Citigroup Inc. — Q3 2019 Form 10-Q Summary
Reporting period: Quarter ended September 30, 2019; comparisons are primarily with Q3 2018. Citigroup reports Global Consumer Banking (GCB), Institutional Clients Group (ICG), and Corporate/Other. Unless stated otherwise, amounts are U.S. dollars.
Financial performance and position
| Metric | Q3 2019 | Comparison |
|---|---|---|
| Revenue, net of interest expense | $18.6 billion | Up 1% year over year; up 2% excluding the prior-year asset-sale gain |
| Net interest revenue | $11.6 billion | Down 1%; net interest margin was 2.56%, down 14 basis points |
| Operating expenses | $10.5 billion | Up 1%; efficiency ratio was 56.3%, versus 56.1% |
| Credit-loss and benefits provisions | $2.1 billion | Up 6%; net credit losses were $1.9 billion, up 9% |
| Income before taxes | $6.0 billion | Down 1% |
| Citigroup net income | $4.9 billion | Up 6%; diluted EPS was $2.07, up 20% |
For the first nine months of 2019, revenue was $55.9 billion, essentially unchanged; net income was $14.4 billion, up 5%, and diluted EPS was $5.89, up 17%. Operating cash flow was negative $35.4 billion versus positive $30.1 billion in the comparable 2018 period; investing cash flow was negative $12.1 billion and financing cash flow was positive $81.2 billion. Cash, due from banks and deposits with banks totaled $220.4 billion at period-end. The filing attributes substantial cash-flow movements to changes in trading assets and liabilities, brokerage balances and other items.
At September 30, 2019, total assets were $2.015 trillion, loans net of allowance were $679.2 billion, deposits were $1.088 trillion, long-term debt was $242.2 billion, and total stockholders’ equity was $197.1 billion. Versus September 30, 2018, assets increased 5%, deposits 8%, and long-term debt 3%. End-of-period loans increased 2% year over year, or 4% excluding foreign-exchange translation.
Regulatory capital remained above minimum requirements: CET1 was 11.58% versus 11.73% a year earlier; the supplementary leverage ratio was 6.27% versus 6.50%. Citi reported average high-quality liquid assets of $422.7 billion and an average liquidity coverage ratio (LCR) of 113%, compared with 120% a year earlier. The LCR decline reflected higher modeled net outflows. Citi returned $6.3 billion to common shareholders in Q3 through dividends and repurchases of approximately 76 million shares.
Material changes and business results
- GCB: Revenue was $8.7 billion, broadly unchanged as reported; excluding foreign-exchange effects and the prior-year Latin America asset-sale gain, revenue grew 4%. Net income rose 1% to $1.6 billion. North America revenue grew 4%, supported by cards; Latin America reported revenue fell 16%, largely reflecting the absence of the prior-year approximately $250 million asset-management sale gain; Asia revenue grew 3%.
- ICG: Revenue increased 3% to $9.5 billion and net income increased 1% to $3.2 billion. Banking revenue rose 5%; Markets and securities services revenue rose 1%. Treasury and trade solutions revenue grew 6% and investment banking revenue grew 4%; equity markets revenue fell 4%. Nine-month ICG revenue was essentially flat and included an approximately $350 million Tradeweb investment gain.
- Corporate/Other: Revenue fell 18% to $402 million, mainly due to the legacy-asset wind-down. Net income was $167 million versus a $68 million loss, primarily reflecting tax benefits, including a deferred-tax-asset valuation-allowance release, despite a pretax loss.
- Consumer credit costs increased, particularly in North American cards, with management citing portfolio growth and seasoning. Q3 corporate net credit losses were $89 million versus $30 million a year earlier. The total allowance for loan losses was $12.5 billion, or 1.82% of loans net of unearned income.
Outlook, risks, contingencies and unusual items
- The filing provides no specific consolidated earnings or revenue guidance. Management noted lowered 2019 global growth forecasts and said lower interest rates could weigh on North America retail banking and ICG revenue in the near term.
- Q3 results included a reported effective tax rate of approximately 18%, including discrete items; excluding those items, the rate was approximately 22%. A roughly $182 million release of a valuation allowance on foreign tax credit carry-forwards contributed to the tax benefit. The filing states the company considers its $22.5 billion of net deferred tax assets more likely than not to be realized.
- Citi’s preliminary CECL assessment estimated a 20–30% increase in expected credit-loss reserves at adoption on January 1, 2020, with consumer reserve increases and corporate reserve releases expected. The effect depends on economic forecasts and portfolio conditions; the increase would reduce opening retained earnings, net of tax.
- Argentina is a notable country risk: the peso depreciated 36% in Q3, new capital and currency controls restricted access to dollars and remittances, and reduced liquidity in offshore non-deliverable forwards could limit hedging. Citi warned that further devaluation could affect earnings and that regulators could require additional reserves.
- Other disclosed risks include macroeconomic and geopolitical volatility, interest-rate and foreign-exchange movements, LIBOR transition, regulatory and capital-rule changes, credit deterioration, ratings downgrades, cybersecurity and operational risks, and legal proceedings. A hypothetical one-notch simultaneous downgrade of Citi and Citibank could require about $1.0 billion of additional cash or collateral.
- Management estimated reasonably possible unaccrued losses on litigation, regulatory, tax and other matters at approximately $1.2 billion, materially unchanged from June 30. Management did not expect the eventual outcome of disclosed matters to materially harm consolidated financial condition, while noting an adverse outcome could materially affect results or cash flows in a particular period.
Most important facts for investors to verify
- Whether revenue and earnings growth persist after adjusting for the prior-year Latin America sale gain, tax benefits and the nine-month Tradeweb gain.
- Credit performance and reserve adequacy in North American cards, including the effects of portfolio seasoning and the expected CECL transition impact.
- Interest-rate sensitivity: NIM declined year over year, and management identified lower rates as a near-term pressure on selected businesses.
- Capital and liquidity trends, including the effects of shareholder distributions, risk-weighted-asset growth, higher modeled outflows and the LCR decline.
- Developments in Argentina, including currency controls, hedge-market liquidity, potential reserve requirements and exposure-related earnings effects.
- Potential outcomes of disclosed legal matters and guarantee exposures; maximum guarantee amounts are not estimates of expected losses.