3 Things to Watch in Citigroup's Earning Report

With earnings season upon us, there are three things to keep an eye on when Citigroup (NYSE: C  ) reports on Thursday.


Source: Matt Brown.

Citigroup's stock had a solid performance in 2013, and it actually grew its tangible book value -- which is a key indicator of a bank's value available to shareholders -- better than both Bank of America (NYSE: BAC  ) and JPMorgan Chase (NYSE: JPM  ) , but it did trail Wells Fargo (NYSE: WFC  ) , as shown in the chart below:

C Tangible Book Value (Per Share) Chart

As we move into 2014 and survey the bank's results for the fourth quarter and all of 2013, these three things are vital to see just how well Citigroup is positioning itself moving forward.

1. Consumer banking operations
Citigroup watched its net income from its consumer business fall by 12% when comparing the first nine months of 2012 to 2013. While it may be easy to say this was the result of worsening results thanks to fewer mortgage refinancings in the U.S., the decline was evident across its three major geographic regions:


Source: Company earnings reports.

This drop in net income is even starker when compared to its three peers mentioned above:

 

YTD 2012

YTD 2013

Change

Citigroup -- Global Consumer Banking

$6.2

$5.5

-12%

Bank of America -- Consumer & Business Banking

$4.1

$4.6

13%

Wells Fargo -- Community Banking

$7.6

$9.5

25%

JPMorgan Chase -- Consumer & Community Banking

$8.6

$8.4

-2%

Source: Company earnings reports.

In 2011 and 2012, Citigroup's consumer banking operations accounted for more than half of its core net income, yet thanks to the decline in 2013, that number now stands at 43%. Check to see how its consumer operations fared in the fourth quarter, because when any company is unable to execute on its most important driver of income, it's almost always worrisome.

2. Where are expenses and efficiency?
On a brighter note, through the first nine months of the year, Citigroup's efficiency ratio, which essentially measures the cost of each dollar of revenue, has dropped from 71% to 62%. In Citigroup's presentation at the Goldman Sachs financial services conference, chief financial officer John Gerspach's first bullet point noted the company was "focused on expenses and efficiency." 

However, somewhat troublingly, following two great quarters to begin 2013 after a tumultuous 2012, things moved in the wrong direction in the third quarter:


Source: Company earnings reports.

One quarter's results isn't any reason to craft an investment decision, but seeing how this pivotal metric looked in the fourth quarter will be crucial in understanding both how well Citigroup executed on one of its key focus areas, and also whether or not the performances in the first and second quarters were more in line with what we could expect the bank to do moving forward.

3. Shareholder returns
In April, Citi announced it had authorized a $1.2 billion share repurchase plan, and CEO Mike Corbat noted on the last earnings call that the company had a preference to buy back shares when they were trading below tangible book value -- which the company was for almost all of the fourth quarter.

CEO Michael Corbat. Source: Citigroup.

I speculated previously that Citigroup would raise its dividend in 2014 and move from its paltry 0.1% dividend payout of a penny per quarter to something higher.

The last thing to monitor in the upcoming announcement is further guidance on how Citigroup will return its income to its shareholders. Since the company is still inexpensive relative to its peers, it may raise its share repurchase budget. Or it may begin the steps to ensure the Federal Reserve approves it raising its dividends. Regardless of which it choses, further clarity will be critical, and if neither one is mentioned, it will be cause for concern.

Certainly, there is a lot to watch for when a company with a balance sheet nearing $2 trillion reports earnings, but those are three things to keep an especially close eye on.

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