Citigroup (C) was the third large US bank to report its second quarter results this earnings season. Last Friday, competitors JP Morgan (JPM) and Wells Fargo (WFC) opened their books. Shares of Citigroup ended the day 0.6% higher after releasing the earnings report.
Second Quarter Earnings
Citigroup reported second quarter earnings of $2.9 billion, or $0.95 per share. Excluding one-time factors, which included a positive $219 million adjustment in the valuation of Citigroup's debt and a $424 million net loss on the sale of a 10.1% stake in Akbank T.A.S, earnings came in at $1.00 per share. Second quarter revenues came in at $18.8 billion which is down 7% on the year. Adjusted earnings per share which came in at $1.00 per share fell 2% on the year.
I will quickly run you through the highlights of the earnings report.
Consumer Banking
The consumer banking division of Citigroup reported revenues of $9.8 billion, roughly unchanged compared to last year. The North American unit reported 4% revenue growth to $5.1 billion, offset by a 4% decline in international revenues to $4.6 billion. Excluding currency effects, international revenues grew by 4% as well. Citigroup reported $1.2 billion in net profits for its North American unit, an 8% increase driven by revenue growth and a decrease in net credit losses. International revenues fell by 4% in Latin America, 4% in Asia and 11% in Europe, Middle East & Africa amidst the negative headwinds caused by a strong dollar.
Securities and Banking
The securities and banking division reported a 1% decline in quarterly revenues to $5.4 billion. Fixed income revenues fell 4% to $2.8 billion driven by a weaker environment for credit and structured products. Equity markets revenues fell 29% to $550 million driven by lower volumes in equity markets. The investment banking division reported a 21% decrease in revenues to $854 million amidst falling underwriting business for debt and equity offerings. Private banking activities reported a 3% increase in revenues to $570 million driven by growth in North America and an increasing deposits base. Net profits of the overall unit rose 18% to $1.4 billion driven by a 8% decline in operating expenses.
Transaction Services
The transaction services unit reported a 5% increase in quarterly revenues to $2.8 billion driven by a 9% increase in revenues for its Treasury & Trade Solutions business. The Securities and Fund Services revenues fell 6% to $695 million. Net income for the overall unit rose 6% to $910 million driven by revenue growth and unchanged operating expenses. The Transaction Services unit reported a 8% increase in deposits to $396 billion, while assets under custody for the Securities and Fund Services units fell 6% to $12.3 trillion amidst "difficult" market conditions.
Balance Sheet
Citigroup's balance sheet continued to shrink to $1.92 trillion which is down 1% compared to the first quarter and 2% compared to the second quarter of 2011. The bank aggressively increased its deposit base which rose 6% on the year to $914 billion, thereby reducing its reliance on the capital markets as long term debt outstanding fell by 11% to $288 billion. The company's shareholder equity increased to $184 billion resulting in a 12.7% Tier 1 Common Ratio, or 14.4% Tier 1 Capital Ratio. The estimated Basel III Tier 1 Common Ratio came in at 7.9%. Citigroup's tangible book value per share rose 6% on the year to $51.81 suggesting that shares trade at a 50% discount to its tangible book value.
Investment Thesis
Citigroup reported a reasonable set of figures on Monday which were initially well received by the market, but opening gains of 3% evaporated to a small gain of 0.6% at the close. Year to date, shares of the bank trade flat after peaking at $38 per share in March of this year when the market was relieved that most major US banks passed the stress tests.
Ever since, shares have given up 30% on the back of worries about an economic slowdown, the impact of the major JP Morgan trading loss on further future regulation and on worries about the European Debt Crisis. While shares appear rather cheap with estimated annual profits of around $4 per share for the full year of 2012, the bank is still paying out merely $0.01 in quarterly dividends.
The key for capital gains is a renewed trust of investors into financial markets and banking asset valuations. The key to unlock the value and see lower discounts of Citigroup's share price to its book value per share, is a boost in the trust in the financial system, driven by a viable solution for the European Debt problem. As I do not see a credible solution anytime soon for the "old" continent's issues, I continue to shun an investment in Citigroup despite the fact that shares "appear" to be cheap on valuation motives.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
