Getting there

Citi's new test: building on return to mediocrity

Citigroup's second-quarter showing sets a new test for Chief Executive Mike Corbat: building on the bank's return to mediocrity. The firm earned $3.9 billion profit, after stripping out accounting gains, in the three months to June. While that's the best, cleanest performance in years, it means Citi is still a tad shy of covering its cost of capital. The task now is to prove these results are the foundation for longer-term success.

All banks need to show they can produce in a tougher environment, one with a welter of new regulations and a Federal Reserve less willing to intervene in the market. But Citi's checkered history puts even more onus on its current leaders to demonstrate the staying power of the institution's slow turnaround since the financial crisis.

Citi has been whacked by virtually every major imbroglio since the 1980s, from that decade's Latin American loans debacle to domestic losses in the early 1990s to the 2008 markets blow-up that left it needing a $45-billion bailout. The bank's involvement during the 2000s in scandals at WorldCom, Enron and Parmalat as well as its infamous Evil bond trades were major embarrassments, if not franchise-threatening ones.

Investor skepticism has been harder to shrug off this time, as it has been for most of the financial services industry. As a laggard, though, the bank's stock is only now on the verge of hitting tangible book value, implying shareholders reckon its assets are properly valued and its earnings sufficient to exceed operating costs. In fact, excluding the $570 million income hit from Citi Holdings leaves the core business cranking out an almost respectable 11 per cent return on tangible equity.

That's encouraging. And as Citicorp earns more and Holdings loses less, the bank should be able to boost the bottom line by using more deferred tax assets and freeing up more capital - though it's a multi-year process and handing excess equity back to shareholders will need regulatory approval.

The trick, though, will be to avoid being burned by future disasters - be they interest-rate gyrations, problems in emerging markets or anything else Wall Street can cook up. Bypassing them will be a sign that Citi may have finally escaped its past.