Citigroup Inc. (NYSE:C) had a strong second-quarter earning's report beating expectations as the company is headed in the right direction. The earnings were solid and made investors happy, however, if we review the company's activities in the last quarter you will find much more reason to look for a bright future. The investments and partnerships created over the last 90 days will increase income on the top line because Citigroup is positioned strategically around the world. The bottom line will reap the benefits because Citigroup will expand operations in key business regions. This will immediately increase profitability for the company as results should show growth in late 2013 and strong growth in 2014. Citigroup is a recommended buy and hold for the future with growth to the top line income and an increase bottom line profits.
Citigroup's second-quarter's highlights
On July 15, 2013, Citigroup released its 2Q earnings statement that included earnings per share of $1.34; $1.25 excluding CVA/DVA, net income of $4.2 billion; $3.9 billion excluding CVA/DVA. Revenues for the quarter were $20.5 billion; $20.0 billion excluding CVA/DVA. Net credit loss of $2.6 billion declined 25% versus the prior-year's quarter. Loan loss reserves released were $784 Million versus $1.0 billion in total prior year. Citigroup also utilized approximately $600 million of Deferred Tax Assets (DTAs).
Maybe the most important numbers include the Basel I Tier 1 common ratio Increased to 12.2%, and the estimated Basel III Tier 1 common ratio increased to 10.0%.
The July 9, 2013 meeting held by the Federal Deposit Insurance Corp. finalized Basel III rules already approved by the Federal Reserve. Under the approved rule, banking institutions with more than $700 billion in consolidated total assets - or $10 trillion in assets under custody - would be required to maintain a Tier 1 capital leverage buffer of at least 2% above the minimum supplementary leverage ratio requirement of 3%, for a total of 5%. Additionally, the proposed rule will require insured depository institutions to meet a 6% supplementary leverage ratio to be considered 'well capitalized' for prompt corrective action purposes. Over the next two quarters, Citigroup will retain the additional funds to cover the 11% total requirement. The Federal Reserve is close to a final adjustment and these numbers should not change much in the future, and Citigroup, along with the major banks should begin increasing dividends, but more importantly, begin the buyback of shares many have wanted to do over the last two years.
Citigroup deposits of $938 billion grew 3% compared to last year's 2nd quarter. Citicorp loans of $544 billion grew 3% also. Citi Holdings assets of $131 billion declined 31% from prior year period and represented 7% of total Citigroup assets at the end of the second quarter. Citigroup's press release.
The release of reserves is justified, since regulators don't want to see banks as "over-reserved" during times of strong credit quality, for fear that banks may manipulate provisions for loan loss reserves to smooth out earnings improvements over the long term. But the reserve releases can't go on indefinitely.
Citigroup was the third-largest bank at the end of 2010 with $1.31 trillion in assets or 9.8% of the total assets in the banking system. At the end of the first quarter 2013 Citi slipped into fourth place with a 0.24% decline in assets, and 9.1% of the total assets in the banking system. Wells Fargo (NYSE:WFC) jumped ahead of Citigroup during 2Q 2013. This is not a bad step, as Citi Holdings is reducing assets, the focus is on the core growth of the company and the profitability it is producing.
Book price for Citigroup stock is $63.02, however the tangible book value increased to $53.10. Investors' comfort zone in assessed value has proven to steady near 85% of book value. But with the increase in income and profits, expect Citi's stock price should grow 10% for the remainder of the year to near $60 with third-quarter results pumping the stock.
Citigroup Inc.'s CEO, Michael Corbat began his leadership in January 2013 and has set a quiet, but aggressive tone for the company. His personally reserve tone, but aggressive guidance in the direction of the company has seen several very bold steps to increase the income of the core business now and into the future. Here are a few of the business ventures over the last quarter that will increase the top line income.
Citigroup's key activity in the 2nd quarter
On May 16, 2013, Citi Holdings announced the sale of its Brazil-based consumer finance unit, Credicard, to Banco Itaú Unibanco. The sale is expected to give Citigroup $1.37 billion in cash, but two bigger pluses are driving the deal. Citigroup is expected to profit $300 million in after-tax profit, and Citigroup will retain the corporate cards offerings by Credicard and transfer them to its current credit card business it maintains in Brazil. Press release on Citigroup's website.
On February 19, 2013, Citigroup announced that it will enter into a strategic agreement with Best Buy to issue and manage Best Buy-branded cards in the United States. In addition, Citi also reached an agreement with Capital One Financial Corp. (NYSE:COF) to acquire approximately $7 billion of Best Buy (NYSE:BBY) private label and co-branded card loans. Both deals are anticipated to close in the third quarter of 2013 subject to customary conditions. Press release on Citigroup's website.
On July 1, 2013, that Citigroup Inc (NYSE: ) reached a deal with Fannie Mae (OTCQB:FNMA) over the breach of representation and warranties on 3.7 million residential first mortgage loans between 2000 and 2012. Citigroup has agreed to pay Fannie Mae $968 million, which covers almost all issues. Announcement on Citigroup's website.
In January 2012, Citi created a joint venture with Shanghai-based Orient Securities and approved by the Chinese government. In August 2012, the joint venture was named Citi Orient Securities and became operational. It has a registered capital of $126 million with Citi holding a 33.3% stake in the venture. With the number of outlets Citigroup currently has in the country and the anticipated growth, the amount of investments expected to flow into these funds will be staggering. Chinese investments will be the largest growth market over the next 10 years. China could represent 25% of Citigroup's wealth management within 10 years.
On June 26, 2013, Citigroup announced China had approved Citigroup and HSBC Holdings PLC (HBC) to market local mutual funds in China. China's markets are controlled, but not structured to serve the masses of Chinese investors like the U.S, European, and Japanese markets. This move by the Chinese government may be an attempt to get many investors into mutual funds that will encourage wealth building through long-term investments. Citigroup has the largest access of any foreign bank inside China and the marketing opportunity will be enormous to the wealth management business.
On July 5, 2013, Citibank (NASDAQ:CHINA) Co., Ltd. ("Citi China") announced it opened its third consumer outlet in Chengdu on Dong Da Jie in Jinjiang district. The new sub-branch is a Smart Banking outlet, designed to provide a unique and superior banking experience to Citi customers in Chengdu. This expansion in China will continue and increase the number of accounts and amount of deposits on hand in the largest growing financial country in the world. Announcement on Citigroup's website.
We anticipate a growth of income that will directly translate to the bottom line for investors. We anticipate the company will exceed the Basel III requirements and increase the dividend to investors beginning 1st-quarter 2014 and conduct a buy back of shares beginning in 2014.
Citigroup's expansion globally will continue to build the world's most comprehensive bank as the leader in financial products. Citi has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. Citigroup provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services, and wealth management.
Disclosure: I am long C. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: All information was collected from Citigroup's website, press releases, the second quarter's report and media reports. As always, we recommend you evaluate any opportunity before investing.