Citigroup Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 4, 2020. Citi reports through Global Consumer Banking (GCB), Institutional Clients Group (ICG), and Corporate/Other. Results reflect the initial economic and market disruption from COVID-19 and Citi’s January 1, 2020 adoption of CECL.
Financial performance and position
| Metric | Q1 2020 | Comparable period / change |
|---|---|---|
| Revenue, net of interest expense | $20.7 billion | Up 12% year over year |
| Net interest revenue | $11.5 billion | Down 2%; net interest margin was 2.48%, down 24 bps |
| Net income / diluted EPS | $2.5 billion / $1.05 | $4.7 billion / $1.87 in Q1 2019 |
| Operating expenses | $10.6 billion | Largely unchanged; efficiency ratio improved to 51.1% from 57.0% |
| Provisions for credit losses and benefits | $7.0 billion | $2.0 billion in Q1 2019 |
| Net credit losses on loans | $2.1 billion | Up 8% year over year |
| End-period loans / deposits | $721 billion / $1.185 trillion | Up 6% / 15% year over year |
| Total assets / long-term debt | $2.220 trillion / $266.1 billion | Assets up 13%; debt up 9% year over year |
| CET1 / supplementary leverage ratio | 11.2% / 6.0% | At year-end 2019: 12.13% / 6.21% under the cited frameworks |
| Liquidity coverage ratio / available liquidity | 115% / approximately $840 billion | LCR was 115% at December 31, 2019 |
Net cash used in operating activities was $25.5 billion, versus $37.6 billion used in Q1 2019; investing activities used $72.9 billion, versus $16.0 billion provided. Financing activities provided $191.4 billion, mainly reflecting deposit growth, secured funding and debt issuance. Cash, due from banks and deposits with banks ended at $285.9 billion. These cash-flow figures include substantial financial-institution balance-sheet movements.
Changes versus Q1 2019
- Net income fell 46%, principally due to the credit reserve build following the deterioration in Citi’s economic outlook under CECL. Diluted EPS declined 44%, partly cushioned by a 10% reduction in average diluted shares.
- Non-interest revenue rose 36%, led by trading and markets activity amid exceptional volatility. ICG revenue rose 25% and net income rose 7%; Markets and securities services revenue increased 37%.
- GCB reported a $755 million net loss versus $1.32 billion of income, as provisions increased sharply. GCB revenue rose 1%; expenses declined 1%.
- Citi’s allowance for credit losses on loans increased to $20.8 billion from $12.8 billion at year-end 2019. The increase reflects both CECL adoption and current-quarter reserve builds; the total allowance, including unfunded commitments and other items, was $22.8 billion.
Outlook, commentary, risks and unusual items
- Management said near-term revenue could be pressured by lower interest rates and challenging macroeconomic and market conditions. Citi expected lower card purchase activity and loan volumes to continue at least through Q2 2020, and warned that credit losses and reserves could rise further if the outlook deteriorated. The filing provides no quantified earnings or revenue guidance.
- CECL adoption increased the opening allowance by approximately $4.1 billion pretax and reduced opening retained earnings by $3.1 billion after tax. Citi built approximately $4.9 billion of net reserves during Q1, reflecting revised lifetime-loss estimates under pandemic-related economic forecasts.
- Citi reported strong reported liquidity and capital, while balance-sheet growth reflected client activity: corporate clients drew approximately $25 billion on previously extended facilities, and Citi approved more than $21 billion of new facilities. COVID-related customer relief programs covered approximately $1 billion of loans at quarter-end, excluding TDRs. Citi reported more than $3.3 billion in PPP applications approved as of May 1, 2020, after quarter-end.
- Citi returned $4.0 billion to common shareholders in Q1, including approximately 40.7 million shares repurchased. It suspended share repurchases on March 15 to preserve capital and liquidity; the filing said its dividend policy was unchanged.
- Other comprehensive income included a $3.8 billion after-tax gain, including a $3.1 billion own-credit DVA gain, a $4.1 billion foreign-currency translation loss, $3.1 billion of unrealized AFS securities gains and a $1.9 billion cash-flow-hedge gain. These items are not equivalent to operating earnings.
- Key risks include the uncertain duration and severity of COVID-19, borrower defaults and downgrades, market volatility, lower rates, funding and capital pressure, remote-work and technology/cyber disruption, and the effects of government relief programs. Fitch revised Citi’s outlook to Negative on April 22, 2020.
- Citi estimated reasonably possible unaccrued losses for litigation, regulatory and tax matters at approximately $1.3 billion, materially unchanged from year-end. Management said the matters were not likely to materially affect consolidated financial condition, but adverse outcomes could materially affect results or cash flows in particular periods. Citi also disclosed an approximately $850 million net investment in Argentina, where currency controls and limited hedge-market liquidity pose risks.
Important facts for investors to verify
- Whether subsequent economic forecasts, borrower performance and relief-program effects required further credit reserve builds or increased realized losses.
- How much of Q1 ICG revenue growth—especially trading gains and the $816 million of loan-hedge gains—was repeatable, and the effect of lower rates on net interest revenue.
- Capital and liquidity trends after quarter-end, including the effect of balance-sheet growth, suspended repurchases and applicable regulatory relief.
- Actual utilization, performance and credit quality of customer relief, corporate facilities and PPP lending, including their effect on delinquency measures.
- Developments in legal and regulatory matters, Argentina exposures, and Fitch’s Negative outlook and any resulting funding or collateral impacts.