Citigroup Receives an "A" in Fuzzy Math

Citigroup posted revenues of nearly $25 billion and net income of $1.6 billion for the first quarter of 2009. A review of the earnings release suggests, however, that the financial service provider’s performance gains had more to do with fuzzy math than an embrace by loyal customers of the Citi franchise:

• Tier 1 capital ratio on the balance sheet climbed 410 basis points year-on-year to 11.8 percent at March 31, bolstered by the divestment of its stake in the Brazilian credit card processor Redecard and the January 2009 issuance of $7.1 billion in equity to the U.S. Treasury and the Federal Deposit Insurance Corporation.
• Rising unemployment and higher bankruptcy filings, combined with the real estate downturn, drove the managed net credit loss ratio up 395 basis points year-over-year to 8.88 percent in the Citi-branded portfolio and 508 basis points higher to 12.40 percent in the retail partners’ portfolio. In addition, market conditions (lower asset performance metrics) and financial advisor attrition contributed to a $40 billion outflow in managed client assets.
• The bottom line (net income) benefited from $2.5 billion in credit value adjustments generated by the fixed income desk. In plain English, the bank’s traders made money by betting against the company! The “masters of the universe” correctly gambled that the cost of insuring the bank would rise — credit default swaps — as the perceived risk of default rose on Citigroup’s own bonds.

“It’s junk income,” Jack T. Ciesielski, publisher of “The Analyst’s Accounting Observer” told The New York Times. “They are making more money from being a lousy credit than from extending loans to good credits.”

More on recent bank earnings at BNET Finance:

• Earnings Fiasco at Citigroup and JP Morgan: What’s In The Piggy Banks?
• Goldman, Citibank and Others Rely on Earnings Tricks — But Not Revised Mark-to-Market Rules