Fee income, which was up 19% in the quarter, is once again a significant driver of Citigroup's profits, helped by better-than-expected trading revenue. What this means is that, despite the weakness that remain in Citi's core banking operation, Citi, along with JPMorgan, is once again near the top in terms of investment banking.
Equally impressive is that despite the 10-basis-point sequential decline in net interest margin (NIM), the bank still benefited from an improvement in average earning assets, which contributed to a 3% year-over-year improvement in net interest income.
In the April quarter, management issued some warnings to investors and talked about working through "legacy issues," many of which have impacted upon Citigroup's ability to move forward from the height of the credit crisis. I've said it recently: I think management underestimated their ability to right this ship in the quicker-than-expected pace that they have.
As I've said before, Citigroup is not out of the woods yet. I believe the challenges that still remain in consumer banking (its largest business) serve as evidence that there is work still left to do. But the bank is navigating the trough pretty well, helped (in part) by its diligent operating expenses control - a strategy that's also working for Wells Fargo.
To the extent that management can continue to balance expenses and grow income fees, it makes a strong argument for better-than expected performance improvements in return on equity (ROE), which is currently at 5.22%.
With the stock trading today at around $52 per share, 8% ROE would place the stock at around $56 per share, which still seems too conservative. I believe Citi can reach $60 per share by the end of the year, which assumes ROE of roughly 11.5%, which is 2% lower than Wells Fargo's ROE of 13.5%
At the time of publication, the author held no position in any of the stocks mentioned
This article was written by an independent contributor, separate from TheStreet's regular news coverage.