The fact that Citigroup posted a $1.6 billion profit is certainly better than a $1.6 billion loss.
But all this “best quarter since 2007” talk has me wondering whether anyone looked at the “provision for credit losses” tab of the company’s supplemental quarterly earnings data, which you can find here.
Citi’s provisions for credit losses last quarter topped $9.9 billion. While that number was lower than the $12.17 billion provision in the fourth quarter of 2008, it is still 78% higher than the bank’s provision in the first quarter of 2008. Year-over-year, Citi’s fourth quarter ’08 provision increased 66%. Since the credit crisis started in early 2007, Citi has allocated $60.4 billion to cover credit losses.
These are massive numbers. These are also ugly numbers. Remember, credit losses are allocations for future credit losses. Just to give you a feel, in global consumer banking, for example, Citi socked away $3.8 billion for future credit losses, a 66% quarter-over-quarter increase. Nearly every corner of the bank required credit loss provision increases in the high double digits.
Barclays Plc President Robert Diamond told Bloomberg:
The industry’s first-quarter profits aren’t a “one-off” phenomenon, Diamond said in an April 15 interview. “It has been quite a while since we’ve seen analysts talk about revenue as opposed to writedowns and balance-sheet risks,” he said.
I don’t know about that. I look at Citi’s provisions and see a bank expecting more and more credit losses, and one that didn’t properly provision in quarters past. Well, I guess that’s what you get when you underwrite loans with one eye shut.
I agree with Ave to an extent – I use the car analogy all the time, but only to illustrate that you can’t “count” on a value going up, and should expect your “cost” (whether in depreciation or other costs) to be higher the greater the value of the item purchased. (In other words, a Lexus will depreciate more on a dollar for dollar basis than a Toyota – if you want the Lexus, you have to pay for it.)
I disagree, however, with the generalization that real estate will depreciate in the future, assumingly based on some sort of wear-and-tear theory. I don’t believe this will be the case, and there are two main reasons for it: First, while I agree that residential real estate can easily depreciate if the housing unit is not maintained, most people both maintain as well as improve their homes during their period of ownership. Second, remember the real estate mantra – location, location, location. A very smart (and wealthy) man once told me that real estate in the path of growth will always increase in value. The key clause there is “in the path of growth.” Remember all the movies about the evil guys in the old west kicking poor people off their farms because the railroad was going through? That was because the land was going to become more valuable – driven by the growth which came along with the railroad. Unless something massive changes, the US will continue to grow in terms of population, so demand for housing will increase, and again, real estate in the path of growth will appreciate. I can’t say where exactly that growth will be (though it’s a good bet not in Detroit), but only that enough of it will happen to keep real estate on average from depreciating.
I don’t think I’m being too optimistic. There are areas which may never see the same values that were seen a few years ago, but that’s because the “appreciation” was artificial. IMHO, places where there is genuine demand for housing will recover quickly once liquidity returns to the mortgage lending market.