UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
Commission file number 1-9924
Citigroup Inc.
(Exact name of registrant as specified in its
charter)
Delaware | 52-1568099 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
399 Park Avenue, New York, NY | 10022 |
(Address of principal executive offices) | (Zip code) |
Registrant's telephone number, including area code: (212) 559-1000
Securities registered pursuant to Section 12(b) of the Act: See Exhibit 99.01
Securities registered pursuant to Section 12(g) of the Act: none
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes X No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes X No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). X Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
X Large accelerated filer | ¨ Accelerated filer | ¨ Non-accelerated filer | ¨ Smaller reporting company |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes X No
The aggregate market value of Citigroup Inc. common stock held by non-affiliates of Citigroup Inc. on June 30, 2012 was approximately $80.4 billion.
Number of shares of Citigroup, Inc. common stock outstanding on January 31, 2013: 3,038,758,550
Documents Incorporated by Reference: Portions of the registrant's proxy statement for the annual meeting of stockholders scheduled to be held on April 24, 2013, are incorporated by reference in this Form 10-K in response to Items 10, 11, 12, 13 and 14 of Part III.
FORM 10-K CROSS-REFERENCE INDEX
Item Number | Page | |||
Part I | ||||
1. | Business | 4–36, 40, 126–132, | ||
135–136, 163, | ||||
290–293 | ||||
1A. | Risk Factors | 60–71 | ||
1B. | Unresolved Staff Comments | Not Applicable | ||
2. | Properties | 293 | ||
3. | Legal Proceedings | 280–287 | ||
4. | Mine Safety Disclosures | Not Applicable | ||
Part II | ||||
5. | Market for Registrant's Common | |||
Equity, Related Stockholder Matters, | ||||
and Issuer Purchases of Equity | ||||
Securities | 44, 169, 288, | |||
294–295, 297 | ||||
6. | Selected Financial Data | 10–11 | ||
7. | Management's Discussion and | |||
Analysis of Financial Condition and | ||||
Results of Operations | 6–59, 72–125 | |||
7A. | Quantitative and Qualitative | |||
Disclosures About Market Risk | 72–125, 164–165, | |||
187–218, 223–273 | ||||
8. | Financial Statements and | |||
Supplementary Data | 140–289 | |||
9. | Changes in and Disagreements with | |||
Accountants on Accounting and | ||||
Financial Disclosure | Not Applicable | |||
9A. | Controls and Procedures | 133–134 | ||
9B. | Other Information | Not Applicable |
Part III | ||||
10. | Directors, Executive Officers and | |||
Corporate Governance | 296–297, 299* | |||
11. | Executive Compensation | ** | ||
12. | Security Ownership of Certain | |||
Beneficial Owners and Management | ||||
and Related Stockholder Matters | *** | |||
13. | Certain Relationships and Related | |||
Transactions and Director | ||||
Independence | **** | |||
14. | Principal Accountant Fees and | |||
Services | ***** | |||
Part IV | ||||
15. | Exhibits and Financial Statement | |||
Schedules |
* | For additional information regarding Citigroup's Directors, see "Corporate Governance," "Proposal 1: Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the definitive Proxy Statement for Citigroup's Annual Meeting of Stockholders scheduled to be held on April 24, 2013, to be filed with the SEC (the Proxy Statement), incorporated herein by reference. | |
** | See "Executive Compensation-The Personnel and Compensation Committee Report," "-Compensation Discussion and Analysis" and "-2012 Summary Compensation Table" in the Proxy Statement, incorporated herein by reference. | |
*** | See "About the Annual Meeting", "Stock Ownership" and "Proposal 4, Approval of Amendment to the Citigroup 2009 Stock Incentive Plan" in the Proxy Statement, incorporated herein by reference. | |
**** | See "Corporate Governance-Director Independence," "-Certain Transactions and Relationships, Compensation Committee Interlocks and Insider Participation," and "-Indebtedness" in the Proxy Statement, incorporated herein by reference. | |
***** | See "Proposal 2: Ratification of Selection of Independent Registered Public Accounting Firm" in the Proxy Statement, incorporated herein by reference. | |
2
CITIGROUP'S 2012 ANNUAL REPORT ON FORM 10-K
OVERVIEW | 4 | |
MANAGEMENT'S DISCUSSION AND ANALYSIS | ||
OF FINANCIAL CONDITION AND RESULTS | ||
OF OPERATIONS | 6 | |
Executive Summary | 6 | |
Five-Year Summary of Selected Financial Data | 10 | |
SEGMENT AND BUSINESS-INCOME (LOSS) | ||
AND REVENUES | 12 | |
CITICORP | 14 | |
Global Consumer Banking | 15 | |
North America Regional Consumer Banking | 16 | |
EMEA Regional Consumer Banking | 18 | |
Latin America Regional Consumer Banking | 20 | |
Asia Regional Consumer Banking | 22 | |
Institutional Clients Group | 24 | |
Securities and Banking | 25 | |
Transaction Services | 28 | |
Corporate/Other | 30 | |
CITI HOLDINGS | 31 | |
Brokerage and Asset Management | 32 | |
Local Consumer Lending | 33 | |
Special Asset Pool | 36 | |
BALANCE SHEET REVIEW | 37 | |
CAPITAL RESOURCES AND LIQUIDITY | 41 | |
Capital Resources | 41 | |
Funding and Liquidity | 50 | |
OFF-BALANCE-SHEET ARRANGEMENTS | 58 | |
CONTRACTUAL OBLIGATIONS | 59 | |
RISK FACTORS | 60 | |
MANAGING GLOBAL RISK | 72 | |
CREDIT RISK | 74 | |
Loans Outstanding | 75 | |
Details of Credit Loss Experience | 76 | |
Non-Accrual Loans and Assets and | ||
Renegotiated Loans | 78 | |
North America Consumer Mortgage Lending | 83 | |
North America Cards | 97 | |
Consumer Loan Details | 98 | |
Corporate Loan Details | 100 | |
MARKET RISK | 102 | |
OPERATIONAL RISK | 112 | |
COUNTRY AND CROSS-BORDER RISK | 113 | |
Country Risk | 113 | |
Cross-Border Risk | 120 |
FAIR VALUE ADJUSTMENTS FOR | ||
DERIVATIVES AND STRUCTURED DEBT | 123 | |
CREDIT DERIVATIVES | 124 | |
SIGNIFICANT ACCOUNTING POLICIES AND | ||
SIGNIFICANT ESTIMATES | 126 | |
DISCLOSURE CONTROLS AND PROCEDURES | 133 | |
MANAGEMENT'S ANNUAL REPORT ON | ||
INTERNAL CONTROL OVER FINANCIAL | ||
REPORTING | 134 | |
FORWARD-LOOKING STATEMENTS | 135 | |
REPORT OF INDEPENDENT REGISTERED | ||
PUBLIC ACCOUNTING FIRM-INTERNAL | ||
CONTROL OVER FINANCIAL REPORTING | 137 | |
REPORT OF INDEPENDENT REGISTERED | ||
PUBLIC ACCOUNTING FIRM- | ||
CONSOLIDATED FINANCIAL STATEMENTS | 138 | |
FINANCIAL STATEMENTS AND NOTES | ||
TABLE OF CONTENTS | 139 | |
CONSOLIDATED FINANCIAL STATEMENTS | 140 | |
NOTES TO CONSOLIDATED FINANCIAL | ||
STATEMENTS | 146 | |
FINANCIAL DATA SUPPLEMENT (Unaudited) | 289 | |
SUPERVISION, REGULATION AND OTHER | 290 | |
Disclosure Pursuant to Section 219 of the | ||
Iran Threat Reduction and Syria Human Rights Act | 291 | |
Customers | 292 | |
Competition | 292 | |
Properties | 293 | |
LEGAL PROCEEDINGS | 293 | |
UNREGISTERED SALES OF EQUITY, | ||
PURCHASES OF EQUITY SECURITIES, DIVIDENDS | 294 | |
PERFORMANCE GRAPH | 295 | |
CORPORATE INFORMATION | 296 | |
Citigroup Executive Officers | 296 | |
CITIGROUP BOARD OF DIRECTORS | 299 |
3
OVERVIEW
Citigroup's history dates back to the
founding of Citibank in 1812. Citigroup's original corporate predecessor was
incorporated in 1988 under the laws of the State of Delaware. Following a series
of transactions over a number of years, Citigroup Inc. was formed in 1998 upon
the merger of Citicorp and Travelers Group
Inc.
Citigroup is a
global diversified financial services holding company whose businesses provide
consumers, corporations, governments and institutions with a broad range of
financial products and services, including consumer banking and credit,
corporate and investment banking, securities brokerage, transaction services and
wealth management. Citi has approximately 200 million customer accounts and does
business in more than 160 countries and jurisdictions.
Citigroup
currently operates, for management reporting purposes, via two primary business
segments: Citicorp, consisting of Citi's Global Consumer Banking businesses and Institutional Clients Group ; and Citi Holdings, consisting of Brokerage and Asset Management, Local Consumer Lending and Special Asset
Pool . For a further description of the
business segments and the products and services they provide, see "Citigroup
Segments" below, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 4 to the Consolidated Financial
Statements.
Throughout this report, "Citigroup," "Citi" and "the Company"
refer to Citigroup Inc. and its consolidated subsidiaries.
Additional
information about Citigroup is available on Citi's website at www.citigroup.com . Citigroup's recent annual reports on Form 10-K,
quarterly reports on Form 10-Q, proxy statements, as well as other filings with
the SEC, are available free of charge through Citi's website by clicking on the
"Investors" page and selecting "All SEC Filings." The SEC's website also
contains current reports, information statements, and other information
regarding Citi at www.sec.gov .
Within this Form 10-K, please refer to the
tables of contents on pages 3 and 139 for page references to Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Notes to Consolidated Financial Statements, respectively.
Certain
reclassifications have been made to the prior periods' financial statements to
conform to the current period's presentation. For information on certain recent
such reclassifications, including the transfer of the substantial majority of
Citi's retail partner cards businesses (which are now referred to as Citi retail
services) from Citi Holdings- Local Consumer
Lending to Citicorp- North America Regional Consumer Banking, which was effective January 1, 2012, see Citi's Form 8-K
furnished to the SEC on March 26, 2012.
At December 31, 2012, Citi had approximately 259,000 full-time
employees compared to approximately 266,000 full-time employees at December 31,
2011.
Please see "Risk Factors" below for a discussion of the most significant risks and uncertainties that could impact Citigroup's businesses, financial condition and results of operations.
4
As described above, Citigroup is managed pursuant to the following segments:
The following are the four regions in which Citigroup operates. The regional results are fully reflected in the segment results above.
(1) North America includes the U.S., Canada and Puerto Rico, Latin America includes Mexico, and Asia includes Japan.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
Overview
2012-Ongoing Transformation of
Citigroup
During 2012, Citigroup
continued to build on the significant transformation of the Company that has
occurred over the last several years. Despite a challenging operating
environment (as discussed below), Citi's 2012 results showed ongoing momentum in
most of its core businesses, as Citi continued to simplify its business model
and focus resources on its core Citicorp franchise while continuing to wind down
Citi Holdings as quickly as practicable in an economically rational manner. Citi
made steady progress toward the successful execution of its strategy, which is
to:
With these goals in mind, on December 5, 2012, Citi announced a number of repositioning efforts to optimize its footprint, re-size and re-align certain businesses and improve efficiencies, while at the same time maintaining its unique competitive advantages. As a result of these repositioning efforts, in the fourth quarter of 2012, Citi recorded pretax repositioning charges of approximately $1 billion, and expects to incur an additional $100 million of charges in the first half of 2013.
Continued Challenges in
2013
Citi continued to face a
challenging operating environment during 2012, many aspects of which it expects
will continue into 2013. While showing some signs of improvement, the overall
economic environment-both in the U.S. and globally-remains largely uncertain,
and spread compression 1 continues to negatively impact the results of
operations of several of Citi's businesses, particularly in the U.S. and Asia.
Citi also continues to face a significant number of regulatory changes and
uncertainties, including the timing and implementation of the final U.S.
regulatory capital standards. Further, Citi's legal and related costs remain
elevated and likely volatile as it continues to work through "legacy" issues,
such as mortgage-related expenses, and operates in a heightened litigious and
regulatory environment. Finally, while Citi reduced the size of Citi Holdings by
approximately 31% during 2012, the remaining assets within Citi Holdings will
continue to have a negative impact on Citi's overall results of operations in
2013, although this negative impact should continue to abate as the wind-down
continues. For a more detailed discussion of these and other risks that could
impact Citi's businesses, results of operations and financial condition, see
"Risk Factors" below. As a result of these continuing challenges, Citi remains
highly focused on the areas within its control, including operational efficiency
and optimizing its core businesses in order to drive improved
returns.
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). |
6
2012 Summary Results
Citigroup
For 2012, Citigroup reported net income of $7.5 billion and
diluted earnings per share of $2.44, compared to $11.1 billion and $3.63 per
share, respectively, for 2011. 2012 results included several significant
items:
a $582 million tax benefit in the third quarter of 2012 related to the resolution of certain tax audit items.
Excluding CVA/DVA, the impact of minority investments, the repositioning charges in the fourth quarters of 2012 and 2011 and the tax benefit, net income was $11.9 billion, or $3.86 per diluted share, in 2012, an increase of 18% compared to $10.1 billion, or $3.30 per diluted share, reported in 2011, as higher revenues, lower core operating expenses and lower net credit losses were partially offset by higher legal and related costs and a lower net loan loss reserve release. 3
Citi's revenues, net of interest expense, were $70.2 billion in 2012, down 10% versus the prior year. Excluding CVA/DVA and the impact of minority investments, revenues were $77.1 billion, up 1% from 2011, as revenues in Citicorp rose 5%, but were offset by a 40% decline in Citi Holdings revenues compared to the prior year. Net interest revenues of $47.6 billion were 2% lower than the prior year, largely driven by the decline in loan balances in Local Consumer Lending in Citi Holdings as well as spread compression in North America and Asia Regional Consumer Banking (RCB) in Citicorp. Non-interest revenues were $22.6 billion, down 25% from the prior year, driven by CVA/DVA and the loss on MSSB in the third quarter of 2012. Excluding CVA/DVA and the impact of minority investments, non-interest revenues were $29.5 billion, up 6% from the prior year, principally driven by higher revenues in Securities and Banking and higher mortgage revenues in North America RCB , partially offset by lower revenues in the Special Asset Pool within Citi Holdings.
Operating
Expenses
Citigroup expenses decreased
1% versus the prior year to $50.5 billion. In 2012, in addition to the
previously mentioned repositioning charges, Citi incurred elevated legal and
related costs of $2.8 billion compared to $2.2 billion in the prior year.
Excluding legal and related costs, repositioning charges for the fourth quarters
of 2012 and 2011, and the impact of foreign exchange translation into U.S.
dollars for reporting purposes (as used throughout this report, FX translation),
which lowered reported expenses by approximately $0.9 billion in 2012 as
compared to the prior year, operating expenses declined 1% to $46.6 billion
versus $47.3 billion in the prior year.
Citicorp's expenses were $45.3 billion, up 2% from the prior
year, as efficiency savings were more than offset by higher legal and related
costs and repositioning charges. Citi Holdings expenses were down 19%
year-over-year to $5.3 billion, principally due to the continued decline in
assets.
2 | As referenced above, in 2012, the sale of minority investments included a pretax loss of $4.7 billion ($2.9 billion after-tax) from the sale of a 14% interest and other-than-temporary impairment of the carrying value of Citi's remaining 35% interest in MSSB recorded in Citi Holdings- Brokerage and Asset Management during the third quarter of 2012. In addition, Citi recorded a net pretax loss of $424 million ($274 million after-tax) from the partial sale of Citi's minority interest in Akbank T.A.S. (Akbank) recorded in Corporate/Other during the second quarter of 2012. 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 of $1.2 billion, all within Corporate/Other . In 2011, Citi recorded a $199 million pretax gain ($128 million after-tax) from the partial sale of Citi's minority interest in HDFC, recorded in Corporate/Other . | |
3 | Presentation of Citi's results excluding CVA/DVA, the impact of minority investments, the repositioning charges in the fourth quarters of 2012 and 2011 and the tax benefit, as applicable, represent non- GAAP financial measures. Citigroup believes the presentation of its results of operations excluding these impacts provides a more meaningful depiction of the underlying fundamentals of Citi's businesses and enhances the comparison of results across periods. |
7
Credit Costs
Citi's total provisions for credit losses and for benefits and
claims of $11.7 billion declined 8% from the prior year. Net credit losses of
$14.6 billion were down 27% from 2011, largely reflecting improvements in North America cards and Local Consumer Lending and the Special Asset Pool within Citi
Holdings. Consumer net credit losses declined 22% to $14.4 billion reflecting
improvements in North America Citi-branded cards and Citi retail services in Citicorp and Local Consumer Lending within Citi Holdings. Corporate net credit losses decreased
86% year-over-year to $223 million, driven primarily by continued credit
improvement in both the Special Asset
Pool in Citi Holdings and Securities and Banking in
Citicorp.
The net
release of allowance for loan losses and unfunded lending commitments was $3.7
billion in 2012, 55% lower than 2011. Of the $3.7 billion net reserve release,
$2.1 billion was attributable to Citicorp compared to a $4.9 billion release in
the prior year. The decline in the Citicorp reserve release year-over-year
mostly reflected a lower reserve release in North America Citi-branded cards and
Citi retail services and Securities and
Banking . The $1.6 billion net reserve release
in Citi Holdings was down from $3.3 billion in the prior year, due primarily to
lower releases within the Special Asset
Pool , reflecting the decline in assets. Of
the $3.7 billion net reserve release, $3.6 billion related to Consumer, with the
remainder in Corporate.
Capital and Loan Loss Reserve
Positions
Citigroup's Tier 1 Capital
and Tier 1 Common ratios were 14.1% and 12.7% as of December 31, 2012,
respectively, compared to 13.6% and 11.8% in the prior year. Citi's estimated
Tier 1 Common ratio under Basel III was 8.7% at December 31, 2012, up slightly
from an estimated 8.6% at September 30,
2012. 4
Citigroup's total allowance for loan losses was $25.5 billion at year
end, or 3.9% of total loans, compared to $30.1 billion, or 4.7%, at the end of
the prior year. The decline in the total allowance for loan losses reflected the
continued wind-down of Citi Holdings and overall continued improvement in the
credit quality of Citi's loan portfolios.
The Consumer allowance for loan losses was $22.7
billion, or 5.6% of total Consumer loans, at year end, compared to $27.2
billion, or 6.5% of total loans, at December 31, 2011. Total non-accrual assets
increased 3% to $12.0 billion as compared to December 31, 2011. Corporate
non-accrual loans declined 28% to $2.3 billion, reflecting continued credit
improvement. Consumer non-accrual loans increased $1.4 billion, or 17%, to $9.2
billion versus the prior year. The increase in Consumer non-accrual loans
predominantly reflected the Office of the Comptroller of the Currency (OCC)
guidance issued in the third quarter of 2012 regarding the treatment of mortgage
loans where the borrower has gone through Chapter 7 bankruptcy, which added $1.5
billion to Consumer non-accrual loans (of which approximately $1.3 billion were
current).
Citicorp net income decreased 8% from the prior year to $14.1 billion. The decrease largely reflected the impact of CVA/DVA and higher legal and related costs and repositioning charges, partially offset by lower provisions for income taxes. CVA/DVA, recorded in Securities and Banking, was $(2.5) billion in 2012, compared to $1.7 billion in the prior year. Within Citicorp, repositioning charges were $951 million ($604 million after-tax) in the fourth quarter 2012, versus $368 million ($237 million after-tax) in the prior year period. Excluding CVA/DVA, the impact of minority investments, the repositioning charges in the fourth quarters of 2012 and 2011, and the tax benefit in the third quarter of 2012, Citicorp net income increased 9% from the prior year to $15.6 billion, primarily driven by growth in revenues and lower net credit losses partially offset by lower loan loss reserve releases and higher taxes.
Citicorp revenues, net of interest expense, were $71 billion in 2012, down 1% versus the prior year. Excluding CVA/DVA and the impact of minority investments, Citicorp revenues were $73.4 billion in 2012, 5% higher than 2011. Global Consumer Banking ( GCB) revenues of $40.2 billion increased 3% versus the prior year. North America RCB revenues grew 5% to $21.1 billion. International RCB revenues (consisting of Asia RCB , Latin America RCB and EMEA RCB ) increased 1% year-over-year to $19.1 billion. Excluding the impact of FX translation, 6 international RCB revenues increased 5% year-over-year. Securities and Banking revenues were $19.7 billion in 2012, down 8% year-over-year . Securities and Banking revenues, excluding CVA/DVA, were $22.2 billion, or 13%, higher than the prior year. Transaction Services revenues were $10.9 billion, up 3% from the prior year, but up 5% excluding the impact of FX translation. Corporate/Other revenues, excluding the impact of minority investments, declined 80% from the prior year mainly reflecting the absence of hedging gains.
In North America RCB , the revenue growth year-over-year was driven by higher mortgage revenues, partially offset by lower revenues in Citi-branded cards and Citi retail services, mostly driven by lower average card loans. North America RCB average deposits of $154 billion grew 6% year-over-year and average retail loans of $41 billion grew 19%. Average card loans of $109 billion declined 3%, driven by increased payment rates resulting from consumer deleveraging, and card purchase sales of $232 billion were roughly flat. Citi retail services revenues were also negatively impacted by improving credit trends, which increased contractual partner payments.
4 | Citi's estimated Basel III Tier 1 Common ratio is a non-GAAP financial measure. For additional information on Citi's estimated Basel III Tier 1 Common Capital and Tier 1 Common ratio, including the calculation of these measures, see "Capital Resources and Liquidity-Capital Resources" below. |
5 | 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. | |
6 | For the impact of FX translation on 2012 results of operations for each of EMEA RCB, Latin America RCB, Asia RCB and Transaction Services , see the table accompanying the discussion of each respective business' results of operations below. |
8
The international RCB revenue growth
year-over-year, excluding the impact of FX translation, was driven by 9% revenue
growth in Latin America RCB and 2% revenue growth in EMEA RCB . Asia RCB revenues were flat
year-over-year, primarily reflecting spread compression in some countries in the
region and the impact of regulatory actions in certain countries, particularly
Korea. International RCB average deposits grew 2% versus the prior year, average
retail loans increased 11%, investment sales grew 12%, average card loans grew
6%, and international card purchase sales grew 10%, all excluding the impact of
FX translation.
In Securities and Banking, fixed income markets revenues of $14.0
billion, excluding CVA/DVA, 7 increased 28% from the prior year, reflecting higher
revenues in rates and currencies and credit-related and securitized products.
Equity markets revenues of $2.4 billion in 2012, excluding CVA/DVA, increased 1%
driven by improved derivatives performance as well as the absence in the current
year of proprietary trading losses, partially offset by lower cash equity volumes.
Investment banking revenues rose 10% from the prior year to $3.6 billion,
principally driven by higher revenues in debt underwriting and advisory
activities, partially offset by lower equity underwriting revenues. Lending
revenues of $997 million were down 45% from the prior year, reflecting $698
million in losses on hedges related to accrual loans as credit spreads tightened
during 2012 (compared to a $519 million gain in the prior year as spreads
widened). Excluding the mark-to-market impact of loan hedges related to accrual
loans, lending revenues rose 31% year-over-year to $1.7 billion reflecting
growth in the Corporate loan portfolio and improved spreads in most regions.
Private Bank revenues of $2.3 billion increased 8% from the prior year,
excluding CVA/DVA, driven primarily by growth in North America lending and
deposits.
In Transaction Services, the increase in revenues year-over-year, excluding
the impact of FX translation, was driven by growth in Treasury and Trade Solutions, which
was partially offset by a decline in Securities and Fund Services .
Excluding the impact of FX translation, Treasury and Trade Solutions revenues
were up 8%, driven by growth in trade as end-of-period trade loans grew 23%,
partially offset by ongoing spread compression given the low interest rate
environment. Securities and Fund
Services revenues were down 2%, excluding the
impact of FX translation, mostly reflecting lower market volumes as well as
spread compression on deposits.
Citicorp end-of-period loans increased 7% year-over-year to
$540 billion, with 3% growth in Consumer loans, primarily in Latin America, and 11%
growth in Corporate loans.
Citi
Holdings 8
Citi Holdings net
loss was $6.6 billion compared to a net loss of $4.2 billion in 2011. The
increase in the net loss was driven by the $4.7 billion pretax ($2.9 billion
after-tax) loss on MSSB described above. In addition, Citi Holdings results
included $77 million in repositioning charges in the fourth quarter of 2012,
compared to $60 million in the fourth quarter of 2011. Excluding the loss on
MSSB, CVA/DVA 9 and the repositioning charges in the fourth quarters
of 2012 and 2011, Citi Holdings net loss decreased to $3.7 billion compared to a
net loss of $4.2 billion in the prior year, as revenue declines and lower loan
loss reserve releases were more than offset by lower operating expenses and
lower net credit losses. These improved results in 2012 reflected the continued
decline in Citi Holdings assets.
Citi Holdings revenues decreased to $(833) million from $6.3
billion in the prior year. Excluding CVA/DVA and the loss on MSSB, Citi Holdings
revenues were $3.7 billion in 2012 compared to $6.2 billion in the prior year. Special Asset Pool revenues, excluding CVA/DVA, were $(657) million in 2012, compared to
$473 million in the prior year, largely due to lower non-interest revenue
resulting from lower gains on asset sales. Local Consumer Lending revenues of
$4.4 billion declined 20% from the prior year primarily due to the 24% decline
in average assets. Brokerage and Asset
Management revenues, excluding the loss on
MSSB, were $(15) million, compared to $282 million in the prior year, mostly
reflecting higher funding costs. Net interest revenues declined 30%
year-over-year to $2.6 billion, largely driven by continued declining loan
balances in Local Consumer
Lending . Non-interest revenues, excluding the
loss on MSSB and CVA/DVA, were $1.1 billion versus $2.5 billion in the prior
year, principally reflecting lower gains on asset sales within the Special Asset Pool .
As noted
above, Citi Holdings assets declined 31% year-over-year to $156 billion as of
the end of 2012. Also at the end of 2012, Citi Holdings assets comprised
approximately 8% of total Citigroup GAAP assets and 15% of risk-weighted assets
(as defined under current regulatory guidelines). Local Consumer Lending continued to
represent the largest segment within Citi Holdings, with $126 billion of assets
as of the end of 2012, of which approximately 73% consisted of mortgages in North America real estate lending.
7 | For the summary of CVA/DVA by business within Securities and Banking for 2012 and comparable periods, see "Citicorp- Institutional Clients Group. " |
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 $157 million in 2012, compared to $74 million in the prior year. |
9
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA-PAGE 1 | Citigroup Inc. and Consolidated Subsidiaries |
In millions of dollars, except per-share amounts and ratios | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||
Net interest revenue | $ | 47,603 | $ | 48,447 | $ | 54,186 | $ | 48,496 | $ | 53,366 | |||||
Non-interest revenue | 22,570 | 29,906 | 32,415 | 31,789 | (1,767 | ) | |||||||||
Revenues, net of interest expense | $ | 70,173 | $ | 78,353 | $ | 86,601 | $ | 80,285 | $ | 51,599 | |||||
Operating expenses | 50,518 | 50,933 | 47,375 | 47,822 | 69,240 | ||||||||||
Provisions for credit losses and for benefits and claims | 11,719 | 12,796 | 26,042 | 40,262 | 34,714 | ||||||||||
Income (loss) from continuing operations before income taxes | $ | 7,936 | $ | 14,624 | $ | 13,184 | $ | (7,799 | ) | $ | (52,355 | ) | |||
Income taxes (benefits) | 27 | 3,521 | 2,233 | (6,733 | ) | (20,326 | ) | ||||||||
Income (loss) from continuing operations | $ | 7,909 | $ | 11,103 | $ | 10,951 | $ | (1,066 | ) | $ | (32,029 | ) | |||
Income (loss) from discontinued operations, net of taxes (1) | (149 | ) | 112 | (68 | ) | (445 | ) | 4,002 | |||||||
Net income (loss) before attribution of noncontrolling interests | $ | 7,760 | $ | 11,215 | $ | 10,883 | $ | (1,511 | ) | $ | (28,027 | ) | |||
Net income (loss) attributable to noncontrolling interests | 219 | 148 | 281 | 95 | (343 | ) | |||||||||
Citigroup's net income (loss) | $ | 7,541 | $ | 11,067 | $ | 10,602 | $ | (1,606 | ) | $ | (27,684 | ) | |||
Less: | |||||||||||||||
Preferred dividends-Basic | $ | 26 | $ | 26 | $ | 9 | $ | 2,988 | $ | 1,695 | |||||
Impact of the conversion price reset related to the $12.5 | |||||||||||||||
billion convertible preferred stock private issuance-Basic | - | - | - | 1,285 | - | ||||||||||
Preferred stock Series H discount accretion-Basic | - | - | - | 123 | 37 | ||||||||||
Impact of the public and private preferred stock exchange offers | - | - | - | 3,242 | - | ||||||||||
Dividends and undistributed earnings allocated to employee restricted | |||||||||||||||
and deferred shares that contain nonforfeitable rights to dividends, | |||||||||||||||
applicable to Basic EPS | 166 | 186 | 90 | 2 | 221 | ||||||||||
Income (loss) allocated to unrestricted common shareholders for Basic EPS | $ | 7,349 | $ | 10,855 | $ | 10,503 | $ | (9,246 | ) | $ | (29,637 | ) | |||
Less: Convertible preferred stock dividends | - | - | - | (540 | ) | (877 | ) | ||||||||
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 | 11 | 17 | 2 | - | - | ||||||||||
Income (loss) allocated to unrestricted common shareholders for diluted EPS (2) | $ | 7,360 | $ | 10,872 | $ | 10,505 | $ | (8,706 | ) | $ | (28,760 | ) | |||
Earnings per share (3) | |||||||||||||||
Basic (3) | |||||||||||||||
Income (loss) from continuing operations | 2.56 | 3.69 | 3.66 | (7.61 | ) | (63.89 | ) | ||||||||
Net income (loss) | 2.51 | 3.73 | 3.65 | (7.99 | ) | (56.29 | ) | ||||||||
Diluted (2)(3) | |||||||||||||||
Income (loss) from continuing operations | $ | 2.49 | $ | 3.59 | $ | 3.55 | $ | (7.61 | ) | $ | (63.89 | ) | |||
Net income (loss) | 2.44 | 3.63 | 3.54 | (7.99 | ) | (56.29 | ) | ||||||||
Dividends declared per common share (3)(4) | 0.04 | 0.03 | 0.00 | 0.10 | 11.20 |
Statement continues on the next page, including notes to the table.
10
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA-PAGE 2 | Citigroup Inc. and Consolidated Subsidiaries | |||||||||||||||
In millions of dollars, except per-share amounts, ratios and direct staff | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||
At December 31: | ||||||||||||||||
Total assets | $ | 1,864,660 | $ | 1,873,878 | $ | 1,913,902 | $ | 1,856,646 | $ | 1,938,470 | ||||||
Total deposits | 930,560 | 865,936 | 844,968 | 835,903 | 774,185 | |||||||||||
Long-term debt | 239,463 | 323,505 | 381,183 | 364,019 | 359,593 | |||||||||||
Trust preferred securities (included in long-term debt) | 10,110 | 16,057 | 18,131 | 19,345 | 24,060 | |||||||||||
Citigroup common stockholders' equity | 186,487 | 177,494 | 163,156 | 152,388 | 70,966 | |||||||||||
Total Citigroup stockholders' equity | 189,049 | 177,806 | 163,468 | 152,700 | 141,630 | |||||||||||
Direct staff (in thousands) | 259 | 266 | 260 | 265 | 323 | |||||||||||
Ratios | ||||||||||||||||
Return on average assets | 0.4 | % | 0.6 | % | 0.5 | % | (0.08 | )% | (1.28 | )% | ||||||
Return on average common stockholders' equity (5) | 4.1 | 6.3 | 6.8 | (9.4 | ) | (28.8 | ) | |||||||||
Return on average total stockholders' equity (5) | 4.1 | 6.3 | 6.8 | (1.1 | ) | (20.9 | ) | |||||||||
Efficiency ratio | 72 | 65 | 55 | 60 | 134 | |||||||||||
Tier 1 Common (6) | 12.67 | % | 11.80 | % | 10.75 | % | 9.60 | % | 2.30 | % | ||||||
Tier 1 Capital | 14.06 | 13.55 | 12.91 | 11.67 | 11.92 | |||||||||||
Total Capital | 17.26 | 16.99 | 16.59 | 15.25 | 15.70 | |||||||||||
Leverage (7) | 7.48 | 7.19 | 6.60 | 6.87 | 6.08 | |||||||||||
Citigroup common stockholders' equity to assets | 10.00 | % | 9.47 | % | 8.52 | % | 8.21 | % | 3.66 | % | ||||||
Total Citigroup stockholders' equity to assets | 10.14 | 9.49 | 8.54 | 8.22 | 7.31 | |||||||||||
Dividend payout ratio (4) | 1.6 | 0.8 | NM | NM | NM | |||||||||||
Book value per common share (3) | $ | 61.57 | $ | 60.70 | $ | 56.15 | $ | 53.50 | $ | 130.21 | ||||||
Ratio of earnings to fixed charges and preferred stock dividends | 1.38 | x | 1.59 | x | 1.51 | x | NM | NM |
(1) | Discontinued operations in 2012 includes a carve-out of Citi's liquid strategies business within Citi Capital Advisors, the sale of which is expected to close in the first half of 2013. Discontinued operations in 2012 and 2011 reflect the sale of the Egg Banking PLC credit card business. Discontinued operations for 2008 to 2009 reflect the sale of Nikko Cordial Securities to Sumitomo Mitsui Banking Corporation, the sale of Citigroup's German retail banking operations to Crédit Mutuel, and the sale of CitiCapital's equipment finance unit to General Electric. Discontinued operations for 2008 to 2010 also include the operations and associated gain on sale of Citigroup's Travelers Life & Annuity, substantially all of Citigroup's international insurance business, and Citigroup's Argentine pension business sold to MetLife Inc. Discontinued operations for the second half of 2010 also reflect the sale of The Student Loan Corporation. See Note 3 to the Consolidated Financial Statements for additional information on Citi's discontinued operations. | |
(2) | The diluted EPS calculation for 2009 and 2008 utilizes basic shares and income allocated to unrestricted common stockholders (Basic) due to the negative income allocated to unrestricted common stockholders. Using diluted shares and income allocated to unrestricted common stockholders (Diluted) would result in anti-dilution. As of December 31, 2012, primarily all stock options were out of the money and did not impact diluted EPS. The year-end share price was $39.56. See Note 11 to the Consolidated Financial Statements. | |
(3) | All per share amounts and Citigroup shares outstanding for all periods reflect Citigroup's 1-for-10 reverse stock split, which was effective May 6, 2011. | |
(4) | Dividends declared per common share as a percentage of net income per diluted share. | |
(5) | 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. | |
(6) | 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. | |
(7) | The leverage ratio represents Tier 1 Capital divided by quarterly adjusted average total assets. |
Note: The following accounting changes were adopted by Citi during the respective years:
On January 1, 2010, Citigroup adopted SFAS 166/167. Prior periods have not been restated as the standards were adopted prospectively. See Note 1 to the Consolidated Financial Statements. On January 1, 2009, Citigroup adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (now ASC 810-10-45-15, Consolidation: Noncontrolling Interest in a Subsidiary ), and FSP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" (now ASC 260-10-45-59A, Earnings Per Share: Participating Securities and the Two-Class Method ). All prior periods have been restated to conform to the current period's presentation.11
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
% Change | % Change | |||||||||||||
In millions of dollars | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||
Income (loss) from continuing operations | ||||||||||||||
CITICORP | ||||||||||||||
Global Consumer Banking | ||||||||||||||
North America | $ | 4,815 | $ | 4,095 | $ | 974 | 18 | % | NM | |||||
EMEA | (18 | ) | 95 | 97 | NM | (2 | )% | |||||||
Latin America | 1,510 | 1,578 | 1,788 | (4 | ) | (12 | ) | |||||||
Asia | 1,797 | 1,904 | 2,110 | (6 | ) | (10 | ) | |||||||
Total | $ | 8,104 | $ | 7,672 | $ | 4,969 | 6 | % | 54 | % | ||||
Securities and Banking | ||||||||||||||
North America | $ | 1,011 | $ | 1,044 | $ | 2,495 | (3 | )% | (58 | )% | ||||
EMEA | 1,354 | 2,000 | 1,811 | (32 | ) | 10 | ||||||||
Latin America | 1,308 | 974 | 1,093 | 34 | (11 | ) | ||||||||
Asia | 822 | 895 | 1,152 | (8 | ) | (22 | ) | |||||||
Total | $ | 4,495 | $ | 4,913 | $ | 6,551 | (9 | )% | (25 | )% | ||||
Transaction Services | ||||||||||||||
North America | $ | 470 | $ | 415 | $ | 490 | 13 | % | (15 | )% | ||||
EMEA | 1,244 | 1,130 | 1,218 | 10 | (7 | ) | ||||||||
Latin America | 654 | 639 | 663 | 2 | (4 | ) | ||||||||
Asia | 1,127 | 1,165 | 1,251 | (3 | ) | (7 | ) | |||||||
Total | $ | 3,495 | $ | 3,349 | $ | 3,622 | 4 | % | (8 | )% | ||||
Institutional Clients Group | $ | 7,990 | $ | 8,262 | $ | 10,173 | (3 | )% | (19 | )% | ||||
Corporate/Other | $ | (1,625 | ) | $ | (728 | ) | $ | 242 | NM | NM | ||||
Total Citicorp | $ | 14,469 | $ | 15,206 | $ | 15,384 | (5 | )% | (1 | )% | ||||
CITI HOLDINGS | ||||||||||||||
Brokerage and Asset Management | $ | (3,190 | ) | $ | (286 | ) | $ | (226 | ) | NM | (27 | )% | ||
Local Consumer Lending | (3,193 | ) | (4,413 | ) | (5,365 | ) | 28 | % | 18 | |||||
Special Asset Pool | (177 | ) | 596 | 1,158 | NM | (49 | ) | |||||||
Total Citi Holdings | $ | (6,560 | ) | $ | (4,103 | ) | $ | (4,433 | ) | (60 | )% | 7 | % | |
Income from continuing operations | $ | 7,909 | $ | 11,103 | $ | 10,951 | (29 | )% | 1 | % | ||||
Discontinued operations | $ | (149 | ) | $ | 112 | $ | (68 | ) | NM | NM | ||||
Net income attributable to noncontrolling interests | 219 | 148 | 281 | 48 | % | (47 | )% | |||||||
Citigroup's net income | $ | 7,541 | $ | 11,067 | $ | 10,602 | (32 | )% | 4 | % |
NM Not meaningful
12
CITIGROUP REVENUES
% Change | % Change | |||||||||||||
In millions of dollars | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||
CITICORP | ||||||||||||||
Global Consumer Banking | ||||||||||||||
North America | $ | 21,081 | $ | 20,159 | $ | 21,747 | 5 | % | (7 | )% | ||||
EMEA | 1,516 | 1,558 | 1,559 | (3 | ) | - | ||||||||
Latin America | 9,702 | 9,469 | 8,667 | 2 | 9 | |||||||||
Asia | 7,915 | 8,009 | 7,396 | (1 | ) | 8 | ||||||||
Total | $ | 40,214 | $ | 39,195 | $ | 39,369 | 3 | % | - | % | ||||
Securities and Banking | ||||||||||||||
North America | $ | 6,104 | $ | 7,558 | $ | 9,393 | (19 | )% | (20 | )% | ||||
EMEA | 6,417 | 7,221 | 6,849 | (11 | ) | 5 | ||||||||
Latin America | 3,019 | 2,370 | 2,554 | 27 | (7 | ) | ||||||||
Asia | 4,203 | 4,274 | 4,326 | (2 | ) | (1 | ) | |||||||
Total | $ | 19,743 | $ | 21,423 | $ | 23,122 | (8 | )% | (7 | )% | ||||
Transaction Services | ||||||||||||||
North America | $ | 2,564 | $ | 2,444 | $ | 2,485 | 5 | % | (2 | )% | ||||
EMEA | 3,576 | 3,486 | 3,356 | 3 | 4 | |||||||||
Latin America | 1,797 | 1,713 | 1,530 | 5 | 12 | |||||||||
Asia | 2,920 | 2,936 | 2,714 | (1 | ) | 8 | ||||||||
Total | $ | 10,857 | $ | 10,579 | $ | 10,085 | 3 | % | 5 | % | ||||
Institutional Clients Group | $ | 30,600 | $ | 32,002 | $ | 33,207 | (4 | )% | (4 | )% | ||||
Corporate/Other | $ | 192 | $ | 885 | $ | 1,754 | (78 | )% | (50 | )% | ||||
Total Citicorp | $ | 71,006 | $ | 72,082 | $ | 74,330 | (1 | )% | (3 | )% | ||||
CITI HOLDINGS | ||||||||||||||
Brokerage and Asset Management | $ | (4,699 | ) | $ | 282 | $ | 609 | NM | (54 | )% | ||||
Local Consumer Lending | 4,366 | 5,442 | 8,810 | (20 | )% | (38 | ) | |||||||
Special Asset Pool | (500 | ) | 547 | 2,852 | NM | (81 | ) | |||||||
Total Citi Holdings | $ | (833 | ) | $ | 6,271 | $ | 12,271 | NM | (49 | )% | ||||
Total Citigroup net revenues | $ | 70,173 | $ | 78,353 | $ | 86,601 | (10 | )% | (10 | )% |
NM Not meaningful
13
CITICORP
Citicorp is Citigroup's global
bank for consumers and businesses and represents Citi's core franchises.
