My fellow Fools, operating under the assumption you can't properly evaluate a company as an investment if you don't know exactly what makes that company tick, last week we kicked off an investigation of Citigroup (NYSE: C ) by examining how the superbank generates its revenue.
This week we're going to examine how much of that revenue makes its way to the bottom line, what eats it up along the way, how profitable Citi is relative to its peers, and how that profitability has changed over the years -- all in the pursuit of better understanding Citi as an investment.
One for you, two for me
Referencing Citi's first-quarter earnings report for 2013, we see the bank generated $20.5 billion in revenue, including CVA/DVA (for a full explanation of CVA/DVA, please see last week's article). Out of that $20.5 billion, $3.8 billion eventually reached the bottom line. So what came between Citi's $20.5 billion in revenue and $3.8 billion in profit?
In the first-quarter earnings financial supplement, we see the following expenses:
- Provisions for credit losses and loan losses and the like: $2.5 billion.
- Operating expenses: $12.4 billion. These include compensation and benefits, premises and equipment, advertising and marketing, etc.
- And finally, income taxes: $1.6 billion.
Throw in some miscellaneous expenses, and taking into account my rounding-off of the numbers along the way, and you see how Citi gets from $20.5 billion in revenue to $3.8 billion in profit. These are the kinds of expenses almost any big bank will incur in quarter to quarter operations, but some banks manage this process better than others.
The ultimate measure of efficiency
$3.8 billion in profit on $20.5 billion in revenue makes for a profit margin of 18.5%. Profit margin is a no-B.S. measure of operating efficiency, which is a direct outgrowth of management efficiency. How does Citi stack up against its peers on this all-important metric? For the same quarter:
- JPMorgan Chase (NYSE: JPM ) earned $6.5 billion on revenue of $25.8 billion, for a profit margin of 25.2%.
- Wells Fargo (NYSE: WFC ) earned $5.2 billion on revenue of $21.3 billion, for a profit margin of 24.4%.
- And Bank of America (NYSE: BAC ) earned $2.6 billion on revenue of $23.7 billion, for a profit margin of 11.0%.
It's clear to see which banks are the leanest and meanest here: the banks that are making the most out of what they take in. At least Citi didn't come in last.
It's getting better all the time
Anyone who's followed banking for the past five years knows intuitively that all of the big banks are performing better now than they were during the financial crisis: They couldn't be performing much worse. But some banks performed significantly worse than others, like Citi.
Yet here's a quick look at how far Citi has come from a profitability perspective on a year-to-year basis since 2008:
- In 2008, Citi reported a loss of $27.7 billion.
- In 2009, Citi reported a loss of $1.6 billion.
- In 2010, Citi reported a profit of $10.6 billion.
- In 2011, Citi reported a profit of $11.1 billion.
- In 2012, Citi reported a profit of $7.5 billion.
Like many of its peers, Citi's financial-crisis mess was fueled by overexposure to a bursting real-estate market. But thanks to help from a little government bailout program known as TARP, a steady-if-uninspired hand at the wheel in the person of former CEO Vikram Pandit, and a return to safer lending practices, Citi has cleaned up the majority of the mess and is at the very least now solidly profitable (if trending in the wrong direction).
Now we know how Citigroup generates its revenue, how the superbank turns that revenue into profit, and how well Citi stacks up against its peers in this all-important area. Stay tuned for the next installment in this series: "What's Citigroup's Special Sauce?" In it, we'll find out what -- if anything -- Citi has going for it that makes it stand out as an investment among the Big Four banks.
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