Citigroup released its financial results today for 1Q09 and they were profitable (let us all rejoice!!). Not so fast though , Citi posted a loss of $0.18 per share on a profit of $1.6bn for the quarter (I didn’t know it was possible to have negative EPS when being profitable).

It looks like Citi has used some “smoke and mirrors” to create this profit. For one, Bloomberg is reporting that:

“Citigroup posted a $2.5 billion gain because of an accounting change adopted in 2007. Under the rule, companies are allowed to record any declines in the market value of their own debt as an unrealized gain.”

Furthermore, Citigroup has been able to move some assets that might suffer further writedowns, into its “held to maturity” portfolio, which means it doesn’t have to mark those assets to market. Again, another accounting trick.

Like the other banks, the company saw a huge gain in its trading profit for the quarter, though it continues to show real weakness in basic areas like credit cards and retail banking. The graph below from the investor presentation struck me as interesting as Citi is facing Net Credit Losses (NCL) of over 10% from Credit Cards in 1Q08, and the trend is only accelerating. Ouch!

Citigroup also announced that the long awaited exchange offer swapping preferred shares for common shares will take place after the stress test results are released May 4.

With all this said, I actually like owning Citigroup stock in the short term. I think the market has been pessimistic (and rightly so given the numbers), but the pessimism has gone too far. I’m playing for a pop when the stress test results come out, because the market already believes Citi will be the worst performer among the 19 banks and will need to raise more capital.

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