Citigroup Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The filing was signed October 30, 2018. Citi operates through Global Consumer Banking (GCB), Institutional Clients Group (ICG), and Corporate/Other.
Financial results and position
| Metric | Q3 2018 | Change vs. Q3 2017 |
|---|---|---|
| Revenue | $18.4 billion | Essentially unchanged as reported; up 4% excluding specified business-sale gains and FX translation (non-GAAP) |
| Net income | $4.6 billion | Up 12% |
| Diluted EPS | $1.73 | Up 22% |
| Operating expenses | $10.3 billion | Down 1%; efficiency ratio 56.1%, versus 56.6% |
| Credit-loss and benefits provisions | $2.0 billion | Down 1%; net credit losses were $1.8 billion, down 1% |
| Net interest revenue | $11.8 billion | Up 2%; net interest margin was 2.70%, down 4 basis points |
| Return measures | ROA 0.95%; return on average common equity 9.6%; ROTCE 11.3% | Q3 2017: 0.87%, 7.3%, and 8.4%, respectively |
- Nine-month results: Revenue was $55.7 billion, up 1%; net income was $13.7 billion, up 14%; diluted EPS was $5.04, up 24%. Lower taxes were a major contributor.
- Balance sheet at September 30: Assets $1.925 trillion; deposits $1.005 trillion; long-term debt $235.3 billion; loans, net of unearned income, $674.9 billion. Year over year, deposits rose 4% and end-period loans rose 3%.
- Capital and liquidity: Fully implemented Basel III CET1 ratio was 11.73% and Tier 1 ratio 13.36% under the Standardized Approach; the reportable Total Capital ratio was 15.98% under the Advanced Approaches. Supplementary Leverage Ratio was 6.50%. Average HQLA was $420.8 billion and average LCR was 120%. Management cited an approximate 11.5% CET1 target.
- Cash flows, nine months: Operating cash flow was $30.1 billion, versus cash used of $3.5 billion in 2017; investing cash flow was negative $56.6 billion and financing cash flow was positive $46.0 billion. Cash, due from banks, and deposits with banks totaled $199.3 billion at period-end. These bank cash-flow movements should not be read as ordinary industrial-company free cash flow.
- Capital returns: Citi returned $6.4 billion to common shareholders in Q3, repurchasing about 75 million shares and paying dividends. The Q3 common dividend declared was $0.45 per share. Shares outstanding were down 8% year over year.
Material changes and business performance
- GCB net income increased 34% to $1.6 billion, supported by lower credit costs, a lower effective tax rate, and a Latin America business-sale gain. GCB revenue rose 2% as reported.
- ICG net income increased 2% to $3.1 billion, while revenue declined 2% as reported. Excluding the prior-year sale gain and FX translation, ICG revenue increased 4%. Treasury and trade solutions, fixed income markets, securities services, and private banking showed growth; investment-banking revenue fell 8%.
- Corporate/Other reported a $67 million net loss, improved from an $83 million loss, with expenses down 44% mainly from legacy-asset wind-down and lower infrastructure costs.
- Reported revenue comparisons were affected by an approximately $250 million pretax gain on the sale of Mexico asset management in Q3 2018 and an approximately $580 million gain on the sale of an ICG fixed-income analytics business in Q3 2017. FX translation also affected reported comparisons.
- Net interest revenue benefited from higher rates, loan growth, and improved loan mix, but interest expense increased faster than interest revenue year over year. Core accrual NIM was 3.60%, up 12 basis points, a non-GAAP measure.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management described operating momentum and a generally positive macroeconomic environment, while cautioning that economic, political, regulatory, and market uncertainties could affect future results.
- On October 15, 2018, Sears filed for Chapter 11. Citi said it did not expect an immediate or ongoing material consolidated impact, but store closures could affect card acquisition, purchase volume, costs, and credit performance in Citi retail services.
- Citi’s preliminary estimate for adoption of CECL on January 1, 2020 was a 10%–20% increase in credit-loss reserves, subject to economic conditions, portfolio mix, and unresolved implementation questions. Lease accounting adoption in 2019 was estimated to increase assets and liabilities by about $5 billion and retained earnings by about $140 million.
- Rising rates may affect funding costs, deposits, and net interest revenue. A modeled instantaneous 100-basis-point rate increase was estimated to raise annualized net interest revenue by $1.5 billion but initially reduce after-tax AOCI by $4.6 billion; Citi estimated the AOCI impact could be offset over approximately 19 months through expected income and portfolio accretion.
- About 64% of revolving home-equity lines had reset. Citi estimated remaining 2018 resets could increase monthly payments by about $270 on average, or 98%; payment shock, higher rates, and limited refinancing capacity could increase delinquencies.
- Management estimated aggregate reasonably possible unaccrued litigation and regulatory losses at approximately $1.0 billion, materially unchanged from June 30. Management did not expect the matters described to materially affect consolidated financial condition, but an adverse outcome could materially affect results or cash flows in a particular period.
- Citi reported $23.0 billion of net deferred tax assets. It expected to complete its Tax Reform analysis within the measurement period and record any final adjustments in Q4 2018. The quarter’s effective tax rate was 24.1%, versus 31.1% a year earlier, primarily reflecting the lower U.S. federal statutory rate.
- Management concluded disclosure controls and procedures were effective as of September 30, 2018.
Important facts for investors to verify
- How much reported earnings growth reflects the lower tax rate and the Mexico asset-management gain, versus recurring business performance?
- Whether loan growth, deposit pricing, and rising funding costs sustain net interest revenue and margins.
- Credit trends in North American cards, Sears-linked portfolios, and resetting home-equity lines, alongside the stated CECL reserve estimate.
- Capital headroom and planned shareholder returns relative to regulatory requirements, risk-weighted-asset growth, and stress-test outcomes.
- The eventual resolution and financial consequences of significant legal and regulatory matters, and final Tax Reform adjustments.