Global banking giant Citigroup (C) reported stronger than expected results Monday, earning $0.95 per share (consensus estimates called for $0.89 per share). The firm's revenue came in at $18.6 billion, slightly lower than the Street was expecting and down nearly 10% year-over-year. Though CEO Vikram Pandit indicated that the firm may seek approval to raise its dividend, which may represent a positive catalyst to some investors, we think shares are fairly valued at current levels.
As with its banking supermarket competitors, Citigroup continues to experience weakness in capital markets and investment banking. Investment banking revenues tumbled 21% year-over-year, equity markets revenue fell 29%, and fixed income revenue fell 4%. However, lending picked up at the bank, increasing 70% year-over-year. Thanks to lower loan loss provisions, profitability in the segment remained relatively strong, growing 20% year-over-year. Ultimately, we think the entire investment banking sector is facing challenging headwinds, but any stabilization in Europe (and the global markets, in general) should help boost the thirst for deal making.
Consumer banking revenue fared much better than its securities and banking businesses, as revenue for the segment only slipped 2% year-over-year. North America, Citi's largest consumer segment, experienced revenue growth of 4% thanks to stronger contributions from non-interest revenue, which grew 45% year-over-year. Credit losses improved to $1.5 billion, compared to $2.1 billion in the same period last year. As a result, net income grew 8% year-over-year and has now increased 23% for the segment year-to-date.
Unlike Wells Fargo (WFC), Bank of America (BAC) and JP Morgan Chase (JPM), Citigroup has an expansive international footprint. The bank has focused on controlling costs in Latin America, where it has recently consolidated some branches, but it has also expanded its loan portfolio. A similar strategy is taking place in Asia, where Citi has 10% fewer branches than it did a year ago, while generating similar amounts of revenue. Citi's net credit margin in Asia was about 13.74%, much stronger than the 9.43% the firm achieved in North America, but still lower than the 20%+ net credit margins the firm achieved in Latin America and in EMEA (Europe, Middle East, and Africa). The net credit margin is typically defined as net interest income minus net credit losses, as a percentage of average managed outstanding balances.
Overall, we think Citi posted a fairly strong quarter, which is in-line with how its peers performed in the second quarter. We think Citi is trading near the top end of its fair value range (click here for our bank reports), so we do not find it very compelling right now. As we've stated previously, we think the XLF Financial Sector ETF (XLF) is the best way to gain exposure to the financial sector as it largely diversifies away firm-specific banking risk. We also own the SPDR S&P Bank ETF (KBE), which adds an additional degree of diversification via regional exposure. No matter how well-run some of these institutions seem to be, every bank could be prone to relatively large hidden losses (think JP Morgan's recent trading debacle), and most of the "too big to fail" banks have such enormous balance sheets (with poor public disclosure) that it's almost impossible to evaluate them appropriately.
Additional disclosure: Some of the securities mentioned in this article are included in our Best Ideas portfolio.