Citigroup Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparisons are primarily with 2014. Citi is a global financial services holding company operating through Citicorp, its core consumer and institutional businesses, and Citi Holdings, its non-core and wind-down portfolios. Amounts below are U.S. dollars unless stated otherwise.
Financial results and key metrics
| Metric | 2015 | 2014 | Change or context |
|---|---|---|---|
| Net revenues | $76.4 billion | $77.2 billion | Down 1% reported; up 3% excluding foreign-exchange translation and CVA/DVA, on Citi’s non-GAAP basis |
| Net income attributable to Citi | $17.2 billion | $7.3 billion | Diluted EPS was $5.40 versus $2.20 |
| Operating expenses | $43.6 billion | $55.1 billion | Down 21%; 2014 included a $3.8 billion mortgage-related settlement charge |
| Provisions for credit losses and benefits/claims | $7.9 billion | $7.5 billion | Up 6% |
| Net credit losses | $7.3 billion | $9.0 billion | Down 19% |
| Net interest margin | 2.93% | 2.90% | Improved 3 basis points |
| Operating cash flow | $39.7 billion | $46.3 billion | Cash flow from continuing operations |
| Total assets | $1.73 trillion | $1.84 trillion | Down 6% |
| Deposits | $907.9 billion | $899.3 billion | Up 1% |
| Long-term debt | $201.3 billion | $223.1 billion | Down 10% |
| Fully implemented Basel III CET1 ratio | 12.07% | 10.57% | Advanced Approaches basis |
| Fully implemented supplementary leverage ratio | 7.08% | 5.94% | Above the company’s stated effective 5% minimum |
| Liquidity coverage ratio | 112% | 112% | $378.5 billion of HQLA versus $336.5 billion of modeled net outflows at year-end |
Net cash from investing activities was $14.9 billion and net cash used in financing was $64.8 billion. Cash and due from banks declined $11.2 billion to $20.9 billion. These cash-flow measures reflect bank balance-sheet and trading activity and should not be read as a conventional industrial-company free-cash-flow measure.
Reported efficiency ratio improved to 57% from 71%; return on average assets was 0.95% versus 0.39%, and return on average common equity was 8.1% versus 3.4%.
Material changes versus 2014
- Reported net income rose substantially, but the comparison is affected by the $3.8 billion 2014 mortgage-related settlement charge. Citi’s non-GAAP comparison, excluding specified CVA/DVA and 2014 items, was net income of $17.1 billion versus $11.5 billion.
- Lower expenses were a major driver: legal and related expenses were $1.5 billion versus $5.8 billion, and repositioning costs were $472 million versus $1.6 billion. Foreign-exchange translation also reduced reported expenses.
- 2015 results included significant disposal-related items. OneMain Financial’s sale generated a $2.6 billion pretax gain, but related debt-redemption losses reduced the net after-tax gain to $0.8 billion. Sales of Citi’s Japan retail banking and card businesses generated additional pretax gains.
- Credit performance improved overall, with lower net credit losses, but reserve releases fell substantially. Citi recorded a $120 million net reserve release in 2015, compared with a $2.4 billion release in 2014 excluding the mortgage settlement.
- Citi Holdings continued to contract: assets fell 43% to $74 billion. Citi ended 2015 with agreements expected to reduce Holdings’ GAAP assets by a further approximately $7 billion in 2016, subject to closing conditions.
- Citi returned approximately $5.9 billion to common shareholders through repurchases and dividends, while issuing approximately $6.3 billion of preferred stock.
Outlook, commentary, risks and contingencies
- Operating outlook: Management expected 2016 to remain challenging amid slower global growth, market volatility, lower commodity prices and uncertainty around U.S. interest rates. Citi expected Citicorp credit costs to rise as reserve releases had largely run their course. It also expected first-half 2016 net interest margin to decline, in part following the OneMain sale.
- Energy credit risk: Citi built approximately $530 million of ICG reserves for energy and energy-related exposures in 2015, including $250 million in the fourth quarter. Total corporate energy and energy-related exposure was approximately $58 billion, of which $21 billion was funded; about 80% was rated investment grade. Further reserve builds could be significant if commodity prices remained low or weakened.
- Consumer and business changes: In February 2016, Citi announced plans to exit consumer businesses in Argentina, Brazil and Colombia. Those businesses had approximately $6 billion of assets and generated a $34 million net loss in 2015. Citi expected increased U.S. card acquisition, rewards and partnership investment to weigh on 2016 pretax earnings.
- Mortgage reset exposure: Of $12.3 billion in revolving HELOCs not yet amortizing, approximately 66% were expected to reset in 2016–2017. Citi estimated average monthly payments on resetting loans could rise about $370, or 165%; higher delinquencies and credit losses are possible.
- Country and currency risk: Citi estimated a potential approximately $172 million first-quarter 2016 foreign-currency loss from Venezuela’s announced exchange-rate changes, subject to implementation and market developments. Argentina’s currency controls and devaluation, and sanctions and economic weakness in Russia, also present risks.
- Tax assets: Net deferred tax assets were $47.8 billion, including $15.9 billion of foreign tax credit carry-forwards. Citi stated that realization depends on generating sufficient U.S. taxable income; approximately $4.8 billion of FTCs expire in 2018. Citi estimated it would need about $59 billion of U.S. taxable income during the relevant carry-forward periods to prevent FTC expirations.
- Legal and regulatory matters: Citi estimated reasonably possible unaccrued losses of up to approximately $3.5 billion in aggregate for matters where an estimate could be made; it could not estimate losses for certain other matters. The filing cautions that actual losses may exceed accruals and estimates. A U.K. PPI reserve was $262 million at year-end. Regulatory and compliance costs, resolution-plan requirements, proposed TLAC rules and CCAR outcomes could affect costs, funding, capital distributions or operations.
- Other risks: The filing highlights cyber and operational threats, litigation and conduct risk, emerging-market exposure, ratings-related funding costs, and uncertainty in fair-value, credit-loss and other significant accounting estimates. A 100-basis-point parallel rise in rates was estimated to increase annualized net interest revenue by $2.1 billion while initially reducing AOCI by $4.8 billion and the fully implemented CET1 ratio by 57 basis points.
Most important facts for investors to verify
- How much of the earnings increase reflects recurring expense and credit improvement versus the 2014 settlement comparison, 2015 disposal gains, tax benefits and other unusual items.
- Whether 2016 credit costs rise as management anticipated, particularly in energy, corporate lending, cards and resetting HELOCs.
- Progress and final economics of the announced Latin American consumer exits, remaining Citi Holdings run-off and signed asset-sale agreements.
- Realization of deferred tax assets and FTCs, including taxable-income generation and expiration schedules.
- Developments in material litigation, regulatory inquiries, the resolution plan and TLAC requirements, including any effects on funding, capital or distributions.
- Liquidity and capital resilience under stress, including the sustainability of reported ratios after regulatory buffers, balance-sheet changes and shareholder returns.