Citigroup Inc. — Third Quarter 2020 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2020. Citi reports through Global Consumer Banking (GCB), Institutional Clients Group (ICG) and Corporate/Other. Results reflect COVID-19 disruption, unusually low interest rates, market volatility and adoption of CECL credit-loss accounting on January 1, 2020.
Key financial results
| Metric | Q3 2020 | Comparable period / change |
|---|---|---|
| Revenue, net of interest expense | $17.3 billion | Down 7% year over year |
| Net interest revenue | $10.5 billion | Down 10%; taxable-equivalent net interest margin was 2.03%, down 53 basis points year over year |
| Operating expenses | $11.0 billion | Up 5%; efficiency ratio was 63.4%, versus 56.3% |
| Credit-loss and benefits provisions | $2.3 billion | Up 8%; net credit losses were $1.9 billion, broadly unchanged |
| Income before taxes | $4.1 billion | Down 32% |
| Net income attributable to Citigroup | $3.2 billion | Down 34% from $4.9 billion |
| Diluted earnings per share | $1.40 | Down 32% from $2.07 |
The effective tax rate was approximately 20%, compared with 18%, primarily because the $400 million civil money penalty was nondeductible. For the first nine months, revenue rose 3% to $57.8 billion, but net income fell 51% to $7.1 billion; provisions increased to $17.2 billion from $6.2 billion, reflecting pandemic-related reserve builds and CECL.
Business performance
- GCB: Revenue fell 13% to $7.2 billion and net income fell 30% to $1.1 billion. Lower card activity and interest rates weighed on results; lower expenses and credit costs partly offset the revenue decline. For the first nine months, GCB recorded a $95 million net loss, compared with $4.1 billion of income a year earlier, largely due to higher credit provisions.
- ICG: Revenue rose 5% to $10.4 billion, led by a 16% increase in Markets and securities services, including strong fixed-income and equity markets. Banking revenue declined 4%, including $124 million of losses on loan hedges. Net income fell 10% to $2.9 billion as higher credit costs and expenses more than offset revenue growth.
- Corporate/Other: Recorded a $723 million net loss, versus $191 million of income a year earlier. Revenue was negative $224 million and expenses rose to $969 million, including the civil penalty and continued investment in infrastructure and controls.
Balance sheet, liquidity and capital
- Total assets were $2.23 trillion, up 11% year over year. Deposits were $1.26 trillion, up 16%; end-of-period loans were $666.9 billion, down 4%.
- Long-term debt was $273.3 billion, up from $242.2 billion a year earlier; short-term borrowings were $37.4 billion. Citi redeemed or repurchased approximately $7.1 billion of long-term debt during the quarter.
- Citi reported approximately $965 billion of available liquidity resources and an average Liquidity Coverage Ratio of 118% at September 30.
- Reported Common Equity Tier 1 capital was 11.75% and the Supplementary Leverage Ratio was 6.83%. The reported leverage ratio benefited by 103 basis points from temporary regulatory relief; excluding that relief, it would have been 5.80%. The reported CET1 ratio also reflects modified CECL transition relief.
- Book value per common share was $84.48 and tangible book value per share was $71.95. Citi returned $1.1 billion to common shareholders through dividends in Q3; share repurchases were suspended.
Cash flow
For the nine months ended September 30, operating activities used $22.3 billion and investing activities used $83.2 billion; financing activities provided $236.0 billion, primarily reflecting deposit growth and debt issuance. Cash, due from banks and deposits with banks increased $129.8 billion to $323.7 billion. These cash-flow totals include substantial banking and trading balance movements and should not be interpreted like industrial-company free cash flow.
Material changes, outlook and risks
- Credit reserves and relief programs: Citi’s allowance for credit losses was approximately $28.9 billion at September 30, including $26.4 billion against loans; the funded-loan reserve ratio was 4.00%, versus 1.84% at year-end 2019. Citi built approximately $10.8 billion of ACL during the first nine months. Approximately $5.9 billion of consumer loans remained in pandemic relief programs, about 2% of consumer loans. Deferrals and relief measures can delay recognition of borrower stress; reported delinquency trends may worsen as programs expire.
- Management outlook: Citi expected lower interest rates and pandemic-related weakness in consumer activity to continue weighing on revenues. It anticipated normalization and a seasonal decline in Markets and investment banking in Q4, higher spending on infrastructure, risk management and controls, and near-term net credit losses similar to Q3, subject to economic conditions. If its Q3 macroeconomic assumptions were realized, Citi did not expect additional reserve builds on existing portfolios; reserves remained dependent on the evolving outlook and lending volumes.
- Regulatory orders: On October 7, 2020, the Federal Reserve and OCC issued consent orders requiring plans addressing risk management, compliance, data quality, governance and internal controls. Citi recorded a $400 million OCC civil penalty in Q3 and described the remediation effort as a multi-year transformation.
- Operational incident: In August, Citi mistakenly sent lenders approximately $894 million in connection with a Revlon credit facility. By November 4, $389.8 million had been recovered; the remaining $504.2 million was recorded as a receivable, with no impairment recognized. Litigation was ongoing.
- Other exposures: Management estimated approximately $1.3 billion of reasonably possible unaccrued losses across litigation, regulatory and tax matters. Other risks include pandemic-driven credit deterioration, low-rate pressure on net interest revenue, market and foreign-exchange volatility, capital-distribution restrictions, and U.K.-EU and LIBOR-transition uncertainty.
- Capital distributions: Through year-end 2020, Federal Reserve restrictions prohibited share repurchases and capped dividends under an income-based formula; extensions were possible. Citi resubmitted its capital plan on November 2 and declared a $0.51-per-share Q4 dividend.
Important facts for investors to verify
- Whether loan performance and reserve adequacy hold up as COVID-19 relief programs and government support expire, particularly in consumer cards and higher-risk corporate sectors.
- How much the Revlon payment is ultimately recovered, and whether the remaining receivable or related litigation results in a loss.
- Progress, cost and regulatory consequences of the consent-order remediation and broader controls transformation.
- How reported capital ratios change as temporary leverage relief and CECL transition provisions phase out, and as capital-distribution restrictions evolve.
- Whether Q4 revenue, credit-loss and expense trends align with management’s stated outlook, including any changes to its macroeconomic assumptions.