Business Context and Reporting Period
Citigroup Inc. is a global financial services holding company operating through Citicorp, its core consumer and institutional businesses, and Citi Holdings, a portfolio of legacy and non-core assets. This unaudited Form 10-Q covers the quarter ended March 31, 2013; comparisons are primarily with the first quarter of 2012 unless noted.
Key Financial Metrics
| Metric | Q1 2013 | Comparable period / change |
|---|---|---|
| Revenue, net of interest expense | $20.5 billion | Up 6% |
| Net interest revenue | $11.9 billion | Down 1% |
| Non-interest revenue | $8.6 billion | Up 15% |
| Operating expenses | $12.4 billion | Up 1% |
| Provisions for credit losses and benefits and claims | $2.5 billion | Down 16% |
| Income from continuing operations before tax | $5.6 billion | Up 37% |
| Income taxes / effective tax rate | $1.6 billion / 28.6% | Tax provision up 58% |
| Citigroup net income | $3.8 billion; diluted EPS $1.23 | Net income up 30%; Q1 2012 diluted EPS $0.95 |
| Net interest margin | 2.94% | 2.90% in Q1 2012 |
| Return on average assets / common equity | 0.82% / 8.21% | 0.62% / 6.53% |
| Efficiency ratio | 61% | 63% |
Management’s non-GAAP comparison excludes CVA/DVA in both periods and the Q1 2012 minority-investment gain: Q1 2013 net income was $4.0 billion, or $1.29 diluted EPS, versus $1.11 EPS in Q1 2012, a 16% increase in earnings per share.
Cash Flow, Balance Sheet and Capital
- Operating cash flow from continuing operations was $25.0 billion, versus $9.5 billion in Q1 2012; investing cash flow was negative $28.3 billion and financing cash flow negative $1.5 billion. Cash and due from banks ended at $31.2 billion. Bank cash-flow figures are affected by trading and balance-sheet movements.
- Total assets were $1.882 trillion, up 1% from year-end 2012 and down 3% year over year. Total deposits were $933.8 billion, up 3% year over year. Long-term debt was $234.3 billion, down 25% year over year and about $5 billion from year-end.
- Common stockholders’ equity was $190.2 billion; book value per share was $62.51 and tangible book value per share $52.35. The common dividend declared was $0.01 per share.
- Regulatory capital ratios at March 31 were Tier 1 Common 11.84%, Tier 1 Capital 13.09% and Total Capital 16.09%. Estimated Basel III Tier 1 Common was 9.3%, versus 8.7% at year-end 2012. The current-rule ratios reflect Basel II.5 market-risk rules effective January 1, 2013.
- Liquidity resources were $375.8 billion; estimated Basel III liquidity coverage ratio was 116%, approximately $52 billion above the proposed 100% minimum. Citi also reported a 72% structural liquidity ratio.
Credit and Business Segments
- Net credit losses were $3.0 billion, down 25%; the allowance for loan losses was $23.7 billion, or 3.7% of loans, compared with $29.0 billion, or 4.5%, a year earlier. The quarter included a $652 million net reserve release. Non-accrual assets were $11.1 billion, down 9% year over year.
- Citicorp earned $4.6 billion, up 17%; revenue was $19.6 billion, up 6%. Institutional Clients Group revenue rose 19%, driven largely by Securities and Banking; Transaction Services revenue fell 4%. Global Consumer Banking revenue was essentially flat, while net income fell 11%.
- Citi Holdings reported a $794 million net loss, improved from a $1.0 billion loss. Assets were $149 billion, down 29% year over year. Legal and related expenses contributed to a 23% increase in segment expenses.
Changes, Outlook, Risks and Unusual Items
- Reported results benefited from a smaller net negative CVA/DVA impact: $319 million pretax in Q1 2013 versus $1.288 billion in Q1 2012. Q1 2012 also included a $477 million pretax gain on minority investments. These items make reported year-over-year comparisons less representative of underlying performance.
- Legal and related expenses were $710 million, versus $545 million a year earlier; repositioning charges were $148 million, versus $66 million. Citi continued its announced cost-reduction and branch-optimization efforts.
- Management said global spread compression continued to pressure Global Consumer Banking and Transaction Services and expected the pressure to persist in the near term. Citi expected full-year 2013 net interest margin to remain above 2.88%, the 2012 level, but anticipated a sequential decline of a few basis points in Q2. It also expected liquidity resources could decrease modestly during the remainder of 2013.
- North America mortgage gain-on-sale margins and card loan balances were pressure points. Management noted consumer deleveraging and higher card payment rates; it expected mortgage volumes to remain higher through Q3, but spread compression to weigh on revenue through the rest of 2013.
- Mortgage repurchase exposure remains uncertain. Citi added $225 million to its whole-loan repurchase reserve in Q1; the reserve was $1.415 billion at quarter-end. Management estimated reasonably possible whole-loan representation-and-warranty losses up to $0.6 billion above accrued amounts. Private-label securitization claims were addressed through litigation accrual analysis.
- Other legal matters include a proposed $730 million settlement in bond litigation, preliminarily approved by the court, subject to a scheduled fairness hearing. Citi estimated aggregate reasonably possible litigation and regulatory losses in excess of accruals at approximately $5 billion, materially unchanged from year-end 2012; actual outcomes could differ substantially.
- Additional exposures include payment-protection-insurance claims (reserve $307 million), obligations under the national mortgage settlement, and potential mortgage foreclosure delays and re-defaults. Citi said it expected to meet the settlement’s homeowner-relief obligations without cash payments.
- Country and regulatory risks include Eurozone stress, currency controls, and foreign-exchange movements. Venezuela’s February 2013 currency devaluation caused an approximately $100 million pretax loss. Moody’s said it planned to review government-support assumptions for major U.S. banks by year-end, potentially affecting ratings; Citi estimated a simultaneous one-notch downgrade could trigger about $4.3 billion of cash obligations and collateral requirements for Citigroup and Citibank.
Important Facts for Investors to Verify
- Reconcile reported earnings with management’s non-GAAP figures, particularly CVA/DVA, prior-year investment gains and discontinued operations.
- Review the sustainability of revenue and margins given spread compression, changing card balances, and markets-driven results.
- Assess the quality and trajectory of credit performance, reserve releases, mortgage exposures and Citi Holdings run-off.
- Check capital-ratio comparability after Basel II.5 implementation and the assumptions underlying the estimated Basel III ratio.
- Evaluate liquidity and refinancing risks, including rating-trigger exposures, debt maturities and transfer timing for MSSB-related deposits.
- Track legal accruals, the mortgage repurchase reserve and claims, and the timing and costs of settlements and other contingencies.