Citigroup: More Downside from Consumer Credit

Despite the myriad of downward revisions in the last six months, analysts may still be overestimating future earnings for Wall Street behemoth Citigroup (C). With the spotlight focused directly on the continuing mortgage backed security write-downs, earnings estimates seem to be overlooking the disturbing rise in delinquencies related to consumer credit loans.

Last quarter, Citigroup's $4.1 billion in consumer credit losses were largely overshadowed by the $18 billion write-down on subprime exposures. To some extent this makes sense (subprime is larger, newer and therefore less understood, and involves frightening amounts of leverage), but rising consumer credit losses should also be a big red flag, and I'm not so sure Wall Street analysts are recognizing it.

For example, the average 2008 and 2009 Wall Street earnings estimates for Citigroup are $2.91 and $3.66, respectively, but a detailed review of these estimates reveals little credence for growing consumer credit losses (mainly credit cards and other retail lending). For example, one of the prominent Wall Street analysts whose reports mentions growing concerns related to consumer credit losses, but then almost completely ignores this trend in its pro-forma earnings model. This particular analyst report has one of the lower Citigroup outlooks on The Street (2008 and 2009 earnings estimates are only $2.70 and $2.85, respectively), and these figures could easily be revised downward by factoring in lower net income from consumer credit businesses.

To confirm my suspicions, I used KnowledgeBid to reach out to an industry expert. I had a thirty minute conversation with the president of a financial risk and forensic accounting advisory firm. He was able to direct my attention to a short list of companies who will face the greatest challenges if consumer credit delinquencies continue to rise. Not surprisingly, Citigroup was near the top of his list. Other companies included Capital One (COF), CompuCredit (CCRT), and interestingly Target Corporation (TGT).

So how significant is consumer credit to Citigroup? Historically, it generates almost half of their total net income. Consumer credit will be increasingly important to Citigroup in the future as their other main business segment (Markets & Banking) continues to suffer from mortgage backed security write-downs.

In summary:
1) Subprime security write-downs have demanded and captured Wall Street's attention.

2) With the focus on subprime securities, not enough attention has been given to the disturbing increase in consumer credit delinquencies.

3) Management and Wall Street Analysts have consistently been overly optimistic about Financial Sector (including Citigroup) performance (i.e. they have underestimated subprime write-downs and overestimated earnings).

4) Based on the growing trend of consumer credit delinquencies, I won't be surprised when we find out that Wall Street estimates of future earnings for Citigroup are still too high.

Disclosure: No Positions