Citi's 1Q profit spike: Less than meets the eye

Citigroup Inc. Chief Executive Vikram Pandit put his credibility on the line last month when he wrote a memo saying the bank, after five consecutive quarters of losses, at last was profitable. It turns out that depends on which definition of “profit” is used. Excluding expenses such as dividends on preferred shares, Citi had net income of $1.6 billion, a dramatic improvement over the $5.1 billion loss it suffered in the year-earlier period. However, accounting rules dictate that dividends and other such costs must be counted when tallying up a company’s profitability. On that basis, Citi posted a loss of $966 million, or 18 cents a share. Shareholders seemed inclined not to buy into Citi’s rosy concept of its results, released Friday morning: Its share price was down 3% in midday trading. Mr. Pandit said in a statement he was “pleased with our performance.” But analysts at independent credit-research firm Egan-Jones were not impressed, chalking up Citi’s results to “accounting and government magic.” In particular, Egan-Jones noted that recent accounting-rule changes enabled Citi to defer losses it would have otherwise had to recognize. Citi, they wrote, “needs to be watched.” The accounting-rule changes helped Citi report a $3.8 billion gain from trading debt and other securities, Egan-Jones said, a vast improvement from the year-earlier period’s $6.8 billion loss. Goldman Sachs and J.P. Morgan Chase also reported robust trading results earlier this week, also due in part to the rule changes. Apart from changes in the accounting rules, Citi helped its cause with shareholders by cutting costs aggressively, in large part by eliminating 13,000 employees. But it also set aside less money than some analysts had expected to guard against loan-losses—a move that raised some eyebrows in light of rising credit losses, with non-performing assets growing 15%. While Citi appears to be making halting progress, it still faces plenty of difficulties. Its exposure to problem asset classes, such as subprime mortgages, commercial real estate and structured-investment vehicles, is only half as much as a year ago, yet remains more than $100 billion.