On Monday Citi (C) reported net income of $2.9 billion or $3.1 billion excluding the once off loss on the sale of its investment in Turkish bank Akbank and excluding DVA profits (accounting profits that increase as value of own debt falls [discussed in recent BAC article]). Both figures were down on the $3.4 billion profit reported in Q2 2011 but overall it was considered a decent bottom line result given the difficult economic environment.
More concern has been leveled at Citi's failure to generate revenue growth as the increase in profits has been generated by falling credit losses and reducing bonuses in the investment bank. However, before assessing the significance of revenues reducing from $20.6 billion in the Q2 2011 to $18.6 billion in 2012 investors should exclude the $424 million loss on Akbank which drove the $528 million reduction in corporate revenues. Similarly the 62% or $1.5 billion reduction in Citi Holdings revenue should be viewed in the context that this is a wind down division.
Excluding these items, the core businesses performed rather well with investment bank revenues increasing 2% from the first quarter to $5.4 billion and the payments business also saw a 2% increase in revenues to $2.8 billion. Admittedly the core consumer banking business, which accounts for over 50% of total revenues and 67.5% of total net income, reported revenues of $9.8 billion representing a 2% sequential drop in revenues compared to the first quarter. However this reflects capital building, a sluggish economy, conservative growth policy and strict pricing targets. I would consider these to be positive features given banking's recent history. Citi has strengthened its balance sheet with a Basel I Tier 1 ratio of 12.7% and estimated Basel III ratio of 7.9%. As such it is well placed to meet stricter regulatory requirements coming into force in 2013. In my opinion it is following the correct strategy in growing conservatively and not chasing non-profitable business.
Priced on 7.5 times historic earnings Citi looks cheap. Recent loan book growth has been conservative and the legacy portfolio is well understood at this stage with future surprises unlikely. Even given stalling growth in the US, Citi is well placed as a global franchise able to benefit from growth in emerging markets as well as in the US. Consensus analyst earnings forecasts predict average annual EPS growth of 9.25% for the next 5 years. On that basis a multiple of closer to 14 would probably be more appropriate.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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