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The second quarter of the year was quite an eventful one for Citigroup (NYSE:C), with the global banking group continuing to work its way through non-core assets housed under Citi Holdings (see Citi Sells Credicard To Banco Itaú Unibanco For $1.4 Billion) and also taking two big steps towards clearing its legal backlog by settling mortgage-related lawsuits with the FHFA (see Citigroup Settles Mortgage-Related Lawsuit With FHFA) and Fannie Mae (see Citigroup Settles Mortgage Repurchase Row With Fannie Mae). And going by the performance figures for the quarter which the bank reported this Monday, things were great on the operational front too, with the bank earning a solid $4.2 billion for the period; 7% higher than the $3.9 billion figure for Q1 2013. [1]

Citigroup’s geographically diversified business model which boasts of a presence in no fewer than 100 countries across the globe is the reason for the continuing profit run, as the banking group saw improvements across the board. While the top line witnessed just a small growth, lower provisions from improving credit conditions and a marked decline in operating expenses on the back of the bank’s cost-cutting efforts helped it achieve its highest quarter profit since Q1 2010.

Continued growth in the bank’s global card business, better than anticipated improvements to operating expenses, as well as strong investment banking performance prompted us to revise our price estimate for Citigroup’s stock upwards from $50 to $56. It must be mentioned here that the current market price for the bank’s shares are a good 20% below its book value of $63.02.

Retail Banking Business Draws Strength From Emerging Markets

As we have pointed out on numerous occasions in the past, Citigroup’s biggest strength is its extensive global presence. That combined with the fact that Citigroup is a leader in all financial services, ranging from traditional loan-deposit offerings to investment banking services to custody banking solutions allows the bank to benefit from truly diversified revenue streams that are not subject to the restrictions faced by all its peers who are largely focused on U.S. markets.

Citigroup’s strong retail banking presence across the globe and in emerging markets in particular gives it access to cheap funds in the form of low interest rate deposits from all the regions in which it operates allowing it to achieve better net interest margins. And as the bank caters to the demand for loans globally, its interest income is not very dependent on the interest rate environment prevalent in a single country like the U.S.

The table below summarizes Citigroup’s reported net NIM figures for each of the last ten quarters:

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013
2.88% 2.82% 2.83% 2.90% 2.90% 2.82% 2.87% 2.94% 2.95% 2.92%

The first thing that stands out from these figures is that Citigroup’s NIM figure has largely remained intact over the last two years – in stark contrast to the considerable declines shown by competitors like Wells Fargo (NYSE:WFC) and JPMorgan (NYSE:JPM) for the same period.

Favorable Investment Banking Environment Also Helps Citigroup’s Cause

Citigroup’s Securities & Banking division, which houses its advisory, underwriting, trading and private banking units, generated total revenues of $6.4 billion for the quarter, excluding a $462 million accounting profit from a revaluation of its own debt. While this is about 10% lower than the adjusted revenue figure of $7.2 billion for the previous quarter, it is still one of the highest recorded by the bank since Q1 2010.

The continuing rally in global equity markets combined with strong debt capital markets for the larger part of the quarter helped cement the investment bank’s performance. Quite notably, Citigroup made $266 million in equity underwriting fees in Q2 2013, which is the highest since Q2 2011 when assisting companies with their IPOs and follow-up offers helped the the bank pocket $272 million.

Notes:

  1. Citigroup Reports Second Quarter 2013 Earnings per Share of $1.34; $1.25 Excluding CVA/DVA, Citigroup Press Releases, Jul 15 2013

Disclosure: No positions

Source: Citigroup's Profits Swell As Global Presence Helps Revenue Growth