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C > SEC Filings for C > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for CITIGROUP INC


3-May-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE SUMMARY

First Quarter of 2013 Summary Results

During the first quarter of 2013, Citi benefitted from growth in its core businesses in Citicorp, including seasonally strong results in its markets businesses within Securities and Banking and year-over-year growth in loans and deposits (for additional information, see "Balance Sheet Review" and "Capital Resources and Liquidity-Funding and Liquidity," respectively, below) as well as an improved credit environment. Despite this growth, Citi's results for the first quarter of 2013 also reflected a continued challenging operating environment, with spread compression(1) globally impacting its Global Consumer Banking and Transaction Services businesses, and continued elevated legal and related expenses as Citi continues to work through "legacy" legal issues.

Citigroup

Citigroup reported first quarter of 2013 net income of $3.8 billion, or $1.23 per diluted share. Citi's reported net income increased by 30%, or $877 million, from the first quarter of 2012. Results for the first quarter of 2013 included a net negative credit valuation adjustment (CVA) on derivatives (counterparty and own-credit, excluding monolines), net of hedges, and debt valuation adjustment (DVA) on Citi's fair value option debt of $(319) million ($(198) million after-tax), compared to $(1,288) million ($(800) million after-tax) in the first quarter of 2012, as Citi's credit spreads improved during the quarter. First quarter of 2012 results also included a net gain of $477 million on minority investments ($308 million after-tax).(2)

Excluding CVA/DVA in both periods and the gain on minority investments in the first quarter 2012,(3) Citi reported net income of $4.0 billion in the first quarter of 2013, or $1.29 per diluted share, an increase of 16% compared to $1.11 per diluted share in the prior-year period. The year-over-year increase in earnings per share (excluding CVA/DVA and minority investments) primarily reflected higher revenues and lower net credit losses, partially offset by higher legal and related expenses, a lower loan loss reserve release and a higher effective tax rate as compared to the prior-year period (for additional information, see "Income Taxes" below).

Citi's revenues, net of interest expense, were $20.5 billion in the first quarter of 2013, up 6% versus the prior-year period. Excluding CVA/DVA and the gain on minority investments in the first quarter 2012, revenues were $20.8 billion, up 3% from the first quarter of 2012, as revenues in Citicorp and Citi Holdings grew by 2% and 15%, respectively, compared to the prior-year period. Net interest revenues of $11.9 billion were 1% lower than the prior-year period, largely driven by the ongoing impact of spread compression in Transaction Services in Citicorp, which Citi expects will likely continue to negatively impact net interest revenues in the near term. Non-interest revenues were $8.6 billion, up 15% from the prior-year period, driven by the lower CVA/DVA and growth in Securities and Banking revenues, partially offset by the absence of the gains on minority investments in the first quarter of 2012. Excluding CVA/DVA in both periods and the gain on minority investments in the first quarter of 2012, non-interest revenues of $8.9 billion were 8% higher than the prior-year period.

Operating Expenses

Citigroup expenses increased 1% versus the prior-year period to $12.4 billion driven by higher legal and related expenses in Citi Holdings (see below) and higher repositioning charges. Citi incurred higher legal and related expenses of $710 million (compared to $545 million in the prior-year period, but down from approximately $1.3 billion in the fourth quarter of 2012) and higher repositioning charges of $148 million (compared to $66 million in the prior-year period, but down from approximately $1.0 billion in the fourth quarter of 2012 as a result of the restructuring efforts announced in December 2012). Excluding legal and related expenses, repositioning charges and the impact of foreign exchange translation into U.S. dollars for reporting purposes (as used throughout this report, FX translation(4)), which lowered reported expenses by approximately $0.2 billion in the first quarter of 2013 as compared to the prior-year period, Citi's operating expenses were $11.5 billion versus $11.6 billion in the prior-year period.

Citicorp's expenses were $10.9 billion, down 2% from the prior-year period, largely reflecting lower legal and related expenses. Citicorp legal and related expenses were $66 million in the first quarter of 2013, compared to $378 million in the prior-year period and $735 million in the fourth quarter of 2012. Citi Holdings expenses increased 23% to $1.5 billion from the prior-year period, principally due to higher legacy legal and related expenses in the Special Asset Pool. Citi Holdings legal and related expenses were $644 million in the first quarter of 2013, compared to $167 million in the prior-year period and $551 million in the fourth quarter of 2012.


