What’s in Store for Citigroup?

Citigroup (C) “announced a third-quarter profit of $3.8 billion, or $1.23 a share, beating analyst consensus estimates of 81 cents a share. That represented a 74 percent increase from a year ago, when the bank announced a quarterly profit of $2.2 billion, or 72 cents a share,” wrote the New York Times earlier today. If that’s such good news, then why is Citigroup trading lower than Friday’s close, especially after the market rallied Friday pre-market?

Citigroup Shuffles the Paper

The problem is that Citigroup 85% of the earnings Citigroup reported are “in paper.” Roughly $1.9 billion of its increase was thanks to an accounting adjustment related to the perceived riskiness of its debt. The New York Times writes that “Citigroup also delivered another $1.4 billion to its bottom line from money it had previously set aside to cover losses on credit cards and other loans. Together, those items accounted for more than 85 percent of the company’s earnings.” If  the accounting adjustment was excluded, “evenue dropped 8 percent to $18.9 billion as the bank contended with the global economic slowdown and some of the most turbulent markets in decades.”

Next Steps for Citigroup

Citigroup execs are still bullish on the economy. John Gerspach, Citigroup Chief Financial Officer, told journalists in a conference call, “We are seeing loan growth in every one of our businesses, in every geography.” “There still is a recovery in place,” said Gerspach. “It may not be moving as robustly as we would like it, but it’s there and having an impact.” Citigroup is facing many of the same issues other banks are – rising administrative expenses, trimmed margins after removing many of its fees and the weak dollar. Specifically, Citigroup’s earnings were down 8 percent while its expenses were up 9 percent. This was the result after Citigroup made efforts to reduce its balance sheet. To date, Citigroup has had to be bailed out by the US government, twice. Now, it has plans to sell around $289 billion of it assets, but it has to find buyers first, which is difficult for some of Citigroup’s larger assets, like “CitiFinancial, its large consumer lending franchise; a roughly $115 billion portfolio of American mortgages, and a $42 billion private-label credit card loan business.”