Clearly, gaining $1.9bn in revenue from your own credit spreads blowing out must be the trophy asset for the A/W ’11 US bank earnings season…
Citigroup’s Q3 results, out on Monday (total revenue $20.8bn):
Third quarter revenues included $1.9 billion of credit valuation adjustment (CVA) reflecting the widening of Citi’s credit spreads during the third quarter. Excluding CVA, third quarter 2011 revenues were $18.9 billion, 8% below the prior year period and 8% below the second quarter 2011. CVA increased reported third quarter earnings by $0.39 per share.
Much like JPMorgan’s earlier earnings release, Citi’s recording of revenue gains from CVA (on itself, or “CVA on Citi Liabilities at Fair Value Option”. AKA… DVA) helps to hide truly terrible trading figures. (Fixed income revenues fell by a third from the prior year period.)
This looks very similar — heck, it’s even the same headline figure of $1.9bn — but there is one interesting difference. Citi appears to have been a bit more careful, or lucky, in hedging its counter-party credit risk than JPMorgan. Here’s a chart from Citi’s results:
Whereas JPMorgan lost a net $691m from widening credit spreads at its derivatives counter-parties, Citi posted a $314m gain. Whether it’s due to Citi buying cheap or early protection (or JPMorgan buying late and expensive), we don’t know.
In any case, the overall quarterly jump in CVA is remarkable, and testament to how bad it was for US bank credit in the third quarter. Citigroup avoided inversion in its CDS curve, unlike Morgan Stanley or Bank of America. Which would suggest that those two could potentially register out-sized CVA gains, applying the Alice-in-Wonderland logic that’s in fashion here…
Related links:
How one bank’s default is the same bank’s gain – FT Alphaville
Profiting from your own crummy creditworthiness, redux – FT Alphaville