Citigroup Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 25, 2015. Citi is a global financial services company operating through Citicorp, its core consumer and institutional businesses, and Citi Holdings, its non-core and runoff portfolios.
Financial results and condition
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue, net of interest expense | $76.9 billion | $76.4 billion | +1% |
| Operating expenses | $55.1 billion | $48.4 billion | +14% |
| Provisions for credit losses and benefits/claims | $7.5 billion | $8.5 billion | -12% |
| Income from continuing operations | $7.5 billion | $13.6 billion | -45% |
| Net income attributable to Citigroup | $7.3 billion | $13.7 billion | -47% |
| Diluted EPS | $2.20 | $4.35 | Down |
| Net interest margin | 2.90% | 2.85% | +5 bps |
| Efficiency ratio | 72% | 63% | Higher costs relative to revenue |
| Return on average assets | 0.39% | 0.73% | Down |
| Return on average common equity | 3.4% | 7.0% | Down |
Reported earnings included a $3.8 billion pretax ($3.7 billion after-tax) mortgage settlement charge, negative $390 million of CVA/DVA, and an approximately $210 million tax charge from state tax reforms. Excluding specified items, management reported non-GAAP net income of $11.5 billion, or $3.55 per diluted share, down 16% from 2013. The decline reflected higher expenses, a smaller reserve release and a higher effective tax rate, partly offset by lower credit losses and higher Citi Holdings revenue.
- Expenses and credit: Legal and related expenses were $5.8 billion, versus $3.0 billion in 2013; repositioning costs were $1.6 billion, versus $590 million. Net credit losses declined 14% to $9.0 billion. The net release of loan-loss and unfunded-commitment reserves was $2.3 billion, compared with $2.8 billion in 2013.
- Cash flow: Continuing-operations operating cash flow was $45.4 billion (2013: $63.2 billion); investing cash flow was $29.5 billion (2013: negative $91.3 billion); financing cash flow was negative $70.3 billion (2013: $23.1 billion). These flows reflect substantial balance-sheet and funding activity and should not be read as operating cash generation alone.
- Year-end balance sheet: Total assets were $1.843 trillion; deposits $899.3 billion; long-term debt $223.1 billion; total equity $212.0 billion, including $200.1 billion of common equity. Loans were $644.6 billion before the $16.0 billion allowance, and $628.6 billion net.
- Capital and liquidity: Fully implemented Basel III CET1 was 10.58% (2013: 10.59%); the transitional Advanced Approaches CET1 ratio was 13.10%. Estimated supplementary leverage ratio was 5.96% (2013: 5.43%). High-quality liquid assets were $412.6 billion and estimated U.S. LCR was 112%, with $44.0 billion of HQLA above estimated net outflows.
- Credit quality: Allowance for loan losses declined to $16.0 billion, or 2.50% of loans, from $19.6 billion, or 2.97%. Non-accrual assets fell 22% to $7.4 billion. Consumer 90+ day delinquencies were $4.6 billion, or 1.27% of consumer loans.
Material changes and business developments
- Citicorp net income declined 32% to $10.7 billion, with revenue down 1% and expenses up 12%. Citi Holdings reported a $3.4 billion net loss, primarily reflecting the mortgage settlement; excluding it, Holdings reported $385 million net income. Holdings assets fell 16% to $98 billion.
- ICG revenue declined 1% to $33.3 billion: banking revenue grew, while Markets and securities services revenue fell 8%, including an 11% decline in fixed-income markets.
- Citi announced plans to exit consumer businesses in 11 markets and its consumer finance business in Korea, plus certain ICG businesses. The consumer businesses represented $28 billion of assets at year-end and are expected to move to Citi Holdings reporting in 2015; Citi expected substantially to complete the consumer exits by year-end 2015. The Japan retail banking sale was agreed in December 2014, subject to approvals and closing conditions.
- Citi reduced direct staff to approximately 241,000 from 251,000. It issued approximately $3.7 billion of preferred stock and repurchased approximately $1.2 billion of common shares during 2014.
Outlook, risks and unusual items
- Management expected a challenging 2015 environment, citing low interest rates, uneven global growth, market volatility, regulatory uncertainty, legal costs and cybersecurity threats. Citi remained committed to 2015 targets for Citicorp operating efficiency and Citigroup return on assets, but the filing does not provide numeric target values in the supplied text.
- The Federal Reserve objected to Citi’s 2014 CCAR capital plan, limiting the requested increase in shareholder capital returns. Additional dividends or buybacks depend substantially on regulatory approval in the 2015 CCAR process.
- Citi estimated up to approximately $4 billion of aggregate reasonably possible unaccrued litigation and regulatory losses. It cautioned that some matters are not estimable and actual losses could exceed accruals. Matters include foreign-exchange and benchmark-rate investigations, mortgage-related litigation, and Banamex/OSA inquiries. The 2014 FX regulatory settlements included penalties of approximately $1.018 billion across the FCA, OCC and CFTC.
- Net deferred tax assets were $49.5 billion, including $17.6 billion of foreign tax credit carry-forwards. Citi said roughly $81 billion of U.S. taxable income would be needed during the relevant periods to prevent those credits from expiring; utilization depends on future taxable income and tax-planning actions.
- Home-equity reset exposure warrants attention: $16.7 billion of revolving HELOCs remained in their interest-only period, and approximately 78% were scheduled to reset during 2015–2017. Citi estimated average monthly payments on resetting loans could rise about $360, or 170%; higher rates could add pressure.
- Citi disclosed approximately $60 billion of corporate energy and energy-related credit exposure, including $22 billion of funded loans; approximately 85% was investment grade. Country risks include Russia and Ukraine, Argentina’s currency controls and bond litigation, and uncertainty in Greece. Citi also cited potential consumer credit deterioration in Russia and Mexico.
- Citi’s auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management reported disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Reconcile reported earnings with the $3.8 billion mortgage settlement and other excluded items; assess recurring legal and repositioning costs.
- Track reserve releases, delinquency trends, and the timing and credit performance of HELOC resets.
- Monitor CET1 and supplementary leverage ratios against final requirements, the proposed 4% GSIB surcharge, and potential TLAC rules.
- Follow the 2015 CCAR outcome and any effect on dividends, buybacks, and capital plans.
- Check progress and realized costs or gains from announced business exits, alongside Citi Holdings’ path toward break-even.
- Monitor DTA/foreign tax credit utilization, significant legal contingencies, and exposures to energy and higher-risk countries.