Citigroup Reports Profits of $2.2 Billion
Citigroup Inc.’s profits for the quarter came in better than expected due to decreased losses from bad credit, despite overall lagging revenues.
Revenues falling from the previous quarter is primarily the result of reduced fixed income trading and losses from credit derivative hedges, according to the bank. The increased profits came as the bank released funds it had set aside to cover bad loans as the rate of defaulting debtors decreases.
Many analysts, however, discount such releases from low-quality loans when considering an institution’s overall financial health, and are skeptical of how the bank can continue expanding as the overall economy remains sluggish, with relatively little demand for loans and a still-escalated rate of losses from credit. Eventually, revenues have to increase, which is a problem banks are having trouble finding a solution to.
“Reducing loan reserves is not something you can do indefinitely,” observes Matt McCormick, portfolio manager at Bahl & Gaynor Investment Council Inc. “Eventually, they’ll get to the point where they’ll say, ‘We can’t keep doing down this path.’”
The bank is also plagued by a threat regarding documentation of its mortgage operations. Citigroup bundled many home loans together and sold them to investors, a large number of which went bad. If errors in documentation exist, the bank may be forced to buy back billions in such bad loans.
12 percent of Citigroup is still owned by the U.S. government due to bailouts it received in 2008 and 2009. While it and other banking institutions have largely recovered from the worst of the crisis, banks continue to have trouble making new loans this year.
