One hopes that this signifies a real upturn, but I have to be dubious for now. My understanding is that Citi was “profitable”, without considering nonrecurring items. That’s probably true of nearly any bank, even insolvent ones. The nonrecurring items are typically what bring a bank down. Part of the whole problem with banks now is that it’s pretty hard for anone outside the upper executives of a bank (and sometimes them as well) to know when the “hits” are going to come and how big they will be.
I have watched a few bank stocks, and a lot of them have written down a lot of assets, established big loss reserves, etc. When those things occur, they occur at one point in time only, and happen suddenly. Sometimes they have no connection with the actual profitability of the bank in more “normal” terms.
I remember, for example, seeing one big regional bank show a terrible loss during this quarter. However, all of it was due to its writing off a huge “goodwill” asset on its books, but had nothing to do with its underlying profitability, because the “goodwill” was a non-earning asset anyway.
I remember seeing another bank operating profitably, suddenly take a huge loss on a loan made to another bank that went under. That skewed the results for the whole year, but the bank was otherwise operating at a pretty substantial profit. Nevertheless, the loss of that loan really did affect its profitability somewhat, because up to that point, the loan to the other bank was an “earning asset”.
One of the truly bizarre things about this whole situation is the fact that banks pay nearly half their net income to the government in the form of income taxes. So, in the course of trying to raise capital levels by earning income, they’re severely hampered in that effort by the very government that guarantees savings accounts and loans TARP money.
So, in the case of the regional bank I mentioned above, its net worth was reduced, but it also generated a tax loss that would allow the bank to slowly “replace” the written down non-earning “goodwill” asset with earnings upon which, due to the accounting loss, it would not pay income taxes. In other words, it might allow that bank to ultimately replace a non-earning asset with an earning asset.
What any of this portends for Citi, I don’t know. I really do hope, for the sake of stockholders in Citi, that it survives. I don’t wish that bank or any bank to go under. But just because it was profitable based on recurring earnings, it doesn’t mean it has turned any corner. The further question is how many more assets get written down or written off. How many “nonrecurring” loss items are in its future, and how many of them can it withstand?.
What we also don’t know is the effect of “mark to market” accounting rules. If a bank holds, say, a security that is actually paying, but for which the market is presently weak or nonexistent, the bank is required to write it down notwithstanding that it may still be an earning asset. That writedown also affects earnings reported, but would not necessarily represent a real loss in earnings potential.
There sure is a lot we don’t know, and can’t know about banks nowadays. No doubt that’s the reason their stocks are doing so poorly. Some very depressed bank stocks are going to be worth a lot of money in a few years. Some will be worthless. The problem is that it’s extremely difficult to tell which will be the case. No doubt that’s a good part of the reason the market doesn’t favor them right now. It’s terribly difficult to really know what you’re buying.
Short selling is just rampant among bank stocks right now. One suspects that reimposing the “uptick rule” will help with that. Prohibiting “naked shorts” might be helpful as well. As far as I know, that has not happened.