Citicorp is focused on providing best-in-class products and services to
customers and leveraging Citigroup's unparalleled global network, including many
of the world's emerging economies. Citicorp is physically present in
approximately 100 countries, many for over 100 years, and offers services in
over 160 countries and jurisdictions. Citi believes this global network provides
a strong foundation for servicing the broad financial services needs of its
large multinational clients and for meeting the needs of retail, private
banking, commercial, public sector and institutional clients around the world.
At December 31, 2012, Citicorp had $1.7 trillion of assets and $863 billion of
deposits, representing 92% of Citi's total assets and 93% of its
deposits.
Citicorp consists of the following operating businesses: Global Consumer Banking (which consists of Regional Consumer
Banking in North America, EMEA, Latin America and Asia ) and Institutional Clients
Group (which includes Securities and Banking and Transaction Services ). Citicorp also includes Corporate/Other .
% Change | % Change | |||||||||||||
In millions of dollars except as otherwise noted | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||
Net interest revenue | $ | 45,026 | $ | 44,764 | $ | 46,101 | 1 | % | (3 | )% | ||||
Non-interest revenue | 25,980 | 27,318 | 28,229 | (5 | ) | (3 | ) | |||||||
Total revenues, net of interest expense | $ | 71,006 | $ | 72,082 | $ | 74,330 | (1 | )% | (3 | )% | ||||
Provisions for credit losses and for benefits and claims | ||||||||||||||
Net credit losses | $ | 8,734 | $ | 11,462 | $ | 16,901 | (24 | )% | (32 | )% | ||||
Credit reserve build (release) | (2,177 | ) | (4,988 | ) | (3,171 | ) | 56 | (57 | ) | |||||
Provision for loan losses | $ | 6,557 | $ | 6,474 | $ | 13,730 | 1 | % | (53 | )% | ||||
Provision for benefits and claims | 236 | 193 | 184 | 22 | 5 | |||||||||
Provision for unfunded lending commitments | 40 | 92 | (35 | ) | (57 | ) | NM | |||||||
Total provisions for credit losses and for benefits and claims | $ | 6,833 | $ | 6,759 | $ | 13,879 | 1 | % | (51 | )% | ||||
Total operating expenses | $ | 45,265 | $ | 44,469 | $ | 40,019 | 2 | % | 11 | % | ||||
Income from continuing operations before taxes | $ | 18,908 | $ | 20,854 | $ | 20,432 | (9 | )% | 2 | % | ||||
Provisions for income taxes | 4,439 | 5,648 | 5,048 | (21 | ) | 12 | ||||||||
Income from continuing operations | $ | 14,469 | $ | 15,206 | $ | 15,384 | (5 | )% | (1 | )% | ||||
Income (loss) from discontinued operations, net of taxes | (149 | ) | 112 | (68 | ) | NM | NM | |||||||
Noncontrolling interests | 216 | 29 | 74 | NM | (61 | ) | ||||||||
Net income | $ | 14,104 | $ | 15,289 | $ | 15,242 | (8 | )% | - | % | ||||
Balance sheet data (in billions of dollars) | ||||||||||||||
Total end-of-period (EOP) assets | $ | 1,709 | $ | 1,649 | $ | 1,601 | 4 | % | 3 | % | ||||
Average assets | 1,717 | 1,684 | 1,578 | 2 | 7 | |||||||||
Return on average assets | 0.82 | % | 0.91 | % | 0.97 | % | ||||||||
Efficiency ratio (Operating expenses/Total revenues) | 64 | % | 62 | % | 54 | % | ||||||||
Total EOP loans | $ | 540 | $ | 507 | $ | 450 | 7 | 13 | ||||||
Total EOP deposits | 863 | 804 | 769 | 7 | 5 |
NM Not meaningful
14
GLOBAL CONSUMER BANKING
Global Consumer Banking (GCB) consists of Citigroup's four geographical Regional Consumer Banking (RCB) businesses that provide traditional banking services to retail customers through retail banking, commercial banking, Citi-branded cards and Citi retail services. GCB is a globally diversified business with 4,008 branches in 39 countries around the world. For the year ended December 31, 2012, GCB had $387 billion of average assets and $322 billion of average deposits. Citi's strategy is to focus on the top 150 cities globally that it believes have the highest growth potential in consumer banking. Consistent with this strategy, as announced in the fourth quarter of 2012 as part of its repositioning efforts, Citi intends to optimize its branch footprint and further concentrate its presence in major metropolitan areas. As of December 31, 2012, Citi had consumer banking operations in approximately 120, or 80%, of these cities.
% Change | % Change | |||||||||||||
In millions of dollars except as otherwise noted | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||
Net interest revenue | $ | 29,468 | $ | 29,683 | $ | 29,858 | (1 | )% | (1 | )% | ||||
Non-interest revenue | 10,746 | 9,512 | 9,511 | 13 | - | |||||||||
Total revenues, net of interest expense | $ | 40,214 | $ | 39,195 | $ | 39,369 | 3 | % | - | % | ||||
Total operating expenses | $ | 21,819 | $ | 21,408 | $ | 18,887 | 2 | % | 13 | % | ||||
Net credit losses | $ | 8,452 | $ | 10,840 | $ | 16,328 | (22 | )% | (34 | )% | ||||
Credit reserve build (release) | (2,131 | ) | (4,429 | ) | (2,547 | ) | 52 | (74 | ) | |||||
Provisions for unfunded lending commitments | - | 3 | (3 | ) | (100 | ) | NM | |||||||
Provision for benefits and claims | 237 | 192 | 184 | 23 | 4 | |||||||||
Provisions for credit losses and for benefits and claims | $ | 6,558 | $ | 6,606 | $ | 13,962 | (1 | )% | (53 | )% | ||||
Income from continuing operations before taxes | $ | 11,837 | $ | 11,181 | $ | 6,520 | 6 | % | 71 | % | ||||
Income taxes | 3,733 | 3,509 | 1,551 | 6 | NM | |||||||||
Income from continuing operations | $ | 8,104 | $ | 7,672 | $ | 4,969 | 6 | % | 54 | % | ||||
Noncontrolling interests | 3 | - | (9 | ) | - | 100 | ||||||||
Net income | $ | 8,101 | $ | 7,672 | $ | 4,978 | 6 | % | 54 | % | ||||
Balance Sheet data (in billions of dollars) | ||||||||||||||
Average assets | $ | 387 | $ | 376 | $ | 353 | 3 | % | 7 | % | ||||
Return on assets | 2.09 | % | 2.04 | % | 1.41 | % | ||||||||
Efficiency ratio | 54 | % | 55 | % | 48 | % | ||||||||
Total EOP assets | $ | 402 | $ | 385 | $ | 374 | 4 | 3 | ||||||
Average deposits | 322 | 314 | 299 | 3 | 5 | |||||||||
Net credit losses as a percentage of average loans | 2.95 | % | 3.93 | % | 6.22 | % | ||||||||
Revenue by business | ||||||||||||||
Retail banking | $ | 18,059 | $ | 16,398 | $ | 15,874 | 10 | % | 3 | % | ||||
Cards (1) | 22,155 | 22,797 | 23,495 | (3 | ) | (3 | ) | |||||||
Total | $ | 40,214 | $ | 39,195 | $ | 39,369 | 3 | % | - | % | ||||
Income from continuing operations by business | ||||||||||||||
Retail banking | $ | 2,986 | $ | 2,523 | $ | 3,052 | 18 | % | (17 | )% | ||||
Cards (1) | 5,118 | 5,149 | 1,917 | (1 | ) | NM | ||||||||
Total | $ | 8,104 | $ | 7,672 | $ | 4,969 | 6 | % | 54 | % | ||||
Foreign Currency (FX) Translation Impact | ||||||||||||||
Total revenue-as reported | $ | 40,214 | $ | 39,195 | $ | 39,369 | 3 | % | - | % | ||||
Impact of FX translation (2) | - | (742 | ) | (153 | ) | |||||||||
Total revenues-ex-FX | $ | 40,214 | $ | 38,453 | $ | 39,216 | 5 | % | (2 | )% | ||||
Total operating expenses-as reported | $ | 21,819 | $ | 21,408 | $ | 18,887 | 2 | % | 13 | % | ||||
Impact of FX translation (2) | - | (494 | ) | (134 | ) | |||||||||
Total operating expenses-ex-FX | $ | 21,819 | $ | 20,914 | $ | 18,753 | 4 | % | 12 | % | ||||
Total provisions for LLR & PBC-as reported | $ | 6,558 | $ | 6,606 | $ | 13,962 | (1 | )% | (53 | )% | ||||
Impact of FX translation (2) | - | (167 | ) | (19 | ) | |||||||||
Total provisions for LLR & PBC-ex-FX | $ | 6,558 | $ | 6,439 | $ | 13,943 | 2 | % | (54 | )% | ||||
Net income-as reported | $ | 8,101 | $ | 7,672 | $ | 4,978 | 6 | % | 54 | % | ||||
Impact of FX translation (2) | - | (102 | ) | (17 | ) | |||||||||
Net income-ex-FX | $ | 8,101 | $ | 7,570 | $ | 4,961 | 7 | % | 53 | % |
(1) | Includes both Citi-branded cards and Citi retail services. |
(2) | Reflects the impact of foreign exchange (FX) translation into U.S. dollars at the current exchange rate for all periods presented. |
NM | Not meaningful |
15
NORTH AMERICA REGIONAL CONSUMER BANKING
North America Regional Consumer Banking (NA RCB) provides traditional banking and Citi-branded cards and Citi retail services to retail customers and small to mid-size businesses in the U.S. NA RCB 's approximate 1,000 retail bank branches as of December 31, 2012 are largely concentrated in the greater metropolitan areas of New York, Los Angeles, San Francisco, Chicago, Miami, Washington, D.C., Boston, Philadelphia, Dallas, Houston, San Antonio and Austin. As announced in the fourth quarter of 2012, as part of its repositioning efforts, Citi expects to optimize its branch network in North America and further concentrate its presence in major metropolitan areas. At December 31, 2012, NA RCB had approximately 12.4 million customer accounts, $42.7 billion of retail banking loans and $165.2 billion of deposits. In addition, NA RCB had approximately 102.1 million Citi-branded and Citi retail services credit card accounts, with $111.5 billion in outstanding card loan balances.
% Change | % Change | |||||||||||||
In millions of dollars, except as otherwise noted | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||
Net interest revenue | $ | 16,591 | $ | 16,915 | $ | 17,892 | (2 | )% | (5 | )% | ||||
Non-interest revenue | 4,490 | 3,244 | 3,855 | 38 | (16 | ) | ||||||||
Total revenues, net of interest expense | $ | 21,081 | $ | 20,159 | $ | 21,747 | 5 | % | (7 | )% | ||||
Total operating expenses | $ | 9,933 | $ | 9,690 | $ | 8,445 | 3 | % | 15 | % | ||||
Net credit losses | $ | 5,756 | $ | 8,101 | $ | 13,132 | (29 | )% | (38 | )% | ||||
Credit reserve build (release) | (2,389 | ) | (4,181 | ) | (1,319 | ) | 43 | NM | ||||||
Provisions for benefits and claims | 1 | (1 | ) | - | NM | - | ||||||||
Provision for unfunded lending commitments | 70 | 62 | 57 | 13 | 9 | |||||||||
Provisions for credit losses and for benefits and claims | $ | 3,438 | $ | 3,981 | $ | 11,870 | (14 | )% | (66 | )% | ||||
Income from continuing operations before taxes | $ | 7,710 | $ | 6,488 | $ | 1,432 | 19 | % | NM | |||||
Income taxes | 2,895 | 2,393 | 458 | 21 | NM | |||||||||
Income from continuing operations | $ | 4,815 | $ | 4,095 | $ | 974 | 18 | % | NM | |||||
Noncontrolling interests | 1 | - | - | - | - | |||||||||
Net income | $ | 4,814 | $ | 4,095 | $ | 974 | 18 | % | NM | |||||
Balance Sheet data (in billions of dollars) | ||||||||||||||
Average assets | $ | 172 | $ | 165 | $ | 163 | 4 | % | 1 | % | ||||
Return on average assets | 2.80 | % | 2.48 | % | 0.60 | % | ||||||||
Efficiency ratio | 47 | % | 48 | % | 39 | % | ||||||||
Average deposits | $ | 154 | $ | 145 | $ | 145 | 6 | - | ||||||
Net credit losses as a percentage of average loans | 3.83 | % | 5.50 | % | 8.71 | % | ||||||||
Revenue by business | ||||||||||||||
Retail banking | $ | 6,677 | $ | 5,113 | $ | 5,323 | 31 | % | (4 | )% | ||||
Citi-branded cards | 8,323 | 8,730 | 9,695 | (5 | ) | (10 | ) | |||||||
Citi retail services | 6,081 | 6,316 | 6,729 | (4 | ) | (6 | ) | |||||||
Total | $ | 21,081 | $ | 20,159 | $ | 21,747 | 5 | % | (7 | )% | ||||
Income from continuing operations by business | ||||||||||||||
Retail banking | $ | 1,237 | $ | 463 | $ | 744 | NM | (38 | )% | |||||
Citi-branded cards | 2,080 | 2,151 | (24 | ) | (3 | )% | NM | |||||||
Citi retail services | 1,498 | 1,481 | 254 | 1 | NM | |||||||||
Total | $ | 4,815 | $ | 4,095 | $ | 974 | 18 | % | NM |
NM Not meaningful
16
2012 vs. 2011
Net income increased 18%, mainly driven by higher mortgage revenues and a $2.3
billion decrease in net credit losses, partially offset by a $1.8 billion
reduction in loan loss reserve
releases.
Revenues increased 5%, driven by a
38% increase in non-interest revenues from higher gains on sale of mortgages,
partly offset by a 2% decline in net interest revenues. The higher gains on sale
of mortgages were driven by high volumes of mortgage refinancing activity, due
largely to the U.S. government's Home Affordable Refinance Program (HARP), as
well as higher margins resulting from the shift to retail as compared to
third-party origination channels. Assuming the continued low interest rate
environment, Citi believes the higher mortgage refinancing volumes could
continue into the first half of 2013. Excluding mortgages, revenue from the
retail banking business was essentially flat, as volume growth and improved mix
in the deposit and lending portfolios was offset by significant spread
compression. Citi expects spread compression to continue to negatively impact
revenues during 2013.
Cards
revenues declined 4%. In Citi-branded cards, both average loans and net interest
revenue declined year-over-year, reflecting continued increased payment rates
resulting from consumer deleveraging and the impact of the look-back provisions
of The Credit Card Accountability Responsibility and Disclosure Act (CARD
Act). 10 Citi expects the look-back provisions of the CARD Act will
likely have a diminishing impact on the results of operations of its cards
businesses during 2013. In Citi retail services, net interest revenues improved
slightly but were offset by declining non-interest revenues, driven by improving
credit and the resulting impact on contractual partner payments. Citi expects
cards revenues could continue to be negatively impacted by higher payment rates
for consumers, reflecting ongoing economic uncertainty and deleveraging as well
as Citi's shift to higher credit quality borrowers.
As
part of its U.S. Citi-branded cards business, Citibank, N.A. issues a co-branded
credit card product with American Airlines, the Citi/AAdvantage card. AMR
Corporation and certain of its subsidiaries, including American Airlines, Inc.,
filed voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code in November 2011. On February 14, 2013, AMR Corporation and US
Airways Group, Inc. announced that the boards of directors of both companies had
approved a merger agreement under which the companies would be combined. For
additional information, see "Risk Factors-Business and Operational Risks"
below.
Expenses increased 3%, primarily due to increased mortgage origination
costs resulting from the higher retail channel mortgage volumes and $100 million
of repositioning charges in the fourth quarter of 2012, partially offset by
lower expenses in cards. Expenses continued to be impacted by elevated legal and
related costs.
Provisions decreased 14%, due to lower
net credit losses in the cards portfolio partly offset by continued lower loan
loss reserve releases ($2.4 billion in 2012 compared to $4.2 billion in 2011).
Assuming no downturn in the U.S. economic environment, Citi believes credit
trends have largely stabilized in the cards portfolios.
2011 vs.
2010
Net income increased $3.1 billion, driven by higher loan loss reserve
releases and an improvement in net credit losses, partly offset by lower
revenues and higher expenses.
Revenues decreased 7% due to a
decrease in net interest and non-interest revenues. Net interest revenue
decreased 5%, driven primarily by lower cards net interest revenue, which was
negatively impacted by the look-back provision of the CARD Act. In addition, net
interest revenue for cards was negatively impacted by higher promotional
balances and lower total average loans. Non-interest revenue decreased 16%,
primarily due to lower gains from the sale of mortgage loans, as margins
declined and Citi held more loans on-balance sheet, and declining revenues
driven by improving credit and the resulting impact on contractual partner
payments in Citi retail services. In addition, the decline in non-interest
revenue reflected lower retail banking fee income.
Expenses increased 15%, primarily
driven by higher investment spending in the business during the second half of
2011, particularly in cards marketing and technology, and increases in
litigation accruals related to the interchange fees litigation (see Note 28 to
the Consolidated Financial Statements).
Provisions decreased 66%, primarily
due to a loan loss reserve release of $4.2 billion in 2011, compared to a loan
loss reserve release of $1.3 billion in 2010, and lower net credit losses in the
cards portfolios (cards net credit losses declined $5.0 billion, or 38%, from
2010).
____________________ | ||
10 | The CARD Act requires a review once every six months for card accounts where the annual percentage rate (APR) has been increased since January 1, 2009 to assess whether changes in credit risk, market conditions or other factors merit a future decline in the APR. |
17
EMEA REGIONAL CONSUMER BANKING
EMEA Regional Consumer Banking (EMEA RCB) provides traditional banking and Citi-branded card services to retail customers and small to mid-size businesses, primarily in Central and Eastern Europe, the Middle East and Africa. The countries in which EMEA RCB has the largest presence are Poland, Turkey, Russia and the United Arab Emirates. As announced in the fourth quarter of 2012, as part of its repositioning efforts, Citi expects to either sell or significantly scale back its consumer operations in Turkey, Romania and Pakistan, and expects to further optimize its branch network in Hungary. At December 31, 2012, EMEA RCB had 228 retail bank branches with 3.9 million customer accounts, $5.1 billion in retail banking loans and $13.2 billion in deposits. In addition, the business had 2.8 million Citi-branded card accounts with $2.9 billion in outstanding card loan balances.
% Change | % Change | |||||||||||||
In millions of dollars, except as otherwise noted | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||
Net interest revenue | $ | 1,040 | $ | 947 | $ | 936 | 10 | % | 1 | % | ||||
Non-interest revenue | 476 | 611 | 623 | (22 | ) | (2 | ) | |||||||
Total revenues, net of interest expense | $ | 1,516 | $ | 1,558 | $ | 1,559 | (3 | )% | - | % | ||||
Total operating expenses | $ | 1,434 | $ | 1,343 | $ | 1,225 | 7 | % | 10 | % | ||||
Net credit losses | $ | 105 | $ | 172 | $ | 315 | (39 | )% | (45 | )% | ||||
Credit reserve build (release) | (5 | ) | (118 | ) | (118 | ) | 96 | - | ||||||
Provision for unfunded lending commitments | (1 | ) | 4 | (3 | ) | NM | NM | |||||||
Provisions for credit losses | $ | 99 | $ | 58 | $ | 194 | 71 | % | (70 | )% | ||||
Income from continuing operations before taxes | $ | (17 | ) | $ | 157 | $ | 140 | NM | 12 | % | ||||
Income taxes | 1 | 62 | 43 | (98 | ) | 44 | ||||||||
Income from continuing operations | $ | (18 | ) | $ | 95 | $ | 97 | NM | (2 | )% | ||||
Noncontrolling interests | 4 | - | (1 | ) | - | 100 | ||||||||
Net income | $ | (22 | ) | $ | 95 | $ | 98 | NM | (3 | )% | ||||
Balance Sheet data (in billions of dollars) | ||||||||||||||
Average assets | $ | 9 | $ | 10 | 10 | (10 | )% | - | % | |||||
Return on average assets | (0.24 | )% | 0.95 | % | 0.98 | % | ||||||||
Efficiency ratio | 95 | % | 86 | % | 79 | % | ||||||||
Average deposits | $ | 12.6 | $ | 12.5 | $ | 13.7 | 1 | (9 | ) | |||||
Net credit losses as a percentage of average loans | 1.40 | % | 2.37 | % | 4.42 | % | ||||||||
Revenue by business | ||||||||||||||
Retail banking | $ | 889 | $ | 890 | $ | 878 | - | 1 | % | |||||
Citi-branded cards | 627 | 668 | 681 | (6 | ) | (2 | ) | |||||||
Total | $ | 1,516 | $ | 1,558 | $ | 1,559 | (3 | )% | - | % | ||||
Income (loss) from continuing operations by business | ||||||||||||||
Retail banking | $ | (81 | ) | $ | (37 | ) | $ | (59 | ) | NM | 37 | % | ||
Citi-branded cards | 63 | 132 | 156 | (52 | ) | (15 | ) | |||||||
Total | $ | (18 | ) | $ | 95 | $ | 97 | NM | (2 | )% | ||||
Foreign Currency (FX) Translation Impact | ||||||||||||||
Total revenue-as reported | $ | 1,516 | $ | 1,558 | $ | 1,559 | (3 | )% | - | % | ||||
Impact of FX translation (1) | - | (75 | ) | (55 | ) | |||||||||
Total revenues-ex-FX | $ | 1,516 | $ | 1,483 | $ | 1,504 | 2 | % | (1 | )% | ||||
Total operating expenses-as reported | $ | 1,434 | $ | 1,343 | $ | 1,225 | 7 | % | 10 | % | ||||
Impact of FX translation (1) | - | (66 | ) | (34 | ) | |||||||||
Total operating expenses-ex-FX | $ | 1,434 | $ | 1,277 | $ | 1,191 | 12 | % | 7 | % | ||||
Provisions for credit losses-as reported | $ | 99 | $ | 58 | $ | 194 | 71 | % | (70 | )% | ||||
Impact of FX translation (1) | - | (2 | ) | (7 | ) | |||||||||
Provisions for credit losses-ex-FX | $ | 99 | $ | 56 | $ | 187 | 77 | % | (70 | )% | ||||
Net income-as reported | $ | (22 | ) | $ | 95 | $ | 98 | NM | (3 | )% | ||||
Impact of FX translation (1) | - | (11 | ) | (13 | ) | |||||||||
Net income-ex-FX | $ | (22 | ) | $ | 84 | $ | 85 | NM | (1 | )% |
(1) | Reflects the impact of foreign exchange (FX) translation into U.S. dollars at the current exchange rate for all periods presented. | |
NM | Not meaningful |
18
The discussion of the results of operations for EMEA RCB below excludes the impact of FX translation for all periods presented. Presentation of the results of operations, excluding the impact of FX translation, are non-GAAP financial measures. Citi believes the presentation of EMEA RCB 's results excluding the impact of FX translation is a more meaningful depiction of the underlying fundamentals of the business. For a reconciliation of certain of these metrics to the reported results, see the table above.
2012 vs. 2011
The net loss of $22 million compared to net income of $84
million in 2011 was mainly due to higher operating expenses and lower loan loss
reserve releases, partially offset by higher
revenues.
Revenues increased 2%, with growth
across the major products, including strong growth in Russia. Year-over-year,
cards purchase sales increased 12%, investment sales increased 15% and retail
loan volume increased 17%. Revenue growth year-over-year was partly offset by
the absence of Akbank, Citi's equity investment in Turkey, which was moved
to Corporate/Other in the first quarter of 2012. Net interest revenue increased 17%, driven
by the absence of Akbank investment funding costs and growth in average deposits
of 5%, average retail loans of 16% and average cards loans of 6%, partially
offset by spread compression. Interest rate caps on credit cards, particularly
in Turkey and Poland, the continued liquidation of a higher yielding
non-strategic retail banking portfolio and the continued low interest rate
environment were the main contributors to the lower spreads. Citi expects spread
compression to continue to negatively impact revenues in this business during
2013. Non-interest revenue decreased 20%, mainly reflecting the absence of
Akbank.
Expenses grew 12%,
primarily due to the $57 million of fourth quarter of 2012 repositioning charges
in Turkey, Romania and Pakistan and the impact of continued investment spending
on new internal operating platforms during the year.
Provisions increased $43 million due
to lower loan loss reserve releases, partially offset by lower net credit losses
across most countries. Net credit losses continued to decline, decreasing 36%
due to the ongoing improvement in credit quality and the move toward lower-risk
customers. Citi believes that net credit losses in EMEA RCB have largely stabilized and
assuming the underlying core portfolio continues to grow in 2013, credit costs
could begin to rise.
2011 vs. 2010
Net
income decreased 1%, as an improvement in credit costs was offset by higher
expenses from increased investment spending and lower revenues.
Revenues decreased 1%, driven by the liquidation of higher yielding non-strategic customer portfolios and a lower contribution from
Akbank. Net interest revenue declined 1% due to the decline in the higher yielding non-strategic retail banking portfolio
and spread compression in the Citi-branded cards portfolio. Interest rate caps on credit cards, particularly in Turkey and
Poland, contributed to the lower spreads in the cards portfolio. Non-interest revenue decreased 2%, mainly reflecting the
lower contribution from Akbank. Despite the negative impacts to revenues described above, underlying businesses showed
growth, with investment sales up 28% from the prior year and cards purchase sales up 15%.
Expenses increased 7% due to the impact of account acquisition, focused investment spending and higher transactional expenses,
partly offset by continued savings initiatives.
Provisions decreased
70%, driven by a reduction in net credit losses. Net credit losses decreased 46%, reflecting the continued credit quality
improvement during the year, stricter underwriting criteria and the move to lower-risk products.
19
LATIN AMERICA REGIONAL CONSUMER BANKING
Latin America Regional Consumer Banking (Latin America RCB) provides traditional banking and Citi-branded card services to retail customers and small to mid-size businesses, with the largest presence in Mexico and Brazil. Latin America RCB includes branch networks throughout Latin America as well as Banco Nacional de Mexico, or Banamex, Mexico's second-largest bank, with over 1,700 branches. As announced in the fourth quarter of 2012, as part of its repositioning efforts, Citi expects to either sell or significantly scale back consumer operations in Paraguay and Uruguay, and expects to further optimize its branch network in Brazil. At December 31, 2012, Latin America RCB had 2,181 retail branches, with approximately 31.8 million customer accounts, $28.3 billion in retail banking loans and $48.6 billion in deposits. In addition, the business had approximately 12.9 million Citi-branded card accounts with $14.8 billion in outstanding loan balances.
% Change | % Change | |||||||||||||
In millions of dollars, except as otherwise noted | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||
Net interest revenue | $ | 6,695 | $ | 6,456 | $ | 5,953 | 4 | % | 8 | % | ||||
Non-interest revenue | 3,007 | 3,013 | 2,714 | - | 11 | |||||||||
Total revenues, net of interest expense | $ | 9,702 | $ | 9,469 | $ | 8,667 | 2 | % | 9 | % | ||||
Total operating expenses | $ | 5,702 | $ | 5,756 | $ | 5,139 | (1 | )% | 12 | % | ||||
Net credit losses | $ | 1,750 | $ | 1,684 | $ | 1,868 | 4 | % | (10 | )% | ||||
Credit reserve build (release) | 299 | (67 | ) | (823 | ) | NM | 92 | |||||||
Provision for benefits and claims | 167 | 130 | 127 | 28 | 2 | |||||||||
Provisions for loan losses and for benefits and claims (LLR & PBC) | $ | 2,216 | $ | 1,747 | $ | 1,172 | 27 | % | 49 | % | ||||
Income from continuing operations before taxes | $ | 1,784 | $ | 1,966 | $ | 2,356 | (9 | )% | (17 | )% | ||||
Income taxes | 274 | 388 | 568 | (29 | ) | (32 | ) | |||||||
Income from continuing operations | $ | 1,510 | $ | 1,578 | $ | 1,788 | (4 | )% | (12 | )% | ||||
Noncontrolling interests | (2 | ) | - | (8 | ) | - | 100 | |||||||
Net income | $ | 1,512 | $ | 1,578 | $ | 1,796 | (4 | )% | (12 | )% | ||||
Balance Sheet data (in billions of dollars) | ||||||||||||||
Average assets | $ | 80 | $ | 80 | $ | 72 | - | % | 11 | % | ||||
Return on average assets | 1.89 | % | 1.97 | % | 2.50 | % | ||||||||
Efficiency ratio | 59 | % | 61 | % | 59 | % | ||||||||
Average deposits | $ | 45.0 | $ | 45.8 | $ | 40.3 | (2 | ) | 14 | |||||
Net credit losses as a percentage of average loans | 4.34 | % | 4.69 | % | 6.14 | % | ||||||||
Revenue by business | ||||||||||||||
Retail banking | $ | 5,766 | $ | 5,468 | $ | 5,016 | 5 | % | 9 | % | ||||
Citi-branded cards | 3,936 | 4,001 | 3,651 | (2 | ) | 10 | ||||||||
Total | $ | 9,702 | $ | 9,469 | $ | 8,667 | 2 | % | 9 | % | ||||
Income from continuing operations by business | ||||||||||||||
Retail banking | $ | 861 | $ | 902 | $ | 927 | (5 | )% | (3 | )% | ||||
Citi-branded cards | 649 | 676 | 861 | (4 | ) | (21 | ) | |||||||
Total | $ | 1,510 | $ | 1,578 | $ | 1,788 | (4 | )% | (12 | )% | ||||
Foreign Currency (FX) Translation Impact | ||||||||||||||
Total revenue-as reported | $ | 9,702 | $ | 9,469 | $ | 8,667 | 2 | % | 9 | % | ||||
Impact of FX translation (1) | - | (569 | ) | (335 | ) | |||||||||
Total revenues-ex-FX | $ | 9,702 | $ | 8,900 | $ | 8,332 | 9 | % | 7 | % | ||||
Total operating expenses-as reported | $ | 5,702 | $ | 5,756 | $ | 5,139 | (1 | )% | 12 | % | ||||
Impact of FX translation (1) | - | (367 | ) | (233 | ) | |||||||||
Total operating expenses-ex-FX | $ | 5,702 | $ | 5,389 | $ | 4,906 | 6 | % | 10 | % | ||||
Provisions for LLR & PBC-as reported | $ | 2,216 | $ | 1,747 | $ | 1,172 | 27 | % | 49 | % | ||||
Impact of FX translation (1) | - | (156 | ) | (57 | ) | |||||||||
Provisions for LLR & PBC-ex-FX | $ | 2,216 | $ | 1,591 | $ | 1,115 | 39 | % | 43 | % | ||||
Net income-as reported | $ | 1,512 | $ | 1,578 | $ | 1,796 | (4 | )% | (12 | )% | ||||
Impact of FX translation (1) | - | (66 | ) | (39 | ) | |||||||||
Net income-ex-FX | $ | 1,512 | $ | 1,512 | $ | 1,757 | - | % | (14 | )% |
(1) | Reflects the impact of foreign exchange (FX) translation into U.S. dollars at the current exchange rate for all periods presented. | |
NM | Not meaningful |
20
The discussion of the results of operations for Latin America RCB below excludes the impact of FX translation for all periods presented. Presentation of the results of operations, excluding the impact of FX translation, are non-GAAP financial measures. Citi believes the presentation of Latin America RCB 's results excluding the impact of FX translation is a more meaningful depiction of the underlying fundamentals of the business. For a reconciliation of certain of these metrics to the reported results, see the table above.
2012 vs. 2011
Net income was flat to the prior year as higher revenues were offset by higher
credit costs and repositioning charges.
Revenues increased 9%, primarily due to strong revenue growth in Mexico and
higher volumes, mostly related to personal loans and credit cards. However,
continued regulatory pressure involving foreign exchange controls and related
measures in Argentina and Venezuela is expected to negatively impact revenues in
the near term. Net interest revenue increased 10% due to increased volumes,
partially offset by continued spread compression. Citi expects spread
compression to continue to negatively impact revenues in this business during
2013. Non-interest revenue increased 7%, primarily due to increased business
volumes in the private pension fund and insurance businesses.
Expenses increased 6%, primarily due to $131 million of repositioning charges in
the fourth quarter of 2012, higher volume-driven expenses and increased legal
and related costs.
Provisions increased 39%,
primarily due to increased loan loss reserve builds driven by underlying
business volume growth, primarily in Mexico and Colombia. In addition, net
credit losses increased in the retail portfolios, primarily in Mexico,
reflecting volume growth. Citi believes that net credit losses in Latin America will likely continue to trend higher as various
loan portfolios continue to mature.
2011 vs. 2010
Net income declined 14% as higher revenues were more than offset by higher expenses
and higher credit costs.
Revenues increased 7%
primarily due to higher volumes. Net interest revenue increased 6% driven by the
continued growth in lending and deposit volumes, partially offset by spread
compression driven in part by the continued move toward customers with a lower
risk profile and stricter underwriting criteria, especially in the Citi-branded
cards portfolio. Non-interest revenue increased 8%, primarily driven by an
increase in banking fee income from credit card purchase sales.
Expenses increased 10% due to higher volumes and investment spending, including
increased marketing and customer acquisition costs as well as new branches,
partially offset by continued savings initiatives. The increase in the level of
investment spending in the business was largely completed at the end of
2011.
Provisions increased 43%, reflecting lower loan loss reserve
releases. Net credit losses declined 13%, driven primarily by improvements in
the Mexico cards portfolio due to the move toward customers with a lower-risk
profile and stricter underwriting criteria.
21
ASIA REGIONAL CONSUMER BANKING
Asia Regional Consumer Banking (Asia RCB) provides traditional banking and Citi-branded card services to retail customers and small to mid-size businesses, with the largest Citi presence in Korea, Australia, Singapore, Japan, Taiwan, Hong Kong, India and Indonesia. As announced in the fourth quarter of 2012, as part of its repositioning efforts, Citi expects to optimize its branch network and further concentrate its presence in major metropolitan areas. The markets affected by the reductions include Hong Kong and Korea. At December 31, 2012, Asia RCB had approximately 600 retail branches, 16.9 million customer accounts, $69.7 billion in retail banking loans and $110 billion in deposits. In addition, the business had approximately 16.0 million Citi-branded card accounts with $20.4 billion in outstanding loan balances.
