Wall Street should hold off on the champagne for now

ON first glance, it’s rather hard to find the good news among all the negative numbers in Citigroup’s latest batch of figures. Headline profits and revenues fell slightly and yet the bank’s share price rose 1.8 per cent yesterday, adding around $1.8bn to its value.

The rise is a sign that markets think that normality might – might – be returning to the US economy.

For North American consumers at least, the picture is mixed but improving. On the one hand, recent US unemployment numbers have given economists cause for concern, but credit quality seems generally on the rise as households pay down debt.

Citigroup’s core retail business in the US saw net credit losses drop by 31 per cent versus the same period last year to $1.6bn, which was also $110m lower than during the fourth quarter.

Income from its cards business jumped 27 per cent to $607m for the quarter and retail banking revenues climbed 37 per cent to $1.6bn. The overall effect was a 41 per cent quarterly profit boost to Citi’s flagship North American consumer banking business, which has now made $1.3bn so far this year.

Still, it is a mark of how scared investors are and how deeply they have discounted bank shares that analysts estimating a future valuation of 0.8 times book value for Citi are recommending buying the stock.

The problem is that you never quite know when the bad news is really over.

First there is the investment bank. Bernstein Research’s John McDonald pinpointed the key question immediately: how sustainable is the recovery?

Revenues in Citi’s fixed income division jumped from $1.6bn at the end of 2011 to $3.7bn this year, while debt underwriting brought in $601m this quarter versus $389m in the last three months of last year.

Citi claimed yesterday that its underperformance in certain areas like equities – where revenues jumped 70 per cent on last quarter – is “behind us”.

But investment banks are at the mercy of market risk appetite. If the European Central Bank had not folded to pressure and flooded banks with €1 trillion in December, it’s unlikely Citi would be seeing such a bounceback.

Second, there are those pesky “one-off costs”. Vikram Pandit’s call with analysts was littered with excuses: “excluding the one-offs...”, “absent those numbers, we would have...” and so on. One such “one-off” was a “litigation cost” of $550m. But on questioning by a JP Morgan analyst, Pandit seemed to suggest the provision could be ongoing. “Oh – I guess I’m assuming you won’t have to take litigation reserves every quarter,” the analyst concluded with a slight laugh.

Alas, the lawsuits are no laughing matter at Citi, which has warned that it could face a staggering $4bn bill for legal tangles, much of it related to foreclosures and mortgage-backed securities clients wish they hadn’t bought.

These ongoing hangovers from 2008 and the Eurozone mean it is far too early to celebrate, even if US consumers are ready to fire up their credit cards again.