Citi Has Big Upside Despite Lukewarm Results

Citigroup (NYSE:C) announced its performance figures for the second quarter this Monday and despite reporting a 4% decline in total revenues compared to last quarter, the earnings figure remained more-or-less the same due to improved cost efficiency and lower provisions. Citigroup’s globally diversified consumer banking business saw a notable reduction in overall net income, which was largely compensated by an increase in net income for its securities business.

We revised our price estimate for Citigroup’s stock from $36 to $37 accounting for the fact that the banking group would likely get the Fed’s clearance to increase dividend payout later this year. This new price target is about 35% above its current market price, which is largely a result of a loss in investor confidence due to the deteriorating debt situation in Europe and negative financial sector headlines.

See our full analysis of Citigroup here

Securities Business Generated Lesser Revenues, But Saved More On Costs

Citigroup’s securities business, which encompasses its advisory & underwriting, sales & trading as well as private banking services, essentially reported the same revenues as it did last quarter and the same quarter last year. However, considering that the division had a $1.38 billion accounting loss from the revaluation of its own debt last quarter compared to $198 million profit this quarter, the division’s operating revenues declined by more than 20%. This was expected for the period which saw significant volatility in capital markets globally.

The fixed income unit saw the largest decline in revenues with the segment generating under $3 billion during the quarter – almost 20% below $3.65 billion reported in the last quarter.

Traditional Banking Business Saw Loan Growth, Although Revenues Dipped

Citigroup reported a total of $409 billion in consumer loans and $246 billion in corporate loans at the end of the quarter. This represents a 2% decline in consumer loans and 6% growth in corporate loans – resulting in 1% growth in overall loan portfolio over the previous quarter.

It must be noted here that the decline in consumer loan volumes was completely due to a reduction in loan portfolios for CitiHoldings. This combined with the fact that the bank has a diversified business globally – particularly in developing countries – would lead us to believe that the ongoing Citicorp business had a sizable improvement in its loan portfolios owing to the devaluation of most of the currencies this quarter against the U.S. Dollar. The currency devaluation is also what explains the revenue dip for retail banking operations.

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