% Change | % Change | |||||||||||||
In millions of dollars, except as otherwise noted | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||
Net interest revenue | $ | 5,142 | $ | 5,365 | $ | 5,077 | (4 | )% | 6 | % | ||||
Non-interest revenue | 2,773 | 2,644 | 2,319 | 5 | 14 | |||||||||
Total revenues, net of interest expense | $ | 7,915 | $ | 8,009 | $ | 7,396 | (1 | )% | 8 | % | ||||
Total operating expenses | $ | 4,750 | $ | 4,619 | $ | 4,078 | 3 | % | 13 | % | ||||
Net credit losses | $ | 841 | $ | 883 | $ | 1,013 | (5 | )% | (13 | )% | ||||
Credit reserve build (release) | (36 | ) | (63 | ) | (287 | ) | 43 | 78 | ||||||
Provisions for loan losses | $ | 805 | 820 | 726 | (2 | )% | 13 | % | ||||||
Income from continuing operations before taxes | $ | 2,360 | $ | 2,570 | $ | 2,592 | (8 | )% | (1 | )% | ||||
Income taxes | 563 | 666 | 482 | (15 | ) | 38 | ||||||||
Income from continuing operations | $ | 1,797 | $ | 1,904 | $ | 2,110 | (6 | )% | (10 | )% | ||||
Noncontrolling interests | - | - | - | - | - | |||||||||
Net income | $ | 1,797 | $ | 1,904 | $ | 2,110 | (6 | )% | (10 | )% | ||||
Balance Sheet data (in billions of dollars) | ||||||||||||||
Average assets | $ | 126 | $ | 122 | $ | 108 | 3 | % | 13 | % | ||||
Return on average assets | 1.43 | % | 1.56 | % | 1.96 | % | ||||||||
Efficiency ratio | 60 | % | 58 | % | 55 | % | ||||||||
Average deposits | $ | 110.8 | $ | 110.5 | $ | 99.8 | - | 11 | ||||||
Net credit losses as a percentage of average loans | 0.95 | % | 1.03 | % | 1.37 | % | ||||||||
Revenue by business | ||||||||||||||
Retail banking | $ | 4,727 | $ | 4,927 | $ | 4,657 | (4 | )% | 6 | % | ||||
Citi-branded cards | 3,188 | 3,082 | 2,739 | 3 | 13 | |||||||||
Total | $ | 7,915 | $ | 8,009 | $ | 7,396 | (1 | )% | 8 | % | ||||
Income from continuing operations by business | ||||||||||||||
Retail banking | $ | 969 | $ | 1,195 | $ | 1,440 | (19 | )% | (17 | )% | ||||
Citi-branded cards | 828 | 709 | 670 | 17 | 6 | |||||||||
Total | $ | 1,797 | $ | 1,904 | $ | 2,110 | (6 | )% | (10 | )% | ||||
Foreign Currency (FX) Translation Impact | ||||||||||||||
Total revenue-as reported | $ | 7,915 | $ | 8,009 | $ | 7,396 | (1 | )% | 8 | % | ||||
Impact of FX translation (1) | - | (98 | ) | 237 | ||||||||||
Total revenues-ex-FX | $ | 7,915 | $ | 7,911 | $ | 7,633 | - | % | 4 | % | ||||
Total operating expenses-as reported | $ | 4,750 | $ | 4,619 | $ | 4,078 | 3 | % | 13 | % | ||||
Impact of FX translation (1) | - | (61 | ) | 133 | ||||||||||
Total operating expenses-ex-FX | $ | 4,750 | $ | 4,558 | $ | 4,211 | 4 | % | 8 | % | ||||
Provisions for loan losses-as reported | $ | 805 | $ | 820 | $ | 726 | (2 | )% | 13 | % | ||||
Impact of FX translation (1) | - | (9 | ) | 45 | ||||||||||
Provisions for loan losses-ex-FX | $ | 805 | $ | 811 | $ | 771 | (1 | )% | 5 | % | ||||
Net income-as reported | $ | 1,797 | $ | 1,904 | $ | 2,110 | (6 | )% | (10 | )% | ||||
Impact of FX translation (1) | - | (25 | ) | 35 | ||||||||||
Net income-ex-FX | $ | 1,797 | $ | 1,879 | $ | 2,145 | (4 | )% | (12 | )% |
(1) | Reflects the impact of foreign exchange (FX) translation into U.S. dollars at the current exchange rate for all periods presented. |
NM | Not meaningful |
22
The discussion of the results of operations for Asia RCB below excludes the impact of FX translation for all periods presented. Presentation of the results of operations, excluding the impact of FX translation, are non-GAAP financial measures. Citi believes the presentation of Asia RCB 's results excluding the impact of FX translation is a more meaningful depiction of the underlying fundamentals of the business. For a reconciliation of certain of these metrics to the reported results, see the table above.
2012 vs. 2011
Net income decreased
4% primarily due to higher expenses.
Revenues were
flat year-over-year. Net interest revenue decreased 3%, as the benefit of higher loan and deposit balances was offset by
spread compression, mainly in retail lending. Spread compression continued to reflect improvements in the customer risk
profile, stricter underwriting criteria and certain regulatory changes in Korea where, as previously disclosed, policy
actions, including rate caps and other initiatives, have been implemented to slow the growth of consumer credit in that
market, thus impacting volume growth, lending rates and fees. Spread compression is expected to continue to have a negative
impact on net interest revenue as regulatory pressure and low interest rates persist. Non-interest revenue increased 6%,
reflecting growth in Citi-branded cards purchase sales, partially offset by a decrease in revenue from foreign exchange
products. Despite the continued spread compression and regulatory changes
in the region, the underlying business metrics continued to grow, with average retail loans up 6% and average card loans up
2%.
Expenses increased 4%, primarily due to approximately $78 million of repositioning charges in the fourth quarter of 2012, largely in
Korea, and increased investment spending, including China cards and branches, higher volume-driven expenses and increased
regulatory costs.
Provisions decreased
1%, reflecting continued overall credit quality improvement. Net credit losses continued to improve, declining 3% due to the
ongoing improvement in credit quality. Citi believes that net credit losses in Asia
RCB will largely remain stable, with increases largely in line with portfolio
growth.
2011 vs. 2010
Net income decreased 12%, driven by higher operating expenses, lower loan loss
reserve releases and a higher effective tax rate, partially offset by higher
revenue. The higher effective tax rate was due to lower tax benefits Accounting
Principles Bulletin (APB) 23 and a tax charge of $66 million due to a write-down
in the value of deferred tax assets due to a change in the tax law, each in
Japan.
Revenues increased 4%,
primarily driven by higher business volumes, partially offset by continued
spread compression and $65 million of net charges relating to the repurchase of
certain Lehman structured notes. Net interest revenue increased 1%, as
investment initiatives and economic growth in the region drove higher lending
and deposit volumes. Spread compression continued to partly offset the benefit
of higher balances and continued to be driven by stricter underwriting criteria,
resulting in a lowering of the risk profile for personal and other loans.
Non-interest revenue increased 10%, primarily due to a 9% increase in
Citi-branded cards purchase sales and higher revenues from foreign exchange
products, partially offset by a 16% decrease in investment sales,
particularly in the second half of 2011, and the net charges for the repurchase
of certain Lehman structured notes.
Expenses increased
8%, due to investment spending, growth in business volumes, repositioning
charges and higher legal and related costs, partially offset by ongoing
productivity savings.
Provisions increased 5% as
lower loan loss reserve releases were partially offset by lower net credit
losses. The increase in provisions reflected increasing volumes in the region,
partially offset by continued credit quality improvement. India was a
significant driver of the improvement in credit quality, as it continued to
de-risk elements of its legacy portfolio.
23
INSTITUTIONAL CLIENTS GROUP
Institutional Clients Group (ICG) includes Securities and Banking and Transaction Services . ICG provides corporate, institutional, public sector and high-net-worth clients around the world with a full range of products and services, including cash management, foreign exchange, trade finance and services, securities services, sales and trading of loans and securities, institutional brokerage, underwriting, lending and advisory services. ICG 's international presence is supported by trading floors in approximately 75 countries and jurisdictions and a proprietary network within Transaction Services in over 95 countries and jurisdictions. At December 31, 2012, ICG had approximately $1.1 trillion of assets and $523 billion of deposits.
% Change | % Change | |||||||||||||
In millions of dollars, except as otherwise noted | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||
Commissions and fees | $ | 4,318 | $ | 4,449 | $ | 4,267 | (3 | )% | 4 | % | ||||
Administration and other fiduciary fees | 2,790 | 2,775 | 2,753 | 1 | 1 | |||||||||
Investment banking | 3,618 | 3,029 | 3,520 | 19 | (14 | ) | ||||||||
Principal transactions | 4,130 | 4,873 | 5,566 | (15 | ) | (12 | ) | |||||||
Other | (85 | ) | 1,821 | 1,686 | NM | 8 | ||||||||
Total non-interest revenue | $ | 14,771 | $ | 16,947 | $ | 17,792 | (13 | )% | (5 | )% | ||||
Net interest revenue (including dividends) | 15,829 | 15,055 | 15,415 | 5 | (2 | ) | ||||||||
Total revenues, net of interest expense | $ | 30,600 | $ | 32,002 | $ | 33,207 | (4 | )% | (4 | )% | ||||
Total operating expenses | $ | 20,232 | $ | 20,768 | $ | 19,626 | (3 | )% | 6 | % | ||||
Net credit losses | $ | 282 | $ | 619 | $ | 573 | (54 | )% | 8 | % | ||||
Provision (release) for unfunded lending commitments | 39 | 89 | (29 | ) | (56 | ) | NM | |||||||
Credit reserve build (release) | (45 | ) | (556 | ) | (626 | ) | 92 | 11 | ||||||
Provisions for loan losses and benefits and claims | $ | 276 | $ | 152 | $ | (82 | ) | 82 | % | NM | ||||
Income from continuing operations before taxes | $ | 10,092 | $ | 11,082 | $ | 13,663 | (9 | )% | (19 | )% | ||||
Income taxes | 2,102 | 2,820 | 3,490 | (25 | ) | (19 | ) | |||||||
Income from continuing operations | $ | 7,990 | $ | 8,262 | $ | 10,173 | (3 | )% | (19 | )% | ||||
Noncontrolling interests | 128 | 56 | 131 | NM | (57 | ) | ||||||||
Net income | $ | 7,862 | $ | 8,206 | $ | 10,042 | (4 | )% | (18 | )% | ||||
Average assets (in billions of dollars) | $ | 1,042 | $ | 1,024 | $ | 949 | 2 | % | 8 | % | ||||
Return on average assets | 0.75 | % | 0.80 | % | 1.06 | % | ||||||||
Efficiency ratio | 66 | % | 65 | % | 59 | % | ||||||||
Revenues by region | ||||||||||||||
North America | $ | 8,668 | $ | 10,002 | $ | 11,878 | (13 | )% | (16 | )% | ||||
EMEA | 9,993 | 10,707 | 10,205 | (7 | ) | 5 | ||||||||
Latin America | 4,816 | 4,083 | 4,084 | 18 | - | |||||||||
Asia | 7,123 | 7,210 | 7,040 | (1 | ) | 2 | ||||||||
Total revenues | $ | 30,600 | $ | 32,002 | $ | 33,207 | (4 | )% | (4 | )% | ||||
Income from continuing operations by region | ||||||||||||||
North America | $ | 1,481 | $ | 1,459 | $ | 2,985 | 2 | % | (51 | )% | ||||
EMEA | 2,598 | 3,130 | 3,029 | (17 | ) | 3 | ||||||||
Latin America | 1,962 | 1,613 | 1,756 | 22 | (8 | ) | ||||||||
Asia | 1,949 | 2,060 | 2,403 | (5 | ) | (14 | ) | |||||||
Total income from continuing operations | $ | 7,990 | $ | 8,262 | $ | 10,173 | (3 | )% | (19 | )% | ||||
Average loans by region ( in billions of dollars ) | ||||||||||||||
North America | $ | 83 | $ | 69 | $ | 67 | 20 | % | 3 | % | ||||
EMEA | 53 | 47 | 38 | 13 | 24 | |||||||||
Latin America | 35 | 29 | 23 | 21 | 26 | |||||||||
Asia | 63 | 52 | 36 | 21 | 44 | |||||||||
Total average loans | $ | 234 | $ | 197 | $ | 164 | 19 | % | 20 | % |
NM Not meaningful
24
SECURITIES AND BANKING
Securities and Banking
(S&B) offers a wide array of
investment and commercial banking services and products for corporations,
governments, institutional and public sector entities, and high-net-worth
individuals. S&B transacts with
clients in both cash instruments and derivatives, including fixed income,
foreign currency, equity, and commodity products. S&B includes investment banking and advisory services, lending, debt and
equity sales and trading, institutional brokerage, derivative services and
private banking.
S&B revenue is generated primarily from fees and spreads associated with
these activities. S&B earns fee income
for assisting clients in clearing transactions, providing brokerage and
investment banking services and other such activities. Revenue generated from
these activities is recorded in Commissions and fees . In
addition, as a market maker, S&B facilitates transactions,
including holding product inventory to meet client demand, and earns the
differential between the price at which it buys and sells the products. These
price differentials and the unrealized gains and losses on the inventory are
recorded in Principal
transactions . S&B interest income earned on inventory and loans held is recorded as a
component of net interest revenue.
% Change | % Change | |||||||||||||
In millions of dollars, except as otherwise noted | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||
Net interest revenue | $ | 9,676 | $ | 9,123 | $ | 9,728 | 6 | % | (6 | )% | ||||
Non-interest revenue | 10,067 | 12,300 | 13,394 | (18 | ) | (8 | ) | |||||||
Revenues, net of interest expense | $ | 19,743 | $ | 21,423 | $ | 23,122 | (8 | )% | (7 | )% | ||||
Total operating expenses | 14,444 | 15,013 | 14,628 | (4 | ) | 3 | ||||||||
Net credit losses | 168 | 602 | 567 | (72 | ) | 6 | ||||||||
Provision (release) for unfunded lending commitments | 33 | 86 | (29 | ) | (62 | ) | NM | |||||||
Credit reserve build (release) | (79 | ) | (572 | ) | (562 | ) | 86 | (2 | ) | |||||
Provisions for credit losses | $ | 122 | $ | 116 | $ | (24 | ) | 5 | % | NM | ||||
Income before taxes and noncontrolling interests | $ | 5,177 | $ | 6,294 | $ | 8,518 | (18 | )% | (26 | )% | ||||
Income taxes | 682 | 1,381 | 1,967 | (51 | ) | (30 | ) | |||||||
Income from continuing operations | $ | 4,495 | $ | 4,913 | $ | 6,551 | (9 | )% | (25 | )% | ||||
Noncontrolling interests | 111 | 37 | 110 | NM | (66 | ) | ||||||||
Net income | $ | 4,384 | $ | 4,876 | $ | 6,441 | (10 | )% | (24 | )% | ||||
Average assets (in billions of dollars) | $ | 904 | $ | 894 | $ | 842 | 1 | % | 6 | % | ||||
Return on average assets | 0.48 | % | 0.55 | % | 0.77 | % | ||||||||
Efficiency ratio | 73 | % | 70 | % | 63 | % | ||||||||
Revenues by region | ||||||||||||||
North America | $ | 6,104 | $ | 7,558 | $ | 9,393 | (19 | )% | (20 | )% | ||||
EMEA | 6,417 | 7,221 | 6,849 | (11 | ) | 5 | ||||||||
Latin America | 3,019 | 2,370 | 2,554 | 27 | (7 | ) | ||||||||
Asia | 4,203 | 4,274 | 4,326 | (2 | ) | (1 | ) | |||||||
Total revenues | $ | 19,743 | $ | 21,423 | $ | 23,122 | (8 | )% | (7 | )% | ||||
Income from continuing operations by region | ||||||||||||||
North America | $ | 1,011 | $ | 1,044 | $ | 2,495 | (3 | )% | (58 | )% | ||||
EMEA | 1,354 | 2,000 | 1,811 | (32 | ) | 10 | ||||||||
Latin America | 1,308 | 974 | 1,093 | 34 | (11 | ) | ||||||||
Asia | 822 | 895 | 1,152 | (8 | ) | (22 | ) | |||||||
Total income from continuing operations | $ | 4,495 | $ | 4,913 | $ | 6,551 | (9 | )% | (25 | )% | ||||
Securities and Banking revenue details (excluding CVA/DVA) | ||||||||||||||
Total investment banking | $ | 3,641 | $ | 3,310 | $ | 3,828 | 10 | % | (14 | )% | ||||
Fixed income markets | 13,961 | 10,891 | 14,265 | 28 | (24 | ) | ||||||||
Equity markets | 2,418 | 2,402 | 3,710 | 1 | (35 | ) | ||||||||
Lending | 997 | 1,809 | 971 | (45 | ) | 86 | ||||||||
Private bank | 2,314 | 2,138 | 2,009 | 8 | 6 | |||||||||
Other Securities and Banking | (1,101 | ) | (859 | ) | (1,262 | ) | (28 | ) | 32 | |||||
Total Securities and Banking revenues (ex-CVA/DVA) | $ | 22,230 | $ | 19,691 | $ | 23,521 | 13 | % | (16 | )% | ||||
CVA/DVA | $ | (2,487 | ) | $ | 1,732 | $ | (399 | ) | NM | NM | ||||
Total revenues, net of interest expense | $ | 19,743 | $ | 21,423 | $ | 23,122 | (8 | )% | (7 | )% |
NM Not meaningful
25
2012 vs. 2011
Net income decreased 10%. Excluding $2.5 billion of negative CVA/DVA (see table
below), net income increased 56%, primarily driven by a 13% increase in
revenues.
Revenues decreased 8%,
driven by the negative CVA/DVA and mark-to-market losses on hedges related to
accrual loans. Excluding CVA/DVA:
Expenses decreased 4%.
Excluding repositioning charges of $349 million in 2012 (including $237 million
in the fourth quarter of 2012) compared to $267 million in 2011, expenses also
decreased 4%, driven by efficiency savings from ongoing re-engineering programs
and lower compensation costs. The repositioning efforts in S&B announced in the fourth quarter of 2012 are designed to streamline S&B 's client coverage model and improve overall
productivity.
Provisions increased 5% to $122 million, primarily reflecting lower loan loss reserve
releases, partially offset by lower net credit losses, both due to portfolio
stabilization.
26
2011 vs. 2010
Net income decreased 24%. Excluding $1.7 billion of positive CVA/DVA (see table
below), net income decreased 43%, primarily driven by lower revenues in most
products and higher expenses.
Revenues decreased 7%, driven by lower revenues partially offset by positive
CVA/DVA resulting from the widening of Citi's credit spreads in 2011. Excluding
CVA/DVA:
Expenses increased 3%,
primarily due to investment spending, which largely occurred in the first half
of 2011, relating to new hires and technology investments. The increase in
expenses was also driven by higher repositioning charges and the negative impact
of FX translation (which contributed approximately 2% to the expense growth),
partially offset by productivity saves and reduced incentive compensation due to
business results. The increase in the level of investment spending in S&B was largely completed at the end of
2011.
Provisions increased $140 million, primarily due to builds in
the allowance for unfunded lending commitments as a result of portfolio growth
and higher net credit losses.
In millions of dollars | 2012 | 2011 | 2010 | ||||||
S&B CVA/DVA | |||||||||
Fixed Income Markets | $ | (2,047 | ) | $ | 1,368 | $ | (187 | ) | |
Equity Markets | (424 | ) | 355 | (207 | ) | ||||
Private Bank | (16 | ) | 9 | (5 | ) | ||||
Total S&B CVA/DVA | $ | (2,487 | ) | $ | 1,732 | $ | (399 | ) | |
S&B Hedges on Accrual | |||||||||
Loans gain (loss) (1) | $ | (698 | ) | $ | 519 | $ | (65 | ) |
(1) | Hedges on S&B accrual loans reflect the mark-to-market on credit derivatives used to hedge the corporate loan accrual portfolio. The fixed premium cost of these hedges is included (netted against) the core lending revenues to reflect the cost of the credit protection. |
27
TRANSACTION SERVICES
Transaction Services is composed of Treasury and Trade Solutions and Securities and Fund Services. Treasury and Trade Solutions provides comprehensive cash management and trade finance services for corporations, financial institutions and public sector entities worldwide. Securities and Fund Services provides securities services to investors, such as global asset managers, custody and clearing services to intermediaries, such as broker-dealers, and depository and agency/trust services to multinational corporations and governments globally. Revenue is generated from net interest revenue on deposits and trade loans as well as fees for transaction processing and fees on assets under custody and administration.
% Change | % Change | |||||||||||||
In millions of dollars, except as otherwise noted | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||
Net interest revenue | $ | 6,153 | $ | 5,932 | $ | 5,687 | 4 | % | 4 | % | ||||
Non-interest revenue | 4,704 | 4,647 | 4,398 | 1 | 6 | |||||||||
Total revenues, net of interest expense | $ | 10,857 | $ | 10,579 | $ | 10,085 | 3 | % | 5 | |||||
Total operating expenses | 5,788 | 5,755 | 4,998 | 1 | 15 | |||||||||
Provisions (releases) for credit losses and for benefits and claims | 154 | 36 | (58 | ) | NM | NM | ||||||||
Income before taxes and noncontrolling interests | $ | 4,915 | $ | 4,788 | $ | 5,145 | 3 | % | (7 | )% | ||||
Income taxes | 1,420 | 1,439 | 1,523 | (1 | ) | (6 | ) | |||||||
Income from continuing operations | 3,495 | 3,349 | 3,622 | 4 | (8 | ) | ||||||||
Noncontrolling interests | 17 | 19 | 21 | (11 | ) | (10 | ) | |||||||
Net income | $ | 3,478 | $ | 3,330 | $ | 3,601 | 4 | % | (8 | )% | ||||
Average assets (in billions of dollars) | $ | 138 | $ | 130 | $ | 107 | 6 | % | 21 | |||||
Return on average assets | 2.52 | % | 2.56 | % | 3.37 | % | ||||||||
Efficiency ratio | 53 | % | 54 | % | 50 | % | ||||||||
Revenues by region | ||||||||||||||
North America | $ | 2,564 | $ | 2,444 | $ | 2,485 | 5 | % | (2 | )% | ||||
EMEA | 3,576 | 3,486 | 3,356 | 3 | 4 | |||||||||
Latin America | 1,797 | 1,713 | 1,530 | 5 | 12 | |||||||||
Asia | 2,920 | 2,936 | 2,714 | (1 | ) | 8 | ||||||||
Total revenues | $ | 10,857 | $ | 10,579 | $ | 10,085 | 3 | % | 5 | % | ||||
Income from continuing operations by region | ||||||||||||||
North America | $ | 470 | $ | 415 | $ | 490 | 13 | % | (15 | )% | ||||
EMEA | 1,244 | 1,130 | 1,218 | 10 | (7 | ) | ||||||||
Latin America | 654 | 639 | 663 | 2 | (4 | ) | ||||||||
Asia | 1,127 | 1,165 | 1,251 | (3 | ) | (7 | ) | |||||||
Total income from continuing operations | $ | 3,495 | $ | 3,349 | $ | 3,622 | 4 | % | (8 | )% | ||||
Foreign Currency (FX) Translation Impact | ||||||||||||||
Total revenue-as reported | $ | 10,857 | $ | 10,579 | $ | 10,085 | 3 | % | 5 | % | ||||
Impact of FX translation (1) | - | (254 | ) | (84 | ) | |||||||||
Total revenues-ex-FX | $ | 10,857 | $ | 10,325 | $ | 10,001 | 5 | % | 3 | % | ||||
Total operating expenses-as reported | $ | 5,788 | $ | 5,755 | $ | 4,998 | 1 | % | 15 | % | ||||
Impact of FX translation (1) | - | (64 | ) | (3 | ) | |||||||||
Total operating expenses-ex-FX | $ | 5,788 | $ | 5,691 | $ | 4,995 | 2 | % | 14 | % | ||||
Net income-as reported | $ | 3,478 | $ | 3,330 | $ | 3,601 | 4 | % | (8 | )% | ||||
Impact of FX translation (1) | - | (173 | ) | (65 | ) | |||||||||
Net income-ex-FX | $ | 3,478 | $ | 3,157 | $ | 3,536 | 10 | % | (11 | )% | ||||
Key indicators (in billions of dollars) | ||||||||||||||
Average deposits and other customer liability balances-as reported | $ | 404 | $ | 364 | $ | 334 | 11 | % | 9 | % | ||||
Impact of FX translation (1) | - | (6 | ) | 1 | ||||||||||
Average deposits and other customer liability balances-ex-FX | $ | 404 | $ | 358 | $ | 335 | 13 | % | 7 | % | ||||
EOP assets under custody (2) (in trillions of dollars) | $ | 13.2 | $ | 12.0 | $ | 12.3 | 10 | % | (2 | )% |
(1) | Reflects the impact of foreign exchange (FX) translation into U.S. dollars at the current exchange rate for all periods presented. |
(2) | Includes assets under custody, assets under trust and assets under administration. |
NM | Not meaningful |
28
The discussion of the results of operations for Transaction Services below excludes the impact of FX translation for all periods presented. Presentation of the results of operations, excluding the impact of FX translation, are non-GAAP financial measures. Citi believes the presentation of Transaction Services' results excluding the impact of FX translation is a more meaningful depiction of the underlying fundamentals of the business. For a reconciliation of certain of these metrics to the reported results, see the table above.
2012 vs. 2011
Net income increased 10%, reflecting growth in revenues, partially offset by higher
expenses and credit costs.
Revenues increased 5% as higher trade loan and deposit balances were partially
offset by continued spread compression and lower market volumes. Treasury and
Trade Solutions revenues were up 8%, driven by growth in trade as end-of-period
trade loans grew 23%. Cash management revenues also grew, reflecting growth in
deposit balances and fees, partially offset by continued spread compression due
to the continued low interest rate environment. Securities and Fund Services
revenues decreased 2%, primarily driven by lower market volumes as well as
spread compression on deposits. Citi expects spread compression will continue to
negatively impact Transaction
Services .
Expenses increased 2%. Excluding repositioning charges of $134 million in 2012
(including $95 million in the fourth quarter of 2012) compared to $60 million in
2011, expenses were flat, primarily driven by incremental investment spending
and higher legal and related costs, offset by efficiency savings.
Average deposits and other customer liabilities grew 13%, driven by focused deposit building activities as well as continued
market demand for U.S. dollar deposits (for additional information on Citi's
deposits, see "Capital Resources and Liquidity-Funding and Liquidity"
below).
2011 vs. 2010
Net income decreased 11%, as higher expenses, driven by investment spending,
outpaced revenue growth.
Revenues grew 3%, driven
primarily by international growth, as improvement in fees and increased deposit
balances more than offset the continued spread compression. Treasury and Trade Solutions revenues increased 4%, driven primarily by growth
in the trade and commercial cards businesses and increased deposits, partially
offset by the impact of the continued low rate environment. Securities and Fund Services revenues increased 1%, primarily due to growth in
transaction and settlement volumes, driven in part by the increase in activity
resulting from market volatility, and new client mandates.
Expenses increased 14%, reflecting investment spending and higher business
volumes, partially offset by productivity savings.
Average deposits and other customer liabilities grew 7% and included the shift to operating balances as the business
continued to emphasize more stable, lower cost deposits as a way to mitigate
spread compression (for additional information on Citi's deposits, see "Capital
Resources and Liquidity-Funding and Liquidity" below).
29
CORPORATE/OTHER
Corporate/Other includes unallocated global staff functions (including finance, risk, human resources, legal and compliance), other corporate expenses and unallocated global operations and technology expenses, Corporate Treasury and discontinued operations. At December 31, 2012, this segment had approximately $249 billion of assets, or 13%, of Citigroup's total assets, consisting primarily of Citi's liquidity portfolio (approximately $46 billion of cash and cash equivalents and $145 billion of liquid available-for-sale securities, each as of December 31, 2012).
In millions of dollars | 2012 | 2011 | 2010 | |||||||
Net interest revenue | $ | (271 | ) | $ | 26 | $ | 828 | |||
Non-interest revenue | 463 | 859 | 926 | |||||||
Revenues, net of interest expense | $ | 192 | $ | 885 | $ | 1,754 | ||||
Total operating expenses | $ | 3,214 | $ | 2,293 | $ | 1,506 | ||||
Provisions for loan losses and for benefits and claims | (1 | ) | 1 | (1 | ) | |||||
Loss from continuing operations before taxes | $ | (3,021 | ) | $ | (1,409 | ) | $ | 249 | ||
Benefits for income taxes | (1,396 | ) | (681 | ) | 7 | |||||
Income (loss) from continuing operations | $ | (1,625 | ) | $ | (728 | ) | $ | 242 | ||
Income (loss) from discontinued operations, net of taxes | (149 | ) | 112 | (68 | ) | |||||
Net income (loss) before attribution of noncontrolling interests | $ | (1,774 | ) | $ | (616 | ) | $ | 174 | ||
Noncontrolling interests | 85 | (27 | ) | (48 | ) | |||||
Net income (loss) | $ | (1,859 | ) | $ | (589 | ) | $ | 222 |
2012 vs. 2011
The net loss increased by $1.3 billion due to a
decrease in revenues and an increase in repositioning charges and legal and
related expenses. The net loss increased despite a $582 million tax benefit
related to the resolution of certain tax audit items in the third quarter of
2012 (see the "Executive Summary" above for a discussion of this tax benefit as
well as the impact of minority investments on the results of operations of Corporate/Other during 2012, also as discussed
below).
Revenues decreased $693
million, driven by an other-than-temporary impairment of pretax $(1.2) billion
on Citi's investment in Akbank and a loss of pretax $424 million on the partial
sale of Akbank, as well as lower investment yields on Citi's treasury portfolio
and the negative impact of hedging activities. These negative impacts to
revenues were partially offset by an aggregate pretax gain on the sales of
Citi's remaining interest in HDFC and its interest in SPDB.
Expenses increased by $921 million, largely driven by higher legal and related
costs, as well as higher repositioning charges, including $253 million in the
fourth quarter of 2012.
2011 vs. 2010
The net loss of $589 million reflected a decline
of $811 million compared to net income of $222 million in 2010. This decline was
primarily due to lower revenues and higher expenses.
Revenues decreased $869 million, primarily driven by lower investment yields on
Citi's treasury portfolio and lower gains on sales of available-for-sale
securities, partially offset by gains on hedging activities and the gain on the
sale of a portion of Citi's holdings in HDFC (see the "Executive Summary"
above).
Expenses increased $787 million, due to higher legal and
related costs and investment spending, primarily in
technology.
30
CITI HOLDINGS
Citi Holdings contains
businesses and portfolios of assets that Citigroup has determined are not
central to its core Citicorp businesses and consists of Brokerage and Asset Management, Local Consumer
Lending and Special Asset Pool .
Consistent with its strategy, Citi intends to continue to exit these
businesses and portfolios as quickly as practicable in an economically rational
manner. Citi Holdings assets have declined by approximately $302 billion since
the end of 2009. To date, the decrease in Citi Holdings assets has been
primarily driven by asset sales and business dispositions, as well as portfolio
run-off and pay-downs. Asset levels have also been impacted, and will continue
to be impacted, by charge-offs and fair value marks as and when appropriate.
Citi expects the wind-down of the assets in Citi Holdings will continue,
although likely at a slower pace than experienced over the past several years as
Citi has already disposed of some of the larger operating businesses within Citi
Holdings (see also "Risk Factors-Business and Operational Risks"
below).
As of December 31, 2012, Citi
Holdings assets were approximately $156 billion, a decrease of approximately 31%
year-over-year and a decrease of 9% from September 30, 2012. The decline in
assets of $69 billion in 2012 was composed of a decline of approximately $17
billion related to MSSB (primarily consisting of $6.6 billion related to the
sale of Citi's 14% interest and impairment on the remaining investment and
approximately $11 billion of margin loans), $18 billion of other asset sales and
business dispositions, $30 billion of run-off and pay-downs and $4 billion of
charge-offs and fair value marks. Citi Holdings represented approximately 8% of
Citi's assets as of December 31, 2012, while Citi Holdings risk-weighted assets
(as defined under current regulatory guidelines) of approximately $144 billion
at December 31, 2012 represented approximately 15% of Citi's risk-weighted
assets as of that date.
% Change | % Change | ||||||||||||
In millions of dollars, except as otherwise noted | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | ||||||||
Net interest revenue | $ | 2,577 | $ | 3,683 | $ | 8,085 | (30 | )% | (54 | )% | |||
Non-interest revenue | (3,410 | ) | 2,588 | 4,186 | NM | (38 | ) | ||||||
Total revenues, net of interest expense | $ | (833 | ) | $ | 6,271 | $ | 12,271 | NM | (49 | )% | |||
Provisions for credit losses and for benefits and claims | |||||||||||||
Net credit losses | $ | 5,842 | $ | 8,576 | $ | 13,958 | (32 | )% | (39 | )% | |||
Credit reserve build (release) | (1,551 | ) | (3,277 | ) | (2,494 | ) | 53 | (31 | ) | ||||
Provision for loan losses | $ | 4,291 | $ | 5,299 | $ | 11,464 | (19 | )% | (54 | )% | |||
Provision for benefits and claims | 651 | 779 | 781 | (16 | ) | - | |||||||
Provision (release) for unfunded lending commitments | (56 | ) | (41 | ) | (82 | ) | (37 | ) | 50 | ||||
Total provisions for credit losses and for benefits and claims | $ | 4,886 | $ | 6,037 | $ | 12,163 | (19 | )% | (50 | )% | |||
Total operating expenses | $ | 5,253 | $ | 6,464 | $ | 7,356 | (19 | )% | (12 | )% | |||
Loss from continuing operations before taxes | $ | (10,972 | ) | $ | (6,230 | ) | $ | (7,248 | ) | (76 | )% | 14 | % |
Benefits for income taxes | (4,412 | ) | (2,127 | ) | (2,815 | ) | NM | 24 | |||||
(Loss) from continuing operations | $ | (6,560 | ) | $ | (4,103 | ) | $ | (4,433 | ) | (60 | )% | 7 | % |
Noncontrolling interests | 3 | 119 | 207 | (97 | ) | (43 | ) | ||||||
Citi Holdings net loss | $ | (6,563 | ) | $ | (4,222 | ) | $ | (4,640 | ) | (55 | )% | 9 | % |
Balance sheet data (in billions of dollars) | |||||||||||||
Average assets | $ | 194 | $ | 269 | $ | 420 | (28 | )% | (36 | )% | |||
Return on average assets | (3.38 | )% | (1.57 | )% | (1.10 | )% | |||||||
Efficiency ratio | NM | 103 | % | 60 | % | ||||||||
Total EOP assets | $ | 156 | $ | 225 | $ | 313 | (31 | ) | (28 | ) | |||
Total EOP loans | 116 | 141 | 199 | (18 | ) | (29 | ) | ||||||
Total EOP deposits | $ | 68 | $ | 62 | $ | 76 | 10 | (18 | ) |
NM Not meaningful |
31
BROKERAGE AND ASSET MANAGEMENT
Brokerage and Asset Management (BAM) primarily consists of Citi's remaining investment in, and assets related to, MSSB. At December 31, 2012, BAM had approximately $9 billion of assets, or approximately 6% of Citi Holdings assets, of which approximately $8 billion related to MSSB. During 2012, BAM 's assets declined 67% due to the decline in assets related to MSSB (see discussion below). At December 31, 2012, the MSSB assets were composed of an approximate $4.7 billion equity investment and $3 billion of other MSSB financing (consisting of approximately $2 billion of preferred stock and $1 billion of loans). For information on the agreement entered into with Morgan Stanley regarding MSSB on September 11, 2012, see Citigroup's Current Report on Form 8-K filed with the SEC on September 11, 2012. The remaining assets in BAM consist of other retail alternative investments.
% Change | % Change | ||||||||||||
In millions of dollars, except as otherwise noted | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | ||||||||
Net interest revenue | $ | (471 | ) | $ | (180 | ) | $ | (277 | ) | NM | 35 | % | |
Non-interest revenue | (4,228 | ) | 462 | 886 | NM | (48 | ) | ||||||
Total revenues, net of interest expense | $ | (4,699 | ) | $ | 282 | $ | 609 | NM | (54 | )% | |||
Total operating expenses | $ | 462 | $ | 729 | $ | 987 | (37 | )% | (26 | )% | |||
Net credit losses | $ | - | $ | 4 | $ | 17 | (100 | )% | (76 | )% | |||
Credit reserve build (release) | (1 | ) | (3 | ) | (18 | ) | 67 | 83 | |||||
Provision for unfunded lending commitments | - | (1 | ) | (6 | ) | 100 | 83 | ||||||
Provision (release) for benefits and claims | - | 48 | 38 | (100 | ) | 26 | |||||||
Provisions for credit losses and for benefits and claims | $ | (1 | ) | $ | 48 | $ | 31 | NM | 55 | % | |||
Income (loss) from continuing operations before taxes | $ | (5,160 | ) | $ | (495 | ) | $ | (409 | ) | NM | (21 | )% | |
Income taxes (benefits) | (1,970 | ) | (209 | ) | (183 | ) | NM | (14 | ) | ||||
Loss from continuing operations | $ | (3,190 | ) | $ | (286 | ) | $ | (226 | ) | NM | (27 | )% | |
Noncontrolling interests | 3 | 9 | 11 | (67 | )% | (18 | ) | ||||||
Net (loss) | $ | (3,193 | ) | $ | (295 | ) | $ | (237 | ) | NM | (24 | )% | |
EOP assets (in billions of dollars) | $ | 9 | $ | 27 | $ | 27 | (67 | )% | -% | ||||
EOP deposits (in billions of dollars) | 59 | 55 | 58 | 7 | (5 | ) |
NM Not meaningful
The net loss in BAM increased by $2.9 billion due to the loss related to MSSB, consisting of (i) an $800 million after-tax loss on Citi's sale of the 14% interest in MSSB to Morgan Stanley and (ii) a $2.1 billion after-tax other-than-temporary impairment of the carrying value of Citigroup's remaining 35% interest in MSSB. For additional information on MSSB, see Note 15 to the Consolidated Financial Statements. Excluding the impact of MSSB, the net loss in BAM was flat.
