Second-quarter earnings season is now underway, and the major U.S. banks are among the first companies to report their latest results. Citigroup (NYSE:C) was the very first major report of a highly anticipated earnings season, and the bank delivered generally strong results.
Citigroup delivered strong earnings and revenue, and there was quite a bit for investors to smile about in the bank's results. Here's a quick rundown of the highs and lows of Citigroup's second quarter.
The headline numbers
Looking at the top- and bottom-line numbers, it seems Citigroup had a pretty strong second quarter. The bank's bottom-line earnings of $1.95 per share handily surpassed the $1.80 analysts had been looking for.
On the top line, Citigroup generated $18.8 billion in revenue, about $300 million more than the market had been looking for.
Digging a little deeper: The good
Much of Citigroup's outperformance was due to gains from the IPO of Tradeweb (NASDAQ:TW), which gave the bank a $350 million pre-tax gain (Citi was a pre-IPO investor in Tradeweb). It's worth noting, however, that with the contributions from the IPO excluded, Citigroup still would have surpassed expectations with $1.83 per share in earnings.
Citigroup continues to improve the efficiency of its operations. Analysts had been expecting a 57.3% efficiency ratio for the quarter (lower is better) and Citigroup's actual efficiency came in at 56%.
Citigroup's profitability was strong, with return on assets of 0.97% and return on equity of 10.1%. In fact, Citigroup has struggled to achieve a ROE greater than 10% since the financial crisis, so this could be interpreted as very good news by investors.
Citigroup's book value increased by 10% year over year to $79.40 per share, which means the bank is trading for roughly a 9% discount to the value of its assets.
Not a perfect earnings report
To be perfectly clear, the general tone of Citigroup's second quarter was strong. However, it wasn't an all-around home run, so there are some negative points and caveats investors should know.
One thing to keep in mind is that even though the bank beat earnings estimates and the Tradeweb-adjusted $1.83 per share in earnings represents 12% year-over-year growth, these numbers should be taken with a big grain of salt. Much of the increase is due to share buybacks, not actual earnings growth.
In fact, Citigroup aggressively bought back shares over the past year and reduced its outstanding share count by 10%, so almost all of its earnings growth can be attributed to either buybacks or the Tradeweb IPO, not organic growth in its business. Retail loans grew by just 1% over the past year, and deposits grew by 2%. This is certainly better than a decline, but it's important to realize that the earnings growth can be a bit misleading.
Trading revenue continues to be a weak point. Excluding the Tradeweb gain, Citi's fixed-income trading revenue was about $2.97 billion, just shy of expectations. Equity trading revenue came in at $790 million -- significantly lower than the $811 million the market had been looking for.
Net interest margin dropped a bit from 2.72% in the first quarter to 2.67% in the second. This was expected, thanks to falling long-term interest rates, but is still worth noting.
A good start to bank earnings
The big takeaway is that Citigroup had a strong second quarter and the additional profits from its Tradeweb investment made it even better. Trading revenue remains a weak point, and interest margins are important to keep an eye on going forward, but the bank's profitability and efficiency give investors a reason to smile.