Citigroup's Second Quarter Earnings

Citigroup's second quarter earnings were interesting. In no systematic order, we noted a few key items. Citicorp's North American banking operations, the old John Reed core business, saw deposits grow by 12% year-over-year. Expenses are down 21% year-over-year. Tier I capital ratio improved to 12.7% at the end of the quarter. The interest margin was healthy but can go higher once the separation of the companies and asset sales are done.

Their credit card business and their mortgage business, both now sequestered into Holdings, look like delinquencies are still increasing and charge-offs are ahead. Consistent with this view, provisions of $9.9 billion for Holdings were consistent with a similar level in 4Q 2008. These trends are visible in the slide presentation to accompany the call and shouldn't be a surprise going forward. Sub-par performance from the credit card master trusts impacted Citigroup in the quarter. It's hard to see how this plays out and over what time horizon.

The other piece of good news is that Richard Parsons seems to be quietly improving relationships with all the multiple regulatory bodies overseeing Citi, and it no longer seems as if anyone is looking to take Citi as a scalp for being a reluctant ward of the state.

The one thing that is now a serious issue, in our mind, is the culture inside the organization, which has never been anything but awful even in the growth years. There is so much turnover and changes in reporting relationships, it's hard to see why anyone would be enthusiastic about helping the organization through the current crisis given the disconnect between risk and reward for all but the super-elite management. The troops need a mission, a message, and a strongbox full of lucre if the company succeeds that will be shared throughout the organization.