CITIGROUP INC quarterly report, Q2 FY2009

Citigroup Inc. — Second Quarter 2009 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2009. Financial statements are unaudited. Citigroup is a global diversified financial services holding company.

Key financial results

Metric	Q2 2009	Prior comparable period
Net revenues	$29.969 billion	$17.538 billion in Q2 2008; up 71%
Net interest revenue	$12.829 billion	$13.986 billion; down 8%
Net interest margin	3.24%	3.17%; up 7 basis points
Operating expenses	$11.999 billion	$15.214 billion; down 21%
Credit-loss and benefits provisions	$12.676 billion	$7.100 billion; up 79%
Income from continuing operations	$4.387 billion	Loss of $2.329 billion
Citigroup net income	$4.279 billion; diluted EPS $0.49	Loss of $2.495 billion; diluted EPS loss of $0.55

For the six months, net income was $5.872 billion versus a $7.606 billion loss in 2008; diluted EPS was $0.31 versus a $1.57 loss. No standalone cash-flow statement for the quarter is provided; for the first six months, operating cash flow was negative $20.737 billion, investing cash flow was positive $16.457 billion, and financing cash flow was positive $0.959 billion. Cash and due from banks declined $2.338 billion to $26.915 billion.

Balance sheet, capital and liquidity

• Total assets were $1.849 trillion, down 12% from June 2008 and down from $1.938 trillion at December 31, 2008. Total deposits were $804.7 billion, compared with $803.6 billion a year earlier.
• Long-term debt was $348.0 billion, down 17% year over year. Common stockholders’ equity was $78.0 billion, down 28% year over year; total stockholders’ equity was $152.3 billion.
• At June 30, regulatory ratios were Tier 1 Common 2.75%, Tier 1 Capital 12.74%, Total Capital 16.62%, and leverage 6.92%. Management reported tangible common equity (TCE) of $40 billion.
• Management reported structural liquidity of approximately 71% of assets, a $65 billion parent-company and broker-dealer liquidity portfolio, and approximately $110 billion of bank subsidiary deposits with major central banks. Liquidity capacity remained supported by government programs and access to secured funding.

Material changes and unusual items

• The principal driver of the return to quarterly profitability was the Smith Barney transaction: Citi contributed Smith Barney and related businesses to a Morgan Stanley joint venture on June 1, retaining 49% ownership and receiving $2.75 billion cash. The sale produced an $11.1 billion pretax gain, or $6.7 billion after tax.
• Revenue also benefited from improved marks and gains relative to the prior-year quarter in Citi Holdings. Results included significant valuation effects, including derivative credit valuation adjustment gains and losses on Citi’s own fair-value-option liabilities; these are market-sensitive and may reverse.
• Credit deterioration continued. Citi recorded a $3.9 billion net reserve build in Q2. The loan-loss allowance reached $35.9 billion, or 5.60% of loans. Consumer delinquency was 4.24%, versus 3.93% at March 31 and 2.30% a year earlier; non-accrual loans totaled $28.2 billion, versus $11.6 billion a year earlier.
• Citicorp earned $3.1 billion in Q2, down 11% year over year, while Citi Holdings earned $1.4 billion versus a $5.2 billion loss. Citi Holdings’ result included the Smith Barney gain; Local Consumer Lending remained loss-making, with a $4.2 billion quarterly loss.
• Headcount fell to 279,000, down 84,000 from a year earlier. Management cited re-engineering and expense control as factors behind lower expenses.

Outlook, risks and contingencies

• The filing gives no numerical earnings or revenue guidance. Management said the difficult economic environment continued to weigh on all businesses.
• In July, completed preferred-stock and trust-preferred exchanges covered approximately $57.8 billion of liquidation value, including $25 billion exchanged by the U.S. Treasury. Subject to the planned shareholder authorization of additional common shares, the transactions were expected to raise Tier 1 Common by about $64 billion, to approximately $91 billion, and TCE by about $60 billion, to approximately $100 billion. These are pro forma, non-GAAP estimates; the exchanges also imply substantial common-share dilution. The Treasury was expected to own approximately 33.6% of outstanding common stock after conversion, excluding warrants.
• The U.S. government loss-sharing agreement covered an asset pool of approximately $266.4 billion at June 30. Citi bears the first $39.5 billion of qualifying net losses and 10% of qualifying losses thereafter; recorded GAAP losses on the pool were approximately $5.3 billion to date. Final asset-pool composition remained subject to government review.
• Material exposures include U.S. subprime-related direct exposure of $9.6 billion, commercial real estate, Alt-A securities, monoline insurers, and highly leveraged financing. Citi’s $8.3 billion net ABS CDO super-senior subprime exposure used Level 3 valuations with significant unobservable inputs; management estimated that each 10-basis-point discount-rate change would affect fair value by about $24 million.
• Risks include rising credit losses, housing and commercial real estate weakness, market and counterparty volatility, Level 3 valuation uncertainty, and funding sensitivity to credit ratings. A one-notch downgrade could require approximately $12.2 billion of parent-company collateral and cash, plus $4.2 billion for Citibank, N.A.
• The CARD Act was expected to require material changes to the credit-card business model; its impact was not yet clear. The filing also identifies uncertainty over mortgage-modification performance, realization of $41.6 billion in net deferred tax assets and possible limits under tax ownership-change rules.
• New consolidation rules for certain securitizations and variable-interest entities were expected to take effect in 2010. Citi estimated an $8.3 billion after-tax retained-earnings charge and, using June 30 data, a 134-basis-point reduction in the Tier 1 Capital ratio; actual effects could differ.
• Citigroup disclosed numerous legal and regulatory matters, including securities, subprime, auction-rate securities and other litigation. Management stated that ordinary-course proceedings were not likely to materially adversely affect consolidated financial condition, but monetary outcomes could materially affect results in a particular period.

Investor verification priorities

• Separate recurring operating performance from the Smith Barney gain and other valuation, credit-spread and accounting effects.
• Track credit costs, delinquency, non-accrual loans, reserve adequacy and the performance of mortgage modifications.
• Confirm completion and accounting of the preferred and trust-preferred exchanges, shareholder approval, resulting share count, dilution and pro forma capital ratios.
• Assess funding dependence on government-supported programs, rating-triggered collateral needs and the durability of reported liquidity.
• Review sensitivity of subprime, commercial real estate, monoline and other Level 3 exposures to valuation assumptions and market conditions.
• Monitor the loss-sharing agreement’s final covered-asset pool, eligible losses and Citi’s first-loss exposure, as well as the effects of upcoming securitization accounting changes.