The perennial poster child of troubled U.S. banks is showing signs of life.
There were many reasons why Citigroup’s earnings for the second quarter, released a week ago, might have elicited familiar groans. Revenue from its North American retail operations plunged by 26 percent, thanks in part to an abrupt drop in the refinancing of mortgages due to rising interest rates.
Worse, the bank agreed to a $7 billion settlement with prosecutors over its dealings in mortgage-backed securities before the financial crisis, twice what analysts had initially expected and 20 times what Citi had first offered.
Yet in the wake of all this bad news, Citi’s shares rose.
In part, that’s because Citi’s troubles are, for the most part, reassuringly typical of American banks.
Wells Fargo, America’s biggest bank by valuation, had previously announced its first decline in earnings per share since the financial crisis thanks largely to the refinancing drought.
By the same token, Citi’s income from trading bonds, currencies and derivatives fell no more dramatically than that of its rivals.
Even the settlement may have cheered investors. Although the accompanying statement of facts fingered the bank for giving misleading information about the quality of the mortgages that underpinned securities it sold, there was little to fuel private lawsuits seeking compensation.
The most incriminating element was an e-mail from an unnamed trader saying, “I would not be surprised if half of these loans went down.”
No employees have been charged with any sort of fraud related to the sales. Moreover, a provision of the settlement protects Citi from prosecution on similar grounds for its sales from 2005 to 2007 of another sort of toxic financial instrument — collateralized debt obligations.
Attention is now shifting to Citi’s future.
Michael Corbat, its boss since 2012, has concentrated on cutting costs and selling unprofitable businesses.
But there are also hints of growth: lending rose by 4 percent, thanks to strong demand from European and American companies. Profits from advising on mergers and underwriting stocks and bonds were up, too — possibly a sign of bigger banking opportunities ahead.
Citi’s market capitalization remains far lower than its accounting value, suggesting that concerns remain about hidden problems. But the disparity has begun to shrink, as has the premium it pays to borrow.
As one fund manager puts it, the debate over Citi’s prospects has shifted from whether it might die to how it might survive.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.