CITIGROUP INC quarterly report, Q1 FY2010

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Citigroup Inc. — Q1 2010 Form 10-Q

Business context and period: Global diversified financial-services holding company operating through Citicorp, Citi Holdings and Corporate/Other. This report covers the three months ended March 31, 2010; balance-sheet amounts are as of March 31, 2010. Comparisons are with Q1 2009 unless noted. Citi adopted SFAS 166/167 on January 1, 2010, materially changing consolidation and reported balances; some prior-period credit-card results are presented on a managed basis for comparison.

Financial performance and condition

  • Revenue: GAAP revenue was $25.4 billion, up 4% from $24.5 billion. Managed revenue was $25.4 billion, down 6% from $27.0 billion, reflecting the absence of prior-year credit-card securitization revenue under the new accounting, lower Securities and Banking and Local Consumer Lending revenue, and no Smith Barney revenue. Net interest revenue rose 13% to $14.6 billion; non-interest revenue fell 6% to $10.9 billion.
  • Earnings: Net income attributable to Citigroup was $4.43 billion, or $0.15 diluted EPS, versus $1.59 billion and a $0.18 diluted loss per share a year earlier. Continuing-operations income was $4.25 billion; discontinued operations contributed $211 million net of tax. Pretax continuing income was $5.29 billion and the effective tax rate was 20%.
  • Costs and credit: Operating expenses were $11.52 billion, down 1%. Provisions for credit losses and benefits/claims were $8.62 billion, down 16%. Managed net credit losses were $8.38 billion, down 15%; Citi recorded an $18 million net reserve release versus a $2.6 billion build a year earlier.
  • Margins: Net interest margin was 3.32%, 67 basis points above Q4 2009 and roughly flat with Q1 2009. Management attributed nearly three-quarters of the sequential increase to SFAS 166/167 adoption.
  • Cash flow: Continuing-operations operating cash flow was $35.4 billion, investing cash flow was $14.4 billion and financing cash flow was negative $49.5 billion; cash and due from banks ended at $25.7 billion. These banking cash-flow figures reflect substantial movements in trading, financing and loan balances and should not be read like operating cash flow for a nonfinancial company.
  • Balance sheet and funding: Total assets were $2.00 trillion, up $145.6 billion from year-end, primarily due to adoption of SFAS 166/167. Loans were $721.8 billion, up $130.3 billion, also primarily from consolidation. Deposits were $827.9 billion, down 1% sequentially and up 9% year over year. Long-term debt was $439.3 billion, versus $364.0 billion at year-end; short-term borrowings were $96.7 billion, versus $68.9 billion. These increases were substantially affected by newly consolidated entities.
  • Capital and liquidity: Tier 1 Common, Tier 1 Capital and Total Capital ratios were 9.11%, 11.28% and 14.88%, respectively; the leverage ratio was 6.16%. Citi reported $319.9 billion of aggregate liquidity resources and structural liquidity of 71% of assets. Total stockholders’ equity was $153.8 billion, including $151.4 billion attributable to Citigroup.
  • Credit quality: The allowance for loan losses was $48.7 billion, or 6.80% of loans, up from 6.09% at year-end, largely reflecting adoption. Consumer 90+ day delinquency was 4.02%, down from 4.28% at year-end but above 3.51% a year earlier. Consumer non-accrual loans were $15.6 billion; corporate non-accrual loans were $12.9 billion.

Material changes and segment results

  • Citicorp: Net income was $5.14 billion, down 34%; revenue was $18.52 billion, down 11% on the reported comparison. Regional Consumer Banking revenue rose 27% to $8.08 billion, while Institutional Clients Group revenue fell 28% to $10.44 billion.
  • Securities and Banking: Revenue declined 34% to $8.00 billion and income from continuing operations declined 48% to $3.21 billion. Q1 2009 included $2.7 billion of positive credit valuation adjustments (CVA), versus $289 million in Q1 2010; Q1 2009 was also exceptionally strong in fixed income markets.
  • Citi Holdings: Net loss narrowed to $887 million from $5.47 billion, helped by positive Special Asset Pool marks. Holdings revenue was $6.55 billion, including $1.38 billion of selected positive net revenue marks, versus $4.48 billion of negative marks in Q1 2009. Local Consumer Lending still lost $1.84 billion.
  • SFAS 166/167 adoption: Added approximately $137 billion of assets and $146 billion of liabilities at adoption; the loan-loss allowance increased $13.4 billion, deferred tax assets increased $5.0 billion and retained earnings fell $8.4 billion. Adoption reduced Tier 1 Common by 138 basis points at the transition date; quarter earnings partly offset the capital impact.
  • Portfolio restructuring: Citi Holdings assets were $503 billion, down 16% year over year. Citi reported 20 divestitures since early 2009 through quarter-end and continued to plan exits through sales and portfolio run-off.

Outlook, risks and unusual items

  • Management identified economic recovery, capital-markets activity and credit costs as key near-term drivers, with continuing uncertainty, particularly around U.S. employment and potential legislation or regulation.
  • Management cautioned that Q1 is historically the strongest period for Securities and Banking, particularly fixed income; Special Asset Pool marks are expected to be episodic. The CARD Act was expected to weigh increasingly on U.S. card revenue during 2010, despite Q1 pricing actions.
  • Management expected to absorb an estimated $400 million pretax U.K. bonus tax in Q2 2010. It also noted that some cost savings in Holdings may be reinvested in Citicorp.
  • Credit costs remained a significant near-term risk. Management expected stabilization or gradual improvement only if economic recovery continued; reserve balances would also reflect portfolio risks and loan-modification programs.
  • Credit-risk exposures include U.S. mortgages, cards and commercial real estate. Citi disclosed deteriorated refreshed mortgage FICO/LTV profiles, foreclosure backlogs and uncertainty around HAMP trial-to-permanent conversions. Mortgage repurchase and representation-and-warranty obligations may also generate losses; the repurchase reserve was $450 million.
  • Other risks include potential rating downgrades and related funding or collateral triggers, regulatory changes, market and counterparty risk, and realization of approximately $50.2 billion of net deferred tax assets. Standard & Poor’s revised its outlook to negative in February 2010; Moody’s and Fitch outlooks remained stable.
  • Litigation and regulatory matters included credit-crisis-related claims and inquiries. Management stated that current accruals and available insurance supported its view that outcomes were not likely to materially affect consolidated financial condition, while acknowledging that adverse outcomes could materially affect results or cash flows in individual periods. A $276 million Visa litigation accrual was included in other liabilities.

Most important facts for investors to verify

  • Separate underlying performance from the effects of SFAS 166/167: confirm the managed-versus-GAAP comparison and the associated opening balance-sheet, allowance and capital adjustments.
  • Assess whether credit improvement is sustained: monitor net charge-offs, delinquencies, non-accruals, reserve coverage, mortgage performance and modification-program re-defaults.
  • Test the quality and repeatability of earnings, especially capital-markets revenue, positive Special Asset Pool marks, discontinued-operation gains and the timing of reserve releases.
  • Verify capital and liquidity resilience, including rating-trigger exposures, funding needs and the effects of regulatory changes; management provided no specific earnings or revenue guidance.
  • Review contingent exposures and estimates, including mortgage repurchase claims, litigation and regulatory matters, deferred tax asset realization and fair-value marks on less-liquid assets.