At Last, Citigroup Starts to Pull Through

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CitigroupIt took a while -- three years, really -- but Citigroup (C), by far the weakest of the big banks coming out of the recession, is pulling through.

After this morning's second-quarter earnings report of $3.3 billion, or $1.09 per share, investors have several things to rejoice over:

  • Credit costs are plunging, falling nearly 50% in the quarter to $3.4 billion. Loan losses are dropping quickly, and cash previously set aside to cover losses is being released back to shareholders as results improve.
  • Delinquencies are dropping. Consumer loans 30-89 days late fell 21% year over year. Consumer loans more than 90 days delinquent fell 46%, to 2.3%.
  • Management is talking about dividends. "We expect to begin returning capital to shareholders next year," CFO John Gerspach said.

If you exclude periods where accounting games juiced results, this was probably Citigroup's best quarterly result in years.

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Bad Bank, Good Riddance

Back in 2009, Citigroup effectively split itself into two internal units -- Citicorp and Citi Holdings. The latter was designed as a "bad bank" that quarantined a portion of its worst assets. Much of Citigroup's overall improvement is due to the rapid jettison of those assets.

Total assets in Citi Holdings fell 34% over the past year, and are now down by nearly two-thirds since 2009. Once Citi Holdings is put out to pasture for good, what's left of the Citigroup mothership will be a collection of fairly strong assets.

Still, there are risks. Citigroup is a consumer-centric bank at a time when unemployment is more than 9%. While losses have narrowed, it may be hard to generate substantial and sustainable earnings in that environment. The bank doesn't have the trading prowess of competitors JPMorgan Chase (JPM) or Goldman Sachs (GS). Even though its bailout funds have been repaid, it still has the stigma of being a ward of the state. And like all big banks, pending regulatory changes put a question mark over its future.

Citigroup has been a spectacular turnaround story, but can it win the next act by becoming a strong, sustainable earnings machine? The question remains. If the past three years taught bank investors anything, it's to stay skeptical.

Motley Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of JPMorgan Chase.

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