Monday, October 17, 2011

A Deeper Dive into the Muck of Citigroup's Earnings (C; XLF)

The stocl is down 1.13% at $28.08, one of the best performances among the financials.
The reversal of the loan loss reserves was the easy part, I think we were talking about it when FASB threw the banks a lifeline back in 2009. This is a bit more interesting.
From FT Alphaville:
Spreads and the Citi
Clearly, gaining $1.9bn in revenue from your own credit spreads blowing out must be the trophy asset for the A/W ’11 US bank earnings season…
Citigroup’s Q3 results, out on Monday (total revenue $20.8bn):
Third quarter revenues included $1.9 billion of credit valuation adjustment (CVA) reflecting the widening of Citi’s credit spreads during the third quarter. Excluding CVA, third quarter 2011 revenues were $18.9 billion, 8% below the prior year period and 8% below the second quarter 2011. CVA increased reported third quarter earnings by $0.39 per share.
Much like JPMorgan’s earlier earnings release, Citi’s recording of revenue gains from CVA (on itself, or “CVA on Citi Liabilities at Fair Value Option”. AKA… DVA) helps to hide truly terrible trading figures. (Fixed income revenues fell by a third from the prior year period.)
This looks very similar — heck, it’s even the same headline figure of $1.9bn — but there is one interesting difference. Citi appears to have been a bit more careful, or lucky, in hedging its counter-party credit risk than JPMorgan....MORE