Digging Into Citigroup's Earnings


Before the market opened yesterday, Citigroup added its name to the list of banks that performed abominably last quarter.

Following the lead of both JPMorgan Chase and Wells Fargo , the nation's third-largest bank by assets said its earnings before taxes plunged by $2.1 billion, or 32%, in the three months ended September 30.

Tracking down Citigroup's problems
Even a cursory glance at Citigroup's income statement reveals a number of troubling headwinds. The first is that its net interest income fell by $171 million. This is the amount of money a bank earns on its asset portfolio after the cost of funds (that is, deposits and loans) is deducted.

While we've known for some time banks would struggle to keep this figure steady in the face of still-historically low interest rates, Citigroup's performance was significantly worse than the other two megabanks to have reported thus far. Wells Fargo's net interest income was effectively flat for the quarter while JPMorgan's was up by $71 million thanks to a lower cost of funds.

It should be noted, moreover, that a decline in net interest income affects Citigroup to a much greater extent than its too-big-to-fail brethren. Whereas Wells Fargo and JPMorgan both look to noninterest income for roughly half of their total revenue, Citigroup's net interest income accounts for roughly two-thirds of its top line.

Digging a bit deeper, Citigroup also experienced declines in almost every category of noninterest income. Far and away the worst was its trading revenue, which dropped by 58% compared to the second quarter.

That trading revenues plummeted at the New York-based bank, and particularly in its fixed-income division, doesn't necessarily come as a surprise. Aside from its massive $9.2 billion charge-off related to litigation reserves, this was JPMorgan's Achilles' heel last quarter.

The impetus for the drop in trading income was twofold. First, trading volumes dropped after the Federal Reserve announced last month that it wasn't ready to taper its bond-buying stimulus program. This assured investors that it was safe to hold bonds for a least another month. And second, fears late in the quarter about an impending government shutdown made investors reluctant to trade, choosing instead to wait until the political storm blows over.

These issues are what CEO Michael Corbat was referring to when he said in the bank's earnings release that, "We performed relatively well in this challenging, uneven macro environment. While many of the factors which influence our revenues are not within our full control, we certainly can control our costs, and I am pleased with our expense discipline and improved efficiency year-to-date."

The silver lining in Citigroup's results
As Corbat noted, despite an otherwise abysmal performance, all was not lost at Citigroup. More specifically, it notched improvements in both its expenses and credit costs.

Compared to the second quarter, Citigroup's operating expenses fell by an impressive $485 million, with roughly half of that amount stemming from lower compensation costs. And its total provisions for credit losses dropped by 3% on a sequential basis and by 25% compared to the same quarter last year.

In addition, the bank continued to wind down its legacy asset division, which holds noncore assets and those that were impaired during the financial crisis. The division, known as Citi Holdings, now makes up only 6% of Citigroup's consolidated balance sheet and accounts for an increasingly smaller drag on the bank's bottom line.

And finally, Citigroup's capital base remained on an upward trajectory. At the end of the third quarter, its Basel III Tier 1 common capital ratio stood at 10.4% -- well above both JPMorgan and Wells Fargo - though this goes to show that capital is only a necessary, and not a sufficient, piece of the profitability puzzle for banks.

The Foolish bottom line
Citigroup has long been considered the basket case of Wall Street thanks to its legal antics (namely, its role in overturning Glass-Steagall) and geographically diverse assortment of businesses. This is why I've never been a fan of the bank. And, suffice it to say, last quarter didn't persuade me to change my opinion.

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The article Digging Into Citigroup's Earnings originally appeared on Fool.com.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Wells Fargo. It owns shares of Citigroup and JPMorgan Chase. 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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Originally published