Revenues decreased by $5.0 billion to $(4.7) billion due to the MSSB impact described above. Excluding this impact, revenues in BAM were $(15) million, compared to $282 million in the prior-year period, due to higher funding costs related to MSSB assets, partially offset by a higher equity contribution from MSSB.
Expenses decreased 37%, primarily driven by lower legal and related costs.
Provisions decreased by $49 million due to the absence of certain unfunded lending commitments.
2011 vs. 2010
The net loss increased 24% as lower revenues were
partly offset by lower expenses.
Revenues decreased by 54%,
driven by the 2010 sale of Citi's Habitat and Colfondos businesses (including a
$78 million pretax gain on sale related to the transactions in the first quarter
of 2010) and lower revenues from MSSB.
Expenses decreased 26%,
also driven by divestitures, as well as lower legal and related
expenses.
Provisions increased 55%, primarily due to the absence of
the prior-year reserve releases.
32
LOCAL CONSUMER LENDING
Local Consumer Lending (LCL) includes a substantial portion of Citigroup's North America mortgage business (see "North America Consumer Mortgage Lending" below), CitiFinancial North America (consisting of the OneMain and CitiFinancial Servicing businesses), remaining student loans and credit card portfolios, and other local consumer finance businesses globally (including Western European cards and retail banking and Japan Consumer Finance). At December 31, 2012, LCL consisted of approximately $126 billion of assets (with approximately $123 billion in North America ), or approximately 81% of Citi Holdings assets, and thus represents the largest segment within Citi Holdings. The North America assets primarily consist of residential mortgages (residential first mortgages and home equity loans), which stood at $92 billion as of December 31, 2012.
% Change | % Change | ||||||||||||
In millions of dollars, except as otherwise noted | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | ||||||||
Net interest revenue | $ | 3,335 | $ | 4,268 | $ | 7,143 | (22 | )% | (40 | )% | |||
Non-interest revenue | 1,031 | 1,174 | 1,667 | (12 | ) | (30 | ) | ||||||
Total revenues, net of interest expense | $ | 4,366 | $ | 5,442 | $ | 8,810 | (20 | )% | (38 | )% | |||
Total operating expenses | $ | 4,465 | $ | 5,442 | $ | 5,798 | (18 | )% | (6 | )% | |||
Net credit losses | $ | 5,870 | $ | 7,504 | $ | 11,928 | (22 | )% | (37 | )% | |||
Credit reserve build (release) | (1,410 | ) | (1,419 | ) | (765 | ) | 1 | (85 | ) | ||||
Provision for benefits and claims | 651 | 731 | 743 | (11 | ) | (2 | ) | ||||||
Provisions for credit losses and for benefits and claims | $ | 5,111 | $ | 6,816 | $ | 11,906 | (25 | )% | (43 | )% | |||
(Loss) from continuing operations before taxes | $ | (5,210 | ) | (6,816 | ) | $ | (8,894 | ) | 24 | % | 23 | % | |
Benefits for income taxes | (2,017 | ) | (2,403 | ) | (3,529 | ) | 16 | 32 | |||||
(Loss) from continuing operations | $ | (3,193 | ) | $ | (4,413 | ) | $ | (5,365 | ) | 28 | % | 18 | % |
Noncontrolling interests | - | 2 | 8 | (100 | ) | (75 | ) | ||||||
Net (loss) | $ | (3,193 | ) | $ | (4,415 | ) | $ | (5,373 | ) | 28 | % | 18 | % |
Balance sheet data (in billions of dollars) | |||||||||||||
Average assets | $ | 142 | $ | 186 | $ | 280 | (24 | )% | (34 | )% | |||
Return on average assets | (2.25 | )% | (2.37 | )% | (1.92 | )% | |||||||
Efficiency ratio | 102 | % | 100 | % | 66 | % | |||||||
EOP assets | $ | 126 | $ | 157 | $ | 206 | (20 | ) | (24 | ) | |||
Net credit losses as a percentage of average loans | 4.72 | % | 4.69 | % | 5.16 | % |
2012 vs. 2011
The net loss decreased by 28%, driven mainly by
the improved credit environment primarily in North America mortgages.
Revenues decreased 20%,
primarily due to a 22% net interest revenue decline resulting from a 24% decline
in loan balances. This decline was driven by continued asset sales, divestitures
and run-off. Non-interest revenue decreased 12%, primarily due to portfolio
run-off, partially offset by a lower repurchase reserve build. The repurchase
reserve build was $700 million compared to $945 million in 2011 (see "Managing
Global Risk-Credit Risk-Citigroup Residential Mortgages-Representations and
Warranties" below).
Expenses decreased 18%,
driven by lower volumes and divestitures. Legal and related expenses in LCL remained elevated due to the previously disclosed
$305 million charge in the fourth quarter of 2012, related to the settlement
agreement reached with the Federal Reserve Board and OCC regarding the
independent foreclosure review process required by the Federal Reserve Board and
OCC consent orders entered into in April 2011 (see "Managing
Global Risk-Credit
Risk- North America Consumer Mortgage Lending-Independent Foreclosure
Review Settlement" below). In addition, legal and related expenses were elevated
due to additional reserves related to payment protection insurance (PPI) (see
"Payment Protection Insurance" below) and other legal and related matters
impacting the business.
Provisions decreased 25%,
driven primarily by the improved credit environment in North America mortgages, lower volumes and divestitures. Net
credit losses decreased by 22%, despite being impacted by incremental
charge-offs of approximately $635 million in the third quarter of 2012 relating
to OCC guidance regarding the treatment of mortgage loans where the borrower has
gone through Chapter 7 bankruptcy (see Note 1 to the Consolidated Financial
Statements) and $370 million of incremental charge-offs in the first quarter of
2012 related to previously deferred principal balances on modified mortgages
related to anticipated forgiveness of principal in connection with the national
mortgage settlement. Substantially all of these charge-offs were offset by
reserve releases. In addition, net credit losses in 2012 were negatively
impacted by an additional aggregate amount
33
of $146 million related to the
national mortgage settlement. Citi expects that net credit losses in LCL will continue to be negatively impacted by Citi's
fulfillment of the terms of the national mortgage settlement through the second
quarter of 2013 (see "Managing Global Risk-Credit Risk-National Mortgage
Settlement" below).
Excluding the incremental charge-offs arising from the OCC guidance and
the previously deferred balances on modified mortgages, net credit losses
in LCL would have declined 35%, with net credit losses
in North America mortgages decreasing by 20%, other portfolios
in North America by 56% and international by 49%. These declines
were driven by lower overall asset levels driven partly by the sale of
delinquent loans as well as underlying credit improvements. While Citi expects
some continued improvement in credit going forward, declines in net credit
losses in LCL will largely be driven by declines in asset
levels, including continued sales of delinquent residential first mortgages (see
"Managing Global Risk-Credit Risk- North America Consumer
Mortgage Lending- North
America Consumer Mortgage
Quarterly Credit Trends" below).
Average assets declined
24%, driven by the impact of asset sales and portfolio run-off, including
declines of $16 billion in North
America mortgage loans and $11
billion in international average assets.
2011 vs. 2010
The net loss decreased 18%, driven primarily by
the improving credit environment, including lower net credit losses and higher
loan loss reserve releases in mortgages. The improvement in credit was partly
offset by lower revenues due to decreasing asset balances and sales.
Revenues decreased 38%, driven primarily by the lower asset balances due to asset
sales, divestitures and run-offs, which also drove the 40% decline in net
interest revenue. Non-interest revenue decreased 30% due to the impact of
divestitures. The repurchase reserve build was $945 million compared to $917
million in 2010.
Expenses decreased 6%, driven by the lower volumes and
divestitures, partly offset by higher legal and related expenses, including
those relating to the national mortgage settlement, reserves related to
potential PPI refunds (see "Payment Protection Insurance" below) and
implementation costs associated with the Federal Reserve Board and OCC consent
orders (see "Managing Global Risk-Credit Risk- North America Consumer Mortgage Lending-National Mortgage
Settlement" below).
Provisions decreased 43%,
driven by lower credit losses and higher loan loss reserve releases. Net credit
losses decreased 37%, primarily due to the credit improvements of $1.6 billion
in North America mortgages, although the pace of the decline in
net credit losses slowed. Loan loss reserve releases increased 85%, driven by
higher releases in CitiFinancial North America due to better credit quality and
lower loan balances.
Average assets declined
34%, primarily driven by portfolio run-off and the impact of asset sales and
divestitures, including continued sales of student loans, auto loans and
delinquent mortgages.
34
Japan Consumer Finance
Citi continues to actively
monitor various aspects of its Japan Consumer Finance business, including
customer defaults, refund claims and litigation, as well as financial,
legislative, regulatory, judicial and other political developments, relating to
the charging of "gray zone" interest. Gray zone interest represents interest at
rates that are legal but for which claims may not be enforceable. In 2008, Citi
decided to exit its Japan Consumer Finance business and has liquidated
approximately 85% of the portfolio since that time. As of December 31, 2012,
Citi's Japan Consumer Finance business had approximately $709 million in
outstanding loans that currently charge or have previously charged interest
rates in the gray zone, compared to approximately $2.1 billion as of December
31, 2011. However, Citi could also be subject to refund claims on previously
outstanding loans that charged gray zone interest and thus could be subject to
losses on loans in excess of these amounts.
During 2012, LCL recorded a net
decrease in its reserves related to customer refunds in the Japan Consumer
Finance business of approximately $117 million (pretax) compared to an increase
in reserves of approximately $119 million (pretax) in 2011. At December 31,
2012, Citi's reserves related to customer refunds in the Japan Consumer Finance
business were approximately $736 million. Although Citi recorded a net decrease
in its reserves in 2012, the charging of gray zone interest continues to be a
focus in Japan. Regulators in Japan have stated that they are planning to submit
legislation to establish a framework for collective legal action proceedings. If
such legislation is passed and implemented, it could potentially introduce a
more accessible procedure for current and former customers to pursue refund
claims.
Citi continues to monitor and
evaluate these developments and the potential impact to both currently and
previously outstanding loans in this business and its reserves related thereto.
The potential amount of losses and their impact on Citi is subject to
significant uncertainty and continues to be difficult to predict.
Payment Protection
Insurance
The alleged
misselling of PPI by financial institutions in the U.K. has been, and continues to
be, the subject of intense review and focus by U.K. regulators, particularly the
Financial Services Authority (FSA). The FSA has found certain problems across
the industry with how these products were sold, including customers not
realizing that the cost of PPI premiums was being added to their loan or PPI
being unsuitable for the customer.
PPI is designed to cover a customer's loan repayments if certain events
occur, such as long-term illness or unemployment. Prior to 2008, certain of
Citi's U.K. consumer finance businesses, primarily CitiFinancial Europe plc and
Canada Square Operations Ltd (formerly Egg Banking plc), engaged in the sale of
PPI. While Citi has sold a significant portion of these businesses, and the
remaining businesses are in the process of wind down, Citi generally remains
subject to customer complaints for, and retains the potential liability relating
to, the sale of PPI by these businesses.
In
2011, the FSA required all firms engaged in the sale of PPI in the U.K. to review
their historical sales processes for PPI. In addition, the FSA is requiring all
such firms to contact proactively any customers who may have been mis-sold PPI
after January 2005 and invite them to have their individual sale reviewed
(Customer Contact Exercise).
Citi initiated a pilot Customer Contact Exercise during the third quarter
of 2012 and expects to initiate the full Customer Contact Exercise during the
first quarter of 2013; however, the timing and details of the Customer Contact
Exercise are subject to discussion and agreement with the FSA. While Citi is not
required to contact customers proactively for the sale of PPI prior to January
2005, it is still subject to customer complaints for those sales.
During the third quarter of 2012, the FSA also
requested that a number of firms, including Citi, re-evaluate PPI customer
complaints that were reviewed and rejected prior to December 2010 to determine
if, based on the current regulations for the assessment of PPI complaints,
customers would have been entitled to redress (Customer Re-Evaluation Exercise).
Citi currently expects to complete the Customer Re-Evaluation Exercise by the
end of the first quarter of 2013.
Redress, whether as a result of customer complaints pursuant to or
outside of the required Customer Contact Exercise, or pursuant to the Customer
Re-Evaluation Exercise, generally involves the repayment of premiums and the
refund of all applicable contractual interest together with compensatory
interest of 8%. Citi estimates that the number of PPI policies sold after
January 2005 (across all applicable Citi businesses in the U.K.) was approximately
417,000, for which premiums totaling approximately $490 million were collected.
As noted above, however, Citi also remains subject to customer complaints on the
sale of PPI prior to January 2005, and thus it could be subject to customer
complaints substantially higher than this amount.
During 2012, Citi increased its PPI reserves by
approximately $266 million ($175 million of which was recorded in LCL and $91 million of which was recorded in Corporate/Other for discontinued operations). This amount
included a $148 million reserve increase in the fourth quarter of 2012 ($57
million of which was recorded in LCL and $91 million of
which was recorded in Corporate/Other for
discontinued operations). PPI claims paid during 2012 totaled $181 million,
which were charged against the reserve. The increase in the reserves during 2012
was mainly due to a significant increase in the level of customer complaints
outside of the Customer Contact Exercise, which Citi believes is largely as a
result of the continued regulatory focus and increased customer awareness of PPI
issues across the industry. The fourth quarter of 2012 reserve increase was also
driven by a higher than anticipated rate of response to the pilot Customer
Contact Exercise, which Citi believes was also likely due in part to the
heightened awareness of PPI issues. At December 31, 2012, Citi's PPI reserve was
$376 million.
While the number
of customer complaints regarding the sale of PPI significantly increased in
2012, and the number could continue to increase, the potential losses and impact
on Citi remain volatile and are subject to significant
uncertainty.
35
SPECIAL ASSET POOL
The Special Asset Pool (SAP) consists of a portfolio of securities, loans and other assets that Citigroup intends to continue to reduce over time through asset sales and portfolio run-off. SAP had approximately $21 billion of assets as of December 31, 2012, which constituted approximately 13% of Citi Holdings assets.
% Change | % Change | ||||||||||||
In millions of dollars, except as otherwise noted | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | ||||||||
Net interest revenue | $ | (287 | ) | $ | (405 | ) | $ | 1,219 | 29 | % | NM | ||
Non-interest revenue | (213 | ) | 952 | 1,633 | NM | (42 | )% | ||||||
Revenues, net of interest expense | $ | (500 | ) | $ | 547 | $ | 2,852 | NM | (81 | )% | |||
Total operating expenses | $ | 326 | $ | 293 | $ | 571 | 11 | % | (49 | )% | |||
Net credit losses | $ | (28 | ) | $ | 1,068 | $ | 2,013 | NM | (47 | )% | |||
Credit reserve builds (releases) | (140 | ) | (1,855 | ) | (1,711 | ) | 92 | (8 | ) | ||||
Provision (releases) for unfunded lending commitments | (56 | ) | (40 | ) | (76 | ) | (40 | ) | 47 | ||||
Provisions for credit losses and for benefits and claims | $ | (224 | ) | $ | (827 | ) | $ | 226 | 73 | % | NM | ||
Income (loss) from continuing operations before taxes | $ | (602 | ) | $ | 1,081 | $ | 2,055 | NM | (47 | )% | |||
Income taxes (benefits) | (425 | ) | 485 | 897 | NM | (46 | ) | ||||||
Net income (loss) from continuing operations | $ | (177 | ) | $ | 596 | $ | 1,158 | NM | (49 | )% | |||
Noncontrolling interests | - | 108 | 188 | (100 | )% | (43 | ) | ||||||
Net income (loss) | $ | (177 | ) | $ | 488 | $ | 970 | NM | (50 | )% | |||
EOP assets (in billions of dollars) | $ | 21 | $ | 41 | $ | 80 | (49 | )% | (49 | )% |
NM Not meaningful |
2012 vs. 2011
The net loss of $177 million reflected a decline
of $665 million compared to net income of $488 million in 2011, mainly driven by
a decrease in revenues and higher credit costs, partially offset by a tax
benefit on the sale of a business in 2012.
Revenues were $(500)
million. CVA/DVA was $157 million, compared to $74 million in 2011. Excluding
the impact of CVA/DVA, revenues in SAP were $(657) million,
compared to $473 million in 2011. The decline in revenues was driven in part by
lower non-interest revenue due to the absence of positive private equity marks
and lower gains on asset sales, as well as an aggregate repurchase reserve build
in 2012 of approximately $244 million related to private-label mortgage
securitizations (see "Managing Global Risk-Credit Risk-Citigroup Residential
Mortgages-Representations and Warranties" below). The loss in net interest
revenues improved from the prior year due to lower funding costs, but remained
negative. Citi expects continued negative net interest revenues, as interest
earning assets continue to be a smaller portion of the overall asset
pool.
Expenses increased 11%, driven by higher legal and related
costs, partially offset by lower expenses from lower volume and asset
levels.
Provisions were a benefit of $224 million, which represented
a 73% decline from 2011 due to a decrease in loan loss reserve releases (a
release of $140 million compared to a release of $1.9 billion in 2011),
partially offset by a $1.1 billion decline in net credit losses.
Assets declined 49% to $21 billion, primarily driven by sales, amortization and
prepayments. Asset sales of $11 billion generated pretax gains of approximately
$0.3 billion, compared to asset sales of $29 billion and pretax gains of $0.5
billion in 2011.
2011 vs. 2010
Net income decreased 50%, driven by the decrease in revenues due to lower asset
balances, partially offset by lower expenses and improved
credit.
Revenues decreased 81%,
driven by the overall decline in net interest revenue during the year, as
interest-earning assets declined and thus represented a smaller portion of the
overall asset pool. Non-interest revenue decreased by 42% due to lower gains on
asset sales and the absence of positive private equity marks from the prior-year
period.
Expenses decreased 49%, driven by lower volume and asset
levels, as well as lower legal and related costs.
Provisions were a benefit of $827 million, which represented an improvement of $1.1
billion from the prior year, as credit conditions improved during 2011. The
improvement was primarily driven by a $945 million decrease in net credit losses
as well as an increase in loan loss reserve releases.
Assets declined 49%, primarily driven by sales, amortization and prepayments.
Asset sales of $29 billion generated pretax gains of approximately $0.5 billion,
compared to asset sales of $39 billion and pretax gains of $1.3 billion in
2010.
36
BALANCE SHEET REVIEW
The following sets forth a general discussion of the changes in certain of the more significant line items of Citi's Consolidated Balance Sheet. For additional information on Citigroup's aggregate liquidity resources, including its deposits, short-term and long-term debt and secured financing transactions, see "Capital Resources and Liquidity-Funding and Liquidity" below.
EOP | EOP | ||||||||||||||||||
4Q12 vs. 3Q12 | 4Q12 vs. | ||||||||||||||||||
December 31, | September 30, | December 31, | Increase | % | 4Q11 Increase | % | |||||||||||||
In billions of dollars | 2012 | 2012 | 2011 | (decrease) | Change | (decrease) | Change | ||||||||||||
Assets | |||||||||||||||||||
Cash and deposits with banks | $ | 139 | $ | 204 | $ | 184 | $ | (65 | ) | (32 | )% | $ | (45 | ) | (24 | )% | |||
Federal funds sold and securities borrowed | |||||||||||||||||||
or purchased under agreements to resell | 261 | 278 | 276 | (17 | ) | (6 | ) | (15 | ) | (5 | ) | ||||||||
Trading account assets | 321 | 315 | 292 | 6 | 2 | 29 | 10 | ||||||||||||
Investments | 312 | 295 | 293 | 17 | 6 | 19 | 6 | ||||||||||||
Loans, net of unearned income and | |||||||||||||||||||
allowance for loan losses | 630 | 633 | 617 | (3 | ) | - | 13 | 2 | |||||||||||
Other assets | 202 | 206 | 212 | (4 | ) | (2 | ) | (10 | ) | (5 | ) | ||||||||
Total assets | $ | 1,865 | $ | 1,931 | $ | 1,874 | $ | (66 | ) | (3 | )% | $ | (9 | ) | - | % | |||
Liabilities | |||||||||||||||||||
Deposits | $ | 931 | $ | 945 | $ | 866 | $ | (14 | ) | (1 | )% | $ | 65 | 8 | % | ||||
Federal funds purchased and securities loaned or sold | |||||||||||||||||||
under agreements to repurchase | 211 | 224 | 198 | (13 | ) | (6 | ) | 13 | 7 | ||||||||||
Trading account liabilities | 116 | 130 | 126 | (14 | ) | (11 | ) | (10 | ) | (8 | ) | ||||||||
Short-term borrowings | 52 | 49 | 54 | 3 | 6 | (2 | ) | (4 | ) | ||||||||||
Long-term debt | 239 | 272 | 324 | (33 | ) | (12 | ) | (85 | ) | (26 | ) | ||||||||
Other liabilities | 125 | 122 | 126 | 3 | 2 | (1 | ) | (1 | ) | ||||||||||
Total liabilities | $ | 1,674 | $ | 1,742 | $ | 1,694 | $ | (68 | ) | (4 | )% | $ | (20 | ) | (1 | )% | |||
Total equity | 191 | 189 | 180 | 2 | 1 | 11 | 6 | ||||||||||||
Total liabilities and equity | $ | 1,865 | $ | 1,931 | $ | 1,874 | $ | (66 | ) | (3 | )% | $ | (9 | ) | - | % |
ASSETS
Cash and Deposits with
Banks
Cash and deposits
with banks is composed of both Cash and due from banks and Deposits with banks. Cash and due from banks includes (i) cash on hand at
Citi's domestic and overseas offices, and (ii) non-interest-bearing balances due
from banks, including non-interest-bearing demand deposit accounts with
correspondent banks, central banks (such as the Federal Reserve Bank), and other
banks or depository institutions for normal operating purposes. Deposits with banks includes interest-bearing balances, demand
deposits and time deposits held in or due from banks (including correspondent
banks, central banks and other banks or depository institutions) maintained for,
among other things, normal operating and regulatory reserve requirement
purposes.
During 2012, cash and deposits
with banks decreased $45 billion, or 24%, driven by a $53 billion, or 34%,
decrease in deposits with banks offset by an $8 billion, or 27%,
increase in cash and due from banks. The purposeful reduction in cash and
deposits with banks was in keeping with Citi's continued strategy to deleverage
the balance sheet and deploy excess cash into investments. The overall decline
resulted from cash used to repay long-term debt maturities (net of modest
issuances) and to reduce other long-term debt and short-term borrowings
(including the redemption of trust preferred
securities and debt
repurchases), the funding of asset growth in the Citicorp businesses (including
continued lending to both Consumer and Corporate clients), as well as the
reinvestment of cash into higher yielding available-for-sale (AFS) securities.
These uses of cash were partially offset by the cash generated by the $65
billion increase in customer deposits over the course of 2012, as well as cash
generated from asset sales, primarily in Citi Holdings (including the $1.89
billion paid to Citi by Morgan Stanley for the 14% interest in MSSB, as
described under "Citi Holdings-Brokerage and Asset Management" and in Note 15 to
the Consolidated Financial Statements), and from Citi's operations.
The $65 billion, or 32%, decline in cash and
deposits with banks during the fourth quarter of 2012 was similarly driven by
cash used to repay short-term borrowings and long-term debt obligations and the
redeployment of excess cash into investments. The reduction during the fourth
quarter also reflected a net decline in client deposits that was expected during
the quarter and reflected the run-off of episodic deposits that came in at the
end of the third quarter and the outflows of deposits related to the Transaction
Account Guarantee (TAG) program, partially offset by deposit growth in the
normal course of business. These deposit changes are discussed further under
"Capital Resources and Liquidity-Funding and Liquidity"
below.
37
Federal Funds Sold and Securities
Borrowed or
Purchased Under Agreements
to Resell (Reverse Repos)
Federal funds sold consist of unsecured advances to third parties of
excess balances in reserve accounts held at the Federal Reserve Banks. During
2011 and 2012, Citi's federal funds sold were not significant.
Reverse repos and securities borrowing
transactions decreased by $15 billion, or 5%, during 2012, and declined $17
billion, or 6%, compared to the third quarter of 2012. The majority of this
decrease was due to changes in the mix of assets within certain Securities and Banking businesses between reverse repos and trading
account assets.
For further information
regarding these balance sheet categories, see Notes 1 and 12 to the Consolidated
Financial Statements.
Trading Account
Assets
Trading account
assets includes debt and
marketable equity securities, derivatives in a net receivable position, residual
interests in securitizations and physical commodities inventory. In addition,
certain assets that Citigroup has elected to carry at fair value, such as
certain loans and purchase guarantees, are also included in Trading account assets .
During 2012, trading account assets increased $29 billion, or 10%,
primarily due to increases in equity securities ($24 billion, or 72%), foreign
government securities ($10 billion, or 12%), and mortgage-backed securities ($4
billion, or 13%), partially offset by an $8 billion, or 12%, decrease in
derivative assets. A significant portion of the increase in Citi's trading
account assets (approximately half of which occurred in the first quarter of
2012, with the remainder of the growth occurring steadily during the rest of
2012) was the reversal of reductions in trading positions during the second half
of 2011 as a result of the economic uncertainty that largely began in the third
quarter of 2011 and continued into the fourth quarter. During 2011, Citi reduced
its rates trading in the G10, particularly in Europe, given the market
environment in the region, and credit trading and securitized markets also
declined due to reduced client volume and less market liquidity. In 2012, the
increases in trading assets and the assets classes noted above were the result
of a more favorable market environment and more robust trading activities, as
well as a change in the asset mix of positions held in certain equities
businesses.
Average trading account assets
were $251 billion in 2012, compared to $270 billion in 2011. The decrease versus
the prior year reflected the higher levels of trading assets (excluding
derivative assets) during the first half of 2011, prior to the de-risking and
market-related reductions noted above.
For further information on Citi's trading account assets, see Notes 1 and
14 to the Consolidated Financial Statements.
Investments
Investments consist of
debt and equity securities that are available-for-sale, debt securities that are
held-to-maturity, non-marketable equity securities that are carried at fair
value, and non-marketable equity securities carried at cost. Debt securities
include bonds, notes and redeemable preferred stock, as well as certain
mortgage-backed and asset-backed securities and other structured notes.
Marketable and non-marketable equity securities carried at fair value include
common and nonredeemable preferred stock. Nonmarketable equity securities
carried at cost primarily include equity shares issued by the Federal Reserve
Bank and the Federal Home Loan Banks that Citigroup is required to
hold.
During 2012, investments increased by
$19 billion, or 6%, primarily due to a $23 billion, or 9%, increase in AFS,
predominantly foreign government and U.S. Treasury securities, partially offset
by a $1 billion decrease in held-to-maturity securities. The majority of this
increase occurred during the fourth quarter of 2012, where investments increased
$17 billion, or 6%, in total. The increase in AFS was part of the continued
balance sheet strategy to redeploy excess cash into higher-yielding
investments.
As
noted above, the increase in AFS included growth in foreign government
securities (as the increase in deposits in many countries resulted in higher
liquid resources and drove the investment in foreign government AFS, primarily
in Asia and Latin America ) and U.S.
Treasury securities. This growth and reallocation was supplemented by smaller
increases in mortgage-backed securities (both U.S. government agency MBS and
non-U.S. residential MBS), municipal securities and other asset-backed
securities, partially offset by a reduction in U.S. federal agency
securities.
For
further information regarding investments, see Notes 1 and 15 to the
Consolidated Financial Statements.
38
Loans
Loans represent the largest asset category of Citi's balance sheet. Citi's
total loans (as discussed throughout this section, are presented net of unearned
income) were $655 billion at December 31, 2012, compared to $647 billion at
December 31, 2011. Excluding the impact of FX translation, loans increased 1%
year-over-year. At year-end 2012, Consumer and Corporate loans represented 62%
and 38%, respectively, of Citi's total loans.
In Citicorp, loans were up 7% to $540 billion at year end 2012, as
compared to $507 billion at the end of 2011. Citicorp Corporate loans increased
11% year-over-year, and Citicorp Consumer loans were up 3%
year-over-year.
Corporate loan growth was driven by Transaction Services (25% growth), particularly from increased trade
finance lending in most regions, as well as growth in the Securities and Banking Corporate loan book (6% growth), with increased
borrowing generally across most segments and regions. Growth in Corporate lending
included increases in Private Bank and certain middle-market client segments
overseas, with other Corporate lending segments down slightly as compared to
year-end 2011. During 2012, Citi continued to optimize the Corporate lending
portfolio, including selling certain loans that did not fit its target market
profile.
Consumer loan growth was
driven by Global Consumer Banking , as loans
increased 3% year-over-year, led by Latin America and Asia. North
America Consumer loans decreased
1%, driven by declines in card loans, as the cards market reflected overall
consumer deleveraging as well as other regulatory changes. Retail lending in North America , however, increased 10% year-over-year, as a
result of higher real estate lending as well as growth in the commercial
segment.
In contrast, Citi Holdings
loans declined 18% year-over-year, due to the continued run-off and asset sales
in the portfolios.
During 2012, average loans of $649 billion yielded an average rate of
7.5%, compared to $644 billion and 7.8%, respectively, in the prior year. For
further information on Citi's loan portfolios, see generally "Managing Global
Risk-Credit Risk" below and Notes 1 and 16 to the Consolidated Financial
Statements.
Other
Assets
Other assets consists of Brokerage receivables, Goodwill,
Intangibles and Mortgage servicing rights in addition to Other assets (including, among other items, loans
held-for-sale, deferred tax assets, equity-method investments, interest and fees
receivable, premises and equipment, certain end-user derivatives in a net
receivable position, repossessed assets and other receivables).
During 2012, other assets decreased $10 billion,
or 5%, primarily due to a $5 billion decrease in brokerage receivables, a $3
billion decrease in other assets, a $1 billion decrease in mortgage servicing
rights (see "Managing Global Risk-Credit Risk- North America Consumer Mortgage Lending-Mortgage Servicing
Rights" below), and a $1 billion decrease in intangible assets.
For further information on brokerage receivables,
see Note 13 to the Consolidated Financial Statements. For further information
regarding goodwill and intangible assets, see Note 18 to the Consolidated
Financial Statements.
LIABILITIES
Deposits
Deposits represent customer funds that are payable on demand or upon maturity.
For a discussion of Citi's deposits, see "Capital Resources and
Liquidity-Funding and Liquidity" below.
Federal Funds Purchased and Securities
Loaned or Sold
Under Agreements to Repurchase (Repos)
Federal funds purchased consist of unsecured
advances of excess balances in reserve accounts held at the Federal Reserve
Banks from third parties. During 2011 and 2012, Citi's federal funds purchased
were not significant.
For further information on Citi's secured
financing transactions, including repos and securities lending transactions, see
"Capital Resources and Liquidity-Funding and Liquidity" below. See also Notes 1
and 12 to the Consolidated Financial Statements for additional information on
these balance sheet categories.
Trading Account
Liabilities
Trading account
liabilities includes securities
sold, not yet purchased (short positions), and derivatives in a net payable
position, as well as certain liabilities that Citigroup has elected to carry at
fair value.
During 2012, trading account
liabilities decreased by $10 billion, or 8%, primarily due to a $5 billion, or
8%, decrease in derivative liabilities, and a reduction in short equity
positions. In 2012, average trading account liabilities were $74 billion,
compared to $86 billion in 2011, primarily due to lower average volumes of short
equity positions.
For further information on Citi's trading account liabilities, see Notes
1 and 14 to the Consolidated Financial Statements.
Debt
Debt is composed of both short-term and long-term borrowings. Short-term
borrowings include commercial paper and borrowings from unaffiliated banks and
other market participants. Long-term borrowings include senior notes,
subordinated notes, trust preferred securities and securitizations. For further
information on Citi's long-term and short-term debt borrowings during 2012, see
"Capital Resources and Liquidity-Funding and Liquidity" below and Notes 1 and 19
to the Consolidated Financial Statements.
Other
Liabilities
Other
liabilities consists of Brokerage payables and Other liabilities (including, among other items, accrued expenses and other payables,
deferred tax liabilities, certain end-user derivatives in a net payable
position, and reserves for legal claims, taxes, restructuring, unfunded lending
commitments, and other matters).
During 2012, other liabilities decreased $1 billion, or 1%. For further
information regarding Brokerage
payables , see Note 13 to the
Consolidated Financial Statements.
39
SEGMENT BALANCE SHEET AT DECEMBER 31, 2012 (1)
Citigroup | ||||||||||||||||||||||
Corporate/Other, | Parent Company- | |||||||||||||||||||||
Discontinued | Issued | |||||||||||||||||||||
Operations | Long-Term | |||||||||||||||||||||
Global | Institutional | and | Debt and | |||||||||||||||||||
Consumer | Clients | Consolidating | Subtotal | Citi | Stockholders' | Total Citigroup | ||||||||||||||||
In millions of dollars | Banking | Group | Eliminations | (2) | Citicorp | Holdings | Equity | (3) | Consolidated | |||||||||||||
Assets | ||||||||||||||||||||||
Cash and deposits with banks | $ | 19,474 | $ | 71,152 | $ | 46,634 | $ | 137,260 | $ | 1,327 | $ | - | $ | 138,587 | ||||||||
Federal funds sold and securities borrowed or | ||||||||||||||||||||||
purchased under agreements to resell | 3,243 | 256,864 | - | 260,107 | 1,204 | - | 261,311 | |||||||||||||||
Trading account assets | 12,716 | 300,360 | 244 | 313,320 | 7,609 | - | 320,929 | |||||||||||||||
Investments | 29,914 | 112,928 | 151,822 | 294,664 | 17,662 | - | 312,326 | |||||||||||||||
Loans, net of unearned income and | ||||||||||||||||||||||
allowance for loan losses | 283,365 | 241,819 | - | 525,184 | 104,825 | - | 630,009 | |||||||||||||||
Other assets | 53,180 | 75,543 | 49,154 | 177,877 | 23,621 | - | 201,498 | |||||||||||||||
Total assets | $ | 401,892 | $ | 1,058,666 | $ | 247,854 | $ | 1,708,412 | $ | 156,248 | $ | - | $ | 1,864,660 | ||||||||
Liabilities and equity | ||||||||||||||||||||||
Total deposits | $ | 336,942 | $ | 523,083 | $ | 2,579 | $ | 862,604 | $ | 67,956 | $ | - | $ | 930,560 | ||||||||
Federal funds purchased and securities loaned or | ||||||||||||||||||||||
sold under agreements to repurchase | 6,835 | 204,397 | - | 211,232 | 4 | - | 211,236 | |||||||||||||||
Trading account liabilities | 167 | 113,530 | 535 | 114,232 | 1,317 | - | 115,549 | |||||||||||||||
Short-term borrowings | 140 | 46,535 | 4,974 | 51,649 | 378 | - | 52,027 | |||||||||||||||
Long-term debt | 2,688 | 43,515 | 8,917 | 55,120 | 7,790 | 176,553 | 239,463 | |||||||||||||||
Other liabilities | 18,752 | 79,384 | 17,693 | 115,829 | 8,999 | - | 124,828 | |||||||||||||||
Net inter-segment funding (lending) | 36,368 | 48,222 | 211,208 | 295,798 | 69,804 | (365,602 | ) | - | ||||||||||||||
Total liabilities | $ | 401,892 | $ | 1,058,666 | $ | 245,906 | $ | 1,706,464 | $ | 156,248 | $ | (189,049 | ) | $ | 1,673,663 | |||||||
Total equity | - | - | 1,948 | 1,948 | - | 189,049 | 190,997 | |||||||||||||||
Total liabilities and equity | $ | 401,892 | $ | 1,058,666 | $ | 247,854 | $ | 1,708,412 | $ | 156,248 | $ | - | $ | 1,864,660 |
(1) | The supplemental information presented in the table above reflects Citigroup's consolidated GAAP balance sheet by reporting segment as of December 31, 2012. The respective segment information depicts the assets and liabilities managed by each segment as of such date. While this presentation is not defined by GAAP, Citi believes that these non-GAAP financial measures enhance investors' understanding of the balance sheet components managed by the underlying business segments, as well as the beneficial inter-relationship of the asset and liability dynamics of the balance sheet components among Citi's business segments. | |
(2) | Consolidating eliminations for total Citigroup and Citigroup parent company assets and liabilities are recorded within the Corporate/Other segment. | |
(3) | The total stockholders' equity and substantially all long-term debt of Citigroup resides in the Citigroup parent company Consolidated Balance Sheet. Citigroup allocates stockholders' equity and long-term debt to its businesses through inter-segment allocations as described above. |
40
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL RESOURCES
Overview
Capital is used principally to support assets in Citi's
businesses and to absorb credit, market and operational losses. Citi primarily
generates capital through earnings from its operating businesses. Citi may
augment its capital through issuances of common stock, perpetual preferred stock
and equity issued through awards under employee benefit plans, among other
issuances. During the fourth quarter of 2012, Citi issued approximately $2.25
billion of noncumulative perpetual preferred stock (see "Funding and
Liquidity-Long-Term Debt" below).
Citi has also previously augmented
its regulatory capital through the issuance of subordinated debt underlying
trust preferred securities, although the treatment of such instruments as
regulatory capital will be phased out under the U.S. Basel III rules in
accordance with the timeframe specified by The Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (Dodd-Frank Act) (see "Regulatory Capital
Standards" below). Accordingly, Citi has begun to redeem certain of its trust
preferred securities (see "Funding and Liquidity-Long-Term Debt" below) in
contemplation of such future phase out.
