Poor, Poor Citigroup

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"With strong capital, strong liquidity and a strong franchise, we are looking forward," said Citigroup (NYSE:  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 backing a 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 quarantined in 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 really question whether earning $10 billion or so per year is feasible.

Citi is sort of a worst-practices case study for its competitors: It doesn't have the investment banking talent of JPMorgan or Goldman Sachs (NYSE: GS  ) , and its loan book doesn't have even close to the earnings strength of Wells Fargo (NYSE: WFC  ) or US Bancorp (NYSE: USB  ) .

It doesn't have much, save for the enduring love of Mother Government, who's always there to give it a hug and a little capital when it needs it.

Maybe you disagree? Feel free to share your thoughts in the comment section below.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.

Read/Post Comments (22) | Recommend This Article (30)

Comments from our Foolish Readers

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  • Report this Comment On October 15, 2009, at 4:50 PM, mtr wrote:

    Ignore the basher. Disclosure own 2,500 shares

  • Report this Comment On October 15, 2009, at 5:03 PM, vrpirata wrote:

    I want transparency!

    Citi, as well as all banks, should stop "cooking" their books and report their balance sheet based on mark-to-market!!!

    Before the crash, reports were based on mark-to-market. Now, asset values are just made up at will by banks.

    FASB should do their job instead of bowing down to the lobby that has been going on.

  • Report this Comment On October 15, 2009, at 5:08 PM, LessGovernment wrote:

    If you can't make money in banking with 0% money from the Fed, then you can't make money in banking.

    My free advice (worth what you pay for it) is to stay away from this stinker. There are too many other choices that have better balance sheets with less future write-offs still lurking on the books, and therefore better long term upside potential. If you were buying C hoping that housing would get better, then today's news that foreclosures hit an all time high and actually increased in the most recent quarter to quarter, then that hope of somehow making good the bad stuff on the balance sheet just went out the window. C is severely injured from self inflicted wounds. Finally, if Too Big To Fail is negated in Congress with legislation to break them up, then what is C worth in a breakup? In my opinion, C is like a bad marriage only in this case between equity holders and debt holders. If it breaks up, it is worth even less. If it doesn't breakup, it still loses money for most likely a few more years. And what happens when the Fed stops breast feeding C with 0% funds? It earns even less than nothing.

    Stay away. This stock could go to $2.

  • Report this Comment On October 15, 2009, at 5:50 PM, Merely4fun wrote:

    Always have faith in people and company.

    First impression is not always right.

    Citi is going through a tough time and it will turn around eventually.

    Overall, the company's financial and infrastructure are fundenmentally sound. Its market performance has ups and downs, just same as others.

    As long as it has a strategic plan and right management team, it will be a winner in the financial world once again.

  • Report this Comment On October 15, 2009, at 6:13 PM, jesse2159 wrote:

    Citi is riding down a very steep slope with the hope that something, anything, stops the ride. But, never count them out. Of all the banks in the world, citi has managed to shoot itself in the foot over and over, yet managed to come out of it stronger than ever. How? Who knows? I worked for FNCB, (the original citibank) from 1963 to 1967 and I couldn't understand how they could lose so much money in South America, and still survive. They have incredible luck.

  • Report this Comment On October 15, 2009, at 6:38 PM, fsx101 wrote:

    How can Citi make profits?

    To me, its simple.....WHEN the Global and US economies recover, so will Citi and THEN watch out.

    Citi is THE most Global of all the "big Money" banks (ie, BAC, JPM, WFC). It gets 50% of its revenues from outside the US, mainly APAC and LatAm.

    These areas (APAC and LatAm) are already recovered from the global recession, and GROWING FAST.

    The US economy provides the OTHER half of Citi's revenues, where Citi has a ton of exposure to the US consumer. We are JUST coming to the end of the worst recession in a decade, and GDP should start to pick up from here. And unemployment should start to drop in the coming months as well.

    Once unemployment drops, so will Citi's consumer based loan losses, and with about $40 billion in Loan Loss Provisions, Citi may actually begin to write UP some of those loss provisions, adding to profits.

  • Report this Comment On October 15, 2009, at 6:40 PM, thisislabor wrote:

    I gotta say I agree with Merely4fun.

    Give it time. watch and see.

  • Report this Comment On October 15, 2009, at 6:45 PM, swkwie wrote:

    Directors of Citigroup should forego their fat pay and be like Vikram Pandit who opted for just a dollar a month to stem the mounting losses of this banking behemoth. Afterall, shareholders like us get NOTHING (dividends) for nearly one year and are waiting for the banking giant to turn around. How much longer must we wait?

