Citigroup Inc. — Second Quarter 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Comparisons below are year over year unless stated otherwise. Amounts are U.S. dollars.
Business context and results
Citigroup operates through Global Consumer Banking (GCB), Institutional Clients Group (ICG), and Corporate/Other. Second-quarter results showed higher revenue and earnings, lower expenses, and rising credit costs. Management cited continued profitability and return improvements despite uncertain economic and market conditions.
- Revenue: $18.76 billion, up 2%. Net interest revenue was $11.95 billion, up 2%; non-interest revenue was $6.81 billion, essentially unchanged.
- Profit: Net income was $4.80 billion, up 7%; diluted EPS was $1.95, up 20%. Excluding the approximately $350 million pretax Tradeweb investment gain, EPS was $1.83, up 12% (company-presented non-GAAP measure).
- Expenses and margins: Operating expenses were $10.50 billion, down 2%. The efficiency ratio improved to 56.0% from 58.0%. Net interest margin was 2.67% on a taxable-equivalent basis, down 3 basis points year over year and 5 basis points sequentially.
- Credit: Provisions for credit losses and benefits/claims were $2.09 billion, up 16%; net credit losses were approximately $2.0 billion, up 15%. Consumer losses rose with card portfolio growth and seasoning; ICG credit costs reflected normalization.
- Returns: Return on average common equity was 10.1%, versus 9.2%; return on average assets was 0.97%, versus 0.94%.
Segments and material changes
- GCB: Revenue of $8.51 billion rose 3% and net income of $1.41 billion rose 11%. Revenue grew across regions. North America GCB net income was largely unchanged as card revenue growth was offset by higher credit costs and expenses. Latin America and Asia GCB net income rose 33% and 19%, respectively, as reported; Asia revenue included a building-sale gain.
- ICG: Revenue of $9.72 billion was essentially flat and net income of $3.33 billion rose 3%. The Tradeweb gain offset weaker investment banking and markets activity. Treasury and trade solutions revenue increased 4%, while investment banking fell 10%, equity markets fell 9%, and corporate lending revenue fell 24% as reported, including loan-hedge losses.
- Corporate/Other: Net income was $54 million versus a $14 million loss a year earlier. Expenses fell 20%, largely from the legacy-asset wind-down.
- Citi reported its eleventh consecutive quarter of positive operating leverage. Average outstanding common shares declined 10% year over year, supporting EPS growth.
Financial position, cash flow, capital and liquidity
- At June 30, total assets were $1.99 trillion, deposits $1.05 trillion, and end-of-period loans $688.7 billion. Loans increased 3% and deposits 5% year over year.
- Long-term debt was $252.2 billion, up from $236.8 billion a year earlier; short-term borrowings were $42.4 billion. Citi repurchased or called approximately $1.7 billion of long-term debt during the quarter.
- For the first six months, operating cash flow was negative $37.8 billion, versus positive $8.3 billion in 2018; investing cash flow was positive $5.3 billion and financing cash flow positive $48.3 billion. Operating cash flow was substantially affected by changes in trading assets and liabilities and brokerage balances.
- Standardized Basel III CET1 was 11.89%, Tier 1 capital 13.43%, total capital 16.65%, and supplementary leverage ratio 6.38%. Citi stated that capital ratios exceeded applicable minimums and that it was well capitalized.
- Average high-quality liquid assets were $407.0 billion; average liquidity coverage ratio was 115%, down from 119% in both the prior quarter and prior-year quarter. Citi also cited approximately $32 billion of FHLB borrowing capacity, in addition to central-bank capacity.
- Book value per common share was $79.40 and tangible book value per share $67.64. Citi returned $4.6 billion to common shareholders during the quarter through repurchases and dividends.
Outlook, risks and unusual items
- The Federal Reserve did not object to Citi’s 2019 CCAR capital plan. Citi planned to return $21.5 billion to common shareholders over the four quarters beginning in Q3 2019: a $17.1 billion repurchase program and a planned quarterly dividend increase from $0.45 to $0.51 per share, subject to Board approval.
- Management expected a 22%–23% effective tax rate for the remainder of 2019. No company-wide revenue or earnings forecast was provided. Citi said markets and investment banking revenue would likely continue to reflect market conditions and that ICG credit-cost normalization could continue near term.
- Management noted that 2019 economic forecasts had been lowered and warned that economic, political, market, regulatory, foreign-exchange and geopolitical uncertainty could affect results. Other cited risks included card-partner relationships, interest-rate benchmark transition, cybersecurity, legal proceedings and capital regulation.
- CECL, effective for Citi January 1, 2020, was preliminarily estimated to increase expected credit-loss reserves by approximately 20%–30%, with the initial impact recorded against opening retained earnings, net of tax. The estimate is dependent on economic forecasts and portfolio conditions.
- Citi disclosed a $1.2 billion aggregate estimate of reasonably possible unaccrued losses on legal, regulatory, tax and other matters. Management did not expect the matters described to materially affect consolidated financial condition, but noted possible material effects on results or cash flows in particular periods. Foreign-exchange settlements included a €310.8 million EC fine and a CHF 28.5 million Swiss fine; the filing said required settlement payments were made or covered by existing accruals.
- Citi reported an operational-error performance bond for a client benefiting an entity it said appeared majority-owned by the Iranian government: EUR 100,670. The bond was not claimed and Citi made no payment; approximately $4,674 of administrative fees were received. Citi voluntarily self-disclosed the transaction to OFAC.
Important facts for investors to verify
- How much of earnings and EPS growth reflects recurring performance versus the Tradeweb gain, Asia building-sale gain, investment-sale gains, and lower tax rate.
- Whether card loss rates and credit costs continue to rise as portfolios season, and whether corporate credit normalization broadens.
- Execution and regulatory conditions for the planned $21.5 billion capital return, including the dividend increase and repurchase pace.
- The drivers and sustainability of negative first-half operating cash flow, and the trend in the LCR after its decline to 115%.
- How CECL’s preliminary 20%–30% reserve estimate changes as adoption approaches, and the resulting effects on retained earnings and regulatory capital.
- Developments in the disclosed legal matters, the unaccrued-loss estimate, and the OFAC self-disclosure.