• 15 Oct 2012 at 2:10 PM
  • Banks

Citi Has An Excellent 88% Decrease In Profit

I don’t have much insight into Citi’s earnings but I do enjoy the reporting of them. When a car or Facebook company reports earnings you basically ask questions like “how many cars or Facebooks did it sell?” and “how much money did it make on each one?” and those questions are kind of answerable and their answers give you a sense of how you should feel in your heart about the company. When a bank – like, a bank bank – reports earnings you can ask “how many mortgages did it sell?” and “how much money did it make on each one?” and those answers will be useful to you too, though there will be murky liquidity and valuation overhangs that will reduce their usefulness.

If you asked those questions of Citi, you might or might not get answers that might or might not be useful, but you’d be hard pressed to translate them into the headlines on Citi’s earnings. Big banks are not primarily engines for selling products and collecting a margin on them; they are bundles of accounting decisions, and this is never more apparent than at earnings time. This is pretty far removed from economic activity in the world:

Citigroup Inc.’s third-quarter profit fell 88% as the bank took charges tied to the value of its debt and the sale of a stake in its brokerage joint venture …

Others chose to emphasize economic activity in the world, at the cost of, y’know, GAAP:

Citigroup Profit Beats Estimate on Bond-Trading Gains

Take your pick! It is fun to say things like “non-cash accounting charges are fake and you should back them out and concentrate on recurring items with economic significance” but that’s just, like, your opinion man. I can’t really defend DVA as a thing to care about – I mean, I sort of have, but that was mostly out of perversity – but the charges on Morgan Stanley Smith Barney are totally, totally, totally real! They’re not really this quarter – Citi didn’t like lose $4.7 billion of actual money on Smith Barney in July through September 2012 – but they’re real: Citi bopped around for a long while saying “oh yeah we’ve totally got a $23 billion retail financial advisory business” and turns out they didn’t, so, yeah, sure, somebody misplaced some money somewhere, though of course the writedown is not a surprise now.

If you wanted a model of how to react to Citi’s earnings you could I suppose build one based on your subtle and comprehensive understanding of real economic factors. Things like actually growing sustainable lending businesses would look good, things like sharp surprising improvement in FICC trading would cause skepticism in the short term until you fully satisfied yourself that this is “Citi is expanding its FICC client franchise and/or getting smarter at trading bonds” rather than, like, the coin came up heads this quarter. You’d build your own model for MSSB valuation, based on its performance, and Citi’s accounting value for MSSB would carry no weight in your price. That accounting value of MSSB, like the noise of DVA, would just be meaningless presentation issue, no more important to you than the font that Citi uses to report earnings.

That would be great, but also, like, hard. Here’s a simpler idea. This is Goldman’s quick research take this morning:

Basel 3 capital increased to 8.6% from 7.9% last quarter on capital accretion from the MSSB sale, continued runoff in Citi Holdings and retained earnings. Encouragingly, Citi is now within range of it’s fully phased in Basel requirement after factoring in additional capital accretion to come from the remaining MSSB sale (~+40bp). …

We expect shares to respond favorably today given strong top-line performance, positive operating leverage, and better than expected Basel III capital. We expect the call to focus on (1) the outlook for capital return (2) the pace of future asset run-off in Citi Holdings and (3) outlook for 4Q & beyond in the securities business. We maintain our Buy rating and make no changes to our price target.

The “shares to respond favorably” prediction was right, but I particularly appreciated the focus on capital and capital return. Basel III capital is, like, an even faker thing than GAAP earnings, isn’t it?1 But unlike GAAP, it is readily translatable into actual economic activity in the world. Citi, you may recall, wanted to give out money to shareholders, but was stymied by its regulators’ view that doing so would leave it without enough capital to deal with stress. Now that it has more capital than expected, it has a better chance of giving money back to shareholders.

That would be good. As of September 30 Citi’s equity is worth $179.3 billion as far as US GAAP is concerned; as of this sentence it’s worth $106.6 billion as far as the stock market is concerned. A dollar in Citi’s hands is worth 59 cents: the sooner Citi gives you back your dollars, the happier you’ll be.

Citi earnings 8-K [EDGAR]
Citigroup Profit Beats Estimate on Bond-Trading Gains [Bloomberg]
Citi Profit Slides, but Core Businesses Show Strength [WSJ]
Citigroup Earnings Plummet in Third Quarter [DealBook]

1. “No” is a fine answer there. Basel III is a collection of accounting conventions, and so is GAAP, and that’s pretty much that. Each has pluses and minuses. The fact that you can make up a lot of your Basel III risk weighting might worry you, but on the other hand Basel III, for instance, excludes DVA.

