All eyes were on Citigroup (NYSE: C ) this morning when the bank released its first-quarter earnings. Since Wall Street hadn't been incredibly impressed with Friday's release of two other banks' results, the pressure was on Citi to turn the tides back in favor of the financials. And it delivered, bringing the other banks up with it in trading this morning.
Citi beat analyst expectations with EPS of $1.29 and revenue of $20.8 billion. This is a breath of fresh air for bank investors who saw shares drop Friday when JPMorgan Chase (NYSE: JPM ) and Wells Fargo (NYSE: WFC ) delivered record EPS, but disappointed analysts with missed revenue targest and news of lacking growth in crucial operations. Besides beating the street, there are some fundamental wins for Citi -- let's take a look at some of the highlights and why investors should be impressed with the bank's progress.
No 1: Loan improvements
There's a lot of pressure on banks to build and maintain big loan portfolios, as the revenue generated from loans is a primary source of income for them. But with hurdles like consumers reducing their debt loads, continued interest spread compression, and legacy loan delinquencies, many banks have had to turn to other sources of revenue to bolster their earnings. Citi is not immune to any of these headwinds, but the bank's earnings report displayed an improvement in its loan portfolio that will help offset the negative impacts.
Citi reported an increase in its net interest margin for the fourth consecutive quarter, while both Wells and JPMorgan reported decreases. Though the increase (from 2.93% to 2.94%) is not monumental, it shows that the bank is taking advantage of opportunities to improve its interest revenue stream. In the bank's credit card loan portfolio, it has been able to offset the decrease in card balances due to consumers reducing outstanding debt by increasing interest rates. The company also reported drops in most segments for net credit losses, or loan losses. This shows an improvement in the quality of Citi's loan portfolio as well as growth.
No. 2: Growth in Securities and Banking
Citi has made a great effort to continue growing its Securities and Banking segment, with its investment banking operations revenue jumping 22% in the first quarter compared to the previous year's quarter. And with big sequential gains in both equities and fixed income, 78% and 69% respectively, the bank's operations are set to continue growing.The bank has also been able to find some efficiency savings, reducing expenses by 4% year over year, which contributed to a 17% increase in earnings.
No. 3: Balance sheet strength
In the bank's press release, CEO Michael Corbat stated, "It is critical that Citi be viewed as an indisputably strong and stable institution and we made progress toward that goal." The progress can be seen in the bank's continued increases to its estimated Basel III Tier I Common Capital Ratio.
|Bank||Q1 2013 Tier I Common Ratio||Q4 2012 Tier I Common Ratio|
|Bank of America (NYSE: BAC )||?||9.25%|
Since the Basel III provision has stricter rules for what can and can't be counted toward the banks' capital reserves, Citi's leading position in the ranks shows that the bank is serious about maintaining a stable role in the banking sector. And with many investors and Main Street still concerned about the state of the nation's banks and quibbles over too-big-to-fail statuses, Citi's goals to stay atop the leader board may inspire more investor confidence.
And now that the banking sector is back in favor with investors thanks to Citi, it's Bank of America's turn to wow us. The most-watched bank will announce earnings on Wednesday.
Making a comeback
While some consider Citigroup to be one of the laggards in the banking sector, this morning's earnings release proves that the bank is on a roll -- setting and achieving high goals. With new loan activity, increased interest revenue, more securities revenue, and better capital reserves, Citi is on its way back to the top of its game.
Citigroup's stock looks tantalizingly cheap. Yet the bank's balance sheet is still in need of more repair, and there's a considerable amount of uncertainty after a shocking management shakeup. 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 Citigroup investors need to watch going forward. Click here now for instant access to our best expert's take on Citigroup.