Business context and reporting period
Citigroup Inc. is a global financial-services holding company operating through Citicorp (Global Consumer Banking and Institutional Clients Group) and Citi Holdings (businesses and portfolios being exited). This unaudited Form 10-Q covers the quarter ended March 31, 2012; comparisons are primarily with Q1 2011. Citi reclassified most retail partner card operations from Citi Holdings to Citicorp effective January 1, 2012, and recast prior-period segment results to conform.
Key financial metrics
| Metric | Q1 2012 | Comparable / period-end |
|---|---|---|
| Net income attributable to Citigroup | $2.931 billion; diluted EPS $0.95 | Q1 2011: $2.999 billion; $0.99 |
| Revenue, net of interest expense | $19.406 billion | Q1 2011: $19.726 billion |
| Net interest revenue / net interest margin | $11.947 billion / 2.90% | Q1 2011: $12.102 billion; 2.88% NIM |
| Operating expenses | $12.319 billion | Q1 2011: $12.326 billion |
| Credit-loss and benefits/claims provisions | $3.019 billion | Q1 2011: $3.184 billion |
| Operating cash flow, continuing operations | $5.498 billion | Q1 2011: $1.039 billion |
| Total assets / deposits | $1.944 trillion / $906.0 billion | March 31, 2011: $1.948 trillion / $865.9 billion |
| Long-term debt | $311.1 billion | March 31, 2011: $376.5 billion |
| Capital ratios | Tier 1 Common 12.50%; Tier 1 Capital 14.26%; total capital 17.64% | Tier 1 Common 11.34%; Tier 1 Capital 13.26%; total capital 16.98% at March 31, 2011 |
| Loan-loss allowance / non-accrual assets | $29.0 billion, 4.51% of loans / $12.3 billion | March 31, 2011 allowance: $36.6 billion, 5.78%; non-accrual assets: $16.4 billion |
Operating cash flow improved, but investing cash flow was negative $34.4 billion and financing cash flow was positive $26.3 billion. These bank cash flows are affected by substantial trading, lending, deposit and funding movements; they are not a conventional measure of free cash flow. Return on average common equity was 6.51%, versus 7.30% in Q1 2011.
Material changes versus the prior comparable period
- Reported net income declined 2%, while revenue fell 2% and expenses were essentially flat. Income from continuing operations rose 1% to $3.062 billion, but discontinued operations and higher income attributable to noncontrolling interests contributed to the lower net income attributable to Citi.
- Credit performance improved: net credit losses fell 37% to $4.0 billion, and the allowance for loan losses declined to $29.0 billion. The net reserve release narrowed to $1.2 billion from $3.3 billion in Q1 2011, moderating the benefit to earnings.
- Citicorp revenue was down 1% as reported, but up 6% excluding CVA/DVA; net income was $4.3 billion, down 3%. Global Consumer Banking revenue rose 5%, Transaction Services rose 7%, and Securities and Banking revenue fell 12% as reported.
- Citi Holdings’ net loss was $1.026 billion, versus $1.018 billion in Q1 2011. Revenue declined 47% to $874 million, while assets fell 29% year over year to $209 billion.
- Deposits rose 5% year over year and long-term debt fell 17%. Aggregate liquidity resources were $420.5 billion, compared with $447.1 billion a year earlier.
Outlook, commentary, risks and unusual items
- Earnings adjustments and unusual items: Q1 results included an approximately $1.3 billion net negative CVA/DVA effect, versus $256 million negative in Q1 2011, as Citi’s credit spreads tightened. Citi also reported a $477 million pretax net gain on minority investments: gains on sales of HDFC and SPDB were partly offset by a $1.2 billion pretax Akbank impairment. Management said earnings excluding CVA/DVA and the net minority-investment gain were $3.4 billion, or $1.11 per diluted share. These are management-presented adjusted figures, not GAAP results.
- Outlook: No formal company-wide earnings guidance is provided in the supplied filing text. Management expected overall long-term debt to continue declining during 2012; said NIM could decrease slightly in the near term; and expected foreclosure-review expenses to remain elevated for the rest of 2012. EMEA consumer provisions could remain a drag as reserve releases ease; Asia consumer credit costs could rise modestly with portfolio growth.
- Mortgage and legal exposure: The national mortgage settlement requires $1.4 billion in borrower relief and $378 million in refinancing concessions over three years. Citi expected to meet these obligations through relief rather than additional cash payments, but estimated approximately $40 million of annual forgone interest from planned refinancing concessions. The mortgage repurchase reserve was $1.376 billion; a hypothetical simultaneous 10% adverse change in key whole-loan assumptions would increase that reserve by about $602 million. Citi’s estimated aggregate reasonably possible litigation losses in excess of accruals remained approximately $4 billion; management cautioned actual outcomes could materially differ.
- Credit and housing risks: Citi cited potential mortgage re-defaults, lengthening foreclosure timelines and limits on future asset sales or modifications. The filing notes a regulatory reclassification of $0.8 billion of home-equity loans to non-accrual status; it did not affect delinquency statistics or reserves. Deferred-principal charge-offs related to anticipated mortgage-settlement forgiveness also affected Q1 credit losses.
- Funding, regulation and markets: Citi estimated Basel III Tier 1 Common at 7.2%, subject to final rules and implementation. It estimated proposed Basel III liquidity coverage above 125%, also subject to final guidance. A hypothetical two-notch downgrade of both Citigroup and Citibank, N.A. across the three major agencies could generate about $4.7 billion in aggregate derivative-trigger and margin cash or collateral requirements. The filing also highlights Eurozone, regulatory, market, cybersecurity, tax-asset and other litigation risks.
- Capital returns: Citi declared a $0.01 common dividend per share. It reported $6.7 billion remaining under authorized repurchase programs and no material open-market repurchases in Q1; employee-related share transactions did occur. The filing describes restrictions on dividends and repurchases while U.S. government-held trust preferred securities remain outstanding, subject to specified exemptions or waiver.
Most important facts for investors to verify
- Reconcile GAAP earnings with management’s adjusted $3.4 billion earnings and $1.11 diluted EPS, including the treatment of CVA/DVA and minority-investment gains.
- Track reserve releases, charge-offs and allowance coverage, particularly in North American mortgages, cards and Citi Holdings; distinguish the regulatory non-accrual reclassification from deterioration in payment performance.
- Review mortgage repurchase claims, reserve assumptions and national-settlement performance, including potential cash penalties and forgone interest.
- Assess whether Citi can sustain deposit growth and liquidity while reducing debt, and monitor the 2012 debt maturity schedule and rating-related collateral triggers.
- Monitor the Basel III capital estimate against final rules, and the effect of regulatory requirements on capital returns and core-business profitability.
- Follow material litigation, including mortgage-related and LIBOR matters, and compare outcomes with the approximately $4 billion estimate of reasonably possible losses in excess of accruals.