Citigroup Inc. — Q1 2015 Form 10-Q
Business context and reporting period. This filing covers the three months ended March 31, 2015; balance-sheet figures are as of March 31, 2015. Citi reports through Citicorp, Citi Holdings, and Corporate/Other. Management highlighted cost discipline, continued wind-down and planned asset sales in Citi Holdings, and use of deferred tax assets (DTAs). Prior-period segment figures were reclassified to match the current presentation.
Key financial metrics
| Metric | Q1 2015 | Comparable period / change |
|---|---|---|
| Revenue, net of interest expense | $19.7 billion | $20.2 billion; down 2% |
| Net interest revenue | $11.6 billion | $11.8 billion; down 2% |
| Operating expenses | $10.9 billion | $12.1 billion; down 10% |
| Provisions for credit losses and benefits/claims | $1.9 billion | $2.0 billion; down 3% |
| Income from continuing operations | $4.8 billion | $4.0 billion; up 22% |
| Citigroup net income | $4.8 billion | $3.9 billion; up 21% |
| Diluted EPS | $1.51 | $1.23; up 23% on net income |
| Cash flow from operating activities | $2.1 billion provided | $29.6 billion provided |
| Net interest margin / efficiency ratio | 2.92% / 55% | 2.90% / 60% |
| Return on average assets / common equity | 1.04% / 9.4% | 0.85% / 7.8% |
Q1 2015 earnings included a $73 million pretax negative CVA/DVA impact ($47 million after tax). Q1 2014 included a roughly $210 million tax charge; excluding these items, Citi reported net income of $4.8 billion, or $1.52 per diluted share, versus $4.2 billion, or $1.30, a year earlier. These exclusions are non-GAAP measures.
- Balance sheet and debt: Total assets were $1.832 trillion, down 3% year over year. Deposits were $899.6 billion, down 7% year over year; the comparison includes deposits reclassified as held for sale for the Japan retail-bank sale. Long-term debt was $210.5 billion, down 5% year over year; short-term borrowings were $39.4 billion.
- Credit: Net credit losses were $2.0 billion, down 20% year over year. The allowance for loan losses was $14.6 billion, or 2.38% of loans net of unearned income, versus $18.9 billion and 2.87% a year earlier. The allowance release for loan losses and unfunded commitments was $239 million, compared with $673 million in Q1 2014.
- Capital and liquidity: On a fully implemented Basel III basis, Common Equity Tier 1 was 11.1%, Tier 1 capital 12.1%, total capital 13.4%, and supplementary leverage ratio 6.4%. High-quality liquid assets were $400.5 billion; the U.S. Liquidity Coverage Ratio was 111%.
- Cash flows: Investing activities provided $7.6 billion and financing activities used $19.9 billion. Cash and due from banks ended at $21.9 billion, down from $32.1 billion at year-end 2014. Operating cash flow was substantially lower than the prior-year quarter; bank cash flows can be affected by trading and balance-sheet movements.
Material changes versus prior comparable period
- Lower legal and repositioning costs were major contributors to expense reduction: legal and related expenses were $387 million versus $945 million, and repositioning costs were $16 million versus $211 million. Foreign-exchange translation also reduced reported expenses by about $573 million.
- Revenue declined 2% as reported. Excluding CVA/DVA and FX translation, Citi said revenue increased 1%, with 2% growth in Citicorp partly offset by the Citi Holdings wind-down.
- Citicorp net income rose 10% to $4.7 billion; revenue fell 2% to $17.9 billion. North America GCB revenue grew 4%, while reported international GCB revenue fell, largely reflecting FX translation. ICG revenue declined 1%, including a 6% decline in Markets and securities services.
- Citi Holdings earned $146 million, compared with a $284 million loss. Its assets fell 19% year over year to $122 billion, and it had about $35 billion of assets held for sale. Lower legal expenses drove much of its earnings improvement.
- Other comprehensive income included a $2.1 billion after-tax foreign-currency translation loss, contributing to a $1.5 billion total comprehensive loss component from other comprehensive items despite net income.
Outlook, commentary, risks and unusual items
- Management expected a challenging 2015 environment, citing uneven economic growth, macroeconomic uncertainty and volatility, low interest rates, and a difficult legal and regulatory environment. Citi said credit costs could rise during the remainder of 2015 because of loan growth and lower reserve releases.
- Citi expected a slight seasonal decline in net interest margin in Q2 2015. Management noted that planned divestitures, including OneMain Financial and Japan businesses, could affect future NIM, depending on timing and transaction effects.
- Citi had agreements to sell OneMain Financial, its Japan cards business, and its Japan retail banking business; closings were expected in the second half of 2015, subject to approvals and other conditions. The sales and other portfolio changes contributed to held-for-sale reclassifications.
- Management reported approximately $48.1 billion of net DTAs and said it used about $1.2 billion during the quarter. Continued utilization depends on generating taxable income and is subject to tax-law and regulatory considerations.
- Legal and regulatory exposures remain significant. The filing estimated reasonably possible litigation and regulatory losses in excess of accruals at approximately $4 billion, materially unchanged from year-end; management said outcomes could nevertheless materially affect results or cash flows in particular periods. Citi was in discussions with the U.S. Department of Justice concerning the foreign-exchange investigation, with a resolution potentially including a guilty plea on an antitrust charge.
- Country risks included Argentina, where a U.S. court order concerning restructured-bond payments conflicted with local requirements and authorities took adverse actions against Citi Argentina; Venezuela’s foreign-exchange controls and potential devaluation; and continuing economic and political uncertainty in Russia and Greece.
- About 76% of Citi’s remaining revolving HELOC balances scheduled to reset were expected to do so during 2015–2017. Citi estimated average monthly payments on those loans could increase about $360, or 180%; higher rates or borrowers’ limited refinancing options could worsen credit performance.
- Citi announced a $7.8 billion common-stock repurchase program covering five quarters beginning Q2 2015, subject to capital-plan and regulatory requirements. The filing also describes a proposed Federal Reserve GSIB surcharge that Citi estimated could raise its fully implemented capital requirement; the proposal was not final.
Most important facts for investors to verify
- Whether expense savings and lower legal costs are sustainable, and how much reported revenue and earnings trends depend on FX translation, CVA/DVA, reserve releases, and asset-sale gains.
- Progress, closing conditions, proceeds, and earnings/capital effects of the OneMain and Japan divestitures, including the held-for-sale balances.
- Credit trends, reserve adequacy, energy-related exposures, and delinquency outcomes as HELOCs reset and reserve releases diminish.
- Capital and liquidity headroom under final regulatory rules, and whether the planned buybacks receive regulatory approval and are executed as announced.
- Developments in the approximately $4 billion reasonably possible legal-loss estimate, the DOJ FX matter, and country-specific risks in Argentina, Venezuela, Russia, and Greece.
- Drivers of the sharp year-over-year decline in operating cash flow and the effect of continued balance-sheet changes on cash, funding, and liquidity.