Last updated: April 14, 2014 11:30 pm

Citigroup: small favours

Earnings have beaten expectations, but there are big hurdles to overcome

Thank goodness for small favours. Citigroup on Monday reported first-quarter revenue and earnings that beat analysts’ expectations. This is a welcome relief for shareholders who have been smarting over some disturbing developments at the bank so far this year. First, there were fraud allegations at the Mexican unit, Banamex. Then Citigroup’s plans to return more capital to shareholders received a costly and embarrassing veto from the Federal Reserve in the annual stress tests. A small favour, yes, but big hurdles to overcome.

Citigroup is benefiting as Citi Holdings, a unit that houses troubled assets from the crisis, becomes less of a drag on profitability. On a pre-tax basis, losses there narrowed by about $1bn from a year ago to $400m as assets shrunk by 23 per cent. Along with other banks, loan loss reserve releases are also underpinning results as credit quality improves. Nonetheless, return on equity remains an unimpressive 7.8 per cent. Trading was a trouble spot for Wall Street banks last quarter – and Citigroup’s revenue from fixed-income markets dropped 18 per cent. But that was better than the 21 per cent decline at JPMorgan.

Beyond the financials, Citigroup said it had found another alleged fraud at its Mexican business. It is small compared to last time (less than $30m, versus $400m misappropriated in a case related to Oceanografia, a supplier to Pemex), but this revelation does not boost confidence in Citigroup’s ability to control its extensive global operations. Indeed, the bank stumbled in the stress tests not over its capital levels, but shortcomings in its capital planning process. That failure means Citigroup will probably miss its return on tangible common equity target of 10 per cent for 2015; it was contingent on capital return.

Shares on Monday rose 4 per cent, but, contrary to US rivals, they remain below Citigroup’s tangible book value. A disappointing quarter would have made the bank’s situation feel worse, but it needs to clean up its processes and produce even better profits for the stock to break out.

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