A Resurgent Citigroup Records Another Solid Quarter

Narrow-moat

We think Citigroup’s management team is doing an excellent job given the current circumstances, and the quarter’s results support this thesis. Expenses related to Citi Holdings fell by more than half a billion dollars during the year, and the company reduced staff by 18,000 employees over the same time frame. Citigroup had clearly expanded its operations far beyond optimal levels in the boom years, and we think a smaller, more profitable company is far preferable to the unmanageable behemoth that existed in 2007. At the same time, capital has increased to exceptionally high levels--the bank’s balance sheet is now supported by $185 billion in tangible common equity, compared with less than $50 billion as it entered the 2008 downturn.

This capital now supports a high-quality balance sheet. Within the core business, delinquent consumer loans actually decreased during the quarter, both in the U.S. and around the world. Furthermore, there was relatively little change in corporate credit quality, with energy loan performance stabilizing to some extent as oil and gas prices rebounded. We believe the market is underestimating the improvements that have been made on the asset side of the balance sheet over the better part of a decade.

Citigroup’s Institutional Clients Group also appears to have held its own during the quarter. Investment banking revenue was down in an uncertain macro environment, but trading revenue remained strong, up 2% from last year.

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