23 comments (hidden to protect delicate sensibilities)
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Comments (23)

  1. Posted by citi board | October 15, 2012 at 2:25 PM

    you pay peanuts, you get pandits

  2. Posted by Mr. Chips | October 15, 2012 at 2:30 PM

    There's a lot of good stuff in here……..but I'm not loving all the "likes". Smarminess and sarcasm are what drives this little gravy train, and that's all quite groovy. But layer this over the Legally Blonde manuscript……..and you've got an eerie match. It should also be noted that the main character in that movie was a female, Mr. Levine.

    Vocal fry, I think they call it.

    C'mon, man…….snap out of it…..there's too much to like here.

  3. Posted by Guest | October 15, 2012 at 2:42 PM

    Used to be, a bank made money on the difference between interest charged on its loans and paid on its deposits, rather than just bundling up loans of questionable quality and hoping that an uninformed buyer would be willing to pay more for them than what they were really worth. Those were the days!

    – Guy with nostalgia for the days when bankers were bankers, and had the three-piece suits, monocles, and moustaches to match

  4. Posted by Guest | October 15, 2012 at 2:44 PM

    Well, Dealbreaker isn't exactly, like, meant to be an honors Chaucer thesis so, like, you snap out of it.

  5. Posted by Mess Anger | October 15, 2012 at 2:53 PM

    If I exclude DVA/CVA, does that equal Recurring Earnings?

  6. Posted by Guest | October 15, 2012 at 2:53 PM

    and if you don't like peanuts you can f*** off!

    -J. Gorman

  7. Posted by Vik Giggles | October 15, 2012 at 2:58 PM

    Earnings must be awesome! They are putting up a new Citi sign at 153 East 53rd. Wait a minute…Vik is over at 399 Park! It's a decoy used to throw off the OWS 99%ers!!

  8. Posted by Jenna J | October 15, 2012 at 2:59 PM

    I prefer DVDA. Pays better.

  9. Posted by Guesticle | October 15, 2012 at 3:11 PM

    It is no "Old Lane" performance, but bang up jump, Pandit.

  10. Posted by guest | October 15, 2012 at 3:54 PM

    Can shareholders or regulators end this charade and break this bank up already?

  11. Posted by Game Night Quant | October 15, 2012 at 3:55 PM

    Jeez, what do you have against charades man, we played Trivial Pursuit last week.

  12. Posted by PermaGuestII | October 15, 2012 at 4:01 PM

    Used to be, if you wanted to start your car on a winter morning, you had to go crank it by hand for ten minutes and hope that it didn't snap back and break your wrist.

    -Guy who also realizes that Pierpont Morgan, E.H. Harriman and Andrew Mellon weren't exactly George Bailey at the Bedford Falls Building & Loan

  13. Posted by Turnip Truck | October 15, 2012 at 5:03 PM

    Send your complaint by autogyro to the Prussian embassy.

  14. Posted by Guest | October 15, 2012 at 5:25 PM

    I think even John Pierpont Morgan would have felt guilty about selling bundles of bad mortgages to firefighter pension plans. Well, he may not have felt guilty, but he certainly would have known that going down the short-term-profits-for-long-term-risks route would lead to massive losses that would force government intervention.

    And the Federal government did not bail out J. P. Morgan, J. P. Morgan bailed out the Federal government. Like I said, those were the days.

    – Guy who thinks "old times bad, modern times good" arguments are specious, particularly in light of the extraordinarily bad leadership of the financial and political sectors

  15. Posted by guest | October 15, 2012 at 9:49 PM

    Are you retarded?

    S&T people are not considered bankers. You should stop listening to OWS.

    If you want to see real banking, come watch me work on 14 comps and run 10 DCFs.

  16. Posted by Ta Da! | October 16, 2012 at 8:41 AM

    And on that note, Uncle Vic exists stage right.

  17. Posted by UBS 8thGradeLitQuant | October 16, 2012 at 9:12 AM

    deus ex machina?!

    *exits, there I fixed it for you

  18. Posted by HFguy | October 16, 2012 at 9:23 AM

    See what you did, Matt. Now Vickula is gone, Happy.


  19. Posted by Ta Da! | October 16, 2012 at 11:27 AM

    A+. Damned auto-complete

  20. Posted by brady dougan | November 26, 2012 at 11:15 PM

    makes sense they have the mets

  21. Posted by sohbet | May 12, 2013 at 7:20 PM

    Chair, I will bail out strippers. The rest of the argument becomes irrelevant because the world will be a kinder happier place with more strippers. And, hence, the U.S. shall maintain world leadership in porn by preserving the efficiencies of a an

  22. Posted by العاب تلبيس بنات | July 15, 2013 at 9:03 AM

    العاب تلبيس بنات http://www.girls-gamess.com/

  23. Posted by غرائب وعجائب | August 29, 2013 at 6:53 AM

    It is "Old Lane"