(1)
As used throughout this report, spread compression refers to the reduction in net interest revenue as a percentage of loans or deposits, as applicable, as driven by either lower yields on interest-earning assets or higher costs to fund such assets (or a combination thereof).

(2)
In the first quarter of 2012, Citi recorded a net pretax gain on minority investments of $477 million ($308 million after-tax), which included pretax gains of $1.1 billion and $542 million on the sales of Citi's remaining stake in Housing Development Finance Corporation Ltd. (HDFC) and its stake in Shanghai Pudong Development Bank (SPDB), respectively, offset by a pretax impairment charge relating to Akbank T.A.S. of $1.2 billion, all within Corporate/Other.

(3)
Citigroup's results of operations, excluding the impact of CVA/DVA and gains/(losses) on minority investments, are non-GAAP financial measures. Citi believes the presentation of its results of operations excluding the impact of CVA/DVA and gains/(losses) on minority investments provides a more meaningful depiction of the underlying fundamentals of its businesses impacted by these amounts.

(4)
For the impact of FX translation on first quarter of 2013 results of operations for each of EMEA Regional Consumer Banking (RCB), Latin America RCB, Asia RCB and Transaction Services, see the table accompanying the discussion of each respective business' results of operations below.


Credit Costs and Loan Loss Reserve Positions

Citi's total provisions for credit losses and for benefits and claims of $2.5 billion declined 16% from the prior-year period. Net credit losses of $3.0 billion were down 25% from the first quarter of 2012. Consumer net credit losses declined 28% to $2.9 billion reflecting improvements in mortgages in Citi Holdings-Local Consumer Lending and North America Citi-branded cards and Citi retail services in Citicorp. Corporate net credit losses were $45 million in the first quarter of 2013, compared to a recovery of $83 million in first quarter of 2012.

The net release of allowance for loan losses and unfunded lending commitments was $652 million in the first quarter of 2013, 44% lower than the prior-year period, with $662 million related to Consumer and the remainder in Corporate. Of the $652 million net reserve release, $301 million was attributable to Citicorp, compared to a $589 million release in the prior-year period. The decline in the Citicorp reserve release principally reflected lower releases in North America RCB. The $351 million net reserve release in Citi Holdings included a reserve release of $375 million related to North America mortgages, and was down from $576 million in the prior-year period, which included approximately $350 million of reserve releases related to previously deferred principal balances on modified mortgages recorded in Local Consumer Lending.

Citigroup's total allowance for loan losses was $23.7 billion at quarter end, or 3.7% of total loans, compared to $29.0 billion, or 4.5%, at the end of the prior-year period. The decline in the total allowance for loan losses reflected asset sales, lower non-accrual loans, and overall continued improvement in the credit quality of Citi's loan portfolios.

The Consumer allowance for loan losses was $20.9 billion, or 5.3% of total Consumer loans, at quarter end, compared to $26.0 billion, or 6.3% of total loans, at March 31, 2012. Total non-accrual assets decreased 9% to $11.1 billion as compared to March 31, 2012. Corporate non-accrual loans declined 16% to $2.5 billion, reflecting continued credit improvement. Consumer non-accrual loans declined 5%, to $8.1 billion, versus the prior-year period.

Capital

Citigroup's Tier 1 Capital and Tier 1 Common ratios were 13.1% and 11.8% as of March 31, 2013, respectively, each reflecting the final U.S. market risk capital rules (Basel II.5) which became effective on January 1, 2013 (for additional information, see "Capital Resources and Liquidity-Capital Resources" below). Citi's estimated Tier 1 Common ratio under Basel III was 9.3% at the end of the first quarter of 2013, up from an estimated 8.7% at year-end 2012.(5)

Citicorp(6)

Citicorp net income increased 17% from the prior-year period to $4.6 billion. CVA/DVA in Securities and Banking was $(310) million ($(192) million after-tax), compared to $(1.4) billion ($(854) million after-tax) in the prior-year period. Excluding CVA/DVA and the gain on minority investments in the first quarter of 2012, Citicorp net income increased 7% from the prior-year period to $4.8 billion, as revenue growth, lower expenses and lower net credit losses were partially offset by lower loan loss reserve releases and a higher effective tax rate.

Citicorp revenues, net of interest expense, were $19.6 billion in the first quarter of 2013, up 6% versus the prior-year period. Excluding CVA/DVA and the gain on minority investments in the first quarter of 2012, Citicorp revenues were $19.9 billion in the quarter, a 2% increase versus the prior-year period, as growth in Securities and Banking revenues was partially offset by a decline in Transaction Services revenues. Global Consumer Banking (GCB) revenues of $10.0 billion were flat versus the prior-year period, as were Corporate/Other revenues of $(7) million, excluding the gain on minority investments in the first quarter of 2012.

