If a part-time investor can read all of Citigroup's (NYSE:C) earnings and not get a headache, that is an impressive accomplishment. After all, just consider the impact of credit value adjustments (CVA) in this period - Citi incorporated a $1.1 billion loss into its earnings because its debt actually became more valuable. So, things are getting better at Citi, and that causes them to recognize a loss. That is just part of the fun-filled, anything-but-logical world of bank accounting, but investors who can maintain the patience and inner peace to look through all of this might still find an interesting recovery/rebound prospect in this stock.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

The Quarter That Was
Okay, here is a quick run-down of the major salient points of Citigroup's fiscal fourth quarter earnings. Revenue (excluding that CVA) was down about 6%. Weakness in investment banking (fixed income revenue was down almost one-third sequentially) certainly hurt, but a 3% net interest income was pretty feeble in its own right, as was the decline in net interest margin to below 3% (2.97%). Consumer banking was "stable" overall as pretty good overseas performance covered up for a 5% decline in North America.

Credit was better, as the NPA ratio improved 44 basis points (to 3.25%) and the NCO ratio declined as well, as non-performing loans dropped 13% sequentially. Feeling better about credit, Citi released about $2.3 billion from its loan loss reserves (that is, the company's charge-offs exceeded the provisions it took for bad debt), with a little more than half of that coming from the consumer business. On the other hand, the company is having to build its litigation reserves - a common issue these days for large banks like Citi, Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC) and others facing legal disputes with mortgage borrowers, mortgage insurers (like Assured Guaranty (NYSE:AGO), and mortgage buyers like Fannie and Freddie.

More Trouble Still to Come?
Speaking of Freddie and Fannie, Citi may not really be out of the woods here just yet. The company spent about a quarter-billion dollars this quarter buying back mortgages, but a Bloomberg report suggests that Citi has still been selling an unacceptably high percentage of bad loans to Freddie. Still, it would seem likely that the worst of the mortgage repurchase issue is over for Citi, at least as it pertains to the GSEs Fannie and Freddie. After all, if Bank of America got a pennies-on-the-dollar deal, why would Citi not expect the same?

Still Waiting for Real Recovery
Once again, Citi showed a sequential decline in its loan book, and the company's return on equity is still far below its cost of capital. Eventually, though, it seems probable that business will return to something closer to normal. The economy is in recovery and if banks like Citi, US Bancorp (NYSE:USB), and PNC (NYSE:PNC) are not eager to once again lend and build their loan books, they will lose share to smaller banks who are willing and able to grow their lending.

The Bottom Line
Citi clearly has a lot of problems yet to solve, but the stock nevertheless seems worth a look to patient (and risk-tolerant) investors. The stock trades at a 10% premium to its tangible book value and that implies a fairly ferocious level of skepticism about the bank's prospects. Assuming that the bank can get its return on equity back into the low teens (say, 13%) over the next five years, the shares could be worth around $6 a share - and that still assumes a double-digit cost of capital that would have seemed unthinkably high in the pre-recession days. (For more, see Different Shades Of Banking Profits.)

The one potential hang-up with Citi shares (apart from the prospect of larger legal bills and still more negative fallout from its reckless home lending bender a few years ago) is the relative value issue. There are quite a lot of banks trading below fair value today, and banks like TCF Financial (NYSE:TCB), Washington Federal (Nasdaq:WFSL), Prosperity (Nasdaq: PRSP) and Zions (Nasdaq:ZION) have a growth kicker and/or buyout target edge that Citi cannot match. Still, the opportunity to get a huge bank 25% (or possibly more) below fair value is not an opportunity that comes along every day. (For more, see Banking Profits In Bull And Bear Markets.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  2. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  3. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  4. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  5. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  6. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  7. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  8. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  9. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  10. Investing

    Don't Freak Out Over Black Swans; Be Prepared

    Could 2016 be a big year for black swans? Who knows? Here's what black swans are, how they can devastate the unprepared, and how the prepared can emerge unscathed.
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
Trading Center