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Citigroup puts lipstick on a pig in third quarter earnings report
10/15/2009 3:01 pm EST
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?
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?"
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.
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