Citi half-way pretty

Ultra-efficient Citi needs efficient returns

Ultra-efficient Citigroup needs more efficient returns. The banking behemoth is now second only to US Bancorp in keeping costs down. And its net income of $4.85 billion for the three months to June was its best quarterly showing since 2007. But Citi is nowhere near its smaller rival's market-leading return on equity.

Citi now spends only 56 per cent of its revenue to cover costs. Not only is that way down on the 80 per cent it shelled out in last year's second quarter, when litigation charges were high. It's also the best in class of its big bank peers. Wells Fargo and JPMorgan both spent around 58 per cent of revenue and Bank of America 65 per cent, adjusting the latter two for special items.

Regional lender US Bancorp's 53 per cent showing beats them all and has a market-leading annualised return on equity for the quarter of more than 14.3 per cent. Citi, though, could only manage 9.1 per cent.

That's because of two major drags on the bank's balance sheet. First, it still has around $120 billion of toxic or unwanted assets in Citi Holdings, though that will drop to almost $90 billion by the end of the year. That takes up around $10 billion of capital. Another $33 billion is locked up in deferred tax assets, which are essentially tax credits from its crisis-era losses. Freeing up the former and utilising the latter, though, will take a long time.

That leaves Citi in the same boat as its rivals - lacking big revenue growth and hoping the Federal Reserve will raise interest rates. A one percentage point increase in short-term rates would boost revenue by $2 billion a year, though this would only give a small jolt to return on equity, even if the Fed were unlikely enough to oblige. For now, the most Citi can do is keep itself in trim.