Citigroup (NYSE:C) reported its third-quarter earnings today, posting solid improvement in most areas and pleasantly surprising the market.
The company beat expectations on both earnings and revenue, and grew pretty much every individual revenue stream. It also announced an intention to significantly reduce its physical footprint. Here is what we learned from Citigroup's earnings, and where the company might head from here.
Citigroup's net income rose to $1.07 per share from $1 during the same period a year ago. The company produced impressive revenue of $19.6 billion, handily beating analysts' estimate of just under $19 billion. Operating expenses rose by about 6% year over year, but this was more than offset by a 9% revenue increase, which drove the increased profitability.
The across-the-board gains are perhaps the most impressive aspect of Citigroup's performance. Trading revenue climbed by 6.7%, including a 14% surge in equities trading. The global consumer banking, or GCB, division posted a 4% increase, and the institutional clients group's revenue jumped by 14%. Even the "legacy" Citi Holdings division produced $1.6 billion in revenue, 26% more than a year ago.
The only areas where Citigroup saw business shrink were in its loan portfolio and bank deposits, both of which fell by just 1%. The loan portfolio decline was mainly due to the reduction of Citi Holdings' North America mortgage portfolio. In fact, the Citicorp "core" loan portfolio actually grew by 3%.
Citi Holdings, which represents some of the bank's riskier assets, saw its assets fall from $111 billion just a few months ago to $103 billion. While $103 billion still represents about 5% of the company's assets, this is a tremendous improvement from the $290 billion in legacy assets the division held in 2011.
Why reducing the size of its operations is a good thing
Citigroup announced that it plans to accelerate the transformation of its GCB division by exiting its consumer businesses in 11 markets, including Costa Rica, the Czech Republic, Japan, and Peru. While this represents nearly one-third of the 35 markets the division currently serves, the company said the remaining 24 markets capture more than 95% of the GCB business.
For reporting purposes, these businesses will become part of the Citi Holdings' legacy asset division beginning in 2015.
Basically, this is a good thing because it allows Citi to concentrate its resources and efforts on those markets with the greatest potential for future growth. CEO Michael Corbat said in a press release that the company "believe[s] our Global Consumer Bank will achieve stronger performance by focusing on the countries where our scale and network provide a competitive advantage."
Looking to the future
Shareholders should expect Citigroup to continue winding down its old assets and to concentrate on its best growth opportunities.
And, in the not-too-distant future, the company's 6% Basel III supplementary leverage ratio (up from 5.1% a year ago) might persuade regulators to finally allow Citi to boost its dividend and really start returning capital to shareholders. The company is in an excellent position to perform well on the next "stress test" in March, and a positive outcome could cause investor confidence in the bank to soar.
In the meantime, shares are still trading at a nice discount to their tangible book value of $57.73, even after today's gains.