Earlier this week, Citigroup reported earnings of $4.4 billion for the last quarter, along with its best turnover for the last couple of years. It managed to leave behind JP Morgan and Bank of America, its closest competitors, in terms of earnings. The management of the bank claimed that it is now out of all the difficulties that it faced during the recession, because of which it had to be rescued using taxpayers’ money.
However, if analysts are to be believed, this performance by Citigroup will be short-lived. Its profits are a result of gains in securities trading, lower expenses in business, and credit-card rate hikes. Out of these, the credit card profits are almost certain to be hit severely because of the CARD Act.
There are many other factors that point towards reversal of Citigroup’s fortune in the next few quarters. The company reduced some of its toxic assets and some more are to be sold in the next 2-3 years. However, its toxic asset pool has decreased only marginally. Although the management will be happy that these assets, which were an eye-sore on the balance sheet of the company, have yielded some positive returns, the majority of these assets are still there and they could come back to haunt Citigroup.
The tax rate for Citi was just 17.3 % this year, while that of JP Morgan was 26% and for Bank of America it was 27%, but these rates will not remain constant. Citi had converted all its preferred shares into common shares and did not have to pay any stock dividend, but it has started selling preferred shares again.
Another factor which led to Citi’s good performance is that it has very few home equity loans as compared to JP Morgan and Bank of America. Again, this advantage will not be there forever and the chances of Citigroup beating its rivals again do not look that good.
Meanwhile Mr. Vikram S. Pandit, the CEO of Citigroup, said he was very pleased with the group’s performance. The shareholders of the group are still not pacified though and they objected to the management’s proposal for a reverse stock split in a recent meeting. The proposal cast a doubt over the management’s claim that the company’s problems are over and that shareholders can look forward to sustained profitability for at least the next few years.