JoJo writes:
"Now that Citigroup has posted its first quarter earning for 2008, do you still stand by your original analysis, or you think you have to revise it?"
Thanks for getting my butt in gear for the update I promised, JoJo.
As many of you may know, Citigroup (C) reported a loss of $5.1 billion in the first quarter, which hardly makes it easy to figure out what a more "normal" quarter would look like for them. While the losses and writedowns did go down in Q1, versus Q4, there is still plenty of cloudiness in Citi's results.
Nonetheless, there is no point in shying away from digging through the numbers, even if they are complicated, which is why I even bothered writing about Citi in the first place. The first thing I did was update my spreadsheet showing Citi's quarterly income results by segment going all the way back to 2007. This allows us to see the trend for the last five quarters. Then I added my prior forecasts from February (For those who don't recall, I projected three scenarios -- conservative, moderate, and aggressive -- each trying to pinpoint the possible earnings power for Citi post-credit bubble). Here is the data:
Now, let's go through it. As you can see, the biggest obstacle to valuing Citi is the Markets and Banking segment. That division lost $5.7 billion during the first quarter, which accounts for all of Citi's total loss and then some.
It is going to take some time to really pinpoint if my projected "normal" profit range for the investment banking operations of ~$2-$4 billion is accurate. The reason is that much of the losses right now are one-time events, not recurring costs of doing business.
For example, Citi wrote down $3 billion in Q1 just on auction rate securities and monoline insurance exposures. That accounts for more than half of the investment bank's losses for the period, but those issues won't be around long term, as they are simply due to the recent credit crunch. As of right now, I'm sticking with my estimates for the investment bank, as nothing we know now leads me to think they can't earn several billion in say, 2010.
As for the other segments, the numbers are actually not that far off. The International Consumer division's trailing twelve month profit figure is right in between my moderate and aggressive forecast. U.S. Consumer is clearly strained right now, though they are not too far off from my numbers ($6.5 billion in profit for the past year, versus a conservative estimate of $7 billion). Global Wealth Management is also not too far off, so all in all I don't see the need to change much right now.
Now, you may be asking why I am using trailing twelve month profits rather than annualizing the latest quarter. Well, I'm thinking that just as 2006 and early 2007 profits were overstated due to the credit bubble inflating, the results from Q4 2007 and Q1 2008 are understated due to the extreme strain in the credit markets. By using a rolling four quarter average, I can get a better idea of what an entire year might look like rather than extrapolating just three months. That said, this formula isn't perfect either, and we will see a lot of volatility as the strong numbers from 2007 are anniversaried.
Full Disclosure: No position in Citigroup at the time of writing