Citi "Beats" Earnings As $2 Billion In Reserve Releases Generate Half Of Pre-Tax "Income"

Tyler Durden's picture

All you need to know about Citi's $1.09 beat of $0.96 consensus EPS: "Citigroup’s total allowance for loan losses was $34.4 billion at quarter end, or 5.4% of total loans. The $2.0 billion net release of credit reserves was 37% higher than the prior year period as credit quality continued to improve during the second quarter. More than half of the net credit reserve release was attributable to Citi Holdings. Consumer loans that were 90+ days delinquent, excluding the Special Asset Pool (SAP), fell 46% versus the prior year period to $9.9 billion, or 2.3% of consumer loans, while corporate non-accrual loans fell 56% to $4.8 billion and consumer non-accrual loans fell 39% to $8.4 billion." Translated: the "improvement" in mortgage loan standards (despite the ongoing foreclosure moratorium) is what "urged" the bank that it should provision less, and drive EPS higher. In other words of the $4.3 billion in pretax net income, almost half came from loan loss reserve releases. Since Q2 2009, loan loss reserve changes have reduced pretax income by $5.6 billion and added to pretax income by $11.2 billion. And that is what in the New Normal, is called "Income".

And another way to visualize this:

As for actual banking-related operations:

  • Equity Markets revenues dropped 24% QoQ
  • Fixed Income Markets revenues dropped 20% QoQ

Also notable- Citi says its exposure to the PIIGS is $13 billion or about 10% of its Tangible Common Equity.

The full investor presentation is below:

Earnings Presentation

Full earnings release can be found here.


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digitlman's picture

Please explain to me in laymans terms.


edit:  or more geekier, Jack Carter "Everyman" terms ;-)

Popo's picture

Capital reallocated from loan-loss provisioning was counted as "income".

Which is b.s. because that reduction in loan-loss provisioning was based on the red-herring / false indicator of improving loan-quality.

Ultimately, C has magically beat estimates while making themselves more vulnerable.   Once again:  Their profit = the public's (future) loss.


idea_hamster's picture

It means they just went all-in (no reserves)
on 7-2 (their balance sheet sucks)
with 9-6-3 on the board (recent data on recovery all suck)
versus a known tight/agressive player (gold)
because they know that if -- excuse me -- when they lose (stock price goes back to $1)
and they need a marker (bail-out)
from the pit boss (Obama/Geithner/Bernenke)
they will get it (shadow discount window op? 0.01 bp loan? your guess is as good as mine)
and it won't matter because the debt enforcer (the court system, but think Joe Pesci from "Casino")
won't be coming to break their legs but rather all the other idiots' sitting at the table (that's you and me).

Hope that helps.

trav7777's picture

Tyler wasn't bitching when increased loss reserves were counted AGAINST income.  Only now does it become a "fantasy"?

Tyler Durden's picture

Actually we did mention it. The problem is it coincided with a taxpayer rescue which FUNDED the massive surge in reserves. Because without this taxpayer rescue, none of these observations would even exit today (and neither would the US have to issue $1.5 trillion in debt each year to fund a ponzi scheme).

And since you missed the bolded text, the ratio of reserve generating pretax Income to Loss is 11 to 5 billion. Translated for your benefit: over 100%.

DaveyJones's picture

Should have added italics. Rescue technicalities. In distress does not a damsel make

SRV - ES339's picture

Good point trav... anyone know what the reg is on Reserve level adjustment, or can they just use it as they see fit to pad bonus and manipulate the stock price (you know... the WTI model)?

Saxxon's picture

That's right ploc.  What a gaggle of beetches. 

Citi beat, were some of you short?

Remember the Paul Simon song?

"Still shortin' after all these years...O, still shortin' after all these years".

You have had at least (2) years to study the mechanics of the pump.  You knew the fix was in...

"O, still shortin' after all these years..."

Popo's picture

The 'fix' is always, and only ever a 'patch'. 

If governments could stave off insolvency indefinitely via accounting tricks,  nations and empires would never fail.

Extend and pretend has limits that cannot be breached.

...Then again... the Soviet Union extended and pretended for quite a few decades.   Imminence is a very difficult thing to measure...

Caveman93's picture

Accounting magic! Turds into gold nuggets! We're so screwed.

optionsoptions's picture

It means that Citi overreserved the last couple of years and are actually showing less loses than was previously estimated. 

