Citigroup Inc. — First-Quarter 2019 Form 10-Q
Business context and period. Citigroup is a diversified global bank organized around Global Consumer Banking (GCB), Institutional Clients Group (ICG), and Corporate/Other. This unaudited report covers the three months ended March 31, 2019; comparisons are generally with first-quarter 2018 unless noted.
Financial results and key metrics
| Metric | Q1 2019 | Comparable period | Change |
|---|---|---|---|
| Revenue, net of interest expense | $18.576 billion | $18.872 billion | Down 2% |
| Net interest revenue | $11.759 billion | $11.172 billion | Up 5% |
| Non-interest revenue | $6.817 billion | $7.700 billion | Down 11% |
| Operating expenses | $10.584 billion | $10.925 billion | Down 3% |
| Provisions for credit losses and benefits/claims | $1.980 billion | $1.857 billion | Up 7% |
| Net income attributable to Citigroup | $4.710 billion | $4.620 billion | Up 2% |
| Diluted EPS | $1.87 | $1.68 | Up 11% |
| Effective tax rate | 21.2% | 23.7% | Lower |
The efficiency ratio improved to 57.0% from 57.9%; net interest margin was 2.72%, up 8 basis points year over year. Return on average common equity was 10.2% versus 9.7%, and return on average assets was 0.98%, unchanged.
Cash flow. Operating activities used $37.6 billion, compared with $7.0 billion provided in Q1 2018. Investing activities provided $16.0 billion and financing activities provided $39.5 billion; cash, due from banks and deposits with banks increased $17.8 billion to $205.9 billion. Operating cash flow was heavily affected by movements in trading assets/liabilities and brokerage balances, so it should not be read like cash flow at a non-financial company.
Balance sheet, funding and capital. At March 31, total assets were $1.958 trillion; deposits were $1.030 trillion; loans before allowance were $682.3 billion ($670.0 billion net of allowance); and long-term debt was $243.6 billion. Compared with March 31, 2018, loans rose 1% and deposits 3%; reported loan growth excluding foreign exchange translation was 3%. Long-term debt was $237.9 billion a year earlier and $232.0 billion at December 31, 2018. Average high-quality liquid assets were $394.9 billion and the average liquidity coverage ratio was 119%, versus 120% a year earlier. CET1 was 11.91% and the supplementary leverage ratio was 6.44%; Citi said regulatory capital ratios exceeded applicable minimums and the company was well capitalized.
Material changes and business performance
- GCB: Revenue was $8.5 billion, broadly flat as reported; excluding FX translation and the prior-year Hilton portfolio sale gain, revenue rose 4%. Net income increased 4% to $1.4 billion, or 14% excluding those effects. Provisions rose 4%, with North American card losses reflecting portfolio growth and seasoning.
- ICG: Revenue declined 2% to $9.7 billion and net income was essentially unchanged at $3.3 billion. Banking revenue excluding loan-hedge marks rose 8%, supported by investment banking and treasury and trade solutions. Markets and securities services revenue fell 6%, including a 24% decline in equity markets revenue. Corporate lending included $231 million of loan-hedge losses, compared with $23 million of gains in the prior-year quarter.
- Corporate/Other: Net loss narrowed to $38 million from $87 million, mainly on lower expenses as legacy assets wound down; revenue declined 27% to $431 million.
- Citi returned $5.1 billion to common shareholders through repurchases and dividends, repurchasing approximately 66 million shares. Average common shares outstanding fell 9% year over year. The declared common dividend was $0.45 per share, versus $0.32.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management described the macroeconomic environment as largely positive but noted that global 2019 growth forecasts had been lowered and that economic, political and other risks could make conditions more volatile. Citi reported its tenth consecutive quarter of positive operating leverage and emphasized expense discipline, growth and continued capital returns.
- Credit costs increased: net credit losses were $1.9 billion, up 4%; consumer net credit losses rose 7%, while corporate net credit losses declined to $56 million from $96 million. Management described overall credit quality as broadly stable, while highlighting seasoning in North American cards and slower Mexican economic growth and lending activity.
- CECL, effective January 1, 2020, was preliminarily estimated to increase expected credit loss reserves by approximately 20%–30%, based on then-current forecasts and exposures. Citi said the estimate could change with economic conditions and portfolio composition; the increase was expected to reduce opening retained earnings, net of tax.
- A hypothetical parallel 100-basis-point rate increase was estimated to raise annualized net interest revenue by $1.2 billion but initially reduce AOCI by $3.8 billion and CET1 by 25 basis points; Citi estimated the AOCI impact could potentially be offset over about 21 months. These are scenario estimates, not forecasts.
- Potential risks include macroeconomic and geopolitical conditions, foreign exchange and emerging-market exposures, regulatory and capital changes, funding and ratings pressure, cybersecurity and operational disruptions, benchmark-rate transition, and legal and regulatory proceedings. Citi estimated reasonably possible unaccrued losses for legal and regulatory matters at approximately $1.0 billion, materially unchanged from year-end; outcomes could still affect results or cash flows in particular periods.
- In a disclosed sanctions-related incident, a Hungarian branch inadvertently processed a domestic payment of approximately $490 for Iranian Embassy operating expenses. Citi said it received no revenue and voluntarily disclosed the transaction to OFAC.
Important facts for investors to verify
- Whether revenue and earnings trends persist after separating FX effects, prior-period portfolio-sale gains and ICG loan-hedge marks.
- Whether card credit losses and reserve coverage remain consistent with portfolio seasoning, loan growth and the estimated CECL transition impact.
- How the 119% LCR, HQLA levels, debt maturities and funding costs evolve, particularly under ratings or market stress.
- Whether capital ratios and shareholder distributions remain sustainable under regulatory requirements and stress-testing outcomes.
- Developments in the approximately $1.0 billion estimate of reasonably possible unaccrued legal and regulatory losses, and the outcome of the OFAC disclosure.