OREANDA-NEWS. Citigroup (Citi) reported a 0.89% return on assets (ROA) in the second quarter of 2016 (2Q'16), higher on a sequential basis following a challenging first quarter, though down from a year ago, according to Fitch Ratings. Earnings improved on a linked-quarter basis despite a challenging environment including low interest rates and global uncertainty, as well as continued investments in cards and technology.

The quarter's results also include the acquisition of the Costco portfolio on June 17th, with over $11 billion in balances, and the renewal of key partnerships in North American cards, including Home Depot and American Airlines.

It is estimated that the partnership renewal with American Airlines will lower pre-tax earnings by $50 million per quarter through the end of next year, with the impact to earnings expected to increase somewhat in 2018 as certain additional revenue sharing arrangements become effective. Citi disclosed it now has all of its significant partnerships and retail services secured through 2020 or beyond.

Citi's long-term ROA expectation for branded card is between 225bps and 235bps and retail services at 250bps, which is consistent with returns Citi reporting entering the financial crisis.

In terms of Global Consumer Banking, net income in international consumer banking was higher on a linked-quarter basis and year ago basis reflecting lower expenses and credit costs, combined with continued momentum in Latin America retail banking, partially offset by lower wealth management and retail lending revenues in Asia.

Conversely, net income in North America consumer banking declined both linked-quarter and from a year ago. Citi reported a modest benefit from the Costco acquisition, offset by the continued impact of higher reward costs and the impact of partnership renewals.

In terms of the Institutional segment, fixed income revenues improved 14% from a year ago reflecting a 25% increase in rates and currencies, with particularly strong performance in the days following the UK referendum, which was partially offset by lower spread products revenues. Equity markets were down 4% from a year ago (excluding a $175m valuation adjustment last year) driven by lower market activity.

Investment Banking was down 6% from a year ago due lower industry-wide equity underwriting activity and lower corporate lending revenues. Partially offsetting this, Citi continued to build momentum in Treasury & Trade Solutions, which was 5% higher both sequentially and from a year ago.

Citi Holdings once again was profitable, albeit at a lower level than last quarter and a year ago. Beginning next year, Citi Holdings will no longer be separately reported reflecting the company's view that the remaining assets are not material enough to warrant separate reporting.

In terms of Citi's exposure to energy, Citi's energy funded exposure in the ICG segment totaled $57bn at June 30, 2016, with a still relatively high 73% of exposures rated investment grade. The make-up of Citi's higher-grade clients enabled them access to the capital markets, which remained open in June. Citi disclosed that the cost of credit related to energy was minimal in 2Q16.

Citi also disclosed its energy exposure in the GCB segment at $1.4 billion in funded loans and $2.0 billion in exposure, with most of the exposure in North America. Given the relatively weaker credit profile of this segment, with roughly 77% sub-investment grade, Citi carries higher loan loss reserves in this segment at 9.8% of funded loans. In terms of asset quality outside of energy, consumer credit remained relatively stable from last quarter, while commercial nonaccruals once again increased due to energy-related loans in ICG.

Citi's capital ratios continue to remain very good and generally above global peers. The company's estimated Common Equity Tier 1 under Basel III on a fully phased-in basis increased again to an estimated 12.5%. The approximate 21 bps improvement from last quarter was due primarily to net income, and utilization of the DTA, partially offset by share buybacks and a deduction for larger card-related intangibles. CET1 also reflected lower risk-weighted assets.

Citi received no objection to its capital plan, and announced a planned 220% increase in the common dividend to $0.16 per share, pending board approval, and up to $8.6 billion in share repurchases.