Accounting is the language of business -- Warren Buffet
Bradley Keoun of Bloomberg just published a report on its website, "Citigroup Posts Loss on Credit-Card Securitizations", saying Citigroup Inc. (C) reported its first loss since at least 2005 on credit-card securitizations, signaling that risks may be growing in a business that generated $3.5 billion of revenue in the past three years. The biggest U.S. credit-card lender lost $176 million in the second quarter packaging card loans into securities, the company said on August 1. The firm's results may portend similar losses for rivals.
After reading his article, an innocent person might come up with a conclusion that credit card companies may be in peril just like the mortgage companies, but that is far from the truth. In its 10-Q filed on August 1, Citigroup said that In the second quarters of 2008 and 2007, the company recorded net gains (losses) from securitization of credit card receivables of ($176) million and $243 million, and $45 million and $578 million during the first six months of 2008 and 2007, respectively. Net gains (losses) reflect the following:
- Incremental gains from new securitizations
- The reversal of the allowance for loan losses associated with receivables sold
- Net gains on replenishments of the trust assets offset by other-than-temporary impairments
- Mark-to-market changes for the portion of the residual interest classified as trading assets
Basically, what the company is talking about is the interest-only strip (I.O. strip) on its book. After Citigroup sold its loan receivables to the trust, it records an intangible asset call I.O. strip. The I.O. strips are valued based on three factors:
- interest rates the company charging on its customers
- the interest rates company paying the investors in the trust
- expect losses or charge-off in the trust.
The company then adjusts the IO strip quarterly base on prevalent interest rates and expected charge-offs.
The company did not lose any money in its trust. It merely adjusted the valuation of its interest only strips. Of course, the question remains, how much did Citigroup make from the credit card loan receivables from its trust then? To answer that question, we simply need to go to SEC website and pull some information from the Citibank Credit Card Issuance Trust.
The trust files a 10-D monthly and tells investors the charge-off rates and interest rates it's charging, and other good stuff. For the month ended June 2008:
Portfolio Yield, (it charges customer) -- 15.90%
Credit Loss Component (Charge-off) -- 5.83%
Interest rates paid to the trust investor -- 3.43%
That leaves the profit margin to Citigroup - an unbelievable margin of 6.24% on 72 billion dollars worth of credit card loan balance. Citigroup is on pace to collect over 4 billion dollars from its credit card trust this year alone.
My point is this: many reporters in the news media simply have no clue about how a business is doing, because they have no background in accounting. Just like Bill Clinton famously said, it depends on what "is" is.
Disclosure: I have no position in C.