North America RCB revenues of $5.1 billion declined 1% from the prior-year period, driven by a 3% decline in retail banking revenues with total cards revenues (Citi-branded cards and Citi retail services) flat versus the prior-year period. The decline in retail banking revenues was driven by spread compression, which more than offset growth in loans and deposits. North America RCB average retail loans of $43 billion grew 7% and average deposits of $164 billion grew 10%, both versus the prior-year period. Cards revenues remained flat, as improved net interest spreads were offset by lower average loans. Average card loans of $106 billion declined 4% versus the prior-year period, driven by increased payment rates resulting from ongoing consumer deleveraging, and card purchase sales of $54 billion were roughly flat. Citi retail services revenues were also negatively impacted by higher contractual partner payments due to the impact of improving credit trends.
Quarter-over-quarter, revenues in North America RCB declined 4% due to lower mortgage gain on sale margins as well as seasonally lower cards revenues.

International GCB revenues (consisting of Asia RCB, Latin America RCB and EMEA RCB) grew 1% versus the prior-year period as reported, and 3% on a constant dollar basis (excluding the impact of FX translation), driven by 6% revenue growth in Latin America RCB and 2% revenue growth in EMEA RCB. Asia RCB revenues declined by 1% versus the prior-year period, primarily reflecting ongoing spread compression in certain markets and the continued impact of regulatory actions in certain countries, most notably Korea. While international GCB revenues continued to reflect spread compression in certain markets, as well as the impact of regulatory changes, particularly in Asia, most underlying business metrics continued to improve. International GCB average retail loans increased 4% versus the prior-year period, investment sales grew 24%, average card loans grew 3%, and card purchase sales grew 7%,


(5)
Citi's estimated Basel III Tier 1 Common ratio and related metrics are non-GAAP financial measures. For additional information on Citi's estimated Basel III Tier 1 Common ratio, including the calculation of the ratio, see "Capital Resources and Liquidity-Capital Resources" below.

(6)
Citicorp includes Citi's three operating businesses-Global Consumer Banking, Securities and Banking and Transaction Services-as well as Corporate/Other. See "Citicorp" below for additional information on the results of operations for each of the businesses in Citicorp.


although average deposits declined 1%, all excluding the impact of FX translation.

Securities and Banking revenues were $7.0 billion in the first quarter of 2013, up 31% from the prior-year period, including the benefit of lower CVA/DVA. Excluding CVA/DVA, Securities and Banking revenues of $7.3 billion increased 8% from the prior-year period, as a decline in equity and fixed income markets revenues was more than offset by growth in investment banking and Private Bank revenues, as well as lower mark-to-market losses on hedges related to accrual loans in lending.

Fixed income markets revenues of $4.6 billion, excluding CVA/DVA,(7) decreased 3% from the prior-year period as rates and currencies revenues declined from a strong performance in the prior-year period, partially offset by growth in credit-related and securitized product revenues. Equity markets revenues of $826 million in the first quarter of 2013, excluding CVA/DVA, declined 10% from the prior-year period, driven in part by lower volatility that impacted derivatives performance.

Investment banking revenues rose 22% from the prior-year period to $1.1 billion, driven by higher revenues in all major products. Private Bank revenues of $629 million, excluding CVA/DVA, increased 5% from the prior-year period, driven by growth in North America and Asia. Lending revenues increased to $309 million from $12 million in the prior-year period, reflecting $(24) million mark-to-market losses on hedges related to accrual loans as credit spreads tightened during the first quarter of 2013 (compared to a $(344) million loss in the prior-year period). Excluding the mark-to-market impact on hedges related to accrual loans, lending revenues declined 7% to $333 million versus the prior year, primarily related to loan sale activity.

Transaction Services revenues declined 4% on a reported basis to $2.6 billion versus the prior-year period, and declined 2% excluding the impact of FX translation. Treasury and Trade Solutions revenues declined 5% on a reported basis and 3% excluding the impact of FX translation as the impact of spread compression globally was only partially offset by loan and deposit growth. Securities and Fund Services revenues declined 1% on a reported basis, but increased 2% excluding the impact of FX translation, as higher settlement volumes and fees offset lower net interest spreads.

