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Citigroup: Balance Sheet Improvement Winner

The Federal Reserve Bank of New York said that "indexes for the six-month outlook pointed to a moderate degree of optimism about future conditions." Responses among manufacturers to an annual set of supplemental questions about hiring conditions yielded some interesting results. As one might expect, manufacturers said they were continuing to have difficulty finding enough workers with advanced computer skills. But the bank added that "a skill set that has reportedly grown harder to find is punctuality and reliability."

The KBW Bank Index (I:BKX) was down over 2% to close at 54.90, with all 24 index components down for the session, except for Citigroup.

Citi Continues to Strengthen

Citigroup on Monday reported first-quarter earnings of $3.81 billion, or $1.23 a share, compared to earnings of $1.2 billion, or 38 cents a share, in the fourth quarter, and $2.93 billion, or 95 cents a share, in the first quarter of 2012.

The fourth-quarter results were significantly lower because they included $1 billion in pretax expenses tied to incoming CEO Michael Corbat's major expense reduction initiative announced in December.

Citi's first-quarter revenue, excluding credit and debit valuation adjustments (CVA and DVA) and minority interests, totaled $20.81 billion, compared to $18.66 billion the previous quarter, and $20.22 billion a year earlier.

First-quarter highlights included a seasonal increase in fixed income and equity trading, a continued increase in investment banking revenue, and the utilization of $700 million in deferred tax assets (DTA). Citi's DTA arising from losses from the credit crisis and foreign tax credits disallowed from equity capital totaled $49.805 billion as of March 31. As the bank continues its profit streak and the strengthening of its balance sheet, investors over the long haul view the potential release of the entire DTA as the catalyst for a very large return of capital to shareholders.

Another highlight for Citigroup was the continued improvement of credit quality, which led to a $652 million reserve release during the first quarter, including $350 million in mortgage loan loss reserves.

Please see TheStreet's earnings coverage for full details on Citigroup's first quarter results, including the mortgage credit quality improvement within Citi Holdings, which is the company's runoff subsidiary.

Atlantic Equities analyst Richard Staite rates Citigroup "overweight," with a $54 price target, and said in a note to clients on Monday that "it was a low quality beat in that it was driven by trading revenues and reserve releases but other aspects of the results were positive," including the DTA recapture.
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