Citigroup Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. Citigroup is a global financial-services holding company operating through Citicorp, its core consumer and institutional banking businesses, and Citi Holdings, which contains businesses and assets being wound down. The consolidated financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Financial results and position
| Metric | 2012 | 2011 | Change / context |
|---|---|---|---|
| Revenue, net of interest expense | $70.2 billion | $78.4 billion | Down 10%; excluding CVA/DVA and minority-investment impacts, $77.1 billion, up 1%. |
| Net interest revenue | $47.6 billion | $48.4 billion | Down 2%. |
| Net income attributable to Citigroup | $7.5 billion | $11.1 billion | Diluted EPS was $2.44 versus $3.63; net income down 32%. |
| Operating expenses | $50.5 billion | $50.9 billion | Down 1%; efficiency ratio rose to 72% from 65%. |
| Net interest margin | 2.88% | 2.86% | Up 2 basis points. |
| Net credit losses | $14.6 billion | $20.0 billion | Down 27%; net reserve release was $3.7 billion, versus $8.4 billion in 2011. |
| Operating cash flow, continuing operations | $14.3 billion | $64.8 billion | Investing cash flow was $18.6 billion provided; financing cash flow was $25.4 billion used. |
| Total assets / loans | $1.865 trillion / $655.5 billion | $1.874 trillion / $647.2 billion | Loans grew about 1%. |
| Deposits / long-term debt | $930.6 billion / $239.5 billion | $865.9 billion / $323.5 billion | Deposits up 7%; long-term debt down about $84 billion. |
| Capital | Tier 1 Common 12.67%; Tier 1 Capital 14.06% | 11.80%; 13.55% | Estimated Basel III Tier 1 Common ratio was 8.7%. |
| Aggregate liquidity resources | $353.8 billion | $405.5 billion | Down from year-end 2011; estimated Basel III LCR was 122%. |
Reported income from continuing operations was $7.9 billion. Citicorp reported $14.1 billion net income, while Citi Holdings reported a $6.6 billion net loss. Citi Holdings assets declined 31% to $156 billion, representing about 8% of consolidated assets and 15% of risk-weighted assets.
Material changes and unusual items
- 2012 earnings included a pretax negative CVA/DVA impact of $2.3 billion, compared with a positive $1.8 billion in 2011.
- Minority-investment transactions produced a net pretax loss of $4.6 billion, chiefly from the sale of part of Citi’s Morgan Stanley Smith Barney (MSSB) interest and impairment of the remainder. Morgan Stanley agreed, subject to regulatory approval, to buy Citi’s remaining 35% interest for $4.725 billion by June 1, 2015.
- Citi recorded about $1.0 billion in fourth-quarter repositioning charges and expected a further $100 million in the first half of 2013. Total 2012 repositioning charges were $1.375 billion.
- A $582 million tax benefit arose from resolving certain tax audit items. The reported effective tax rate on continuing operations was approximately 0.3%.
- Legal and related costs increased to $2.8 billion from $2.2 billion. Citi also recorded a $305 million charge for the independent foreclosure review settlement.
- Mortgage-related items included a $376 million PPI reserve, a $1.565 billion mortgage repurchase reserve, and an estimated up-to-$0.6 billion reasonably possible loss beyond accruals for whole-loan representation-and-warranty claims. Citi estimated aggregate reasonably possible unaccrued losses across disclosed legal matters of up to approximately $5 billion.
- Consumer non-accrual loans rose partly because OCC guidance added approximately $1.5 billion of mortgage loans to non-accrual status, of which about $1.3 billion were current; the change was not solely a deterioration in payment performance.
Outlook, management commentary and risks
- Management expected 2013 net interest margin to be relatively stable versus 2012, with quarterly fluctuations, while low rates and spread compression continued to pressure revenues.
- Management expected mortgage refinancing volumes could remain elevated into the first half of 2013, assuming low interest rates. It anticipated continued pressure on cards from customer deleveraging and a higher-quality borrower mix.
- Citi planned to continue reducing long-term debt and wind down Citi Holdings at an economically rational pace; Holdings’ remaining assets were expected to continue weighing on results, though the impact should abate over time.
- Repositioning included footprint and business changes, including plans to sell or significantly scale back consumer operations in Turkey, Romania, Pakistan, Paraguay and Uruguay, and further branch optimization in several markets.
- Key risks include uncertain U.S. and international regulation and capital rules; economic, interest-rate and Eurozone volatility; funding and liquidity sensitivity to ratings downgrades; legal and mortgage-related claims; foreign-exchange controls and political risk; cyber and operational risks; and the ability to realize $55.3 billion of net deferred tax assets. Citi stated realization depended on generating sufficient U.S. taxable income, particularly before foreign tax credit carry-forwards expire.
- The $305 million foreclosure settlement also requires $487 million of mortgage assistance. Under the separate national mortgage settlement, Citi reported progress toward required borrower relief and stated it did not expect cash payments, while noting obligations and timing remain relevant.
Important facts for investors to verify
- Reconcile reported earnings with the large MSSB, CVA/DVA, repositioning, tax and legal items; assess the recurring earnings base and the use of non-GAAP adjustments.
- Track progress, costs and timing of the remaining MSSB sale and the Citi Holdings wind-down.
- Review reserve adequacy and outcomes for mortgage repurchase claims, private-label securitization litigation, PPI, foreclosure settlement assistance and other legal proceedings.
- Assess capital under finalized regulatory rules: the 8.7% Basel III estimate was based on proposed requirements and management assumptions, not final standards.
- Monitor liquidity after the decline in aggregate resources, deposit flows, debt maturities and potential rating-triggered collateral needs; Citi estimated a one-notch downgrade could require about $5.1 billion in cash or collateral.
- Evaluate the sustainability of credit-loss improvement and the implications of mortgage non-accrual classifications, reserve releases and home-equity loan resets expected largely in 2015–2017.
- Test assumptions supporting realization of deferred tax assets and whether future U.S. taxable income can use foreign tax credits within their carry-forward periods.