Citi is Back from the Ashes

Rashmi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Citigroup (NYSE: C) pleasantly surprised the analysts and investors alike as it announced the second quarter results reporting a profit of $4.2 billion, up 42% from a year earlier on the back of strong performance in the emerging economies.

The results are indicative of the bank’s efforts of aligning itself with its global strategy of overseas expansion and exit from businesses that are unfit to its strategic vision.

Although the global economic scenario is still relatively weak with major emerging economies, particularly China and India experiencing declining rates of economic growth, Citigroup performed phenomenally well in the second quarter.

Latin America continued to outperform as the second quarter results saw the company gain substantially in the consumer banking segment, recording revenue of $2.3 billion, a year-over-year growth of 8%.

Overall the company recorded a 12% YOY growth in revenue, amounting to $20 billion and an EPS of $1.25 beating the average analysts’ estimate of $1.17 as tracked by Reuters. That, too, after excluding a $477 million gain owing to a valuation adjustment on its debt.

The recovery phase

The financial crisis brought to light the weaknesses of the players in the American financial industry. It showed how improper and inadequate risk and capital frameworks coupled with a weak regulatory environment led to the collapse of the American financial system and the bankruptcy of several high profile players, most notably Lehmann Brothers.

Citigroup also faced the music as the company lost much of its value in the midst of the crisis and battled a definite collapse until it was rescued with a $45 billion bailout by the American government. The company has come a long way since then, which is evidenced by a 30% gain in value of the company’s stock during the year so far.

Citigroup comes across as a promising player on the global landscape with Asia and Latin America delivering above average results and tremendous growth in revenue despite a tepid domestic scenario on account of low interest rates and declining revenue from the US mortgage business.

Global strategy

Global expansion has been the company’s core strategy with emerging economies being the main drivers of the company’s above average performance. However, with China and India, the two fastest growing economies in the world, facing a slump in growth rates, Citigroup has a new challenge to face and could have a significant bearing on the company’s future profitability.

In response to a declining currency and spiraling fiscal deficit and current account deficit, India has sprung into action, as the government cleared several high level foreign direct investment proposals from Defense to Retail and Telecom.

The Chinese, too, are taking active steps in a bid to reverse the declining growth trajectory and get back on the path of economic consolidation. The government recently announced a spate of measures to boost employment, as the government offered the companies preferential tax rates assistance to meet social insurance for employees and small-scale guaranteed loans.

All these efforts are testimony to the South Asian region giants' commitment to drive the global economy out of its current state of recession and spell good news not just for Citigroup, but for all the players in the industry.

Let’s see how the competitors fared in the second quarter

Wall Street giant Goldman Sachs (NYSE: GS) beat analyst estimates as the company recorded a more than double increase in its bottom line on the back of strong performance in the fixed income, currency and commodity trading business along with stable performance from most segments.

Net income for the period rose to $1.93 billion from $962 million a year earlier, and net revenue rose 30% to over $8.5 billion in spite of mixed economic sentiments prevailing in most parts of the world.

Improving domestic economy and a global client franchise provided a significant push to the company’s revenue and profitability.

The company was ranked No. 1 in the investment banking space for the period as revenue rose 29.7% to over $1.5 billion backed by a 45% increment in underwriting revenue.

The biggest gains were recorded by the company’s investing and lending unit, which manages the firm’s own capital with revenue of $1.42 billion compared to $200 million in the previous year quarter, representing a triple fold increase in revenue from debt securities and loans.

The bond markets have driven Goldman Sachs' revenue for over a decade, but, of late, the company’s revenue streams are undergoing a change, owing to increased regulatory requirements rendering the company’s once profitable businesses very expensive.

Despite such change, Goldman Sachs recorded a return on equity of 10.5%, well above the 8% mark expected by some analysts and over the 10% mark which is considered a benchmark to meet the banks’ cost of capital.

Bank of America (NYSE: BAC), another significant player in the American financial industry, started the year with its three point plan of stabilizing revenues, minimizing costs and strengthening its balance sheet as announced by the bank’s CFO Bruce Thompson.

The second quarter saw the company deliver on all three counts as revenue rose 3% to $22.9 billion, Basel III tier 1 capital ratio climbed up 8 basis points from the previous year quarter to reach 9.6% and expenses related to servicing delinquent mortgage loans declined at a rate faster than it was originally expected.

Moreover, strong performance in all the major segments saw the company deliver a 63% growth in net income to record a profit of $4 billion.

The global wealth and investment management division posted record revenue and profitability, and the Investment banking division saw a 36% increase in fees to reach $1.6 billion compared to the second quarter in 2012, recording a splendid performance and holding its No. 2 position in the segment.

The bank’s CEO, Brian T. Moynihan’s, focus on cost-cutting has certainly paid off for the bank and with the American economy showing signs of recovery, the bank has a good chance to turn the tables around and emerge a winner out of these trying times.

Foolish bottom line

As all the major players tackle high litigation costs owing to the disaster of the 2008 financial crisis, the industry has once again shifted the focus back on operations and profitability and this could work well for the all the firms and help build their lost reputation and create a more stable and responsible scenario for its investors.

As the American and European economies further stabilize and the emerging economies liberalize their business environment offering a stable governance, policy and regulatory environment, capital flows will increase significantly, creating a massive opportunity for Citigroup to grab.

The company, however, would do good to refrain from over ambitious indulgence in high risk areas to avoid a repeat of 2008 and regain the confidence of the investors through a series of internal reforms and major risk management efforts.

The recent results show the company moving towards the right direction and poised to deliver sustained revenue and profitability targets in the coming times making the company a worthy addition to your portfolio.

Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable stand-out. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.


Rashmi Singh has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Goldman Sachs. The Motley Fool owns shares of Bank of America and Citigroup Inc . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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