Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

Citigroup Inc.'s risk takers are once again leading the charge. So far, it's been all rewards.

The bank on Friday reported second-quarter results that were better-than-expected, including revenue for the period of $17.9 billion, or nearly $450 million more than analysts were anticipating. The results are the latest in a string of good news for Citi. Just last month, it flew through the U.S. Federal Reserve's stress tests, allowing the bank to double its dividend. Citi shares are up some 12 percent this year, significantly outpacing all of its big bank rivals.

Thank-You Points
Citi's investors have rewarded the bank this year for a big boost in its dividend
Source: Bloomberg

But the business that is giving Citi a good portion of its boost should give investors with any memory a pause. Every dollar and then some of Citi's better-than-expected revenue came from its trading business, in particular the buying and selling of bonds and commodities. Trading is thought to be on the retreat on Wall Street, especially at the big banks. Regulations were supposed to ensure that. But while other banks, including securities powerhouses like Morgan Stanley, have been putting their emphasis elsewhere, Citi has been leaning in.

Citi's $3.2 billion in revenue from FICC (fixed income, currencies and commodities) trading in the second quarter essentially ties it with rival JPMorgan Chase & Co. as the biggest bond trader on the street, and well ahead of Bank of America Corp. It's also taking market share: A year ago, Citi was $500 million behind JPMorgan.

Top Tier
Citigroup and JPMorgan are now neck-and-neck in the bond-trading business
Source: Bloomberg
Based on their most recent reported quarter, as of July 14, 2017.

That success in trading has made Citi much more reliant on a business that is one of banking's most volatile, and it's giving the financial giant's results a more pre-crisis look. Citi generated just 10 percent of its revenue from trading when it exited TARP, the government financial crisis bailout fund, in late 2009. Nearly 19 percent of its revenue now comes from bond trading, not much different than pre-crisis, but much more than most of its peers. Fixed-income trading accounted f0r just 13 percent of revenue at both JPMorgan and Bank of America. Wells Fargo, mostly a lender, doesn't break out its trading division.

Upping Its Game
Citi has boosted its trading operations at a time when most other banks have been cutting the percentage of overall revenue they get from the business
Source: Bloomberg
Based on the most recently reported quarter, as of July 14, 2017

At the same time, Citi's trading operation itself has gotten a lot more risky at a time when rivals have sought to make their bond operations less vulnerable to sudden losses. Its value-at-risk, a measure banks report each quarter reflecting potential daily trading losses, is now by far the highest of any of the large banks, at $86 million as of the end of the first quarter. But VaR factors in market volatility, which is currently historically low. Adjust for that and Citi's VaR is up 21 percent in the past year to $144 million. 

Risky Behavior
As Citi's trading revenue has grown, it Value-at-Risk has risen more than rivals
Source: Corporate Filings, Bloomberg
Bank VaRs have been volatility adjusted

Regulators and investors don't seem to be acknowledging all the extra risk Citi is taking on. In last month's stress test, the Fed estimated that the bank would have trading losses of $8 billion in another financial crisis, or $1.5 billion less than Goldman, even though Citi's trading operation is now about twice the size of Goldman's. Investors, too, exuberant about Citi's dividend hike, seem to be missing the trading risk. Citi's shares now trade at 13 times next year's earnings, only a slight discount to JPMorgan and Bank of America's price-to-earnings multiple of 14. What's more, Citi's largest consumer business, credit cards, where it generates 28 percent of its income, is one of the areas of lending starting to show signs of strain.

Financial markets remain calm. But if that changes, Citi's investors could be in for a fright.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Stephen Gandel in New York at sgandel2@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net