Citigroup's "Earnings" by David Atkins

With a big push from a one-time accounting gain, Citigroup on Monday squeezed out its seventh consecutive quarterly profit, but it faces significant challenges to growth.

Citigroup announced a third-quarter profit of $3.8 billion, or $1.23 a share, beating analyst consensus estimates of 81 cents a share. That represented a 74 percent increase from a year ago, when the bank announced a quarterly profit of $2.2 billion, or 72 cents a share.

But a big portion of that increase came from gains that will be difficult to repeat. Citigroup benefited from a paper gain of $1.9 billion, reflecting a sharp increase in the perceived riskiness of its debt — an accounting adjustment that gave JPMorgan Chase a similar earnings increase last week. Citigroup also delivered another $1.4 billion to its bottom line from money it had previously set aside to cover losses on credit cards and other loans. Together, those items accounted for more than 85 percent of the company’s earnings...

Excluding the accounting adjustment on its debt, revenue dropped 8 percent to $18.9 billion as the bank contended with the global economic slowdown and some of the most turbulent markets in decades. Like the rest of the banking industry, Citigroup has come under pressure from rising expenses, slim lending margins and the evaporation of many of the lucrative fees that kept its consumer businesses afloat.

Indeed, Citi shares have fallen sharply since the bank completed a reverse stock split in early May that brought its price to around $45 from $4.50. After a bit of a lift in early trading Monday, Citi shares were trading down around 1 percent to about $28.15.

Thank you Dealbook for giving a few paragraphs to the smoke and mirrors going on in this report. 85% of their earnings are booked on accounting games. And unlike JPMorgan, they have the guts to play both ends at the same time. Here's how: like JPM they book a big profit on the perceived deteriorioration of their debt ( it's called Debt Valuation Adjustment). It's like taking out default insurance on yourself and calling it a profit as it rises. This suggests things are looking bad for Citi. On the other hand, they release money they had set aside to cover bad mortgages. It now has 5% reserves against outstanding third-party mortgages. This suggests things are looking up for them, right? Their mortgage default risk must have declined. So good or bad they make money both ways.
Of course if you look at the core bank functions -- managing deposits and allocating capital through investments you get a very very different, and much lower number.
The headline: another quarterly profit! And the bonuses will reflect that accordingly.