Accounting fraud allows Citigroup to post phantom profit for Q1 2011

After JPMorgan and Bank of America, yesterday was Citigroup's turn to use accounting fraud to post phantom profits.

Basically, the company is reporting a profit of $3 billion in profits when at the same time, reducing the loan loss reserves by $3.3 billion... Nothing new under the sun, that has been going on for all the banks for the past 3 years, and analysts cheer on the news, accounting firms approve the numbers, scandals are left for the next year or two.
April 18 (Bloomberg) -- Citigroup Inc. rose in New York trading, the only U.S. lender among the top 10 by assets to advance, after reporting profit that beat analysts’ estimates and cutting provisions for future loan losses by $3.3 billion.

[...] First-quarter net income fell 32 percent to $3 billion, or 10 cents a share, exceeding by a penny the average per-share estimate of 21 analysts surveyed by Bloomberg.

Chief Executive Officer Vikram Pandit, 54, relied on the reduction in reserves to report the New York-based bank’s fifth profitable quarter in a row. Losses on troubled loans declined 25 percent as fewer customers missed payments compared with the same period last year. Profit at Citigroup’s trading and investment-banking businesses fell by almost half. Revenue declined in five of the six business units.

The company is showing just an incredible turn in the quality of its loan portfolio, which I don’t think was expected,” said Lutz, Florida-based Richard Bove, an analyst with Rochdale Securities LLC. “I don’t see any bank having that type of rapid improvement.”

[...] Citigroup’s revenue declined 22 percent to $19.7 billion. Revenue for the Citicorp division, which contains the bank’s trading, consumer and investment-banking units, fell to $16.5 billion from $18.5 billion in last year’s first quarter. The Citi Holdings division, which contains unwanted businesses and assets, had revenue of $3.28 billion, down from $6.55 billion.

Losses from bad loans declined to $6.27 billion from $8.38 billion. The $3.3 billion reduction in the provision for losses on future soured loans amounted to about 80 percent of the bank’s pretax profit.

These guys have put up a fairly respectable record of turning this institution around,” said David Knutson, a credit analyst with Legal & General Investment Management, which manages Citigroup bonds worth about $85 million. “It’s another question whether they should be releasing reserves as aggressively as they are.”

Total trading revenue declined to $4.87 billion from $6.59 billion in the same period last year, a period that Oppenheimer & Co. analyst Chris Kotowski called “the best quarter in history” in a note last month. New York-based Kotowski had predicted a drop to $5.01 billion.

Trading and investment banking are run from Citigroup’s institutional-clients group, which Pandit overhauled in January when he appointed ICG head John Havens to chief operating officer. James Forese now runs securities and banking, reporting to Havens.

Stock-trading revenue fell to $1.07 billion from $1.21 billion a year earlier, and compared with $596 million in the fourth quarter. Fixed-income trading revenue declined to $3.8 billion from $5.38 billion in the same period last year.

“This was a very solid quarter outside of trading and a strong quarter inside trading,” said Moshe Orenbuch, an analyst with Credit Suisse Group AG who had predicted that fixed-income trading revenue would fall to $2.73 billion.

The earthquake in Japan forced the bank to set aside about $100 million for possible losses on mortgages and private-equity investments, Chief Financial Officer John Gerspach told analysts on a conference call. The bank recovered initial trading losses “within a week or so” after the quake, Gerspach said.

Citigroup’s regional consumer-banking business reported earnings rose 58 percent to $1.55 billion. Profit at the U.S. bank increased to $551 million from $15 million. Latin American earnings rose to $486 million from $372 million last year. In Asia, the consumer bank’s profit fell to $461 million from $567 million.

Citigroup may invest as much as $4 billion in consumer banking in the next three years, mainly in emerging markets, Manuel Medina-Mora, head of consumer banking for the Americas, told reporters in Santiago in March.

Citigroup’s investment-banking business, which includes advising on mergers and acquisitions as well as managing sales of equities and bonds, reported revenue slid to $851 million from $1.06 billion in the same quarter last year. The bank dropped to seventh from third among advisers on completed global mergers and acquisitions during the quarter.

Transaction Services

Profit at the transaction-services business fell to $841 million from $930 million last year in the first quarter. The unit, which made about one-third of Citigroup’s $10.6 billion profit in 2010, lost top executive Paul Simpson to Bank of America during the quarter. Pandit has yet to appoint a permanent replacement.

In Citi Holdings, the local consumer-lending division reported a $599 million loss, compared with $1.83 billion in the first quarter of last year. This unit, which contains the CitiFinancial business, also reduced its provision for future loan losses by $1.11 billion.

“Citi Holdings losses continued to decrease,” Pandit said in the statement. “We are investing in our core businesses in Citicorp, our capital strength improved and the mix of revenues reflects the diversity of our businesses and our depth in both the emerging and developed markets.”

Citigroup reclassified $12.7 billion of assets in its “special asset pool” business to trading from held-to- maturity, a move that paves the way for the sale of those assets, the bank said. The move reduced revenue by $709 million.

“Securities-related revenue was a positive surprise and the reserve release was better than expected,” David Trone, an analyst with JMP Securities LLC, said in a note. “On the negative side, like peers, there is no material momentum on the traditional banking side, which we view as key to getting the stock out of its range.”

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