Citigroup (C 2.82%) reported better-than-expected earnings and revenue on Monday, handily beating analysts' estimates. This was very welcome news to investors, especially after JPMorgan Chase kicked off earnings season on a bad note, and since most recent Citigroup headlines have to do with the Federal Reserve's rejection of its capital plan.
The three biggest takeaways from Citigroup's earnings have to do with the falling losses from the Citi Holdings division, the lower trading and mortgage income, and the stock's incredibly low valuation -- which seems to keep getting more attractive. So, how was the bank able to beat estimates despite the challenges it faces? Is Citigroup still a buy after the post-earnings pop?
The bad assets are less of a problem now
Citigroup made more money because the bad assets left over from the financial crisis aren't dragging on the balance sheet nearly as much as they had been. The Citi Holdings unit, which is where the bank's "legacy assets" are kept, is in the process of being wound down, and great progress has been made.
The adjusted net loss from Citi Holdings fell by more than 63% year-over-year, and the company's allowance for credit losses now stands at $6.1 billion (6.8% of loans), down from $9.4 billion (8.7% of loans) last year.
Citi Holdings now represents $114 billion, or around 6% of Citigroup's total assets. While this is no small amount, the exposure to bad assets has dropped considerably over the past few years. Even though it's not quite there yet, the chart below shows it's likely just a matter of time before Citi Holdings becomes a non-factor.
Trading and mortgage lending are down
As mentioned, Citicorp's revenue and earnings are down, mainly due to lower revenues in bond trading and mortgage lending.
The mortgage lending drop is no big surprise, as record-low rates in recent years and home price gains had sparked a flurry of refinancing activity. However, over the second half of 2013, rates shot up and fewer people found it worthwhile to refinance. When you look at the difference in the 30-year mortgage rate from this time last year, it's no wonder refinancing revenue dropped. This has cost Citigroup a great deal of fees, which the bank collects to originate and process mortgages.
As for trading revenue, the drop is a combination of new industry regulations and the effect of interest rate uncertainty, which has driven clients and their money to the sidelines. This is affecting the entire industry, and JPMorgan took a hit as well this past quarter, with their bond trading revenues off by 21% year-over-year.
Citigroup's bond trading revenue dropped 18% from last year, but the key point for investors to keep in mind this is not a Citigroup-specific problem. Trading revenues should start to rise again as the Federal Reserve has given the market more clarity on the direction of interest rates and banks are adjusting to the new regulations. Even so, Citigroup's CFO expects bond trading revenue to fall 5-10% across the industry this year because of these issues.
Still a great discount
Even after the post-earnings pop, Citigroup still trades at a pretty great discount. Citigroup's tangible book value per share grew by 8% year-over-year to $56.40, so shares trade at less than 85% of TBV even after the post-earnings pop. This is extremely low on a historic basis, and well below the valuation of its peers.
While it is true Citigroup has much more global exposure than peers, and the full impact of another crisis is difficult to predict, the company's valuation more than makes up for any risks.
