Citigroup Inc. — First Quarter 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are generally with the three months ended March 31, 2015. Balance-sheet changes are identified separately where compared with December 31, 2015. Citi operates through Global Consumer Banking (GCB), Institutional Clients Group (ICG), Corporate/Other and Citi Holdings. Certain consumer businesses and regional results were reclassified for presentation; consolidated results were unchanged.
Financial performance and condition
| Metric | Q1 2016 | Prior comparable period / change |
|---|---|---|
| Revenue, net of interest expense | $17.6 billion | Down 11% from $19.7 billion |
| Net interest revenue | $11.2 billion | Down 3% |
| Operating expenses | $10.5 billion | Down 3%; included $491 million of repositioning costs |
| Provisions for credit losses and benefits and claims | $2.0 billion | Up 7% |
| Income before tax | $5.0 billion | Down 28% |
| Net income attributable to Citigroup | $3.5 billion | Down 27% from $4.8 billion |
| Diluted earnings per share | $1.10 | $1.51 |
| Net interest margin / efficiency ratio | 2.92% / 60% | Margin unchanged; efficiency ratio was 55% |
| Return on average assets / common equity | 0.79% / 6.4% | 1.04% / 9.4% |
Lower revenue and higher credit costs were the main drivers of the earnings decline; lower expenses partly offset them. Revenue was pressured by market-sensitive ICG businesses and Asian wealth management amid market volatility. Citi reported $166 million of legal and related expenses, compared with $388 million a year earlier. Foreign-exchange translation reduced year-over-year revenue by approximately $600 million and expenses by approximately $377 million; excluding FX translation and prior-year CVA/DVA, revenue declined 9%.
Cash flow: Operating cash flow from continuing operations was $144 million, versus $2.1 billion in Q1 2015. Investing cash flow was negative $37.2 billion, compared with positive $7.6 billion; financing cash flow was positive $38.2 billion, versus negative $19.9 billion. Cash and due from banks ended the quarter at $22.2 billion. The filing’s cash flows reflect substantial movements in deposits with banks, investments, trading balances and financing; operating cash flow alone should not be read as a simple measure of bank liquidity.
Balance sheet and funding: At March 31, total assets were $1.801 trillion, deposits $934.6 billion, long-term debt $207.8 billion and total stockholders’ equity $227.5 billion. Versus December 31, 2015, deposits rose from $907.9 billion and long-term debt from $201.3 billion; assets increased from $1.731 trillion. Total loans were $618.8 billion, broadly unchanged from year-end. Average deposits were $911.7 billion.
Liquidity and capital: End-of-period high-quality liquid assets (HQLA) were $417.5 billion. Average Q1 HQLA was $400.1 billion against average net outflows of $333.3 billion, producing an average liquidity coverage ratio (LCR) of 120% and $66.8 billion of HQLA in excess of net outflows. On a fully implemented Basel III basis, the Common Equity Tier 1 ratio was 12.34%, Tier 1 ratio 13.81%, total capital ratio 15.71% and supplementary leverage ratio 7.44%. Citi returned approximately $1.5 billion to common shareholders through repurchases and dividends and issued approximately $1.0 billion of preferred stock.
Material changes and segment performance
- Citicorp: Net income was $3.2 billion, down 32%; revenue was $16.1 billion, down 9%. Loans increased 5% and deposits 6% year over year excluding FX translation. GCB revenue declined 6%; ICG revenue declined 11% as reported (12% excluding prior-year CVA/DVA).
- ICG: Revenue was $8.0 billion. Markets and securities services revenue, excluding prior-year CVA/DVA, fell 15%; banking revenue excluding CVA/DVA and loan-hedge effects fell 6%. Investment banking revenue declined 27%, while treasury and trade solutions revenue increased 3% as reported and 8% excluding FX translation.
- GCB: Revenue was $7.8 billion, down 6%. North America revenue declined 4%; branded-card revenue fell 6% amid acquisition and rewards investment, despite 12% growth in purchase sales. International GCB revenue declined 2% excluding FX translation; Asia was affected by weaker investment sales and card regulation.
- Citi Holdings: Net income was $346 million versus $149 million, while revenue fell 31% and expenses fell 40%. Assets declined 44% year over year to $73 billion, about 4% of consolidated assets. Citi had agreements to reduce Holdings assets by a further $10 billion, with most expected to close during the rest of 2016, subject to approvals and other conditions.
Outlook, risks and unusual items
- Management described the macroeconomic and market environment as challenging and expected operating conditions to remain difficult. ICG, particularly Markets and securities services, was expected to continue reflecting market conditions.
- Citi said Holdings should largely break even for the remainder of 2016 and cautioned that it did not expect to repeat Q1 Holdings earnings, which benefited from asset-sale gains. Repositioning actions cost $491 million in Q1; management expects these actions to support future expense savings.
- North America GCB expected further U.S. card investment during 2016, including costs connected with the planned Costco portfolio acquisition, then expected to close in June. Management said these investments and competitive partnership renewals would reduce pretax earnings during the remainder of the year. Latin America GCB expected card payment rates and revenue to remain under pressure.
- Energy and energy-related credit were a significant concern. Citi reported approximately $57 billion of ICG corporate exposure, including $22 billion funded; 73% was investment grade, down from 80% at year-end. Q1 included about $260 million of reserve builds and $115 million of net credit losses in this portfolio. Management warned that persistently low or lower oil prices could lead to additional, potentially significant reserve builds and losses. Citicorp corporate non-accrual loans rose 47% during Q1; about $500 million of the increase related to energy.
- Revolving home-equity lines create reset risk: Citi estimated that payments on loans resetting in 2016–2017 could rise by about $370 per month, or 165% on average; higher rates could increase the shock further.
- Unusual items included $422 million of revenue from the novation of the Primerica coinsurance agreement ($274 million after tax); a roughly $180 million Venezuela write-down following a foreign-exchange rule change; and $465 million of investment and other-asset impairment losses, including a $160 million impairment on Venezuela-affected available-for-sale securities. Q1 also included $491 million of repositioning costs.
- Citi early adopted the accounting presentation change for own-credit DVA effective January 1, 2016: related fair-value changes moved from earnings to other comprehensive income. Prior periods were not restated, affecting comparability of reported revenue and earnings.
- Litigation and regulatory matters remained uncertain. Citi estimated reasonably possible unaccrued losses of up to approximately $3.0 billion in aggregate; management said the eventual outcome was not likely to materially adversely affect consolidated financial condition, but adverse outcomes could materially affect results or cash flows in particular periods. The filing also identified regulatory, CCAR, resolution-planning, funding, ratings, cybersecurity, tax and emerging-market risks.
Important facts for investors to verify
- Whether energy-sector deterioration continues, and how exposures, non-accrual loans, reserve coverage and realized losses evolve.
- How HELOC resets affect delinquency, losses and reserve adequacy, particularly if interest rates rise.
- Whether Citi sustains capital and liquidity ratios after shareholder distributions, DTA utilization and regulatory developments, including CCAR outcomes.
- Whether the Costco portfolio acquisition closes as expected and whether card growth investments translate into durable returns.
- Whether Holdings asset-reduction agreements close on schedule and whether results move toward management’s break-even expectation.
- How litigation, regulatory matters and the estimated unaccrued loss exposure develop; the filing does not specify a single expected payment for the aggregate matters.