Citigroup Inc. — Second-Quarter 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Citigroup is a global financial services company reported through Citicorp, Citi Holdings, and Corporate/Other. Comparisons below are to the second quarter or first half of 2010, as indicated. Per-share figures reflect the May 2011 1-for-10 reverse stock split.
Financial performance and position
- Quarter earnings: Net income attributable to Citigroup was $3.341 billion, up 24% from $2.697 billion. Diluted EPS was $1.09 versus $0.90. Continuing-operations income was $3.332 billion.
- Revenue and margins: Net revenue was $20.622 billion, down 7%. Net interest revenue declined 13% to $12.148 billion; non-interest revenue rose 4% to $8.474 billion. Net interest margin was 2.82%, down 33 basis points year over year.
- Expenses and credit: Operating expenses rose 9% to $12.936 billion. Total provisions for credit losses and benefits and claims fell 49% to $3.387 billion. Net credit losses were $5.147 billion, down 35%; allowance releases were $2.0 billion, compared with $1.5 billion a year earlier.
- First-half results: Net revenue fell 15% to $40.348 billion and net income fell 11% to $6.340 billion. Operating expenses increased 8% to $25.262 billion, while total provisions declined 57% to $6.571 billion. Diluted EPS was $2.08 versus $2.39.
- Cash flow: For the first half, operating cash flow from continuing operations was $4.845 billion, investing cash flow was $8.255 billion, and financing cash flow was negative $16.884 billion. These compare with $41.601 billion, $40.278 billion, and negative $82.645 billion, respectively, in the first half of 2010. Cash and due from banks ended at $27.766 billion, down $206 million from year-end. Cash flows were materially affected by trading, lending, investment, and funding movements.
- Balance sheet and funding: Total assets were $1.957 trillion; deposits were $866.3 billion, up 6% from June 2010. Long-term debt was $352.5 billion, down 15% year over year. Common stockholders’ equity was $176.1 billion. Aggregate liquidity resources were $333.6 billion at quarter-end.
- Capital and credit quality: Tier 1 Common ratio was 11.62%, Tier 1 Capital 13.55%, and Total Capital 17.18%. The allowance for loan losses was $34.4 billion, or 5.35% of loans, versus $46.2 billion, or 6.72%, a year earlier. Non-accrual loans were $13.2 billion, down 47%; allowance coverage was 260%.
Material changes and business drivers
- Citicorp: Quarter revenue was $16.3 billion, down 1%, and net income was $3.7 billion, down 2%. International Regional Consumer Banking and Transaction Services grew, but Securities and Banking revenue fell 8%, principally due to weaker fixed-income markets. Investment banking revenue increased 61%. Regional Consumer Banking revenue rose 2%; growth abroad was offset by North America weakness, CARD Act effects, and spread compression.
- Citi Holdings: Net loss narrowed to $218 million from $1.2 billion, while revenue fell 18% to $4.0 billion. Assets declined 34% year over year to $308 billion, reflecting disposals, runoff, and credit and asset marks. A $511 million pretax gain on securities sold contributed to the quarter’s non-interest revenue.
- Corporate/Other: Quarter net revenue fell to $263 million from $663 million, and expenses increased to $670 million from $255 million, principally due to legal and related costs. Current-quarter revenue included an approximately $200 million pretax gain from sale of part of Citi’s HDFC holding.
Outlook, risks, and unusual items
- Management expected operating expenses to remain elevated through the rest of 2011, citing foreign-exchange translation, legal and related costs, and investment spending. The impact of FX and legal costs was described as difficult to predict.
- Absent further significant Citi Holdings portfolio sales, management expected net interest margin to generally stabilize in the second half of 2011. The filing also anticipated continued decline in long-term debt and approximately $11 billion of long-term debt issuance during the remainder of 2011.
- Management expected credit costs to increase in international Regional Consumer Banking and Corporate portfolios as those loan books grow. Continued Citi Holdings exits may not proceed at the pace achieved previously.
- Key external risks included uncertainty over U.S. government debt and a possible U.S. sovereign downgrade, European sovereign stresses, regulatory changes, and possible ratings downgrades. Moody’s had placed Citi under review for downgrade. Citi estimated that a specified one-notch downgrade scenario could trigger about $9.6 billion in non-bank funding needs; a more severe scenario could add $1.5 billion. These are company estimates, not realized losses.
- Mortgage risks include prolonged foreclosures, weak home prices, possible modification redefaults, and representations-and-warranties claims. The mortgage repurchase reserve was $1.001 billion; an illustrative simultaneous 10% adverse change in key assumptions would increase it by about $427 million. Management said it could not estimate a reasonably possible loss range for consumer mortgage representations and warranties.
- Litigation and regulatory matters remained significant. Citigroup estimated reasonably possible losses above accruals at approximately $4 billion, materially unchanged from year-end 2010; management stated outcomes were not likely to materially affect consolidated financial condition, but could materially affect results or cash flows in particular periods.
- Other notable items: Citi recognized a $126 million gain on the April sale of Egg’s credit card business, reported in discontinued operations. The common dividend was reinstated at $0.01 per share, while restrictions generally limited higher dividends and share repurchases under government-related agreements.
Most important facts for investors to verify
- How much of earnings improvement depends on lower credit costs and reserve releases, rather than recurring revenue growth; also verify the effect of the $511 million securities-sale gain.
- Whether expense growth, legal costs, and investment spending persist, and whether the expected second-half margin stabilization occurs.
- The adequacy of loan-loss reserves and trends in mortgage delinquencies, foreclosures, modifications, and redefaults—especially in Citi Holdings real estate portfolios.
- The scope and potential cost of mortgage representations-and-warranties claims, litigation, and regulatory proceedings, including the assumptions underlying the $1.001 billion repurchase reserve and the approximately $4 billion excess-loss estimate.
- Liquidity resilience under U.S. sovereign-market disruption or ratings downgrades, including the availability and transferability of the reported $333.6 billion in liquidity resources.
- Progress in reducing Citi Holdings assets and debt, and the sensitivity of reported earnings and capital to further asset sales, valuation changes, and regulatory requirements.