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Citigroup Inc. (C - Analyst Report) reported impressive second-quarter 2013 earnings, with a positive surprise of about 6%. Earnings per share came in at $1.25 for the quarter, beating the Zacks Consensus Estimate by 7 cents. Moreover, earnings were up 25% from the prior-year period, driven by higher revenues and lower net credit losses.

Notably, results in the reported quarter were impacted by credit valuation adjustment (CVA) and debt valuation adjustment (DVA). Including CVA/DVA and repositioning charges, Citigroup reported earnings of $1.34 per share.

For the second quarter, Citigroup reported net income of $4.2 billion, up 45% from the prior-year quarter.

Total provisions for credit losses as well as benefits and claims for the quarter were down 25% year over year at $2.0 billion. The improvement was primarily attributable to a 25% decline in net credit losses to $2.6 billion.

Performance in Detail

Revenues came in at $20.5 billion for the quarter, up 11% from the prior-year quarter. Excluding CVA/DVA and the Akbank loss in second-quarter 2012, Citigroup revenues rose 8% from the prior-year period to $20.0 billion. Moreover, the figure exceeded the Zacks Consensus Estimate of $19.6 billion. The rise was primarily driven by revenue growth in both Citicorp and Citi Holdings.

At Citicorp, revenues came in at $19.4 billion, up 11% year over year. Excluding CVA/DVA and the Akbank loss in the second quarter 2012, revenues were $18.9 billion, up 7% year over year. Higher revenues in the Securities and Banking and Global Consumer Banking businesses led to this rise. However, declining transaction services revenues were the downside.

Further, Citi Holdings reported revenues of $1.09 billion, up 16% year over year. Revenues came in at $1.07 billion (excluding CVA/DVA), up 17% from the prior-year quarter. The rise was primarily due to an increase in Local Consumer Lending as well as Special Asset Pool revenues, partially offset by a decline in Brokerage and Asset Management revenues.

Operating expenses at Citigroup were up 1% year over year at $12.1 billion. Increased expenses mainly reflected a rise in legal and associated costs.

Credit Quality

Citigroup’s credit quality improved in the reported quarter. Total non-accrual assets declined 12% year over year to $10.1 billion. The company registered a 17% year-over-year fall in corporate non-accrual loans and a 9% fall in consumer non-accrual loans.

Citigroup’s total allowance for loan losses was $21.6 billion at quarter-end or 3.4% of total loans, down from $27.6 billion or 4.3% in the prior-year period.

Capital Position

Citigroup continues to build its capital levels.

As of Jun 30, 2013, the company’s Basel I Tier 1 Capital Ratio was 13.3% and its Basel I Tier 1 Common Ratio was 12.2%, both reflecting the Basel 2.5 rules. Moreover, Citigroup’s estimated Basel III Tier 1 Common Ratio was 10.0%, up from 9.3% in the prior quarter.

As of Jun 30, 2013, book value per share was $63.02 and tangible book value per share was $53.10, up 1% and 2% respectively, from the prior-year period end.

Citigroup’s end-of-period assets were $1.88 trillion, down 2% year over year while deposits of $938 billion were up 3% year over year. Citi Holdings’ assets decreased 31% from the prior-year quarter level to $131 billion and represented merely 7% of the company’s total assets at second quarter-end.

Performances of Other Large Wall Street Firms

The second-quarter earnings season kick started with Wall Street biggies such as Wells Fargo & Company (WFC - Analyst Report) and JPMorgan Chase & Co. (JPM - Analyst Report). Wells Fargo achieved the fourteenth consecutive quarter of earnings growth by reporting earnings of 98 cents per share.

Results improved from earnings per share of 92 cents in the prior quarter and 82 cents in the year-ago quarter. Additionally, it beat the Zacks Consensus Estimate by a nickel.

On the other hand, JPMorgan delivered positive earnings surprise of about 11%. The banking giant reported record earnings per share of $1.60, surpassing the Zacks Consensus Estimate of $1.44 and the year-ago earnings of $1.21. With this, JPMorgan has delivered 6 consecutive positive earnings surprises.

Our Viewpoint

Following the volatile 2012 results, Citigroup began 2013 on a positive note and continued its impressive results into the second quarter. With the surge in revenues, on the whole, its profit level also surpassed expectations.

Citigroup’s underlying franchises of the consumer businesses have remained strong but revenues have persistently been under pressure for the past several quarters. Considering the tepid economic recovery, we believe that robust top-line expansion will remain elusive in the near term.

Moreover, though Citigroup’s strategy to shrink non-core assets will improve the valuation over time, the reduced Citi Holdings portfolio is expected to cause revenue challenges, partly limiting the upside potential of the stock. Additionally, with the thrust of new banking regulations, there will be pressure on fees and consequently, loan growth could remain feeble.

The clearing of the stress test this year showed how Citigroup’s efforts to streamline its operations have borne fruit. Over the past few years, the company has been restructuring its business, making several layoffs, selling assets and trimming costs.

Citigroup has come a long way since 2008, when it had to take a bailout of $45 billion to survive the economic downturn. Through the stress test clearance and these restructuring initiatives, the company has shown the improvement in its capital position since 2008.

However, Citigroup should not be complacent with its capital enhancement initiatives. The company should continue to strive for improvement in its balance sheet and capital ratios.

Further, reduction in provisions for future losses and improved credit trends are expected to counter the negatives. One can consider a company such as Citigroup to be a sound investment option, given its global footprint and attractive core business. It is also among the best reserved banks.

Moreover, Citigroup currently carries a Zacks Rank #3 (Hold). Among other Wall Street banking majors, Goldman Sachs Group Inc. (GS - Analyst Report) is slated to report second-quarter earnings on Jul 16.

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