Citigroup Inc. — Third-Quarter 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Citigroup is a global financial-services holding company, reporting through Citicorp, Citi Holdings and Corporate/Other. Comparisons are affected by the January 1, 2010 adoption of SFAS 166/167, which brought certain securitization vehicles onto the balance sheet; the filing presents prior-period managed figures for comparability where indicated.
Key financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Managed net revenues | $20.7 billion | $23.1 billion | $68.2 billion | $83.2 billion |
| Net interest revenue | $13.2 billion | $12.0 billion | $41.8 billion | $37.8 billion |
| Operating expenses | $11.5 billion | $11.8 billion | $34.9 billion | $35.5 billion |
| Provisions for credit losses and benefits/claims | $5.9 billion | $9.1 billion | $21.2 billion | $32.1 billion |
| Income from continuing operations | $2.6 billion | $593 million | $9.6 billion | $6.7 billion |
| Citigroup net income | $2.2 billion | $101 million | $9.3 billion | $6.0 billion |
| Diluted EPS | $0.07 | $(0.27) | $0.31 | $(0.19) |
- Q3 reported net revenues were $20.7 billion, up 2% from reported Q3 2009 revenue of $20.4 billion; on the filing’s managed basis, revenues declined 10%. Nine-month reported revenues declined 9%, while managed revenues declined 18%.
- Net interest margin was 3.07%, down 8 basis points sequentially from Q2 2010; management attributed pressure to runoff and sales of higher-yielding Holdings assets and investment in lower-yielding securities. The margin was 2.95% in Q3 2009.
- Net credit losses were $7.7 billion, down 30% year over year on a comparable managed basis and down 4% sequentially. Consumer losses were $6.7 billion; corporate losses were $922 million, up 95% sequentially, mainly due to a specific Citicorp credit charge-off and Holdings loan-sale/write-off effects.
- The allowance for loan losses was $43.7 billion, or 6.73% of loans, versus 6.72% at June 30. Citi recorded a net $2.0 billion release from credit reserves and unfunded-commitment allowances during the quarter.
- For the first nine months, operating cash flow from continuing operations was $24.3 billion, compared with a use of $13.5 billion a year earlier. Investing activities provided $30.7 billion; financing activities used $54.7 billion. Period-end cash and due from banks was $26.3 billion.
- At September 30, total assets were $1.98 trillion, deposits $850.1 billion and long-term debt $387.3 billion. Total stockholders’ equity was $162.9 billion.
- Regulatory capital ratios were 10.33% Tier 1 Common, 12.50% Tier 1 Capital and 16.14% Total Capital. The company reported a 6.57% leverage ratio and said it remained “well capitalized.”
- Aggregate liquidity resources were $330.8 billion, up from $310.9 billion at June 30. Structural liquidity was 71%. Management stated that parent and broker-dealer liquidity could cover maturing obligations for significantly more than one year without unsecured wholesale-market access.
Material changes and segment performance
- Citicorp: Q3 net income was $3.5 billion, up 43% year over year. Regional Consumer Banking revenue rose 33% as reported, but only 3% on a comparable managed basis, with growth in Latin America and Asia offset by North America card headwinds. Transaction Services revenue increased 3%.
- Securities and Banking: Q3 revenue was $5.6 billion, up 14% as reported, but down 17% excluding credit valuation adjustments (CVA), according to management. Fixed-income revenue excluding CVA was $3.4 billion versus $4.9 billion a year earlier; investment banking revenue fell 20% to $930 million. CVA was a $99 million gain, versus a $1.8 billion loss in Q3 2009.
- Citi Holdings: Q3 net loss was $1.1 billion, compared with a $2.0 billion loss a year earlier. Revenue fell 38% to $3.9 billion as reported and 47% on a managed basis. Local Consumer Lending revenue declined 33% on a comparable basis; Special Asset Pool revenue fell to $314 million from $1.4 billion, reflecting lower positive marks.
- Holdings assets were $421 billion, down 24% year over year and 49% from the Q1 2008 peak; asset sales, dispositions, runoff and paydowns drove the reduction. Holdings represented 21% of Citi assets but about 37% of risk-weighted assets.
- Q3 expenses fell 3% year over year to $11.5 billion. Headcount was 258,000, down 18,000 from a year earlier. Common stockholders’ equity rose $10.2 billion from year-end 2009; the quarter’s increase included the ADIA share issuance and improved accumulated other comprehensive income.
Outlook, risks and unusual items
- Management expected quarterly expenses to remain in the $11.5–$12.0 billion range. It expected net interest margin to remain under pressure through the rest of 2010.
- Citi estimated the CARD Act’s full-year 2010 pretax revenue impact at the lower end of its prior $400–$600 million range for Citi-branded cards, and approximately $150–$200 million for Retail partner cards. Management expected ongoing North America consumer-credit pressure; card losses were expected to improve modestly but remain elevated until U.S. employment recovered.
- Management expected Local Consumer Lending revenue to continue declining with portfolio runoff and asset sales. Special Asset Pool marks were expected to remain episodic. Credit costs were expected to remain a significant factor in Q4 earnings.
- The announced sale of The Student Loan Corporation was expected to close in Q4 2010. Citi recorded a $435 million after-tax loss on the sale in discontinued operations; approximately $31 billion of SLC assets and $30 billion of liabilities were classified as held for sale.
- Mortgage repurchase exposure remains material: the repurchase reserve rose to $952 million from $727 million at Q2 end, including a $322 million Q3 estimate increase. Management cited rising documentation requests and deterioration in several reserve assumptions; it said a meaningful reasonably possible loss range could not be determined.
- U.S. mortgage foreclosure practices were under increased industry scrutiny. Citi said it had not identified systemic deficiencies to date, but its review continued; adverse regulatory or judicial action could affect foreclosure processes and results.
- Other notable items included a $295 million pretax loss on the sale of a $3.5 billion commercial real-estate loan portfolio and $567 million of selected positive Special Asset Pool revenue items, including accretion and marks, partly offset by commercial real-estate write-downs.
- Regulatory capital and liquidity standards remained uncertain. Basel III and U.S. financial-reform implementation could raise capital, leverage or liquidity requirements. Rating-agency reviews and possible downgrades could increase collateral needs or restrict funding access.
- Legal proceedings include mortgage-related investor claims, foreclosure inquiries, and other credit-crisis matters. The filing says possible losses beyond accrued amounts generally could not be estimated for significant matters in early stages. A September 2010 SEC settlement concerning 2007 subprime disclosures required a $75 million penalty and specified disclosure controls for three years.
Most important facts for investors to verify
- How much of earnings and revenue reflects recurring operating performance versus reserve releases, CVA, asset marks, securities gains and discontinued-operation effects.
- Whether credit-loss improvement persists, especially in U.S. cards and mortgages, and whether the $43.7 billion loan-loss allowance remains adequate as portfolios run off or are sold.
- The ultimate SLC sale proceeds, closing timing and total realized loss, and the pace and economic cost of further Citi Holdings reductions.
- Developments in mortgage repurchase claims, foreclosure reviews and related litigation, including whether reserve needs rise beyond the $952 million recorded.
- Capital and liquidity resilience after regulatory changes, ratings actions and upcoming debt maturities; confirm the terms and restrictions associated with government-related support and share repurchases.
- Comparability of reported results: reconcile GAAP and managed figures and account for SFAS 166/167 consolidation effects when assessing year-over-year trends.