“The conference call is still going on but earlier CEO Vikram Pandit said Citi enters 2010 with a strong foundation. Consumer credit remains an issue…”– CNBC’s The Call 1/19/2010
Citigroup (C) lost $7.6 billion in their fiscal fourth quarter which was in-line with estimates of a loss of $.33 per share. Excluding one-time charges, particularly those related to paying back the TARP loans, Citi would have only lost $1.4 billion or just 6 cents per share. The quarter ended a three quarter long streak of profitability, and shares opened slightly lower because they missed on top-line estimates with revenue of only $17.9 billion versus projections of $18.43 billion. As of midmorning shares had turned positive along with the broader market because there are some encouraging signs of improvement from a bank that has earned the dubious title of “Zombie Bank”.
One thing Citi has going for it is the fact that the fourth quarter a year ago was just so awful. A year ago, Citi reported a record loss of $17.3 billion or $3.40 a share as the company was mired in credit losses and write-downs. In the past year, it was necessary for Citi to raise capital and streamline operations in a difficult period that Citi’s CEO Pandit described as
“enormous progress.” The tier 1 common ratio rose to 9.6% from just 7.3% a year ago, and tier 1 capital improved to 11.7%. In regards to consumer credit, the credit card division costs dropped 10% from Q3, the lowest level since second quarter of 2008. Credit losses were down sequentially to $7.13 billion from $7.97 billion a quarter ago. The slowing rate of credit losses is likely a product of improved economic conditions and the worst quality loans losses already having been realized in the last eighteen months.
Interestingly, with improving condition is its overall credit portfolio Citi only bolstered its loan-loss reserves by $706 million, and it can now cover just 6.1% of total loans. The total loan loss provision stands at $8.2 billion, down 36% from Q4 last year and 10% lower sequentially. This seems to fly in the face of the banks stated goals over the last year of trying to nurse the struggling bank back to health rather than aggressively grow earnings. The lack of replenishment to their reverses for losses is clearly a bet that the economy is on the mend, and Citi may be underestimating the risk of a double dip recession.
We are maintaining our Fairly Valued stance on Citigroup even at this very low price level. Will the bank be trading higher in three years? We think there is a pretty good chance that it will, but there is still plenty of risk in these shares. The first huge risk is the uncertainty of Citi’s earnings power going forward as a restructured company, and Vikram Pandit has been very clear that he would like to dispose of Citi Holdings which dragged down this quarter’s results losing $2.44 billion in the fourth quarter. However, in the boom times these businesses were the high flyers for Citi, rather than the more stable Citicorp part of the business. Wall Street is calling for the company to earn only eight cents in profit over the next year, which is pretty uninspiring. Secondly, and perhaps more immanently, Citi is in the process of paying back TARP and believes they are adequately capitalized heading into 2010, and some of the important capital ratios seem to support that. However, at the same time its loan loss provision is falling. If you are among the set of investors that believes a double-dip is coming, than Citi is quite exposed to further balance sheet damaging losses. In our view, Citigroup remains a risky investment and seems better fit for speculating on continued and robust improvement to the economy.
