Citigroup Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Citigroup is a global financial-services holding company reporting through Citicorp, its core consumer and institutional businesses, and Citi Holdings, its legacy and non-core portfolios.
Financial results and condition
| Metric | Q2 2013 | Q2 2012 | Change |
|---|---|---|---|
| Net revenues | $20.5 billion | $18.4 billion | +11% |
| Net interest revenue | $11.7 billion | $11.3 billion | +3% |
| Operating expenses | $12.1 billion | $12.0 billion | +1% |
| Credit-loss and benefits provisions | $2.0 billion | $2.7 billion | -25% |
| Income before taxes | $6.3 billion | $3.7 billion | +71% |
| Net income attributable to Citigroup | $4.2 billion | $2.9 billion | +42% |
| Diluted EPS | $1.34 | $0.95 | +41% |
| Net interest margin | 2.85% | 2.75% | +10 bps |
Reported Q2 earnings included a $477 million pretax ($293 million after-tax) positive CVA/DVA impact. Q2 2012 included a $424 million pretax ($274 million after-tax) loss on the Akbank stake sale. Excluding these items, and the prior-year Akbank loss, management reported net income up 26% to $3.9 billion and diluted EPS up 25% to $1.25; these are non-GAAP comparisons.
- Six-month results: Revenue was $40.7 billion, up 9%; operating expenses were $24.4 billion, up 1%; provisions were $4.5 billion, down 20%; net income was $8.0 billion, up 36%; diluted EPS was $2.57, up 35%.
- Cash flow, first six months: Operating cash flow from continuing operations was $45.1 billion, versus $4.1 billion a year earlier; investing activities used $55.2 billion and financing activities provided $6.0 billion. The large operating cash-flow swing includes substantial trading, asset and liability movements and should not be read as earnings-based cash generation alone. Cash and due from banks ended at $31.1 billion, down from $36.5 billion at year-end 2012.
- Balance sheet at June 30: Total assets were $1.884 trillion; deposits $938.4 billion; loans, net of allowance, $622.2 billion; long-term debt $221.0 billion; and total Citigroup stockholders’ equity $195.9 billion.
- Credit: Net credit losses were $2.6 billion, down 25% year over year. The allowance for loan losses was $21.6 billion, or 3.4% of loans, versus $27.6 billion, or 4.3%, a year earlier. Non-accrual assets were $10.1 billion, down 12% year over year.
- Capital and liquidity: Basel I Tier 1 Common, Tier 1 Capital and Total Capital ratios were 12.16%, 13.24% and 16.18%, respectively. Management’s estimated Basel III Tier 1 Common ratio was 10.0%, and estimated supplementary leverage ratio was 4.9%; these estimates used proposed rules and are non-GAAP. Liquidity resources totaled $389.2 billion; estimated proposed-rule LCR was 110%, with management indicating it expected to operate around that level. The structural liquidity ratio was approximately 72%.
Material changes and business drivers
- Citicorp: Net income was $4.8 billion, up 23%. Institutional Clients Group revenue grew 16% to $9.6 billion, led by Securities and Banking, whose revenue rose 25% (21% excluding CVA/DVA). Transaction Services revenue fell 1%, reflecting spread compression. Global Consumer Banking revenue rose 2%, but net income was essentially flat.
- Citi Holdings: Net loss narrowed to $570 million from $910 million; assets fell 31% year over year to $131 billion. Lower credit losses and asset reduction helped results, while legal and related expenses increased materially.
- Cost and legal items: Legal and related expenses were $832 million versus $480 million a year earlier, including $702 million in Citi Holdings. Repositioning charges were $75 million versus $186 million.
- Debt and portfolio reduction: Long-term debt was down 23% year over year. Citi repurchased about $5.0 billion of short- and long-term debt during the quarter, including $3.0 billion of trust preferred securities. Citi completed the sale of its remaining 35% MSSB joint-venture interest.
Outlook, risks and unusual items
- Management expected full-year 2013 net interest margin to remain slightly above the 2.82% achieved in 2012, absent significant changes or events. It expected spread compression to continue to pressure Transaction Services and consumer banking revenues in the near term.
- Management cited a challenging operating environment, including slower emerging-market growth, higher legal costs and a higher expected tax rate. It also warned that U.S. mortgage origination volumes and gain-on-sale margins could decline as interest-rate conditions change.
- Q2 included an approximately $525 million loan-loss reserve release related to North America mortgages. A $180 million mortgage-portfolio sale gain also supported North America retail banking revenue.
- On June 28, Citi paid Fannie Mae $968 million to resolve specified future representation-and-warranty repurchase claims on 3.7 million loans. The quarter-end repurchase reserve was $719 million; Citi estimated reasonably possible additional losses of up to $200 million above accrued amounts for whole-loan claims.
- Citi reported approximately $5 billion of aggregate reasonably possible litigation losses in excess of accruals in its contingency discussion; management said the estimate was materially unchanged from year-end. Legal outcomes remain uncertain and could materially affect results or cash flows in particular periods.
- The sale of Brazil Credicard was expected to close by early 2014, subject to approvals, and management estimated an after-tax gain of about $300 million upon closing. Citi also disclosed planned transfers of $57 billion of MSSB-related deposits to Morgan Stanley, beginning with approximately $20 billion in Q3 2013.
- Other exposures and uncertainties include Basel III and leverage-rule implementation, interest-rate and market risk, foreign-exchange controls and country risk, tax-asset realization, mortgage servicing and foreclosure delays, and ongoing litigation and regulatory proceedings. Citi’s estimated $54.0 billion of net deferred tax assets depends on future taxable income and tax-planning actions.
Important facts for investors to verify
- Reconcile reported earnings with management’s non-GAAP figures and the effects of CVA/DVA, the Akbank comparison and mortgage-sale gains.
- Track whether credit improvement and reserve releases continue, particularly in North America mortgages, and assess allowance coverage alongside asset sales and charge-offs.
- Monitor legal expense trends, the Fannie Mae settlement’s scope, remaining repurchase reserves, and developments in the broader litigation matters.
- Confirm the timing and impact of MSSB deposit transfers and the Credicard sale, including proceeds, capital effects and any gain recognized.
- Assess capital and liquidity under the final regulatory rules, rather than relying solely on estimates based on proposed Basel III rules; review deposit, debt and LCR trends.
- Compare actual second-half NIM, consumer revenue and expense performance with management’s stated expectations and identified spread-compression risks.