Citigroup (NYSE:C) announced improved numbers and long-suffering investors some may say speculators were encouraged. Most financials such as Wells Fargo (NYSE:WFC) and JPMorgan (NYSE:JPM) as well as Citi seem to have the same mantra. Improving economy, reducing loan loss provisions and even pray tell some reversals where yesterdays red ink turns miraculously black. You have to love bank accounting.
The key difference for Citigroup was recognized by the CEO Vikran Pandit very early in his prepared remarks. Fed Reserve still decides the major issues. It sounds like the Fed will decide what are the major issues before they tip their hand. So as an investor you have to say thanks for the honesty when Vikran Pandit describes at length something he calls the CR Process. He continues to describe that Citi has to resubmit a capital plan to the Fed. Only a few paragraphs preceding he laid out where Citi was with the Basel ratios and everything seems lovely.
If you are re-submitting plans to the Fed things are not lovely. In fact you have been kept in after school so that teacher can pay special attention to your particular circumstances. in many ways you should say thank you but clearly the other banks running around the financial school yard are having way more fun and so are their shareholders. While we can only speculate about the Feds response Vikram Pandit is telling one and all that the Fed will respond just shortly before the end of their Q3. So basically he gets two more earnings announcements with the thousand pound gorilla sitting in the room sipping your best scotch.
So investors wishing to maximize wealth need to aware of the real back room power than the Fed has. All this before you consider the puny dividend yield which the Fed is probably restraining for now as well as the classic problem all banks and financial institutions have when interest rates start to rise that of managing interest rate margins as your cost of funds increases and borrowers attempt to go long and lock in the cheap rates.
George Gutowski writes from a caveat emptor perspective.
- JP Morgan & Wells Fargo Set Tone. Except No One Thinks About Rising Interest Rates or Margin Compression $JPM $WFC $XLF (financialskeptic.wordpress.com)
- Why Citigroup’s Earnings May Surprise (fool.com)
- Why I Own Citigroup Warrants (fool.com)
- Wells Fargo: Another Show of Strength (fool.com)