A very brief outline of what each of us stated to the questions above is listed below. This certainly isn't the complete description of our call:
1. What are the accounting rule changes that made Citi profitable this time?
2. Debt Valuation: FASB allowst companies recognize losses on the value of some debt securities on their balance sheets without counting the writedowns against earnings. Also,companies are allowed to record any declines in the market value of their own debt as an unrealized gain. The rule reflects the possibility that a company could buy back its own debt at a discount, which under traditional accounting methods would result in a profit.
3. Another accounting rule that lets a company record income when the value of its own debt falls. That reflects the possibility a company could buy back bonds at a discount, generating a profit. In reality, when a bank can’t fund such a transaction, the gain is an accounting quirk.
4. Provisions for loan losses cut profits, so adding more to this reserve could have wiped out the quarterly earnings but Citi increased its provision for loan losses at a lower pace.
Sure, the NII was down 16% due to fall in loan balances. Citi has been reducing its loan balance for years now and the reduction in NII was expected. I think the Citi operations in Japan is affecting the bank earnings due to higher reserve.
Looking at the non interest revenue side, Citi was faced with a reduction of 31% for several reasons. One, which was expected, due net charges due to asset transfer, and second, the lower revenue from the trading in securities division which was not expected due to the fact the banks don’t disclose such information until quarter end.
In regard to expenses, Citi was expected to have higher expenses this year due to legal fees and charges. The bank was faced with tremendous legal claims.
Before moving to a deeper discussion, first, we need know what non-accrual loans mean for a bank. Generally speaking, they are nonperforming loans not generating the stated interest income because of nonpayment from the borrower. In other words, non-accrual loans are more likely to default, and the bank, as the loaner, would not recoup its principal. Banks maintain reserves to cover those losses from nonaccrual loans. Even when borrowers resume making payments on the loan, the cash is firstly applied to principal and then to interest. A decrease in non-accrual loans is a good sign for a bank’s credit quality: its loans quality is improving.
Non-Accrual Loans for Citigroup as a whole in 2011 1Q are $14,812 M (decreasing 48% from the prior year quarter), and it is made up of the Corporate Non-Accrual Loans of $5,481M, and Consumer Non-Accrual Basis Loans of $9,331M. As summarized in the latest news, a significant portion of the reduction was due to the recapitalization of Maltby Acquisitions Limited, the holding company that controls EMI Group Ltd., during the first quarter 2011. Unfortunately, no concrete data in its influence to this reduction is found so far. On February 1, 2011, EMI was sold to Citigroup along with its holding company Maltby Acquisitions Limited. Immediately following the transfer in ownership, Citi used a debt-for-equity swap to recapitalize them. The previously unsustainable debt load at EMI was reduced by 65%, leaving EMI with a strong balance sheet and the ability to invest in and grow its business, and the non-accrual loans for Citi were then decreased correspondingly.
Hence, the larger the tier 1 capital ratio, the better it is. So yes, an increase in citi's Tier 1 capital ratio means a better standing for the bank.
Yes, Citi's stock is currently very liquid and is one of the most traded stocks on the exchange, but it's not attracting the types of investors that it needs to bring it back to a high market cap and generate the funds needed to further grow the firm. The international exposure which Citi has will certainly help it propel itself in the coming years, but that would be pending on the perception of the investor and clients. This perception can be manipulated if firms see that the stock price of Citi is going up and is no longer a penny stock, indicating that a larger percentage of institutional investors are putting their money into the firm.
There are many large institutions which want to invest in Citi, but the idea of investing in a penny stock doesn't settle well with them. This all will change after the May 6th reverse stock split.
I don‘t agree with the optimism overlook at Citigroup’s international business and how much it would help the company to grow by providing its clients things such as access to emerging markets, as described in the article.
Although I cannot be 100% sure about the following opinion, the negative financial image that the company created during the recession has largely affected it's business oversees, disregard how successful its franchising model is. The advantage still exists, but the growth potential is being wished, not guaranteed.