Citigroup has finally turned the page.
Nearly 10 years after the financial crisis began — 10 years Citi has spent doing everything it could to jettison nonperforming assets and reinvigorate itself — the bank has announced that it will no longer report Citi Holdings, its erstwhile "bad bank," as a separate entity.
In the first minutes of an earnings call on Tuesday that lasted nearly two hours, the bank's CEO, Michael Corbat, indulged in a walk down memory lane. He recalled how the business unit, at its peak, "had over $800 billion of assets generating, sometimes, multi-billion-dollar losses in a single quarter."
Citi Holdings has now strung together 10 profitable quarters in a row — a surprising streak given that the unit consists of assets earmarked for sale. And, after years of drastic reductions, it now comprises only $54 billion of assets, a mere 3% of Citi's balance sheet.
"The results of Citigroup today are driven by the core franchise, and we no longer need to distinguish between core and noncore," Corbat said during the call. "In short, restructuring is over."
It has been a dramatic turnaround. In the beginning, most people never believed it would happen, said Marty Mosby, an analyst at Vining Sparks.
But Mosby cautioned that in fact Citi is merely entering the second phase of its restructuring, a phase which will last at least through 2017. The bank continues to post significant legal and repositioning costs as it shrinks its retail network, sells assets and shutters some of its operations.
Legal and repositioning costs were $382 million in the fourth quarter, on total operating expenses of $10.1 billion. Citi's chief financial officer, John Gerspach, said such costs "will be a diminishing part" of Citi's story from now on, and that the bank hopes to be able to stop accounting separately for them in 2018.
Revenue declined 9% from the prior-year quarter, to $17 billion, though the drop — due entirely to the continued wind-down of Citi Holdings — was partly offset by a 6% uptick in Citicorp revenue.
Total loans increased only 1% overall, to $624 billion, from the fourth quarter of 2015, but that sort of modest growth is "what you want to see" right now, said Mosby. With the institution having worked so hard to reduce its risk, "the last thing this country needs is for Citigroup to all of a sudden turn the corner, take a big sigh of relief and jump right back into the pool," he added.
If the bank's loan growth were to double or triple its current numbers, that would be a warning sign, he said.
Overall, the megabank earned a fourth-quarter profit of $3.6 billion, up 4% from the prior year. Its earnings per share of $1.14 increased 8% year over year and beat analysts' estimates for the fourth straight quarter.
While Citi Holdings' revenue dropped precipitously, to $657 million — a 79% drop from the prior-year quarter — the unit still managed to post a profit of $87 million, beating even Gerspach's expectations. Citi's CFO had said at an investor conference last month that he expected the unit to show a "modest loss" for the first time in years.
During the call on Tuesday, Gerspach said he expected Citi Holdings to break even in 2017 even as its revenue continues to decline sharply.
"Holdings is a series of empty calories," he said. "The growth is going to come from Citicorp."
By that he meant steady growth in net interest income throughout 2017 and 2018. Citi is expecting at least one rate hike next year.
Like the chiefs of other top banks recently, Corbat sounded optimistic about the economic outlook under a Trump administration.
"Economic sentiment has clearly become more positive since the U.S. election," Citi's CEO said. "In general, we'll benefit from pro-growth policies, as will our clients. In addition, we see a path to more consistent interest-rate increases and revenue opportunities in areas such as infrastructure investment."
Among the bank's big bets on the future was the acquisition, earlier in 2016, of the Costco credit card portfolio. Since replacing American Express as the partner for Costco's co-branded cards — gaining 11 million cardmembers in the process — Citi has added more than 1 million new accounts to the portfolio.
As a result, Citi's North American cards business posted revenue of $2.2 billion for the quarter, up 15% from the end of 2015. As the promotional interest rates for new cardmembers convert later this year into full-rate revolving balances, the bank expects the portfolio to contribute substantially to its bottom line.
At times on the call, Citi executives clashed with analysts over what metrics to use when measuring the health of the bank and how soon certain benchmarks would be hit.
Gerspach said the bank is targeting an efficiency ratio of 58% for 2017, and aiming to hit "the mid-50s" the following year. When pressed, he defined the mid-50s as perhaps 56.7%, with 56.9% being the outer edge of Citi's target.
Another key metric analysts are watching is price to tangible book value. As recently as the summer of 2016, Citi's stock was trading more than 30% below its tangible book value. Today the gap is much narrower, with its tangible book value standing at $64.57 and its stock trading at $57.46.
Mosby and other analysts expect the gap to close altogether later this year, though it won't happen overnight.
"It's going to take time, it's not going to be fast," said Mosby. "It's a slow grind, which is what frustrates people, because they want it to turn the corner instantly. But this is an aircraft carrier, this isn't a speedboat. It takes years, not quarters, to get this thing trued-up in the right way that won't jeopardize it down the road."