Citi Earnings Bloodbath: $3.8 Billion ($1.23/Share) In Reported "Earnings" Really $0.5 Billion Or $0.16/Share

Another stunning EPS beat from Citi today which reported $20.8 billion in revenue and $1.23 in earnings on expectations of $19.23 billion in top line and $0.82 in EPS.... Until one actually reads the following two parts from the earnings release: "Third quarter revenues included $1.9 billion of credit valuation adjustment (CVA) reflecting the widening of Citi’s credit spreads during the third quarter. Excluding CVA, third quarter 2011 revenues were $18.9 billion, 8% below the prior year period and 8% below the second quarter 2011. CVA increased reported third quarter earnings by $0.39 per share"....and... "Loan Loss Reserve Release of $1.4 Billion in Third Quarter, Down from $2.0 Billion in Each of Second Quarter 2011 and Third Quarter 2010." Once again, the bank releases reserves (i.e. a perceived improvement in economic conditions), even as its takes a benefit for major economic deterioration (the equivalent of hypothetically buying bank its debt at lower prices due to risk flaring, or said otherwise, buying CDS on itself). Either way, this is non-recurring gibberish. You take the $3.77 billion in Net Income, take out $1.9 billion in "buying CDS on yourself", and the $1.4 billion in phantom EPS loss reserve, and end up with $0.5 billion or $0.16 per share. It will take the vacuum tubes about an hour to figure this out. Oh yes, and revenues were really $18.9 billion ex $1.888 billion in CVA. Adding insult to injury is that Citi will now have to pull a Morgan Stanley and defend itself against its European exposure: Citigroup (C) has $14.4 billion gross funded exposure in France and Belgium, and $18.0 billion unfunded commitment to Belgium/France.

The bank is kind enough to present the key P&L items:

Citi's loan loss reserve releases: the bank has taken $11 billion in benefits form loan loss reserves since Q3 2009.

As a reminder, Citi has $421 billion in its 3rd party mortgage servicing portfolio, against which it has about 5%, or just $27 billion in Rep and Warranty liability reserves:

And lest anyone forget, courtesy of Operation Twist, banks can kiss Net Interest Margin goodbye. The 2.83% NIM in Q3 is going down. Going down down.

Full presentation: