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Don't Dawdle, Uncover 15% Value in Citigroup's Earnings

NEW YORK (TheStreet) -- With better-than-expected results from Wells Fargo (WFC) and JPMorgan Chase (JPM), there were concerns that banking giant Citigroup (C) was getting a run for its money.

While Citigroup has the largest global reach amongst the major banks, this also means that Citigroup is highly weighted against the global economy. Not to mention, Citigroup still has a strong dependency on the housing recovery.

Among other reasons, these realities played a role in the bank failing the Federal Reserve stress test. As a consequence, the bank was denied its attempt to raise its quarterly dividend to 5 cents and institute a $6.4 billion stock buyback.

To add insult to injury, Bank of America (BAC), which has had similar (if not, greater) operational struggles, had its planned capital return proposal approved. For Citi, these (among other reasons) were cited as cause to avoid the stock ahead of the bank's first-quarter earnings report. But faithful shareholders were nonetheless rewarded.

Driven by management's diligent expense-controls, Citigroup posted $1.30 in earnings per share, which beat last year's mark by a penny and beat consensus estimates by more than 10%. While revenue of $20.1 billion was down 1% year over year, this was enough to match most estimates.

The revenue struggle, while still important, is not unique to Citigroup. Both Wells Fargo and JPMorgan suffered their own setbacks. This has been the result of a weak interest rate environment. In the case of Citigroup, the dip in revenue was driven mostly by a 3% decline at the bank's Citicorp division. Weakness in the the segment's Institutional Clients Group and Global Consumer Banking  divisions was mostly to blame.

But the key in the report was the still the sharp rise in earnings, which Citigroup helped by a 1% decline in operating expenses. Management has worked diligently to shed the bank's poor-performing assets, which helped offset legal expenses and costs related regulatory and compliance.

The bank has come under fire in recent weeks. But these results, including a slight improvement in the bank's efficiency ratio, demonstrate that the worst is over. And with 20% year-over-year decline in total costs of credit, the Street owes Citigroup an apology for underestimating the pace of its turnaround efforts.

Although the bank's dependence on an improved economy and housing recovery don't inspire great confidence, it also means that Citigroup is better positioned to capitalize when business conditions are back in full swing. For now, investors have to be encouraged that management is doing as good of a job as can be expected.

As it stands, the bank is no longer in "a mode of perpetual restructuring," as has been claimed. Citigroup, by dint of its new leadership and meaningful operational improvements, does not carry the same investment risk as it did two years ago.

These results continue Citigroup's recent streak of quarterly performances that answer questions about the bank's long-term strategy. To the extent management can maintain Citigroup's core banking operation by focusing on things like credit-cost reduction and growing its mortgage business, Citigroup will regain its status among JPMorgan and Wells Fargo.

And at around $48 per share, Citigroup stock is trading at a P/E that is 1 point and 2 points below Wells Fargo and JPMorgan, respectively. And when you factor in Bank of America's P/E of 18, which is 7 points higher, Citigroup is the best bargain in this sector. On similar metrics, the stock will trade at $55, or 15% higher.

At the time of publication, the author did not hold any stock in the companies mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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