CITIGROUP INC quarterly report, Q3 FY2022

Citigroup Inc. — Q3 2022 Form 10-Q

Reporting period: Quarter ended September 30, 2022; comparisons are primarily with Q3 2021. Nine-month figures cover the period ended September 30. Citi reports Institutional Clients Group (ICG), Personal Banking and Wealth Management (PBWM), Legacy Franchises, and Corporate/Other. Segment results were recast to reflect the 2022 reporting structure.

Financial results and position

MetricQ3 2022Comparison / context
Revenue, net of interest expense$18.5 billionUp 6% year over year; excluding Asia Consumer divestiture impacts, down 1%.
Net interest income$12.6 billionUp 18%; taxable-equivalent net interest margin was 2.31%, up 32 basis points year over year.
Operating expenses$12.7 billionUp 8%; up 7% excluding divestiture-related costs.
Provisions for credit losses and benefits/claims$1.4 billion expenseCompared with a $0.2 billion benefit in Q3 2021.
Net income / diluted EPS$3.5 billion / $1.63Net income down 25%; diluted EPS down 24% from $2.15.
Efficiency ratio / return metrics68.9%; ROA 0.58%; RoTCE 8.2%Efficiency ratio was 67.5%, ROA 0.79%, and RoTCE 11.0% in Q3 2021.

The Philippines sale produced an approximately $616 million pretax gain; divestiture-related costs were approximately $107 million. Together with other Asia Consumer exit impacts, these items contributed approximately $256 million after tax and $0.13 to reported EPS. Citi reported adjusted EPS of $1.50 excluding these impacts; this is a non-GAAP measure.

Nine-month results: Revenue was $57.3 billion, up 4%; net income was $12.3 billion, down 34%; diluted EPS was $5.84, down 32%. Higher expenses and the shift from prior-year credit reserve releases to builds weighed on earnings.

Balance sheet and capital at September 30: Total assets were $2.38 trillion; deposits $1.31 trillion, down 3% year over year; long-term debt $253.1 billion, down 2%. Net loans were $646.0 billion, down 3% year over year. Common equity was $179.6 billion and tangible book value per share was $80.34. CET1 was 12.29% under the Standardized Approach, versus 11.65% a year earlier; supplementary leverage ratio was 5.71%, versus 5.80%.

Credit: Total cost of credit was $1.4 billion. The allowance for credit losses on loans and unfunded commitments increased by a net $0.4 billion, primarily reflecting consumer loan growth and weaker macroeconomic forecasts affecting corporate exposures. Net credit losses were $0.9 billion, down 8% year over year; consumer losses were $881 million. Total loan allowance was $16.3 billion, or 2.54% of loans.

Cash flow, nine months: Operating cash flow from continuing operations was negative $4.2 billion, versus positive $59.2 billion in 2021; investing cash flow was negative $26.8 billion, versus negative $112.1 billion; financing cash flow was positive $71.6 billion. Cash, due from banks, and deposits with banks rose $37.6 billion to $299.6 billion. Bank cash flows are affected by large securities, trading, and funding movements.

Liquidity and funding: Average HQLA was $557.1 billion and average LCR was 117% (115% in Q3 2021), leaving $80.1 billion of HQLA above net outflows. Citi reported approximately $967 billion of available liquidity resources at quarter-end. Short-term borrowings were $47.4 billion, up 60% year over year.

Material changes and business performance

  • ICG: Revenue fell 5% to $9.5 billion and net income fell 30% to $2.2 billion. Services rose 33%, led by Treasury and Trade Solutions; Markets fell 7%, and Banking fell 50%, including a steep decline in investment banking fees.
  • PBWM: Revenue rose 6% to $6.2 billion, but net income fell 58% to $792 million, largely due to the comparison with a prior-year reserve release, higher expenses, and increased credit costs. U.S. cards loan growth and higher rates supported revenue; Global Wealth revenue declined 2% amid investment-fee pressure.
  • Legacy Franchises: Revenue rose 66% to $2.6 billion and net income was $316 million, compared with a $200 million loss. The Philippines sale gain and comparison with the prior-year Australia sale loss were major drivers.
  • Corporate/Other: Net income was $209 million, compared with a $143 million loss, reflecting higher investment-portfolio revenue and lower expenses, partly offset by mark-to-market losses.
  • Reported company revenue benefited from the Philippines gain compared with the Australia loss in the prior-year period. Excluding those divestiture effects, revenue declined 1%.

Outlook, risks, and unusual items

  • Citi expected expenses to remain higher for the rest of 2022, reflecting transformation and control investments, business investment, inflation, and other costs. Management cited approximately 25% of transformation-program investments as technology-related.
  • Citi expected investment banking revenues to continue reflecting weaker capital-markets and M&A activity. The filing provides no specific earnings or revenue guidance.
  • Common share repurchases were paused as Citi built capital amid macroeconomic uncertainty and higher regulatory requirements. Citi returned $1.0 billion to common shareholders in Q3 through dividends; the quarterly dividend was $0.51 per share.
  • The required Standardized CET1 ratio was 11.5% from October 1, 2022 and was scheduled to rise to 12.0% on January 1, 2023. Citi’s Q3 ratio exceeded the October requirement, but management said capital needs and uncertainty informed the repurchase pause.
  • Consumer exits continued. The Australia and Philippines sales closed in 2022; Thailand and Malaysia closed November 1, after quarter-end. Other transactions remained subject to approvals and closing conditions. Citi was also winding down its Korea and Russia consumer businesses and exiting Mexico consumer/SBMM.
  • Russia exposure totaled $7.9 billion, including $4.6 billion of country-risk exposure; a loss of control of the Russian subsidiary could require a $1.3 billion investment write-off, a $1.0 billion pretax currency-translation loss, and a $0.3 billion loss on intercompany liabilities. Citi estimated approximately $170 million of Russia consumer/local commercial wind-down costs and approximately $100 million for ending nearly all institutional banking services; a post-quarter loan-portfolio sale was expected to incur an additional approximately $35 million loss.
  • Macroeconomic risks included elevated inflation and rates, recession risk, market volatility, the Ukraine war, supply-chain disruptions, and China economic and property-sector stress. Citi also cited foreign-exchange, credit, funding, cyber, operational, regulatory, and consent-order remediation risks.
  • Citi disclosed approximately $1.2 billion of reasonably possible unaccrued losses across litigation, regulatory, tax, and other matters. In September, it paid $125 million to the SEC and $75 million to the CFTC to resolve record-keeping matters involving unapproved messaging channels.
  • Net income was affected by unusual items, including a $535 million Asia Consumer goodwill impairment in Q1, foreign-currency translation losses, and divestiture gains, losses, and costs. The Banking reporting unit had no goodwill impairment in Q3, but its estimated fair value was 106% of carrying value, leaving sensitivity to future assumptions.

Important facts for investors to verify

  1. How much of reported earnings and revenue reflects divestiture gains, exit costs, and other unusual items, and what earnings level remains after those effects?
  2. Whether credit costs, card delinquencies, and allowance builds continue to rise as loan growth and economic conditions evolve.
  3. Whether CET1 remains comfortably above the higher regulatory requirement, and when Citi may resume share repurchases.
  4. Whether planned business exits close on schedule and within expected costs, particularly in Asia, Mexico, and Russia.
  5. How transformation spending, consent-order remediation, and the disclosed litigation and regulatory exposures affect future expenses and results.
  6. How to interpret negative operating cash flow in the context of bank balance-sheet movements, alongside funding trends and liquidity measures.