Citi’s subpar Q4 a reminder of hard slog to come

January 18, 2011

By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

NEW YORK — Citigroup’s subpar fourth-quarter showing is even more disappointing than it looks. Not only did the U.S. megabank’s $1.3 billion profit, a mere 3.2 percent return on equity, miss consensus analyst estimates. It also needed some extra help from the taxman and its own reserves even to get there. Strip those items out, and the meager return in the final three months of the year dissolves into a loss of around $165 million. It’s a timely reminder to shareholders that the recovering Citi is still faced with a hard slog back to decent profitability.

The funky accounting rule that compels companies to book as losses any increased valuations of their own liabilities knocked $1.1 billion off Citi’s top line. But even allowing for that, Citi was in the red in its day-to-day business. Releasing loan loss provisions to the tune of $2.25 billion accounted for much of its profit last quarter. And the bank paid no tax; in fact, it received a benefit that added 29 percent to reported net income.

Granted, traders in Citi’s investment bank had a slow quarter. Equities and fixed income revenue both dropped by nearly a third from the previous quarter after adjusting for the accounting hit from revaluing the bank’s own debt.

Suppose, then, that the trading decline is a one-off and the third-quarter showing was more representative. Applying that to the fourth quarter would have taken Citi’s operating income for the quarter out of the red to around $1 billion. But that’s not much to write home about, either — it’s an annualized return on equity of just 2.4 percent before tax.

Of course, as the bank whittles down the unwanted assets in Citi Holdings another drag on earnings will be removed — the unit lost $1 billion last quarter. But that process is slow. And while progress will boost income and release capital, it will also help take Citi’s tax rate up towards the 28 percent that executives reckon is more normal.

Absent rapid business growth or balance sheet tinkering that could allow Citi to reduce its capital — which Chief Executive Vikram Pandit reckons is unlikely until next year at the earliest — Citi’s shareholders look stuck with anemic returns for some time yet.

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