Citigroup Inc. — FY 2018 Form 10-K
Business context and reporting period. Citigroup is a global financial services holding company operating through Global Consumer Banking (GCB), Institutional Clients Group (ICG), and Corporate/Other. This annual report covers the fiscal year ended December 31, 2018; quarterly figures are noted where useful.
Key financial results
| Metric | FY 2018 | FY 2017 | Change / context |
|---|---|---|---|
| Revenue, net of interest expense | $72.9 billion | $72.4 billion | Up 1%; GCB and ICG underlying growth was 3%, excluding gains on sales in both years. |
| Net interest revenue | $46.6 billion | $45.1 billion | Up 3%; higher core lending and deposit revenue was partly offset by lower trading-related revenue. |
| Operating expenses | $41.8 billion | $42.2 billion | Down 1%; efficiency savings and legacy wind-down more than offset higher volume and investment costs. |
| Credit-loss and benefits provisions | $7.6 billion | $7.5 billion | Up 2%; net credit losses were $7.1 billion, up 1%. |
| Income before tax | $23.4 billion | $22.8 billion | Up 3%. |
| Citigroup net income / diluted EPS | $18.0 billion / $6.68 | $(6.8) billion / $(2.98) | 2017 included a $22.6 billion non-cash Tax Cuts and Jobs Act charge. Excluding that charge, 2018 net income rose 14% and diluted EPS rose 25%. |
| Efficiency ratio | 57.4% | 58.3% | Improved. |
| Net interest margin | 2.69% | 2.73% | Down 4 basis points on a taxable-equivalent basis; core accrual margin increased. |
| Total assets / deposits | $1.92 trillion / $1.01 trillion | $1.84 trillion / $959.8 billion | Deposits increased 6% year over year. |
| Long-term debt | $232.0 billion | $236.7 billion | Down; Citi repurchased about $5.4 billion of long-term debt during 2018. |
| Common Equity Tier 1 / Supplementary Leverage ratios | 11.86% / 6.41% | 12.36% / 6.68% | Declines primarily reflected capital returns and other capital movements. |
Return on average assets was 0.94%; return on average common equity was 9.4% (7.0% in 2017 excluding Tax Reform). Common stockholders’ equity was $177.8 billion, and tangible book value per share was $63.79, up from $60.16.
Cash flow and lending
- Cash flow from continuing operations: $37.0 billion provided by operations, $73.1 billion used in investing, and $44.5 billion provided by financing. Cash, due from banks, and deposits with banks increased $7.6 billion to $188.1 billion. Bank cash flows can be materially affected by balance-sheet and trading activity.
- Loans were $684.2 billion at year end, up 3%; deposits were $1.01 trillion, up 6%. Consumer net credit losses increased 4% to $6.9 billion, largely reflecting card portfolio growth and seasoning.
- Average total liquidity coverage ratio was 121%, above the 100% minimum; average high-quality liquid assets were $403.7 billion, down from $446.4 billion at year-end 2017.
Business performance and period comparison
- GCB: Revenue increased 3% to $33.8 billion; net income was $5.8 billion, up 49% as reported. Excluding the prior-year Tax Reform charge, net income increased 25%. Growth across regions was partly offset by weaker Asia wealth-management revenues and the effect of North American card partnership terms.
- ICG: Revenue increased 1% to $37.0 billion; excluding the approximately $580 million prior-year business-sale gain, revenue increased 3%. Banking was strong, including 8% growth in treasury and trade solutions, while fixed-income markets revenue declined 6% and investment-banking revenue declined 7%.
- Corporate/Other: Revenue declined 33% to $2.1 billion as legacy assets continued to run off. Net income was $107 million, versus a $19.7 billion loss in 2017, which primarily reflected the Tax Reform charge.
- Fourth quarter: Revenue was $17.1 billion versus $17.5 billion in Q4 2017. Net income was $4.3 billion versus a reported loss of $18.9 billion, with the prior-year quarter heavily affected by the Tax Reform charge.
Outlook, risks, contingencies, and unusual items
- Management described the underlying macroeconomic environment as broadly positive but warned of economic, political and market uncertainties that could increase volatility in 2019. It expects markets and investment-banking revenues to reflect the overall market environment; the filing provides no specific consolidated earnings or revenue guidance.
- Citi returned $18.4 billion to common shareholders in 2018 through dividends and repurchases, buying back about 212 million shares and reducing outstanding common shares by 8%. Future distributions depend substantially on regulatory capital planning and stress-test outcomes. Management cited a target CET1 ratio of approximately 11.5%, subject to change.
- Tax Reform drove a $22.6 billion non-cash charge in 2017. Citi finalized its provisional accounting in 2018 and recorded a $94 million tax benefit. It reported $22.9 billion of net deferred tax assets, including time-sensitive foreign tax credit carryforwards; realization depends on future taxable income.
- Citi estimated CECL adoption in 2020 could increase expected credit-loss reserves by approximately 10%–20%, based on preliminary analysis and then-current forecasts. The eventual impact will depend on economic conditions and portfolio composition.
- Risks highlighted include credit deterioration, deposit competition and funding costs, regulatory and capital requirements, cyber and operational disruptions, emerging-market and geopolitical exposures, LIBOR transition, retailer card-partnership changes, and legal or regulatory proceedings. Sears filed for bankruptcy in October 2018; Citi said it did not expect the subsequent sale of substantially all Sears assets to have an immediate or ongoing material consolidated impact, while noting uncertainty around store closures and customer attrition.
- At December 31, 2018, Citi estimated reasonably possible unaccrued litigation and regulatory losses of up to approximately $1.0 billion in aggregate for matters where it could estimate a range. It could not estimate potential losses for certain other matters. Management said an adverse outcome could affect results or cash flows in particular periods.
- Auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management concluded disclosure controls and internal controls were effective as of year-end.
Investor verification priorities
- Reconcile reported 2018 earnings and the 2017 comparison for the one-time Tax Reform charge and 2018 tax benefit.
- Review card credit trends, particularly seasoning and losses in North American cards, alongside allowance coverage and the expected CECL reserve increase.
- Assess the sustainability of ICG revenue given fixed-income weakness and reduced underwriting activity, and GCB growth given partnership economics and wealth-management sensitivity.
- Check capital ratios and regulatory approval conditions against the scale and pace of planned dividends and buybacks.
- Review liquidity composition, deposit pricing and flows, and upcoming debt maturities; confirm the effects of market stress or ratings changes on funding and collateral needs.
- Examine the detailed legal-contingency disclosures, including matters for which no loss estimate is available, and track the Sears relationship, LIBOR transition, and UK/EU operating preparations.