Citi (C) Q2 Fine, But CFO Still Hallucinating: More CDO Writedowns Coming

Citigroup reported stronger than expected earnings this morning and its share price has spiked nearly 10%. Goldman Sachs, however, while acknowledging some positive steps, is reiterating caution:

All things considered, it was a decent quarter for Citigroup. The consumer businesses continued to show deterioration in credit statistics, as we expected. However, results were not as bad as investors’ had expected. Net credit losses for the North America consumer segment were 3.25% in 2Q2008, up from 2.56% in the prior quarter. Overall net credit losses of $4.42 bn were 5% greater than our forecast, and the provision expense of $7.19 bn exceeded our estimate by 12%.

Goldman’s most pressing concern is over Citi’s tattered CDO book. CFO Crittenden and CEO Pandit insist that their CDOs are of an early vintage and therefore not subject to the same kind of gargantuan losses that other CDOs are. Goldman, however, isn’t so sure:

Management continues to contend that their ABS CDOs are earlier vintage years and therefore will not have the same negative impact. Nonetheless, we still believe the company will face additional write-downs on these assets in coming quarters.

Goldman reiterates Neutral. Estimates and target under review.

See Also: Citigroup’s Q2 Earnings Beat Street

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