Citi Fortifies Its Foundation

NEW YORK (TheStreet) -- Since shares of Citigroup (C) reached a low of $25.15 in July of 2012, the stock has been one of the best performers in any industry, soaring 120%. And this was while the company has been in what many analysts consider to be a mode of perpetual restructuring.

Be that as it may, with the likes of Bank of America (BAC) and JPMorgan Chase (JPM) having had their own issues with internal controls, astute investors were dissuaded by the perceived dim lights in Citi's businesses. But new CEO Michael Corbat has just completed his first full year at the helm, and I believe the Street should acknowledge that Citi is no longer under siege.

[Read: There's No Shame in Loving Bank of America]

Don't, however, misinterpret this for an "all is clear" signal. As with Bank of America, which I happen to like, Citi still presents some operational risks. Citi has been losing share to both Wells Fargo (WFC) and Bank of America in overall loan growth. Severe damage was done to Citi's brand here in the U.S., and the bank's global presence remains under attack by JPMorgan Chase.

These deficits notwithstanding, the pace of Citi's recovery is well ahead of management's schedule. This would be an incredible turnaround even from a longer-tenured CEO, much less from one that has only four full quarters under his belt.

With Citi due to report its fourth-quarter earnings results on Thursday, management will look to convince investors that the bank can maintain the pace of its recovery. Equally important will be the new strategies management outlines to get Citi back to operating more like the large money-center bank that it is. And with the housing recovery in full swing, I don't see any potential drawbacks.

The Street will be looking for 96 cents in earnings per share on revenue of $18.19 billion, which would represent a year-over-year revenue decline of 2.5%. By now, declining revenue seems to be a recurring theme for banks during this earnings season -- at least that's the case among the large money centers.

Citi's projected 2.5% revenue decline matches expectations for Bank of America and falls in line with projections for JPMorgan Chase. Interestingly, though, investors ought to be encouraged by the fact that Citi is expected to outperform Wells Fargo, an arguably better-run bank, for which the Street projected a 6% decline in revenue.

As I've said on more than one occasion, this is not an industry that is driven by the revenue results -- at least not in the post credit-crisis era. After the struggles that have plagued this industry, and specifically Citi, investors should focus on the results for things like the debt and credit valuation adjustments.

These (among other metrics) will be key in helping Citi meet or exceed its earnings-per-share target, and will give investors a certain level of confidence about management's plans to create long-term value. As with Bank of America, which has had to overcome similar deficits and has installed new leadership, Citi needs to produce better fee-income growth.

If management can strengthen Citi's core banking operation by focusing on things like credit-cost reduction and growing its mortgage business, Citigroup could perform relatively well, if not become an immediate threat to JPMorgan and Wells Fargo in loan originations. This means that, despite underlying weaknesses, Citi can still produce above-average returns for investors -- even while the once-sluggish interest rate environment is suddenly beginning to improve.

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As Corbat continues to erase questions about Citi's long-term strategy, I believe too much fuss continues to be made over Citi's perceived adverse yield curve -- the metric that is used to predict the bank's economic output changes and growth potential. While these may be near-term concerns, I believe the bank's progress tips the long-term risk/reward scale more in the bank's favor.

So until there are meaningful signs of declining profitability or market share erosion, investors should remain optimistic. Given Corbat's careful attention to operating expenses controls, not to mention Citi's better-than-expected performance improvements in return on equity, I don't see anything standing in the way of this stock going higher.

At the time of publication, the author held no position in any of the stocks mentioned.

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

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