We know that banks can be too big to fail or too big to manage, but can they also be too big to grow?
That’s the elephant in the room after Citigroup (NYSE:C), the original one-stop-shop financial supermarket, posted its latest quarterly earnings. Yes, business is getting better. The balance sheet is stronger. The worst is behind the bank.
But it’s sure hard to see where the profit and revenue growth is going to come from. And the token penny-a-quarter dividend isn’t getting a bump anytime soon, so the stock doesn’t work as an income play, either.
On the domestic side, Citigroup’s quarter looked a lot like Wells Fargo‘s (NYSE:WFC), in that the mortgage business held its own. Record-low interest rates and stabilizing home prices are fueling increases in home loans and refinancings.
But Wells Fargo also benefited from being less reliant on investment banking and international operations — and those were drags on Citi’s numbers.
It’s not a good time to be a bank with sprawling global operations. Europe is struggling with sluggish-to-zero growth. Meanwhile, worldwide anxiety is pushing up the value of the dollar, which means earnings from overseas take a beating when they’re exchanged for ever-more-expensive dollars.
Citi CEO Vikram Pandit has bet the bank’s future on its international footprint, and yet that very sprawl is hampering results.
Citi’s earnings beat Wall Street estimates by 11 cents a share, but it wasn’t because business is booming. It’s more like management did a masterful job of keeping analysts’ expectations low.
Indeed, profit actually fell 12% from the year-ago-period on a 9.7% decline in revenue. That’s right: On both the top and bottom line, business is shrinking.
However, and important, the balance sheet is getting stronger. The bank was able to release nearly a billion dollars from its loan-loss reserves, thanks to more borrowers paying their debts on time. That boosted the bottom line, but it was also only about half of the amount Citi was able to release in the year-ago period.
Growth Is Hard to Find
So, although those reserve releases make the bottom line look better, they aren’t indicative of organic growth. And at the same time, the sharp drop from the year-ago period indicates that releasing loan-loss reserves is a windfall with a dwindling half-life.
Meanwhile, in the actual business of banking, growth was nowhere to be found. The securities and banking business saw no year-over-year increase. The North American consumer business was flat, too.
And as for overseas, the international consumer business would have grown 4%, but converting weaker foreign currencies into stronger greenbacks erased all of that gain.
Yes, Citi is healthier. The bank that famously failed the Federal Reserve’s March stress test should have more than adequate capital ratios under more stringent Basel III standards this year, Pandit said. And the CEO said Citi will seek permission from the Fed to raise its measly dividend probably sometime next year.
Citi is no longer on life support. It’s even been released from the hospital. But it’s hardly thriving, and it’s hard to see how it will as currently constituted. Whether it’s domestic troubles or international, revenue isn’t growing and continues to surprise the Street on the downside. The top line has now missed analysts’ estimates for three consecutive quarters.
A better balance sheet and lower expenses are all well and good, but the stock will ultimately trade on profit growth. In Citi’s case, the bottom line is bound up with its international strategy. And it’s hardly a good time to be counting on Europe or Asia to fill the till.
As of this writing, Dan Burrows doesn’t own any securities mentioned here.