...der 90-er, weil man in den USA entschlossen vermieden hat, dass sich in Zombiebanken die ganze Malaise gespeichert hält!
Die enorme "hidden" Quersubventionierung der Banken aus dem gesponserten Zinsspread wird noch gaaaanz lange brauchen, bis sie die Zombies aus dem Untotendasein erlöst hat. Vermutlich ähnlich lange wie in Japan, zumindest ehe ich lange keine nachhaltige Earnings-Power, und mit den Bonus-Exzessen unterminiert die Branche latent die Sustainability der Subventionierungen.
Und deshalb, lieber AL, ist Dough Kass mit seinem Lastwagen von Calls auf BofA eben doch falsch: BofA wird vielleicht weniger absaufen als andere, sozusagen als King unter den Zombies, aber das gibt allenfalls einen Spread her... Sage ich mal so, als einer von vielen, der letztendlich natürlich auch nix weiss... ;-)
Citi has never been a paragon of accounting standards, so it’s with little surprise that we read the latest work from the oft-controversial Bloomberg columnist, Jonathan Weil.
Weil has been a vehement critic of Citi, in particular on the subject of the bank’sdeferred tax credits — a debate which helped kick off something of a revolution inbank capital.
His latest target, however, is Citi’s fair value accounting. He explains:
A big improvement to the accounting rules this year is that lenders now must disclose their loans’ fair-market values every quarter, rather than just once a year. When a bank says its loans are worth much less than their balance-sheet amount, that means a large portion of its capital cushion may be illusory.
Such gaps arise because loans don’t have to be carried on the balance sheet at fair value, giving lenders lots of wiggle room to play with.
. . .
Citigroup, which is audited by KPMG, estimated its loans had a fair value of $601.3 billion as of June 30, just 0.2 percent less than their carrying amount. By comparison, the fair-value shortfall was 7.3 percent at Bank of America Corp., 4.3 percent at Wells Fargo & Co., and 2.5 percent at JPMorgan Chase & Co. PwC audits Bank of America and JPMorgan, while KPMG audits Wells.
What that means is that Citi has taken the slightest of haircuts on its loans at fair value — a (to say the least) surprising claim in the current market.
Needless to say, Weil isn’t happy with the difference, claiming that some banks may be inflating their fair values. In fact, he even suggests that the US Securities and Exchange Commission could be on the case of certain fair value or mark-to-market obscuring banks.
Unsurprisingly, financial blogger Zero Hedge picks up the thread (in effective but typically outraged form) in a Thursday post:
Yet what caught our attention is the FV action at the big 4 banks: Citi, BofA, Wells and JPM. What is most notable is that while the three firms ex Citi have taken a decent haircut to their Book-to-FV margin, Citi is now down to a mere 0.2% difference between loan Carrying Value at Q2 ($602.6 billion) and loan Fair Value ($601.3 billion). What is more notable is that on average the margin has increased over the past 2 quarters: while the average FV-to-Book spread was 3.2% at year end 2008 for the non-Citi banks, it grew by 1.5% to 4.7% at Q2 (non weighted). And in this environment where banks have been getting more cautious and applying an increasing discount to their loan book values, Citi has collapsed the differential from 2.8% to 0.2%!
In graphic terms, it looks like this:
And like Weil, Zero Hedge is calling on the SEC to investigate.
But when it comes to bank results, what concerns us more are the things you can’t see.
The discrepancy between book and fair value was one of the things the Federal Accounting Standards Board was trying to expose when it decided to apply FAS 107— the accounting standard which requires fair value disclosure — quarterly. In the Citi example then, the new standard is working very well — now you can see just how delusional different Citi is from its big bank peers every quarter, instead of every year.
What’s more concerning, to us anyway, are Citi’s loan loss reserves.
Loan loss reserves, or the amount of money banks set aside to cover bad debts, have been written about at length when it comes to European banks. In particular, the effect that declining coverage ratios (LLRs divided by non-performing loans) in the second quarter of 2009 might have had on their results. One Goldman analysis, for instance, suggested that if coverage ratios had not declined in Q2, the collective first-half profit of Europe’s banking industry would have been wiped out. In short, banks were boosting their headline numbers with lower provisioning for bad debts.
We suspect this is something which may be happening in the US too — and it’s not as easy to spot as the difference between book and fair value.
For instance, in the third quarter, Citi added $802m to its loan loss reserves (down from $3.9bn in Q2) to increase the reserves to $36.4bn, or 5.9 per cent of total loans. But that increase was $1.6bn below some analyst estimates.
Lower loan loss provisioning is fine if Citi’s non-performing loans are actually decreasing.
But there are mixed signs in Citi’s results. Delinquency rates in Citi’s consumer businesses fell in the third quarter, compared with the second. But delinquency in its local consumer lending unit, one of its biggest businesses, continued to climb.
What’s more, Citi has completed more than 24,000 loan modifications in the quarter, and has more than 63,000 in the trial modification period under the US government’s Home Affordable Modification Program, or HAMP. Here’s Citi CFO John Gerspach on the bank’s conference call on Thursday:
… when it comes to mortgages, as I mentioned on the call, or just before,the HAMP program right now has got a rather significant impact on our delinquency statistics and really makes it difficult for anyone from the outside to actually have a good view as to the inherent credit profile in our delinquency buckets.
That effectively obscures the real performance of those loans - which means we can’t tell whether Citi’s lower loan loss provisioning is prudent or not.
That’s more of a problem with judging Citi’s - and banks’ - earnings: opaqueness, not transparency.
Related link:
Citigroup earnings: Lower loan loss provisions a good sign? - WSJ MarketBeat
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