Will Citigroup Earnings Avoid JPMorgan's Losses?

Citigroup (C 4.47%) will release its quarterly report on Tuesday, and investors who bought into the bank after the financial crisis have benefited from its recovery over the past several years. Yet despite substantial improvement in Citigroup earnings, the bank hasn't yet boosted its dividend, suggesting that it has a lot further to go than JPMorgan Chase (JPM 2.98%) and many of its other banking peers before Citi can declare final victory over its past problems.

Citigroup faces many of the same challenges that have started to plague JPMorgan, Wells Fargo (WFC 2.32%), and other U.S. banks. Rising interest rates will threaten Citi's domestic mortgage business, and uncertainty about the impact of the government shutdown on the U.S. economy could create further drags on lending activity. Moreover, Citi has been involved in several legal and regulatory battles that have cost it billions in settlement and other costs. Yet to a larger extent than JPMorgan and Wells, Citi has done a good job looking overseas for growth opportunities. Let's take an early look at what's been happening with Citigroup over the past quarter and what we're likely to see in its report.

Stats on Citigroup

Source: Yahoo! Finance.

Will Citigroup earnings fizzle as rates rise?
Analysts have had mixed views in recent months about Citigroup earnings. They've cut their third-quarter estimates by more than 10%, but they've boosted their full-year 2013 and 2014 projections slightly. The stock has largely treaded water over the past quarter, falling 2% since early July.

Citi actually got the quarter off to a good start, with a strong second-quarter earnings report setting a positive tone. Net income rose 42% from the year-ago quarter, and the bank saw particularly strong results from its global business. Citi got more than half of its total revenue outside the U.S. in the second quarter, and 4% growth in its international consumer-banking business showed that it's capitalizing on opportunities in promising markets around the world.

Yet despite solid results, Citi has had to deal with troubling trends. Last month, it said it would fire 120 employees in its home-loan refinancing operations, closing an Illinois office as refinancing activity has plunged. It then followed up with 1,000 more cuts later in the month. That's still less than Bank of America's (BAC 2.63%) 2,100 mortgage-job cuts, which reflect the same issues. Similar downsizing at Wells Fargo and JPMorgan shows that Citi is far from alone, but with Wells having reduced its workforce by more than 4,000 in home loans and mortgage servicing, Citi might well have further to go in the future to streamline its mortgage operations.

Customer perception also continues to be a problem for Citi. A study from management consultants cg42 found that Citi was the most likely to suffer from customers getting so annoyed that they'd move to competing banks, taking over the top spot from Bank of America. Wells Fargo made substantial progress, moving from No. 3 to No. 7 and showing that Citi has a lot more work to do to recover its pre-crisis reputation.

Nevertheless, Citi continues to make its balance sheet look more solid. Recent mid-cycle stress test results found that Citi topped B of A and JPMorgan in capital-ratio performance, although Citi still suffered the bigger losses than those two banks or Wells Fargo.

In the Citigroup earnings report, watch to see how recent payouts to settle loan repurchasing disputes with Freddie Mac affect its bottom line. With so much attention paid to legal and regulatory liability, Citi needs to demonstrate it can get past the consequences of the financial crisis and move ahead with stronger growth.

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