With its first full quarter with new CEO Michael Corbat in charge now in the books, Citigroup (NYSE:C) continues to make progress towards operating more like the large money-center bank that it is. While there are some very valid questions about the company's long-term strategy (including managing its far-flung global empire and rebuilding share in U.S. banking), it seems like the bank can increasingly focus on more common banking issues like dealing with a very adverse yield curve and pretty sluggish loan growth.

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Core Results Largely On Track
Big bank earnings these days are always a murky soup of charges, credits, and various not-so “one time” items. That said, it looks like Citigroup's core earnings were about $0.11 ahead of the sell-side average, making Citigroup one of the best outperformers among the banks that have reported so far.
Excluding credit/debt valuation adjustments, revenue rose 3% from the year-ago level and 12% from the fourth quarter. Citicorp's core revenue was up 2% and 13%, with very strong growth from securities and banking, flattish results in Global Consumer Banking, and a modestly negative result in transaction services. 
Bank-wide net interest income was sluggish – down 1% from the year-ago period and down 2% from the prior quarter. Citi actually did pretty well relative to Wells Fargo (NYSE:WFC) and JPMorgan (NYSE:JPM) from a reported net interest margin perspective, as NIM declined only 4bp from last year and 1bp from the prior quarter. Average earning asset balances were a bit weaker than expected, though, and down 1%.
Fee income was very strong on those better trading and banking results, while core fee income growth (service charges, insurance, etc.) were up in the mid single digits. Management's efforts to better control costs also seem to be having some effect, as operating costs increased only 1% from the year ago period; the sequential drop was also sizable (down 10%) but highly influenced by legal expenses).
All told, Citigroup did beat estimates for its pre-provision net revenue. The biggest sources of upside where the company's trading and banking revenue (a big help to JPMorgan this quarter, and likely so for Bank of America (NYSE:BAC) as well), as well as much lower loan loss provisions (down 19% from the year-ago period and 22% from the fourth quarter).

SEE: Understanding The Income Statement 
Growth Still Challenging
While the company is seeing better investment banking and trading and lower provision expense, the underlying growth drivers for the bank are still pretty sluggish.
Total period-end loans were flat on an annual basis and down 1% sequentially, as stronger commercial lending was offset by weaker consumer lending, particularly in cards. Looking more specifically at the Global Consumer Banking segment, average retail loans were up about 2% sequentially, while card loans were down 1%. The strength in commercial lending was a bit of a surprise relative to what other banks have reported so far, and the decline in consumer card lending is a little bit concerning as other banks like Wells Fargo and JPMorgan look to accelerate their growth here.
The company's transaction services group also saw pretty sluggish results. Management blamed tighter spreads, and it's certainly true that the interest rate environment is not helping. I think it's also worth noting, though, that banks like JPMorgan and U.S. Bancorp (NYSE:USB) have been stepping up their efforts in this business. Perhaps I'm making a mountain out of a molehill at this point, but one of my long-term worries about Citi is that the company's need to retrench and refocus on cleaning up its credit has left it vulnerable to share loss – we've definitely seen the company cede a lot of share in mortgage lending, and losing share in lucrative non-banking businesses would be a bad thing for long-term returns.
The Bottom Line
It may go without saying that the value in Citigroup's shares today really depends on your view of how well the company will rebuild its franchise. While that's arguably true for every bank, Citi's fair value seems to jump around a lot more on the basis of those assumptions.
For instance, I am currently using a base assumption of a long-term return on equity of 9%, but if you bump that to 10% the fair value goes from about $47.50 to $54.50. Likewise, the company's price-to-tangible book multiple seems basically fair today given its return on assets, but could be 20% or more too low if you allow for improvements to “industry average” over the next 12-18 months.

SEE: 5 Must-Have Metrics For Value Investors
I'm not all that comfortable with the more aggressive/opportunistic assumptions at this point, as I do still have my doubts about the company's long-term share loss and whether it can really drive costs out of its global banking operations. Still, I would say that the odds favor optimism over pessimism. While I think JPMorgan, Wells Fargo, and U.S. Bancorp are all better values today (at least relative to their risk), Citi still looks undervalued and worth owning today.
At the time of writing, Stephen D. Simpson owned shares of JP Morgan.

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