Citigroup Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Citi operates through Institutional Clients Group (ICG), Personal Banking and Wealth Management (PBWM), and Legacy Franchises, with unallocated activities in Corporate/Other. Amounts below are U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2023 | Comparable period |
|---|---|---|
| Revenue | $19.4 billion | $19.6 billion; down 1% year over year |
| Net interest income | $13.9 billion | $12.0 billion; up 16% |
| Non-interest revenue | $5.5 billion | $7.7 billion; down 28% |
| Operating expenses | $13.6 billion | $12.4 billion; up 9% |
| Credit-loss and benefits provisions | $1.8 billion | $1.3 billion; up 43% |
| Net income attributable to Citigroup | $2.9 billion | $4.5 billion; down 36% |
| Diluted EPS | $1.33 | $2.19; down 39% |
| Efficiency ratio | 69.8% | 63.1% |
| Net interest margin | 2.48% on a taxable-equivalent basis | 2.24%; up 24 basis points |
For the first six months, revenue was $40.9 billion, up 5%; net income was $7.5 billion, down 15%; and diluted EPS was $3.52, down 16%. Q2’s effective tax rate was approximately 27%, versus 20% a year earlier.
Cash flow: For the first six months, operating activities used $84.5 billion, compared with $14.2 billion provided in the prior-year period. Investing activities provided $42.7 billion (prior year: $60.8 billion used), while financing activities used $1.1 billion (prior year: $70.4 billion provided). Citi attributed substantial operating cash-flow movements to balance-sheet changes, including trading assets; these cash flows should be read in the context of its banking and trading activities.
Balance sheet and liquidity: Total assets were $2.424 trillion at June 30. Deposits were $1.320 trillion, essentially unchanged year over year; loans were $661 billion, up 1%. Long-term debt was $274.5 billion, up 7% year over year, and short-term borrowings were $40.4 billion. Average liquidity coverage ratio was 119%, with $583.8 billion of average high-quality liquid assets. Citi reported approximately $993 billion of available liquidity resources at quarter-end.
Capital and credit: The Basel III Standardized CET1 ratio was 13.37%, compared with a 12.0% requirement then in effect; the requirement was scheduled to rise to 12.3% on October 1, 2023. Supplementary leverage ratio was 5.97%. Total allowance for credit losses was $20.1 billion, including $17.5 billion for loans and $1.9 billion for unfunded lending commitments. Q2 net credit losses were $1.5 billion, up 77% year over year, largely reflecting normalization in U.S. cards.
Material changes and segment results
- ICG: Revenue fell 9% to $10.4 billion and net income fell 45% to $2.2 billion. Services revenue rose 15%, while Markets fell 13% and Banking fell 44%, including a $66 million loss on loan hedges versus a $494 million gain a year earlier.
- PBWM: Revenue rose 6% to $6.4 billion, but net income declined 11% to $494 million as higher card credit losses and expenses offset revenue growth. Branded cards and Retail services revenue increased; Global Wealth revenue declined 5%.
- Legacy Franchises: Recorded a $125 million net loss versus a $17 million loss a year earlier. Revenue was down 1% to $1.9 billion; lower Asia Consumer revenue was largely offset by growth in Mexico Consumer/SBMM.
- Corporate/Other: Net income rose to $356 million from $50 million, primarily reflecting higher interest income, a reserve release related to repayment of the First Republic Bank deposit, and comparison with a prior-year AOCI-related loss release.
Q2 results included $73 million of pretax adverse divestiture-related impacts, or $92 million after tax, reducing EPS by $0.04. Excluding those impacts, Citi reported EPS of $1.37, a non-GAAP measure. First-half Legacy Franchises results included approximately $1.0 billion of net divestiture gains, primarily from the India consumer banking sale.
Outlook, risks and contingencies
- Management expected Q3 2023 expenses to increase sequentially, mainly due to continued transformation and risk-and-control investments. It also expected higher year-over-year Q3 net credit losses, particularly in PBWM cards, as losses normalize.
- Citi said it intended to maintain a quarterly common dividend of at least $0.53 per share, subject to conditions and Board approval. Share repurchases would be assessed quarter by quarter given regulatory-capital uncertainty. Citi returned $2.0 billion to common shareholders in Q2.
- Citi intended to pursue an IPO of its Mexico consumer, small-business and middle-market banking operations: separation was expected in the second half of 2024 and an IPO in 2025. Citi planned to retain its Mexico ICG and Private bank businesses. It also reported progress on Asia exits and ongoing wind-downs in Korea, China and Russia.
- Management cited inflation, interest rates, possible recession, China-related uncertainty and the Russia-Ukraine war as risks to customers, funding costs, expenses and results. The proposed Basel III Endgame capital rules were expected to have a material impact if adopted as proposed, but implementation would be multiyear. A proposed FDIC special assessment could add significant expense; if finalized as proposed, Citi estimated a pretax charge of up to $1.5 billion.
- Citi disclosed reasonably possible unaccrued losses on litigation, regulatory, tax and other matters of up to approximately $1.3 billion in aggregate. The potential FDIC assessment is excluded from that estimate. Management said the eventual outcome of disclosed matters was not likely to materially harm consolidated financial condition, while noting adverse outcomes could affect particular periods’ results or cash flows.
- Russia exposures included restricted funds that Citi said it could not remit; a loss-of-control event could trigger write-offs and recognition of accumulated translation losses. Argentina’s currency controls, inflation and limited hedging capacity also create potential earnings and capital risks.
Important facts for investors to verify
- Whether card delinquencies and net credit losses continue to normalize as management expected, and how that affects provisions and earnings.
- Whether expense growth, especially transformation and risk-and-control spending, translates into improved controls and productivity.
- Developments in the FDIC assessment and Basel III Endgame proposals, including their eventual effects on costs, required capital and capital returns.
- Progress, timing and financial impacts of the Mexico IPO and remaining consumer-business sales and wind-downs.
- The drivers of negative first-half operating cash flow and the sustainability of deposit levels, funding costs and reported liquidity.
- Updates to litigation and regulatory contingencies, Russia and Argentina exposures, and any material changes in credit-loss assumptions or reserves.