5 Concerning Trends From the Citigroup Earnings Report

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Citigroup announced earnings on Tuesday -- and the report left investors with some things to keep an eye on.

Citigroup's bottom-line earnings of $3.2 billion looked mighty impressive when compared with the $468 million it reported in the third quarter of 2012, but that has less to do with the 2013 performance than the host of one-time items that characterized its quarter in 2012.

After excluding a pre-tax loss of $4.7 billion related to its Morgan Stanley Smith Barney joint venture and other finicky accounting adjustments, earnings look like this on a comparable basis:

Source: Company earnings report.

Certainly, things look much less rosy after excluding the onetime items and looking at its performance comparable basis. While many investors braced for worse results thanks to lower refinancing volume and difficulties in the bond-trading markets, here are five other things that should concern investors.

1. Margins are shrinking
Citigroup was off to a strong start in 2013, with two consecutive quarters of return on average common equity above 8% after two straight quarters where it was below 2.5%. It also saw improving return on average assets through the first six months of 2013, after a paltry final six months of 2012. However, things took a turn for the worse in the third quarter, and both return on average common equity and return on average common assets fell by almost a quarter:

Source: Company earnings report.

2. It's losing customers
It is easy to look at a bank's deposits and think that if they're growing, then surely the customer base is as well. Citigroup's deposits grew by 4%, or $36 billion, over the past year as a whole -- but it did see a troubling trend in its consumer banking business.

In its supplemental information, Citigroup reveals that it has lost half a million accounts from the third quarter of 2012. Granted, it still has 64.7 million other accounts to rely on, but it's never a good thing when a customer base shrinks and margins decline.

3. Non-interest revenue is plummeting
Many banks have become less reliant on traditional interest income over the past year as they sought to diversify their revenue streams in the wake of low interest rates. Many have done a great job of boosting their non-interest revenue, in the form of things like fee income. In fact, while JPMorgan Chase and Wells Fargo each saw their non-interest income fall by 15% and 8%, respectively, Citigroup saw its decline by 28%.

3. Its North American retail banking business lost money
To Citigroup's credit, it does a great job of disclosing a wealth of helpful financial information -- but once more in the financial supplements, we learn that its North American retail banking business went from an income of $274 million in the second quarter to a loss of $22 million in the third quarter. While its North American credit card business saw its revenue grow by almost 25%, or about $100 million, that couldn't offset the major loss, as its North American consumer banking unit saw its income fall by 17%.

5. The efficiency ratio went the wrong way
In the earnings press release, CEO Michael Corbat said that "we certainly can control our costs, and I am pleased with our expense discipline and improved efficiency year-to-date."

While expenses were down 4% against last quarter and the same quarter last year, that expense management didn't lead to a lower efficiency ratio, which measures the cost of each dollar of revenue. The expense ratio ballooned when compared with the second quarter, from 59% to 65%.

Citigroup has seen its expenses fall by almost $450 million over the last year, but almost $150 million of that figure, or 30%, is the result of decreased advertising and marketing expense, which fell 22% in the past year. One has to wonder whether the aggressive cuts in its marketing budget have gone too far and led to lower revenues.

Ultimately, there's a lot more than meets the eye in Citigroup's most recent earnings release, and unfortunately for investors, a lot of that news we might have otherwise overlooked isn't good.

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The article 5 Concerning Trends From the Citigroup Earnings Report originally appeared on Fool.com.

Fool contributor Patrick Morris has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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