What separates one bank from its competitors? As banks in the United States continue to merge and oligopolize, the real answer is "not much." The four largest American banks are so dominant that the fourth-largest one by assets, Citigroup Inc. (C), has double the assets of the fifth-largest.

Citi introduced the ATM to the United States back in the 1970s and created more innovations along the way, including certificates of deposit and compound interest on savings accounts. The bank has broken ground in more dubious ways, too. It was one of the first beneficiaries of the Troubled Asset Relief Program (TARP) that rewarded mismanaged banks with billions of dollars (in Citi’s case, $25 billion) in taxpayer money following the 2008 mortgage crisis. In the year and a half before the Secretary of the Treasury graciously turned on the public spigot into Citi’s pockets, the bank’s stock price had fallen from over $500 to $35. After multiple splits and reverse splits, Citi's shares have remained in the double digits ever since, which is still high enough to give the bank a market capitalization around $157.14 billion as of October 30, 2018.

Citi released its Q3 2018 earnings on October 12, 2018. The bank reported revenue of $18.39 billion this quarter, compared to $18.2 billion over the same period last year. Here's how Citi makes its money.

A Tale of Two Citis

Citi found itself on the wrong side of history during the mortgage crisis one decade ago. The bank's decision to double down on subprime mortgages on the eve of the financial crisis resulted in losses of $17 billion in Q4 2008. In order to slow the bank's losses, Citi split its operations into two distinct subsidiaries: Citicorp and Citi Holdings.

"Citicorp is our core franchise and will be the source of Citi's long term profitability and growth," former-CEO Vikram Pandit said at the time. "We will manage our businesses and assets in Citi Holdings to optimize their value over time."

Citicorp, quite literally, controls Citi's "core" operations and is separated into three divisions: global consumer banking, institutional clients group, and corporate. The first of those divisions operates under the “Citibank” name. It handles the ordinary stuff you’d expect from a consumer bank, such as holding depositor funds, lending money to small businesses, and offering low-level financial advice. Citibank is also the home of Citi’s card operations, which we’ve learned time and again is where banks enjoy some of their most highest profit margins.

The institutional clients group is the second of Citicorp's divisions. This is where Citi performs its traditional investment banking, such as corporate and securities lending. When Sprint Corp. (S) merged with Japanese company SoftBank, Citi served as the lead financial advisor. Institutional clients business fell 2% to $9.2 billion in Q3 2018. Citicorp's final division is its corporate department, which is analogous to corporate departments in other non-bank entities. It’s an account for day-to-day operations, payroll, the bank’s own real estate holdings, and other items necessary to conduct business. It’s not a moneymaker, but it’s vital. Corporate revenue also fell 5% to $494 million in Q3 2018.

Citi Holdings on the other hand, manages a small portfolio of $54 billion assets, which equates to only 3% of Citigroup's total balance sheet. At its peak, Citi Holdings administered more than $800 billion worth of assets, which would make the subsidiary the fifth-largest bank in the country — both now, and when it was created in 2009. In Q4 2016, however, Citigroup announced that it would no longer separate the company's results from Citi Holdings when reporting earnings.

Global Reach

Citi has approximately 200 million customer accounts and operates in over 160 countries, separating operations into four geographic regions: North America, Latin America, Asia Pacific, Europe, the Middle East, and Africa. Looking primarily at consumer banking by region, North America is by far Citi’s most profitable. The continent accounted for more than $5.1 billion in revenue in Q3 2018. A little less than half of that, $2.1 billion, comes from credit cards, the perpetual profit center for most banks

Europe, the Middle East and Africa remain a small market for Citi. In Western Europe, Citi barely registers. Its largest markets in this part of the world are Poland, Russia, and the United Arab Emirates; France, Germany and the United Kingdom are non-factors. Consumer banking revenue in Europe, the Middle East and Africa were barely $3 million billion for Q2 of 2018. Total net income was a mere $4.5 million for that quarter, which was driven by higher revenue and a lower effective tax rate, which worked to offset the higher cost of credit.

In Latin America, average loan balances are even higher. Consumer banking there generated revenue of $1.7 billion this quarter, a 20% increase from the same time last year. That leaves Asia, the region in which Citi’s securities banking is largest relative to its corresponding consumer banking. Consumer banking revenue on the world’s largest and most populous continent totaled $1.9 billion in Q3 2018, driven by growth in deposit, lending, and insurance.

The Bottom Line

From dominant shares of the banking market to influence over lobbyists, Citi has everything going for it. When a corporation gets repeated federal guarantees that it cannot go defunct, investors should take that as a green light and run with it. 

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