Further, changes in regulatory and
accounting standards as well as the impact of future events on Citi's business
results, such as corporate and asset dispositions, may also affect Citi's
capital levels.
Citigroup's capital management
framework is designed to ensure that Citigroup and its principal subsidiaries
maintain sufficient capital consistent with each entity's respective risk
profile and all applicable regulatory standards and guidelines. Citi assesses
its capital adequacy against a series of internal quantitative capital goals,
designed to evaluate the Company's capital levels in expected and stressed
economic environments. Underlying these internal quantitative capital goals are
strategic capital considerations, centered on preserving and building financial
strength. Senior management, with oversight from the Board of Directors, is
responsible for the capital assessment and planning process, which is integrated
into Citi's capital plan, as part of the Federal Reserve Board's Comprehensive
Capital Analysis and Review (CCAR) process. Implementation of the capital plan
is carried out mainly through Citigroup's Asset and Liability Committee, with
oversight from the Risk Management and Finance Committee of Citigroup's Board of
Directors. Asset and liability committees are also established globally and for
each significant legal entity, region, country and/or major line of
business.
Capital Ratios Under Current
Regulatory Guidelines
Citigroup is subject
to the risk-based capital guidelines (currently Basel I) issued by the Federal
Reserve Board. Historically, capital adequacy has been measured, in part, based
on two risk-based capital ratios, the Tier 1 Capital and Total Capital (Tier 1
Capital + Tier 2 Capital) ratios. Tier 1 Capital consists of the sum of "core
capital elements," such as qualifying common stockholders' equity, as adjusted,
qualifying perpetual preferred stock, qualifying noncontrolling interests, and
qualifying trust preferred securities, principally reduced by goodwill, other
disallowed intangible assets, and
disallowed deferred tax assets. Total
Capital also includes "supplementary" Tier 2 Capital elements, such as
qualifying subordinated debt and a limited portion of the allowance for credit
losses. Both measures of capital adequacy are stated as a percentage of
risk-weighted assets.
In 2009, the U.S. banking regulators
developed a new supervisory measure of capital termed "Tier 1 Common," which is
defined as Tier 1 Capital less non-common elements, including qualifying
perpetual preferred stock, qualifying noncontrolling interests, and qualifying
trust preferred securities.
Citigroup's risk-weighted assets, as
currently computed under Basel I, are principally derived from application of
the risk-based capital guidelines related to the measurement of credit risk.
Pursuant to these guidelines, on-balance-sheet assets and the credit equivalent
amount of certain off-balance-sheet exposures (such as financial guarantees,
unfunded lending commitments, letters of credit and derivatives) are assigned to
one of several prescribed risk-weight categories based upon the perceived credit
risk associated with the obligor or, if relevant, the guarantor, the nature of
the collateral, or external credit ratings. Risk-weighted assets also
incorporate a measure for market risk on covered trading account positions and
all foreign exchange and commodity positions whether or not carried in the
trading account. Excluded from risk-weighted assets are any assets, such as
goodwill and deferred tax assets, to the extent required to be deducted from
regulatory capital.
Citigroup is also subject to a
Leverage ratio requirement, a non-risk-based measure of capital adequacy, which
is defined as Tier 1 Capital as a percentage of quarterly adjusted average total
assets.
To be "well capitalized" under
current federal bank regulatory agency definitions, a bank holding company must
have a Tier 1 Capital ratio of at least 6%, a Total Capital ratio of at least
10%, and not be subject to a Federal Reserve Board directive to maintain higher
capital levels. In addition, the Federal Reserve Board expects bank holding
companies to maintain a minimum Leverage ratio of 3% or 4%, depending on factors
specified in its regulations. The following table sets forth Citigroup's
regulatory capital ratios as of December 31, 2012 and December 31,
2011:
At year end | 2012 | 2011 | |||
Tier 1 Common | 12.67 | % | 11.80 | % | |
Tier 1 Capital | 14.06 | 13.55 | |||
Total Capital (Tier 1 Capital + Tier 2 Capital) | 17.26 | 16.99 | |||
Leverage | 7.48 | 7.19 |
As indicated in the table above, Citigroup was "well capitalized" under the current federal bank regulatory agency definitions as of December 31, 2012 and December 31, 2011.
41
Components of Capital Under Current Regulatory Guidelines
In millions of dollars at year end | 2012 | 2011 | |||||
Tier 1 Common Capital | |||||||
Citigroup common stockholders' equity | $ | 186,487 | $ | 177,494 | |||
Regulatory Capital Adjustments and Deductions: | |||||||
Less: Net unrealized gains (losses) on securities available-for-sale, net of tax (1)(2) | 597 | (35 | ) | ||||
Less: Accumulated net losses on cash flow hedges, net of tax | (2,293 | ) | (2,820 | ) | |||
Less: Pension liability adjustment, net of tax (3) | (5,270 | ) | (4,282 | ) | |||
Less: Cumulative effect included in fair value of financial liabilities attributable to the change in | |||||||
own creditworthiness, net of tax (4) | 18 | 1,265 | |||||
Less: Disallowed deferred tax assets (5) | 40,148 | 37,980 | |||||
Less: Intangible assets: | |||||||
Goodwill | 25,686 | 25,413 | |||||
Other disallowed intangible assets | 4,004 | 4,550 | |||||
Other | (502 | ) | (569 | ) | |||
Total Tier 1 Common Capital | $ | 123,095 | $ | 114,854 | |||
Tier 1 Capital | |||||||
Qualifying perpetual preferred stock | $ | 2,562 | $ | 312 | |||
Qualifying trust preferred securities | 9,983 | 15,929 | |||||
Qualifying noncontrolling interests | 892 | 779 | |||||
Total Tier 1 Capital | $ | 136,532 | $ | 131,874 | |||
Tier 2 Capital | |||||||
Allowance for credit losses (6) | $ | 12,330 | $ | 12,423 | |||
Qualifying subordinated debt (7) | 18,689 | 20,429 | |||||
Net unrealized pretax gains on available-for-sale equity securities (1) | 135 | 658 | |||||
Total Tier 2 Capital | $ | 31,154 | $ | 33,510 | |||
Total Capital (Tier 1 Capital + Tier 2 Capital) | $ | 167,686 | $ | 165,384 | |||
Risk-Weighted Assets | |||||||
In millions of dollars at year end | |||||||
Risk-Weighted Assets (using Basel I) (8)(9) | $ | 971,253 | $ | 973,369 | |||
Estimated Risk-Weighted Assets (using Basel II.5) (10) | $ | 1,110,859 | N/A |
(1) | Tier 1 Capital excludes net unrealized gains (losses) on available-for-sale (AFS) debt securities and net unrealized gains on AFS equity securities with readily determinable fair values, in accordance with risk-based capital guidelines. In arriving at Tier 1 Capital, banking organizations are required to deduct net unrealized losses on AFS equity securities with readily determinable fair values, net of tax. Banking organizations are permitted to include in Tier 2 Capital up to 45% of net unrealized pretax gains on AFS equity securities with readily determinable fair values. | |
(2) | In addition, includes the net amount of unamortized loss on held-to-maturity (HTM) securities. This amount relates to securities which were previously transferred from AFS to HTM, and non-credit-related factors such as changes in interest rates and liquidity spreads for HTM securities with other-than-temporary impairment. | |
(3) | The Federal Reserve Board granted interim capital relief for the impact of ASC 715-20, Compensation-Retirement Benefits-Defined Benefits Plans (formerly SFAS 158). | |
(4) | The impact of changes in Citigroup's own creditworthiness in valuing liabilities for which the fair value option has been elected is excluded from Tier 1 Capital, in accordance with risk-based capital guidelines. | |
(5) | Of Citi's approximate $55 billion of net deferred tax assets at December 31, 2012, approximately $11 billion of such assets were includable without limitation in regulatory capital pursuant to risk-based capital guidelines, while approximately $40 billion of such assets exceeded the limitation imposed by these guidelines and, as "disallowed deferred tax assets," were deducted in arriving at Tier 1 Capital. Citigroup's approximate $4 billion of other net deferred tax assets primarily represented effects of the pension liability and cash flow hedges adjustments, which are permitted to be excluded prior to deriving the amount of net deferred tax assets subject to limitation under the guidelines. | |
(6) | Includable up to 1.25% of risk-weighted assets. Any excess allowance for credit losses is deducted in arriving at risk-weighted assets. | |
(7) | Includes qualifying subordinated debt in an amount not exceeding 50% of Tier 1 Capital. | |
(8) | Risk-weighted assets as computed under Basel I credit risk and market risk capital rules. | |
(9) | Includes risk-weighted credit equivalent amounts, net of applicable bilateral netting agreements, of $62 billion for interest rate, commodity and equity derivative contracts, foreign exchange contracts, and credit derivatives as of December 31, 2012, compared with $67 billion as of December 31, 2011. Market risk equivalent assets included in risk-weighted assets amounted to $41.5 billion at December 31, 2012 and $46.8 billion at December 31, 2011. Risk-weighted assets also include the effect of certain other off-balance-sheet exposures, such as unused lending commitments and letters of credit, and reflect deductions such as certain intangible assets and any excess allowance for credit losses. | |
(10) | Risk-weighted assets as computed under Basel I credit risk capital rules and final (revised) market risk capital rules (Basel II.5). |
42
Basel II.5 and
III
In June 2012, the U.S. banking
agencies released final (revised) market risk capital rules (Basel II.5), which
became effective on January 1, 2013. At the same time, the U.S. banking agencies
also released proposed Basel III rules, although the timing of the finalization
and effective date(s) of these rules is subject to uncertainty. Collectively
these rules would establish an integrated framework of standards applicable to
virtually all U.S. banking organizations, including Citi and Citibank, N.A., and
upon implementation would comprehensively revise and replace existing regulatory
capital requirements. For additional information on the proposed U.S. Basel III
and final Basel II.5 rules see "Regulatory Capital Standards" and "Risk
Factors-Regulatory Risks" below.
Citi's estimated Tier 1 Common ratio
as of December 31, 2012, assuming application of the Basel II.5 rules, was
11.08%, compared to 12.67% under Basel I. 11 This decline reflects the
significant increase in risk-weighted assets under the Basel II.5 rules relative
to those under the current Basel I market risk capital rules. Furthermore, Citi
continues to incorporate mandated enhancements and refinements to its Basel II.5
market risk models for which conditional approval has been received from the
Federal Reserve Board and OCC. Citi's Basel II.5 risk-weighted assets would be
substantially higher absent the successful incorporation of these required
enhancements and refinements.
At December 31, 2012, Citi's
estimated Basel III Tier 1 Common ratio was 8.7%, compared to an estimated 8.6%
at September 30, 2012 (each based on total risk-weighted assets calculated under
the proposed U.S. Basel III "advanced approaches" and including Basel
II.5). 12 This slight increase quarter-over-quarter was primarily due
to lower risk-weighted assets, partially offset by a decline in Tier 1 Common
Capital attributable largely to changes in OCI as well as certain other
components.
Citi's estimated Basel III Tier 1
Common ratio is based on its understanding, expectations and interpretation of
the proposed U.S. Basel III requirements, anticipated compliance with all
necessary enhancements to model calibration and other refinements, as well as
further regulatory clarity and implementation guidance in the
U.S.
11 | Citi's estimate of risk-weighted assets under Basel II.5 is a non-GAAP financial measure as of December 31, 2012. Citi believes this metric provides useful information to investors and others by measuring Citi's progress against future regulatory capital standards. | |
12 | Citi's estimated Basel III Tier 1 Common ratio and its related components are non-GAAP financial measures. Citi believes this ratio and its components (the latter of which are presented in the table below) provide useful information to investors and others by measuring Citi's progress against expected future regulatory capital standards. |
43
Components of Tier 1 Common Capital and Risk-Weighted Assets Under Basel III
In millions of dollars | December 31, 2012 | September 30, 2012 | |||||
Tier 1 Common Capital (1) | |||||||
Citigroup common stockholders' equity | $ | 186,487 | $ | 186,465 | |||
Add: Qualifying minority interests | 171 | 161 | |||||
Regulatory Capital Adjustments and Deductions: | |||||||
Less: Accumulated net unrealized losses on cash flow hedges, net of tax | (2,293 | ) | (2,503 | ) | |||
Less: Cumulative change in fair value of financial liabilities attributable to the change in own creditworthiness, net of tax | 587 | 998 | |||||
Less: Intangible assets: | |||||||
Goodwill (2) | 27,004 | 27,248 | |||||
Identifiable intangible assets other than mortgage servicing rights (MSRs) | 5,716 | 5,983 | |||||
Less: Defined benefit pension plan net assets | 732 | 752 | |||||
Less: Deferred tax assets (DTAs) arising from tax credit and net operating loss carryforwards | 27,200 | 23,500 | |||||
Less: Excess over 10%/15% limitations for other DTAs, certain common equity investments, and MSRs (3) | 22,316 | 23,749 | |||||
Total Tier 1 Common Capital | $ | 105,396 | $ | 106,899 | |||
Risk-Weighted Assets (4) | $ | 1,206,153 | $ | 1,236,619 |
(1) | Calculated based on the U.S. banking agencies proposed Basel III rules. | |
(2) | Includes goodwill "embedded" in the valuation of significant common stock investments in unconsolidated financial institutions. | |
(3) | Aside from MSRs, reflects DTAs arising from temporary differences and significant common stock investments in unconsolidated financial institutions. | |
(4) | Calculated based on the proposed U.S. Basel III "advanced approaches" for determining risk-weighted assets and including Basel II.5. |
Common Stockholders'
Equity
As set forth in the table below,
during 2012, Citigroup's common stockholders' equity increased by $9 billion to
$186.5 billion, which represented 10% of Citi's total assets as of December 31,
2012.
In billions of dollars | ||
Common stockholders' equity, December 31, 2011 | $ | 177.5 |
Citigroup's net income | 7.5 | |
Employee benefit plans and other activities (1) | 0.6 | |
Net change in accumulated other comprehensive income (loss), | ||
net of tax | 0.9 | |
Common stockholders' equity, December 31, 2012 | $ | 186.5 |
(1) | As of December 31, 2012, $6.7 billion of common stock repurchases remained under Citi's repurchase programs. Any Citi repurchase program is subject to regulatory approval. No material repurchases were made in 2012. See "Risk Factors-Business and Operational Risks" and "Purchases of Equity Securities" below. |
44
Tangible Common Equity and
Tangible Book Value Per Share
Tangible
common equity (TCE), as defined by Citigroup, represents common equity less
goodwill, other intangible assets (other than mortgage servicing rights (MSRs)),
and related net deferred tax assets. Other companies may calculate TCE in a
different manner. Citi's TCE was $155.1 billion at December 31, 2012 and $145.4
billion at December 31, 2011. The TCE ratio (TCE divided by Basel I
risk-weighted assets) was 16.0% at December 31, 2012 and 14.9% at December 31,
2011. 13
A reconciliation of Citigroup's
total stockholders' equity to TCE, and book value per share to tangible book
value per share, as of December 31, 2012 and December 31, 2011,
follows:
In millions of dollars or shares at year end, | |||||||
except ratios and per share data | 2012 | 2011 | |||||
Total Citigroup stockholders' equity | $ | 189,049 | $ | 177,806 | |||
Less: | |||||||
Preferred stock | 2,562 | 312 | |||||
Common equity | $ | 186,487 | $ | 177,494 | |||
Less: | |||||||
Goodwill | 25,673 | 25,413 | |||||
Other intangible assets (other than MSRs) | 5,697 | 6,600 | |||||
Goodwill and other intangible
assets (other than MSRs) related to assets for discontinued operations held for sale | 32 | - | |||||
Net deferred tax assets related to
goodwill and other intangible assets | 32 | 44 | |||||
Tangible common equity (TCE) | $ | 155,053 | $ | 145,437 | |||
Tangible assets | |||||||
GAAP assets | $ | 1,864,660 | $ | 1,873,878 | |||
Less: | |||||||
Goodwill | 25,673 | 25,413 | |||||
Other intangible assets (other than MSRs) | 5,697 | 6,600 | |||||
Goodwill
and other intangible assets (other than MSRs) related to assets for discontinued operations held for sale | 32 | - | |||||
Net deferred tax assets related to goodwill | |||||||
and other intangible assets | 309 | 322 | |||||
Tangible assets (TA) | $ | 1,832,949 | $ | 1,841,543 | |||
Risk-weighted assets (RWA) | $ | 971,253 | $ | 973,369 | |||
TCE/TA ratio | 8.46 | % | 7.90 | % | |||
TCE/RWA ratio | 15.96 | % | 14.94 | % | |||
Common shares outstanding (CSO) | 3,028.9 | 2,923.9 | |||||
Book value per share (common equity/CSO) | $ | 61.57 | $ | 60.70 | |||
Tangible book value per share (TCE/CSO) | $ | 51.19 | $ | 49.74 |
Capital Resources of Citigroup's
Subsidiary U.S. Depository Institutions
Citigroup's subsidiary U.S. depository institutions are also subject to
risk-based capital guidelines issued by their respective primary federal bank
regulatory agencies, which are similar to the guidelines of the Federal Reserve
Board.
The following table sets forth the
capital tiers and capital ratios under current regulatory guidelines for
Citibank, N.A., Citi's primary subsidiary U.S. depository institution, as of
December 31, 2012 and December 31, 2011:
In billions of dollars, except ratios | 2012 | 2011 | |||||
Tier 1 Common Capital | $ | 116.6 | $ | 121.3 | |||
Tier 1 Capital | 117.4 | 121.9 | |||||
Total Capital | |||||||
(Tier 1 Capital + Tier 2 Capital) | 135.5 | 134.3 | |||||
Tier 1 Common ratio | 14.12 | % | 14.63 | % | |||
Tier 1 Capital ratio | 14.21 | 14.70 | |||||
Total Capital ratio | 16.41 | 16.20 | |||||
Leverage ratio | 8.97 | 9.66 |
13 | TCE, tangible book value per share and related ratios are non-GAAP financial measures that are used and relied upon by investors and industry analysts as capital adequacy metrics. |
45
Impact of Changes on Capital
Ratios Under Current Regulatory Guidelines
The following table presents the estimated sensitivity of Citigroup's and
Citibank, N.A.'s capital ratios to changes of $100 million in Tier 1 Common
Capital, Tier 1 Capital or Total Capital (numerator), or changes of $1 billion
in risk-weighted assets or adjusted average total assets (denominator), as of
December 31, 2012. This information is provided for the purpose of analyzing the
impact that a change in Citigroup's or Citibank, N.A.'s financial position or
results of operations could have on these ratios. These sensitivities only
consider a single change to either a component of capital, risk-weighted assets
or adjusted average total assets. Accordingly, an event that affects more than
one factor may have a larger basis point impact than is reflected in this
table.
Tier 1 Common ratio | Tier 1 Capital ratio | Total Capital ratio | Leverage ratio | |||||||||||||
Impact of $1 | ||||||||||||||||
Impact of $1 | Impact of $1 | Impact of $1 | billion change | |||||||||||||
Impact of $100 | billion change in | Impact of $100 | billion change in | Impact of $100 | billion change in | Impact of $100 | in adjusted | |||||||||
million change in | risk-weighted | million change in | risk-weighted | million change in | risk-weighted | million change in | average total | |||||||||
Tier 1 Common Capital | assets | Tier 1 Capital | assets | Total Capital | assets | Tier 1 Capital | assets | |||||||||
Citigroup | 1.0 bps | 1.3 bps | 1.0 bps | 1.4 bps | 1.0 bps | 1.8 bps | 0.5 bps | 0.4 bps | ||||||||
Citibank, N.A. | 1.2 bps | 1.7 bps | 1.2 bps | 1.7 bps | 1.2 bps | 2.0 bps | 0.8 bps | 0.7 bps |
Broker-Dealer
Subsidiaries
At December 31, 2012,
Citigroup Global Markets Inc., a U.S. broker-dealer registered with the SEC that
is an indirect wholly owned subsidiary of Citigroup, had net capital, computed
in accordance with the SEC's net capital rule, of $6.2 billion, which exceeded
the minimum requirement by $5.7 billion.
In addition, certain of Citi's other
broker-dealer subsidiaries are subject to regulation in the countries in which
they do business, including requirements to maintain specified levels of net
capital or its equivalent. Citigroup's other broker-dealer subsidiaries were in
compliance with their capital requirements at December 31, 2012. See Note 20 to
the Consolidated Financial Statements.
46
Regulatory Capital
Standards
The future regulatory capital
standards applicable to Citi include Basel II, Basel II.5 and Basel III, as well
as the current Basel I credit risk capital rules, until superseded.
Basel II
In November 2007, the U.S. banking agencies adopted Basel II,
a new set of risk-based capital standards for large, internationally active U.S.
banking organizations, including Citi. These standards require Citi to comply
with the most advanced Basel II approaches for calculating risk-weighted assets
for credit and operational risks.
More specifically, credit risk under
Basel II is generally measured using an advanced internal ratings-based models
approach which is applicable to wholesale and retail exposures, and under
certain circumstances also to securitization and equity exposures. For wholesale
and retail exposures, a U.S. banking organization is required to input risk
parameters generated by its internal risk models into specified required
formulas to determine risk-weighted assets. Basel II provides several
approaches, subject to various conditions and qualifying criteria, to measure
risk-weighted assets for securitization exposures. For equity exposures, a U.S.
banking organization may use a simple risk weight approach or, if it qualifies
to do so, an internal models approach to measure risk-weighted assets for
exposures other than exposures to investments funds, for which a look through
approach must be used.
Basel II sets forth advanced
measurement approaches to be employed by a U.S. banking organization in the
measurement of its operational risk, which is defined by Citi as the risk of
loss resulting from inadequate or failed internal processes, systems or human
factors, or from external events. The advanced measurement approaches do not
require a banking organization to use a specific methodology in its operational
risk assessment and rely on a banking organization's internal estimates of its
operational risks to generate an operational risk capital
requirement.
The U.S. Basel II implementation
timetable originally consisted of a parallel calculation period under the
current regulatory capital rules (Basel I), followed by a three-year
transitional "floor" period, during which Basel II risk-based capital
requirements could not fall below certain floors based on application of the
Basel I rules. Citi began parallel Basel I and Basel II reporting to the U.S.
banking agencies on April 1, 2010, although, as required under U.S. banking
regulations, reported only its Basel I capital ratios for purposes of assessing
compliance with minimum Tier 1 Capital and Total Capital ratio
requirements.
In June 2011, the U.S. banking agencies adopted final regulations to implement the "capital floor" provision of the so-called "Collins Amendment" of the Dodd-Frank Act. These regulations eliminated the three-year transitional floor period in favor of a permanent floor based on the generally applicable risk-based capital rules (currently Basel I). Pursuant to these regulations, a banking organization that has formally implemented Basel II must calculate its risk-based capital requirements under both Basel I and Basel II, compare the two results, and then report the lower of the resulting capital ratios for purposes of determining compliance with its minimum Tier 1 Capital and Total Capital ratio requirements. As of December 31, 2012, neither Citi nor any other U.S. banking organization had received approval from the U.S. banking agencies to formally implement Basel II. Citi expects, however, that it will be required to formally implement Basel II during 2013 and will begin reporting the lower of its Basel I and Basel II ratios.
Basel II.5
Basel II.5 substantially revised the market risk capital
framework, and implements a more comprehensive and risk sensitive methodology
for calculating market risk capital requirements for covered trading positions.
Further, the U.S. version of the Basel II.5 rules also implements the Dodd-Frank
Act requirement that all federal agencies remove references to, and reliance on,
credit ratings in their regulations, and replace these references with
alternative standards for evaluating creditworthiness. As a result, the U.S.
banking agencies provided alternative methodologies to external credit ratings
to be used in assessing capital requirements on certain debt and securitization
positions subject to the Basel II.5 rules.
Basel III
The U.S. Basel III rules consist of three notices of proposed
rulemaking (NPRs): the "Basel III NPR," the "Standardized Approach NPR" and the
"Advanced Approaches NPR." With the broad exceptions of the new "Standardized
Approach" to be employed by substantially all U.S. banking organizations in
deriving credit risk-weighted assets and the required alternatives to the use of
external credit ratings in arriving at applicable risk weights for certain
exposures as referenced above, the NPRs are largely consistent with the Basel
Committee's Basel III rules. In November 2012, the U.S. banking agencies
announced that none of the proposed rules would be finalized and effective
January 1, 2013 as was, in part, initially suggested.
47
Basel III NPR
The Basel III NPR, as with the Basel Committee Basel III
rules, is intended to raise the quantity and quality of regulatory capital by
formally introducing not only Tier 1 Common Capital and mandating that it be the
predominant form of regulatory capital, but by also narrowing the definition of
qualifying capital elements at all three regulatory capital tiers as well as
imposing broader and more constraining regulatory adjustments and
deductions.
The Basel III NPR would modify the
regulations implementing the capital floor provision of the Collins Amendment of
the Dodd-Frank Act that were adopted in June 2011 (as discussed above). This
provision would require "Advanced Approaches" banking organizations (generally
those with consolidated total assets of at least $250 billion or consolidated
total on-balance sheet foreign exposures of at least $10 billion), which
includes Citi and Citibank, N.A., to calculate each of the three risk-based
capital ratios (Tier 1 Common, Tier 1 Capital and Total Capital) under both the
proposed "Standardized Approach" and the proposed "Advanced Approaches" and
report the lower of each of the resulting capital ratios. The principal
differences between these two approaches are in the composition and calculation
of total risk-weighted assets, as well as in the definition of Total Capital.
Compliance with the Basel III NPR stated minimum Tier 1 Common, Tier 1 Capital,
and Total Capital ratio requirements of 4.5%, 6%, and 8%, respectively, would be
assessed based upon each of the reported ratios. The newly established Tier 1
Common and increased Tier 1 Capital stated minimum ratio requirements have been
proposed to be phased in over a three-year period. Under the Basel III NPR,
consistent with the Basel Committee Basel III rules, there would be no change in
the stated minimum Total Capital ratio requirement.
Additionally, the Basel
III NPR establishes a 2.5% Capital Conservation Buffer applicable to
substantially all U.S. banking organizations and, for Advanced Approaches
banking organizations, a potential Countercyclical Capital Buffer of up to 2.5%. The Countercyclical Capital Buffer would be invoked upon a determination by
the U.S. banking agencies that the market is experiencing excessive aggregate
credit growth, and would be an extension of the Capital Conservation Buffer
(i.e., an aggregate combined buffer of potentially between 2.5% and 5%). Citi
would be subject to both the Capital Conservation Buffer and, if invoked, the
Countercyclical Capital Buffer. Consistent with the Basel Committee Basel III
rules, both of these buffers would be required to be comprised entirely of Tier
1 Common Capital.
The calculation of the Capital
Conservation Buffer for Advanced Approaches banking organizations, including
Citi, would be based on a comparison of each of the three risk-based capital
ratios as calculated under the Advanced Approaches and the stated minimum
required ratios for each (i.e., 4.5% Tier 1 Common and 6% Tier 1 Capital, both
as fully phased-in, and 8% Total Capital), with the reportable Capital
Conservation Buffer being the smallest of the three differences. If a banking
organization failed to comply with the proposed buffers, it would be subject to
increasingly onerous restrictions (depending upon the extent of the shortfall)
regarding capital distributions and discretionary executive bonus payments. The
buffers are proposed to be phased in from January 1, 2016 through January 1,
2019.
Unlike the Basel Committee's final rules
for global systemically important banks (G-SIBs), the Basel III NPR does not
include measures for G-SIBs, such as those addressing the methodology for
assessing global systemic importance, the imposition of additional Tier 1 Common
capital surcharges, and the phase-in period regarding these requirements. The
Federal Reserve Board is required by the Dodd-Frank Act to issue rules
establishing a quantitative risk-based capital surcharge for financial
institutions deemed to be systemically important and posing risk to market-wide
financial stability, such as Citi, and the Federal Reserve Board has indicated
that it intends for these rules to be consistent with the Basel Committee's
final G-SIB rules. Although these rules have not yet been proposed, Citi
anticipates that it will likely be subject to a 2.5% initial additional capital
surcharge.
The Basel III NPR, consistent with
the Basel Committee's Basel III rules, provides that certain capital
instruments, such as trust preferred securities, would no longer qualify as
non-common components of Tier 1 Capital. Furthermore, the Collins Amendment of
the Dodd-Frank Act generally requires a phase-out of these securities over a
three-year period beginning January 1, 2013 for bank holding companies, such as
Citi, that had $15 billion or more in total consolidated assets as of December
31, 2009. Accordingly, the U.S. banking agencies have proposed that trust
preferred securities and other non-qualifying Tier 1 Capital instruments, as
well as non-qualifying Tier 2 Capital instruments, be phased out by these bank
holding companies, including Citi, at a 25% per year incremental phase-out
beginning on January 1, 2013 (i.e., 75% of these capital instruments would be
includable in Tier 1 Capital on January 1, 2013, 50% on January 1, 2014, and 25%
on January 1, 2015), with a full phase-out of these capital instruments by
January 1, 2016. However, the timing of the phase-out of trust preferred
securities and other non-qualifying Tier 1 and Tier 2 Capital instruments is
currently uncertain, given the delay in finalization and implementation of the
U.S. Basel III rules. For additional information on Citi's outstanding trust
preferred securities, see Note 19 to the Consolidated Financial Statements. See
also "Funding and Liquidity" below.
Under the Basel III NPR, Advanced
Approaches banking organizations would also be required to calculate two
leverage ratios, a "Tier 1" Leverage ratio and a "Supplementary" Leverage ratio.
The Tier 1 Leverage ratio would be a modified version of the current U.S.
leverage ratio and would reflect the more restrictive proposed Basel III
definition of Tier 1 Capital in the numerator, but with the same current
denominator consisting of average total on-balance sheet assets less amounts
deducted from Tier 1 Capital. Citi, as with substantially all U.S. banking
organizations, would be required to maintain a minimum Tier 1 Leverage ratio of
4%. The Supplementary Leverage ratio would significantly differ from the Tier 1
Leverage ratio regarding the inclusion of certain off-balance sheet exposures
within the denominator of the ratio. Advanced Approaches banking organizations,
such as Citi, would be required to maintain a minimum Supplementary Leverage
ratio of 3%, commencing on January 1, 2018, although it was proposed that
reporting commence on January 1, 2015. The Basel Committee's Basel III rules
only require that banking organizations calculate a similar Supplementary
Leverage ratio.
48
In addition, under the Basel III NPR, the
U.S. banking agencies are proposing to revise the Prompt Corrective Action (PCA)
regulations in certain respects. The PCA requirements direct the U.S. banking
agencies to enforce increasingly strict limitations on the activities of insured
depository institutions that fail to meet certain regulatory capital thresholds.
The PCA framework contains five categories of capital adequacy as measured by
risk-based capital and leverage ratios: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized."
The U.S. banking agencies are
proposing to revise the PCA regulations to accommodate a new minimum Tier 1
Common ratio requirement for substantially all categories of capital adequacy
(other than critically undercapitalized), increase the minimum Tier 1 Capital
ratio requirement at each category, and introduce for Advanced Approaches
insured depository institutions the Supplementary Leverage ratio as a metric,
but only for the "adequately capitalized" and "undercapitalized" categories.
These revisions have been proposed to be effective on January 1, 2015, with the
exception of the Supplementary Leverage ratio for Advanced Approaches insured
depository institutions for which January 1, 2018 was proposed as the effective
date. Accordingly, as proposed, beginning January 1, 2015, an insured depository
institution, such as Citibank, N.A., would need minimum Tier 1 Common, Tier 1
Capital, Total Capital, and Tier 1 Leverage ratios of 6.5% (a new requirement),
8% (a 2% increase over the current requirement), 10%, and 5%, respectively, to
be considered "well capitalized."
Standardized Approach
NPR
The Standardized Approach NPR would be
applicable to substantially all U.S. banking organizations, including Citi and
Citibank, N.A., and when effective would replace the existing Basel I rules
governing the calculation of risk-weighted assets for credit risk. As proposed,
this approach would incorporate heightened risk sensitivity for calculating
risk-weighted assets for certain on-balance sheet assets and off-balance sheet
exposures, including those to foreign sovereign governments and banks,
residential mortgages, corporate and securitization exposures, and counterparty
credit risk on derivative contracts, as compared to Basel I. Total risk-weighted
assets under the Standardized Approach would exclude risk-weighted assets
arising from operational risk, require more limited approaches in measuring
risk-weighted assets for securitization exposures under Basel II.5, and apply
the standardized risk-weights to arrive at credit risk-weighted assets. As
required under the Dodd-Frank Act, the Standardized Approach proposes to rely on
alternatives to external credit ratings in the treatment of certain exposures.
The proposed effective date for implementation of the Standardized Approach is
January 1, 2015, with an option for U.S. banking organizations to early
adopt.
Advanced Approaches
NPR
The Advanced Approaches NPR
incorporates published revisions to the Basel Committee's Advanced Approaches
calculation of risk-weighted assets as proposed amendments to the U.S. Basel II
capital guidelines. Total risk-weighted assets under the Advanced Approaches
would include not only market risk equivalent risk-weighted assets as determined
under Basel II.5, but also the results of applying the Advanced Approaches in
calculating credit and operational risk-weighted assets. Primary among the
proposed Basel II modifications are those related to the treatment of
counterparty credit risk, as well as substantial revisions to the securitization
exposure framework. As required by the Dodd-Frank Act, the Advanced Approaches
NPR also proposes to remove references to, and reliance on, external credit
ratings for various types of exposures.
49
FUNDING AND LIQUIDITY
Overview
Citi's funding and liquidity objectives generally are to
maintain liquidity to fund its existing asset base as well as grow its core
businesses in Citicorp, while at the same time maintain sufficient excess
liquidity, structured appropriately, so that it can operate under a wide variety
of market conditions, including market disruptions for both short- and long-term
periods. Citigroup's primary liquidity objectives are established by entity, and
in aggregate, across three major categories:
At an aggregate level, Citigroup's
goal is to ensure that there is sufficient funding in amount and tenor to ensure
that aggregate liquidity resources are available for these entities. The
liquidity framework requires that entities be self-sufficient or net providers
of liquidity, including in conditions established under their designated stress
tests.
Citi's primary sources of funding
include (i) deposits via Citi's bank subsidiaries, which are Citi's most stable
and lowest cost source of long-term funding, (ii) long-term debt (primarily
senior and subordinated debt) issued at the non-bank level and certain bank
subsidiaries, and (iii) stockholders' equity. These sources may be supplemented
by short-term borrowings, primarily in the form of secured financing
transactions (securities loaned or sold under agreements to repurchase, or
repos).
As referenced above, Citigroup works
to ensure that the structural tenor of these funding sources is sufficiently
long in relation to the tenor of its asset base. The key goal of Citi's
asset/liability management is to ensure that there is excess tenor in the
liability structure so as to provide excess liquidity to fund the assets. The
excess liquidity resulting from a longer-term tenor profile can effectively
offset potential decreases in liquidity that may occur under stress. This excess
funding is held in the form of aggregate liquidity resources, as described
below.
Aggregate Liquidity Resources
Non-bank | Significant Citibank Entities | Other Citibank and Banamex Entities | Total | |||||||||||||||||||||||||||||||||
In billions of dollars | Dec. 31, 2012 | Sept. 30, 2012 | Dec. 31, 2011 | Dec. 31, 2012 | Sept. 30, 2012 | Dec. 31, 2011 | Dec. 31, 2012 | Sept. 30, 2012 | Dec. 31, 2011 | Dec. 31, 2012 | Sept. 30, 2012 | Dec. 31, 2011 | ||||||||||||||||||||||||
Available cash at central banks | $ | 33.2 | $ | 50.9 | $ | 29.1 | $ | 26.5 | $ | 72.7 | $ | 70.7 | $ | 13.3 | $ | 15.9 | $ | 27.6 | $ | 73.0 | $ | 139.5 | $ | 127.4 | ||||||||||||
Unencumbered liquid securities | 31.3 | 26.8 | 69.3 | 173.3 | 164.0 | 129.5 | 76.2 | 73.9 | 79.3 | 280.8 | 264.7 | 278.1 | ||||||||||||||||||||||||
Total | $ | 64.5 | $ | 77.7 | $ | 98.4 | $ | 199.8 | $ | 236.7 | $ | 200.2 | $ | 89.5 | $ | 89.8 | $ | 106.9 | $ | 353.8 | $ | 404.2 | $ | 405.5 |
All amounts in the table above are
as of period-end and may increase or decrease intra-period in the ordinary
course of business.
As set forth in the table above,
Citigroup's aggregate liquidity resources totaled approximately $353.8 billion
at December 31, 2012, compared to $404.2 billion at September 30, 2012 and
$405.5 billion at December 31, 2011. During 2011 and the first half of 2012,
Citi consciously maintained an excess liquidity position given uncertainties in
both the global economic outlook and the pace of its balance sheet deleveraging.
In the second half of 2012, as these uncertainties showed signs of abating, Citi
purposefully began to decrease its liquidity resources, primarily through
long-term debt reductions and limiting deposit growth, as well as through
increased lending to both Consumer and Corporate clients.
As discussed
in more detail below, this reduction in excess liquidity in turn contributed to
a reduction in overall cost of funds, and thus improved Citi's net interest
margin, which increased to 2.88% for full year 2012 from 2.86% for full year
2011 (see "Deposits" and "Market Risk-Interest Revenue/ Expense and Yields"
below, respectively).
At December 31, 2012, Citigroup's
non-bank aggregate liquidity resources totaled approximately $64.5 billion,
compared to $77.7 billion at September 30, 2012 and $98.4 billion at December
31, 2011. These amounts included unencumbered liquid securities and cash held in
Citi's U.S. and non-U.S. broker-dealer entities. The purposeful decrease in
aggregate liquidity resources of Citi's non-bank entities year-over-year and
quarter-over-quarter was primarily due to the continued pay down and runoff of
long-term debt, including Temporary Liquidity Guarantee Program (TLGP) debt,
which fully matured by the end of 2012.
