Citigroup Inc. — Second-Quarter 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Comparisons below are primarily with the second quarter of 2017 unless noted. Citigroup operates through Global Consumer Banking (GCB), Institutional Clients Group (ICG), and Corporate/Other.
Key financial results
| Metric | Q2 2018 | Year-over-year change |
|---|---|---|
| Revenue, net of interest expense | $18.5 billion | Up 2% |
| Net interest revenue | $11.7 billion | Up 4% |
| Operating expenses | $10.7 billion | Essentially unchanged |
| Credit-loss and benefits provisions | $1.8 billion | Up 6% |
| Income from continuing operations | $4.5 billion | Up 16% |
| Citigroup net income | $4.49 billion | Up 16% |
| Diluted earnings per share | $1.63 | Up 27% |
Higher revenue and a lower effective tax rate—24.3% versus 31.6%, primarily reflecting Tax Reform—supported earnings growth. The increase in EPS also reflected an 8% reduction in average shares outstanding. The efficiency ratio improved to 58.0% from 59.3%; return on average assets was 0.94% versus 0.83%, and return on average common equity was 9.2% versus 6.8%. Net interest margin was 2.70%, down 5 basis points year over year; core accrual NIM was 3.60%, up 13 basis points.
For the first six months of 2018, revenue was $37.3 billion, up 2%; net income was $9.11 billion, up 14%; and diluted EPS was $3.31, up 26%.
Business performance and material changes
- GCB: Q2 revenue of $8.25 billion rose 2% and net income of $1.28 billion rose 14%. Revenue grew across regions, while provisions increased 8% and expenses increased 3%. North America revenue was up 1%; international GCB revenue increased 6% excluding FX translation.
- ICG: Revenue of $9.69 billion rose 3% and net income of $3.23 billion rose 17%. Banking revenue increased 6%, led by treasury and trade solutions, corporate lending, and the private bank. Markets and securities services revenue declined 1%: equity markets and securities services gains were offset by lower fixed-income revenue.
- Corporate/Other: Revenue fell 20% to $528 million, largely due to the wind-down of legacy assets; expenses declined 40%. Q2 net loss was $13 million, little changed from the prior-year loss.
- Balances: At June 30, total assets were $1.912 trillion, loans were $671.2 billion (up 4% year over year), and deposits were $996.7 billion (up 4%). Long-term debt was $236.8 billion, up 5% year over year. Common stockholders’ equity was $181.1 billion, down 14% year over year; book value per common share was $71.95 and tangible book value per share was $61.29.
- Credit: Q2 net credit losses were $1.7 billion, broadly unchanged overall; consumer net credit losses increased 4%, while corporate net credit losses were a net recovery of $2 million. Citi recorded an $87 million net loan-loss reserve build, versus a $16 million release in the prior-year quarter.
Cash flow, capital, and liquidity
For the six months ended June 30, operating activities generated $8.3 billion of cash; investing activities used $36.6 billion; and financing activities generated $49.3 billion. Cash, due from banks, and deposits with banks totaled $200.9 billion at period end. These bank cash-flow figures reflect substantial balance-sheet and securities activity and should not be interpreted as operating cash flow for a nonfinancial company.
Fully implemented Basel III CET1 and Tier 1 capital ratios were 12.14% and 13.77%, respectively; the supplementary leverage ratio was 6.60%. Ratios remained above applicable minimums, but CET1 was below 13.06% a year earlier, reflecting capital returns, Tax Reform effects and other movements. Average high-quality liquid assets were $406.6 billion and the average liquidity coverage ratio was 119%, compared with 125% a year earlier.
Outlook, risks, contingencies, and unusual items
- Following Federal Reserve non-objection to its 2018 CCAR plan, Citi intended to return $22.0 billion to common shareholders over the four quarters beginning Q3 2018, including a planned $17.6 billion of repurchases. The announced quarterly common dividend was to increase to $0.45 from Q3, subject to quarterly Board approval and regulatory requirements.
- Management described global economic conditions as broadly positive but cited economic, political, regulatory, market, funding, cyber, operational, legal, and geopolitical uncertainties. Markets revenue was expected to remain sensitive to market conditions and normal second-half seasonality; the Q3 comparison included a $580 million gain in Q3 2017 from a fixed-income analytics business sale.
- Management estimated that adoption of the CECL credit-loss standard, effective January 1, 2020, could increase credit reserves by approximately 10%–20% based on its preliminary 2018 analysis; the eventual effect remained uncertain. Adoption of lease accounting in 2019 was expected to increase assets and liabilities by approximately $5 billion.
- Citi estimated reasonably possible unaccrued losses on litigation and regulatory matters of approximately $1.0 billion in aggregate; outcomes could differ materially, and adverse developments could affect results or cash flows in particular periods. In Q2, Citi disclosed a $100 million civil settlement concerning USD LIBOR submissions, a CARD Act consent order, and Australian cartel charges involving a subsidiary and others. GCB expenses included an approximately $50 million provision for an industry-wide legal matter.
- Argentina was deemed highly inflationary under U.S. GAAP as of Q2. Citi changed the functional currency of its Argentine operations to the U.S. dollar effective July 1, 2018; management said there was no Q2 financial impact, but future translation and hedge-related effects would be recorded in earnings rather than AOCI.
- Citi reported five inadvertent, local-currency payments totaling approximately $2,156 to an IRISL subsidiary, identified in Q2 and reported to OFAC; Citi said the transactions generated no revenue.
Important facts for investors to verify
- Whether revenue and earnings momentum persists after adjusting for FX, Tax Reform, portfolio sales, and other one-time items.
- Trends in card losses, delinquency, reserve builds, and seasoning, particularly in North American card portfolios; also monitor payment increases as home-equity credit lines reset.
- Execution of the announced capital-return plan and the effect of repurchases, AOCI movements, and regulatory requirements on capital ratios and book value.
- Liquidity trends, including the LCR decline, funding costs, debt maturities, and potential cash or collateral needs following ratings downgrades.
- Developments in legal and regulatory proceedings, including the disclosed LIBOR settlement, CARD Act matter, Australian charges, and the estimated unaccrued loss exposure.
- The eventual CECL reserve impact and the effects of the Argentine functional-currency change from Q3 onward.