Citi Slept Here

07/18/2011 2:55 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

“Citi achieved another solid quarter of operating performance as we continue to execute our strategy,” Citigroup (C) CEO Vikram Pandit said on Friday, as the bank released its second-quarter earnings report.

Huh? Vikram and I must have read different quarterly reports.

The one I saw showed a bank that still hasn’t been able to generate any significant revenue growth in its home market. And is seeing earnings grow only because its reserves for bad debt are falling.

I do see one bright spot in Citigroup’s international business, but I sure don’t see a “solid quarter of operating performance.” But rather than engaging in a battle of the spin, let’s look at the numbers that the bank reported.

(Remember that we’re actually talking about the numbers for three different entities. There’s Citigroup, the entity that includes both Citicorp and Citi Holdings. Citicorp encompasses the bank’s ongoing business. Citi Holdings contains the assets and business that the bank is trying to either dispose of or run off.)

Second-quarter net income for Citigroup climbed to $3.3 billion, up 24% from the second quarter of 2010, and 11% above the first quarter of 2011.

Much of this came from a release of $2 billion in credit reserves, as credit quality in the bank’s portfolio continued to improve. More than half of that improvement was attributable to Citi Holdings. At Citicorp, the net release from reserves in the quarter was $914 million.

Revenue for Citigroup as a whole actually declined by 7% from the second quarter of 2010, but climbed by 5% from the first quarter of 2011. Revenue at Citi Holdings fell by 18% in the second quarter, year-over-year.

That’s perfectly reasonable. The bank is selling off the businesses and portfolios in Citi Holdings, and revenue should decline as the asset base does.

Assets in the quarter fell 34% from the second quarter of 2010, to $308 billion. That’s still a lot of assets left for disposal, but it is more than $500 billion less than the peak level in the first quarter of 2008.

Revenue at the businesses that Citigroup wants to continue to operate—those in Citicorp—fell by less than 1% from the second quarter of 2010.

Revenue from North America continued to lag. Revenue from regional consumer banking in North America, for example, was down 9% in the quarter. Citicorp also saw a 10% increase year-over-year in operating expenses.

But the bank’s international business, and especially its emerging-market business, did well in the quarter. International regional consumer banking revenue, for example, climbed by 15% in Latin America and 10% in Asia.

Income growth didn’t keep up with revenue in these markets, however, as the bank continued to invest in building (or re-building) its international business. Operating expenses in the international regional consumer banking business climbed by 19% in the quarter.

So, all in all, where does Citigroup stand?

Clearly the bank still has a huge amount of work to do, to sell off the rest of the assets in Citi Holdings and to rebuild its North American operations, so the bank generates revenue growth in its home market again.

With most US banks having trouble generating revenue growth, it’s not clear to me how much of this problem is due to macroeconomic conditions, and how much of it is specific to Citigroup.

For years, the reason to own Citigroup has been the potential of its international brand. The company seems to be successfully re-investing in overseas markets. But progress in that area isn’t likely to be reflected in the bank’s share price until Citigroup can produce growth in the United States.

In short, I think there are better banks—and more attractive bank bargains—for your portfolio allocations in this sector.

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Home Inns and Hotels Management and Mindray as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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