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Last updated: July 20, 2008 11:36 pm

Dodge Citi

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Citigroup has taken the Scooby-Doo approach to its latest quarterly results: we would have gotten away with it, if it wasn’t for those meddling marks. The bank treated investors to a chart showing what its revenues for the first half of 2008 would have been if not for the writedowns it had to take on dodgy derivatives and real estate: $51.5bn. This is only slightly below first-half revenues in 2007 – which was, after all, when Chuck Prince was still tearing up the dance floor.

Unfortunately, the writedowns are real enough. That Citi reported a loss of only $2.5bn, however, was enough to cheer investors braced for worse: the stock jumped as much as 14 per cent on Friday.

Citi was helped by the fact its results followed Merrill Lynch’s dreadful numbers, but the relief is justified to an extent. Vikram Pandit, Mr Prince’s successor as chief executive, is making progress. Citi is one-fifth of the way towards its $500bn non-core asset disposal target. The tier-1 capital ratio has recovered to 8.7 per cent and is above 9 per cent if the upcoming disposal in Germany is factored in.

Even so, Citi’s capital ratios are towards the bottom of its peer group. And the hangover from Mr Prince’s stint at the disco has not lifted. Exposure to subprime and other risky portfolios totals $114bn. As with Merrill, for all the talk about the strength of the franchise, these banks are still in recovery mode, with scope for more losses, dividend cuts and dilutive capital raisings.

Citi has enjoyed roughly a $20bn-$25bn quarterly revenue run-rate stretching back to the second quarter of 2006. Yet it is hard to believe such top-of-the-cycle numbers are sustainable, particularly when Citi is shrinking itself in a worsening economic environment. Key indicators such as average loans and deposits are flat or declining, and not only in North America. Even if the immediate threat of a capital raising has receded, earnings power from here looks limited.

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