1 Bank Watching Customers Flee

The most recent earnings release from Citigroup (NYSE: C  ) had a few alarming red flags that should give investors pause when they consider investing in this bank.

In the second quarter of this year, Citibank was the fourth largest bank by deposits in the United States, trailing only Bank of America (NYSE: BAC  ) , Wells Fargo (NYSE: WFC  ) and JPMorgan Chase (NYSE: JPM), and with a comfortable lead over U.S. Bancorp (NYSE: USB  ) as shown in the chart below:

Source: FDIC

While many perceive Citigroup to be an investment bank along the lines of Goldman Sachs and Morgan Stanley, about half of its income over the last two years is attributed to its consumer business:

Source: Company SEC Filings

Among the banks previously mentioned, Citigroup actually had the third highest percentage of its total income derived from its consumer business last year:


Consumer Banking Income

Wells Fargo


U.S. Bancorp




JPMorgan Chase


Bank of America


Source: Company Earnings Report

Clearly Citi is heavily dependent on its consumer business for income, and the most recent quarter continued an alarming trend as performance in that segment has fallen dramatically over the last year:

Source: Company Earnings Report

The net income and return on average assets for the consumer bank have each fallen by almost 25%. Revenues have dropped $680 million, or 7%, almost all of which is attributed to its declining noninterest revenues, which fell by 21% from $2.7 billion to $2.1 billion.

While things were certainly bad in the third quarter, this is not a trend unique to the last three months: Citi's global consumer banking business has earned $5.5 billion through the first nine months of 2013, compared to $6.2 billion during that period of 2012. Return on average assets has also seen a sharp decline year to date, down to 1.9% from 2.2%.

If you compare the first three quarters of 2013 to the same period the year prior, you can see that in each quarter both the net income and return on average assets of Citi's consumer banking business is down:

Source: Company Earnings Report

While many banks have seen lower earnings from their consumer businesses, thanks in large part to lower refinancing volumes, no bank has had as rough a 2013 in that segment as Citigroup. As shown in the chart below, both JPMorgan and US Bancorp have seen their consumer business income fall through the first nine months of 2013 compared to 2012, but Bank of America and Wells Fargo have had theirs rise. Citigroup's decline is dramatic relative to all four of those peers:

Source: Company Earnings Reports

Not only is Citigroup watching income fall, but it has also seen its customers fall by 500,000 from 65.2 million to 64.7 million. While other banks don't disclose their total accounts, the fact that Citi is losing both customers and dollars is troubling.

In its most recent earnings release, Citigroup gave no mention as to why things have been so difficult for its consumer business beyond the industry-wide issues of lower mortgage volume and tightening spreads thanks to higher interest rates. In fact, it even noted those things "are expected to continue to be negatively affected" moving forward.

Despite the stock's historically "cheap" valuation, troubles in its biggest and most important segment that are likely to continue should leave many people questioning the actual of operations this bank.

Beyond the third quarter
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9/27/2016 1:18 PM
BAC $15.24 Up +0.15 +0.99%
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US Bancorp CAPS Rating: ****
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