Citi profit: Mouth of a gift horse

Citigroup has finally made some money again. After five quarters of posting multi-billion dollar losses and requiring two capital injections and a partial government guarantee on some $300bn of assets, that’s a welcome relief - not least to embattled chief Vikram Pandit. But the $1.6bn profit the troubled megabank posted for the first three months of the year is not as good as it looks.

First, it’s barely enough to cover $1.3bn in dividend payments to preferred stockholders, including the US Treasury. Of course, most will soon be swapping these securities into common stock - aside from the Abu Dhabi Investment Authority’s preferreds, which start converting next year. That’ll sharply reduce the dividend, but at the expense of diluting current shareholders by quadrupling the amount of common stock.

But Citi struggled to make money anyway. Selling its remaining stake in Brazilian credit card company Redecard brought in $700m. Accounting rules came to the bank’s aid, too: some 12%, or $2.9bn, of the bank’s total revenue resulted from gains revaluing its own liabilities. Even assuming expenses and taxes offset these revenues to the same extent as for Citi overall, stripping out the Redecard sale and the debt accounting boost roughly wipes out Citi’s profit for the quarter.

There are a couple of smaller one-off items, too - $250m released from reserves that had been set aside to cover litigation costs and, ironically given the amount of government assistance Citi has received, a $110m rebate from the tax man. True, this is at least money the bank had earned in the past, but it does flatter the quarter’s results.

And one or two other things look odd. Citi increased reserves by just $2.1 bn even as corporate and consumer defaults grew by $4.5bn - though Citi argues it added more to reserves at the end of last year as it expected first-quarter losses to be higher. More intriguingly, total expenses at the investment bank, at $2.8bn, were a third less than last year’s run rate andjust 40% of the quarter’s revenue. Goldman Sachs set aside half its revenue for pay alone. That implies Citi either has changed its compensation policy or may have higher expenses later in the year.

All in, there’s less to Citi’s first profit under Pandit than meets the eye. But in the bank’s defence, even after stripping out the one-off items it’s the best result the bank has managed in a long time.