On probation

Citi's mortgage payout removes only some shackles

Citigroup's $7 billion mortgage settlement with the US government removes only some of the shackles restraining the bank. Along with the payout, the firm announced on Monday that its bad bank, Citi Holdings, made money for the first time, excluding legal costs. Those are two signs that the behemoth run by Mike Corbat is finally pulling free of the financial crisis. What's emerging, though, is hardly an unfettered institution.

The bank is a serial underperformer. Set aside lawyer fees and the like for the three months to June, for example, and Citi earned $3.9 billion. That equates to an annualized return on equity of about 7.7 per cent. The rule of thumb is that a big bank starts covering its cost of capital at around 10 per cent. Citi has been stuck below that level for years.

That probably won't change soon. The consensus estimates of sell-side analysts do not envisage Citi breaching an eight per cent RoE by 2017. One reason may be uncertainty over whether the Federal Reserve will allow the bank to return capital to shareholders. Estimates show both revenue and net income rising, which implies Citi will be retaining more earnings as capital - a surefire way to reduce returns.

Citi can still do a lot to improve results on its own. Corbat has, for example, targeted an efficiency ratio of around 55 per cent by the middle of next year, a worthy target at present bested only by US Bancorp. Such a ratio would have boosted net income for the second quarter by some $900 million, but increased the equity return to only nine per cent. Raising that figure further would require a mix of greater revenue, the Fed's permission to return capital - and possibly dumping more businesses that aren't making the cut.

Citi also retains a knack for being in the wrong place at the wrong time. Consider the dodgy loans scandal that hit its Mexican bank unit, Banamex, earlier this year. The debacle in one of the sleepier, more straightforward parts of banking raises questions about Citi's internal process that have not yet been fully answered.

Putting some of the more obvious calamities of Citi's recent past behind it is useful. Now Corbat needs to show that the bank can prosper.