CITIGROUP INC quarterly report, Q2 FY2020

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Citigroup Inc. — Q2 2020 Form 10-Q

Business context and reporting period. Citigroup reported the quarter and six months ended June 30, 2020. Its businesses are Global Consumer Banking (GCB), Institutional Clients Group (ICG), and Corporate/Other. Results were shaped by the COVID-19 pandemic, sharply lower interest rates, market volatility, and adoption of the CECL expected-credit-loss standard on January 1, 2020.

Financial results and position

  • Revenue and earnings: Q2 revenue was $19.8 billion, up 5% year over year. Net income was $1.316 billion, down 73%; diluted EPS was $0.50 versus $1.95. Pretax income was $1.448 billion versus $6.165 billion. Six-month revenue increased 8% to $40.5 billion, while net income fell 60% to $3.8 billion.
  • Revenue mix and interest margin: Q2 net interest revenue declined 7% to $11.1 billion; non-interest revenue rose 28% to $8.7 billion, largely reflecting stronger markets activity. Net interest margin was 2.17%, down 50 basis points year over year. Management said lower rates and lower customer activity were weighing on net interest revenue.
  • Costs and credit: Operating expenses were $10.4 billion, down 1%; the efficiency ratio improved to 52.7% from 56.0%. Provisions for credit losses and benefits/claims rose to $7.9 billion from $2.1 billion, including an approximately $5.6 billion ACL build. Net credit losses were $2.2 billion, up 12%.
  • Segments: GCB recorded a $398 million net loss versus $1.3 billion of income, as lower revenue and higher credit costs outweighed expense reductions. ICG earned $1.9 billion, down 45%, despite revenue growth of 21% to $12.1 billion; markets and securities services revenue rose 48%. Corporate/Other recorded a $163 million net loss versus $84 million of income.
  • Balance sheet, debt, and liquidity: Total assets were $2.23 trillion, up 12% year over year; deposits were $1.23 trillion, up 18%; and end-period loans were $685 billion, broadly unchanged year over year. Long-term debt was $279.8 billion, up 11%. Available liquidity resources were approximately $900 billion; the average liquidity coverage ratio was 117%.
  • Capital and shareholder returns: CET1 was 11.6% under the Advanced Approaches framework; the supplementary leverage ratio was 6.66%, including 94 basis points of temporary regulatory relief (5.72% without that relief). Citi paid $1.1 billion in common dividends during the quarter. Share repurchases were suspended.
  • Cash flows: For the first six months, operating activities used $19.2 billion and investing activities used $91.7 billion; financing activities provided $227.7 billion. Cash, due from banks, and deposits with banks increased $115.9 billion to $309.8 billion. These banking cash-flow categories include substantial balance-sheet and funding movements and are not conventional free-cash-flow measures.

Material changes versus comparable periods

  • Q2 earnings were sharply lower chiefly because of pandemic-driven reserve building, even as ICG markets and investment banking supported revenue growth.
  • GCB revenue fell 10%; reduced card spending, lower loan volumes, and lower rates contributed. ICG revenue rose 21%, but its credit provisions increased to $3.9 billion from $132 million.
  • The ACL was approximately $28.5 billion at June 30, versus $14.2 billion at December 31, 2019. Funded-loan ACL coverage rose to 3.89% from 1.84% at year-end; total non-accrual loans increased to $5.8 billion from $4.0 billion at year-end.
  • Deposits grew substantially, strengthening liquidity, while end-period loans declined 5% sequentially. Long-term debt rose both sequentially and year over year.

Outlook, risks, contingencies, and unusual items

  • Outlook: Citi expected near-term revenues to remain pressured by low rates and difficult economic and market conditions; consumer spending and loan volumes were expected to remain weak. Management anticipated higher net credit losses. If its Q2 macroeconomic forecast held, it did not expect significant additional reserve builds in the near term, but warned that a worse outlook could materially increase reserves. It expected markets and investment banking trends to normalize from first-half levels.
  • Credit relief and uncertainty: Consumer pandemic relief programs enrolled about 3.85 million modifications with $20.0 billion of balances during Q2, excluding TDRs. Corporate and private-bank loan modifications totaled $6.0 billion of exposure. Relief programs and government stimulus may defer or obscure credit deterioration; Citi expected losses to rise as support programs expire.
  • CECL and reserve judgment: Adoption increased opening ACL by approximately $4.1 billion pretax and reduced retained earnings by $3.1 billion after tax. The Q2 reserve included a $2.3 billion management adjustment reflecting a 15% probability assigned to a more adverse economic scenario. Citi also recorded a one-time $426 million ACL release from changing its accounting for variable post-charge-off collection costs; beginning in Q3, about $50 million per quarter was to be classified as operating expense instead.
  • Other unusual items: ICG reported $3.9 billion of principal transactions revenue, up about $2.0 billion year over year, amid elevated volatility. Banking revenue included $431 million of losses on loan hedges. Citi recorded a $2.2 billion after-tax Q2 DVA loss in OCI on its own debt; this did not affect regulatory capital.
  • Capital distributions and risks: The Federal Reserve required capital-plan resubmissions and imposed temporary distribution limits for Q3 2020. Citi declared a $0.51-per-share Q3 dividend, subject to applicable approvals and conditions. Key risks include the duration and severity of the pandemic and downturn, deteriorating borrower credit, market volatility, low rates, capital and liquidity requirements, operational and cyber disruptions, litigation, and emerging-market and currency risks.
  • Contingencies and other disclosures: Citi estimated approximately $1.2 billion of reasonably possible unaccrued losses for litigation, regulatory, tax, and other matters; management said outcomes were not likely to materially affect consolidated financial condition, though individual periods could be affected. Citi also disclosed 110 inadvertent non-dollar transactions totaling about $41,000 to a Kenyan medical clinic that may be controlled by the Government of Iran; the transactions were reported to OFAC.

Important facts for investors to verify

  • Whether actual unemployment, GDP, borrower performance, and relief-program expirations support Citi’s reserve assumptions—and whether further ACL builds or credit losses emerge.
  • How consumer and corporate delinquency, non-accrual loans, charge-offs, and modified-loan payment behavior develop after government and bank relief measures end.
  • Capital headroom after separating reported ratios from temporary SLR relief and CECL transition benefits, and the effect of updated Federal Reserve scenarios on dividends and other distributions.
  • Whether low rates, subdued GCB activity, and normalization in ICG markets affect revenue, net interest margin, and expense discipline as management anticipated.
  • The scale and timing of litigation or regulatory losses beyond the $1.2 billion estimated reasonably possible unaccrued amount, and any developments in the disclosed contingencies.