Citigroup's Risk-Reward Ratio Looks Pretty Good

NEW YORK ( TheStreet) -- Assessing the risk-reward trade-off for Citigroup ( C) continues to be the biggest challenge for the big bank's investors.

Being that Citi has the largest global reach among the major banks, including JPMorgan Chase ( JPM), also means that the company is highly levered to the global economy. This is in addition to Citigroup's dependency on the housing recovery.

While these dependencies don't inspire great confidence, Citigroup stands to outperform its peers if/when both housing and the global economy improve. To that end, the first-quarter earnings report, which included a 3% year-over-year increase in revenue -- also 12% higher sequentially -- was a good sign that things are taking a turn for the better.

Granted, the growth in the revenue figure arrived when excluding credit- and debt-valuation adjustments. Still, relative to expectations, and the fact that this was Citigroup's first full quarter under new CEO Michael Corbat, there's plenty cause for optimism.

What's more, core revenue rose 2% year over year and 13% sequentially. This is despite negative results in transaction services and a lackluster showing in Global Consumer Banking, which arrived flat. Citigroup also posted sluggish net interest income, which arrived 1% lower than last year and down 2% sequentially.

It's worth noting here, though, that while these numbers seem uninspiring, not much was expected in terms of performance. If you recall, when Citigroup reported on its fourth quarter, management had essentially thrown everything out, including the kitchen sink. In fact, during the fourth-quarter announcement, Corbat uttered the following words:

"Our bottom line earnings reflect an environment that remains challenging with businesses working through issues like spread compression and regulatory changes as well as the costs of putting legacy issues behind us."

These words, specifically, "putting legacy issues behind us," were a reminder to investors that although growth is still a priority, Corbat's focus was also on fixing Citigroup's nagging fundamental issues, which includes stabilizing U.S. banking, while shoring up the global brand.

There are also pressing concerns such as poor loan growth, a market in which Citigroup has been losing share to the likes of Wells Fargo ( WFC). Then again, Citigroup actually beat estimates on its pre-provision net revenue (PPNR), while Wells Fargo missed.

Along similar lines, when compared with JPMorgan's net interest margin (NIM), which declined almost a quarter-point year over year, Citi's NIM performance, which declined just 4 basis points year over year and by 1 basis point sequentially, looked retty solid. Relative to expectations, the first-quarter report was actually pretty good.

That said, growth drivers still seem pretty lethargic. The fact that average retail loans were up only 2% sequentially while card loans were down 1%, are two examples. This means that the Global Consumer Banking segment is still weak.

Similarly, management has to figure out ways to get consumer lending growing again as loans for the quarter were flat year over year and down 1% sequentially. Here, too, it seems that both Wells Fargo and JPMorgan are stealing market share. Despite Citi's strong showing in commercial lending, the bank is still being hurt on the consumer side.

While there continues to be plenty of optimism with Citi's recovery strategy, there are also plenty of risks that are not of the "quick fix" variety. That said, this recent earnings report suggests that a turnaround is underway.

Given management's efforts to better control costs and Citi's improving performance, these shares don't appear too demanding today. Sustained growth, both in domestic and global operations, along with the housing recovery, could push the stock to $55 per share by the end of the year. 

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.
Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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