Citi - Fourth Quarter review

Today I begin my assessments of conference calls for quarters ending Dec 2011.  Last week, Citigroup announced their Q4 earnings.  Let's go through and see what a rookie like me notices.  This isn't the first conference call I've listened to, but this is the first one I'm going to try to articulate for my own memory as well as to share with others.

Want a definition of a bad quarter?  Look no further than the results from Citigroup this last Monday as they reported $0.39 per share earnings - 22% below estimates of $0.49/share, 5% below Q4 earnings for 2010 and a whopping 53.5% below Q3 earnings.  Talk about a stinker!  But that's just a broad summary, so let's actually try to get into good and bad things I heard in this last quarter's conference call.

I'll start with the bad things today since there are so many.  I already stated the poor earnings, but why were they so poor?  Here are some of the things I noted.  First, I find it amazing how so much emphasis was put on Europe and the turbulence they are putting the markets through as a factor to earnings for Citigroup.  Everyone knows that the crisis has been a factor to stock markets up until mid-December, however, there are a number of other banks that have posted much better numbers - even if they haven't beaten estimates - Wells Fargo, Goldman Sachs, and JP Morgan Chase are prime examples.  Revenues were down for at least one of those companies and most of them met or were slightly below expectations.  How do these banks all differ?  Well, Citi is an international institutional bank, as is JP Morgan.  Goldman Sachs is an investment bank and Wells Fargo is a US regional Institutional bank.  Due to the EU crisis, the Dollar gained significant strength and reduced international revenues compared to previous quarters.

Another concerning factor is the fact that expenses have been on the rise.  Citi tried to play that down by isolating core expense growth to only be 2.1% for the core business, however overall growth was up 6.9%.  Many of these expenses were related to legal issues as well as severance pay and is expected to go down next year, however, these expenses are still out of control.  This is a market where their margins are shrinking.  Interest rates are low, and they're not making much off of deposits and loans.  This leaves for their securities and banking group to make money with investments and hedges and to say this group under performed would be like saying the captain from the Costa Concordia abandoned ship slightly early.  Their hedges were decimated.  And what bothered me most is that they said the worst of it hit them in the last 3 weeks of the year.  Really?  Those were probably the 3 best weeks of the quarter for the average investor.  Were you shorting everything? 

There are two final things that bother me that I'm going to touch quickly here.  Many people in the past have noted how earnings are getting padded by the release of loan loss reserves.  I understand where that's coming from, and if I understand everything I'm seeing correctly, I'm predicting that the loan loss reserves for upcoming quarters are going to be reduced.  Their deposits and loans are on the rise, so there are more loans to protect against losses on plus I think I'm seeing trends in delinquent payments flatten out.  If that's not decreasing, they need to maintain reserves to protect against losses, I would believe, so they can't take and magically make money appear as earnings.  Unless estimates drop considerably, I'm thinking Citi will miss again next quarter.  Then there's the final concern - the dividend.  This is a pretty big concern, if you ask me, because this is one reason a lot of people have been thinking this will be a good stock to pick up as it had dropped.  For at least a year now, Citi has been reporting that they would be establishing a significant dividend in 2012 - all the way through the last quarter's call.  Then on Monday, we heard nothing.  I mean so much nothing the crickets weren't even chirping.  No hints, no mentions, nothing.  The dividend must be all but dead and that's not a positive indicator of things to come.  Sure, they still issued their token $0.01 dividend, but that's a joke for a dividend and it's possible the government won't allow any increases yet.

On to the positives.  Yes, there were a few positives to pay note to and reasons why this stock could take off eventually.  The first reason regards the number of comments made around reducing expenses.  If there truly were some large one-time expenses in the last year which would leave for a significant decrease in expenses this year, it could affect margins and earnings enough to be note worthy.  The second thing to note is the fact that Citi's revenues from EMEA (The European zone) was listed to account for only 6% of Citigroup's $4.7B in revenues in the last quarter.  In addition to that, they were de-risking in that region as well.  If you take that information and combine it with the details stating that they actually increased revenues in non-EU regions over the last year when you take away the foreign exchange impacts, and you find that Citigroup is still growing underneath the covers.  There were comments on the fact that Europe's crisis and the size of the European Banks may force those banks to sell assets or turn away business they usually wouldn't.  So far, this only has referred to the securities portion of banking, though.  If this suddenly changes and some of these extremely large EU banks need to sell some assets to raise money, it's possible a bank like Citi might be able to capitalize on capturing real assets on the cheap.  This is something to keep on the look out for, but so far sounded more like big hopes than probable realities.

So there you have it.  My assessment on the Citigroup 2011 Q4 earnings.  I hope you find it to be of some value or maybe you can help provide countering arguments or spots I can improve my own investigations.  After all, I'm just a green home gamer looking to share what I'm thinking and hope many of you out there can help me learn something of value along the way.  Look forward to any meaningful comments you might have!