For years, shareholders have put up with declining returns as the bank grew through risky acquisitions and took outsized risks to deliver on impossible return targets.
Now, with new CEO Mike Corbat at the helm, the bank is on a massive restructuring drive that could see it become smaller, more efficient and more stable.
Judging by the positive reaction to Citi's first quarter results, it is clear that shareholders are watching the transition closely and are willing to reward any signs of progress.Citigroup shares were up 3.28% to $46.34 in midday trading. The third-largest U.S. bank beat expectations in the first quarter on higher trading revenues and reserve releases, which would normally be considered a "low-quality" beat, because those are not sustainable drivers of growth. But Citi is also earlier in its credit recovery cycle compared to healthier peers such as JPMorgan Chase or Wells Fargo, because it has a more troubled balance sheet. The continued release of mortgage reserves and consumption of deferred tax assets that have trapped capital are likely to provide a boost to profits in the upcoming quarters. Besides, improvement in credit quality is a necessary condition for Citi to complete its overhaul. "We have always maintained that improving asset quality is way more important than just the impact of declining provisions," Oppenheimer analyst Chris Kotowski wrote in a report. "It is important because once a bank management is out of the fire-fighting mode where they are throwing money at problems to staunch the bleeding, they can focus on optimizing the business and running it efficiently. Capital builds up nicely too, and that gives people more comfort in the balance sheet and earns a higher multiple." Another promising development evident in the first quarter is that Citi Holdings, the bank's non-core arm that is in wind-down mode, is now a much lower drag on profits. A combination of asset sales and improving credit has helped shrink losses in the division from $1.05 billion in the fourth quarter of 2012 to $794 million in the first quarter.