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Citigroup’s Profitability Boosted by Lower Expenses

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Profitability improves despite low interest rates and global weakness

In this part of the series, we’ll take a look at profitability ratios of Citigroup (C) in the third quarter of 2015.

A key element gripping the US banking sector (XLF) is the prevalent near zero interest rate, which is acting as a drag on bank earnings. US banks earn lower returns on their assets as well as lower interest-based income when interest rates are low. In order to boost profitability in a low interest rate environment, banks are reducing expenses by restructuring their businesses and focusing on their core.

During the third quarter, net income for Citigroup rose by 51% to $4.3 billion. Much of this was attributable to the bank’s ability to significantly lower legal expenses to $376 million compared to the $1.6 billion reported last year. Operating expenses fell 18% to $10.7 billion.

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Return ratios for Citigroup

Bank’s valuations are derived from the returns they’re able to generate on assets and shareholders’ equity. These are key profitability measures for banks. Return on equity (ROE) fell to 8.0% from 9.1% in the previous quarter but rose sharply from the 5.3% reported in 3Q14. Return on assets fell to 0.9% from 1.1% in 2Q15 but rose from the 0.6% reported in the same period last year.

Capital return

During the quarter, Citigroup returned $2.1 billion to shareholders through dividends and share buybacks. The company repurchased 36 million shares of common stock. Citigroup has a weight of 0.35% in the Financial Select Sector SPDR ETF (XLF)(VFH). Wells Fargo (WFC), J.P. Morgan (JPM), and Bank of America (BAC) have weights of 8.7%, 8.1%, and 5.8%, respectively.

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