Business context and reporting period
Citigroup Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. Citi reports through Citicorp, including Global Consumer Banking (GCB) and Institutional Clients Group (ICG), and Citi Holdings, its non-core portfolios. Management described the quarter as a solid performance across the franchise, while noting a challenging low-rate environment and continuing economic and geopolitical uncertainties.
Key financial metrics
| Metric | Q3 2016 | Prior-year comparison |
|---|---|---|
| Revenue, net of interest expense | $17.760 billion | Down 5% from $18.692 billion |
| Net interest revenue | $11.479 billion | Down 2%; net interest margin was 2.86% versus 2.94% |
| Operating expenses | $10.404 billion | Down 2%; efficiency ratio rose to 59% from 57% |
| Provision for credit losses and benefits and claims | $1.736 billion | Down 5%; net credit losses were $1.525 billion, down 8% |
| Income before taxes | $5.620 billion | Down 9% |
| Net income attributable to Citi | $3.840 billion | Down 11% from $4.291 billion |
| Diluted EPS | $1.24 | Down from $1.35 |
| Return on average assets / common equity | 0.83% / 6.8% | 0.94% / 8.0% |
For the first nine months of 2016, revenue was $52.863 billion, down 9%; net income was $11.339 billion, down 18%; expenses were $31.296 billion, down 4%; and provisions were $5.190 billion, down 4%. Diluted EPS was $3.58 versus $4.38.
At September 30, total assets were $1.818 trillion, deposits $940.3 billion, long-term debt $209.1 billion, and total stockholders’ equity $232.7 billion. Year over year, assets increased 1%, deposits increased 4%, and reported long-term debt decreased 2%. Citicorp loans rose 6% and deposits 5% year over year. Citi’s allowance for loan losses was $12.4 billion, or 1.97% of loans net of unearned income.
Nine-month cash flows were $28.3 billion provided by operations, $71.6 billion used in investing, and $45.9 billion provided by financing; cash and due from banks ended at $23.4 billion. These bank cash-flow totals are affected by trading, lending and deposit activity. Liquidity indicators included $404.3 billion of high-quality liquid assets and a 120% average Liquidity Coverage Ratio (LCR) for Q3.
On a fully implemented Basel III basis, the Common Equity Tier 1 ratio was 12.63%, Tier 1 Capital ratio 14.23%, and Supplementary Leverage Ratio 7.40%. Citi returned approximately $3.0 billion to common shareholders during the quarter through dividends and repurchases of 56 million shares. The quarterly common dividend declared was $0.16 per share.
Material changes and business drivers
- Citicorp revenue decreased 1% as reported; excluding prior-year CVA/DVA and foreign-exchange translation, it increased 2%. GCB revenue rose 1%, led by North America, where revenue increased 7%. Citi-branded card revenue grew 15%, including the first full quarter of the Costco portfolio; expenses and credit provisions also increased.
- International GCB revenue declined 7% as reported. Latin America’s comparison included a prior-year $160 million gain from the sale of its Mexican merchant acquiring business; excluding that gain, management said Latin America revenue would have grown 5%.
- ICG revenue was essentially flat as reported. Fixed income markets improved, while equity markets weakened. Banking revenue was affected by a $218 million mark-to-market loss on corporate-loan hedges, compared with a $352 million gain in the prior-year quarter. Excluding prior-year CVA/DVA and loan-hedge marks, ICG revenue increased 9%.
- Citi Holdings earned $74 million, compared with a $1 million loss, while revenue declined 48% as the portfolio continued to run off. Holdings represented about 3% of Citi’s assets and less than 2% of quarterly net income. Citi had signed agreements to reduce Holdings assets by a further $10 billion, including consumer businesses in Argentina and Brazil, subject to approvals and other closing conditions.
Outlook, risks and unusual items
- Management expected continued uncertainty through the remainder of 2016, including effects from the U.K. vote to leave the EU and the outlook for U.S. interest-rate increases. Citi provided no specific consolidated earnings or revenue guidance in the supplied filing text.
- Management expected near-term increases in card credit losses as portfolios grow and season, including normalization of losses on the Costco portfolio. North America GCB also cited the potential impact of proposed third-party debt-collection guidelines.
- Approximately 50% of revolving home-equity lines scheduled to reset during the remainder of 2016–2017 were expected to enter amortization. Citi estimated average monthly payments on those resetting loans could rise by about $370, or 155%; higher rates could add to payment pressure.
- Citi’s corporate energy and energy-related credit exposure was $55.0 billion, including $20.6 billion funded; 74% of exposure was investment grade. Management said it remained cautious about the sector and possible price volatility. Separate GCB commercial-banking energy exposure was approximately $2.0 billion.
- Net deferred tax assets were approximately $45.4 billion, unchanged during Q3. Citi reported using about $2.4 billion year to date, contributing to a $3.2 billion increase in regulatory capital as fewer DTAs were deducted. Continued DTA utilization remains dependent on future taxable income and other factors.
- Citi increased U.K. payment-protection-insurance reserves by about $70 million during Q3; the quarter-end reserve was $256 million. Further reserving could depend on final FCA rules expected by year-end 2016. Management estimated aggregate reasonably possible litigation and regulatory losses in excess of accruals at approximately $3.0 billion; it said outcomes were not expected to materially affect consolidated financial condition, but could materially affect results or cash flows in a particular period.
- Other notable items included a $422 million pretax gain from the first-quarter novation of a Primerica coinsurance agreement, a $180 million first-quarter ICG charge related primarily to Venezuela, and the absence of prior-year CVA/DVA and Mexico sale gains affecting comparisons. Citi was evaluating the potential effects of the new expected-credit-loss accounting standard, scheduled to apply from 2020.
Important facts for investors to verify
- Whether Costco card portfolio growth, acquisition-related expenses and credit losses develop as management expects, and how proposed debt-collection rules affect reserves.
- Performance and borrower delinquency trends as home-equity lines reset, especially if interest rates rise.
- Progress and final terms for the planned Argentina and Brazil disposals, and the pace and cost of winding down Citi Holdings.
- Energy-sector exposure, reserve coverage and any further deterioration in oil and commodity markets.
- Capital-plan execution, regulatory capital requirements, DTA utilization and the outcome of resolution-plan and other regulatory reviews.
- Changes in PPI reserves and the approximately $3.0 billion estimate of reasonably possible legal and regulatory losses above accruals.