What to make of Citi's earnings?

April 17, 2009 | By Jim Kim

People are buzzing about Citi's big first-quarter profit of $1.6 billion. However, if you account for the dividends on the preferred shares it paid the government, it posted a loss of $966 million. Still, with expected exchange offers to take place soon, it's reasonable to focus on the $1.6 billion figure, which ignited a rally. In general, this is good news, but few think the ailing bank is now fixed, ready to pay back its TARP funds and thrive as a standalone bank.

Much of the big profit reflects a $2.5 billion accounting gain; banks are allowed to account for declines in the value of their own debt as gains, under the theory the securities could then be bought back at a discount. The bank also racked up some huge bond and equity trading gains, which may prove ephemeral.

At a more operational level, there is plenty of reason to be worried. In addition to its weak capital position, the souring economy might easily lead to higher loan loss reserve hikes across all consumer markets and now even the commercial markets. All while the soon-to-be executed exchange offers severely dilute shareholders. For the moment, all eyes will turn to the stress tests, the result of which will be known in early May.

For more:
- here's a AP article