Earnings up 17% at Citigroup in First Quarter

By John Maxfield Markets Fool.com

Citigroup's (NYSE: C) latest quarterly performance confirms that the nation's fourth-biggest bank by assets is making progress on its yearslong efforts to recover from the financial crisis. It reported first-quarter earnings on Thursday, which climbed by 17% compared to the year-ago period.

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"The momentum we saw across many of our businesses toward the end of last year carried into the first quarter, resulting in significantly better overall performance than a year ago,"said CEO Michael Corbat in prepared remarks. "Revenues increased in both our consumer and institutional lines of business, most notably in areas where we have been investing such as Equities, U.S. Cards and Mexico."

Citigroup Chairman and CEO Michael Corbat. Image source: Citigroup.

Two things, in particular, helped to fuel the rise in Citigroup's earnings.

The first was substantially higher trading revenue. Fixed-income trading revenue grew 19%, while equity trading revenue was up 10% in the three months ended March 31. This trend was facilitated by easy year-over-year comparisons, as trading revenues plunged in the first quarter of last year due to heightened uncertainty about the global economy.

Notable Metrics

1Q17

Year-Over-Year Change

Trading revenue

$4.4 billion

17%

Provision for credit losses

$1.7 billion

(19%)

Net interest margin

2.74%

(18 bps*)

Net income

$4.1 billion

17%

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*Basis points. Source: Citigroup.

Citigroup was also able to meaningfully reduce the amount of money it set aside in the first quarter in anticipation of future loan losses. Its provision for credit losses, which has the same impact on a bank's net income as expenses do, fell 19%, or $383 million. This, too, was helped by the year-ago period, during which provisions rose in anticipation of loan defaults throughout the energy sector as oil prices dropped below $30 a barrel.

It's worth pointing out that Citigroup's operating expenses continued their downward trend in the first quarter, as well. The New York City-based bank spent $46 million less on expenses during the period than it did in the same quarter last year. This is particularly impressive given the ascent of regulatory and compliance costs at banks since the Dodd-Frank Act was passed in 2010.

These three positive trends were more than enough to counteract the two aspects of Citigroup's business that weighed most heavily on its bottom line in the quarter.

In the first case, even though the Federal Reserve has boosted the fed funds rate twice since the beginning of December, Citigroup's net interest income nevertheless declined by 3%, or $370 million, versus the year-ago period. A slightly higher cost of funds and a lower yield on earning assets combined to compress Citigroup's net interest margin by 18 basis points.

The other negative trend, though Citigroup couldn't do much about this, was a nearly $1 billion increase in income taxes. That equated to a 20% rise over the same period last year.

All told, Citigroup earned $4.1 billion in the quarter, up from $3.5 billion in the first quarter of 2016. That translates into a 7.4% return on average common equity, which is below the standard 10% threshold that investors tend to expect from a bank like Citigroup. However, it's nevertheless a marked improvement over the 6.4% return on average common equity that the bank reported a year ago.

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John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.