Citigroup Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Citi operates through Citicorp, its core consumer and institutional businesses, and Citi Holdings, its non-core runoff and disposal portfolio. Amounts below are U.S. dollars; quarterly comparisons are year over year unless noted.
Financial results and position
| Metric | Q2 2015 | Q2 2014 | Change or context |
|---|---|---|---|
| Net revenues | $19.47 billion | $19.43 billion | Approximately unchanged; excluding CVA/DVA, down 2%. |
| Net income attributable to Citi | $4.85 billion | $181 million | Prior period included a $3.8 billion pretax mortgage settlement charge. Excluding that charge and CVA/DVA, net income was $4.7 billion versus $3.9 billion. |
| Diluted EPS | $1.51 | $0.03 | Adjusted for the mortgage settlement and CVA/DVA, $1.45 versus $1.24. |
| Operating expenses | $10.93 billion | $15.52 billion | Down 30% reported; down 7% excluding the prior-year mortgage settlement. |
| Credit and benefits provisions | $1.65 billion | $1.73 billion | Down 5%. Net credit losses were $1.92 billion, down 12% reported. |
| Net interest margin | 2.95% | 2.87% | Quarterly margin benefited from a higher trading-NIM contribution; excluding that effect, Citi estimated about 2.91%. |
| Six-month results | Revenue $39.21 billion; net income $9.62 billion | Revenue $39.63 billion; net income $4.13 billion | Reported expenses were $21.81 billion versus $27.67 billion. |
For the six months, operating cash flow was $18.35 billion, investing cash flow was negative $8.61 billion, and financing cash flow was negative $18.33 billion. Cash and due from banks declined by $8.70 billion from year-end to $23.41 billion. Cash flow reflects significant movements in trading assets and liabilities and should not be read as operating earnings alone.
At June 30, total assets were $1.829 trillion, deposits $908.0 billion, long-term debt $211.8 billion, short-term borrowings $25.9 billion, and total equity $220.8 billion. Fully implemented Basel III ratios under the Advanced Approaches were 11.37% Common Equity Tier 1, 12.54% Tier 1, 14.14% total capital, and 6.72% supplementary leverage. High-quality liquid assets were $385.8 billion; the U.S. Liquidity Coverage Ratio was 111%, with $38.6 billion of HQLA above net outflows.
Material changes and business performance
- Citicorp reported $4.70 billion of continuing-operations income, up 25%; revenue rose 2% to $17.80 billion. Institutional Clients Group revenue increased 6%, while Global Consumer Banking revenue decreased 4% as reported, largely reflecting foreign-exchange translation.
- Citi Holdings reported $163 million of income versus a $3.49 billion loss, principally because the prior year included the mortgage settlement. Excluding that settlement and CVA/DVA, current-quarter income was $157 million versus $234 million. Holdings assets fell 22% year over year to $116 billion, or about 6% of Citi’s assets.
- Reported consumer and corporate loans were $632.1 billion, down 5% year over year, while deposits were down 6%. Currency translation and the Holdings runoff affected these comparisons. Citi said Citicorp loans grew 4% excluding currency effects.
- Credit quality improved in several consumer portfolios: total non-accrual loans fell to $6.44 billion from $7.93 billion a year earlier, and the allowance for loan losses declined to $14.08 billion from $17.89 billion. Corporate net credit losses rose to $106 million from $11 million, concentrated in a limited number of loans.
Outlook, risks and unusual items
- Management described the remainder of 2015 as challenging amid uneven global growth and uncertainty over the timing of interest-rate increases. Citi expected credit costs could rise, driven by loan growth and lower reserve releases. It also noted that higher U.S. interest rates could pressure mortgage revenues and that planned divestitures could affect net interest margin.
- Citi had agreements to sell approximately $32 billion of remaining Citi Holdings assets, including OneMain Financial and businesses in Japan and other markets; closing remained subject to approvals and other conditions. The OneMain sale was expected in Q3 2015 and the Japan transactions by Q4 2015.
- Management reported using approximately $1.5 billion of deferred tax assets in the first half, including $300 million in Q2. Net DTAs were approximately $47.9 billion at June 30. The quarter’s effective tax rate was 29.2% excluding CVA/DVA; New York City tax reform produced a $212 million charge, partly offset by a state and local audit settlement.
- Citi returned approximately $1.7 billion to common shareholders in Q2 through repurchases and dividends and issued about $2.0 billion of preferred stock. The common dividend was $0.05 per share. Future common dividends remain subject to Board and regulatory approval, including the CCAR process.
- Material disclosed legal and regulatory matters included a $925 million DOJ foreign-exchange fine and guilty plea, a $342 million Federal Reserve penalty, and a proposed $394 million foreign-exchange class settlement subject to court approval. A separate consumer add-on-products resolution included $700 million of customer refunds and $70 million of fines; Banamex USA paid a $140 million penalty. Citi estimated aggregate reasonably possible litigation and regulatory losses above accruals at approximately $4 billion, materially unchanged from year-end.
- Other risks discussed include HELOC payment resets, regulatory and capital changes, rating downgrades and related collateral needs, emerging-market and currency exposures, and PPI complaints in the U.K. Citi said the effect of a U.K. court decision and FCA review on its PPI exposure remained uncertain.
Most important facts for investors to verify
- Reconcile reported earnings with management’s non-GAAP comparisons, especially the prior-year mortgage settlement, CVA/DVA, foreign-exchange translation, and OneMain’s reclassification of credit losses to revenue.
- Review the full cash-flow statement and liquidity disclosures, including the $8.70 billion cash decline, HQLA composition, LCR assumptions, and the effects of reducing short-term funding.
- Track completion, timing, and accounting effects of announced Citi Holdings disposals, including OneMain and the Japan businesses.
- Assess whether the declining allowance and reserve releases remain appropriate as loan growth continues and management anticipates potentially higher credit costs.
- Monitor legal and regulatory developments, the approximately $4 billion estimated reasonably possible loss above accruals, and customer remediation obligations.
- Confirm capital headroom against evolving Basel III and GSIB requirements, and the sustainability of capital returns given regulatory approval requirements and Citi’s deferred tax asset utilization.