July 15,  5:00 pm EST

Second quarter earnings kick into gear this week.  It starts with the banks.  Today we heard from the third largest bank in the country: Citigroup.

Let’s look at some key takeaways.

First, in Q1, the expectations were set for just 2% year-over-year earnings growth from the big banks.  Instead, we had positive earnings surprises in each (Citi, Wells, JPM and Bank of America), for an average earnings growth of 11%.  So, we had double-digit earnings growth for the biggest banks in the country.

Now we’re looking at Q2.  While the bar has been set low again for the broader market (looking for an earnings contraction by 3% compared the same period a year ago), the view on the banks is much more positive for Q2.  Wall Street is looking for 12% earnings growth in Q2 from the big banks (on average).

Citi got it started this morning with good numbers – and positives surprises.

There was a significant bump in earnings due to Citi’s interest in a trading technology business that IPO’d last quarter. But if we strip that out, they still beat.  Most importantly, on that adjusted EPS (stripping out the gains from the IPO interest) they grew earnings by 12% year-over-year.  That follows 11% yoy growth in Q1.  Remember, this yoy comparison is against a very strong base — we had better than 20% yoy growth last year for the S&P 500 last year.  So, the banks are putting up good numbers.

We’ll hear from JP Morgan and Wells Fargo tomorrow.  And Bank of America will report on Wednesday.

What’s the best buy in the banks?

Citi is the cheapest of the four biggest U.S.-based global money center banks — still trading at a 30% discount to its peak market value (which was pre-financial crisis). Today it’s far better capitalized, better regulated and a more efficient business than it was in the pre-financial crisis days.

What about valuation?  The average tangible  book value of the big four banks is 1.4.  Citi trades at just book value (i.e. 1x).

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