Will Citi Group Pull up Sustain...?

The global stock markets rallied on Tuesday after Citi Chief Executive Vikram Pandit said the bank was profitable in the first two months of this year. Profitably of one banks lead to an amazing euphoria on the Wall Street and on Dalal Street too.

So it is worth parsing Mr. Pandit's comments. "We are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007," he said in a memo to employees. A Citigroup spokesperson said that Mr. Pandit's measure of profits was net income, according to US GAAP. This means that the bank was profitable after all its expenses, including write-downs and provisions for credit losses in the period, which are expected to be large.

But is this something that great that the DJIA rallied over 400 points in a single day and people started extrapolating this performance for the entire banking sector and saying that the
the government's bank-sector revival plan will get financial firms through the downturn. I seriously don't think so. Its again the same old habit of markets getting over excited...

Investors should treat the profit announcement carefully. The bank has assessed its profitability for an arbitrary time period. Often banks do not know their true expenses (write downs) until the end of the quarter and so the two months profit figure is hard to square with bloomberg consensus analyst expectations for the first quarter (which shows a loss). It is possible that bank's two month net profit got a boost from marking up its own debt as the CDS on the bank reflected higher fear.

Secondly, the timing of Mr. Pandit's comments looks opportune. His memo came the day after Sen. Richard Shelby of Alabama, the ranking Republican on the Senate banking committee, called Citi a "problem child."

Thus it would be foolish at this stage to assume that the worst for the US financial sector is over...