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3 Reasons to Hate the Citigroup Earnings Report

By John Grgurich - Apr 15, 2013 at 3:33PM

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The bank had a great first quarter, but challenges remain.

Citigroup's (C 0.04%) first-quarter earnings report has hit the streets, and the news is overall good, with the superbank putting up some impressive numbers. But every party has a pooper, and today, that's me. Hate's such a strong word, but here are three things to strongly dislike about Citi's first-quarter earnings report.

1. Rising operating expenses
Citi is reporting operating expenses of $12.4 billion for the first quarter of 2013, a 1% increase year over year. Per the earnings release, this is attributable to "an increase in legal and related costs and repositioning charges." 

An increase in operating costs means either management efficiency has decreased somewhere in the chain from top line to bottom line, or that something outside the ordinary has happened that the company has to pay for. In this case, it looks like the latter. And while no further details were volunteered, it's likely the "legal and related costs" connect to fines and payouts that relate back to the financial crisis.

As most observers know, Bank of America (BAC 0.53%) is also dealing with costly legal matters left over from five years ago. Thankfully for Citi investors, their superbank isn't facing near the crisis-related danger B of A still is, but they can only hope that no more big payouts loom, and that the legal liabilities from the crash will completely vanish in the not-too-distant future.

2. Shrinking loan-loss reserves
Citi is reporting it released $375 billion in loan-loss reserves in the first quarter. You can look at this one of two ways.

The optimistic way, which I'm sure is CEO Michael Corbat's way, is to view it as another sign that Citi's assets are performing better. As a consequence, less money needs to be out aside to guard against defaulting loans and the like.

The pessimistic viewpoint sees releasing loan-loss reserves in numbers like this as too much, too soon. Many of the poorly performing assets go back to the financial crisis: toxic mortgage debt. But while we do have a recovering housing market, it's kind of shaky, built on the back of a quantitative easing program that may be winding down sooner than we think.

I'm a Citi investor, and while I want to see a bigger bottom line as much as the next investor, when it comes to loan-loss reserves, better safe than sorry. That being said, Corbat is a smart guy with the long-term interests of the bank at heart, so I hope I'm just being overly cautious, here.

3. Decreasing transaction-services revenues
Citi is reporting that total revenues in Transaction Services are down 4% year over year. At Citi, Transaction Services include Treasury and Trade Solutions and Securities and Fund Services, at which first-quarter revenues declined 5% year over year and 1% year over year, respectively. 

At any bank, transaction services help people and businesses transfer money from one place to another. As the efficient moving around of money is fundamental to the running of an economy, it's critical that banks to be good at it. And if they are good at it, revenue and profit will follow.

Surely, people and businesses aren't moving less money around these days, are they? Citi needs to increase its transaction services business; this is at the heart of any bank, big or small.

Foolish bottom line
Of late, I've become a bit of Citigroup bull, but that doesn't mean challenges don't remain. Citi had a great quarter overall, but management -- and investors -- still have things they need to think about moving forward: three of them, at the very least.

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Citigroup Inc. Stock Quote
Citigroup Inc.
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Bank of America Corporation Stock Quote
Bank of America Corporation
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