Citigroup's significant Citibank
entities had approximately $199.8 billion of aggregate liquidity resources as of
December 31, 2012, compared to $236.7 billion at September 30, 2012 and $200.2
billion at December 31, 2011. The decrease in aggregate liquidity resources
during the fourth quarter of 2012 was primarily due to an anticipated reduction
in episodic deposits and the expiration of the Transaction Account Guarantee
(TAG) program (see "Deposits" below), as well as the repayment of remaining TLGP
borrowings and a reduction in secured borrowings. As of December 31, 2012, the
significant Citibank entities' liquidity resources included $26.5 billion of
cash on deposit with major central banks (including the U.S. Federal Reserve
Bank, European Central Bank, Bank
50
of England, Swiss National
Bank, Bank of Japan, the Monetary Authority of Singapore and the Hong Kong
Monetary Authority), compared with $72.7 billion at September 30, 2012 and $70.7
billion at December 31, 2011.
The significant Citibank entities' liquidity
resources amount as of December 31, 2012 also included unencumbered liquid
securities. These securities are available-for-sale or secured financing through
private markets or by pledging to the major central banks. The liquidity value
of these securities was $173.3 billion at December 31, 2012 compared to $164.0
billion at September 30, 2012 and $129.5 billion at December 31, 2011.
Citi estimates that its other Citibank and Banamex
entities and subsidiaries held approximately $89.5 billion in aggregate
liquidity resources as of December 31, 2012, compared to $89.8 billion at
September 30, 2012 and $106.9 billion at December 31, 2011. The decrease
year-over-year was primarily due to increased lending and limited deposit growth
in those entities. The $89.5 billion as of December 31, 2012 included $13.3
billion of cash on deposit with central banks and $76.2 billion of unencumbered
liquid securities.
Citi's $353.8 billion of aggregate liquidity resources as of December 31,
2012 does not include additional potential liquidity in the form of Citigroup's
borrowing capacity from the various Federal Home Loan Banks (FHLB), which was
approximately $36.7 billion as of December 31, 2012 and is maintained by pledged
collateral to all such banks. The aggregate liquidity resources shown above also
do not include Citi's borrowing capacity at the U.S. Federal Reserve Bank
discount window or international central banks, which capacity would also be in
addition to the resources noted above.
Moreover, in general, Citigroup can freely fund legal entities within its
bank vehicles. Citigroup's bank subsidiaries, including Citibank, N.A., can lend
to the Citigroup parent and broker-dealer entities in accordance with Section
23A of the Federal Reserve Act. As of December 31, 2012, the amount available
for lending to these non-bank entities under Section 23A was approximately $15
billion, provided the funds are collateralized appropriately.
Overall, subject to market conditions, Citi
expects to continue to modestly manage down its aggregate liquidity resources as
it continues to pay down or allow its outstanding long-term debt to mature (see
"Long-Term Debt" below).
Aggregate Liquidity
Resources-By Type
The
following table shows the composition of Citi's aggregate liquidity resources by
type of asset as of each of the periods indicated. For securities, the amounts
represent the liquidity value that could potentially be realized, and thus
excludes any securities that are encumbered, as well as the haircuts that would
be required for secured financing transactions. Year-over-year, the composition
of Citi's aggregate liquidity resources shifted as Citi continued to optimize
its liquidity portfolio. Cash and foreign government trading securities
(particularly in Western Europe) decreased, while U.S. treasuries and agencies
increased.
Dec. 31, | Sept. 30, | Dec. 31, | |||||||
In billions of dollars | 2012 | 2012 | 2011 | ||||||
Available cash at central banks | $ | 73.0 | $ | 139.5 | $ | 127.4 | |||
U.S. Treasuries | 89.0 | 73.0 | 67.0 | ||||||
U.S. Agencies/Agency MBS | 72.5 | 67.0 | 68.9 | ||||||
Foreign Government (1) | 111.7 | 119.5 | 136.6 | ||||||
Other Investment Grade | 7.6 | 5.2 | 5.6 | ||||||
Total | $ | 353.8 | $ | 404.2 | $ | 405.5 |
(1) | Foreign government also includes foreign government agencies, multinationals and foreign government guaranteed securities. Foreign government securities are held largely to support local liquidity requirements and Citi's local franchises and, as of December 31, 2012, principally included government bonds from Korea, Japan, Mexico, Brazil, Hong Kong, Singapore and Taiwan. |
The aggregate liquidity resources are composed entirely of cash and securities positions. While Citi utilizes derivatives to manage the interest rate and currency risks related to the aggregate liquidity resources, credit derivatives are not used.
Deposits
Deposits are the primary and lowest cost funding
source for Citi's bank subsidiaries. As of December 31, 2012, approximately 78%
of the liabilities of Citi's bank subsidiaries were deposits, compared to 76% as
of September 30, 2012 and 75% as of December 31, 2011.
The table below sets forth the end of period and
average deposits, by business and/or segment, for each of the periods
indicated.
Dec. 31, | Sept. 30, | Dec. 31, | |||||||
In billions of dollars | 2012 | 2012 | 2011 | ||||||
Global Consumer Banking | |||||||||
North America | $ | 165.2 | $ | 156.8 | $ | 149.0 | |||
EMEA | 13.2 | 12.9 | 12.1 | ||||||
Latin America | 48.6 | 47.3 | 44.3 | ||||||
Asia | 110.0 | 113.1 | 109.7 | ||||||
Total | $ | 337.0 | $ | 330.1 | $ | 315.1 | |||
ICG | |||||||||
Securities and Banking | $ | 114.4 | $ | 119.4 | $ | 110.9 | |||
Transaction Services | 408.7 | 425.5 | 373.1 | ||||||
Total | $ | 523.1 | $ | 544.9 | $ | 484.0 | |||
Corporate/Other | 2.5 | 2.8 | 5.2 | ||||||
Total Citicorp | $ | 862.6 | $ | 877.8 | $ | 804.3 | |||
Total Citi Holdings | 68.0 | 66.8 | 61.6 | ||||||
Total Citigroup Deposits (EOP) | $ | 930.6 | $ | 944.6 | $ | 865.9 | |||
Total Citigroup Deposits (AVG) | $ | 928.9 | $ | 921.2 | $ | 857.0 |
Citi continued to focus on maintaining a geographically diverse retail and corporate deposit base that stood at approximately $931 billion at December 31, 2012, up 7% year-over-year. Average deposits of $929 billion as of December 31, 2012 increased 8% year-over-year. The increase in end-of-period deposits year-over-year was largely due to higher deposit volumes in each of Citicorp's deposit-taking businesses (Transaction Services, Securities and Banking and Global Consumer Banking) . Year-over-year deposit growth occurred in all four regions, including 9% growth in EMEA and 10% growth in Latin America . As of December 31, 2012, approximately 59% of Citi's deposits were located outside of the U.S., compared to 61% at December 31, 2011.
51
Quarter-over-quarter, end-of-period deposits decreased 1% on a reported
basis (2% when adjusted for the impact of FX translation). During the fourth
quarter of 2012, there was an expected decline in end-of-period deposits
reflecting the runoff of approximately $12 billion of episodic deposits which
came in at the end of the third quarter, as well as $10 billion primarily due to
the expiration of the TAG program on December 31, 2012. These reductions were
partially offset by deposit growth across deposit-taking businesses,
particularly Global Consumer
Banking . Further, at the
direction of MSSB, Citi transferred $4.5 billion in deposits to Morgan Stanley
during the fourth quarter of 2012 in connection with the sale of Citi's 14%
interest in MSSB (see "Citi Holdings-Brokerage and Asset Management" above),
although this decline was offset by deposit growth in the normal course of
business.
During 2012, the composition
of Citi's deposits continued to shift toward a greater proportion of operating
balances, and also toward non-interest-bearing accounts within those operating
balances. (Citi defines operating balances as checking and savings accounts for
individuals, as well as cash management accounts for corporations. This compares
to time deposits, where rates are fixed for the term of the deposit and which
have generally lower margins). Citi believes that operating accounts are lower
cost and more reliable deposits, and exhibit "stickier," or more retentive,
behavior. Operating balances represented 79% of Citi's average total deposit
base as of December 31, 2012, compared to 76% at both September 30, 2012 and
December 31, 2011. Citi currently expects this shift to continue into
2013.
Deposits can be
interest-bearing or non-interest-bearing. Of Citi's $931 billion of deposits as
of December 31, 2012, $195 billion were non-interest-bearing, compared to $177
billion at December 31, 2011. The remainder, or $736 billion, was
interest-bearing, compared to $689 billion at December 31, 2011.
Citi's overall cost of funds on deposits decreased
during 2012, despite deposit growth throughout the year. Excluding the impact of
the higher FDIC assessment and deposit insurance, the average rate on Citi's
total deposits was 0.64% at December 31, 2012, compared with 0.80% at December
31, 2011, and 0.86% at December 31, 2010. This translated into an approximate
$345 million reduction in quarterly interest expense over the past two years.
Consistent with prevailing interest rates, Citi experienced declining deposit
rates during 2012, notwithstanding pressure on deposit rates due to competitive
pricing in certain regions.
Long-Term Debt
Long-term debt (generally defined as original
maturities of one year or more) continued to represent the most significant
component of Citi's funding for its non-bank entities, or 40% of the funding for
the non-bank entities as of December 31, 2012, compared to 45% as of December
31, 2011. The vast majority of this funding is composed of senior term debt,
along with subordinated instruments.
Senior long-term debt includes benchmark notes and structured notes, such
as equity- and credit-linked notes. Citi's issuance of structured notes is
generally driven by customer demand and is not a significant source of liquidity
for Citi. Structured notes frequently contain contractual features, such as call
options, which can lead to an expectation that the debt will be redeemed earlier
than one year, despite contractually scheduled maturities greater than one year.
As such, when considering the measurement of Citi's long-term "structural"
liquidity, structured notes with these contractual features are not included
(see footnote 1 to the "Long-Term Debt Issuances and Maturities" table
below).
During 2012, due to the
expected phase-out of Tier 1 Capital treatment for trust preferred securities
beginning as early as 2013, Citi redeemed four series of its outstanding trust
preferred securities, for an aggregate amount of approximately $5.9 billion.
Furthermore, in anticipation of this change in qualifying regulatory capital,
Citi issued approximately $2.25 billion of preferred stock during 2012. For
details on Citi's remaining outstanding trust preferred securities, as well as
its long-term debt generally, see Note 19 to the Consolidated Financial
Statements. See also "Capital Resources-Regulatory Capital Standards"
above.
Long-term debt is an important
funding source for Citi's non-bank entities due in part to its multi-year
maturity structure. The weighted average maturities of long-term debt issued by
Citigroup and its affiliates, including Citibank, N.A., with a remaining life
greater than one year as of December 31, 2012 (excluding trust preferred
securities), was approximately 7.2 years, compared to 7.0 years at September 30,
2012 and 7.1 years at December 31, 2011.
52
Long-Term Debt
Outstanding
The following
table sets forth Citi's total long-term debt outstanding for the periods
indicated:
Dec. 31, | Sept. 30, | Dec. 31, | |||||||
In billions of dollars | 2012 | 2012 | 2011 | ||||||
Non-bank | $ | 188.3 | $ | 210.0 | $ | 245.6 | |||
Senior/subordinated debt (1) | 171.0 | 186.8 | 216.4 | ||||||
Trust preferred securities | 10.1 | 10.6 | 16.1 | ||||||
Securitized debt and securitizations (1)(2) | 0.4 | 3.5 | 4.0 | ||||||
Local country (1) | 6.8 | 9.1 | 9.1 | ||||||
Bank | $ | 51.2 | $ | 61.9 | $ | 77.9 | |||
Senior/subordinated debt | 0.1 | 3.7 | 10.5 | ||||||
Securitized debt and securitizations (1)(2) | 26.0 | 32.0 | 46.5 | ||||||
Local country and FHLB borrowings (1)(3) | 25.1 | 26.2 | 20.9 | ||||||
Total long-term debt | $ | 239.5 | $ | 271.9 | $ | 323.5 |
(1) | Includes structured notes in the amount of $27.5 billion and $23.4 billion as of December 31, 2012, and December 31, 2011, respectively. |
(2) | Of the approximate $26.4 billion of total bank and non-bank securitized debt and securitizations as of December 31, 2012, approximately $23.0 billion related to credit card securitizations, the vast majority of which was at the bank level. |
(3) | Of this amount, approximately $16.3 billion related to collateralized advances from the FHLB as of December 31, 2012. |
As
set forth in the table above, Citi's overall long-term debt decreased by
approximately $84 billion year-over-year. In the bank, the decrease was due to
securitization and TLGP run-off that was replaced with deposit growth. In the
non-bank, the decrease was primarily due to TLGP run-off, trust preferred
redemptions, debt maturities and debt repurchases through tender offers or
buybacks (see discussion below), partially offset by issuances. While long-term
debt in the non-bank declined over the course of the past year, Citi
correspondingly reduced its overall level of assets-including illiquid
assets-that debt was meant to support. These reductions are in keeping with
Citi's continued strategy to deleverage its balance sheet and lower funding
costs.
As noted above and as part of
its liquidity and funding strategy, Citi has considered, and may continue to
consider, opportunities to repurchase its long-term and short-term debt pursuant
to open market purchases, tender offers or other means. Such repurchases further
decrease Citi's overall funding costs. During 2012, Citi repurchased an
aggregate of approximately $11.1 billion of its outstanding long-term and
short-term debt, primarily pursuant to selective public tender offers and open
market purchases, compared to $3.3 billion during 2011.
Citi expects to continue to reduce its outstanding
long-term debt during 2013, although it expects such reductions to occur at a
more moderate rate as compared to 2012. These reductions could occur through
natural maturities as well as repurchases, tender offers, redemptions and
similar means, depending upon the overall economic
environment.
Long-Term Debt Issuances
and Maturities
The table
below details Citi's long-term debt issuances and maturities (including
repurchases) during the periods presented:
2012 | 2011 | 2010 | ||||||||||||||||
In billions of dollars | Maturities | Issuances | Maturities | Issuances | Maturities | Issuances | ||||||||||||
Structural long-term debt (1) | $ | 80.7 | $ | 15.1 | $ | 47.3 | $ | 15.1 | $ | 41.2 | $ | 18.9 | ||||||
Local country level, FHLB and other (2) | 11.7 | 12.2 | 25.7 | 15.2 | 20.5 | 10.2 | ||||||||||||
Secured debt and securitizations | 25.2 | 0.5 | 16.1 | 0.7 | 14.2 | 4.7 | ||||||||||||
Total | $ | 117.6 | $ | 27.8 | $ | 89.1 | $ | 31.0 | $ | 75.9 | $ | 33.8 |
(1) | Citi defines structural long-term debt as its long-term debt (original maturities of one year or more), excluding certain structured debt, such as equity-linked and credit-linked notes, with early redemption features effective within one year. Issuances and maturities of these notes are included in this table in "Local country level, FHLB and other." See footnote 2 below. Structural long-term debt is a non-GAAP measure. Citigroup believes that the structural long-term debt measure provides useful information to its investors as it excludes long-term debt that could in fact be redeemed by the holders thereof within one year. |
(2) | As referenced above, "other" includes long-term debt not considered structural long-term debt relating to certain structured notes. The amounts of issuances included in this line, and thus excluded from "structural long-term debt," were $2.0 billion, $3.7 billion, and $3.3 billion in 2012, 2011, and 2010, respectively. The amounts of maturities included in this line, and thus excluded from "structural long-term debt," were $2.4 billion, $2.4 billion, and $3.0 billion, in 2012, 2011, and 2010, respectively. |
53
The table below shows Citi's aggregate expected annual long-term debt maturities as of December 31, 2012:
Expected Long-Term Debt Maturities as of December 31, 2012 | |||||||||||||||||||||
In billions of dollars | 2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | Total | ||||||||||||||
Senior/subordinated debt (1) | $ | 24.6 | $ | 24.6 | $ | 19.9 | $ | 12.8 | $ | 21.2 | $ | 68.0 | $ | 171.1 | |||||||
Trust preferred securities | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 10.1 | 10.1 | ||||||||||||||
Securitized debt and securitizations | 2.4 | 6.6 | 5.8 | 2.9 | 2.3 | 6.4 | 26.4 | ||||||||||||||
Local country and FHLB borrowings | 15.7 | 5.8 | 3.3 | 4.2 | 0.7 | 2.2 | 31.9 | ||||||||||||||
Total long-term debt | $ | 42.7 | $ | 37.0 | $ | 29.0 | $ | 19.9 | $ | 24.2 | $ | 86.7 | $ | 239.5 |
(1) | Includes certain structured notes, such as equity-linked and credit-linked notes, with early redemption features effective within one year. The amount and maturity of such notes included is as follows: $0.9 billion maturing in 2013; $0.5 billion in 2014; $0.5 billion in 2015; $0.6 billion in 2016; $0.5 billion in 2017; and $2.0 billion thereafter. |
As set forth in the table above, Citi's structural long-term debt maturities peaked during 2012 at $80.7 billion, and included the maturity of the last remaining TLGP debt.
Secured Financing Transactions and
Short-Term Borrowings
As
referenced above, Citi supplements its primary sources of funding with
short-term borrowings. Short-term borrowings generally include (i) secured
financing (securities loaned or sold under agreements to repurchase, or repos)
and (ii) short-term borrowings consisting of commercial paper and borrowings
from the FHLBs and other market participants. See Note 19 to the Consolidated
Financial Statements for further information on Citigroup's and its affiliates'
outstanding short-term borrowings.
The following table contains the year-end, average and maximum month-end
amounts for the following respective short-term borrowings categories at the end
of each of the three prior fiscal years.
Federal funds purchased | ||||||||||||||||||||||||||||||||||||
and securities sold under | ||||||||||||||||||||||||||||||||||||
agreements to | Short-term borrowings | (1) | ||||||||||||||||||||||||||||||||||
repurchase | Commercial paper | Other short-term borrowings | (2) | |||||||||||||||||||||||||||||||||
In billions of dollars | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | |||||||||||||||||||||||||||
Amounts outstanding at year end | $ | 211.2 | $ | 198.4 | $ | 189.6 | $ | 11.5 | $ | 21.3 | $ | 24.7 | $ | 40.5 | $ | 33.1 | $ | 54.1 | ||||||||||||||||||
Average outstanding during the year (3)(4) | 223.8 | 219.9 | 212.3 | 17.9 | 25.3 | 35.0 | 36.3 | 45.5 | 68.8 | |||||||||||||||||||||||||||
Maximum month-end outstanding | 237.1 | 226.1 | 246.5 | 21.9 | 25.3 | 40.1 | 40.6 | 58.2 | 106.0 | |||||||||||||||||||||||||||
Weighted-average interest rate | ||||||||||||||||||||||||||||||||||||
During the year (3)(4)(5) | 1.26 | % | 1.45 | % | 1.32 | % | 0.47 | % | 0.28 | % | 0.38 | % | 1.77 | % | 1.28 | % | 1.14 | % | ||||||||||||||||||
At year end (6) | 0.81 | 1.10 | 0.99 | 0.60 | 0.38 | 0.35 | 1.06 | 1.09 | 0.40 |
(1) | Original maturities of less than one year. |
(2) | Other short-term borrowings include broker borrowings and borrowings from banks and other market participants. |
(3) | Interest rates and amounts include the effects of risk management activities associated with the respective liability categories. |
(4) | Average volumes of securities loaned or sold under agreements to repurchase are reported net pursuant to FIN 41 (ASC 210-20-45). However, Interest expense excludes the impact of FIN 41 (ASC 210-20-45). |
(5) | Average rates reflect prevailing local interest rates, including inflationary effects and monetary correction in certain countries. |
(6) | Based on contractual rates at respective year ends; non-interest-bearing accounts are excluded from the weighted average interest rate calculated at year end. |
54
Secured
Financing
Secured financing is
primarily conducted through Citi's broker-dealer subsidiaries to facilitate
customer matched-book activity and to efficiently fund a portion of the trading
inventory. As of December 31, 2012, approximately 36% of the funding for Citi's
non-bank entities, primarily the broker-dealer, was from secured
financings.
Secured financing was $211 billion as of December 31, 2012, compared to
$198 billion as of December 31, 2011. Average balances for secured financing
were approximately $224 billion for the year ended December 31, 2012, compared to $220
billion for the year ended December 31, 2011. Changes in levels of secured financing were
primarily due to fluctuations in inventory for all periods discussed above
(either on an end-of-quarter or on an average basis).
Commercial
Paper
Citi's commercial paper
balances have decreased and will likely continue to do so as Citi shifts its
funding mix away from short-term sources to deposits and long-term debt and
equity. The following table sets forth Citi's commercial paper outstanding for
each of its non-bank entities and significant Citibank entities, respectively,
for each of the periods indicated:
Dec. 31, | Sep. 30, | Dec. 31, | |||||||
In billions of dollars | 2012 | 2012 | 2011 | ||||||
Commercial paper | |||||||||
Non-bank | $ | 0.4 | $ | 0.6 | $ | 6.4 | |||
Bank | 11.1 | 11.8 | 14.9 | ||||||
Total | $ | 11.5 | $ | 12.4 | $ | 21.3 |
Other Short-Term
Borrowings
At December 31,
2012, Citi's other short-term borrowings, which includes borrowings from the
FHLBs and other market participants, were approximately $41 billion, compared
with $33 billion at December 31, 2011.
Liquidity Management, Measures and Stress Testing
Liquidity
Management
Citi's aggregate
liquidity resources are managed by the Citi Treasurer. Liquidity is managed via
a centralized treasury model by Corporate Treasury and by in-country treasurers.
Pursuant to this structure, Citi's liquidity resources are managed with a goal
of ensuring the asset/liability match and that liquidity positions are
appropriate in every country and throughout Citi.
Citi's Chief Risk Officer is responsible for the
overall risk profile of Citi's aggregate liquidity resources. The Chief Risk
Officer and Chief Financial Officer co-chair Citi's Asset Liability Management
Committee (ALCO), which includes Citi's Treasurer and senior executives. ALCO
sets the strategy of the liquidity portfolio and monitors its performance.
Significant changes to portfolio asset allocations need to be approved by ALCO.
Excess cash available in Citi's aggregate
liquidity resources is available to be invested in a liquid portfolio such that
cash can be made available to meet demand in a stress situation. At December 31,
2012, Citi's liquidity pool was primarily invested in cash, government
securities, including U.S. agency debt and U.S. agency mortgage-backed
securities, and a certain amount of highly rated investment-grade credits. While
the vast majority of Citi's liquidity pool at December 31, 2012 consisted of
long positions, Citi utilizes derivatives to manage its interest rate and
currency risks; credit derivatives are not used.
Liquidity Measures
Citi uses multiple measures
in monitoring its liquidity, including without limitation those described
below.
In broad terms, the structural
liquidity ratio, defined as the sum of deposits, long-term debt and
stockholders' equity as a percentage of total assets, measures whether the asset
base is funded by sufficiently long-dated liabilities. Citi's structural
liquidity ratio remained stable over the past year at approximately 73% as of
December 31, 2012.
In addition, Citi believes it is currently in compliance with the
proposed Basel III Liquidity Coverage Ratio (LCR), as amended by the Basel
Committee on Banking Supervision on January 7, 2013 (the amended LCR
guidelines), even though such ratio is not proposed to take full effect until
2019. Using the amended LCR guidelines, Citi's estimated LCR was approximately
122% as of December 31, 2012, compared with approximately 127% at September 30,
2012 and 143% at March 31, 2012. 13 On a dollar basis, the 122% LCR
represents additional liquidity of approximately $65 billion above the proposed
minimum 100% LCR threshold. Citi's LCR may decrease modestly over
time.
The LCR is designed to ensure
banks maintain an adequate level of unencumbered cash and highly liquid
securities that can be converted to cash to meet liquidity needs under an acute
30-day stress scenario. The LCR estimate is calculated in accordance with the
amended LCR guidelines. Under the amended LCR guidelines, the LCR is calculated
by dividing the amount of highly liquid unencumbered government and
government-backed cash securities, as well as unencumbered cash, by the
estimated net outflows over a stressed 30-day period. The net cash outflows are
calculated by applying assumed outflow factors, prescribed in the amended LCR
guidelines, to the various categories of liabilities (deposits, unsecured and
secured wholesale borrowings), as well as to unused commitments and
derivatives-related exposures, partially offset by inflows from assets maturing
within 30 days. The amended LCR requirements expanded the definition of liquid
assets, and reduced outflow estimates for certain types of deposits and
commitments.
Stress
Testing
Liquidity stress
testing is performed for each of Citi's major entities, operating subsidiaries
and/or countries. Stress testing and scenario analyses are intended to quantify
the potential impact of a liquidity event on the balance sheet and liquidity
position, and to identify viable funding alternatives that can be utilized.
These scenarios include assumptions about significant changes in key funding
sources, market triggers (such as credit ratings), potential uses of funding and
political and economic conditions in certain countries. These conditions include
standard and stressed market conditions as well as firm-specific
events.
A
wide range of liquidity stress tests are important for monitoring purposes. Some
span liquidity events over a full year, some may cover an intense stress period
of one month, and still other time frames may be appropriate. These potential
liquidity events are useful to ascertain potential mismatches between liquidity
sources and uses over a variety of horizons
13 | Citi's estimated LCR is a non-GAAP financial measure. Citi believes this measure provides useful information to investors and others by measuring Citi's progress toward potential future expected regulatory liquidity standards. |
55
(overnight, one week, two weeks, one
month, three months, one year), and liquidity limits are set accordingly. To
monitor the liquidity of a unit, those stress tests and potential mismatches may
be calculated with varying frequencies, with several important tests performed
daily.
Given the range of potential
stresses, Citi maintains a series of contingency funding plans on a consolidated
basis as well as for individual entities. These plans specify a wide range of
readily available actions that are available in a variety of adverse market
conditions, or idiosyncratic disruptions.
Credit Ratings
Citigroup's funding and liquidity, including its
funding capacity, its ability to access the capital markets and other sources of
funds, as well as the cost of these funds, and its ability to maintain certain
deposits, is partially dependent on its credit ratings. The table below
indicates the ratings for Citigroup, Citibank, N.A. and Citigroup Global Markets
Inc. (a broker-dealer subsidiary of Citigroup) as of December 31,
2012.
Citi's Debt Ratings as of December 31, 2012
Citigroup Global | ||||||||||
Citigroup Inc. | Citibank, N.A. | Markets Inc. | ||||||||
Senior | Commercial | Long- | Short- | Long- | ||||||
debt | paper | term | term | term | ||||||
Fitch Ratings (Fitch) | A | F1 | A | F1 | NR | |||||
Moody's Investors Service (Moody's) | Baa2 | P-2 | A3 | P-2 | NR | |||||
Standard & Poor's (S&P) | A- | A-2 | A | A-1 | A |
NR Not rated.
Recent Credit Rating
Developments
On December 5,
2012, S&P concluded its annual review of Citi with no changes to the ratings
and outlooks on Citigroup and its subsidiaries. On October 16, 2012, S&P
noted that Citi's ratings remain unchanged despite the change in senior
management. At the same time, S&P maintained a negative outlook on the
ratings. These ratings continue to receive two notches of government support
uplift, in line with other large banks.
On October 16, 2012, Fitch noted the change in Citi's senior management
as an unexpected, but credit-neutral, event that would likely have no material
impact on the credit profile of Citibank, N.A. or its ratings in the near term.
On October 10, 2012, Fitch affirmed the long- and short-term ratings of "A/F1"
and the Viability Rating of "a-" for Citigroup and Citibank, N.A. and, as of
that date, the rating outlook by Fitch was stable. This rating action was taken
in conjunction with Fitch's periodic review of the 13 global trading and
universal banks.
On February 12, 2013, Moody's
changed the rating outlook on Citibank, N.A. from negative to stable, and
affirmed the long-term ratings. The negative outlook was assigned on October 16,
2012, following changes in Citi's senior management. Moody's maintained the
negative outlook on the long-term ratings of Citigroup Inc. On October 16, 2012,
Moody's affirmed the long- and short-term ratings of Citigroup and Citibank,
N.A.
Potential Impacts of
Ratings Downgrades
Ratings
downgrades by Moody's, Fitch or S&P could negatively impact Citigroup's
and/or Citibank, N.A.'s funding and liquidity due to reduced funding capacity,
including derivatives triggers, which could take the form of cash obligations
and collateral requirements.
The following information is provided for the purpose of analyzing the
potential funding and liquidity impact to Citigroup and Citibank, N.A. of a
hypothetical, simultaneous ratings downgrade across all three major rating
agencies. This analysis is subject to certain estimates, estimation
methodologies, and judgments and uncertainties, including without limitation
those relating to potential ratings limitations certain entities may have with
respect to permissible counterparties, as well as general subjective
counterparty behavior (e.g., certain corporate customers and trading
counterparties could re-evaluate their business relationships with Citi, and
limit the trading of certain contracts or market instruments with Citi).
Moreover, changes in counterparty behavior could impact Citi's funding and
liquidity as well as the results of operations of certain of its businesses.
Accordingly, the actual impact to Citigroup or Citibank, N.A. is unpredictable
and may differ materially from the potential funding and liquidity impacts
described below.
For additional information on
the impact of credit rating changes on Citi and its applicable subsidiaries, see
"Risk Factors-Liquidity Risks" below.
56
Citigroup Inc. and
Citibank, N.A.-Potential Derivative Triggers
As of December 31, 2012, Citi estimates that a
hypothetical one-notch downgrade of the senior debt/long-term rating of
Citigroup across all three major rating agencies could impact Citigroup's
funding and liquidity due to derivative triggers by approximately $1.7 billion.
Other funding sources, such as secured financing transactions and other margin
requirements, for which there are no explicit triggers, could also be adversely
affected.
In addition, as of December 31, 2012, Citi estimates that a hypothetical
one-notch downgrade of the senior debt/long-term rating of Citibank, N.A. across
all three major rating agencies could impact Citibank, N.A.'s funding and
liquidity due to derivative triggers by approximately $3.4 billion.
In total, Citi estimates that a one-notch
downgrade of Citigroup and Citibank, N.A., across all three major rating
agencies, could result in aggregate cash obligations and collateral requirements
of approximately $5.1 billion (see also Note 23 to the Consolidated Financial
Statements). As set forth under "Aggregate Liquidity Resources" above, the
aggregate liquidity resources of Citi's non-bank entities were approximately $65
billion, and the aggregate liquidity resources of Citi's significant Citibank
entities and other Citibank and Banamex entities were approximately $289
billion, for a total of approximately $354 billion as of December 31, 2012.
These liquidity resources are available in part as a contingency for the
potential events described above.
In addition, a broad range of mitigating actions are currently included
in Citigroup's and Citibank, N.A.'s detailed contingency funding plans. For
Citigroup, these mitigating factors include, but are not limited to, accessing
surplus funding capacity from existing clients, tailoring levels of secured
lending, adjusting the size of select trading books and collateralized
borrowings from Citi's significant bank subsidiaries. Mitigating actions
available to Citibank, N.A. include, but are not limited to, selling or
financing highly liquid government securities, tailoring levels of secured
lending, adjusting the size of select trading books, reducing loan originations
and renewals, raising additional deposits, or borrowing from the FHLBs or
central banks. Citi believes these mitigating actions could substantially reduce
the funding and liquidity risk, if any, of the potential downgrades described
above.
Citibank, N.A.-Additional
Potential Impacts
In addition
to the above derivative triggers, Citi believes that a potential one-notch
downgrade of Citibank, N.A.'s senior debt/long-term rating by S&P and Fitch
could also have an adverse impact on the commercial paper/short-term rating of
Citibank, N.A. As of December 31, 2012, Citibank, N.A. had liquidity commitments
of approximately $18.7 billion to asset-backed commercial paper conduits. This
included $11.1 billion of commitments to consolidated conduits and $7.6 billion
of commitments to unconsolidated conduits (each as referenced in Note 22 to the
Consolidated Financial Statements).
In addition to the above-referenced aggregate liquidity resources of
Citi's significant Citibank entities and other Citibank and Banamex entities, as
well as the various mitigating actions previously noted, mitigating actions
available to Citibank, N.A. to reduce the funding and liquidity risk, if any, of
the potential downgrades described above, include repricing or reducing certain
commitments to commercial paper conduits.
In addition, in the event of the potential downgrades described above,
Citi believes that certain corporate customers could re-evaluate their deposit
relationships with Citibank, N.A. Among other things, this re-evaluation could
include adjusting their discretionary deposit levels or changing their
depository institution, each of which could potentially reduce certain deposit
levels at Citibank, N.A. As a potential mitigant, however, Citi could choose to
adjust pricing or offer alternative deposit products to its existing customers,
or seek to attract deposits from new customers, as well as utilize the other
mitigating actions referenced above.
57
OFF-BALANCE-SHEET ARRANGEMENTS
Citigroup enters into various types of off-balance-sheet arrangements in the ordinary course of business. Citi's involvement in these arrangements can take many different forms, including without limitation:
purchasing or retaining residual and other interests in special purpose entities, such as credit card receivables and mortgage-backed and other asset-backed securitization entities; holding senior and subordinated debt, interests in limited and general partnerships and equity interests in other unconsolidated entities; and providing guarantees, indemnifications, loan commitments, letters of credit and representations and warranties. Citi
enters into these arrangements for a variety of business purposes. These
securitization entities offer investors access to specific cash flows and risks
created through the securitization process. The securitization arrangements also
assist Citi and Citi's customers in monetizing their financial assets at more
favorable rates than Citi or the customers could otherwise obtain.
The table below presents where a discussion of
Citi's various off-balance-sheet arrangements may be found in this Form 10-K. In
addition, see "Significant Accounting Policies and Significant
Estimates-Securitizations," as well as Notes 1, 22 and 27 to the Consolidated
Financial Statements.
Types of Off-Balance-Sheet Arrangements Disclosures in this Form 10-K
Variable interests and other obligations, | See Note 22 to the Consolidated | ||
including contingent obligations, | Financial Statements. | ||
arising from variable interests in | |||
nonconsolidated VIEs | |||
Leases, letters of credit, and lending | See Note 27 to the Consolidated | ||
and other commitments | Financial Statements. | ||
Guarantees | See Note 27 to the Consolidated | ||
Financial Statements. |
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CONTRACTUAL OBLIGATIONS
The following table includes
information on Citigroup's contractual obligations, as specified and aggregated
pursuant to SEC requirements.
Purchase obligations consist of those obligations
to purchase goods or services that are enforceable and legally binding on Citi.
For presentation purposes, purchase obligations are included in the table below
through the termination date of the respective agreements, even if the contract
is renewable. Many of the purchase agreements for goods or services include
clauses that would allow Citigroup to cancel the agreement with specified
notice; however, that impact
is not included in the table below (unless Citigroup has already notified the
counterparty of its intention to terminate the agreement).
Other liabilities reflected on Citigroup's Consolidated Balance
Sheet include obligations for goods and services that have already been
received, uncertain tax positions and other liabilities that have been incurred
and will ultimately be paid in cash.
Contractual obligations by year | |||||||||||||||||||||
In millions of dollars | 2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | Total | ||||||||||||||
Long-term debt obligations-principal (1) | $ | 42,651 | $ | 37,026 | $ | 29,046 | $ | 19,857 | $ | 24,151 | $ | 86,732 | $ | 239,463 | |||||||
Long-term debt obligations-interest payments (2) | 1,655 | 1,437 | 1,127 | 770 | 937 | 3,365 | 9,291 | ||||||||||||||
Operating and capital lease obligations | 1,220 | 1,125 | 1,001 | 881 | 754 | 2,293 | 7,274 | ||||||||||||||
Purchase obligations | 792 | 439 | 414 | 311 | 249 | 233 | 2,438 | ||||||||||||||
Other liabilities (3) | 40,358 | 1,623 | 287 | 289 | 255 | 3,945 | 46,757 | ||||||||||||||
Total | $ | 86,676 | $ | 41,650 | $ | 31,875 | $ | 22,108 | $ | 26,346 | $ | 96,568 | $ | 305,223 |
(1) | For additional information about long-term debt obligations, see "Capital Resources and Liquidity-Funding and Liquidity" above and Note 19 to the Consolidated Financial Statements. |
(2) | Contractual obligations related to interest payments on long-term debt are calculated by applying the weighted average interest rate on Citi's outstanding long-term debt as of December 31, 2012 to the contractual payment obligations on long-term debt for each of the periods disclosed in the table. At December 31, 2012, Citi's overall weighted average contractual interest rate for long-term debt was 3.88%. |
(3) | Includes accounts payable and accrued expenses recorded in Other liabilities on Citi's Consolidated Balance Sheet. Also includes discretionary contributions for 2013 for Citi's non-U.S. pension plans and the non-U.S. postretirement plans, as well as employee benefit obligations accounted for under SFAS 87 (ASC 715), SFAS 106 (ASC 715) and SFAS 112 (ASC 712). |
59
RISK FACTORS
The following discussion sets forth what management currently believes could be the most significant regulatory, market and economic, liquidity, legal and business and operational risks and uncertainties that could impact Citi's businesses, results of operations and financial condition. Other factors, including those not currently known to Citi or its management, could also negatively impact Citi's businesses, results of operations and financial condition, and thus the below should not be considered a complete discussion of all of the risks and uncertainties Citi may face.
REGULATORY RISKS
Citi Faces Ongoing
Significant Regulatory Changes and Uncertainties in the U.S. and Non-U.S.
Jurisdictions in Which It Operates That Negatively Impact the Management of Its
Businesses, Results of Operations and Ability to
Compete.
Citi continues to
be subject to significant regulatory changes and uncertainties both in the U.S.
and the non-U.S. jurisdictions in which it operates. As discussed throughout
this section, the complete scope and ultimate form of a number of provisions of
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(Dodd-Frank Act) and other regulatory initiatives in the U.S. are still being
finalized and, even when finalized, will likely require significant
interpretation and guidance. These regulatory changes and uncertainties are
compounded by numerous regulatory initiatives underway in non-U.S. jurisdictions
in which Citi operates. Certain of these initiatives, such as prohibitions or
restrictions on proprietary trading or the requirement to establish "living
wills," overlap with changes in the U.S., while others, such as proposals for
financial transaction and/or bank taxes in particular countries or regions,
currently do not. Even when U.S. and international initiatives overlap, in many
instances they have not been undertaken on a coordinated basis and areas of
divergence have developed with respect to scope, interpretation, timing,
structure or approach.
