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Citigroup’s Focus on Efficiency Could Boost Its Profitability

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Dec. 4 2020, Updated 10:52 a.m. ET

Expense control is key to profitability for banks

Earlier in this series, we highlighted the importance of expense control for banks in the prevalent environment of low interest rates. Controlling overhead expenses has been a key focus for US banks (XLF) as they struggle to remain profitable while containing rising costs in an uncertain and volatile environment.

Wall Street analysts keep a close eye on banks’ efficiency ratios. This ratio is especially important in the upcoming results, as low interest rates and global events have eaten into banks’ revenues.

The efficiency ratio is a measure of non-interest expenses as a percent of net revenue, and it shows how revenues fuel a bank’s operating expenses. A lower percentage is better, as it means lower expenses compared to revenues

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Citigroup’s efficiency ratio

Citigroup’s (C) efficiency ratio was 56% in 2Q15 and 66% in 3Q14. Clearly, the bank has been focusing extensively on efficiency through cost controls and exiting low-return segments that led to a lower efficiency ratio. In comparison, Bank of America’s (BAC) efficiency ratio in 2Q15 was 67.4%, and it was 59% for JPMorgan Chase (JPM). Wells Fargo (WFC) reported an efficiency ratio of 58.5% in 2Q15.

In the current scenario, banks are boosting their profitability through expense control. Banks’ valuations are derived by the returns they are able to generate on the assets and shareholders’ equity. These are key measures to profitability for banks.

In recent quarters, Citigroup’s earnings have been beating Wall Street’s estimates, and the bank has been posting better-than-expected profitability ratios. During 2Q15, it earned 9.1% ROE (return on equity) and 1.06% return on assets (or ROA). For the upcoming results, analysts expect Citigroup’s ROE to be 8.85%, and its ROA is estimated to be 1.08%.

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