They weren't doing as bad as everyone said they were last couple of years (even though they were still really really really bad) and they aren't doing as good as they say they are now

Loan loss provisisions are a way to "manage" earnings or "cook the books"

The most important thing which Tyler highlights is that their loans are going bad at an accelearting slower rate which is a very good thing and by their own admission, they are only giving out loans with much higher quality.

All good things for the stock going forward.....all else being equal.

John McCloy's picture

Imagine you lose your job and you are now making 75% less working at Home Depot. Instead of telling your wife what actually occured and telling her to cancel her gym membership and head to Louis Vuitton less you dip into your savings and pretend your making the same figure as before. She can know continue the lifestyle and no corrections can be made on the expenditure side to compensate for less income. Works wonderfully until and event occurs and she goes looking for the rainy day fund and there is 0 left. In peasentville they would file for BK. In bankster world they care not because when that day arrives they go knock on Uncle counterfeiters door and problem solved. This all happens after a round of "nobody saw it comIng" .

ThirdCoastSurfer's picture

Please correct me if I'm wrong, but I think it also means that they declared a tax loss on these reserves which they are now able to carry-over and apply against earnings. Reserves do not sit idle but are invested in "cash equivalent" investments.

It's like claiming that the money you have in an interest bearing account (except you'd have a balance in the billions) is a tax deduction (imagine a multi-billion dollar-for-dollar deduction) in the years when your business or your crop are failing but, without moving the money, in the good years you can then subject this money to taxation. However, since it was a loss and then a gain,  the net is a wash, except it's up to you how to apply it as the loss can be applied to whatever earnings come first. 

So, it becomes clear that your corn crop is going to fail so you declare a "loan loss reserve" that effectively doubles your tax loss. The next 2 years are good so you offset the taxable gains with the taxable losses and then in year 3, with another good crop in the ground, you declare the loan loss reserve is no longer needed and you pay the tax that that it entails -hopefully, offsetting that liability with the purchase of a new tractor which is 100% tax deductible in 2011. 

Racer's picture

How absolutely ridiculous, what a complete scam, con, farce, ponzi, pyramid....

trav7777's picture

Citi's losses were greater for some time due to loss reserves being counted against income.  They are merely backing out those monies.  These funds were not counted as income when they were reserved; they were counted as a loss.  Now they are counted as the income they should have been, just in a later accounting period.

You idiot doomers need to get edjamacated and stop frothing over Tyler's trollbait.

DaveyJones's picture

it's so idiotic and exagerated that it drags you back here daily. Perhaps we should model your peak oil positions to learn how to be non-doomer. You win, we trust the big banks, their accounting and the rules they regulate 

slaughterer's picture

Pandit the bandit. 

ZeroPower's picture

Citi capital markets blows pretty hard, they still have a decent (presumabely, based on league tables) IBD team but thats about it.

slaughterer's picture

One does not need to be an accounting maven to see the farce.  Short the pop. 

DarthVaderMentor's picture

Did you mean to say "short the poop?"

DarthVaderMentor's picture

They took a wand, moved bad loans into a "special pool" and magically reasoned that risk has gone down, so they took the 2B they had in reserves for the bad loans in the "special pool" released the money and called in revenue. 50% of revenue comes from this asset turned magically into "recurring" income, then they raised client transaction rates and went overseas for the rest of the profit. No revenue growth anywhere else.


Massive example of classic banking window dressing. It'll take a while for the retail investor frogs jumping into the C water to realize the heat has been turned up in the pot.


trav7777's picture

you DO understand that moving the money into reserves generated an accounting LOSS for the period in which the funds were reserved, right?

SheepDog-One's picture

So I guess the topic of QE3 is now dead, considering banks only real problem is what to do with all their extra billions of cash, they should be plenty happy and satisfied today. And like Tony Montanas OTHER only real problem, they just need to remember 'Dont get high on your own supply'.

DarthVaderMentor's picture

Hehehe..."high on your own supply" of released faux reserves. They'll make this part of eps and continuing revenues, you betcha.

Dick Darlington's picture

Reserves, only milkable cow left.

slaughterer's picture

Who needs reserves?  Everything is good. 

Careless Whisper's picture

Also notable- Citi says its exposure to the PIIGS is $13 billion or about 10% of its Tangible Common Equity

the bad news is always in the footnotes.

monopoly's picture

Same old crap and they play it up big time on Wall Street. Nothing has changed, we are moving down but until the stock market pundits admit it, tough to short for more than a day.