Citi could be subject to additional regulatory
requirements or changes beyond those currently proposed, adopted or
contemplated, particularly given the ongoing heightened regulatory environment
in which financial institutions operate. For example, in connection with their
orderly liquidation authority under Title II of the Dodd-Frank Act, U.S.
regulators may require that bank holding companies maintain a prescribed level
of debt at the holding company level. In addition, under the Dodd-Frank Act,
U.S. regulators may require additional collateral for inter-affiliate derivative
and other credit transactions which, depending upon rulemaking and regulatory
guidance, could be significant. There also continues to be discussion of
potential GSE reform which would likely affect markets for mortgages and
mortgage securities in ways that cannot currently be predicted. The heightened
regulatory environment has resulted not only in a tendency toward more
regulation, but toward the most prescriptive regulation as regulatory agencies
have generally taken a conservative approach to rulemaking, interpretive
guidance and their general ongoing supervisory authority.
Regulatory changes and uncertainties make
Citi's business planning more difficult and could require Citi to change its
business models or even its organizational structure, all of which could
ultimately negatively impact Citi's results of operations as well as realization
of its deferred tax assets (DTAs). For example, regulators have proposed
applying limits to certain concentrations of risk, such as through single
counterparty credit limits or legal lending limits, and implementation of such
limits currently or in the future could require Citi to restructure client or
counterparty relationships and could result in the potential loss of
clients.
Further, certain regulatory
requirements could require Citi to create new subsidiaries instead of branches
in foreign jurisdictions, or create subsidiaries to conduct particular
businesses or operations (so-called "subsidiarization"). This could, among other
things, negatively impact Citi's global capital and liquidity management and
overall cost structure. Unless and until there is sufficient regulatory
certainty, Citi's business planning and proposed pricing for affected businesses
necessarily include assumptions based on possible or proposed rules or
requirements, and incorrect assumptions could impede Citi's ability to
effectively implement and comply with final requirements in a timely manner.
Business planning is further complicated by the continual need to review and
evaluate the impact on Citi's businesses of ongoing rule proposals and final
rules and interpretations from numerous regulatory bodies, all within compressed
timeframes.
Citi's costs associated with
implementation of, as well as the ongoing, extensive compliance costs associated
with, new regulations or regulatory changes will likely be substantial and will
negatively impact Citi's results of operations. Given the continued regulatory
uncertainty, however, the ultimate amount and timing of such impact going
forward cannot be predicted. Also, compliance with inconsistent, conflicting or
duplicative regulations, either within the U.S. or between the U.S. and non-U.S.
jurisdictions, could further increase the impact on Citi. For example, the
Dodd-Frank Act provided for the elimination of "federal preemption" with respect
to the operating subsidiaries of federally chartered institutions such as
Citibank, N.A., which allows for a broader application of state consumer finance
laws to such subsidiaries. As a result, Citi is now required to conform the
consumer businesses conducted by operating subsidiaries of Citibank, N.A. to a
variety of potentially conflicting or inconsistent state laws not previously
applicable, such as laws imposing customer fee restrictions or requiring
additional consumer disclosures. Failure to comply with these or other
regulatory changes could further increase Citi's costs or otherwise harm Citi's
reputation.
Uncertainty persists regarding
the competitive impact of these new regulations. Citi could be subject to more
stringent regulations, or could incur additional compliance costs, compared to
its U.S. competitors because of its global footprint. In addition, certain other
financial intermediaries may not be regulated on the same basis or to the same
extent as Citi and consequently may have certain competitive advantages.
Moreover, Citi could be subject to more, or more stringent, regulations than its
foreign competitors because of several U.S. regulatory initiatives, particularly
with respect to Citi's non-U.S. operations. Differences in substance and
severity of regulations across jurisdictions could significantly reduce Citi's
ability to
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compete with its U.S. and non-U.S. competitors and further negatively impact Citi's results of operations. For example, Citi conducts a substantial portion of its derivatives activities through Citibank, N.A. Pursuant to the CFTC's current and proposed rules on cross-border implications of the new derivatives registration and trading requirements under the Dodd-Frank Act, clients who transact their derivatives business with overseas branches of Citibank, N.A. could be subject to U.S. registration and other derivatives requirements. Clients of Citi and other large U.S. financial institutions have expressed an unwillingness to continue to deal with overseas branches of U.S. banks if the rules would subject them to these requirements. As a result, Citi could lose clients to non-U.S. financial institutions that are not subject to the same compliance regime.
Continued Uncertainty Regarding the
Timing and Implementation of Future Regulatory Capital Requirements Makes It Difficult to
Determine the Ultimate Impact of These Requirements on Citi's Businesses and
Results of Operations and Impedes Long-Term Capital
Planning.
During 2012, U.S. regulators
proposed the U.S. Basel III rules that would be applicable to Citigroup and its
depository institution subsidiaries, including Citibank, N.A. U.S. regulators
also adopted final rules relating to Basel II.5 market risk that were effective
on January 1, 2013. This new regulatory capital regime will increase the level
of capital required to be held by Citi, not only with respect to the quantity
and quality of capital (such as capital required to be held in the form of
common equity), but also as a result of increasing Citi's overall risk-weighted
assets.
There
continues to be significant uncertainty regarding the overall timing and
implementation of the final U.S. regulatory capital rules. For example, while
the U.S. Basel III rules have been proposed, additional rulemaking and
interpretation is necessary to adopt and implement the final rules. Overall
implementation phase-in will also need to be finalized by U.S. regulators, and
it remains to be seen how U.S. regulators will address the interaction between
the new capital adequacy rules, Basel I, Basel II, Basel II.5 and the proposed
"standardized" approach serving as a "floor" to the capital requirements of
"advanced approaches" institutions, such as Citigroup. (For additional
information on the current and proposed regulatory capital standards applicable
to Citi, see "Capital Resources and Liquidity – Capital Resources – Regulatory
Capital Standards" above.) As a result, the ultimate impact of this new regime
on Citi's businesses and results of operations cannot currently be
estimated.
Based on the proposed regulatory capital
regime, the level of capital required to be held by Citi will likely be higher
than most of its U.S. and non-U.S. competitors, including as a result of the
level of DTAs recorded on Citi's balance sheet and its strategic focus on
emerging markets (which could result in Citi having higher risk-weighted assets
under Basel III than those of its global competitors that either lack presence
in, or are less focused on, such markets). In addition, while the Federal
Reserve Board has yet to finalize any capital surcharge framework for U.S.
"global systemically important banks" (G-SIBs), Citi is currently expected to be
subject to a
surcharge of 2.5%, which will likely be
higher than the surcharge applicable to most of Citi's U.S. and non-U.S.
competitors. Competitive impacts of the proposed regulatory capital regime could
further negatively impact Citi's businesses and results of
operations.
Citi's estimated Basel III capital ratios
necessarily reflect management's understanding, expectations and interpretation
of the proposed U.S. Basel III requirements as well as existing implementation
guidance. Furthermore, Citi must incorporate certain enhancements and
refinements to its Basel II.5 market risk models, as required by both the
Federal Reserve Board and the OCC, in order to retain the risk-weighted asset
benefits associated with the conditional approvals received for such models.
Citi must also separately obtain final approval from these agencies for the use
of certain credit risk models that would also yield reduced risk-weighted
assets, in part, under Basel III.
All of these uncertainties make long-term
capital planning by Citi's management challenging. If management's estimates and
assumptions with respect to these or other aspects of U.S. Basel III
implementation are not accurate, or if Citi fails to incorporate the required
enhancement and refinements to its models as required by the Federal Reserve
Board and the OCC, then Citi's ability to meet its future regulatory capital
requirements as it projects or as required could be negatively impacted, or the
business and financial consequences of doing so could be more adverse than
expected.
The Ongoing Implementation of
Derivatives Regulation Under the Dodd-Frank Act Could Adversely Affect Citi's
Derivatives Businesses, Increase Its Compliance Costs and Negatively Impact Its
Results of Operations.
Derivatives
regulations under the Dodd-Frank Act have impacted and will continue to
substantially impact the derivatives markets by, among other things: (i)
requiring extensive regulatory and public reporting of derivatives transactions;
(ii) requiring a wide range of over-the-counter derivatives to be cleared
through recognized clearing facilities and traded on exchanges or exchange-like
facilities; (iii) requiring the collection and segregation of collateral for
most uncleared derivatives; and (iv) significantly broadening limits on the size
of positions that may be maintained in specified derivatives. These market
structure reforms will make trading in many derivatives products more costly,
may significantly reduce the liquidity of certain derivatives markets and could
diminish customer demand for covered derivatives. These changes could negatively
impact Citi's results of operations in its derivatives
businesses.
Numerous aspects of the new derivatives
regime require costly and extensive compliance systems to be put in place and
maintained. For example, under the new derivatives regime, certain of Citi's
subsidiaries have registered as "swap dealers," thus subjecting them to
extensive ongoing compliance requirements, such as electronic recordkeeping
(including recording telephone communications), real-time public transaction
reporting and external business conduct requirements (e.g., required swap
counterparty disclosures), among others. These requirements require the
successful and timely installation of extensive technological and operational
systems and compliance infrastructure, and Citi's failure to effectively install
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such systems subject it to increased
compliance risks and costs which could negatively impact its earnings and result
in regulatory or reputational risk. Further, new derivatives-related systems and
infrastructure will likely become the basis on which institutions such as Citi
compete for clients. To the extent that Citi's connectivity, product offerings
or services for clients in these businesses is deficient, this could further
negatively impact Citi's results of
operations
Additionally, while certain of the derivatives regulations under the
Dodd-Frank Act have been finalized, the rulemaking process is not complete,
significant interpretive issues remain to be resolved and the timing for the
effectiveness of many of these requirements is not yet clear. Depending on how
the uncertainty is resolved, certain outcomes could negatively impact Citi's
competitive position in these businesses, both with respect to the cross-border
aspects of the U.S. rules as well as with respect to the international
coordination and timing of various non-U.S. derivatives regulatory reform
efforts. For example, in mid-2012, the European Union (EU) adopted the European
Market Infrastructure Regulation which requires, among other things, information
on all European derivative transactions be reported to trade repositories and
certain counterparties to clear "standardized" derivatives contracts through
central counterparties. Many of these non-U.S. reforms are likely to take effect
after the corresponding provisions of the Dodd-Frank Act and, as a result, it is
uncertain whether they will be similar to those in the U.S. or will impose
different, additional or even inconsistent requirements on Citi's derivatives
activities. Complications due to the sequencing of the effectiveness of
derivatives reform, both among different components of the Dodd-Frank Act and
between the U.S. and other jurisdictions, could result in disruptions to Citi's
operations and make it more difficult for Citi to compete in these
businesses.
The Dodd-Frank Act also contains a
so-called "push-out" provision that, to date, has generally been interpreted to
prevent FDIC-insured depository institutions from dealing in certain equity,
commodity and credit-related derivatives, although the ultimate scope of the
provision is not certain. Citi currently conducts a substantial portion of its
derivatives-dealing activities within and outside the U.S. through Citibank,
N.A., its primary insured depository institution. The costs of revising customer
relationships and modifying the organizational structure of Citi's businesses or
the subsidiaries engaged in these businesses remain unknown and are subject to
final regulations or regulatory interpretations, as well as client expectations.
While this push-out provision is to be effective in July 2013, U.S. regulators
may grant up to an initial two-year transition period to each depository
institution. In January 2013, Citi applied for an initial two-year transition
period for Citibank, N.A. The timing of any approval of a transition period
request, or any parameters imposed on a transition period, remains uncertain. In
addition, to the extent that certain of Citi's competitors already conduct these
derivatives activities outside of FDIC-insured depository institutions, Citi
would be disproportionately impacted by any restructuring of its business for
push-out purposes. Moreover, the extent to which Citi's non-U.S. operations will
be impacted by the push-out provision remains unclear, and it is possible that
Citi could lose market share or profitability in its derivatives business or
client relationships in jurisdictions where foreign bank competitors can operate
without the same constraints.
It Is Uncertain What Impact the
Proposed Restrictions on Proprietary Trading Activities Under the Volcker Rule
Will Have on Citi's Market-Making Activities and Preparing for Compliance with
the Proposed Rules Necessarily Subjects Citi to Additional Compliance Risks and
Costs.
The "Volcker Rule" provisions
of the Dodd-Frank Act are intended in part to restrict the proprietary trading
activities of institutions such as Citi. While the five regulatory agencies
required to adopt rules to implement the Volcker Rule have each proposed their
rules, none of the agencies has adopted final rules. Instead, in July 2012, the
regulatory agencies instructed applicable institutions, including Citi, to
engage in "good faith efforts" to be in compliance with the Volcker Rule by July
2014. Because the regulations are not yet final, the degree to which Citi's
market-making activities will be permitted to continue in their current form
remains uncertain. In addition, the proposed rules and any restrictions imposed
by final regulations will also likely affect Citi's trading activities globally,
and thus will impact it disproportionately in comparison to foreign financial
institutions that will not be subject to the Volcker Rule with respect to all of
their activities outside of the U.S.
As a result of this continued
uncertainty, preparing for compliance based only on proposed rules necessarily
requires Citi to make certain assumptions about the applicability of the Volcker
Rule to its businesses and operations. For example, as proposed, the regulations
contain exceptions for market-making, underwriting, risk-mitigating hedging,
certain transactions on behalf of customers and activities in certain asset
classes, and require that certain of these activities be designed not to
encourage or reward "proprietary risk taking." Because the regulations are not
yet final, Citi is required to make certain assumptions as to the degree to
which Citi's activities in these areas will be permitted to continue. If these
assumptions are not accurate, Citi could be subject to additional compliance
risks and costs and could be required to undertake such compliance on a more
compressed time frame when regulators issue final rules. In addition, the
proposed regulations would require an extensive compliance regime for the
"permitted" activities under the Volcker Rule. Citi's implementation of this
compliance regime will be based on its "good faith" interpretation and
understanding of the proposed regulations, and to the extent its interpretation
or understanding is not correct, Citi could be subject to additional compliance
risks and costs.
Like the other areas of ongoing
regulatory reform, alternative proposals for the regulation of proprietary
trading are developing in non-U.S. jurisdictions, leading to overlapping or
potentially conflicting regimes. For example, in the U.K., the so-called
"Vickers" proposal would separate investment and commercial banking activity
from retail banking and would require ring-fencing of U.K. domestic retail
banking operations coupled with higher capital requirements for the ring-fenced
assets. In the EU, the so-called "Liikanen" proposal would require the mandatory
separation of proprietary trading and other significant trading activities into
a trading entity legally separate from the legal entity holding the banking
activities of a firm. It is likely that, given Citi's worldwide operations, some
form of the Vickers and/or Liikanen proposals will eventually be applicable to a
portion of Citi's operations. While the Volcker Rule and these non-U.S.
proposals are intended to address similar concerns-separating the perceived
risks of
62
proprietary trading and certain other investment banking activities in order not to affect more traditional banking and retail activities-they would do so under different structures, resulting in inconsistent regulatory regimes and increased compliance and other costs for a global institution such as Citi.
Regulatory Requirements in the U.S.
and in Non-U.S. Jurisdictions to Facilitate the Future Orderly Resolution of
Large Financial Institutions Could Negatively Impact Citi's Business Structures,
Activities and Practices.
The
Dodd-Frank Act requires Citi to prepare and submit annually a plan for the
orderly resolution of Citigroup (the bank holding company) under the U.S.
Bankruptcy Code in the event of future material financial distress or failure.
Citi is also required to prepare and submit a resolution plan for its insured
depository institution subsidiary, Citibank, N.A., and to demonstrate how
Citibank is adequately protected from the risks presented by non-bank
affiliates. These plans must include information on resolution strategy, major
counterparties and "interdependencies," among other things, and require
substantial effort, time and cost across all of Citi's businesses and
geographies. These resolution plans are subject to review by the Federal Reserve
Board and the FDIC.
If the Federal Reserve Board and the FDIC both determine that Citi's
resolution plans are not "credible" (which, although not defined, is generally
believed to mean the regulators do not believe the plans are feasible or would
otherwise allow the regulators to resolve Citi in a way that protects
systemically important functions without severe systemic disruption and without
exposing taxpayers to loss), and Citi does not remedy the deficiencies within
the required time period, Citi could be required to restructure or reorganize
businesses, legal entities, or operational systems and intracompany transactions
in ways that could negatively impact its operations, or be subject to
restrictions on growth. Citi could also eventually be subjected to more
stringent capital, leverage or liquidity requirements, or be required to divest
certain assets or operations.
In addition, other jurisdictions, such as
the U.K., have requested or are expected to request resolution plans from
financial institutions, including Citi, and the requirements and timing relating
to these plans are different from the U.S. requirements and from each other.
Responding to these additional requests will require additional effort, time and
cost, and regulatory review and requirements in these jurisdictions could be in
addition to, or conflict with, changes required by Citi's regulators in the
U.S.
Additional Regulations with Respect
to Securitizations Will Impose Additional Costs, Increase Citi's Potential
Liability and May Prevent Citi from Performing Certain Roles in
Securitizations.
Citi plays a variety
of roles in asset securitization transactions, including acting as underwriter
of asset-backed securities, depositor of the underlying assets into
securitization vehicles, trustee to securitization vehicles and counterparty to
securitization vehicles under derivative contracts. The Dodd-Frank Act contains
a number of provisions that affect securitizations. These provisions include,
among others, a requirement that securitizers in certain
transactions retain un-hedged exposure to
at least 5% of the economic risk of certain assets they securitize and a
prohibition on securitization participants engaging in transactions that would
involve a conflict with investors in the securitization. Many of these
requirements have yet to be finalized. The SEC has also proposed additional
extensive regulation of both publicly and privately offered securitization
transactions through revisions to the registration, disclosure, and reporting
requirements for asset-backed securities and other structured finance products.
Moreover, the proposed capital adequacy regulations (see "Capital Resources and
Liquidity-Capital Resources-Regulatory Capital Standards" above) are likely to
increase the capital required to be held against various exposures to
securitizations.
The cumulative effect of these extensive
regulatory changes as well as other potential future regulatory changes cannot
currently be assessed. It is likely, however, that these various measures will
increase the costs of executing securitization transactions, and could
effectively limit Citi's overall volume of, and the role Citi may play in,
securitizations, expose Citi to additional potential liability for
securitization transactions and make it impractical for Citi to execute certain
types of securitization transactions it previously executed. As a result, these
effects could impair Citi's ability to continue to earn income from these
transactions or could hinder Citi's ability to use such transactions to hedge
risks, reduce exposures or reduce assets with adverse risk-weighting in its
businesses, and those consequences could affect the conduct of these businesses.
In addition, certain sectors of the securitization markets, particularly
residential mortgage-backed securitizations, have been inactive or experienced
dramatically diminished transaction volumes since the financial crisis. The
impact of various regulatory reform measures could negatively delay or restrict
any future recovery of these sectors of the securitization markets, and thus the
opportunities for Citi to participate in securitization transactions in such
sectors.
MARKET AND ECONOMIC RISKS
There Continues to Be Significant
Uncertainty Arising from the Ongoing Eurozone Debt and Economic Crisis,
Including the Potential Outcomes That Could Occur and the Impact Those Outcomes
Could Have on Citi's Businesses, Results of Operations or Financial Condition,
as well as the Global Financial Markets and Financial Conditions
Generally.
Several European countries,
including Greece, Ireland, Italy, Portugal and Spain (GIIPS), continue to
experience credit deterioration due to weaknesses in their economic and fiscal
situations. Concerns have been raised, both within the European Monetary Union
(EMU) as well as internationally, as to the financial, political and legal
effectiveness of measures taken to date, and the ability of these countries to
adhere to any required austerity, reform or similar measures. These ongoing
conditions have caused, and are likely to continue to cause, disruptions in the
global financial markets, particularly if they lead to any future sovereign debt
defaults and/or significant bank failures or defaults in the
Eurozone.
63
The impact of the
ongoing Eurozone debt and economic crisis and other developments in the EMU
could be even more significant if they lead to a partial or complete break-up of
the EMU. The exit of one or more member countries from the EMU could result in
certain obligations relating to the exiting country being redenominated from the
Euro to a new country currency. Redenomination could be accompanied by immediate
revaluation of the new currency as compared to the Euro and the U.S. dollar, the
extent of which would depend on the particular facts and circumstances. Any such
redenomination/revaluation would cause significant legal and other uncertainty
with respect to outstanding obligations of counterparties and debtors in any
exiting country, whether sovereign or otherwise, and would likely lead to
complex, lengthy litigation. Redenomination/revaluation could also be
accompanied by the imposition of exchange and/or capital controls, required
functional currency changes and "deposit flight."
The ongoing Eurozone debt
and economic crisis has created, and will continue to create, significant
uncertainty for Citi and the global economy. Any occurrence or combination of
the events described above could negatively impact Citi's businesses, results of
operations and financial condition, both directly through its own exposures as
well as indirectly. For example, at times, Citi has experienced widening of its
credit spreads and thus increased costs of funding due to concerns about its
Eurozone exposure. In addition, U.S. regulators could impose mandatory loan loss
and other reserve requirements on U.S. financial institutions, including Citi,
if a particular country's economic situation deteriorates below a certain level,
which could negatively impact Citi's earnings, perhaps significantly. Citi's
businesses, results of operations and financial condition could also be
negatively impacted due to a decline in general global economic conditions as a
result of the ongoing Eurozone crises, particularly given its global footprint
and strategy. In addition to the uncertainties and potential impacts described
above, the ongoing Eurozone crisis and/or partial or complete break-up of the
EMU could cause, among other things, severe disruption to global equity markets,
significant increases in bond yields generally, potential failure or default of
financial institutions (including those of systemic importance), a significant
decrease in global liquidity, a freeze-up of global credit markets and worldwide
recession.
While Citi endeavors to mitigate its
credit and other exposures related to the Eurozone, the potential outcomes and
impact of those outcomes resulting from the Eurozone crisis are highly uncertain
and will ultimately be based on the specific facts and circumstances. As a
result, there can be no assurance that the various steps Citi has taken to
protect its businesses, results of operations and financial condition against
these events will be sufficient. In addition, there could be negative impacts to
Citi's businesses, results of operations or financial condition that are
currently unknown to Citi and thus cannot be mitigated as part of its ongoing
contingency planning. For additional information on these matters, see "Managing
Global Risk-Country Risk" below.
The Continued Uncertainty Relating to the Sustainability and Pace
of Economic Recovery in the U.S. and Globally Could Have a Negative Impact on Citi's Businesses and Results of
Operations. Moreover, Any Significant Global Economic Downturn or Disruption, Including a Significant Decline in Global
Trade Volumes, Could Materially and Adversely Impact Citi's Businesses, Results of Operations and
Financial Condition.
Like other financial institutions, Citi's
businesses have been, and could continue to be, negatively impacted by the uncertainty surrounding the sustainability and
pace of economic recovery in the U.S. as well as globally. This continued uncertainty has impacted, and could continue to
impact, the results of operations in, and growth of, Citi's businesses. Among other impacts, continued economic
concerns can negatively affect Citi's ICG businesses, as clients cut back on trading and other business activities, as well as its Consumer businesses, including
its credit card and mortgage businesses, as continued high levels of unemployment can impact payment and thus delinquency
and loss rates. Fiscal and monetary actions taken by U.S. and non-U.S. government and regulatory authorities to spur
economic growth or otherwise, such as by maintaining a low interest rate environment, can also have an impact on
Citi's businesses and results of operations. For example, actions by the Federal Reserve Board can impact Citi's
cost of funds for lending, investing and capital raising activities and the returns it earns on those loans and
investments, both of which affect Citi's net interest margin.
Moreover,
if a severe global economic downturn or other major economic disruption were to occur, including a significant decline
in global trade volumes, Citi would likely experience substantial loan and other losses and be required to
significantly increase its loan loss reserves, among other impacts. A global trade disruption that results in a permanently
reduced level of trade volumes and increased costs of global trade, whether as a result of a prolonged "trade
war" or some other reason, could significantly impact trade financing activities, certain trade dependent economies
(such as the emerging markets in Asia) as well as certain industries heavily dependent on trade, among other things. Given
Citi's global strategy and focus on the emerging markets, such a downturn and decrease in global trade volumes could
materially and adversely impact Citi's businesses, results of operation and financial condition, particularly as
compared to its competitors. This could include, among other things, a potential that any such losses would not be tax
benefitted, given the current environment.
Concerns About the Level of U.S.
Government Debt and a Downgrade (or a Further Downgrade) of the U.S. Government
Credit Rating Could Negatively Impact Citi's Businesses, Results of Operations,
Capital, Funding and Liquidity.
Concerns about the level of U.S. government debt and uncertainty relating
to fiscal actions that may be taken to address these and related issues have,
and could continue to, adversely affect Citi. In 2011, Standard & Poor's
lowered its long-term sovereign credit rating on the U.S. government from AAA to
AA+, and Moody's and Fitch both placed such rating on negative outlook.
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According to the credit rating agencies, these actions resulted from the high level of U.S. government debt and the continued inability of Congress to reach an agreement to ensure payment of U.S. government debt and reduce the U.S. debt level. Among other things, a future downgrade (or further downgrade) of U.S. debt obligations or U.S. government-related obligations, or concerns that such a downgrade might occur, could negatively affect Citi's ability to obtain funding collateralized by such obligations and the pricing of such funding as well as the pricing or availability of Citi's funding as a U.S. financial institution. Any further downgrade could also have a negative impact on financial markets and economic conditions generally and, as a result, could have a negative impact on Citi's businesses, results of operations, capital, funding and liquidity.
Citi's Extensive Global Network
Subjects It to Various International and Emerging Markets Risks as well as
Increased Compliance and Regulatory Risks and Costs.
During 2012, international revenues accounted for
approximately 57% of Citi's total revenues. In addition, revenues from the
emerging markets (which Citi generally defines as the markets in Asia (other than Japan,
Australia and New Zealand), the Middle East, Africa and central and eastern
European countries in EMEA and the markets in Latin
America ) accounted for approximately 44% of
Citi's total revenues in 2012.
Citi's extensive global network subjects it to a number of
risks associated with international and emerging markets, including, among
others, sovereign volatility, political events, foreign exchange controls,
limitations on foreign investment, socio-political instability, nationalization,
closure of branches or subsidiaries and confiscation of assets. For example,
Citi operates in several countries, such as Argentina and Venezuela, with strict
foreign exchange controls that limit its ability to convert local currency into
U.S. dollars and/or transfer funds outside the country. In such cases, Citi
could be exposed to a risk of loss in the event that the local currency devalues
as compared to the U.S. dollar (see "Managing Global Risk- Country and
Cross-Border Risk" below). There have also been instances of political turmoil
and other instability in some of the countries in which Citi operates, including
in certain countries in the Middle East and Africa, to which Citi has responded
by transferring assets and relocating staff members to more stable
jurisdictions. Similar incidents in the future could place Citi's staff and
operations in danger and may result in financial losses, some significant,
including nationalization of Citi's assets.
Additionally, given its
global focus, Citi could be disproportionately impacted as compared to its
competitors by an economic downturn in the international and/or emerging
markets, whether resulting from economic conditions within these markets, the
ripple effect of the ongoing Eurozone crisis, the global economy generally or
otherwise. If a particular country's economic situation were to deteriorate
below a certain level, U.S. regulators could impose mandatory loan loss and
other reserve requirements on Citi, which could negatively impact its earnings,
perhaps significantly. In addition, countries such as China, Brazil and India,
each of which are part of Citi's emerging markets strategy, have recently
experienced uncertainty over
the pace and extent of future economic
growth. Lower or negative growth in these or other emerging market economies
could make execution of Citi's global strategy more challenging and could
adversely affect Citi's results of operations.
Citi's extensive global
operations also increase its compliance and regulatory risks and costs. For
example, Citi's operations in emerging markets subject it to higher compliance
risks under U.S. regulations primarily focused on various aspects of global
corporate activities, such as anti-money-laundering regulations and the Foreign
Corrupt Practices Act, which can be more acute in less developed markets and
thus require substantial investment in compliance infrastructure. Any failure by
Citi to comply with applicable U.S. regulations, as well as the regulations in
the countries and markets in which it operates as a result of its global
footprint, could result in fines, penalties, injunctions or other similar
restrictions, any of which could negatively impact Citi's earnings and its
general reputation. Further, Citi provides a wide range of financial products
and services to the U.S. and other governments, to multi-national corporations
and other businesses, and to prominent individuals and families around the
world. The actions of these clients involving the use of Citi products or
services could result in an adverse impact on Citi, including adverse regulatory
and reputational impact.
LIQUIDITY RISKS
The Maintenance of Adequate
Liquidity Depends on Numerous Factors, Including Those Outside of Citi's Control
such as Market Disruptions and Increases in Citi's Credit
Spreads.
As a global financial
institution, adequate liquidity and sources of funding are essential to Citi's
businesses. Citi's liquidity and sources of funding can be significantly and
negatively impacted by factors it cannot control, such as general disruptions in
the financial markets or negative perceptions about the financial services
industry in general, or negative investor perceptions of Citi's liquidity,
financial position or creditworthiness in particular. Market perception of
sovereign default risks, including those arising from the ongoing Eurozone debt
crisis, can also lead to inefficient money markets and capital markets, which
could further impact Citi's availability and cost of funding.
In addition,
Citi's cost and ability to obtain deposits, secured funding and long-term
unsecured funding from the credit and capital markets are directly related to
its credit spreads. Changes in credit spreads constantly occur and are
market-driven, including both external market factors and factors specific to
Citi, and can be highly volatile. Citi's credit spreads may also be influenced
by movements in the costs to purchasers of credit default swaps referenced to
Citi's long-term debt, which are also impacted by these external and
Citi-specific factors. Moreover, Citi's ability to obtain funding may be
impaired if other market participants are seeking to access the markets at the
same time, or if market appetite is reduced, as is likely to occur in a
liquidity or other market crisis. In addition, clearing organizations,
regulators, clients and financial institutions with which Citi interacts may
exercise the right to
65
require additional collateral based on
these market perceptions or market conditions, which could further impair Citi's
access to and cost of funding.
As a holding company, Citigroup relies on dividends,
distributions and other payments from its subsidiaries to fund dividends as well
as to satisfy its debt and other obligations. Several of Citigroup's
subsidiaries are subject to capital adequacy or other regulatory or contractual
restrictions on their ability to provide such payments. Limitations on the
payments that Citigroup receives from its subsidiaries could also impact its
liquidity.
For additional information on Citi's
funding and liquidity, including Basel III regulatory liquidity standards, see
"Capital Resources and Liquidity-Funding and Liquidity-Liquidity Management,
Measures and Stress Testing" above.
The Credit Rating Agencies
Continuously Review the Ratings of Citi and Certain of Its Subsidiaries, and
Reductions in Citi's or Its More Significant Subsidiaries' Credit Ratings Could
Have a Negative Impact on Citi's Funding and Liquidity Due to Reduced Funding
Capacity, Including Derivatives Triggers That Could Require Cash Obligations or
Collateral Requirements.
The credit
rating agencies, such as Fitch, Moody's and S&P, continuously evaluate Citi
and certain of its subsidiaries, and their ratings of Citi's and its more
significant subsidiaries' long-term/senior debt and short-term/commercial
paper, as applicable, are based on a number of factors, including financial
strength, as well as factors not entirely within the control of Citi and its
subsidiaries, such as the agencies' proprietary rating agency methodologies and
assumptions and conditions affecting the financial services industry and markets
generally.
Citi and its subsidiaries may not be able
to maintain their current respective ratings. A ratings downgrade by Fitch,
Moody's or S&P could negatively impact Citi's ability to access the capital
markets and other sources of funds as well as the costs of those funds, and its
ability to maintain certain deposits. A ratings downgrade could also have a
negative impact on Citi's funding and liquidity due to reduced funding capacity,
including derivative triggers, which could take the form of cash obligations and
collateral requirements. In addition, a ratings downgrade could also have a
negative impact on other funding sources, such as secured financing and other
margined transactions for which there are no explicit triggers, as well as on
contractual provisions which contain minimum ratings thresholds in order for
Citi to hold third-party funds.
Moreover, credit ratings downgrades can
have impacts which may not be currently known to Citi or which are not possible
to quantify. For example, some entities may have ratings limitations as to their
permissible counterparties, of which Citi may or may not be aware. In addition,
certain of Citi's corporate customers and trading counterparties, among other
clients, could re-evaluate their business relationships with Citi and limit the
trading of certain contracts or market instruments with Citi in response to
ratings downgrades. Changes in customer and counterparty behavior could impact
not only Citi's funding and liquidity but also the results of operations of certain Citi businesses. For additional
information on the potential impact of a reduction in Citi's or Citibank, N.A.'s
credit ratings, see "Capital Resources and Liquidity-Funding and
Liquidity-Credit Ratings" above.
LEGAL RISKS
Citi Is Subject to Extensive Legal
and Regulatory Proceedings, Investigations, and Inquiries That Could Result in
Substantial Losses. These Matters Are Often Highly Complex and Slow to Develop,
and Results Are Difficult to Predict or Estimate.
At any given time, Citi is defending a significant number of
legal and regulatory proceedings and is subject to numerous governmental and
regulatory examinations, investigations and other inquiries. These proceedings,
examinations, investigations and inquiries could result, individually or
collectively, in substantial losses.
In the wake of the financial crisis of
2007–2009, the frequency with which such proceedings, investigations and
inquiries are initiated, and the severity of the remedies sought, have increased
substantially, and the global judicial, regulatory and political environment has
generally become more hostile to large financial institutions such as Citi. Many
of the proceedings, investigations and inquiries involving Citi relating to
events before or during the financial crisis have not yet been resolved, and
additional proceedings, investigations and inquiries relating to such events may
still be commenced. In addition, heightened expectations by regulators and other
enforcement authorities for strict compliance could also lead to more regulatory
and other enforcement proceedings seeking greater sanctions for financial
institutions such as Citi.
For example, Citi is currently subject to
extensive legal and regulatory inquiries, actions and investigations relating to
its historical mortgage-related activities, including claims regarding the
accuracy of offering documents for residential mortgage-backed securities and
alleged breaches of representation and warranties relating to the sale of
mortgage loans or the placement of mortgage loans into securitization trusts
(for additional information on representation and warranty matters, see
"Managing Global Risk-Credit Risk-Citigroup Residential
Mortgages-Representations and Warranties" below). Citi is also subject to
extensive legal and regulatory inquiries, actions and investigations relating
to, among other things, submissions made by Citi and other panel banks to bodies
that publish various interbank offered rates, such as the London Inter-Bank
Offered Rate (LIBOR), or other rates or benchmarks. Like other banks with
operations in the U.S., Citi is also subject to continuing oversight by the OCC
and other bank regulators, and inquiries and investigations by other
governmental and regulatory authorities, with respect to its anti-money
laundering program. Other banks subject to similar or the same inquiries,
actions or investigations have incurred substantial liability in relation to
their activities in these areas, including in a few cases criminal
convictions or deferred prosecution agreements respecting corporate entities as
well as substantial fines and penalties.
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Moreover,
regulatory changes resulting from the Dodd-Frank Act and other recent regulatory
changes-such as the limitations on federal preemption in the consumer arena, the
creation of the Consumer Financial Protection Bureau with its own examination
and enforcement authority and the "whistle-blower" provisions of the Dodd-Frank
Act-could further increase the number of legal and regulatory proceedings
against Citi. In addition, while Citi takes numerous steps to prevent and detect
employee misconduct, such as fraud, employee misconduct cannot always be
deterred or prevented and could subject Citi to additional
liability.
All of these inquiries, actions and
investigations have resulted in, and will continue to result in, significant
time, expense and diversion of management's attention. In addition, proceedings
brought against Citi may result in adverse judgments, settlements, fines,
penalties, restitution, disgorgement, injunctions, business improvement orders
or other results adverse to it, which could materially and negatively affect
Citi's businesses, financial condition or results of operations, require
material changes in Citi's operations, or cause Citi reputational harm.
Moreover, many large claims asserted against Citi are highly complex and slow to
develop, and they may involve novel or untested legal theories. The outcome of
such proceedings is difficult to predict or estimate until late in the
proceedings, which may last several years. In addition, certain settlements are
subject to court approval and may not be approved. Although Citi establishes
accruals for its legal and regulatory matters according to accounting
requirements, the amount of loss ultimately incurred in relation to those
matters may be substantially higher than the amounts accrued. For
additional information relating to Citi's legal and regulatory proceedings, see
Note 28 to the Consolidated Financial Statements.
BUSINESS AND OPERATIONAL RISKS
The Remaining Assets in Citi
Holdings Will Likely Continue to Have a Negative Impact on Citi's Results of
Operations and Its Ability to Utilize the Capital Supporting the Remaining
Assets in Citi Holdings for More Productive Purposes.
As of December 31, 2012, the remaining assets within Citi
Holdings constituted approximately 8% of Citigroup's GAAP assets and 15% of its
risk-weighted assets (as defined under current regulatory guidelines). Also as
of December 31, 2012, LCL constituted approximately 81% of Citi Holdings assets, of
which approximately 73% consisted of legacy U.S. mortgages which had an
estimated weighted average life of six years.
The pace of the wind-down of
the remaining assets within Citi Holdings has slowed as Citi has disposed of
certain of the larger businesses within this segment. While Citi's strategy
continues to be to reduce the remaining assets in Citi Holdings as quickly as
practicable in an economically rational manner, sales of the remaining assets
could largely depend on factors outside of Citi's control, such as market
appetite and buyer funding. Assets that are not sold will continue to be subject
to ongoing run-off and paydowns. As a result, Citi Holdings' remaining assets
will likely continue to have a negative impact on Citi's overall results of
operations. Moreover, Citi's ability to utilize the capital supporting the remaining
assets within Citi Holdings and thus use such capital for more productive
purposes, including return of capital to shareholders, will also depend on the
ultimate pace and level of the wind-down of Citi Holdings.
