Are Citigroup’s Earnings Worse Than They Appear?

On Friday, investors received another warning shot on the banking sector from JP Morgan (NYSE:JPM).  The bank reported its fourth quarter results, which fell short of estimates.  Net income fell to $3.73 billion (90 cents per share), compared to $4.83 billion ($1.12 per share) last year, which represents a 22.8 percent decline.  Now, the banking sector is receiving more disappointing numbers from Citigroup (NYSE:C).

Early Monday, Citigroup reported that fourth quarter net income fell to $1.17 billion (38 cents per share), compared to $1.31 billion (43 cents per share) last year.  The results fell short of the mean analyst estimate of 50 cents per share.  Vikram Pandit, Citi’s Chief Executive Officer, said, “Overall, we made solid progress in 2011. We increased our net income to $11.3 billion, up 6% from the previous year, and reached key benchmarks in our consumer businesses, showing our strategy is achieving results. Clearly, the macro environment has impacted the capital markets and we will continue to right-size our businesses to match the environment. With Citi Holdings assets at 12% after the transfer of retail partner cards to Citicorp, we are increasingly focused on driving earnings through our core franchise and beginning to return capital to our shareholders this year.”

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Although Pandit is upbeat on his own bank, investors are paying attention to Citi’s loan loss reserve releases, which make earnings appear better than reality. Zero Hedge explains from the “$28 billion in pre-tax net income from continuing operations generated over the past two years, exactly half ($14 billion), has been due from a simply accounting trick, namely the release of loan loss reserves, which have been positive for 8 quarters in a row, and which in the just completed quarter amounted to more than the actual pretax number, confirming EPS would have been negative absent accounting trickery.”  With the global economy still on edge, it appears early for the banks to be releasing loan loss reserves.  If Citigroup did not release $1.5 billion in loan loss reserves in the fourth quarter, the bank would have reported a fourth quarter loss.  This could also help explain why other bank stocks such as Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and Bank of America (NYSE:BAC) continue to decline.  In addition to European solvency issues, investors simply do not trust …

the accounting methods used in these uncertain times.

In order to boost confidence in the fragile banking sector, the FDIC has released a bank stress test proposal.  The proposal will determine how banks with more than $10 billion in assets should conduct annual stress tests.  The tests are required by the Dodd-Frank regulations, and seek to boost investor confidence.  “Both the FDIC and the institutions being tested will benefit from the forward-looking results that the stress tests will provide,” said Martin Gruenberg, the agency’s acting chairman. “The results will assist in ensuring an institutions’ financial stability by helping determine whether it has sufficient capital levels to withstand a period of economic stress.”  Banks would be required to publish the stress test results 90 days after submitting them to regulators.  Depending on when the regulations receive approval, the stress tests could start late 2012 or 2013.  While the stress tests may be a nice gesture, investors are likely to stay cautious on bank stocks, as solvency and accounting issues still plague the globe.

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To contact the reporter on this story: Eric McWhinnie at

To contact the editor responsible for this story: Damien Hoffman at