NEW YORK ( TheStreet) -- Between the Senate's passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act bill and late-breaking news of Goldman Sachs' ( GS) settlement with the SEC, you could almost be forgiven for letting it slip your mind that Citigroup ( C) reports its second-quarter results tomorrow morning.

That is unless you've been holding Citigroup for the past three months (or longer) and watched it dance briefly above $5 back in April, shortly after its blowout first-quarter report, before sliding all the way below $4 until late last week.

Now, with the Treasury having made progress on selling out of its stake and financial reform a known quantity, the stock looks to be in a position to pop if CEO Vikram Pandit is able to post another strong profit for the June-ending quarter.

It would be Citigroup's second consecutive quarter of earnings and proof that the troubled bank is indeed on the road to recovery.

Oppenheimer analyst Chris Kotowski said in a recent research note that the second-quarter report is not about actual earnings, "but rather, first and foremost, the ongoing improvement in asset quality and secondarily, the ongoing disposition of the government's stake in the company."

It's been a tough slog up for Pandit, who has now been at the helm of the massive bank for two-and-a-half years, but it would be hard to argue he hasn't made significant progress in whittling down the bank's bad assets and setting it on the right course. The first-quarter's surprise profit was great validation for Pandit, and he will no doubt look to build on that momentum with the latest numbers.

A good sign came earlier Thursday as JPMorgan Chase ( JPM) once again beat Wall Street estimates with its profit of $4.8 billion, or $1.09 a share, a performance that got a substantial lift from the release of loan loss reserves. That would seem to bode well for Citigroup as it deals with many of the same consumer and institutional issues as its cross-town rival.

Citigroup will have some company in the headlines on Friday morning, of course, as Bank of America ( BAC) will also be reporting its numbers.


Analysts on average expect Citigroup to earn a profit of 5 cents a share in the quarter, according to Thomson Reuters. That compares to profits of 49 cents a share in the year-earlier quarter and 15 cents a share in the first quarter.

While the year-ago second quarter included a large gain related to the sale of a majority stake in Smith Barney to Morgan Stanley ( MS), Citigroup's first-quarter profit came on the back of strong fixed-income trading results and improved credit quality metrics. However, Pandit tempered Wall Street's future expectations at the time by saying the bank remained "cautious about the environment, given the uncertain economic recovery and high unemployment in the U.S."

Pandit added: "Realistically, we do not expect our performance to follow an invariable trend-line upward."

Citigroup is likely to show continuing improvement -- and lower provisioning -- for loan losses for the June-ending quarter, but the bank probably won't be able to release as large amount of loan loss reserves as JPMorgan did. Citigroup has one of the highest reserve-to-loan ratio in the industry of 6.8%, according to Susquehanna Financial analyst David Hilder.

So while JPMorgan's profit is pretty good indicator that Citigroup will remain in the black for the first half of 2010, it seems unlikely to have as significant a beat as JPMorgan.


Analysts on average expect Citigroup's revenue for the June period to come in at $22.61 billion, Thomson Reuters says, down about 12% on a sequential basis from the bank's total of $25.4 billion in the first quarter.

The main source of the decline for Citigroup is likely to be in its investment bank. Even top-ranked JPMorgan, in terms of league tables, experienced falling revenue in almost every category of its investment bank -- except equity trading -- for the June-ending quarter.

"While investment banking in general experienced a difficult quarter, Citi in particular appears to have underperformed many of its peers," debt research analysts CreditSights wrote in a recent industry note.

On the consumer side, Citigroup has been making efforts to build up its mortgage lending business in retail branches, particularly jumbo mortgages, as it refocuses to upper-stratosphere customers. So any progress on the lending front would be a big positive as well.

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Stock Performance:

The median 12-month price target for Citigroup is $5.50 -- a level that is somewhat aggressive considering that shares have bounced around under $4 for so long.

Citigroup fell along with the broad market this spring as macroeconomic factors, including concerns about European debt contagion, as well as the shape of financial reform and the U.S. Treasury's program share sales weighed on the shares. Ahead of the report, the stock finished Thursday at $4.16, down 1.2% for the session. At that level, it's still up 27.2% year-to-date, but it was more than 50% higher at 2010's peak.

Current analyst ratings are less bullish than 12-month price target would indicate. Out of the 21 analysts covering the stock, 11 are at either strong buy (4) or buy (7). The remaining 10 break down to seven holds, a lone underperform, and two sells.

Oppenheimer's Kotowski suggests that the U.S. Treasury's selling program will cross the halfway mark at some point this summer and be positive for the stock "because after that it becomes more and more credible with each passing day that the rest could be cleared up with a block trade."

"This would be positive with any large seller," Kotowski writes. " B ut particularly so in this case because it brings this whole sorry chapter of financial history to a close and lets the company return to a world in which normal commercial relationships are what really drive the company and the sentiment toward its stock."

Management Commentary:

Citigroup investors should expect management to address the progress its made in disposing of unwanted assets in its bad bank entity, Citi Holdings. They should also be listening for similar commentary as JPMorgan regarding credit quality.

While it's unlikely that Citigroup will have a large loan loss release like JPMorgan, any color given on the rate of losses in the bank's card and mortgage portfolio -- two of its most troubled businesses -- and a look at expectations for the rest of the year will get close attention.

--Written by Laurie Kulikowski in New York.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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