CITIGROUP INC annual report, FY2013

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Citigroup Inc. — 2013 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013, with comparisons primarily to 2012. Citigroup is a global financial services holding company operating through Citicorp, its core consumer and institutional businesses, and Citi Holdings, a portfolio being wound down. It reported approximately 251,000 employees and operations in more than 160 countries and jurisdictions at year-end.

Financial results and condition

  • Revenue and earnings: Net revenue was $76.4 billion, up 10% reported; net income was $13.7 billion, up 81%, and diluted EPS was $4.35 versus $2.44. Comparisons were affected by significant items in both years. Excluding the filing’s specified adjustments, 2013 net income was $13.5 billion, or $4.30 per diluted share, up 11% from $11.9 billion, or $3.86, in 2012. Net interest revenue was $46.8 billion, essentially unchanged.
  • Expenses and margins: Operating expenses declined 3% to $48.4 billion; legal and related costs rose to $3.0 billion from $2.8 billion. The efficiency ratio improved to 63% from 72%. Net interest margin was 2.85%, up 3 basis points year over year.
  • Credit: Provisions for credit losses and benefits and claims fell 25% to $8.5 billion. Net credit losses were $10.5 billion, down 26%; the net release of loan-loss reserves and unfunded commitments was $2.8 billion. The year-end allowance for loan losses was $19.6 billion, or 2.98% of loans, versus $25.5 billion, or 3.92%, a year earlier. Non-accrual assets declined 22% to $9.4 billion.
  • Cash flow: Operating cash flow from continuing operations was $57.4 billion; investing cash flow was negative $93.3 billion and financing cash flow was positive $30.9 billion. Cash and due from banks fell $6.6 billion to $29.9 billion. The filing does not provide a single free-cash-flow measure.
  • Balance sheet and funding: Total assets were $1.88 trillion, up 1%; loans, net of unearned income, were $665.5 billion, up 2%; deposits were $968.3 billion, up 4%. Long-term debt declined 8% to $221.1 billion. Total stockholders’ equity was $206.1 billion.
  • Liquidity and capital: Estimated liquid resources were $423.7 billion, up from $359.7 billion. Estimated Basel III liquidity coverage ratio was 117%, approximately $62 billion above the 100% threshold. Under then-current capital rules, Tier 1 Common and Tier 1 Capital ratios were 12.64% and 13.68%; estimated Basel III Tier 1 Common was 10.6%. The Federal Reserve’s required increase in operational risk-weighted assets would have reduced the latter estimate to approximately 10.1% on a pro forma basis. The estimated Basel III supplementary leverage ratio was 5.4%.

Material changes versus 2012

  • Reported net income increased substantially, partly because 2012 included a $4.7 billion pretax loss related to the Morgan Stanley Smith Barney joint venture and approximately $1.0 billion of fourth-quarter repositioning charges. Adjusted for items identified by Citi, 2013 net income rose 11%.
  • Citicorp net income increased 11% to $15.6 billion. Institutional Clients Group revenue increased 9% to $33.6 billion, while Global Consumer Banking revenue declined 2% to $38.2 billion. Citi Holdings’ net loss improved to $1.9 billion from $6.5 billion; excluding the prior-year joint-venture loss and other specified items, its loss improved approximately 49%. Citi Holdings’ assets fell 25% to $117 billion.
  • Credit costs and non-accrual assets improved, while reserve releases were smaller than in 2012. Mortgage refinancing weakness and continued spread compression weighed on consumer and transaction-services revenue.
  • The company sold its Brazil Credicard business for approximately $1.24 billion, recording a $206 million pretax gain and a $189 million after-tax benefit in reported results. It also completed the sale of its remaining Morgan Stanley Smith Barney interest.

Outlook, commentary, risks and unusual items

  • Management expected 2014 to remain challenging: low short-term rates and spread compression, uncertainty about Federal Reserve tapering and market activity, and elevated legal and related expenses. Citi expected its net interest margin to be around the 2013 level, with quarter-to-quarter fluctuation, and planned to continue reducing Citi Holdings in an economically rational manner.
  • In February 2014, Citi disclosed fraud involving Banamex’s receivables-financing program with Mexican oil-services company Oceanografia. Citi recorded an estimated $360 million pretax charge for 2013, net of an approximately $40 million compensation offset; the estimated after-tax impact was $235 million. Citi said it believed approximately $185 million was owed by Pemex and was assessing potential impairment, including approximately $33 million of other direct OSA exposure.
  • Legal and regulatory matters remain material. Citi estimated reasonably possible unaccrued losses in future periods of up to approximately $5 billion in aggregate for matters where it could estimate a range; it could not estimate losses for other matters. Management cautioned that actual losses could differ substantially from accruals and estimates.
  • Key risks include changing U.S. and international capital, liquidity, derivatives and Volcker Rule requirements; potential ratings-related funding and collateral needs; macroeconomic, emerging-market and foreign-exchange risks; cybersecurity and operational failures; and the ability to realize $52.8 billion of net deferred tax assets, including $19.6 billion of foreign tax credits with time-limited carry-forward periods.
  • Approximately 72% of $18.9 billion in revolving home-equity lines of credit were expected to reset during 2015–2017. Citi estimated average monthly payments on those resetting loans could rise about $360, or 170%, creating potential delinquency and loss risk.
  • KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.

Important facts for investors to verify

  • Reconcile reported earnings with Citi’s non-GAAP adjusted results, including valuation adjustments, divestitures, tax benefits and 2012 comparison items.
  • Track the Banamex fraud investigation, Pemex receivable recovery, and any impairment or additional losses on OSA-related exposures.
  • Review updates to litigation accruals and the estimated up-to-$5-billion reasonably possible unaccrued legal loss range.
  • Assess deferred-tax-asset utilization against U.S. taxable income and the expiration schedule for foreign tax credits.
  • Monitor Basel III capital ratios after the required operational-risk adjustment, regulatory implementation and CCAR decisions, alongside liquidity and funding requirements.
  • Follow Citi Holdings’ remaining mortgage portfolio, the pace and economics of its wind-down, and performance of home-equity loans as resets begin.