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Half Of Citi's Adjusted Net Income Comes From Loan Loss Reserves; Home Equity Loan Losses Surge

Tyler Durden's picture


The bottom line on Citigroup's just released results: the firm reported an adjusted adjusted Net Income number of $3.268 billion ($1.06 EPS), which was "better" than the expected $0.97 (just like JPM's bottom line was better and the initial spike higher in the stock price promptly reverted into the red once people read the footnote text). How did Citi get to this number? It started with an unadjusted $964 million of Net LOSS and then added back a tax provision, CVA losses (as its spread tightened in the quarter), the loss for the sale of MSSB ($4.7 billion pre tax), and miraculously got to $3.3 billion. The MSSB and CVA/DVA adjustment also miraculously increased total revenues from $13.951 billion to $19.411 billion, making a sequential unadjusted 25% drop in Revenues equal to a 3% increase. But even if one were to assume that the bank's $3.3 billion uber-adjusted Net Income number is meaningful in any way, it is certainly notable that $1.509 million of this, or nearly 50% came from the tried and true gimmick: Loan Loss Reserves, which boosted EPS by the same percentage, even as the firm saw its Net Credit Losses soar by 11% from Q2, to $3.979 billion. This was a bigger LLR than in Q2 ($984MM) and Q3 2011 ($1,422MM). Same old goosing gimmicks, different day.

The most disturbing data point in today's Citi release: the surge in non-conforming loans: something which is not supposed to happen in a "recovery." Here is how Citi explains the highlighted area blow which has seen the NCL surge in Q3: '3Q’12 included approximately $635MM of charge-offs related to OCC guidance with respect to the treatment of mortgage loans where the borrower has gone through Chapter 7 bankruptcy, of which $186MM was attributable to residential first mortgages and $449MM to home  equity loans. Substantially all of these charge-offs were offset by a reserve release of approximately $600MM."

In other words: here comes the home equity loan collapse: second time for this credit bubble, just as we warned over a month ago!

The other key charts from the Citi presentation.

The Income Statement, where we can see that loan loss reserve release amounts to nearly 50% of adjusted net income...

The firm's CVA (spread tightening) fudge:

Legal costs keep going up. No surprise there. Recall: "Home Banker: A Lawyer's Greatest... Enemy?"

And finally, the firm's exposure to the PIIGS. Just like with JPM, it increased on both a gross and net basis.

Full presentation:

Citi Q3 Presentation

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Mon, 10/15/2012 - 09:17 | 2889848 Shizzmoney
Shizzmoney's picture

Well, I guess we know who is next on this game of "musical chairs".


Mon, 10/15/2012 - 09:19 | 2889851 alstry
alstry's picture

It is simply becoming a world where fewer and fewer are producing what is consumed.....as we transition forward to increasingly technological production, the only way to keep the current game gong is to counterfeit, cheat and steal..


You know it is an http://www.udderworld.com when the system is a game we are all milking off


At some point, something will force us to reset the sytem

Mon, 10/15/2012 - 09:23 | 2889863 LawsofPhysics
LawsofPhysics's picture

Watch the supply lines.  When contracts to deliver on oil, grains, rice, and other commodities start to default, you can bet shit gets real in a hurry.

Mon, 10/15/2012 - 09:20 | 2889854 Dick Darlington
Dick Darlington's picture


And that's all folks, LOL!

Mon, 10/15/2012 - 09:22 | 2889861 Sudden Debt
Sudden Debt's picture

that's what the architect of the Tower of Piza also said when he finished his tower...


Mon, 10/15/2012 - 09:25 | 2889867 JPM Hater001
JPM Hater001's picture

Sorry to budge in here.

Can someone explain in either english or hobbit the Loan Loss Reserves part?

Mon, 10/15/2012 - 09:42 | 2889908 francis_the_won...
francis_the_wonder_hamster's picture

Banks set cash aside (reserve) against expected losses (due to bad loans, lawsuits, etc...).

They can (and do) arbitrarily reduce those reserves whenever convenient.  Those reserves then are added back to the balance sheet.  This is one of the easiest ways banks manipulate quarterly earnings.

That's about as simple as I can make it.

Mon, 10/15/2012 - 09:48 | 2889926 francis_the_won...
francis_the_wonder_hamster's picture

Actually, I can make it more simple:

"So, let's ignore the fact that we have more bad loans and are facing more lawsuit exposure.  If we just reduce the amount we pretend to reserve against those inevitable losses, we can goose up this quarter's numbers and make this bloated pig of a bank we work for look good for at least one more quarter.  No, Bob, it's not illegal.....everyone is doing it.  Just do it, Bob, bonus season starts in a few months and I have some options vesting!!!".

Mon, 10/15/2012 - 10:11 | 2890296 JPM Hater001
JPM Hater001's picture

That's what I thought.  So defaults are undoubtedly on the rise via home equity bubble but rather than adding to the loan loss reserves for these growing losses they pulled money out to pay for the prostitutes.



Mon, 10/15/2012 - 09:20 | 2889855 Sudden Debt
Sudden Debt's picture

Yep, calculated into the stock... next rally to 500$ a share?


Mon, 10/15/2012 - 09:22 | 2889862 101 years and c...
101 years and counting's picture

i doubt they'll be doing another reverse split.  it didnt work out so well last time.

Mon, 10/15/2012 - 09:25 | 2889869 JPM Hater001
JPM Hater001's picture


Stock rally in 5 4 3 2 ...

