Citigroup Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter ended September 30, 2013; comparisons are primarily with Q3 2012. Citigroup is a global financial-services company managed through Citicorp, its core businesses, and Citi Holdings, a portfolio being wound down.
Financial performance and condition
| Metric | Q3 2013 | Q3 2012 | Change / context |
|---|---|---|---|
| Revenue, net of interest expense | $17.9 billion | $13.7 billion | Up 30%; comparison reflects the prior-year MSSB loss. Excluding specified items, revenue was $18.2 billion, down 5%. |
| Net income attributable to Citigroup | $3.23 billion | $468 million | Reported diluted EPS was $1.00 versus $0.15. Excluding CVA/DVA, tax benefits and the prior-year MSSB loss, net income was $3.3 billion in both periods; adjusted diluted EPS was $1.02 versus $1.06. |
| Net interest revenue | $11.51 billion | $11.71 billion | Down 2%. |
| Operating expenses | $11.66 billion | $12.09 billion | Down 4%; included $677 million of legal and related expenses and $133 million of repositioning charges. |
| Credit-loss and benefits provisions | $1.96 billion | $2.62 billion | Down 25%. Net credit losses were $2.43 billion, down 38%. |
| Efficiency ratio | 65% | 88% | Improved; prior-year ratio was affected by the MSSB charge. |
- Net interest margin was 2.81%, unchanged year over year and down 4 basis points from Q2 2013.
- For the first nine months, revenue was $58.6 billion, up 14%; net income was $11.2 billion, up 77%; and diluted EPS was $3.57 versus $2.06.
- Q3 segment results: Citicorp net income was $3.3 billion, down 17%; Citi Holdings reported a $104 million net loss versus a $3.6 billion loss in Q3 2012. The latter comparison primarily reflects the absence of the prior-year $4.7 billion pretax MSSB loss.
Balance sheet, capital and liquidity
- At September 30, total assets were $1.90 trillion; deposits were $955.5 billion; long-term debt was $221.6 billion; and total stockholders’ equity was $200.8 billion.
- Total assets were 2% below September 2012; deposits were up 1%; and long-term debt was down 18% year over year.
- Basel I Tier 1 Common and Tier 1 Capital ratios were 12.68% and 13.64%, respectively. Estimated Basel III Tier 1 Common was 10.5%; estimated Basel III Supplementary Leverage Ratio was 5.1%.
- Reported liquidity resources were $409.6 billion, including $136.3 billion of available cash and $273.3 billion of unencumbered liquid securities. Estimated LCR was 113%, based on Citi’s interpretation of proposed Basel Committee rules.
- For the first nine months, operating cash flow was $59.3 billion, investing cash flow was negative $78.6 billion, and financing cash flow was positive $17.1 billion. Cash and due from banks ended at $32.8 billion, down $3.6 billion from year-end 2012. Banking cash flows include substantial trading and balance-sheet movements.
Material changes and business trends
- Underlying revenue pressure continued from global spread compression, weaker Securities and Banking market activity, lower North American mortgage originations, and regulatory changes in some consumer markets. Excluding specified unusual items, Citicorp revenue declined 7% year over year.
- Global Consumer Banking revenue fell 7%. North America revenue fell 12%, principally due to a 35% decline in retail banking revenue, including lower mortgage refinancing activity. Latin America revenue grew 4% reported, but credit costs rose; Asia revenue fell 6% reported, with spread compression and regulation in Korea among the pressures.
- Securities and Banking revenue excluding CVA/DVA declined 10%; fixed-income markets revenue fell 26% and investment-banking revenue fell 10%, partly offset by 36% growth in equity markets. Transaction Services revenue was flat reported, while customer deposits and other liability balances grew 4% and assets under custody rose 9%.
- Citi Holdings assets fell 29% year over year to $122 billion, reflecting sales and runoff. Its results remain exposed to asset-sale gains or losses, legal costs, and changing credit-reserve releases.
- Credit quality improved overall: allowance for loan losses was $20.6 billion, or 3.2% of loans, versus $25.9 billion, or 4.0%, a year earlier. Non-accrual assets fell 23% to $9.8 billion. Q3 included a $675 million net reserve release, substantially attributable to Citi Holdings mortgages; the filing says such releases may moderate.
Outlook, risks and unusual items
- Management expected the challenging environment to persist through the remainder of 2013, citing macroeconomic uncertainty, slower market activity, spread compression, lower mortgage origination volumes, and regulatory changes. Citi expected spread compression in Asia to remain a revenue headwind into 2014.
- Legal and related expenses remained elevated and volatile. Citi reported $677 million in Q3 versus $529 million a year earlier, primarily in Citi Holdings. A Freddie Mac agreement resolved potential future origination-related repurchase claims on 3.7 million mortgages; Citi paid $395 million from existing reserves. The remaining whole-loan representation-and-warranty reserve was $345 million, with reasonably possible loss above accruals estimated at up to $200 million.
- Citi estimated approximately $30 million of quarterly net credit losses through the first half of 2014 from obligations under the independent foreclosure review settlement. Its U.K. payment-protection-insurance reserve was $257 million after a $61 million Q3 increase; the customer contact exercise was expected to finish in the first half of 2014.
- Other notable items: Q3 results included negative $336 million of CVA/DVA before tax and a $176 million tax benefit; Q3 2012 included the $4.7 billion pretax MSSB loss and a $582 million tax benefit. Citi’s Brazil Credicard sale, for approximately $1.24 billion, remained subject to approvals and was expected to close by early 2014.
- Risks include substantial legal proceedings, potential credit-rating downgrades and related collateral calls, country and foreign-exchange controls, home-equity line reset risk, and changing U.S. and international capital, liquidity and derivatives regulations. Basel III Advanced Approaches rules were due to take effect January 1, 2014; a proposed higher supplementary leverage buffer for large U.S. banks was not final.
Important facts for investors to verify
- Reconcile reported earnings and EPS to management’s adjusted, non-GAAP results, particularly the effects of MSSB, CVA/DVA and tax benefits.
- Assess whether ongoing spread compression, weaker trading activity and lower mortgage originations continue to pressure recurring revenue and margins.
- Review the sustainability of reserve releases and the remaining allowance against mortgage, card and corporate credit risks, including Mexico homebuilder exposures and HELOC resets.
- Track legal accruals, mortgage repurchase claims, settlement costs and the PPI reserve against the possible-loss disclosures.
- Confirm capital and liquidity ratios under final regulatory calculations, including the impact of Basel III implementation, leverage proposals and any rating changes.
- Compare cash-flow movements with underlying operating performance, given material trading, securitization and other balance-sheet effects.