Tickers in this Article: C, BAC, WFC, USB, ITAU, BAP, ZION
The best thing that might be said about Citigroup's (NYSE:C) second quarter is that expectations for large banks had turned so sour going into July that it did not take much for this still-struggling bank to produce a little relief with its results. The problem with Citi is the same as it has been for a while - the bank is going to need time to heal. That means near-term momentum will be lacking, but the long-term prospects suggest there is some value here.

TUTORIAL: Top Stock-Picking Strategies

A Morass of Numbers for Q2
It would be easy to write at great length about the various parts of Citi and how they performed this quarter. In lieu of that, here is a quick summary of some of the most salient takeaways. First, while total company revenue was up 5% sequentially (and down 7% from last year), the parts of the business that management intends to keep saw revenue fall 1% on both a sequential and annual comparison.

Net interest income was flat sequentially and loans ticked up about 1%, helped by good sequential loan growth in the Citi consumer business - oddly enough, especially in mortgages. Adjusted non-accrual loans fell about 13%, and the company was quite successful early in the quarter at selling loans out of its special asset pool.

Still, it wasn't a perfectly clean quarter. Securities and investment banking revenue was down as expected and regional consumer banking is pretty weak overall, though quite strong in Latin America. Expenses are running high and Citi basically owes its beat to a $2 billion reserve release - more than half of which came from the special asset pool.

All in all, a fairly lackluster quarter, though the company is making steady progress at cleaning up its books.

More Global Than Some Realize
Although the U.S. mortgage mess dominates the discussion around Citigroup, some may be surprised that about 60% of the company's consumer banking business is in emerging markets. Citigroup is a major player in markets like Mexico and Brazil and is increasingly looking to Asia and Latin America as a growth engine. That is in sharp contrast to rival Bank Of America (NYSE:BAC), which has largely pulled back and sold out of many of its overseas holdings, and others like U.S. Bancorp (NYSE:USB) and Wells Fargo (NYSE:WFC) that never had an especially large global presence.

Why does this matter? Look at a company like Itau Unibanco or Creditcorp (NYSE:BAP) and its sizable loan growth. That sort of loan growth is not going to be seen again in the U.S. on any sort of sustainable basis. Simply put, the U.S. is over-banked, so a successful U.S. bank has to either fight hard to grow share in a slow-growth market, find other sources of revenue like U.S. Bancorp's sizable payment services businesses or find growth overseas.

The challenge, of course, is achieving sustainable and enduring growth. Plenty of European banks thought that Spain, Portugal, Greece and Eastern Europe were attractive markets before the loud bang after 2008.

Where To Now?
Right now, the American and European economies are staggering around and U.S. loan demand seems very shaky. On top of that, there is plenty of litigation yet to happen stemming from the mortgage boom and bust. Not to mention ample bad debt and foreclosed property to pass through to new buyers. That was always going to take awhile to resolve, and the sluggish economic conditions in the United States, the abundant new regulations and the political bickering in D.C. are stretching that recovery period even further.

Bottom Line
Citigroup looks like a value stock trading roughly 20% below its tangible book value. But that value is going to take time to come to fruition, and some investors may not be able to stomach the idea of an investment that takes years to ripen. Unfortunately, that's just the way it is now - the "clean" growth stories in banking are all pretty well-valued by now, so any interesting value stories like Citigroup or Zions Bancorp (Nasdaq:ZION) come with that obligatory call for patience. (For related reading, take a look at Analyzing A Bank's Financial Statements.)

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

comments powered by Disqus

Trading Center