Source: Citigroup

Citigroup (NYSE:C) shares closed Monday up 3% following a second-quarter report that beat estimates but still showed signs of financial illness. Competitors Goldman Sachs (NYSE:GS) and JPMorgan Chase (NYSE:JPM) reported earnings the following day. What were the key takeaways from Citigroup's second-quarter -- and how did the company stack up to the competition?     

Analyst consensus for Citigroup's report included $18.8 billion in revenue and $1.08 EPS. Citigroup beat revenue with $19.3 billion and a $0.03 EPS that jumped to $1.24 excluding a costly settlement and other adjustments. The earnings release marked a turnaround from two quarters of misses, but the quarter wasn't all good news.

What were the three key investor takeaways from Citigroup's second-quarter report?  

Government settlement 
Though not technically a part of the earnings release, the key revelation Monday was the announced $7 billion settlement with the U.S. Department of Justice regarding the bank's mortgage security sales leading up to the housing crisis. The settlement payment breaks down as follows: 

  • $4 billion civil payment to the DOJ 
  • $2.5 billion in consumer relief via financings and reductions, due by 2018
  • $500 million compensation to the FDIC and state attorney generals

The DOJ settlement came after months of tense negotiations on the price owed. Competitor JPMorgan Chase made its own settlement last year to the tune of $13 billion so Citigroup's payment could've turned out worse for the company, but Citigroup was also standing in a weaker position having recently failed an important government stress test that JPMorgan passed.

In late March, Citigroup was one of the few banks that failed the Federal Reserve's annual Comprehensive Capital Analysis and Review, or CCAR.

The stress test essentially measures a bank's likelihood to complete planned dividends and buybacks under shaky economic conditions. Failing the CCAR curbed Citigroup's plans to repurchase $6.4 billion in shares as part of its turnaround strategy and also barred increasing the quarterly dividend to $0.05. The Fed did allow Citigroup to continue with the plans it already had in motion, which included a $1.2 billion repurchase and a $0.01 dividend.  

Did the stress test failure leave Citi without any ballwarks in the second quarter? 

Strengths: Citi Holdings, Institutional Client Group 
Citgroup's second-quarter strengths were few but notable.

The first-quarter report included a 66% year-over-year revenue growth for Citi Holdings, the segment containing bad assets the bank wants to sell. The second quarter included a 33% growth over the prior year's quarter and a 15% drop in assets. Note that asset drops in Citi Holdings are a good thing since Citigroup wants to sell these assets.

Revenue for institutional clients was down 11% year-over-year overall, but the segment showed a few signs of strength. Investment banking revenue was up 16% from the prior year's quarter and corporate lending grew 12%. Those improvements were offset by a 26% drop in equity markets.

Weaknesses: everything else 
The improvements in the institutional segment were offset with a 26% drop in equity markets a 12% drop in fixed income markets.

Other standout underperformers in the quarter included a 69% in corporate banking to $35 million and a 3% drop in global consumer banking. In general, Citigroup's remaining segments were down in the low-single to low-double digit percents. 

Competitor comparison
Citigroup's results were quickly followed with earnings reports from the competition. 

Goldman Sachs shares opened up about 1.3% Tuesday following second-quarter results on Tuesday. Analysts had expected revenue of $8 billion with $3.07 EPS. Goldman reported $9.13 billion in revenue and $4.07 EPS. Drivers of the quarter included a 15% year-over-year revenue growth in investment banking, 46% growth in the investing and lending segment, and an 8% sales increase for investment management. The sole underperformer was institutional client services, which fell 11% from last year's quarter.

JPMorgan Chase shares were up over 4% early Tuesday following a second-quarter report that included $24.5 billion in revenue and $1.46 EPS. Analysts had expected $23.7 billion and $1.30, respectively. The blight on JPMorgan's quarter was the 66% year-over-year drop in mortgage loan originations, which further prove that the company's core business model has changed significantly since the recession.  

Foolish final thoughts
Investors were most focused on Citigroup's DOJ settlement news thanks to the second quarter's weak but not atrocious segment reports. Citi Holdings remains Citigroup's key segment while corporate banking dwindled. Potential Citigroup investors should keep an eye on future quarterly reports and I'd personally wait to see if Citi can pass next year's stress tests.