Thanks to financial market turmoil in Europe, after a hiatus lasting nearly three years, investors have returned to blindly selling their holdings in the largest financial institutions. Banking giant Citigroup (NYSE:C) has been no exception, and its stock appears to now be discounting an overly bearish outlook on its future growth and profit prospects. (For more on how the banking industry has changed, check out The Evolution Of Banking.)

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Third Quarter Recap
Net revenues came in at $20.8 billion and were basically flat from last year's third quarter revenue figure of $20.6 billion. For reporting purposes, Citigroup has divided itself into two. The first unit consists of the core Citicorp operations, which accounted for just over 85% of total revenue. The rest has been named Citi Holdings and consists of problem loans from the credit crisis. This book of soured loans has been steadily sold off or eliminated and fell to $289 billion in early 2010. This is now a very small percentage of Citigroup's total asset base of nearly $2 trillion.

Total reported net income jumped 74% to $3.8 billion, or $1.23 per diluted share. Excluding a credit value adjustment to increase the reported value of "Citigroup's fair value option debt and derivatives, net of hedges," earnings would have been $0.84 per share. Also included in this figure was a release of loan losses of $1.4 billion as the company becomes more confident that losses it expected in the past will not actually turn into losses. Citi Holdings reported negative net income of $802 million.

Outlook
For the full year, analysts expect reported revenue to decline more than 9% and fall to under $79 billion. They project earnings of $3.81 per share for year-over-year growth in the mid-single digits.

The remaining Citi Holdings assets consist of $117 billion in risky mortgages in North America and $45 billion in other securities, loans, leases and trading assets. There is still considerable risk that Citigroup will find it challenging to unload them, especially if the global economy again heads south. However, it appears that risk of loss is down significantly and the bank has decided it now only needs to set aside $2 billion to cover future expected losses.

The rest of the operations look to be solidifying and contain a healthy mix of profitable consumer and commercial banking as well as transaction and security-based services across the globe, with Latin America, Asia, and Europe huge sales and profit drivers. This global exposure sets Citigroup apart from U.S.-centric rivals including JPMorgan Chase (NYSE:JPM), US Bancorp (NYSE:USB), PNC Financial (NYSE:PNC) and BB&T (NYSE:BBT).

The Bottom Line
At 56% of tangible book value of $49.50 as of quarter end, the stock appears to be discounting investors' worse fears over Citigroup's future. If these fears turn out to be less severe than expected, it's easy to see the stock more than doubling and earnings reaching $6 per share within a few years. (For more on valuing your investments, read The Value Investor's Handbook.)

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