The second-quarter earnings kickoff began in earnest, with Citigroup (NYSE:C) releasing its Q2 fiscal 2018 results. This is a critical moment for the big bank, as well as its rivals JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC), which also released their earnings results. But for Citigroup earnings, this moment symbolized the chance for redemption.

Just prior to the Q2 report, C stock had the worst performance on a year-to-date basis among the big banks, which also includes Bank of America Corp (NYSE:BAC). Citigroup lost its shareholders almost 8% in their portfolios. This isn’t too far off from the 7% loss seen in WFC shares. The difference, of course, is that Citigroup isn’t embroiled in controversies and scandals.

On a broader note, sentiment ahead of Citigroup earnings was generally positive. The U.S. Federal Reserve indirectly provided the biggest tailwind when it “revealed that both large and regional domestic banks have enough capital resources to survive crisis situations.” This so-called “stress test” is a response to public concerns following the 2008 financial crisis.

To further ease minds, this year’s stress test was more severe than the prior year’s edition. Having said that, the Citigroup earnings was the best chance for management to prove its viability over the competition.

So how did Q2 stack up? Let’s take a look at the numbers:

Citigroup Earnings Produced a Mixed Bag

Wall Street consensus pegged the Citigroup earnings per share at $1.56. The banking firm exceeded that target with a $1.63 EPS, or a 4.5% surprise. All told, Citigroup delivered $4.49 billion in net income. These metrics compare favorably to last year’s Q2 results of $3.9 billion in net income ($1.28 EPS).

What wasn’t advantageous for C stock was the revenue picture. The consensus called for $18.512 billion, whereas Citigroup only managed $18.469 billion. While the difference is extremely slight — we’re talking about a 0.23% spread — investors wanted substantive growth, not “paper growth.” In light of growing challenges in the domestic and international economy, prospective buyers sought clues on longer-term viability.

What they received from this latest Citigroup earnings was a tepid performance. Although EPS exceeded consensus, market professionals largely expected not only a beat, but a relatively solid one. The unpleasant surprise was revenue growth. Yes, it exceeded the $18.2 billion haul from Q2 2017, but only by a small margin. More critically, investors worried about the context of the revenue miss.

Internationally, the Citigroup earnings for Q2 demonstrated favorable results. Their Europe, Middle East, and Africa (EMEA), Latin America and Asia divisions all increased by 6% year-over-year. However, the North America market slipped by 1% to $8.515 billion. That’s an indicator that not everything is bright within our economic recovery.

The biggest disappointment, though, was corporate-lending revenue. This division dropped 20% YoY, further reaffirming doubts about the economy. It’s one thing to hit EPS targets, which bake in various factors. But sales are sales. Unfortunately, this latest Citigroup earnings points toward unaddressed vulnerabilities.

Tough Challenges Ahead for Citigroup

Moving forward from the Citigroup earnings, one of the biggest challenges for the banking institution is revenue diversification. More to the point, management must find ways to consistently boost non-interest income over the longer-term, specifically lending-related revenue.

That’s because I’m not entirely sure how long other non-interest income components like trading revenue can last. Throughout this year, we’ve witnessed turbulent and volatile sessions, which gives buy-and-holders headaches. But this dynamic provides shorter-term traders and market professionals the movement they need to work their magic.

In turn, the constant buying and selling rings up the big banks’ trading desks. But if the major indices soar, or if people otherwise lose interest in the markets, trading revenues will suffer. And this could negatively impact initial public offerings, which has represented a substantive boon for underwriting banks.

For Citigroup in particular, non-interest income is worrisome because it has declined 9% to just under $27 billion from 2014 through 2017 end. In contrast, net-interest income declined by a lower rate of 7% over the same timeframe. Stated differently, Citigroup can’t generate service-related income as it does passive income.

Frankly, I’m surprised that more people aren’t raising a fuss about this situation. An economic recovery isn’t a healthy one if banks aren’t lending money for major purchases, such as real estate. While unemployment has hit multi-year lows, that metric doesn’t mean anything if workers can’t advance.

Moreover, banks aren’t guaranteed to enjoy their interest-related income. When I wrote about Bank of America in April, I noted that “the average premium for holding a 30-year Treasury note to maturity compared to the 10-year note is less than 4%.” At time of writing, it’s 3.5%.

If this yield curve inverts, a recession could be in the mix.

Bottom Line for Citigroup Earnings

Ultimately for the Citigroup earnings, the one thought that keeps coming to mind is that the honeymoon phase is over. On paper, the company exceeded EPS forecasts. However, insiders expected as such because of share buybacks and one-off tax benefits.

But Citigroup, like its big-banking peers, symbolize economic bellwethers. If the Citigroup earnings were truly impressive, we’d see that reflected in top-line sales. That figure was the one that surprised financial experts. And while company executives will undoubtedly spin the Q2 report as a strong international showpiece, foreign revenues combined is only 11% greater than U.S. sales.

As soon Citigroup released its Q2 results, CNBC reported that C stock fell 1% in pre-market trading. Half-an-hour before the market opened, it dipped to 1.5% before clawing back up to a 1% loss.

This tells you what you need to know about the Citigroup earnings. It exceeded results where analysts expected it to. However, most investors were looking for substantive justification to risk getting into C stock. The company didn’t provide that reassurance, and so the outlook is now cloudy.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.