Citigroup’s Profit Is Really A Loss
April 17, 2009 by Tisa Silver
Filed under Finance
Today, Citigroup (Ticker: C) shocked Wall Street by reporting first quarter net income of $1.59 billion. With better than expected results, why did the shares close 9 percent?
Perhaps, because Citi’s owners didn’t really profit.
Photo by V. Sharma, courtesy of flickr
In situations like this it is good to know the basics of financial statements.
The income statement tracks a company’s revenues and expenses for a certain period of time. Net income is often referred to as “the bottom line” because it is the bottom line on a company’s income statement.
If revenues are greater than expenses, then the company has turned a profit and if revenues are less than expenses, then the company has realized a loss.
A company’s board of directors decides if net income will be kept by the company or paid out to shareholders. The portion of the profits kept is referred to as retained earnings. The portion paid out to shareholders is in the form of dividends.
Dividends on common stock are optional and adjustable, but this is not the case for preferred stock. According to MarketWatch, Citigroup owed preferred dividends of $1.22 billion and another $1.29 billion linked to a convertible stock issue in January. This combination easily wiped out the $1.59 billion net income.
So, while Citigroup may have profits from an accounting standpoint, it is not really a profit for the stockholders. The loss applicable to common stock owners was $966 million.
Whatever financial engineering Citi did to come up with profits, the key item is that credit quality is still deteriorating at two of the weakest large banks– Citi and BAC.
Thanks Jim. I believe increased credit quality should precede a real comeback for the stock market. The numbers are indeed interesting. I am certain you saw BAC’s better-than-expected profits today. I would like to see where those numbers came from.
The real story behind BAC’s report yesterday was their comments on continued credit quality deterioration into the future. That coupled with the saber rattling by the administration over the weekend to dilute the common shareholders by converting the government’s preferred stock to common so we can have government banks as well as government motors really sent the financials tumbling.