Mon, 10/15/2012 - 09:21 | 2889858 LawsofPhysics
LawsofPhysics's picture

Losses can now be counted as "income".  WTF?!?!?  Gotta love the mark to fantasy accounting that the TBTF get to use.  We lost some production due to drought.  I still don't think that I will count this as income as it would mean higher taxes.  How blatantly stupid does the bullshit have to get before some of these paper-pushing theives are executed?

Mon, 10/15/2012 - 09:25 | 2889865 fonzannoon
fonzannoon's picture

I think that is the benefit of getting retail out. There is no one to call bullshit on this type of situation. Why would these guys eat each other alive? They are better off playing nice with each other and driving it up on hopes retail will jump back in.

Mon, 10/15/2012 - 09:40 | 2889901 LawsofPhysics
LawsofPhysics's picture

yes, but unfortunately, wages matter.

Mon, 10/15/2012 - 09:59 | 2890246 RSloane
RSloane's picture

I'm sure their wages are seasonally adjusted for fatcat.

Oh, you meant the rest of us. My bad.

Mon, 10/15/2012 - 10:10 | 2890283 Quaderratic Probing
Quaderratic Probing's picture

Not if your not paying the mortgage anyway

Mon, 10/15/2012 - 09:22 | 2889859 101 years and c...
101 years and counting's picture

how can wall st hate obama?  he allowed them to commit MASSIVE fraud in 2009 by jamming their B/S with loan loss reserves as a "1 time hit" and all they've done is release 1-3B of this reserve EVERY QUARTER since.  and housing hasnt even bottomed. 

Mon, 10/15/2012 - 09:24 | 2889864 Northeaster
Northeaster's picture

HELOC exposure should make banks insolvent by now, but in today's era of political/financial fraud, The Law and numbers don't mean anything.

Mon, 10/15/2012 - 09:25 | 2889866 insanelysane
insanelysane's picture

Which means they'll pay less taxes than Jon Corzine's bail bondsman's secretary.

Mon, 10/15/2012 - 09:27 | 2889872 Dr. Engali
Dr. Engali's picture

I'm glad to see their bonuses are secured for another quarter. I was afraid they might not be able to trickle down on me.

Mon, 10/15/2012 - 09:28 | 2889876 LongSoupLine
LongSoupLine's picture

loan loss reserves...

reserves = Fed money...

Fed money = middle class fleecing.

Conclusion: Citi beats on adding stolen middle class money.  Party on Garth!


Mon, 10/15/2012 - 09:30 | 2889882 stocktivity
stocktivity's picture

It's all Bullshit!

Mon, 10/15/2012 - 09:44 | 2889912 Bay of Pigs
Bay of Pigs's picture

No Bullish!

Citi up 2-3%...LOL

Mon, 10/15/2012 - 09:47 | 2889924 buzzsaw99
buzzsaw99's picture

The Jamie Dimon school of raping investors.

Mon, 10/15/2012 - 09:47 | 2889927 Seasmoke
Seasmoke's picture

2 Billion + 2 Billion = 5 Billion

Mon, 10/15/2012 - 09:57 | 2890244 DavosSherman
DavosSherman's picture


Mon, 10/15/2012 - 10:15 | 2890308 Miss Expectations
Miss Expectations's picture

I couldn't find the amount remaining in the Loan Loss Reserve.  It's an age old question... I'm trying to figure out how long they can keep it up.

Mon, 10/15/2012 - 13:38 | 2891320 The Iconoclast
The Iconoclast's picture

Yeah, they can't keep doing it forever... right? ... RIGHT???

Mon, 10/15/2012 - 10:56 | 2890457 1eyedman
1eyedman's picture

second mortgage exposure is very very large and never talked about, these 2nds will get 0 pennies on the dollar for most homes w/seconds.    seconds are near impossible to get now bc ltv limits and credit scores.    what seconds do exist are still left over from the bubble, all are quite poor quality and not worth 10cents.

while i agree w/all the comments here there is one accounting trick people are missing and will allow the game to continue right up until the last moment before the a-bomb lays complete waste.

when the surviving banks foreclose, they turn to the fdic for compensation (review terms of wamu/wachovia/ any failed bank).  current banks get paid when they incur addl losses from their takeovers.   then they own the house and I think, mark that value to the value they feel like...as this house (asset) is not the same asset (mortgage loan) they just got paid off on.   here in FL there are many many empyt houses, yet 'supply is constrained, and prices improving'.   the Fed keeps them liquid and they dont have to put houses on the mkt.   everyone pays more than market price should be (given aggregate income and unemployment levels) new homes are built adding to total supply!    these new landlords are paying too much and may be left holding the bag in the next recession (or current one really).  

the Fed liquidity is enabling banks to not put r/e on the mkt, distorting prices...preventing a true and sustainable healing to occur.  they are still trying to turn the clock back to 2007....but incomes arent remotely close to get back there.  

Mon, 10/22/2012 - 04:24 | 2908987 AmeliaV
AmeliaV's picture

Well, mortgage is maybe one of the most popular loans because it's often hard to pay for the house with cash and interest rates on mortgages rates are getting lower, so this way of purchasing a house becomes more affordable. HELOC is a very popular kind of borrowing money, despite it's risky lots of consumers still use it because need large sums of money. I think that these both lending options will be actual for the lending market, because home is a kind of property that we can use as collateral. Large loans are very popular, with a help of payday advance on line it's impossible to borrow large sum of money that's why consumers choose HELOC.

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