Citigroup's (NYSE:C) problems were never the sort that were going to allow a quick fix, and some of the risk in the stock has centered around the company being too aggressive in trying to compensate for past mistakes. While a slowdown in many overseas markets is a definite risk factor to the near-term growth outlook, Citi seems to be sticking to a multi-year recovery strategy and it looks like the bank will be in decent shape in two or three years' time.

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Progress Evident in Q2
Bank accounting is messy in the best of times, and virtually impenetrable when it comes to a large, global diversified financial business like Citigroup. Consequently, the bank's reported operating earnings of $1.00 (against a consensus estimate of 89 cents) have to be taken with at least some grain of salt.

Overall, Citigroup saw revenue fall 7% sequentially, as a big drop in securities and banking (investment banking) outweighed some growth in transaction services. Revenue in global consumer banking was down about 2%, as the bank continues to see a soft U.S. banking environment and its substantial global operations see a slowdown.

Fee income rose 7% sequentially, while net interest income fell 5%. Core Citicorp net interest income was down 2%, as the bank saw a slight (nine basis points) decline in net interest margin. Period end loans were up 3%, though, and expenses were down 2% sequentially.

Citi is also seeing solid credit trends. The non-performing asset ratio improved 15 bp from the first quarter, while the net charge-off ratio also improved. Overall, Citi saw lower-than-expected loan losses and the trends in the credit card business seem to be improving. What's more, the bad assets within Citi Holdings continue to shrink.

SEE: Why You Should Stick With The Big Banks

Where Will Tomorrow's Growth Come from?
Citigroup is somewhat unusual among large American banks with its substantial overseas retail banking operations. Plenty of banks, including Bank of America (NYSE:BAC), do business overseas, but not to the extent that Citi does. Large positions in markets like Mexico and South Korea, not to mention sizable operations in countries like Brazil, China and Australia do give the company exposure to markets that should see faster growth than the U.S. in the coming years.

I do wonder, though, about the company's plans for its U.S. retail operations. Citi is definitely making progress with cost-cutting, but the company's share of mortgage originations is well behind that of Wells Fargo (NYSE:WFC), and I wonder how the bank will compete with up-and-comers like PNC (NYSE:PNC) or entrenched solid operators like U.S. Bancorp (NYSE:USB), given the bank's focus on lowering its costs and its higher cost of capital.

SEE: The Banking Industry in 2012

The Bottom Line
The ongoing investigation into LIBOR bid rigging may represent some risk to Citigroup, but I think government regulators are going to face a hard choice when it comes to meting out punishment. One must ask just how far will regulators go in punishing and fining banks that their government has spent tens of billions of dollars supporting, propping up and recapitalizing?

Barring a real global economic meltdown that would force further asset sales to maintain capital ratios, I think Citi has interesting potential based on its international retail banking operations. Unfortunately, it's going to take time for that value to come through and the company's i-banking and U.S. retail operations are still facing a lot of challenges.

The good news for Citi is that there is a lot of earnings potential in this business. What's more, at only around half of tangible book value, the Street still has not fully bought into that potential. Citi definitely has above-average risk at this point and the bank may well struggle to achieve even high single-digit return on equity on a sustained basis. That said, the sizable returns potential of these shares does make it worth a look for aggressive investors looking for high-risk/high-return plays in U.S. banking.

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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