March 10, 2009 2:10 pm

Citi memo

If management e-mails actually “communicated” anything they would be banned. Risks of a leak means workers are subjected to anodyne words on how valued they are or that their company is uniquely positioned to cope with the challenges ahead. On Tuesday, however, a short memo from chief executive Vikram Pandit to staff at Citigroup set the entire US banking sector alight. Having dropped below a dollar last week, Citi’s share price rallied 35 per cent. What did the memo say? Three nuggets in particular seemed to dazzle investors. First that Citi was profitable in January and February and the quarter was looking the rosiest since the third quarter of 2007. Apparently, Citi made $19bn in revenues in the first two months of the year. Second, Mr Pandit calmed fears that depositors as well as clients were fleeing in their droves. Finally, the memo stressed Citi’s strong capital position.

But investors should not lose their heads. The headline-grabbing revenue number, of course, does not include costs or writedowns. Besides, Citi exceeded $20bn in adjusted revenues for eight quarters up until the end of September. Even in the nightmare final quarter of last year, revenues excluding writedowns were still a respectable $13.4bn.

So Citi having a bumper top line is nothing to get excited about. That “profitable” remains unquantified gives no comfort as to what extent writedowns have eaten into that haul. That is the problem. In volatile markets, flow businesses such as foreign exchange or cash equities will always do well. And all banks are benefiting from short-rates being close to zero. But provided the global economy keeps deteriorating, and house prices sink lower, balance sheets may fail even harsh stress-tests. It remains a brave investor who believes that this time bank revenues can overwhelm the writedown bogeymen.

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