Citicorp end of period loans increased 5% from the prior-year period to $539 billion, with 1% growth in Consumer loans and 9% growth in Corporate loans. Consumer loan growth was driven by 12% growth in Latin America RCB and 8% growth in EMEA RCB, partially offset by a 2% decline in North America RCB and flat end of period loans in Asia RCB.

Citi Holdings(8)

During the first quarter of 2013, Citi made progress on its goal of reducing the negative impact of Citi Holdings on its overall results of operations. Citi Holdings net loss was $794 million in the first quarter of 2013, compared to a net loss of $1.0 billion in the first quarter of 2012. Excluding CVA/DVA,(9) Citi Holdings net loss decreased to $788 million compared to a net loss of $1.1 billion in the prior-year period, as growth in revenues and lower credit costs were partially offset by higher expenses. Expenses increased 23% from the prior-year period reflecting higher legal and related costs, principally recorded in the Special Asset Pool. Excluding legal and related costs, expenses declined 18% versus the prior-year period.

Citi Holdings revenues increased 2% to $901 million from $882 million in the prior-year period. Excluding CVA/DVA, Citi Holdings revenues increased 15% to $910 million versus the prior-year period, as higher revenues in the Special Asset Pool were partially offset by a decline in Local Consumer Lending driven by the continued decline in loan balances.

Special Asset Pool revenues, excluding CVA/DVA, were $(129) million in the first quarter of 2013, compared to $(482) million in the prior-year period, predominantly reflecting lower asset marks and lower funding costs. Local Consumer Lending revenues of $1.1 billion declined 20% from the prior year primarily due to the 21% decline in average assets. Brokerage and Asset Management revenues were $(17) million, compared to $(48) million in the prior year, reflecting lower funding costs given the decline in assets. Net interest revenues increased 6% to $753 million versus the prior-year period, driven by improvements in Special Asset Pool and Brokerage and Asset Management revenues reflecting lower funding costs partially offset by a decline in Local Consumer Lending reflecting the lower loan balances. Non-interest revenues, excluding CVA/DVA, were $157 million versus $85 million in the prior year, reflecting lower asset marks within the Special Asset Pool offset by lower revenues in Local Consumer Lending reflecting the declining assets as well as higher repurchase reserve builds.

Citi Holdings end of period assets declined 29% from the prior year to $149 billion at the end of the first quarter of 2013. At the end of the quarter, Citi Holdings assets comprised approximately 8% of total Citigroup GAAP assets, 14% of risk-weighted assets (as defined under current regulatory guidelines), and 22% of estimated risk-weighted assets under Basel III. Local Consumer Lending continued to represent the largest segment within Citi Holdings, with $122 billion of assets as of the end of first quarter of 2013, of which approximately 70% or $86 billion were related to mortgages in North America real estate lending.


(7)
For the summary of CVA/DVA by business within Securities and Banking for the first quarter of 2013 and comparable periods, see "Citicorp-Institutional Clients Group" below.

(8)
Citi Holdings includes Local Consumer Lending, Special Asset Pool and Brokerage and Asset Management. See "Citi Holdings" below for additional information on the results of operations for each of the businesses in Citi Holdings.

(9)
CVA/DVA in Citi Holdings, recorded in the Special Asset Pool, was $(9) million in the first quarter of 2013, compared to $88 million in the prior-year period.


THIS PAGE INTENTIONALLY LEFT BLANK


RESULTS OF OPERATIONS

SUMMARY OF SELECTED FINANCIAL DATA-Page 1


                                           Citigroup Inc. and Consolidated Subsidiaries

                                                          First Quarter
In millions of dollars, except per-share amounts                                  %
and ratios                                               2013         2012      Change
Net interest revenue                                  $    11,884   $ 11,947         (1 )%
Non-interest revenue                                        8,607      7,459         15

Total revenues, net of interest expense               $    20,491   $ 19,406          6 %
Operating expenses                                         12,398     12,319          1
Provisions for credit losses and for benefits and
claims                                                      2,540      3,019        (16 )

Income from continuing operations before income
taxes                                                 $     5,553   $  4,068         37 %
Income taxes                                                1,588      1,006         58

Income from continuing operations                     $     3,965   $  3,062         29 %
Income (loss) from discontinued operations, net of
taxes(1)                                                      (67 )       (5 )       NM

Net income before attribution of noncontrolling
interests                                             $     3,898      3,057         28 %
Net income attributable to noncontrolling
interests                                                      90        126        (29 )

