"With strong capital, strong liquidity and a strong
franchise, we are looking forward," said
Citigroup (NYSE:Â C) CEO Vikram
Pandit this morning. He's only mostly right, I'd say.
After selling one-third of itself to taxpayers,
Citigroup's capital is indeed quite strong. And with the
FDIC backinga good chunk of its debt, liquidity flows
freely. The whole "strong franchise" part, though, is up for
debate.
Why? Because even as financial markets spring back with a
vengeance, and competitors like
JPMorgan Chase (NYSE: JPM) mint money,
Citigroup is still struggling with that little thing called
"profit."
Net income for the third quarter came in at $101 million.
After charges, preferred dividends, and one-time gains from
the recent
equity conversion, common shareholders took a loss of
$0.27 per share.
Net credit losses were $8 billion. Allowance for loan
losses nudged up to $36.4 billion, but the allowance as a
percentage of non-performing assets shrank to 111% -- by far
the lowest level in nearly two years. As a percentage of
total loans, non-performing loans jumped to 5.25%, from 4.4%
last quarter. Delinquent consumer loans 90 days past due
increased from 4.24% to 4.7%.
All of which suggests that the "strong franchise" Pandit
boasts about is questionable. There's no doubt that the
capital and liquidity concerns that almost made the bank go
kablooey last year are over. But now a potentially bigger
problem -- actually earning money -- looms front and
center.
Will Citi even return to profitability? Someday, somehow,
of course. These things pass. But during this past quarter,
as a result of the equity exchange offer, shares outstanding
grew from 5.5 billion to nearly 23 billion. That massive
dilution means Citigroup now has a market cap of about $110
billion.
The question, then, should be whether Citigroup can ever
return to making something like $10 billion a year -- a
figure that would make its current market value appealing.
That goal is no sure thing. Remember, one-third of Citi's
balance sheet
is quarantinedin a segment called Citi Holdings, which
the company treats like a disease it's forced to carry, and
is busy trying to sell. Even when losses subside, that
scaling down will seriously question where Citi's earnings
power will come from, and
reallyquestion whether earning $10 billion or so per
year is feasible. Continued... |