Citigroup: Expanding Its Balance Sheet while Reducing Risk

Balance sheet expansion

Citigroup’s (C) balance sheet has been growing at a faster pace in recent quarters. Its total assets increased 3% YoY (year-over-year) to ~$1.9 trillion at the end of the second quarter of 2018. It was mainly helped by higher deposits, new assets, increased lending, rate spreads, and broking assets. However, the disposal of some legacy assets and share repurchases partially offset the growth.

Citigroup: Expanding Its Balance Sheet while Reducing Risk

Citigroup’s deposits in the second quarter grew 4% YoY to $996.7 billion. An improving US economy and a strong jobs market have helped boost its deposits. Additionally, a highly volatile market situation has increased its earnings from trading activities.

Loans for the quarter grew 4% YoY to $671.2 billion. Credits to the corporate sector increased 9% YoY to $347.5 billion, while consumer loans inched down 1% to $323.6 billion.

Winding down risky assets

Over the past few quarters, Citigroup has been winding down legacy assets, which has been helping it lower risk-weighted assets on the balance sheet and improve the risk-reward scenario for shareholders.

The bank’s sustained focus on expanding its balance sheet with quality assets and share repurchase programs is helping it attain a higher ROE (return on equity). Return on average equity rose to 9.2% in Q2 2018 from 6.8% in Q2 2017, mainly due to higher revenues, lower credit costs, and lower taxes. Its second-quarter return on average assets improved 9 basis points (or bps) YoY to 0.94% from 0.83% in Q2 2017.

Peer performances

Citigroup’s major competitors are JPMorgan Chase (JPM), Bank of America (BAC), and Goldman Sachs (GS). They’ve been seeing strong deposit and credit growth and higher spreads over the last few quarters. All these factors have enhanced their ROE. In the second quarter, JPMorgan’s ROE improved 360 bps YoY to 14%. Bank of America’s ROE of 10.9% for the second quarter was 250 bps higher YoY. Similarly, Goldman Sachs’s ROE expanded 230 bps to 11%.

Citigroup, together with these competitors, make up ~28% of the Financial Select Sector SPDR ETF (XLF).