Citigroup Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period is Q1 2017. Citigroup operates through Global Consumer Banking (GCB), Institutional Clients Group (ICG), and Corporate/Other. Amounts below are U.S. dollars.
Financial performance
| Metric | Q1 2018 | Change vs. Q1 2017 |
|---|---|---|
| Net revenue | $18.9 billion | +3% |
| Net interest revenue | $11.2 billion | +2% |
| Operating expenses | $10.9 billion | +2% |
| Provision for credit losses and benefits/claims | $1.9 billion | +12% |
| Income before taxes | $6.1 billion | +2% |
| Net income attributable to Citigroup | $4.6 billion | +13% |
| Diluted EPS | $1.68 | +24% |
| Net interest margin | 2.64% | Down 12 basis points |
The effective tax rate was 23.7%, versus 31.1% a year earlier, mainly reflecting the lower U.S. statutory tax rate under Tax Reform; discrete tax items also reduced the Q1 rate. EPS growth additionally benefited from a 7% decline in average shares outstanding. The efficiency ratio was 58%, unchanged.
Cash flow from continuing operations was $7.0 billion, compared with a $3.1 billion outflow in Q1 2017. Investing activities used $32.1 billion and financing activities provided $47.4 billion. Cash, due from banks, and deposits with banks totaled $202.7 billion at quarter-end; this amount includes restricted cash and should not be interpreted as freely available cash.
Balance sheet, capital and liquidity
- Total assets were $1.92 trillion; deposits were $1.00 trillion, up 5% year over year. End-of-period loans were $672.9 billion before the allowance and $660.6 billion net, up 7% year over year on a gross basis.
- Long-term debt was $237.9 billion, up 14% year over year. Citi repurchased or called approximately $3.0 billion of long-term debt during the quarter.
- Common Equity Tier 1 (CET1) capital was 12.05%, Tier 1 capital 13.67%, total capital 16.01%, and the Supplementary Leverage Ratio (SLR) 6.71% under the report’s applicable Basel III calculations. Citi stated these ratios exceeded effective minimum requirements. The year-over-year capital-ratio comparison is affected by a change in the reported regulatory approach.
- Average high-quality liquid assets were $426.9 billion and the average Liquidity Coverage Ratio was 120%, with $71.7 billion of HQLA above modeled net outflows. HQLA was down from $446.4 billion at year-end 2017 as Citi optimized liquidity and funded loan growth.
- Common stockholders’ equity was $182.8 billion and tangible book value per share was $61.02. Management cited Tax Reform’s capital impact among the factors affecting capital ratios and equity comparisons.
Performance by business and material changes
- GCB: Revenue rose 7% to $8.4 billion and net income rose 40% to $1.4 billion. Growth spanned all three regions. Provisions increased 5%, with North America card losses reflecting portfolio growth and seasoning.
- ICG: Revenue rose 6% to $9.8 billion and net income rose 11% to $3.3 billion. Banking revenue increased 9%; Markets and securities services increased 3%. Equity markets revenue grew 38% and securities services 16%, while fixed-income markets declined 7% and investment banking revenue fell 10%.
- Corporate/Other: Revenue fell 51% to $591 million and the segment recorded an $86 million net loss, versus $97 million net income a year earlier. The decline largely reflected continued wind-down of legacy assets; expenses fell 35%.
- Consolidated credit provisions increased to $1.9 billion. Net credit losses rose 9% to $1.9 billion, primarily reflecting growth and seasoning in North America card portfolios. Total allowance for loan losses was $12.4 billion; non-accrual loans were $4.2 billion, down from $4.6 billion at year-end 2017.
- A North America Citi-branded card portfolio sale generated a $150 million pretax gain; after lost operating revenue, management estimated a net year-over-year benefit of approximately $120 million.
Outlook, risks and unusual items
- The filing does not provide formal full-year earnings or revenue guidance. Management described the macroeconomic backdrop as positive but noted economic, political and other uncertainties. It expected Corporate/Other revenue and expenses to continue declining as legacy assets wind down, and anticipated a normal seasonal sequential decline in Markets and securities services revenue in Q2.
- Interest-rate, foreign-exchange, credit, market, funding, regulatory, geopolitical, operational and cybersecurity risks may affect results. A modeled immediate 100-basis-point parallel rate increase would raise annualized net interest revenue by an estimated $1.9 billion but initially reduce AOCI by about $5.0 billion; Citi estimated the AOCI impact could potentially be offset over approximately 20 months.
- Some home-equity lines of credit are resetting from interest-only to amortizing payments. Citi estimated average monthly payments on loans resetting during the remainder of 2018 could increase approximately $284, or 120%; higher rates could add to payment pressure.
- CECL is scheduled to take effect for Citi on January 1, 2020. Based on 2017 portfolios and conditions, Citi’s preliminary analysis estimated a 10%–20% increase in credit reserves at adoption; the eventual effect is uncertain and depends on portfolio and economic conditions. The filing also discusses proposed regulatory capital changes that, if adopted, could raise effective capital requirements.
- The estimated aggregate reasonably possible unaccrued loss for legal and regulatory matters was approximately $1.0 billion, materially unchanged from year-end. Management said the eventual outcome was not likely to materially affect consolidated financial condition, while acknowledging an adverse outcome could materially affect results or cash flows in a particular period.
- Accounting presentation changes included retrospective adoption of revenue-recognition guidance, which increased both revenue and expenses by approximately $250 million in each Q1 period presented, without changing net income.
Most important facts for investors to verify
- How much of earnings growth is attributable to the lower Tax Reform effective tax rate, share-count reduction, and the Hilton portfolio gain rather than underlying recurring operations.
- Whether North America card delinquencies, net losses and reserve needs continue to rise as portfolios grow and season.
- Whether net interest revenue growth can keep pace with higher deposit and funding costs; NIM was down year over year despite higher rates.
- Capital and liquidity trends, including regulatory-ratio calculation bases, CET1 relative to management’s approximately 11.5% target, LCR, and capital-return capacity under stress-test requirements.
- Progress and potential cost of the legacy-asset wind-down, legal matters, HELOC resets, and CECL implementation.