  • Report this Comment On October 15, 2009, at 7:32 PM, xetn wrote:

    With comments like Pandit's, I would say he is overpaid.

    The government should have just let them fail, go through the bankruptcy and then the pieces that have value would have been picked up by other institutions. But our all-knowing government thinks it knows best how the economy should operate. As a result, we (the US) has the largest debt of any nation and our currency is headed for oblivion. Thanks for nothing.

  • Report this Comment On October 15, 2009, at 10:13 PM, oneM0718 wrote:

    Let's just look at the basics of running a business here; no need for fancy words to create a smoke screen to rationalize for Citigroup's major missteps and extremely bad business decisions. Not to mention its sheer arrogance in flaunting its behemoth size. You make bad decisions as a business must accept full accountability and responsibility, and fess up to the reality that --- your business will go belly up when you do not do what you are supposed to do!!!! As xetn stated, "...should have just let them fail,..."

  • Report this Comment On October 15, 2009, at 11:34 PM, jmt1c111 wrote:

    Let's talk about the Gov. preferred shares to common shares conversion. When Citi did this, the commons were diluted. So when Citi reported 3Q they needed to figure loss per/share, because of the dilution they had to use an average of the 3 month 3Q. Therefore, the loss of .27c /share does not reflect correctly, and Citi should have reported less /share loss.

    Anyone else have ideas on this?

    How soon do you think the Gov. will let Citi pay back the TARP?

  • Report this Comment On October 16, 2009, at 6:51 AM, 8Lives wrote:

    What about CIT?

  • Report this Comment On October 16, 2009, at 8:50 AM, LessGovernment wrote:


    CIT is on life support.

    The family (bond holders) has been called and will most likely pull the plug.

    May CIT rest in Peace.

  • Report this Comment On October 16, 2009, at 8:56 AM, LessGovernment wrote:

    To get a better understanding of CIT, you have to look at a three year chart. This is because CIT has been in a comma for a long time. Go to the 3 year chart, and you will see the real CIT. $60 per share 3 years ago, $1 per share now. If CIT lives, it will be a miracle.

  • Report this Comment On October 16, 2009, at 1:21 PM, plange01 wrote:

    citi is doing a lot better than most banks and should see continued improvenent in the future...

  • Report this Comment On October 16, 2009, at 1:54 PM, lawrenceptw02 wrote:

    fsx101 is right on the money.

    I grew up in Taiwan but moved back here to the US 6 years ago. In Taiwan, a Citi credit card is regarded as a luxury item because Citi has built up such a great name for itself. However, everyone who has a Citi credit card complains about the horrible service they offer. Do any of them ever cancel the card? Absolutely not, it's a status symbol amongst business ppl.

    In a competitive and regulated industry like finance, Marketing and Exposure is KEY to future success and sustainability.

  • Report this Comment On October 16, 2009, at 2:35 PM, pethier wrote:

    My Citi holding is so small now that it would be silly to sell it. I'm willing to sit and wait.

  • Report this Comment On October 16, 2009, at 8:04 PM, ET69 wrote:

    I'm with fsx 101 too. Having lived and traveled all over the world I can safely say that the Citi brand name lives and has a name recogniton and exposure that no other bank has. If you have stock still then the down side seems minimal and the potential up side quite large.

  • Report this Comment On October 23, 2009, at 11:01 PM, stockmajor wrote:

    Citi will pay back the government soon enough. This will cause a significant jump in the share price. Over the next few years Citi will divest itself of the so called toxic assets and they will return to profitability. The number of outstanding shares will also be reduced. Long term, Citi share value will increase by several fold. I don't mind waiting a few years for that kind of return on my investment.

    Do the math. If Citi increases by just double its current share value in, say, 5 years, what is your rate of return? The rule of 72 says you would be earning an annualized return of 14.4%. What if the share value doubles in two years? 36%.

    The share value could triple or more during these time frames. Patience will be key in holding Citi, but it will be worth the wait.

  • Report this Comment On October 25, 2009, at 11:35 PM, MadMicro wrote:

    C owns the infrastructure under most of the ACH systems of other major banks. In addition they propped up the US economy in the aftermath of 9/11. I have dealt with them for years as a partner and consider them solid as a rock in terms of investment potential. Bought my shares at 1.40 and am holding them indefinately... already made several hundred percent and expect more. Do what you want but I still think its a deal at $5 a share. If they have a bad day I'll buy more.

  • Report this Comment On October 26, 2009, at 11:19 AM, MKantzler wrote:

    Some bash Citi’s potential to expand and again grow multi-billion dollar profits while there are others who interpreted Citi’s sale of its Phibro unit to Occidental Petroleum as making it a loser, which is about as senseless as making a buy or sell decision on Fed Chmn. Bernanke’s statement that rates will go up when the economy improves sufficiently. Of course the rates will go up–then. It was a say-nothing statement, yet investors react to it, or, at least, talking heads do, as though there were some trace of actionable consequence.

