Citigroup (C) reported reasonably good Q2 results last Friday, but the stock sold off as was the case for other reporting banks. Revenue of $20.6 billion was 7% lower than last year and up 5% from Q1. Net income was $3.3 billion, with EPS of $1.09, higher than 90¢ last year and 99¢ in Q1. By way of comparison, JPMorgan (JPM), considered the best of the big banks, reported $27 billion in revenue and earned $5.4 billion.
Net credit losses at Citi of $5.1 billion declined 35% from last year. Credit losses included a $2.0 billion release of credit reserves, 37% higher than last year, as credit quality continued to improve (common at most banks) and a majority of the release was attributable to Citi Holdings. This portion of income is low quality because it is not part of the ongoing business. Tangible book value per share increased $1.88 from Q1 to $48.75 and was 16% higher than 12 months ago. Citi had its 6th consecutive profitable quarter and Citi Holdings (bad bank) is contracting.
Citicorp (good bank) had $16.3 billion in revenue, essentially flat with last year and Q1. Strong revenue growth came in the international businesses and transaction services. Net income decreased 2% to $3.7 billion from last year. Citicorp represents 80% of the total (and is rising) while City Holdings represents almost all of the remaining revenues.
Below is a chart for Citicorp with revenues and income for Q2 and Q1 of 2011 and Q2 from 2010 (figures in millions of dollars). It shows Citi is a diversified global business, business that should grow over time and help it weather storms in geographical areas (i.e. such as Europe). Last week Citi said it has a $22 billion exposure in Europe which it can handle (with almost $2 trillion in assets).
| CITICORP | 2Q'11 | 1Q'11 | 2Q10 |
| Revenue | |||
| North America | 6100 | 6272 | 6956 |
| Europe | 2929 | 3293 | 2986 |
| Latin America | 3529 | 3299 | 3032 |
| Asia | 3790 | 3640 | 3515 |
| Net Income | |||
| North Ameria | 1167 | 1130 | 1025 |
| Europe | 644 | 1071 | 706 |
| Latin America | 860 | 929 | 826 |
| Asia | 985 | 954 | 1162 |
Citi Holdings (bad bank) had $4 billion in revenue in Q2, up from $3.3 billion in Q1 but down from $4.9 billion last year. The net loss was $218 million, $1.0 billion lower than last year, despite a $908 million decline in revenues. Citi Holdings assets of $308 billion were 34% below last year. Corporate/Other revenues decreased to $263 million from $663 million in 2010 and the net loss of $168 million compared to $193 million in 2010.
Citicorp is making progress on its road to recovery. CEO Vikram Pandit, after bringing Citi back from death's door 2 years ago, had his $1 annual salary upgraded to the usual multi-million dollar pay package common at big banks. Citi is complying with the new Basel III and U..S banking rules. During Q2, Citi had a 1 for 10 reverse stock split, 1000 shares became 100 new shares. The stock is no longer a sub $5 speculative stock and Citi resumed a quarterly dividend (a penny). Now investors or fund managers who only consider dividend paying stocks or require stocks to have a minimum stock price (say $10 or $15) will be able to buy Citi shares. Unfortunately for stockholders, the new stock price sank from around $50 early in the quarter to $38 (related to bank stocks selling off):
S&P 500 Financials Sector Index
(Click to enlarge)
JPMorgan reported Q2 earnings last week which got little respect. First Horizon (FHN), a Tennessee bank and former Dividend Aristocrat which now has a quarterly dividend of a penny, also had a better Q2 but the stock went nowhere. Bank of America (BAC) and Goldman Sachs (GS) reported earnings yesterday and their stocks declined when the stock averages rose sharply. Of course, BAC has huge problems from the Countrywide acquisition. Macro issues involving a potential default on Treasury debt and the unknown outcome of European sovereign debts have been weighing on the banking sector. Banks have a substantial portion of assets in Treasuries which they use like cash. The quality of European sovereign loans has deteriorated to junk status. New regulations in the U.S. and Europe add to concerns about bank stocks.
Citi is having success climbing out of its deep hole. Citi stated its intention to pay a more respectable dividend next year. But realistically that should provide only a modest yield. Investors need long time horizons and the ability to ride through stormy seas when buying Citi shares as has been the case in the last 6 quarters. For the stock to climb back from its depth (really a sub $4 stock), bank stocks need to bounce back. The Financial Index bottomed at 85 two years ago, then stumbled around 200 during its recovery (it was 500 prior to the financial collapse). When the banking recovery occurs Citi should be a leader, largely because of its global business reach.
Disclosure: I am long JPM.
