Citigroup Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Citigroup is a global financial services holding company operating through Citicorp, its core consumer and institutional businesses, and Citi Holdings, its non-core and runoff assets.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Change |
|---|---|---|---|
| Revenue, net of interest expense | $19.342 billion | $20.488 billion | Down 6% |
| Net interest revenue | $11.946 billion | $11.682 billion | Up 2% |
| Operating expenses | $15.521 billion | $12.149 billion | Up 28% |
| Credit-loss and benefits provisions | $1.730 billion | $2.024 billion | Down 15% |
| Net income attributable to Citigroup | $181 million | $4.182 billion | Down 96% |
| Diluted EPS | $0.03 | $1.34 |
Results included a $3.8 billion pretax mortgage-related settlement charge ($3.7 billion after tax), recorded in Citi Holdings. Excluding that charge and CVA/DVA adjustments in both periods, management reported net income of approximately $3.9 billion, or $1.24 per diluted share, versus approximately $3.9 billion, or $1.25, a year earlier. This is a company-presented, non-GAAP comparison.
Margins and credit: Net interest margin was 2.87%, up 2 basis points year over year but down 3 basis points sequentially. Net credit losses were $2.189 billion, down 16%; the allowance for loan losses ended the quarter at $17.9 billion, or 2.70% of loans, versus $21.6 billion and 3.38% a year earlier. Non-accrual assets were $8.3 billion, down 18% year over year.
Cash flow and balance sheet: For the first six months, operating cash flow was $11.856 billion, investing cash flow was negative $9.005 billion, and financing cash flow was positive $2.608 billion. Cash and due from banks ended at $35.268 billion. At June 30, total assets were $1.910 trillion, deposits $965.7 billion, long-term debt $227.0 billion, and total stockholders’ equity $213.1 billion. High-quality liquid assets were estimated at $434.9 billion; the estimated Basel Committee LCR was 123%, with $81.9 billion of HQLA above estimated net outflows.
Changes versus the prior comparable period
- Reported earnings fell sharply because of the mortgage settlement; on the company’s adjusted basis described above, earnings were broadly flat.
- Revenue declined, with weaker fixed-income and equity trading and lower North American mortgage refinancing activity. Investment banking revenue increased 16%; treasury and trade solutions revenue was broadly unchanged as reported.
- Operating expenses rose due to the settlement. Excluding it, expenses declined 3% to $11.8 billion, reflecting efficiency savings, lower Citi Holdings costs and lower legal costs, partly offset by regulatory/compliance and repositioning costs.
- Citi Holdings reported a $3.5 billion net loss, but excluding the settlement it reported $244 million net income. Holdings assets fell 15% year over year to $111 billion.
- Estimated fully implemented Basel III Tier 1 Common and Tier 1 Capital ratios were 10.6% and 11.4%, respectively, compared with 10.0% and 10.4% a year earlier; the estimated supplementary leverage ratio was 5.7%, versus 4.9%.
Outlook, commentary, risks and unusual items
- Management said operating conditions remained challenging, particularly in markets businesses, and planned to continue expense discipline, reduce Citi Holdings and utilize deferred tax assets. It expected second-half 2014 repositioning charges to be roughly in line with the $608 million recorded in the first half; legal costs in Citicorp could remain elevated and episodic.
- The $7.0 billion settlement package comprised a $4.0 billion payment to the Department of Justice, $500 million to certain state attorneys general and the FDIC, and $2.5 billion of consumer relief. The filing reports the Q2 accounting charge as $3.8 billion pretax; the package components and accounting charge are not the same measure.
- Citi expected to implement a funding valuation adjustment for OTC derivatives in the second half of 2014; its preliminary estimated impact was an approximately $500 million pretax loss. No FVA had been recognized at June 30.
- Management identified continuing exposure to regulatory and legal proceedings, foreign exchange and political risks (including Argentina, Venezuela, Russia and Ukraine), Mexico’s economic and regulatory environment, and ongoing spread compression. Possible additional sanctions involving Russia could adversely affect business.
- North American HELOC payment resets were a key credit risk: management estimated payments on loans resetting in 2015–2017 could rise by an average of about $360 monthly, or 165%. Potential effects on delinquencies and losses were uncertain.
- Citi disclosed roughly $285 million of financing tied to metal stored at two Chinese ports under scrutiny for potential fraud; it reported no related Q2 losses. It also disclosed an estimated $5 billion aggregate reasonably possible litigation loss in excess of accruals, materially unchanged from year-end 2013; actual outcomes could differ materially.
- Citi signed agreements to sell its consumer businesses in Greece and Spain, involving approximately $2.7 billion of assets, subject to approvals and customary conditions and expected to close in Q3 2014. No formal companywide earnings guidance is provided in the filing.
Investor facts to verify
- Reconcile the $3.8 billion recorded charge with the settlement’s $7.0 billion package, including timing and delivery of consumer relief.
- Assess the sustainability of earnings excluding settlement and valuation adjustments, particularly given weaker markets revenue and refinancing activity.
- Track the $500 million preliminary FVA estimate, the expected implementation timing and the final methodology.
- Review legal contingencies, including the approximately $5 billion reasonably possible loss estimate and pending mortgage, benchmark-rate, foreign-exchange and other cases.
- Monitor capital and liquidity measures, DTA utilization, Basel III implementation, and the potential credit and funding effects of geopolitical risks and HELOC resets.