Ah, bank accounting. I can’t think of any industry where the rules give a company more absolutely legal leeway to turn a terrible quarter into a good one.
Exhibit 1: Citigroup’s (C) October 15 third quarter earnings report.
The company reported a $101 million profit, absolutely astounding every analyst on Wall Street.
For all of 15 minutes anyway. The stock is down 6.6% for the day as I write this at 2:30.
Why didn’t anybody buy the turn-around story? After all this was a bank that posted a $2.82 billion loss in the second quarter of 2008.
Because the numbers just don’t add up.
Citigroup’s consumer business continues to bleed a flood of write offs on credit cards and other loans. Charge offs in the quarter came to almost $8 billion.
But the bank added a paltry $802 million to its loan loss reserves. That made sense, CFO John Gerspach, said on the company’s conference call, because the bank sees a “moderation in growth of consumer net credit losses.”
Sees where? It’s not apparent to me in looking at the numbers the bank reported. And JPMorgan Chase, which has run a tighter ship than Citigroup throughout the financial crisis, didn’t see it when it reported its third quarter results the day before.
That bank put aside another $2 billion in loan loss reserves in the quarter. That was higher than the $1.4 billion or so that Wall Street had projected.
Citigroup, on the other hand, put away just $802 million. That was about 25% of what Wall Street had been estimating.
And notice what CFO Gerspach said. Not that net credit losses were falling. Not even that they’ve stopped increasing. But just that they’re increasing at a more moderate rate.
And that’s your justification for putting aside less than $1 billion in additional reserves?Â
I’m sorry but it conjures up an image of a late night meeting where Citigroup’s officers sit around saying, “Well, let’s show a profit that will surprise everyone. But not too big a profit since nobody will believe that. So how much can we reserve and still show some black ink?”
Please.
This accounting flim-flam is not the biggest of Citigroup’s problems, actually.   The bank is still dependent of using bond guarantees from the Federal Deposit Insurance Corp. (FDIC) to raise capital. The bank had more than $70 billion in FDIC-guaranteed debt as of June 30. And the bank has added at least another $15 billion more of FDIC guaranteed debt since then, according to David Hendler at CreditSights in a note he wrote on October 12.
That program is scheduled to end on October 31.
Hmmm. You don’t supposed Citigroup is trying to dress up its financials so that it cank raise capital without the guarantees, do you?
Nah, couldn’t be. Bankers would never muck around with their accounting to make things look better than they are to confuse a less-than-careful investor.
Notwithstanding all of the above I am a buyer of C in the mid fours and I will make an excellent return if I am patient. Unless the Sheik sells..then all bets are off since he is a main reason C was a rescue.
I love the comments about Goldman. Can there be any doubt they are, to put it nicely, “better informed” traders than the rest of us? I have noticed however that if you wait a couple days after a GS downgrade of a quality company you can pick the stock up for a pretty decent short term gain. If I had enough money perhaps they would tell me when they are about to downgrade someone!
YX, John Reed. Boy that’s a blast from th past. Reed’s sin, the one that got him booted to the sidelines, was to believe he could build the world’s best consumer bank–and that the profits from that would be enough. How that franchise has fallen. Walk into any Citigroup branch in Manhattan and then walk into any Chase branch. The Citi branch feels down at the heels. The technology is old and second rate. (Not to say Chase is a great consumer bank. Hey I take my kids to TD Bank (once Commerce). They still have lollypops. What bank in its right mind doesn’t understand that a 3 cent lollypop is a very cheap way to build lifelong customer loyalty.
dblwyo, I think you’ve hit on a essential truth about Goldman. Their strategy has been to become the market in as many trading segments as possible. That allows them to charge their clients for executing the clients’ trades. And to reap huge trading profits from their knowledge of what their clients are going to do. So, yes, I’d absolutely agree with your assessment that they profit by front-running their clients buys and sells. (For those unfamiliar with the term front-running is when a manager trades for his or her account before executing a client’s trade that they know or hope will move the market price.) Goldman has gotten so big and influential in the last decade that I’d be willing to argue that they treat the U.S. government and the Treasury as clients and front run the policy decisions made by the Goldman alums who run the money end in Washington.
When you look at banks it turns out you need to look at lines of business (wealth mgt, consumer finance,credit cards, business finance, securities mgt srvcs and trading). The only non-broken bizzmod is the first, the middle three are facing horrendous and mounting losses, and the last breaks down into sub-sectors including proprietary trading. Whether or not any bank made money depends on their mix and not surprisingly GS made money and C/BAC are loosing big time and are at risk of more. The regionals, focused on CRE are in deep trouble. Pandit has been trying to re-engineer Weill’s disastrous mess put has had tsunami after tsunami cross a dike with many holes in it. GS is profitable almost entirely on proprietary trading profits which have dominated it’s business since ’03; it’s effectively a hedge fund that makes money by front-running its clients based on the information it gets from being their servicing agent. One has to wonder what the social value of proprietary trading is. Net net the banks are facing a decade of B/S re-building, years of mounting loan losses and the only source of profits being chicanery (think surcharges, credit card charges or proprietary trading). If you want to analyze their outlook work thru the LOBs and understand the credit risks and profitabilities.
Jim:
Could you comment on this article sited by terryw? I’ve always thought of GS as the smartest guys in the room.
Like many others, I’ve been (profitably) betting on commodities and foreign stocks on the assumption that the dollar would keep getting clobbered. Aside from the possibility of a major pullback in the indices is there any way you see the dollar trend reversing in say the next 6 months? Thanks!
I’ve heard analysts giving out “But”, “Sell”, and “Hold” for various companies/stocks. They might need another one for Citigroup. How about “Comedy” or “Hilarious”? +$101 million in net revenue, -$0.27 EPS.
They should be able to reuse that rating when BofA & WF do their earnings release.
Looks like GS is expecting the dollar to strength in the not too distant future
http://www.reuters.com/article/marketsNews/idUSN1530341020091015
Maybe Citi need to call back John Reed.
Even worse. I remember ran into article recently that Citi had paid outside consultants to audit the company. The conclusion: the management is doing a good job running the company! Can you believe it!
C and CIT are two diff stocks :p
I applaude intel for their transparency vs what these banks are cooking up. I hope a new wave of comercial realestate defualts drag down the good financial companies like JP Morgan GS and BLK so we can jump on board 🙂
Great commentary Jim! I made the mistake of owning this POS before the crash and would not touch it again. The management and Board of C are suspect, at best. If you gave me the stock, I’d turn around and immediately sell… it is just slowly killing itself with mismanagment and oversized pay (and a touch of shady accounting).
When can Citi get rid of the CEO Pandit? His inability is destroying the once greatest global bank on earth!
Yes, it’s true that the trouble started before he came in, but he had much better chance at earlier time to stop the bleeding! Instead, he is the death-watcher of one of the best American institutions. I remember when I heard that he has been named CEO of Citi, doubts immediately came to my mind. After all he is most known for being a loser (at Morgan Stanley? if I remember correctly). I thought why Citi wanted someone who lost the battle to become CEO at Morgan. Additionally, he does not seem have retail & commercial banking experience and is more a bean-counter than a great businessman.
Disclosure: I am SO glad that I do not own any piece of that company.