My fellow Fools, operating under the assumption you can’t properly evaluate a company as an investment if you don’t know exactly what makes that company tick, last week we kicked off an investigation of Citigroup Inc. (NYSE:C) by examining how the superbank generates its revenue.
This week we’re going to examine how much of that revenue makes its way to the bottom line, what eats it up along the way, how profitable Citi is relative to its peers, and how that profitability has changed over the years — all in the pursuit of better understanding Citi as an investment.
One for you, two for me
Referencing Citi’s first-quarter earnings report for 2013, we see the bank generated $20.5 billion in revenue, including CVA/DVA (for a full explanation of CVA/DVA, please see last week’s article). Out of that $20.5 billion, $3.8 billion eventually reached the bottom line. So what came between Citi’s $20.5 billion in revenue and $3.8 billion in profit?
In the first-quarter earnings financial supplement, we see the following expenses:
–Provisions for credit losses and loan losses and the like: $2.5 billion.
–Operating expenses: $12.4 billion. These include compensation and benefits, premises and equipment, advertising and marketing, etc.
–And finally, income taxes: $1.6 billion.
Throw in some miscellaneous expenses, and taking into account my rounding-off of the numbers along the way, and you see how Citigroup Inc. (NYSE:C) gets from $20.5 billion in revenue to $3.8 billion in profit. These are the kinds of expenses almost any big bank will incur in quarter to quarter operations, but some banks manage this process better than others.
The ultimate measure of efficiency
$3.8 billion in profit on $20.5 billion in revenue makes for a profit margin of 18.5%. Profit margin is a no-B.S. measure of operating efficiency, which is a direct outgrowth of management efficiency. How does Citi stack up against its peers on this all-important metric? For the same quarter:
—JPMorgan Chase & Co. (NYSE:JPM) earned $6.5 billion on revenue of $25.8 billion, for a profit margin of 25.2%.
—Wells Fargo & Co (NYSE:WFC) earned $5.2 billion on revenue of $21.3 billion, for a profit margin of 24.4%.
–And Bank of America Corp (NYSE:BAC) earned $2.6 billion on revenue of $23.7 billion, for a profit margin of 11.0%.
It’s clear to see which banks are the leanest and meanest here: the banks that are making the most out of what they take in. At least Citi didn’t come in last.