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.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers

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.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!