The Seeking Alpha transcript of this morning’s Citigroup conference call runs 12,000 words; it makes for incredibly boring reading, and I can fully understand John Carney’s pain in having to listen to the whole thing live.
The most interesting thing to me was how the brand-new CFO, Ned Kelly, not only was at pains to praise his predecessor, Gary Crittenden, but even went so far as to unnaturally pump up this quarter’s result’s — the one quarter for which he can’t really bear any responsibility at all. Here’s how he kicked off:
This is the strongest quarter we’ve had in well over a year on many measures. Perhaps more vividly reflected in positive net income…
Slide one shows our consolidated results for the quarter. We reported revenues of $24.8 billion, that’s nearly double year over year and $19.2 billion higher sequentially.
He’s referring to the slides in this presentation; “sequentially” is Kelly’s way of saying “quarter-on-quater”.
Kelly’s comments were echoed by Derek Thompson:
Another day, another big first quarter announced by a struggling bank. Citigroup today reported that for the first time in a year, it’s turned a profitable quarter with revenue rocketing up 99%, following in the steps of strong earnings from Goldman Sachs and Wells Fargo.
Thompson added some caveats, but not about the net income or the revenue. The fact is, however, that neither of them in reality is nearly as impressive as Kelly would like to make them sound.
For one thing, Citigroup’s earnings per share were negative, which puts the positive income figure into some perspective. For another, Citigroup would have been operating substantially in the red were it not for the fact that it managed to book $2.5 billion of income from the fact that its debt securities plunged in value over the course of the quarter. Since the mark-to-market value of its liabilities is now lower, it’s allowed under US accounting rules to register a profit. But that’s not income as most people understand it.
And the rise in revenue is even more illusory. Here’s Bloomberg:
The company took $5.62 billion of writedowns on subprime- mortgage-related securities and other investments in its trading division, reflecting a further erosion in their market value. That compared with $14.1 billion of writedowns in the first quarter of 2008, for a positive $8.47 billion revenue swing.
In other words, despite the fact that subprime write-downs in the first quarter of 2008 were mind-bogglingly enormous, and continued through the next three quarters of the year, there were still another $5.6 billion of writedowns to be taken this quarter. Will they ever cease? No one knows. But through the magic of year-on-year comparisons, Citigroup can actually show a revenue gain just because its subprime writedowns this quarter were lower than they were a year ago.
Later on in its presentation, Citigroup shows how important net writedowns are to its reported revenue figures:
Suddenly that 99% year-on-year surge in revenues isn’t quite as impressive: if you ignore the writedowns (which Kelly always refers to as “marks”), then revenue only rose from $25.5 billion to $26.9 billion year-on-year.
Given that this chart is so prominent in his presentation, one wonders why Kelly was so keen on pushing the soaring-revenues story: wouldn’t it have been better to simply be honest about why it’s silly to compare revenues over a period of time when writedowns have been so enormous? Instead, you get utter comedy like this back-and-forth with Meredith Whitney, who keeps on trying to cut through the Kelly verbiage, to little effect:
Meredith Whitney: What happened in securities and banking in Europe during the quarter to have such outsize results?
Ned Kelly: My suspicion is and somebody will quickly correct me if I’m wrong. I think the marks by and large are basically booked in New York. The European results reflect the fact that the marks are booked in New York so the relative out performance of Europe on one level given that in terms of that $4.2 billion of traditionally disclosed marks is what drives that.
Meredith Whitney: Could you dumb that down for me please?
Ned Kelly: If you think about it we have $4.2 billion of what we described as traditionally disclosed marks. As you know, those are by and large in securities and banking. Those marks would predominantly be booked in New York rather then in Europe.
Meredith Whitney: Right, but on a relative basis Europe was stronger and that’s what I’m asking about not Europe relative to US, Europe relative to Europe.
Ned Kelly: First quarter ’08 I am told Europe did have the marks, this year they do not.
Meredith Whitney: On the sequential basis the difference they didn’t have the marks last quarter?
Ned Kelly: They did not have the marks last quarter.
Meredith Whitney: They had the marks last quarter they don’t have the marks this quarter?
Ned Kelly: First quarter ’08 Europe had the marks. Not since then. So I was right.
Meredith Whitney: I’m looking at it on a sequential basis.
Ned Kelly: Sequential basis, apples to apples no marks.
Meredith Whitney: It’s materially stronger and I’m just wondering what’s in there if its not marks what is it?
As Carney says of Kelly:
Much of what he says is so obscure that it is not only unquotable but incomprenhensible to anyone but an expert in Citi’s balance sheet. JPM, on the other hand, managed to sound comprehensible and, therefore, candid. When someone is talking jibberish, it’s hard not to think they are pulling something over on you.
To give just a flavor, from Kelly’s opening remarks:
There are three items we added to our traditionally disclosed marks this quarter which amounted to $4.2 billion and which are detailed in the appendix on slide 26. These additional items started with on the mark side $1.2 billion in private equity losses and then these items were offset partially by a $2.7 billion net benefit from CBA on our non-monoline derivative positions and a $541 million benefit in revenue accretion on non-credit marks in certain securities in banking assets we had moved from mark to market to accrual accounts last quarter.
Is this English? No. Is it useful? No. Is it the kind of thing that investors in Citigroup in any way want to hear? No. Even Vikram Pandit didn’t seem to have the time to sit through this kind of stuff: he wasn’t on the call at all, leaving Kelly to deal with the analysts on his own.
I’m not sure why Pandit replaced Crittenden with Kelly, but judging by Kelly’s first earnings call, the change is not clearly for the better. Citigroup would have been much better served by someone who was clear and direct about what was going on within the company, financially, rather than someone who considers his job to be to put the best possible spin on a mixed-bag of numbers. The only way that investors will ever take the CFO seriously is if they feel they can trust him. And after today’s performance, that day is likely to be a very long way off.