Question guys, am I the only one that cannot stand Cramer this early in the morning, (west coast time). What possessed the programming idiots to allow this shill on before breakfast? Back to Bloomberg.

slaughterer's picture

I would never want to watch Cramer before I brushed my teeth.  After he makes me puke, I would only need to brush again.

lizzy36's picture

i heard cramer and all thought was "it shuts up or it gets the hose again".

oogs66's picture

cramer is unbearable, i cannot watch the show with him on, period...andrew ross sorkin is almost as bad..

Loose-Tools's picture

I think he is there to actively recruit Bagholders before the next correction. Ever notice when he gets extra excited his voice sounds like someone straining to pass an oversized turd?

oogs66's picture

wait til you see fixed income revenue next quarter, with limited POMO revenues

bill1102inf's picture

This is quite comical.  We have KD saying that if the limit is raised - we get down graded. FOX saying that if it is not raised, we get down graded. ZH acts as if we already have been down graded, defaulted and that gold is being accepted at supermarkets in america.  We have the american people who DONT want it raised, supposedly, but dont care about our 'rating', and of course the fact is, if we do get downgraded by a  terrorist RATING agency, and interest rates rise, that 800 bil we pay to service our debt is going UP UP and AWAY!!!

monopoly's picture

Terrorist Rating agency, don't get that. You mean SP, Fitch, etc. are terrorists? A bit absurd is it not.

bill1102inf's picture

just like terrorists, they behave (mostly) when they are bribed, etc and act up when it suits them best. Do you really think the us deserves a AAA rating after all the shinanigans?? I mean, I do, because compared to the rest of the world we do more right than wrong, but by ourselves? We deserve a D for douchebaggery

slaughterer's picture

Thanks, all that is correct.  Every single outcome of the debt ceiling "deal" is a LOSE-LOSE for the USA.  BTW, do not forget the advisory role the IBs are playing in this charade. 

Hedgetard55's picture

Reserve reversal, bitchez!

qussl3's picture

Hey where have I seen this movie before?

It seems like almost yesterday.......

HCSKnight's picture

Re "Since Q2 2009, loan loss reserve changes have reduced pretax income by $5.6 billion and added to pretax income by $11.2 billion." Think you need to be a little more clear. Self-contradictory sentences leave the impression of utter ignorance or, at the very least, very poor communication skills.

slaughterer's picture

I am sure there is a planet deep in the universe where the logic of that sentence would be ackowledged. Just not here on Earth. 

Karl Napp's picture

Why do they have any loan loss reserves? Losses have to be carried by the taxpayer!

twotraps's picture

What a joke.  That we even pay attention is even more sick.  The govt and now banks operate out of Pretend Accounts with no basis in reality.  Where is 'value' when the entire system (europe included) treats it as a silly game.    Pathetic...put a politician in charge and you are fucked.

twotraps's picture

Actually....we just need to find the opportunity, expecting things to change or trying to figure out the next level of stupidity and rule-bending is pointless.  At some point, there will be a big fat chance to make some money off this, we just need to find it.  

Rainman's picture

Private analysts can't figure out what "lies" in the bank's financial black box either. So the caravan moves on. Banksters continue to determine the desirable number for a quarterly result and work their way backwards. Same as it ever was...since Q2 09 especially. The numbers ignite the bonus machine.

highwaytoserfdom's picture


Bove Dick says buy.. You short as much as possible.

Bove Dick has made me so much money being wrong..

reverse split close was at 44.16 close 38.38 That is a 13% decline on a FED sponsored insolvent. Of course made 10 times that on levered shorts.. If you believe in free markets then this TBTF is insolvent. From ZeroHedge 2-billion-reserve-releases-generate-half-pre-tax-income

Since Q2 2009, loan loss reserve changes have reduced pretax income by $5.6 billion and added to pretax income by $11.2 billion. And that is what in the New Normal, is called "Income".

The FED has pumped paper into reserves. 

There is a Hobson's choice on the TBTF liquidation on FED transparency or the same fate as the Japanese banks of the 80's.. It is not like we have not seen this before.. 

Bove Dick is an verb for TBTF criminals or as Lloyd says "God's Work".

Yahoo needs a button for "Liquidate". 

Sentiment : Strong Sell