In the first quarter, Citigroup (NYSE:C) reported a profit of $2.9 billion, which was about the same as last year’s number. But there were some signs of growth — in the equity and debt market business. On the news, the stock rose 1.8% in today’s trading.
For the year so far, the stock has posted gains of about 27%. Yet they came after a tough 2011, which saw the stock fall a grueling 44%.
Is Citigroup on the right track? Or should investors be wary? Here’s a look at the pros and cons:
Pros
Global Platform. This is a key advantage for Citigroup. For decades the company has expanded into many countries, including Asia and Latin America. The strategy has not been without its risks, but it has provided diversification. The global footprint will also be key for long-term growth.
Capital Requirements. Citigroup indicated that it increased its capital base in the quarter. This is encouraging since the company flunked the Federal Reserve stress test in March.
So as it bolsters its capital, Citigroup will eventually be able to pay dividends — perhaps even in 2012.
Cost-Cutting. Citigroup is making progress on this front — it plans to cut more than 1,000 jobs in its trading division. But there should be lots more room for pruning of the organization.
Citigroup also continues to streamline its operation by unloading non-core assets. In the latest quarter the company sold equity stakes in Akbank TAS (a bank in Turkey), Shanghai Pudong Development Bank and Housing Development Finance (which is based in India).
Cons
Macro Economy. Even though the U.S. economy is showing progress, there are still risks. Unemployment remains high, and problems in Europe continue. China is also showing signs of a slowdown. In Citigroup’s earnings conference call, CEO Vikram Pandit was fairly cautious on the macro-economic outlook.
Regulations. Since the financial crisis, President Barack Obama and Congress have passed landmark legislation on the banking industry. Some of the key provisions include lower fees for overdrafts and interchanges and restrictions on proprietary trading. As a result, it will be tougher for banks to grow.
Low Rates. At its core, a bank profits from the difference between the rates it pays on deposits and the interest it charges on loans. The problem is that, because of the policy of the Federal Reserve, that margin has been extremely thin. To deal with this, banks have been moving toward fee income, but it’s not enough to make up for the fall in net-interest income.
Verdict
All in all, Citigroup is showing progress. But there are still some headwinds, such as the regulatory environment, as well as the uncertain global economy.
Besides, Citigroup shares have already had a strong move. In fact, the whole industry — including Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) — has enjoyed a bull run lately.
In light of all these factors, the cons outweigh the pros on Citigroup stock for now.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
