Citigroup Inc. — Third-Quarter 2011 Form 10-Q
Reporting period: Quarter ended September 30, 2011; comparisons are primarily with the quarter ended September 30, 2010. Citigroup operates through Citicorp, Citi Holdings and Corporate/Other. Per-share figures reflect the May 2011 1-for-10 reverse stock split.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Change |
|---|---|---|---|
| Net revenue, after interest expense | $20.831 billion | $20.738 billion | Flat |
| Net interest revenue | $12.114 billion | $13.128 billion | Down 8% |
| Non-interest revenue | $8.717 billion | $7.610 billion | Up 15% |
| Operating expenses | $12.460 billion | $11.520 billion | Up 8% |
| Credit-loss and benefits/claims provisions | $3.351 billion | $5.919 billion | Down 43% |
| Income from continuing operations | $3.742 billion | $2.601 billion | Up 44% |
| Citigroup net income | $3.771 billion | $2.168 billion | Up 74% |
| Diluted EPS | $1.23 | $0.72 | Up 71% |
Key earnings qualification: Q3 2011 included a $1.9 billion positive credit valuation adjustment (CVA), chiefly reflecting wider Citi credit spreads; Q3 2010 included $115 million. Management reported earnings excluding CVA of $2.6 billion, or $0.84 per diluted share, versus $0.70 per share a year earlier. The filing cautions that CVA may not be realized in normal settlement and can reverse as credit spreads change.
Net interest margin was 2.83%, down 23 basis points year over year. Management attributed pressure to the low-rate environment and the runoff and sale of higher-yielding Citi Holdings assets. Nine-month net revenue was $61.179 billion, down 10%; net income was $10.111 billion, up 9%; and diluted EPS was $3.32, up 7%.
For the first nine months, operating cash flow from continuing operations was $30.820 billion, investing cash flow was $19.896 billion, and financing cash flow was negative $53.885 billion. Cash and due from banks was $28.950 billion at September 30, 2011. These bank cash-flow measures include significant movements in loans, securities and funding balances.
Balance sheet, capital and liquidity
- Total assets were $1.936 trillion, compared with $1.983 trillion at September 30, 2010. Deposits were $851.3 billion, approximately flat year over year.
- Long-term debt was $333.8 billion, down 14% from $387.3 billion a year earlier. Total allowance for loan losses was $32.1 billion, or 5.07% of loans, compared with $43.7 billion, or 6.73%, a year earlier.
- Tier 1 Common, Tier 1 Capital and Total Capital ratios were 11.71%, 13.45% and 16.89%, respectively; the leverage ratio was 7.01%. Citi reported that it met the then-current “well capitalized” definitions.
- Aggregate liquidity resources for the non-bank and significant bank entities were $300.9 billion; Citi estimated approximately $411 billion including additional resources at other entities. The structural liquidity ratio was 70%.
- Reported long-term debt maturities included $88.7 billion in 2012. Citi expected overall long-term debt to continue declining and anticipated approximately $3 billion of long-term debt issuance for the remainder of 2011, subject to market conditions.
Material changes and business performance
- Credit costs improved substantially: Net credit losses were $4.5 billion, down 41% year over year. Citi released $1.4 billion of credit reserves during the quarter, versus a $2.0 billion release a year earlier. Non-accrual loans fell to $12.1 billion, down 46% year over year; the allowance was 265% of non-accrual loans.
- Citicorp: Net income was $4.6 billion, up 32%; revenue rose 9% to $17.7 billion, but was down 2% excluding CVA. International consumer banking and Transaction Services grew, while North America consumer banking and Securities and Banking faced revenue pressure.
- Securities and Banking: Revenue rose 20% to $6.7 billion including CVA; excluding CVA, it fell 12%. Weak fixed-income, equity and investment-banking activity reflected volatile markets and uncertainty surrounding U.S. and European sovereign debt. Lending revenue benefited from hedge gains.
- Citi Holdings: Net loss improved to $802 million from $1.1 billion, while revenue fell 27% to $2.8 billion as assets ran off. Assets declined 31% year over year to $289 billion, driven by sales, dispositions and runoff. Citi intended to transfer most retail partner card operations to North America Regional Consumer Banking in Q1 2012, later than its earlier Q4 2011 target.
- Expenses: Q3 expenses rose $940 million. Management attributed roughly three-quarters of the increase to foreign-exchange translation, higher legal costs and the absence of prior-period benefits. It cited investment spending, partially offset by productivity savings, for underlying expense growth.
Outlook, risks and unusual items
- Management expected net interest margin to remain under pressure and likely decline by several basis points per quarter in the near term. It expected credit-cost improvement in North America to slow as trends normalize, and provisions in some growing international and corporate portfolios could rise as they season.
- Legal and related expenses and foreign-exchange effects were expected to continue affecting expenses in the near term and were described as difficult to predict. Citi also noted that expense reductions in Citi Holdings may become harder as its asset runoff slows.
- Mortgage risks include potential re-defaults, slower mortgage asset sales and modifications, extended foreclosure timelines, home-price pressure, and representation-and-warranty claims. The mortgage repurchase reserve was $1.076 billion; a hypothetical simultaneous 10% adverse change in key assumptions would increase it by an estimated $607 million. Citi said it could not estimate a reasonably possible loss range for consumer representations and warranties.
- The filing reported approximately $4 billion of aggregate reasonably possible litigation and regulatory loss in excess of accruals, materially unchanged from December 31, 2010. After quarter-end, Citi announced a proposed SEC settlement requiring $285 million in disgorgement, interest and penalties, subject to judicial approval.
- Net funded exposure to Greece, Ireland, Italy, Portugal and Spain (GIIPS) was $7.2 billion after collateral and purchased credit protection; unfunded commitments were $9.2 billion. The filing emphasized that exposure levels and losses could differ from these measures and highlighted broader European-market and rating-downgrade risks.
- Citi’s ability to pay common dividends above $0.01 per share quarterly or repurchase securities remained generally restricted while the U.S. government held certain trust preferred securities, subject to possible waiver. No material open-market share repurchases were made during the first nine months of 2011.
Most important facts for investors to verify
- How much of reported earnings and revenue growth depended on CVA, reserve releases and other nonrecurring or market-sensitive items.
- Whether credit losses, delinquencies and reserve releases continue improving, and whether reserve levels remain adequate—particularly in North America real estate and cards.
- Progress, timing and earnings effects of the retail partner card transfer and Citi Holdings’ asset runoff.
- Developments in mortgage repurchase claims, litigation and regulatory proceedings, including the reserve assumptions and the proposed SEC settlement.
- Whether capital, liquidity and funding remain resilient under further market stress, credit-rating downgrades or European sovereign-market disruption.
- The durability of deposit funding, net interest margin and expense control amid low rates, investment spending, legal costs and changing regulation.