Citigroup Proves The Naysayers Wrong

On the back of a difficult week, U.S. stocks opened nicely higher on Monday, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.54% and 0.46%, respectively, at 10:15 a.m. EDT. The market's main focus this week ought to be on corporate earnings, with more than 10% of the companies in the S&P 500 reporting first-quarter results over the next several days. These include the remaining major banks: Bank of America, Goldman Sachs (NYSE: GS  ) , and Morgan Stanley. JPMorgan Chase and Wells Fargo reported last week, and Citigroup (NYSE: C  ) put its numbers up this morning (see below).

Citigroup has had a rough time over the past several weeks. First, the Federal Reserve rejected its capital return program on March 26 while signing off on its peers' proposals; that decision prompted Citi to quietly drop its 10% return on tangible common equity. Investors weren't impressed and, as of Friday's close, shares had declined 8.9% since the Fed's announcement. I wrote multiple times in this column that this slide was overdone and, with today's first-quarter results, the market appears to be edging back to my view; Citi shares were up 3.6% at 10:15 a.m. EDT.

On the headline numbers, adjusted earnings per share came in at $1.30, solidly beating Wall Street's consensus estimate of $1.15, and revenue of $20.1 billion was also ahead of analysts' expectations (albeit by a smaller 3.4% margin). That constitutes Citi's first "double beat" since the second quarter of 2013.

Investors ought to note, however, that two major factors behind the EPS "beat" are not related to the bank's ordinary earning power. First, Citigroup released a whopping $673 million in loan loss reserves that it had set aside in previous years. Second, losses at its Citi Holdings unit, which contains noncore assets, fell to $284 million from $804 million in the year-ago period. Nevertheless, those developments illustrate my thesis that the market may have overestimated the extent of Citigroup's plight, particularly in the wake of the Fed's decision. With shares valued at nearly a one-fifth discount to their tangible book value as of Friday's close, I continue to think Citigroup offers genuine long-term value (even after today's pop).

On a broader note, Citi's fixed income revenue of $3.9 billion declined 18% year over year, which is consistent with the 21% drop JPMorgan announced last week in the same area. That doesn't augur well for the banks that have yet to report, particularly Goldman Sachs, which earned a quarter of its 2013 revenue from its fixed income, currency and commodities client execution unit. Investors will be looking at that area when the investment bank reports its results on Thursday.

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