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Citi’s Turn to Shine



April 17, 2009 – Comments (4) | RELATED TICKERS: C

Following the Wells Fargo earnings beat pre-announcement and strong reports from JP Morgan and Goldman Sachs, investors were interested to find out if Citigroup (C) could make good on CEO Vikram Pandit’s promise of strong results last month.

The results?  A smaller loss than expected, except maybe it wasn’t really a loss, kind of. 

Analysts were expecting Citi to report a loss of 32 cents a share.  The reported number was a loss of 18 cents a share.  Now you’re probably asking how a loss might not really be a loss.  The answer.  Preferred stock dividends and a conversion adjustment.

Citi reported operating earnings of $1.6 billion for the quarter.  If my math is correct, that would have been about 30 cents a share.  Subtract preferred share dividend payments of $1.3 billion and a preferred share conversion adjustment of nearly $1.3 billion and those operating earnings turn into a loss of 18 cents per share.

Like most financials, the report included both good and bad news.

Positives include:

Actually earning money on an operating basis
Expenses down considerably
A reduction in riskier assets
A build in loan loss reserves. 

Negatives include:

Credit losses continuing to rise
Flat deposits when most of their competitors are increasing deposits
Pending share dilution from an upcoming preferred conversion
Government TARP unknowns.

The upcoming preferred conversion is something anyone with a position in C or who is considering a position needs to understand.  Not sure I understand it, but that’s never stopped me before.

Citi has offered to convert a bunch of preferred shares to common stock, including some of the TARP preferred.  Assuming I skimmed the registration statement correctly, there is a potential for nearly 16 billion new shares if all eligible preferred is converted.  The current float is only about 5 and a half billion shares. 

The preferred conversion comes with a lot of dilution, but it will substantially reduce the preferred dividend payout.  Maybe Citi reports a real profit next quarter.  Or not.


The Fed is loaning money at near zero, Wells Fargo pre-announces a record quarter, JPM and Goldman Sachs report strong results.  Citi follows that up with earnings that aren’t really earnings???.  If they can’t report a profit for a quarter with near zero Fed money, what will it take?

For what it’s worth, I red-thumbed C in CAPS this morning, but have no interest in putting real money on it either long or short.

Disclosure – Long WFC, no position in any other stock mentioned.

4 Comments – Post Your Own

#1) On April 17, 2009 at 9:31 PM, anchak (99.89) wrote:

Rd....I will give you something to chew on ......

On a simple revenue generation basis Citi's revenue was close to $25 BN .....which was at par with JPM ( who have had 2 acquisitions, Bear and WaMu) - remember I am talking revenue here - on a shrinking business model.

The calc on earnings is correct - however I think a lot of this is seasonal Q1 relief thing ( everyone shot their Q4)....

I think you may do well with the Red ( ie at least bank some accuracy)..... 

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#2) On April 17, 2009 at 10:37 PM, rd80 (96.82) wrote:

anchak - thanks for the comment. 

I just saw Morgan Housel's "Not So Fast, Citigroup" article covering a $2.5 billion write-up on Citi's own debt.  More required reading for anyone considering putting real money on Citi.  I missed the debt write-up in my review, good catch by Morgan.

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#3) On April 17, 2009 at 10:59 PM, anchak (99.89) wrote:

Interesting RD....this is essentially similar to the FASB 157 rule that AMBAC and MBIA employed to print profits in Q3....

Here I wrote a blog on it at that time.....

I will need to go thru the 10Q ......

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#4) On April 18, 2009 at 12:11 AM, BravoBevo (99.96) wrote:

The lead should read "Citi Turns Into Shinola."

I recommend this NYTimes article, which helps explain the legal (but questionable) shenanigans that Citi exploited to provide numbers that, if left unanalyzed, would appear to indicate a profitable fiscal quarter.  Here are some relevant quotes: 

"The headline number — a net profit of $1.6 billion for the first quarter — was not quite what it seemed. Behind that figure was some fuzzy math. ... Citigroup, the long-struggling company, also employed several common accounting tactics — gimmicks, critics call them — to increase its reported earnings.

Citigroup accounted for a decline in the value of its own debt, a move known as a credit value adjustment. The strategy added $2.7 billion to the company’s bottom line during the quarter, a figure that dwarfed Citigroup’s reported net income.  Under accounting rules, Citigroup was allowed to book a one-time gain approximately equivalent to the decline in the value of its own debt because, in theory, it could buy back its debt cheaply in the open market. Citigroup did not actually do that, however.

Citigroup also took advantage of beneficial changes in accounting rules related to toxic securities that have not traded in months. The rules took effect last month, after lobbying from the financial services industry.  Previously, banks were required to mark down fully the value of certain “impaired assets” that they planned to hold for a long period, which hurt their quarterly results. Now, they must book only a portion of the loss immediately. For Citigroup, this difference helped inflate quarterly after-tax profits by $413 million and strengthened its capital levels.

Citigroup and other banks also benefit simply by taking a sunnier view of their prospects. Banks routinely set aside money to cover losses on loans that might run into trouble. By squirreling away less money, banks increase their profits. During the fourth quarter, Citigroup added $3.7 billion to its consumer loan loss reserves, more than analysts had expected. In the first quarter, even though more loans are going bad, it set aside just $2.4 billion. Citigroup would increase its provisions if the recession deepened and that its reserves would be adequate."

I went "thumbs down" on Citi earlier this week, and I went "thumbs down" on Bank of America today. These may be the two largest problem "traditional" banks that the FDIC will have to sustain on life-suppport. (I'm not including everyone to which the Fed window has been opened, such as AIG and other insurance companies, financing arms of auto-makers and other manufacturers, etc.)

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