FOOL PLATE SPECIAL: An Investment Opinion
Citigroup's Heavy Assets

Citigroup has increased net income through its corporate and investment banking businesses, together with solid growth in mutual fund, annuity and credit card income. Still, the company's assets are not performing up to our Finance King standards.

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By Brian Lund (TMF Tardior)
October 17, 2000

International bank and insurance giant Citigroup (NYSE: C) tried to calm a jittery Wall Street with impressive third-quarter earnings this morning. Citigroup, a component of the Dow and the Motley Fool Now 50, saw core income grow 27% to a record $3.1 billion for the quarter. Nevertheless, the stock traded down this morning, possibly because the company's return on assets dropped from 1.64 to 1.6.

The gain in core income was driven by 40% year-over-year income growth in the Global Corporate and Investment Bank division. The third quarter of last year, however, was the division's worst in the last two years, so it provides a beatable comparison. The steady Global Consumer division, which includes the familiar Citibank and Travelers Insurance brands, is more representative of Citigroup's growth in the quarter. That division's core income grew 17%, thanks to big gains in North American banking and credit cards.

As a Fool (although I'm a Citigroup shareholder), that makes me sad. Citibank North America's income rose 34% on substantial growth in mutual fund and annuity sales. Investors generally have better places to put their money. Variable annuity premiums and deposits have ramped up significantly in the last year, rising steadily from $169 million a year ago to $385 million in the latest quarter, a 128% gain.

Also slightly disturbing is the rise in credit card income. Revenue net of interest expenses in the North American cards segment crossed the $2 billion mark for the quarter, leading to a 23% boost in core income. It's encouraging that Citigroup's net credit losses in the segment fell 8% to $714 million, or 3.5% of total loans. That's down from 4.4% a year ago and 3.96% last quarter.

Let's see how Citigroup stacks up against our Finance King criteria.

• Sales growth of 15% for the quarter and year-to-date surpasses our 10% target.
• Efficiency margin (non-interest expenses divided by revenue net of interest -- basically a bank's operating income) comes in at 30%, well above our goal of 20%.
• Net margin, at 18.9%, far exceeds our 7% requirement.

So far, so good. Revenue is up and expenses are under control, so margins are sweet. Now let's turn to the balance sheet requirements:

• Asset turnover (trailing 12-month revenue divided by average total assets) fell a bit short of our 0.15 target at 0.086.
• Leverage factor (assets divided by equity) ended the quarter at 13.7, below the desirable 15.
  

Citigroup just has too darn many assets that are performing weakly. Adjusted interest revenue fell slightly this quarter, despite a 16% rise in interest-earning assets. Adjusted interest margin fell 74 basis point to 4.5%. Citigroup's leverage ratio fell to 6.0%, its lowest level in two years. The company reported a solid 24% return on equity, however, up two percentage points from a year ago but down from the first two quarters of 2000.

When you're a big ol' financial behemoth, it can be tough to maximize your assets' productivity. Citigroup has done a good job bringing in corporate and investment bank business, as well as drumming up credit card revenue and selling mutual funds and annuities. It has gotten its hands on $805 billion in assets. Now it needs to make those assets work harder.