    The analogy of being buried in a hole might best illustrate Citi’s situation. When Treasury secretary Henry Paulson, Fed chairman Bernanke, and the CEOs of top banks were meeting in the middle of the night, Citi was buried in the hole it and the other institutions had dug, unable to move in any dimension, climb out or even see the light. Then, along came the TARP shovel, in the hands of Uncle Sam, and Citi’s head and shoulders were freed, enough that it could take the shovel and begin digging itself, though it still couldn’t move very much, stuck in the hole. Now, Pandit is still digging, the dirt up to his crotch, and as the next several quarters pass, he will be free of the dirt and, while still in the hole and unable to move in any direction, except up, he will begin to climb out of the hole, very worn, shedding his coat, shoes, and briefcase to lighten the load as he claws his way up. In the near future, he will hand the shovel back to Uncle Sam and stand on the firm ground, clear of the hole, and he will be able to move in all directions again, and he will take all the effort and energy he applied to get out of the hole, which returned very little movement for each calorie burned, and move through the fresh air of a revitalized economy and, in comparison with the difficulty of climbing out of the hole, very quickly cover ground to reassert himself and his institution’s profits. By then, the golden investment opportunity will be all that’s left in the hole Citi will leave ever farther behind it, never to return or again be so soiled.

    With Citi, the news of the Philbro sale is both actionable, and not. Actionable to buy, or inert to hold, because the sale is a good move, a sensible move, a move that sheds a liability and a non-banking enterprise in a circumstance where focusing on banking is the necessary imperative that will eventually build a stable, profitable, globally present, government-divested, large-cap institution with multi-spectrum, financial-services experience. That experience, while now being shed, remains a building resource for the future which, without the irresponsible derivatives risks, can again expand Citi’s profitability and propel it back to the top of the banking world, where, despite its domestic troubles, poor poor Citi still is in its Treasury and Trade Solutions business, which was voted the number 1 Cash Management Bank, globally, for the third consecutive year in Euromoney’s annual cash management poll. In addition to retaining the top spot in the global Euromoney poll, Citi also took top client-voted honors with five regional awards and 24 country awards.

    And look at the guarantees! Guaranteed, by public statements of President Obama, Treasury Secretary Geithner and Fed Chmn. Bernanke not to fail, with government ownership of one-third and massive incentives for Citi to continue improving to throw that yoke.

    And, again, more guarantees for Citi to improve, like insured loans, and it will continue to enjoy .25% interest on its loan reserves for at least another quarter as it continues to rake in money on the loan spread and its fees. American Express had good news in the third quarter on a marked improvement in loan losses and credit usage, and while AMEX’s clientele is more stratified than that of other card issuers, that result does reflect upon the industry and Citi’s loan-revenue situation.

    And again, another guarantee, as the president’s compensation czar, Kenneth Feinberg, allowed multi-million pay packages to stand for some executives at Citi and some of the other six institutions that faced cuts. If there were any perception at all that Citi was not on the way to growth and recovery, or remained at risk of failure, not a single executive salary would be spared the axe.

    As the merging of Citi’s outstanding international standing with its improving domestic business elevates profit and market reach, and the outcome becomes more clearly envisioned by investors, Citi’s equity prices, in the $5.00 realm, will never be seen again as Citi moves on beyond single digits. The March low of $1.00/share was a rare, once-in-a-lifetime opportunity. Guess what? Right now, priced below $5, Citi is presenting another, final opportunity for investors with vision and the realization that Citi is here to stay, so the news of any steps bringing that future closer, whether it’s the sale of Philbro or slashed executive salaries, and the meaningful exclusions, these are hardly the headlines of a loser.

  • Report this Comment On October 29, 2009, at 1:13 PM, dillon53 wrote:

    I bought my first 14 C shares in December of 2005 at $46.76/share. I added 30 more shares in January of 2008 at $25.11/share. Then another 14 in March 2008 at $23.23; 20 more in September 2009 for $20.66/share, and finally 22 more in October 2008 for $13.47/share. That's 100 with great cost variations. If I sold them anytime soon, I would lose so much. But I have time, plenty of it, and if it takes 10 or more years. There are two more reasons why I will not sell: the money I invested was money I can do without. The other reason is something Warren Buffet said, that the only thing he regretted was selling any his stocks at all. And remember how bleak so many companies looked 10/20/30 years ago and then the market changed and people who had held on to their "loser" shares came out as winners, eventually. To this thought I am holding on.

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