CITIGROUP INC quarterly report, Q2 FY2016

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Citigroup Inc. — Second-Quarter 2016 Form 10-Q

Business context and period. This filing covers the quarter and six months ended June 30, 2016. Citi operates through Citicorp, its core consumer and institutional businesses, and Citi Holdings, a portfolio being wound down. Management described the environment as challenging, citing market volatility, economic uncertainty and low interest rates; the June 23 U.K. referendum added uncertainty.

Financial results and condition

  • Quarterly earnings and revenue: Net income was $4.0 billion and diluted EPS was $1.24, compared with $4.8 billion and $1.51 a year earlier. Revenue was $17.5 billion, down 10%. Excluding prior-year CVA/DVA, net income declined 14% and revenue declined 8%; these are non-GAAP comparisons.
  • Six-month results: Revenue was $35.1 billion, down 10%; net income was $7.5 billion, down 22%; diluted EPS was $2.35 versus $3.02.
  • Expenses, credit and margins: Quarterly operating expenses fell 5% to $10.4 billion, while the efficiency ratio worsened to 59% from 56%. Credit-loss and benefits provisions fell 15% to $1.4 billion; net credit losses were $1.6 billion, down 16%. Net interest margin was 2.86%, versus 2.95% a year earlier.
  • Cash flow: For the six months, operating activities provided $21.1 billion, investing activities used $57.5 billion and financing activities provided $37.8 billion. Cash and due from banks was $22.1 billion at period-end. The filing’s cash flows include substantial securities, lending and trading-related movements.
  • Balance sheet and funding: Assets were $1.819 trillion, deposits $937.9 billion and long-term debt $207.4 billion at June 30. Year over year, deposits increased 3% and long-term debt declined 2%. Fully implemented Basel III common equity Tier 1 capital was 12.54% and the supplementary leverage ratio was 7.48%. Average HQLA was $411 billion and average liquidity coverage ratio was 121%.
  • Returns and book value: Return on average assets was 0.89%; return on average common equity was 7.0%. Tangible book value per share was $63.53, up from $60.61 at year-end 2015.

Material changes versus the prior comparable period

  • Citicorp revenue declined 5% and net income declined 17%. Consumer banking revenue fell 6%; ICG revenue was down 1% as stronger markets revenue was offset by weaker banking revenue.
  • ICG markets and securities services revenue increased 10% excluding prior-year CVA/DVA, helped by fixed-income rates and currencies activity around the U.K. referendum. Investment banking revenue fell 6%, including a 41% decline in equity underwriting.
  • North America consumer banking results reflected higher rewards costs and payment rates, investment spending and the June 17 Costco card portfolio acquisition. Citi reported approximately $11.3 billion of Costco-related card loans.
  • Citi Holdings revenue fell 57% and assets declined 47% year over year to $66 billion, reflecting portfolio runoff and divestitures. Citi Holdings represented about 4% of total GAAP assets.
  • Consumer credit improved overall, but corporate net credit losses rose 33% to $142 million, mainly related to energy exposures. Citi reported $56.9 billion of total corporate energy and energy-related exposure, including $22.1 billion of funded loans.

Outlook, risks and unusual items

  • Management expected the operating environment to remain challenging, with significant uncertainty following the U.K. vote to leave the EU. Citi had not experienced a significant adverse impact from the referendum by the filing date.
  • ICG said provisions could increase from second-quarter levels during the remainder of 2016, depending on energy-sector conditions and other credit developments. North America GCB expected near-term reserve builds for cards, including Costco-originated loans.
  • Management expected Citi retail services revenue to remain roughly around the second-quarter level for at least the rest of 2016; renewed partnership terms could constrain growth. The American Airlines renewal could modestly reduce Citi-branded cards pretax earnings in the remainder of 2016, primarily through higher expenses.
  • About 56% of revolving HELOC balances not yet amortizing were expected to reset during the remainder of 2016–2017. Citi estimated average monthly payments on those resetting loans could rise about $370, or 150%; higher rates could increase the payment shock.
  • The Federal Reserve did not object to Citi’s 2016 CCAR capital plan. Citi announced planned shareholder returns of approximately $10.4 billion over the four quarters beginning Q3 2016, including an $8.6 billion repurchase program and a planned quarterly common dividend of $0.16 per share, subject to Board approval.
  • Notable items include a $422 million pretax gain from the Primerica reinsurance novation in Q1 2016, which affected six-month comparisons; $118 million of investment impairment charges in Q2; and a $180 million Venezuela-related charge in ICG in Q1. Citi disclosed an estimated $3.0 billion of aggregate reasonably possible litigation losses in excess of accruals; management said outcomes were not expected to materially affect consolidated financial condition, though they could affect results or cash flows in particular periods.
  • Citi agreed to CFTC civil settlements of $175 million concerning benchmark-rate matters and $250 million concerning ISDAFIX, and agreed to strengthen related controls. The filing says settlement payments described in the contingencies note had been paid or were covered by existing accruals.
  • Other stated risks include low interest rates, emerging-market and geopolitical conditions, energy-sector deterioration, regulatory and capital changes, rating downgrades, card-partner risks, cybersecurity, tax and deferred-tax-asset utilization, and legal or regulatory proceedings.

Important facts for investors to verify

  • Reconcile reported earnings and revenue declines with prior-year CVA/DVA, episodic gains, foreign-exchange translation and the Q1 Primerica gain.
  • Track card portfolio performance after the Costco acquisition, including rewards costs, reserve builds, credit losses and partnership economics.
  • Monitor energy exposures, corporate non-accrual loans and provisions, and any further deterioration in credit quality.
  • Assess liquidity and funding resilience, including the LCR, HQLA, debt maturities and potential collateral or cash requirements from ratings downgrades.
  • Follow U.K./EU developments, HELOC resets, litigation and regulatory matters, and whether planned capital returns proceed as announced.