C Shows Signs of Hope

For Thomas' preview heading into the Citigroup conference call, please click here.

Citigroup (C - commentary - Cramer's Take) reported a loss of 49 cents per share, slightly better than the average expected loss of 61 cents per share. Overall revenue growth has held up in the U.S. and abroad, and expenses are under control, being basically flat on a normalized basis. Results were helped by a net interest margin that expanded 34 basis points, to 3.18%, but which probably has all of the Fed's rate cuts in it now.

Looking at the outlook to get back to profitability amidst the big marks-to-market and credit losses, there were some hopeful signs, but I was hoping for meat to come out of the call, which is not necessarily management's fault, just a reflection of the situation.

On the positive side, the balance sheet has lost $63 billion in assets, and the tier 1 capital ratio is now 8.7%. Direct subprime exposure in the investment bank operation is down from $29 billion to $23 billion on $3.5 billion of pretax writedowns. An additional $2.4 billion of monoline credit value adjustment was taken. I do not know where the rating agencies will go with monoline ratings longer term, but I would guess that at least a one-quarter respite from further writedowns will come. Highly leveraged transactions got a $428 million haircut.

The global consumer got $3.4 billion in pretax writedowns -- $0.7 billion of a mortgage-servicing right-related loss, which was counter to what might have been expected given mortgage rates, but which is unlikely to be repeated in the third quarter; a $1.1 billion credit loss; and a $1.6 billion loan loss reserve build. North American first mortgage 90+ days past dues increases to 369 basis points from 302 basis points in the first quarter, and the net credit loss ratio went from 100 basis points to 168 basis points. But there may be a ray of hope on the second mortgage side where net credit losses rose from 167 basis points in the fourth quarter to 316 basis points in the first quarter to 366 basis points, while the 90+ day past dues have flattened out a bit, going from 138 basis points to 145 basis points and then 175 basis points in, respectively, the fourth, first and second quarters.

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At the time of publication, Thomas was long Citigroup and JPMorgan Chase.