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BW Businessworld

Can Citigroup's Results...

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Citigroup pulled a rabbit out of a hat in the first quarter — but can it do it again? The company managed to turn in a profit this quarter by one measure, its first quarter of positive net income since 2007.

It may be that Citigroup is returning to profitability, but some analysts wonder whether this quarter's performance can be repeated.

Citigroup Inc benefited from a number of one-time items, such as selling its remaining position in Brazilian credit card processor Redecard SA for $704 million, $250 million of litigation reserve releases and $110 million of tax benefits related to resolving an audit.

Add another $2.5 billion accounting gain from adjusting derivative values as the company's credit quality deteriorated and Citigroup's $1.59 billion net income before preferred share dividends quickly turns into a loss.

Meanwhile, the bank's allowance for loan losses is growing, but not as fast as the company's nonperforming loans, leaving some investors to wonder if the bank is setting aside enough money to cover future losses, known as reserving.

"How sustainable is this profit? How much reserving will they have to do in the future?" asked Ralph Cole, portfolio manager at Ferguson Wellman Capital Management in Portland, Oregon.

The company's institutional clients group, which includes investment banking, generated $9.5 billion of revenue in the quarter, much of which came from bond trading. JPMorgan Chief Executive Jamie Dimon cautioned on Tuesday that his bank's fixed-income trading performance is not likely to continue at the high levels seen in the first quarter.

"I think the first quarter was a historically high quarter," Dimon said, implying that market conditions that benefited banks in the quarter may not be repeated.

And the tremendous government support that helped Citigroup remain profitable, including debt guarantees, $45 billion of capital and insurance on a $300 billion portfolio of troubled assets, will not last forever.

To be sure, there was good news in the Citigroup earnings report. Its securities writedowns have slowed dramatically, signaling its credit pressure in the future will likely come from loans rather than stocks and bonds. Banks have more leeway to record credit losses from loans over time, which can smooth earnings.

Net interest margin, a measure of loan profitability, rose to 3.3 per cent in the first quarter, up half a percentage point from the same quarter last year, signaling the lending business is benefiting from low interest rates.

Not Disappointing
And nonperforming assets growth is slowing. Between the third quarter and fourth quarter of last year, these assets grew 56 per cent, while between the fourth quarter and the first quarter, that rate was 15 per cent. Some consumer credit trends are improving, too.

The conversion of up to $52.5 billion of Citigroup's preferred shares into common will reduce preferred share dividends, which were an eye-popping $1.2 billion in the first quarter, and improve the bank's tangible common equity ratio.

"These results were not disappointing, even if there are still huge headwinds with respect to the credit cycle," said Marshall Front, chairman at Front Barnett Associates, which has been buying Citigroup shares.

Determining how hard those headwinds will blow is the key for Citigroup. The United States is facing the highest unemployment levels in a generation and other economies are suffering as well, which makes determining the magnitude of future losses very difficult.

But analysts at Goldman Sachs noted that Citigroup is trading at around 0.9 times its tangible book value based on common shares after the conversion. Some analysts see that as a fairly high valuation for a company still facing a difficult business environment. JPMorgan is trading at closer to 0.7 times its tangible book value.

Ferguson Wellman's Cole noted that, even if Citigroup continues to be profitable, other banks may be bouncing back faster.

"I feel a lot better about what I've seen other banks accomplish this quarter," Cole said.


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