Though holidays are a few months away, investors are being treated to a Dickens-like story when it comes to Citigroup (C 0.32%). Much like the ghosts of Christmas past, Christmas present, and Christmas yet to come, Citigroup is a bank showing its past, present, and future -- all in one earnings report. The good news for investors is, unlike in Scrooge's story, the company's future isn't scary at all.
The ghost of Christmas past
Most of Citigroup's large bank peers have elected to keep their "good" and "bad" assets lumped together. This is a big part of the reason peer banks like Bank of America (BAC +0.90%) and Wells Fargo (WFC +0.66%) report their non-performing assetpercentages at 2.3% and 2.6%. JPMorgan Chase (JPM +1.78%) also lumps its good and bad assets together, but the bank's non-performing asset percentage is just 1.5%, which shows there is a fair disparity between the biggest banks. .
Citigroup's ghost of Christmas past is represented by the Citi Holdings division. This represents the assets that Citigroup would like to dispose of. Citi Holding's non-performing asset percentage is terrible -- at 3.6%, almost as frightening as when Marley first appeared to Scrooge. The good news is, this isn't a clear picture of Citigroup today.
The ghost of Christmas present
Citigroup's total assets today are comprised of 93% "good bank" and 7% "bad bank." Investors are given a clear picture of what the bank wants to keep (Citicorp), and what the bank hopes to dispose of (Citi Holdings). While Citi Holdings' non-performing asset percentage is terrible, Citicorp's percentage is far better -- at just 0.9%.
Citigroup is making strides in reducing the size and losses from Citi Holdings and trying to shed its past. In the last year, this division cut its losses from nearly $1 billion to just over $500 million. What's amazing is, Citi Holdings achieved this improvement in losses in the face of a 25% increase in expenses. In addition, Citi Holdings' assets are down by 31% year over year. With huge improvements in the size and losses from its ghostly division, even Tiny Tim could appreciate the future of this company.
The ghost of Christmas yet to come
The future of Citigroup looks much brighter than the frightening picture painted for Scrooge. Ironically, after many investors questioned if the bank would survive during the Great Recession, it appears Citi Holdings may have too much money set aside for potential losses. Citigroup's large bank peers carry lower levels of loan loss reserves, and some by a significant amount. There is no "normal" level of loan coverage since each bank has a different composition of loans and metrics for predicting future delinquencies. However, we can get a sense of what each bank believes is necessary by looking at Citigroup's competition.
Bank of America and Wells Fargo carry coverage ratios of 100% or less. By contrast, JPMorgan Chase has a ratio of more than 180%. Considering that Citi Holdings has a coverage ratio of 256%, it's possible the bank is being overly cautious. With about $3 billion in 90+ day non-performing assets and over $8 billion in loan loss reserves, being overly cautious could mean billions returned to net income.
While a high coverage ratio isn't a guarantee of future releases, history suggests Citigroup is getting more comfortable with its loan issues. For example, in the second quarter of 2012, Citi Holdings released $269 million from loan loss reserves. In the recent quarter, this release jumped to $473 million. As you can see, the bank is releasing more of its reserves from this embattled division.
In addition, in the bank's conference call, Citi Holdings was referred to as a "closed book," indicating that Citigroup has no plans of going back to this type of business. How long it will take for Citi Holdings to cease being a drag on the overall business will depend on how quickly the bank can shed itself of these problem assets.
In the last few quarters, the bank modified and sold $2.4 billion in problem loans. Over the last three years, the bank has been consistently selling off non-performing loans.
Long story short, it won't be a short process for Citigroup to rid itself of Citi Holdings, but the bank is on the right path. Much like Scrooge, Citigroup knows it made bad choices in the past, and it has changed its ways in hopes of avoiding the "shadows of what may be."
