CITIGROUP INC annual report, FY2011

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Citigroup Inc. — 2011 Form 10-K

Reporting period: Fiscal year ended December 31, 2011. This is an annual report, not a standalone Q4 filing; selected fourth-quarter figures are noted below. Citigroup is a global financial services holding company operating through Citicorp and Citi Holdings.

Financial performance and condition

  • Revenue: $78.4 billion, down 10% from $86.6 billion in 2010. Excluding credit and debt valuation adjustments (CVA/DVA), revenue was $76.5 billion, down 12%.
  • Profit: Net income attributable to Citigroup was $11.1 billion, up from $10.6 billion; diluted EPS was $3.63 versus $3.54. Excluding CVA/DVA, net income was $9.9 billion, down 9%. Pretax continuing-operations income was $14.6 billion.
  • Fourth quarter: Net income was $956 million and diluted EPS was $0.31, compared with $1.3 billion and $0.43 in Q4 2010. Revenue was $17.2 billion versus $18.4 billion.
  • Expenses and credit: Operating expenses rose 8% to $50.9 billion, including higher legal costs, repositioning charges and investment spending. Provision for credit losses and benefits and claims fell 51% to $12.8 billion. Net credit losses were $20.0 billion, down 35%; the allowance for loan losses and unfunded commitments recorded a net release of $8.4 billion.
  • Interest income and margins: Net interest revenue was $48.4 billion, down 11%. Net interest margin fell 26 basis points to 2.86%, mainly reflecting low rates and the runoff of higher-yielding Citi Holdings assets.
  • Cash flow: Continuing-operations operating cash flow was $44.7 billion; investing cash flow was $11.3 billion; financing cash flow was negative $56.6 billion. Cash and due from banks ended at $28.7 billion. These cash-flow measures can be affected substantially by the timing and movement of banking and trading balances.
  • Balance sheet and debt: Total assets were $1.874 trillion, down 2%. Deposits increased 2% to $865.9 billion. Long-term debt declined to $323.5 billion from $381.2 billion; short-term borrowings were $54.4 billion versus $78.8 billion.
  • Capital and liquidity: Tier 1 Common ratio was 11.80% and Tier 1 Capital ratio was 13.55%, both higher than in 2010. Aggregate liquidity resources were $405.5 billion, down from $426.8 billion. Common stockholders’ equity was $177.5 billion.

Material changes versus 2010

  • Core Citicorp revenue declined 2% to $64.6 billion; Citicorp net income declined 2% to $14.4 billion. Securities and Banking revenue fell 7%, reflecting weaker trading and investment-banking activity, while Transaction Services revenue rose 5%.
  • Citi Holdings’ net loss improved to $2.6 billion from $4.3 billion, while its assets fell 25% to $269 billion. The pace of future asset reductions is expected to slow.
  • Citigroup’s total allowance for loan losses declined to $30.1 billion from $40.7 billion; non-accrual loans fell 42% to $11.2 billion.
  • The 2011 results include a net positive impact from CVA/DVA, compared with a net negative impact in 2010. The filing reports a $1.986 billion pretax 2011 gain from CVA/DVA, while the executive summary describes the net impact on results as approximately $1.8 billion.

Outlook, risks and unusual items

  • Management expected macroeconomic uncertainty, including the Eurozone sovereign-debt crisis and reduced market activity, to remain a potential headwind in 2012. It also expected low interest rates to continue pressuring net interest margin.
  • Management expected credit-cost improvements in North America cards and mortgages to slow; some international credit costs could rise as growing portfolios season. Citi expected Citi Holdings to remain a performance headwind.
  • Effective in Q1 2012, approximately $45 billion of retail partner card assets, including $41 billion of loans, were to transfer from Citi Holdings to Citicorp. Management planned to refinance approximately $15–$20 billion of long-term debt during 2012, subject to market conditions.
  • On February 9, 2012, Citi announced an agreement in principle with U.S. federal agencies and state attorneys general concerning mortgage servicing and origination matters. The settlement’s stated financial consideration totals approximately $2.2 billion, including cash payments, borrower relief and refinancing concessions. Citi recorded an additional $275 million pretax ($209 million after tax) charge in its 2011 results. The agreement remained subject to conditions, including court approval.
  • Mortgage-related repurchase and litigation exposures remain material and uncertain. The mortgage repurchase reserve was $1.188 billion; management estimated that a simultaneous 10% adverse change in key assumptions would increase it by about $620 million. Citi estimated up to $4 billion of aggregate reasonably possible unaccrued losses for specified legal and regulatory matters, while stating that many other matters could not be estimated.
  • Other notable exposures include volatile claims relating to U.K. payment protection insurance and Japan consumer-finance refunds; the Eurozone crisis; potential rating downgrades; cybersecurity and operational risks; and the uncertain costs and effects of evolving capital, derivatives, consumer-protection and other regulations. Citi reported that the SEC’s proposed Class V CDO settlement was not approved by the district court and that appeals were pending.
  • Common dividends were $0.01 per share per quarter from Q2 2011 onward. Restrictions tied to government-held trust preferred securities and regulatory approvals limited dividend increases and share repurchases.

Important facts for investors to verify

  • Reconcile reported earnings with the effects of CVA/DVA and the additional mortgage-related charge; assess the durability of earnings excluding those items.
  • Review the composition and adequacy of credit reserves, especially North America mortgage and card portfolios, and track delinquencies, redefaults and reserve releases.
  • Assess the mortgage settlement’s final terms, implementation costs, remaining repurchase claims and other litigation exposures.
  • Monitor liquidity, debt maturities and funding access, including the effects of any ratings changes and the planned 2012 refinancing.
  • Evaluate future regulatory capital requirements, Citi Holdings’ slower runoff, and the planned retail partner cards transfer when comparing segment results.