01/17/2013 04:54 pm ET Updated Jan 18, 2013

Citigroup Blames Gloomy Earnings On Fiscal Cliff, But Analysts Are Unconvinced

The top management at Citigroup gave a dour view Thursday on the path the U.S. economy would take in 2013, saying it wasn't sure that positive trends in the employment and mortgage landscape were "sustainable." The gloominess came amid, and was partly used to excuse, disappointing quarterly results announced earlier in the day.

“As we said last quarter, we want to make sure that those [positive economic] trends … are sustainable,” John Gerspach, the bank’s chief financial officer, said during the conference call following the release of the financial results.

Thursday's numbers were widely panned as lackluster, with even Citi’s new Chief Executive Officer Mike Corbat telling analysts that “to be clear, we are not satisfied” with the numbers. But a big reason for the smaller-than-expected earnings was the fact that the bank's lack of confidence in the future had led it to dramatically cut the amount of profit gained from tapping its loan-loss reserves.

Banks are generally allowed by their accountants to siphon off a portion of their loan-loss reserves -- essentially a pot of money the bank holds that allows it to absorb defaults in its credit portfolio -- if they are confident improvements in the economy will mean less defaults in the future. Banks can also take advantage of the profitable accounting if their portfolio of bad loans is shrinking. In the previous five quarters, when of both those dynamics were at play, Citigroup was able to move between $600 million and $1 billion dollars each quarter, counting that amount as pure profit. By comparison, it was only able to take in a contribution of $86 million from that line item this time around.

In comments to analysts, CFO Gerspach tried to justify the management's pessimistic turn on the political situation in the United States over the past quarter, claiming a level of certainty had been created that had caused the bank to re-calibrate how prudent they thought it was to move away from loan-loss reserves.

“At the end of last quarter, we pointed out that we wanted to see the U.S. get past the whole fiscal cliff issue. Unfortunately at the end of the year, what we saw was another instance of kicking the can down the road,” Gerspach noted.

Analysts on the call with Citi management were not buying it.

“It just seems really odd that we wouldn’t see some reserve release,” Brennan Hawken, an equity analyst for UBS, said in challenging Gerspach’s explanation during a question to the CFO.

“Dysfunction in Washington is something we’re going to keep seeing ... I guess I’m just trying to figure out what’s really holding back” a larger flow of cash, Hawken said.

Indeed, other parts of the Citi results suggest the pessimism from the bank management might be due to some worrying trends they are seeing in their balance sheet.

In its Citi Holdings unit, which holds some of the bank’s most troublesome assets and is being slowly wound down, Citigroup took a loss of $1.1 billion, a substantial chunk of a total asset base that now stands at $156 billion. The overwhelming majority of those losses occurred due to mortgage defaults, a worrying trend for Citi that goes against the grain as housing prices are rising again nationwide. The losses were so high when compared to previous quarters that Citi actually put money back into its loan-loss reserve fund for the unit, taking yet another financial hit.

Citi’s results were not catastrophic by any stretch. While traders on the New York Stock Exchange were selling off Citigroup stock, pushing it down over 3 percent to levels just north of $41, the stock is still worth more than when the new CEO took over in October. There were some bright spots in the financial results, including a turn-around in the bank's capital markets division when compared to a year ago and growth in its Latin American loan book.

Still, compared to some of its peers, Citibank management gave off a depressing mood thanks to the lackluster results on Thursday.

Near the end of the call with analysts, CEO Corbat answered a question about what he would consider a mark of success on his still-young record at the bank by saying that Citigroup had "to get to a point where we stop destroying our shareholders' capital."

CORRECTION: A previous version of this story mistakenly identified Brennan Hawken as Matt O’Connor.



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