Citigroup back in the black for first time since 2007

Bank's chief warns that debt defaults will climb as unemployment rises
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The Independent Online

Citigroup, the wounded giant of the US banking industry, has posted its first quarterly profit since 2007, capping a week of stronger than expected results for the nation's leading banks.

But the company also put off its plan to convert the US government's bailout investment into ordinary shares, reflecting the continuing uncertainty over the outcome of the Treasury department's "stress test" of the bank's financial health.

The government is working to see how well Citigroup and its rivals will be able to withstand the recession, and has promised to pump more money into those that need it. Citigroup's underlying businesses are continuing to suffer the effects of the downturn on its consumer and business lending divisions, it was clear yesterday, and Ned Kelly, the chief financial officer, said there would be more losses to come as unemployment and weak corporate profits cause debt defaults to climb.

"The elephant hasn't made its way through the python," Mr Kelly said.

In common with Goldman Sachs and JPMorgan Chase, which had already reported first-quarter earnings this week, Citigroup benefited from a strong performance in its fixed income division, where wide spreads have made it easier for traders to make profits. It was also able to limit the writedowns on its remaining portfolios of toxic mortgage derivatives and corporate loans thanks to accounting rule changes which are less strict about valuing these assets at market prices.

"It is a tale of two Citis," said Bart Narder, analyst at the Boston-based consulting group Celent. "It was the best of times, it was the worst of times, and Citigroup can show bits of both in its numerous business units. It was the worst of times in consumer banking, which showed losses in Q1 2009 where it was earning money in Q1 2008. Times are tough and getting tougher in the card business."

Overall, Citigroup's net income was $1.6bn (£1.1bn) in the first three months of 2009, compared with a $5.1bn loss in the same period last year. Its earnings per share were still negative in the quarter, though, because of the treatment of preference shares, $45bn of which are owned by the US government.

Citi and the Treasury announced last month that they would swap those preference shares for common stock, so as to improve certain capital adequacy measures that are important to the outcome of the stress tests. However, the conversion, due to take place this week, is being postponed. The delay has been squeezing Citi's share price higher, because short-sellers who had expected to be able to use the new shares to close out their positions have had to bid up for existing shares instead.

Mr Kelly said the stress test would reveal "information that's relevant not just to preferred holders but to the market as a whole, and as a result we thought the sensible thing to do would be to wait to launch the offer until we had the results of the test". He refused to say more, but told analysts not to read into it that Citi expected any change to the plan as a result of the government's ultimate ruling. "It is no more complicated than that," he said, "and the reason I'd say that with some confidence is I'm the one that came up with the idea."

Analysts nonetheless believe that Citigroup is one of the banks with most to fear from the government's stress tests. Although smoke signals from the Treasury suggest that no bank will be allowed to "fail", it is unclear what will be disclosed about individual institution's financial health and what capital requirements the government will set for banks under the test.

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