall net credit losses were down 25% compared to 2011. It does have one area that it should keep an eye on: international markets. The bank reported increased NCLs in all of its international markets, though the total segment's NCLs account for only 2.15% of Citi's international loan portfolio. 

The bank also reported improvements in its mortgage portfolio, with first mortgage delinquencies falling in all categories but the 90-179 day range. Overall, the portfolio of delinquent mortgages has dropped $1.29 billion since year-end 2011, and $740 million since the third quarter . Both the NCL and mortgage portfolio improvements are a good sign that the bank has cleaned house and will be able to focus on generating new loans in the future.

Citi Holdings
Citi's catch-all for non-core businesses, Citi Holdings, has been weighing down the bank for years. Though the company has been winding Holdings down, a faster reduction in assets may be the right medicine for Citi. Based on the Citigroup earnings release this morning, it looks like the bank is on the right track. By reducing Holdings' assets by $69 billion in 2012, the bank not only cut the overall assets by 31% -- it also reduced Holdings' impact on the bank's results. Totaling only 8% of Citi's total assets, Holdings is no longer the negative juggernaut busting through Citi's earnings. With only a $1 billion loss in the fourth quarter, Citi has reduced its quarterly Holdings exposure by 21% compared to the fourth quarter of 2011. 

So there you have it, folks.
Three for three -- not bad, Citi. Now, there are other issues facing Citi, like its legal expenses, but these three metrics show that the bank is still marching forward toward a stronger financial future. Investors should be happy with the bank's performance on these metrics, but still weigh the other issues when deciding on an investment in Citigroup.  

Even though Citigroup's stock looks tantalizingly cheap, the bank's balance sheet is still in need of more repair. Should investors be treading carefully, or jumping on an opportunity to buy? To help figure out whether Citigroup deserves a spot on your watchlist, I invite you to read our premium research report on the bank today. 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 our best expert's take on Citigroup.


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