Citigroup's net income                                $     3,808   $  2,931         30 %

Less:
Preferred dividends-Basic                             $         4   $      4          - %
Dividends and undistributed earnings allocated to
employee restricted and deferred shares that
contain nonforfeitable rights to dividends,
applicable to Basic EPS                                        72         54         33

Income allocated to unrestricted common
shareholders for Basic EPS                            $     3,732   $  2,873         30 %
Add: Interest expense, net of tax, on convertible
securities and adjustment of undistributed
earnings allocated to employee restricted and
deferred shares that contain nonforfeitable rights
to dividends, applicable to diluted EPS                         -          4         NM

Income allocated to unrestricted common
shareholders for diluted EPS                          $     3,732   $  2,877         30 %
Earnings per share
Basic
Income from continuing operations                            1.25       0.98         28
Net income                                                   1.23       0.98         26

Diluted
Income from continuing operations                     $      1.25   $   0.96         30 %
Net income                                                   1.23       0.95         29
Dividends declared per common share                          0.01       0.01          -

Statement continues on the next page, including notes to the table.


SUMMARY OF SELECTED FINANCIAL DATA-Page 2

                                           Citigroup Inc. and Consolidated Subsidiaries

                                                        First Quarter
In millions of dollars, except per-share                                          %
amounts, ratios and direct staff                      2013          2012        Change
At March 31:
Total assets                                      $  1,881,734   $ 1,944,423         (3 )%
Total deposits                                         933,762       906,012          3
Long-term debt                                         234,326       311,079        (25 )
Citigroup common stockholders' equity                  190,222       181,508          5
Total Citigroup stockholders' equity                   193,359       181,820          6
Direct staff (in thousands)                                257           263         (2 )

Ratios
Return on average assets                                  0.82 %        0.62 %
Return on average common stockholders'
equity(3)                                                 8.21          6.53
Return on average total stockholders'
equity(3)                                                 8.08          6.52
Efficiency ratio                                            61            63

Tier 1 Common(4)(5)                                      11.84 %       12.50 %
Tier 1 Capital(5)                                        13.09         14.26
Total Capital(5)                                         16.09         17.64
Leverage(6)                                               7.78          7.55

Citigroup common stockholders' equity to
assets                                                   10.11 %        9.33 %
Total Citigroup stockholders' equity to assets           10.28          9.35
Dividend payout ratio(2)                                   0.8           1.1
Book value per common share                              62.51         61.90
Ratio of earnings to fixed charges and
preferred stock dividends                                2.26x         1.71x


(1)
Discontinued operations for the first quarter of 2013 includes a carve-out of Citi's liquid strategies business within Citi Capital Advisors, the sale of which is to occur pursuant to two separate transactions, the first of which closed in February 2013. Discontinued operations for the first quarters of 2013 and 2012 also reflect the sale of the Egg Banking PLC credit card business. For additional information, see Note 2 to the Consolidated Financial Statements.

(2)
Dividends declared per common share as a percentage of net income per diluted share.

(3)
The return on average common stockholders' equity is calculated using net income less preferred stock dividends divided by average common stockholders' equity. The return on average total Citigroup stockholders' equity is calculated using net income divided by average Citigroup stockholders' equity.

(4)
As currently defined by the U.S. banking regulators, the Tier 1 Common ratio represents Tier 1 Capital less non-common elements, including qualifying perpetual preferred stock, qualifying noncontrolling interests in subsidiaries and qualifying trust preferred securities divided by risk-weighted assets.

(5)
First quarter of 2013 Basel I capital ratios reflect the final (revised) U.S. market risk capital rules (Basel II.5) that were effective on January 1, 2013.

(6)
The leverage ratio represents Tier 1 Capital divided by quarterly adjusted average total assets.


SEGMENT AND BUSINESS-INCOME (LOSS) AND REVENUES

The following tables show the income (loss) and revenues for Citigroup on a segment and business view:

CITIGROUP INCOME


                                                          First Quarter         %
  In millions of dollars                                 2013       2012      Change
  Income (loss) from continuing operations
  CITICORP
  Global Consumer Banking
  North America                                         $ 1,113   $  1,297        (14 )%
  EMEA                                                        7        (13 )       NM
  Latin America                                             414        392          6
  Asia                                                      417        501        (17 )

  Total                                                 $ 1,951   $  2,177        (10 )%

  Securities and Banking
  North America                                         $ 1,152   $    187         NM
  EMEA                                                      445        514        (13 )%
. . .
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