Citigroup Inc. — First-Quarter 2011 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2011, compared mainly with the three months ended March 31, 2010. Citigroup reported through Citicorp, Citi Holdings, and Corporate/Other. Management describes Citicorp as the core franchise and Citi Holdings as businesses and portfolios being reduced through sales and run-off.
Financial results and condition
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net revenues | $19.7 billion | $25.4 billion | Down 22% |
| Net interest revenue | $12.2 billion | $14.6 billion | Down 16% |
| Non-interest revenue | $7.5 billion | $10.9 billion | Down 31% |
| Operating expenses | $12.3 billion | $11.5 billion | Up 7% |
| Credit-loss and benefits provisions | $3.2 billion | $8.6 billion | Down 63% |
| Income from continuing operations | $3.0 billion | $4.2 billion | Down 29% |
| Citigroup net income | $3.0 billion | $4.4 billion | Down 32% |
| Diluted EPS | $0.10 | $0.15 | Down 33% |
- Profitability and margins: Return on average common and total stockholders’ equity was 7.3%, versus 12.0% a year earlier. Net interest margin was 2.91%, down 43 basis points year over year and about 6 basis points sequentially.
- Cash flow: Continuing-operations operating cash flow was $1.0 billion; investing activities used $17.0 billion; financing activities provided $15.5 billion. Cash and due from banks ended the quarter at $27.8 billion. Cash flows reflect substantial movements in securities, trading balances, loans, and funding.
- Balance sheet and funding: Total assets were $1.948 trillion, deposits $865.9 billion, and long-term debt $376.5 billion. Deposits rose 5% year over year; long-term debt fell 14%. Aggregate liquidity resources were $348.6 billion, including $95.5 billion at non-bank entities and $253.1 billion at significant bank entities.
- Capital: Tier 1 Common ratio was 11.34%, Tier 1 Capital 13.26%, Total Capital 16.98%, and leverage 7.00%. Citi stated it was “well capitalized” under then-current regulatory definitions.
- Credit: Total loans were $637.1 billion, down from $721.8 billion a year earlier. The allowance for loan losses was $36.6 billion, or 5.79% of loans, versus $48.7 billion and 6.80% a year earlier. Non-accrual loans were $14.8 billion, down 48%; allowance coverage of non-accrual loans was 247%.
Material changes and business trends
- Citicorp earned $4.1 billion, down 19% year over year. Revenue declined 11% to $16.5 billion; lower credit costs partially offset revenue weakness and expense growth. International operations generated 72% of Citicorp net income.
- Regional Consumer Banking revenue was down 2% to $7.9 billion. Retail banking loan balances and deposits grew, while North American card balances and CARD Act effects weighed on results. Cards purchase sales rose 8% to $64.9 billion.
- Institutional Clients Group revenue fell 18% to $8.6 billion. Securities and Banking revenue declined 25%, driven by weaker fixed-income and investment-banking results and negative credit valuation adjustments (CVA); Transaction Services revenue rose 5% to $2.6 billion.
- Citi Holdings’ net loss narrowed to $608 million from $886 million. Revenue fell 50% to $3.3 billion, but provisions fell 64% and expenses fell 22%. Assets declined 33% year over year to $337 billion, about 17% of Citigroup assets.
- Total credit-loss and benefits provisions fell sharply, alongside net credit losses of $6.3 billion, down 25%. A $3.3 billion net release of loan-loss and unfunded-commitment reserves materially contributed to lower provisions; consumer and corporate reserve releases were $2.0 billion and $1.4 billion, respectively.
Outlook, commentary, risks and unusual items
- Management expected operating expenses to remain variable during the rest of 2011 as Citi invests in Citicorp and reduces Citi Holdings. Legal costs and foreign-exchange effects were identified as difficult to predict.
- Citi expected net interest margin to remain under pressure in Q2 2011, with possible stabilization in the second half. The higher FDIC assessment, effective in Q2, was expected to add about $550 million annually to costs.
- Management expected to refinance about $20 billion of maturing long-term debt in 2011; after approximately $6.3 billion of Q1 issuance excluding FHLB issuances, it anticipated about $14 billion of issuance for the remainder of the year, subject to market and regulatory conditions.
- Unusual securities action: Citi determined it no longer intended to hold $12.7 billion of securities to maturity, transferring $10.0 billion to trading and selling $2.7 billion. It recognized a $709 million pretax loss ($427 million after tax), citing anticipated regulatory-capital treatment. By April 29, it had sold $10.6 billion of the securities.
- Japan Consumer Finance: Citi recorded an additional $245 million pretax reserve charge for customer refund claims related to “gray zone” interest. Management said the claims’ type, number, and amount remained volatile and difficult to predict.
- Mortgage and legal exposure: Foreclosure inventory continued to increase, with potential effects on delinquencies, non-accrual loans, interest margin, property recoveries, and costs. The mortgage representation-and-warranty reserve was $944 million; a hypothetical simultaneous 10% adverse change in key assumptions could increase it by about $384 million. Management estimated reasonably possible litigation and regulatory losses beyond accruals at approximately $4 billion, materially unchanged from year-end, while noting uncertainty and possible material effects on results or cash flows in particular periods.
- Subsequent developments: The Egg UK card-business sale closed April 28, 2011. On April 13, Citibank and related entities entered into mortgage-servicing and foreclosure consent orders with the OCC and Federal Reserve; the orders provided no monetary penalties at that time but reserved the regulators’ right to impose them later.
- Other key risks include changing capital and liquidity rules, credit-rating downgrades and related funding or collateral needs, global economic and political conditions, derivatives and market risks, deferred-tax-asset realization, and the outcome of legal and regulatory proceedings. Citi disclosed that disclosure controls were effective as of March 31, 2011.
Important facts for investors to verify
- Whether revenue and net interest margin stabilize as expected, and how much the $550 million annual FDIC assessment and continued investment spending affect earnings.
- The sustainability of reserve releases and improving credit trends, especially alongside corporate net credit losses rising year over year and continued mortgage foreclosure risks.
- Actual losses and reserve needs for Japan refund claims and mortgage repurchase or representation-and-warranty claims, including the sensitivity of the $944 million reserve.
- The final accounting and realized proceeds from the HTM securities transfer and subsequent sales, and the effect of evolving capital rules on risk-weighted assets.
- Progress in reducing Citi Holdings assets and losses, and the funding plan for debt maturities, including liquidity and collateral implications if credit ratings decline.
- Developments in the mortgage consent orders, the approximately $4 billion estimate of reasonably possible legal and regulatory losses beyond accruals, and other material proceedings.