Citigroup 1st Quarter Update, As Promised

As many of you may know, Citigroup (C) reported a loss of $5.1 billion in the first quarter, which hardly makes it easy to figure out what a more "normal" quarter would look like for the company. While the losses and writedowns did go down in Q1, versus Q4, there is still plenty of cloudiness in Citi's results.

Nonetheless, there is no point in shying away from digging through the numbers, even if they are complicated, which is why I even bothered writing about Citi in the first place. The first thing I did was update my spreadsheet showing Citi's quarterly income results by segment going all the way back to 2007. This allows us to see the trend for the last five quarters. Then I added my prior forecasts from February. (For those who don't recall, I projected three scenarios -- conservative, moderate, and aggressive -- each trying to pinpoint the possible earnings power for Citi post-credit bubble). Here is the data:

Click to enlarge

Now, let's go through it. As you can see, the biggest obstacle to valuing Citi is the Markets and Banking segment. That division lost $5.7 billion during the first quarter, which accounts for all of Citi's total loss and then some.

It is going to take some time to really pinpoint if my projected "normal" profit range for the investment banking operations of ~$2-$4 billion is accurate. The reason is that much of the losses right now are one-time events, not recurring costs of doing business.

For example, Citi wrote down $3 billion in Q1 just on auction rate securities and monoline insurance exposures. That accounts for more than half of the investment bank's losses for the period, but those issues won't be around long term, as they are simply due to the recent credit crunch. As of right now, I'm sticking with my estimates for the investment bank, as nothing we know now leads me to think they can't earn several billion in say, 2010.

As for the other segments, the numbers are actually not that far off. The International Consumer division's trailing twelve month profit figure is right in between my moderate and aggressive forecast. The U.S. Consumer is clearly strained right now, though they are not too far off from my numbers ($6.5 billion in profit for the past year, versus a conservative estimate of $7 billion). Global Wealth Management is also not too far off, so all in all I don't see the need to change much right now.

You may be asking why I am using trailing twelve month profits rather than annualizing the latest quarter. Well, I'm thinking that just as 2006 and early 2007 profits were overstated due to the credit bubble inflating, the results from Q4 2007 and Q1 2008 are understated due to the extreme strain in the credit markets. By using a rolling four quarter average, I can get a better idea of what an entire year might look like rather than extrapolating just three months. That said, this formula isn't perfect either, and we will see a lot of volatility as the strong numbers from 2007 are anniversaried.

Full Disclosure: No position in Citigroup at the time of writing.

Comments

[PJ568]

Spreadsheets can be dangerous. Wonder what those 15 analysts that reflect a 2008 average and high eps of .50 and 1.10 are missing. Their 2009 average and high estimates are 2.85 and 3.50. With 5.25B shares currently outstanding, that results in an 2009 dollar range of 15B to 18B. (estimates as shown in Yahoo). To say that an 08 range of 20B to 31B is possible makes one wonder doesn't it?

[drmalaka]

One time charges? Well next Q and the Q after that and the Q after that they will continue to have one time charges. Investing in this company is the same as closing your eyes and jumping off a bridge.

There is so much toxic waste in these banks that they refuse to write down becuase they no longer have to. They just move them to Level III assets and value them at whatever keeps the bank from going being insolvent.

Every quarter as they banks make money on their normal businesses (although less than in the past becuase of the fact they are now smaller and business is slower) these banks will write off more of the losses on their books. This might go on for years. The same thing happened in the Latin American crisis, the accounting standards were changed so that the banks did not have to take the losses immediately and they could write them off against future profits as those profits came in.

[ResourceWise]

Chad this is a good start to your excavation at the Citi site! I would encourage you to dig deeper. If you examined Markets and Banking in greater detail: Commercial, Corporate, Transaction Services, FX Trading, Fixed Income Trading as well as US and International, you would see the uneven nature of Citi’s net income). In addition if you could compare incentive compensation (bonus) with net income by each segment (product and geography) you would begin to see the broken pieces of this machine and the leakage of shareholder wealth. Further if you uncovered the numbers over the past 20 quarters – even before the subprime mess oozed into the public consciousness, you would be ready to hold up a mirror for the Board of Directors (trustees of shareholder wealth?!). Confronted with this analysis they may begin to see where the underlying problems lie and start fixing them. Best of luck!

[ResourceWise]

Chad this is a good start to your excavation at the Citi site! I would encourage you to dig deeper. If you examined Markets and Banking in greater detail: Commercial, Corporate, Transaction Services, FX Trading, Fixed Income Trading as well as US and International, you would see the uneven nature of Citi’s net income). In addition if you could compare incentive compensation (bonus) with net income by each segment (product and geography) you would begin to see the broken pieces of this machine and the leakage of shareholder wealth. Further if you uncovered the numbers over the past 20 quarters – even before the subprime mess oozed into the public consciousness, you would be ready to hold up a mirror for the Board of Directors (trustees of shareholder wealth?!). Confronted with this analysis they may begin to see where the underlying problems lie and start fixing them. Best of luck!