Citigroup Inc Earnings: Profit Plunges Higher Legal Costs and Lower Trading Revenue

By Markets Fool.com

Continue Reading Below

This morning, Citigroup became of third big bank to miss profit targets for the fourth quarter of 2014 thanks to a large increase in legal expenses and lower revenue from trading.

For the three months ended Dec. 31, the nation's third-largest bank by assets earned $350 million, compared to $2.5 billion in the same period of the previous year.

This, of course, didn't stop CEO Michael Corbat from trying to put the results in a positive light. "We strengthened our capital planning process and made Citi a safer and stronger institution, as evidenced by the increases to our capital, leverage and liquidity ratios," Corbat said in prepared remarks.

To be fair, there's really no other direction for Citigroup to go from here but up, as the bank earned a mere 0.4% on its average common equity. It is generally assumed a bank must return 10% on its equity simply to satisfy the cost of common capital. Anything below that threshold suggests value is being destroyed, as opposed to created, for a bank's shareholders.

Today's news didn't help matters. Roughly two hours into the trading session, Citigroup's shares were off by more than 2.5%.

Continue Reading Below

C Chart

Citigroup's shares now trade for one of the largest discounts to book value in the industry. At present, they are valued at 27% less than book value -- which theoretically implies the bank is worth less than the aggregate value of its assets.

There were nevertheless a handful of reasons for investors to be somewhat optimistic about Citigroup's performance. First, the lion's share of the drop in earnings resulted from higher legal expenses. Legal and related expenses, as well as repositioning charges, totaled $3.5 billion in the fourth quarter, compared to $1 billion in the prior-year period.

Additionally, like JPMorgan Chase and Bank of America, much of Citigroup's top-line decline resulted from elevated market volatility in the latter half of 2014, which caused institutional clients to reduce trading volumes. Revenue from its fixed-income trading unit was particularly hard hit, falling by 16% on a year-over-year basis, "driven by difficult trading conditions in spread products as well as a challenging macroeconomic environment that affected the rates business."

Finally, Citigroup saw considerable improvement in its so-called "bad bank" -- that is, Citi Holdings, which contains the bank's portfolio of noncore legacy assets dating back to the financial crisis. This has been the biggest drag on Citigroup's earnings over the last few years, but has finally started to recede into the background. Not only was the unit profitable in the fourth quarter, it generated a full-year profitfor the first time since its inception.

The takeaway for current and prospective Citigroup investors is that the global banking behemoth is still a work in progress. Does it trade for an enticing discount to book value? Absolutely. But as we saw last quarter, there are good reasons for that.

The article Citigroup Inc Earnings: Profit Plunges Higher Legal Costs and Lower Trading Revenue originally appeared on Fool.com.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Citigroup Inc, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.