The hot news yesterday morning was Mr. Vikram Pandit’s leaked letter about Citi’s profitability in the first two months of this year. Of course, by evening, the Dow had risen by about six percent — buoyed by the Citi news, and it replaced Citi as the topic of conversation everywhere.
I am quite used to Mr. Market’s mood swings, so I am not going to write about that, but, instead I will comment briefly on Citi.
A few weeks ago I had taken Citi’s example to get a better understanding of the current situation. In that post I observed the following three things about Citi:
- Total revenues went down from 78.45 billion dollars to 52.79 billion dollars in 2008.
- The Provision for Losses had to be increased from 17.91 billion dollars to 34.71 billion dollars in 2008.
- The Operating expense went up from 59.8 billion dollars to 61.19 billion dollars in 2008.
It is obvious that the real troubles at Citi brew from falling revenues and growing Provisions for Losses. To read the details on that, go to this link.
In today’s context, pont 2 about “Provisions on Losses” is the crux of the matter. While Citi may be profitable in the first two months of the year — the real hit will come in the third month.
At the end of the first quarter (third month) — Citi will have to mark down its assets and that will hit its profitability. So, even if it is profitable in the first two months of the year, that doesn’t really show that it will be profitable in the first quarter.
The reason for that is simple — the main factor that has a drag on Citi’s profitability has not come into play yet, that will only come in the picture on March 31st. A look at Citi’s pastÂ results show that the provision for losses in the last three quarters have been roughly 9, 7 and 5 billion dollars.
Vikram Pandit is not in a position to say that the bankÂ had a profitable two months and then turn around and show a loss in the first quarter– so I wonder if Citi would really show a profit in the first quarter. But with all the toxic assets on its books how can it still manage to show a profit?
I am intrigued by the lack of interest this angle has generated in the financial media, which has already taken quite a bit of stick for their failure to see the current bust.
So what is the real story behind this? How many of you think that Citi is really going to turn profitable in the first quarter itself?