Business context and reporting period
Citigroup Inc. is a global financial services holding company operating through Citicorp, Citi Holdings and Corporate/Other. This Form 10-K covers the fiscal year ended December 31, 2010; it was filed February 25, 2011. Citicorp comprised the core consumer and institutional businesses, while Citi Holdings contained businesses and assets being wound down or sold.
Comparability is affected by the January 1, 2010 adoption of SFAS 166/167, which brought certain credit-card securitization trusts and other entities onto the balance sheet. The standards were adopted prospectively, so prior periods were not restated; some credit and revenue comparisons are therefore presented on a managed or comparable basis.
Financial and operating performance
| Metric | 2010 | 2009 |
|---|---|---|
| Net revenues | $86.6 billion | $80.3 billion reported |
| Net interest revenue | $54.7 billion | $48.9 billion |
| Operating expenses | $47.4 billion | $47.8 billion |
| Provision for credit losses and benefits and claims | $26.0 billion | $40.3 billion |
| Income from continuing operations | $11.0 billion | Loss of $1.1 billion |
| Citigroup net income (loss) | $10.6 billion | Loss of $1.6 billion |
| Diluted EPS | $0.35 | $(0.80) |
| Net interest margin | 3.15% | 3.08% |
| Cash from continuing operations | $35.7 billion | $(54.6) billion |
Reported revenues rose 8% year over year, but management cited $91.1 billion of 2009 revenues on a comparable basis; the filing attributes much of the reported net-interest-revenue increase to SFAS 166/167. Net credit losses declined to $30.9 billion on a comparable basis, down 27%; Citi released $5.8 billion of loan-loss and unfunded-commitment reserves in 2010, versus a $8.3 billion build in 2009. Total provision fell 50% on a comparable basis.
Cash from continuing investing activities was $43.3 billion and cash used in financing activities was $77.4 billion. Cash and due from banks ended the year at $28.0 billion, up $2.5 billion from the beginning of the year. These cash-flow figures are affected by the scale and nature of banking balance-sheet movements.
At December 31, 2010, total assets were $1.914 trillion, gross loans were $648.8 billion and loans net of allowance were $608.1 billion. Deposits were $845.0 billion, long-term debt was $381.2 billion, and total stockholders’ equity was $163.5 billion. The $40.7 billion loan-loss allowance equaled 6.31% of total loans and 209% of non-accrual loans.
Tier 1 Common was 10.75%, Tier 1 Capital 12.91%, Total Capital 16.59% and the leverage ratio 6.60%, compared with 9.60%, 11.67%, 15.25% and 6.87%, respectively, at year-end 2009. Risk-weighted assets fell 10% to $977.6 billion. Aggregate liquidity resources were $321.9 billion; the structural liquidity ratio was 73%. Citi issued approximately $22 billion of long-term debt in 2010, excluding local-country debt and securitizations, and expected to refinance approximately $20 billion of 2011 maturities.
For the fourth quarter of 2010, net income was $1.3 billion, net revenues were $18.4 billion, provision was $4.8 billion and diluted EPS was $0.04. The fourth-quarter 2009 net loss was $7.6 billion.
Material changes versus the prior comparable period
- Citicorp: Net income was $14.9 billion versus $15.3 billion in 2009. Revenues rose 6% to $65.6 billion. Regional Consumer Banking and Transaction Services revenues grew, while Securities and Banking revenues declined 15% to $23.1 billion amid weaker market activity.
- Citi Holdings: Net loss narrowed to $4.2 billion from $8.9 billion. Assets fell 26% to $359 billion; excluding the accounting adoption’s asset increase, management reported a $171 billion reduction, driven by sales, dispositions, runoff and paydowns.
- Credit costs: Credit conditions improved across regions, with lower net losses and reserve releases. However, North America Regional Consumer Banking net credit losses rose sharply on a reported basis, partly because of the consolidation of securitized card receivables; comparable-basis measures are more informative.
- Operating costs: Total expenses declined 1%; Citicorp expenses increased 10% to $35.9 billion, while Citi Holdings expenses fell 31% to $9.6 billion as the portfolio contracted.
Outlook, risks and unusual items
Management planned to continue investing in and growing Citicorp while economically rationalizing Citi Holdings. It expected U.S. recovery, unemployment and housing conditions to remain challenging. Management anticipated continued pressure on net interest margin in first-quarter 2011, with possible stabilization later in the year; international credit costs could rise as loan volumes grow. Local Consumer Lending revenues were expected to decline as balances ran off, although credit costs were expected to improve.
Management highlighted uncertainty from Dodd-Frank implementation, Basel III and other capital and liquidity rules, and a new FDIC assessment methodology expected to increase Citi’s premiums beginning in the second quarter of 2011. Other key risks include ratings downgrades and related funding or collateral demands; mortgage foreclosure and representation-and-warranty claims; litigation and regulatory proceedings; global economic and sovereign volatility; and the pace of Citi Holdings disposals.
Unusual and accounting-sensitive items include the SFAS 166/167 adoption, which added approximately $137 billion of assets and $146 billion of liabilities at adoption, added $13.4 billion to loan-loss allowance and reduced retained earnings by $8.4 billion after tax. Special Asset Pool marks improved from negative $4.6 billion in 2009 to positive $2.0 billion in 2010. Citi recorded a $917 million increase in its mortgage repurchase reserve, which ended 2010 at $969 million. The sale of The Student Loan Corporation closed December 31, 2010 and produced an overall after-tax loss of $427 million for 2010.
Citigroup reported that its disclosure controls and internal control over financial reporting were effective at December 31, 2010. KPMG issued unqualified opinions on the consolidated financial statements and internal controls.
Key facts for investors to verify
- How SFAS 166/167 changed revenue, loan-loss, asset and debt comparability, and whether managed-basis comparisons are being used consistently.
- Whether the $40.7 billion loan-loss allowance remains adequate as credit conditions, delinquencies and mortgage performance evolve.
- Whether Citi can realize its $52.1 billion net deferred tax assets, given its cumulative pretax loss position and the potential for ownership-change limitations.
- How mortgage repurchase claims develop relative to the $969 million reserve; management estimated a $342 million reserve increase under a simultaneous 10% adverse change in key assumptions.
- The impact of regulatory changes, FDIC assessments, ratings actions and debt maturities on capital, funding costs and liquidity.
- The ultimate exposure from legal and regulatory proceedings: estimated reasonably possible losses above accruals were up to approximately $4 billion in aggregate; management could not estimate losses for certain other matters.
- Whether dividend and repurchase restrictions remain in force while U.S. government-held trust preferred securities are outstanding; the common dividend was $0.00 per share in 2010.