Citi's Ability to Return Capital to
Shareholders Is Dependent in Part on the CCAR Process and the Results of
Required Regulatory Stress Tests and Other Governmental
Approvals.
In addition to Board of
Directors' approval, any decision by Citi to return capital to shareholders,
whether through an increase in its common stock dividend or by initiating a
share repurchase program, is dependent in part on regulatory approval, including
annual regulatory review of the results of the Comprehensive Capital Analysis
and Review (CCAR) process required by the Federal Reserve Board and the
supervisory stress tests required under the Dodd-Frank Act. Restrictions on
Citi's ability to increase its common stock dividend or engage in share
repurchase programs as a result of these processes has, and could in the future,
negatively impact market perceptions of Citi.
Citi's ability to accurately
predict or explain to stakeholders the outcome of the CCAR process, and thus
address any such market perceptions, is hindered by the Federal Reserve Board's
use of proprietary stress test models. In 2013, for the first time there will
also be a requirement for Citi to publish, in March and September, certain
stress test results (as prescribed by the Federal Reserve Board) that will be
based on Citi's own stress tests models. The Federal Reserve Board will
disclose, in March, certain results based on its proprietary stress test models.
Because it is not clear how these proprietary models may differ from Citi's
models, it is likely that Citi's stress test results using its own models may
not be consistent with those eventually disclosed by the Federal Reserve Board,
thus potentially leading to additional confusion and impacts to Citi's
perception in the market.
In addition, pursuant to Citi's agreement
with the FDIC entered into in connection with exchange offers consummated in
July and September 2009, Citi remains subject to dividend and share repurchase
restrictions for as long as the FDIC continues to hold any Citi trust preferred
securities acquired in connection with the exchange offers. While these
restrictions may be waived, they generally prohibit Citi from paying regular
cash dividends in excess of $0.01 per share of common stock per quarter or from
redeeming or repurchasing any Citi equity securities, which includes its common
stock or trust preferred securities. As of February 15, 2013, the FDIC continued
to hold approximately $2.225 billion of trust preferred securities issued in
connection with the exchange offers (which become redeemable on July 30,
2014).
67
Citi May Be Unable to Reduce Its
Level of Expenses as It Expects, and Investments in Its Businesses May Not Be
Productive.
Citi continues to pursue a
disciplined expense-management strategy, including re-engineering, restructuring
operations and improving the efficiency of functions. In December 2012, Citi
announced a series of repositioning actions designed to further reduce its
expenses and improve its efficiency. However, there is no guarantee
that Citi will be able to reduce its level of expenses, whether as a result of
the recently-announced repositioning actions or otherwise, in the future. Citi's
ultimate expense levels also depend, in part, on factors outside of its control.
For example, as a result of the extensive legal and regulatory proceedings and
inquiries to which Citi is subject, Citi's legal and related costs remain
elevated, have been, and are likely to continue to be, subject to volatility and
are difficult to predict. In addition, expenses incurred in Citi's foreign
entities are subject to foreign exchange volatility. Further, Citi's ability to
continue to reduce its expenses as a result of the wind-down of Citi Holdings
will also decline as Citi Holdings represents a smaller overall portion of
Citigroup. Moreover, investments Citi has made in its businesses, or may make in
the future, may not be as productive as Citi expects or at all.
Citi's Ability to Utilize Its DTAs Will Be Driven by Its
Ability to Generate U.S. Taxable Income, Which Could Continue to Be Negatively Impacted by the Wind-Down of Citi
Holdings.
Citigroup's total DTAs increased by approximately $3.8
billion in 2012 to $55.3 billion at December 31, 2012, while the time remaining for utilization has shortened, particularly
with respect to the foreign tax credit (FTC) component of the DTAs. The increase in the total DTAs in 2012 was due, in large
part, to the continued negative impact of Citi Holdings on Citi's U.S.
taxable income.
The accounting treatment for DTAs is
complex and requires a significant amount of judgment and estimates regarding future taxable earnings in the jurisdictions
in which the DTAs arise and available tax planning strategies. Realization of the DTAs will continue to be driven primarily
by Citi's ability to generate U.S. taxable income in the relevant tax carry-forward periods, particularly the FTC carry-forward periods. Citi does not expect a significant reduction in the balance of its net DTAs during 2013.
For additional information, see "Significant Accounting Policies and Significant Estimates-Income Taxes"
below and Note 10 to the Consolidated Financial Statements.
The Value of Citi's DTAs Could Be
Significantly Reduced If Corporate Tax Rates in the U.S. or Certain State or
Foreign Jurisdictions Decline or as a Result of Other Changes in the U.S.
Corporate Tax System.
Congress and the
Obama Administration have discussed decreasing the U.S. corporate tax rate.
Similar discussions have taken place in certain state and foreign jurisdictions.
While Citi may benefit in some respects from any decrease in corporate tax
rates, a reduction in the U.S., state or foreign corporate tax rates could
result in a significant decrease in the value of Citi's DTAs. There have also
been recent discussions of more sweeping changes to the U.S. tax system,
including changes to the tax treatment of foreign business income. It is
uncertain whether or when any such tax reform proposals will be enacted into
law, and whether or how they will affect Citi's DTAs.
Citi Maintains Contractual
Relationships with Various Retailers and Merchants Within Its U.S. Credit Card
Businesses in NA RCB, and the Failure to Maintain Those Relationships Could Have
a Material Negative Impact on the Results of Operations or Financial Condition
of Those Businesses.
Through its U.S.
Citi-branded cards and Citi retail services credit card businesses within North America Regional Consumer Banking (NA
RCB) , Citi maintains numerous co-branding
relationships with third-party retailers and merchants in the ordinary course of
business pursuant to which Citi issues credit cards to customers of the
retailers or merchants. These agreements provide for shared economics between
the parties and ways to increase customer brand loyalty, and generally have a
fixed term that may be extended or renewed by the parties or terminated early in
certain circumstances. While various mitigating factors could be available in
the event of the loss of one or more of these co-branding relationships, such as
replacing the retailer or merchant or by Citi's offering new card products, the
results of operations or financial condition of Citi-branded cards or Citi
retail services, as applicable, or NA
RCB could be negatively impacted, and the
impact could be material.
These agreements could be terminated due
to, among other factors, a breach by Citi of its responsibilities under the
applicable co-branding agreement, a breach by the retailer or merchant under the
agreement, or external factors outside of either party's control, including
bankruptcies, liquidations, restructurings or consolidations and other similar
events that may occur. For example, within NA
RCB Citi-branded cards, Citi issues a
co-branded credit card product with American Airlines, the Citi-AAdvantage card.
As has been widely reported, AMR Corporation and certain of its subsidiaries,
including American Airlines, Inc. (collectively, AMR), filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy code in November
2011. On February 14, 2013, AMR and US Airways Group, Inc. announced that the
boards of directors of both companies had approved a merger agreement under
which the companies would be combined. The merger, which is conditioned upon,
among other things, U.S. Bankruptcy Court approval, is expected to be completed
in the third quarter of 2013. To date, the ongoing AMR bankruptcy and the merger
announcement have not had a material impact on the results of operations for
U.S. Citi-branded cards or NA
RCB . However, it is not certain when the
bankruptcy and merger processes will be resolved, what the outcome will be,
whether or over what period the Citi-AAdvantage card program will continue to be
maintained and whether the impact of the bankruptcy or merger could be material
to the results of operations or financial condition of U.S. Citi-branded cards
or NA RCB over time.
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Citi's Operational Systems and
Networks Have Been, and Will Continue to Be, Subject to an Increasing Risk of
Continually Evolving Cybersecurity or Other Technological Risks, Which Could
Result in the Disclosure of Confidential Client or Customer Information, Damage
to Citi's Reputation, Additional Costs to Citi, Regulatory Penalties and
Financial Losses.
A significant
portion of Citi's operations relies heavily on the secure processing, storage
and transmission of confidential and other information as well as the monitoring
of a large number of complex transactions on a minute-by-minute basis. For
example, through its global consumer banking, credit card and Transaction
Services businesses, Citi obtains and stores an extensive amount of personal and
client-specific information for its retail, corporate and governmental customers
and clients and must accurately record and reflect their extensive account
transactions. With the evolving proliferation of new technologies and the
increasing use of the Internet and mobile devices to conduct financial
transactions, large, global financial institutions such as Citi have been, and
will continue to be, subject to an increasing risk of cyber incidents from these
activities.
Although
Citi devotes significant resources to maintain and regularly upgrade its systems
and networks with measures such as intrusion and detection prevention systems
and monitoring firewalls to safeguard critical business applications, there is
no guarantee that these measures or any other measures can provide absolute
security. Citi's computer systems, software and networks are subject to ongoing
cyber incidents such as unauthorized access; loss or destruction of data
(including confidential client information); account takeovers; unavailability
of service; computer viruses or other malicious code; cyber attacks; and other
events. These threats may derive from human error, fraud or malice on the part
of employees or third parties, or may result from accidental technological
failure. Additional challenges are posed by external extremist parties,
including foreign state actors, in some circumstances as a means to promote
political ends. If one or more of these events occurs, it could result in the
disclosure of confidential client information, damage to Citi's reputation with
its clients and the market, customer dissatisfaction, additional costs to Citi
(such as repairing systems or adding new personnel or protection technologies),
regulatory penalties, exposure to litigation and other financial losses to both
Citi and its clients and customers. Such events could also cause interruptions
or malfunctions in the operations of Citi (such as the lack of availability of
Citi's online banking system), as well as the operations of its clients,
customers or other third parties. Given Citi's global footprint and high volume
of transactions processed by Citi, certain errors or actions may be repeated or
compounded before they are discovered and rectified, which would further
increase these costs and consequences.
Citi has been subject to intentional cyber incidents from external
sources, including (i) denial of service attacks, which attempted to interrupt
service to clients and customers; (ii) data breaches, which aimed to obtain
unauthorized access to customer account data; and (iii) malicious software
attacks on client systems, which attempted to allow unauthorized entrance to
Citi's systems under the guise of a client and the extraction of client data.
For example, in 2012 Citi and other U.S. financial institutions experienced
distributed denial of service attacks which were intended to disrupt consumer
online banking services. While Citi's monitoring and protection services were
able to detect and respond to these incidents before they became significant,
they still resulted in certain limited losses in some instances as well as
increases in expenditures to monitor against the threat of similar future cyber
incidents. There can be no assurance that such cyber incidents will not occur
again, and they could occur more frequently and on a more significant scale. In
addition, because the methods used to cause cyber attacks change frequently or,
in some cases, are not recognized until launched, Citi may be unable to
implement effective preventive measures or proactively address these
methods.
Third parties with which Citi does business may also be sources of
cybersecurity or other technological risks. Citi outsources certain functions,
such as processing customer credit card transactions, uploading content on
customer-facing websites, and developing software for new products and services.
These relationships allow for the storage and processing of customer
information, by third party hosting of or access to Citi websites, which could
result in service disruptions or website defacements, and the potential to
introduce vulnerable code, resulting in security breaches impacting Citi
customers. While Citi engages in certain actions to reduce the exposure
resulting from outsourcing, such as performing onsite security control
assessments, limiting third-party access to the least privileged level necessary
to perform job functions, and restricting third-party processing to systems
stored within Citi's data centers, ongoing threats may result in unauthorized
access, loss or destruction of data or other cyber incidents with increased
costs and consequences to Citi such as those discussed above. Furthermore,
because financial institutions are becoming increasingly interconnected with
central agents, exchanges and clearing houses, including through the derivatives
provisions of the Dodd-Frank Act, Citi has increased exposure to operational
failure or cyber attacks through third parties.
While Citi maintains
insurance coverage that may, subject to policy terms and conditions including
significant self-insured deductibles, cover certain aspects of cyber risks, such
insurance coverage may be insufficient to cover all losses.
69
Citi's Performance and the
Performance of Its Individual Businesses Could Be Negatively Impacted If Citi Is
Not Able to Hire and Retain Qualified Employees for Any
Reason.
Citi's performance and the
performance of its individual businesses is largely dependent on the talents and
efforts of highly skilled employees. Specifically, Citi's continued ability to
compete in its businesses, to manage its businesses effectively and to continue
to execute its overall global strategy depends on its ability to attract new
employees and to retain and motivate its existing employees. Citi's ability to
attract and retain employees depends on numerous factors, including without
limitation, its culture, compensation, the management and leadership of the
company as well as its individual businesses, Citi's presence in the particular
market or region at issue and the professional opportunities it offers. The
banking industry has and may continue to experience more stringent regulation of
employee compensation, including limitations relating to incentive-based
compensation, clawback requirements and special taxation. Moreover, given its
continued focus on the emerging markets, Citi is often competing for qualified
employees in these markets with entities that have a significantly greater
presence in the region or are not subject to significant regulatory restrictions
on the structure of incentive compensation. If Citi is unable to continue to
attract and retain qualified employees for any reason, Citi's performance,
including its competitive position, the successful execution of its overall
strategy and its results of operations could be negatively impacted.
Incorrect Assumptions or Estimates
in Citi's Financial Statements Could Cause Significant Unexpected Losses in the
Future, and Changes to Financial Accounting and Reporting Standards Could Have a
Material Impact on How Citi Records and Reports Its Financial Condition and
Results of Operations.
Citi is
required to use certain assumptions and estimates in preparing its financial
statements under U.S. GAAP, including determining credit loss reserves, reserves
related to litigation and regulatory exposures and mortgage representation and
warranty claims, DTAs and the fair value of certain assets and liabilities,
among other items. If Citi's assumptions or estimates underlying its financial
statements are incorrect, Citi could experience unexpected losses, some of which
could be significant.
Moreover, the Financial Accounting Standards Board (FASB) is currently
reviewing or proposing changes to several financial accounting and reporting
standards that govern key aspects of Citi's financial statements, including
those areas where Citi is required to make assumptions or estimates. For
example, the FASB's financial instruments project could, among other things,
significantly change how Citi determines the impairment on financial instruments
and accounts for hedges. The FASB has also proposed a new accounting model
intended to require earlier recognition of credit losses. The accounting model
would require a single "expected credit loss" measurement objective for the
recognition of credit losses for all financial instruments, replacing the
multiple existing impairment models in U.S. GAAP, which generally require that a
loss be "incurred" before it is recognized. For additional information on this
proposed new accounting model, see Note 1 to the Consolidated Financial
Statements.
As a result of changes to financial accounting or reporting standards, whether promulgated or required by the FASB or other regulators, Citi could be required to change certain of the assumptions or estimates it previously used in preparing its financial statements, which could negatively impact how it records and reports its financial condition and results of operations generally. In addition, the FASB continues its convergence project with the International Accounting Standards Board (IASB) pursuant to which U.S. GAAP and International Financial Reporting Standards (IFRS) may be converged. Any transition to IFRS could further have a material impact on how Citi records and reports its financial results. For additional information on the key areas for which assumptions and estimates are used in preparing Citi's financial statements, see "Significant Accounting Policies and Significant Estimates" below and Note 28 to the Consolidated Financial Statements.
Changes Could Occur in the Method
for Determining LIBOR and It Is Unclear How Any Such Changes Could Affect the
Value of Debt Securities and Other Financial Obligations Held or Issued by Citi
That Are Linked to LIBOR, or How Such Changes Could Affect Citi's Results of
Operations or Financial Condition.
As
a result of concerns about the accuracy of the calculation of the daily LIBOR,
which is currently overseen by the British Bankers' Association (BBA), the BBA
has taken steps to change the process for determining LIBOR by increasing the
number of banks surveyed to set LIBOR and to strengthen the oversight of the
process. In addition, recommendations relating to the setting and administration
of LIBOR were put forth in September 2012, and the U.K. government has announced
that it intends to incorporate these recommendations in new
legislation.
It is uncertain what changes, if any, may
be required or made by the U.K. government or other governmental or regulatory
authorities in the method for determining LIBOR. Accordingly, it is not certain
whether or to what extent any such changes could have an adverse impact on the
value of any LIBOR-linked debt securities issued by Citi, or any loans,
derivatives and other financial obligations or extensions of credit for which
Citi is an obligor. It is also not certain whether or to what extent any such
changes would have an adverse impact on the value of any LIBOR-linked
securities, loans, derivatives and other financial obligations or extensions of
credit held by or due to Citi or on Citi's overall financial condition or
results of operations.
70
Citi May Incur Significant Losses If Its Risk Management Processes
and Strategies Are Ineffective, and Concentration of Risk Increases the Potential for Such Losses.
Citi's
independent risk management organization is structured so as to facilitate the management of the principal risks Citi
assumes in conducting its activities-credit risk, market risk and operational risk-across three dimensions:
businesses, regions and critical products. Credit risk is the potential for financial loss resulting from the failure of a
borrower or counterparty to honor its financial or contractual obligations. Market risk encompasses both liquidity risk and
price risk. For a discussion of funding and liquidity risk, see "Capital Resources and Liquidity-Funding and
Liquidity" and "Risk Factors-Liquidity Risks" above. Price risk losses arise from fluctuations in the
market value of trading and non-trading positions resulting from changes in interest rates, credit spreads, foreign
exchange rates, equity and commodity prices and in their implied volatilities. Operational risk is the risk for loss
resulting from inadequate or failed internal processes, systems or human factors, or from external events, and includes
reputation and franchise risk associated with business practices or market conduct in which Citi is involved. For
additional information on each of these areas of risk as well as risk management at Citi, including management review
processes and structure, see "Managing Global Risk" below. Managing these risks is made especially challenging
within a global and complex financial institution such as Citi, particularly given the complex and diverse financial markets
and rapidly evolving market conditions in which Citi operates.
Citi
employs a broad and diversified set of risk management and mitigation processes and strategies, including the use of various
risk models, in analyzing and monitoring these and other risk categories. However, these models, processes and strategies
are inherently limited because they involve techniques, including the use of historical data in some circumstances, and
judgments that cannot anticipate every economic and financial outcome in the markets in which it operates nor can it
anticipate the specifics and timing of such outcomes. Citi could incur significant losses if its risk management processes,
strategies or models are ineffective in properly anticipating or managing these risks.
In
addition, concentrations of risk, particularly credit and market risk, can further increase the risk of significant losses.
At December 31, 2012, Citi's most significant concentration of credit risk was with the U.S. government and its
agencies, which primarily results from trading assets and investments issued by the U.S. government and its agencies. Citi
also routinely executes a high volume of securities, trading, derivative and foreign exchange transactions with
counterparties in the financial services sector, including banks, other financial institutions, insurance companies,
investment banks and government and central banks. To the extent regulatory or market developments lead to an increased
centralization of trading activity through particular clearing houses, central agents or exchanges, this could increase
Citi's concentration of risk in this sector. Concentrations of risk can limit, and have limited, the effectiveness of
Citi's hedging strategies and have caused Citi to incur significant losses, and they may do so again in the future.
71
MANAGING GLOBAL RISK
Risk
Management-Overview
Citigroup believes
that effective risk management is of primary importance to its overall
operations. Accordingly, Citi's risk management process has been designed to
monitor, evaluate and manage the principal risks it assumes in conducting its
activities. These include credit, market and operational risks, which are each
discussed in more detail throughout this
section.
Citigroup's risk management framework is designed to balance business
ownership and accountability for risks with well-defined independent risk
management oversight and responsibility. Citi's risk management framework is
based on the following principles established by Citi's Chief Risk
Officer:
Significant focus has been placed on fostering a risk culture based on a policy of "Taking Intelligent Risk with Shared Responsibility, without Forsaking Individual Accountability":
"Taking intelligent risk" means that Citi must carefully identify, measure and aggregate risks, and it must establish risk tolerances based on a full understanding of "tail risk." "Shared responsibility" means that risk managers must own and influence business outcomes, including risk controls that act as a safety net for the business. "Individual accountability" means that all individuals are ultimately responsible for identifying, understanding and managing risks.The Chief Risk Officer, with oversight from the Risk Management and Finance Committee of the Board of Directors, as well as the full Board of Directors, is responsible for:
establishing core standards for the management, measurement and reporting of risk; identifying, assessing, communicating and monitoring risks on a company-wide basis; engaging with senior management on a frequent basis on material matters with respect to risk-taking activities in the businesses and related risk management processes; and ensuring that the risk function has adequate independence, authority, expertise, staffing, technology and resources. The risk management organization is
structured so as to facilitate the management of risk across three dimensions:
businesses, regions and critical products.
Each
of Citi's major business groups has a Business Chief Risk Officer who is the
focal point for risk decisions, such as setting risk limits or approving
transactions in the business. The majority of the staff in Citi's independent
risk management organization report to these Business Chief Risk Officers. There
are also Chief Risk Officers for Citibank, N.A. and Citi Holdings.
Regional Chief Risk Officers, appointed in each of Asia , EMEA and Latin America , are
accountable for all the risks in their geographic areas and are the primary risk
contacts for the regional business heads and local regulators.
The
positions of Product Chief Risk Officers are established for those risk areas of
critical importance to Citigroup, currently real estate and structural market
risk, as well as fundamental credit. The Product Chief Risk Officers are
accountable for the risks within their specialty and focus on problem areas
across businesses and regions. The Product Chief Risk Officers serve as a
resource to the Chief Risk Officer, as well as to the Business and Regional
Chief Risk Officers, to better enable the Business and Regional Chief Risk
Officers to focus on the day-to-day management of risks and responsiveness to
business flow.
Each of the Business, Regional and Product Chief Risk Officers
report to Citi's Chief Risk Officer, who reports to the Head of Franchise Risk
and Strategy, a direct report to the Chief Executive
Officer.
72
Risk Aggregation and Stress
Testing
While Citi's major risk areas
(i.e., credit, market and operational) are described individually on the
following pages, these risks are also reviewed and managed in conjunction with
one another and across the various businesses via Citi's risk aggregation and
stress testing processes.
As
noted above, independent risk management monitors and controls major risk
exposures and concentrations across the organization. This requires the
aggregation of risks, within and across businesses, as well as subjecting those
risks to various stress scenarios in order to assess the potential economic
impact they may have on Citigroup.
Stress tests are in place across Citi's entire portfolio, (i.e., trading,
available-for-sale and accrual portfolios). These firm-wide stress reports
measure the potential impact to Citi and its component businesses of changes in
various types of key risk factors (e.g., interest rates, credit spreads, etc.).
The reports also measure the potential impact of a number of historical and
hypothetical forward-looking systemic stress scenarios, as developed internally
by independent risk management. These firm-wide stress tests are produced on a
monthly basis, and results are reviewed by senior management and the Board of
Directors.
Supplementing the stress testing described above, Citi
independent risk management, working with input from the businesses and finance,
provides periodic updates to senior management and the Board of Directors on
significant potential areas of concern across Citigroup that can arise from risk
concentrations, financial market participants, and other systemic issues. These
areas of focus are intended to be forward-looking assessments of the potential
economic impacts to Citi that may arise from these exposures.
The
stress-testing and focus-position exercises described above are a supplement to
the standard limit-setting and risk-capital exercises described below, as these
processes incorporate events in the marketplace and within Citi that impact the
firm's outlook on the form, magnitude, correlation and timing of identified
risks that may arise. In addition to enhancing awareness and understanding of
potential exposures, the results of these processes then serve as the starting
point for developing risk management and mitigation strategies.
In
addition to Citi's ongoing, internal stress testing described above, Citi is
also required to perform stress testing on a periodic basis for a number of
regulatory exercises, including the Federal Reserve Board's Comprehensive
Capital Analysis and Review (CCAR) and the OCC's Dodd-Frank Act Stress Testing
(DFAST). For 2013, these stress tests are required annually and mid-year. These regulatory exercises typically prescribe certain defined
scenarios under which stress testing should be conducted, and they also provide
defined forms for the output of the results. For additional information, see
"Risk Factors-Business and Operational Risks" above.
Risk Capital
Citi calculates and allocates risk capital across the company
in order to consistently measure risk taking across business activities, and to
assess risk-reward relationships.
Risk
capital is defined as the amount of capital required to absorb potential
unexpected economic losses resulting from extremely severe events over a
one-year time period.
The drivers of economic losses are risks which, for Citi, are broadly categorized as credit risk, market risk and operational risk.
Credit risk losses primarily result from a borrower's or counterparty's inability to meet its financial or contractual obligations. Market risk losses arise from fluctuations in the market value of trading and non-trading positions, including the changes in value resulting from fluctuations in rates. Operational risk losses result from inadequate or failed internal processes, systems or human factors, or from external events.Citi's risk capital framework is reviewed and enhanced on a regular basis in light of market developments and evolving practices.
73
CREDIT RISK
Credit risk is the potential for financial loss resulting from the failure of a borrower or counterparty to honor its financial or contractual obligations. Credit risk arises in many of Citigroup's business activities, including:
wholesale and retail lending; capital markets derivative transactions; structured finance; and repurchase agreements and reverse repurchase transactions.Credit risk also arises from settlement and clearing activities, when Citi transfers an asset in advance of receiving its counter-value, or advances funds to settle a transaction on behalf of a client. Concentration risk, within credit risk, is the risk associated with having credit exposure concentrated within a specific client, industry, region or other category.
Credit Risk
Management
Credit risk is one of the most
significant risks Citi faces as an institution. As a result, Citi has a
well-established framework in place for managing credit risk across all
businesses. This includes a defined risk appetite, credit limits and credit
policies, both at the business level as well as at the firm-wide level. Citi's
credit risk management also includes processes and policies with respect to
problem recognition, including "watch lists," portfolio review, updated risk
ratings and classification triggers. With respect to Citi's settlement and
clearing activities, intra-day client usage of lines is closely monitored
against limits, as well as against "normal" usage patterns. To the extent a
problem develops, Citi typically moves the client to a secured (collateralized)
operating model. Generally, Citi's intra-day settlement and clearing lines are
uncommitted and cancellable at any time.
To
manage concentration of risk within credit risk, Citi has in place a
concentration management framework consisting of industry limits, obligor limits
and single-name triggers. In addition, as noted under "Management of Global
Risk-Risk Aggregation and Stress Testing" above, independent risk management
reviews concentration of risk across Citi's regions and businesses to assist in
managing this type of risk.
Credit Risk Measurement and Stress
Testing
Credit exposures are generally
reported in notional terms for accrual loans, reflecting the value at which the
loans are carried on the Consolidated Balance Sheet. Credit exposure arising
from capital markets activities is generally expressed as the current
mark-to-market, net of margin, reflecting the net value owed to Citi by a given
counterparty.
The credit risk associated with these credit exposures is a
function of the creditworthiness of the obligor, as well as the terms and
conditions of the specific obligation. Citi assesses the credit risk associated
with its credit exposures on a regular basis through its loan loss reserve
process (see "Significant Accounting Policies and Significant Estimates" and
Notes 1 and 17 to the Consolidated Financial Statements below), as well as through
regular stress testing at the company-, business-, geography- and
product-levels. These stress-testing processes typically estimate potential
incremental credit costs that would occur as a result of either downgrades in
the credit quality, or defaults, of the obligors or
counterparties.
74
CREDIT RISK
Loans Outstanding
In millions of dollars | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Consumer loans | ||||||||||||||||||||
In U.S. offices | ||||||||||||||||||||
Mortgage and real estate (1) | $ | 125,946 | $ | 139,177 | $ | 151,469 | $ | 183,842 | $ | 219,482 | ||||||||||
Installment, revolving credit, and other | 14,070 | 15,616 | 28,291 | 58,099 | 64,319 | |||||||||||||||
Cards (2) | 111,403 | 117,908 | 122,384 | 28,951 | 44,418 | |||||||||||||||
Commercial and industrial | 5,344 | 4,766 | 5,021 | 5,640 | 7,041 | |||||||||||||||
Lease financing | - | 1 | 2 | 11 | 31 | |||||||||||||||
$ | 256,763 | $ | 277,468 | $ | 307,167 | $ | 276,543 | $ | 335,291 | |||||||||||
In offices outside the U.S. | ||||||||||||||||||||
Mortgage and real estate (1) | $ | 54,709 | $ | 52,052 | $ | 52,175 | $ | 47,297 | $ | 44,382 | ||||||||||
Installment, revolving credit, and other | 36,182 | 34,613 | 38,024 | 42,805 | 41,272 | |||||||||||||||
Cards | 40,653 | 38,926 | 40,948 | 41,493 | 42,586 | |||||||||||||||
Commercial and industrial | 20,001 | 19,975 | 16,136 | 14,183 | 16,814 | |||||||||||||||
Lease financing | 781 | 711 | 665 | 331 | 304 | |||||||||||||||
$ | 152,326 | $ | 146,277 | $ | 147,948 | $ | 146,109 | $ | 145,358 | |||||||||||
Total Consumer loans | $ | 409,089 | $ | 423,745 | $ | 455,115 | $ | 422,652 | $ | 480,649 | ||||||||||
Unearned income | (418 | ) | (405 | ) | 69 | 808 | 738 | |||||||||||||
Consumer loans, net of unearned income | $ | 408,671 | $ | 423,340 | $ | 455,184 | $ | 423,460 | $ | 481,387 | ||||||||||
Corporate loans | ||||||||||||||||||||
In U.S. offices | ||||||||||||||||||||
Commercial and industrial | $ | 26,985 | $ | 20,830 | $ | 13,669 | $ | 15,614 | $ | 26,447 | ||||||||||
Loans to financial institutions (2) | 18,159 | 15,113 | 8,995 | 6,947 | 10,200 | |||||||||||||||
Mortgage and real estate (1) | 24,705 | 21,516 | 19,770 | 22,560 | 28,043 | |||||||||||||||
Installment, revolving credit, and other | 32,446 | 33,182 | 34,046 | 17,737 | 22,050 | |||||||||||||||
Lease financing | 1,410 | 1,270 | 1,413 | 1,297 | 1,476 | |||||||||||||||
$ | 103,705 | $ | 91,911 | $ | 77,893 | $ | 64,155 | $ | 88,216 | |||||||||||
In offices outside the U.S. | ||||||||||||||||||||
Commercial and industrial | $ | 82,939 | $ | 79,764 | $ | 72,166 | $ | 67,344 | $ | 79,421 | ||||||||||
Installment, revolving credit, and other | 14,958 | 14,114 | 11,829 | 9,683 | 17,441 | |||||||||||||||
Mortgage and real estate (1) | 6,485 | 6,885 | 5,899 | 9,779 | 11,375 | |||||||||||||||
Loans to financial institutions | 37,739 | 29,794 | 22,620 | 15,113 | 18,413 | |||||||||||||||
Lease financing | 605 | 568 | 531 | 1,295 | 1,850 | |||||||||||||||
Governments and official institutions | 1,159 | 1,576 | 3,644 | 2,949 | 773 | |||||||||||||||
$ | 143,885 | $ | 132,701 | $ | 116,689 | $ | 106,163 | $ | 129,273 | |||||||||||
Total Corporate loans | $ | 247,590 | $ | 224,612 | $ | 194,582 | $ | 170,318 | $ | 217,489 | ||||||||||
Unearned income | (797 | ) | (710 | ) | (972 | ) | (2,274 | ) | (4,660 | ) | ||||||||||
Corporate loans, net of unearned income | $ | 246,793 | $ | 223,902 | $ | 193,610 | $ | 168,044 | $ | 212,829 | ||||||||||
Total loans-net of unearned income | $ | 655,464 | $ | 647,242 | $ | 648,794 | $ | 591,504 | $ | 694,216 | ||||||||||
Allowance for loan losses-on drawn exposures | (25,455 | ) | (30,115 | ) | (40,655 | ) | (36,033 | ) | (29,616 | ) | ||||||||||
Total loans-net of unearned income and allowance for credit losses | $ | 630,009 | $ | 617,127 | $ | 608,139 | $ | 555,471 | $ | 664,600 | ||||||||||
Allowance for loan losses as a percentage of total loans-net of | ||||||||||||||||||||
unearned income (3) | 3.92 | % | 4.69 | % | 6.31 | % | 6.09 | % | 4.27 | % | ||||||||||
Allowance for Consumer loan losses as a percentage of total Consumer | ||||||||||||||||||||
loans-net of unearned income (3) | 5.57 | % | 6.45 | % | 7.81 | % | 6.69 | % | 4.61 | % | ||||||||||
Allowance for Corporate loan losses as a percentage of total Corporate | ||||||||||||||||||||
loans-net of unearned income (3) | 1.14 | % | 1.31 | % | 2.75 | % | 4.57 | % | 3.48 | % |
(1) | Loans secured primarily by real estate. |
(2) | Beginning in 2010, includes the impact of consolidating entities in connection with Citi's adoption of SFAS 167. |
(3) | Excludes loans in 2012, 2011 and 2010 that are carried at fair value. |
75
Details of Credit Loss Experience
In millions of dollars at year end | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Allowance for loan losses at beginning of year | $ | 30,115 | $ | 40,655 | $ | 36,033 | $ | 29,616 | $ | 16,117 | ||||||||||
Provision for loan losses | ||||||||||||||||||||
Consumer (1)(2) | $ | 10,761 | $ | 12,512 | $ | 25,119 | $ | 32,407 | $ | 27,942 | ||||||||||
Corporate | 87 | (739 | ) | 75 | 6,353 | 5,732 | ||||||||||||||
$ | 10,848 | $ | 11,773 | $ | 25,194 | $ | 38,760 | $ | 33,674 | |||||||||||
Gross credit losses | ||||||||||||||||||||
Consumer | ||||||||||||||||||||
In U.S. offices (1)(2) | $ | 12,226 | $ | 15,767 | $ | 24,183 | $ | 17,637 | $ | 11,624 | ||||||||||
In offices outside the U.S. | 4,612 | 5,397 | 6,890 | 8,819 | 7,172 | |||||||||||||||
Corporate | ||||||||||||||||||||
Mortgage and real estate | ||||||||||||||||||||
In U.S. offices | 59 | 182 | 953 | 592 | 56 | |||||||||||||||
In offices outside the U.S. | 21 | 171 | 286 | 151 | 37 | |||||||||||||||
Governments and official institutions outside the U.S. | - | - | - | - | 3 | |||||||||||||||
Loans to financial institutions | ||||||||||||||||||||
In U.S. offices | 33 | 215 | 275 | 274 | - | |||||||||||||||
In offices outside the U.S. | 68 | 391 | 111 | 448 | 463 | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
In U.S. offices | 154 | 392 | 1,222 | 3,299 | 627 | |||||||||||||||
In offices outside the U.S. | 305 | 649 | 571 | 1,564 | 778 | |||||||||||||||
$ | 17,478 | $ | 23,164 | $ | 34,491 | $ | 32,784 | $ | 20,760 | |||||||||||
Credit recoveries | ||||||||||||||||||||
Consumer | ||||||||||||||||||||
In U.S. offices | $ | 1,302 | $ | 1,467 | $ | 1,323 | $ | 576 | $ | 585 | ||||||||||
In offices outside the U.S. | 1,183 | 1,273 | 1,315 | 1,089 | 1,050 | |||||||||||||||
Corporate | ||||||||||||||||||||
Mortgage and real estate | ||||||||||||||||||||
In U.S. offices | 17 | 27 | 130 | 3 | - | |||||||||||||||
In offices outside the U.S. | 19 | 2 | 26 | 1 | 1 | |||||||||||||||
Governments and official institutions outside the U.S. | - | - | - | - | - | |||||||||||||||
Loans to financial institutions | ||||||||||||||||||||
In U.S. offices | - | - | - | - | - | |||||||||||||||
In offices outside the U.S. | 43 | 89 | 132 | 11 | 2 | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
In U.S. offices | 243 | 175 | 591 | 276 | 6 | |||||||||||||||
In offices outside the U.S. | 95 | 93 | 115 | 87 | 105 | |||||||||||||||
$ | 2,902 | $ | 3,126 | $ | 3,632 | $ | 2,043 | $ | 1,749 | |||||||||||
Net credit losses | ||||||||||||||||||||
In U.S. offices (1)(2) | $ | 10,910 | $ | 14,887 | $ | 24,589 | $ | 20,947 | $ | 11,716 | ||||||||||
In offices outside the U.S. | 3,666 | 5,151 | 6,270 | 9,794 | 7,295 | |||||||||||||||
Total | $ | 14,576 | $ | 20,038 | $ | 30,859 | $ | 30,741 | $ | 19,011 | ||||||||||
Other-net (3) | $ | (932 | ) | $ | (2,275 | ) | $ | 10,287 | $ | (1,602 | ) | $ | (1,164 | ) | ||||||
Allowance for loan losses at end of year | $ | 25,455 | $ | 30,115 | $ | 40,655 | $ | 36,033 | $ | 29,616 | ||||||||||
Allowance for loan losses as a % of total loans (4) | 3.92 | % | 4.69 | % | 6.31 | % | 6.09 | % | 4.27 | % | ||||||||||
Allowance for unfunded lending commitments (5) | $ | 1,119 | $ | 1,136 | $ | 1,066 | $ | 1,157 | $ | 887 | ||||||||||
Total allowance for loans, leases and unfunded lending commitments | $ | 26,574 | $ | 31,251 | $ | 41,721 | $ | 37,190 | $ | 30,503 | ||||||||||
Net Consumer credit losses | $ | 14,353 | $ | 18,424 | $ | 28,435 | $ | 24,791 | $ | 17,161 | ||||||||||
As a percentage of average Consumer loans | 3.49 | % | 4.20 | % | 5.74 | % | 5.43 | % | 3.34 | % | ||||||||||
Net Corporate credit losses (recoveries) | $ | 223 | $ | 1,614 | $ | 2,424 | $ | 5,950 | $ | 1,850 | ||||||||||
As a percentage of average Corporate loans | 0.09 | % | 0.79 | % | 1.27 | % | 3.13 | % | 0.84 | % | ||||||||||
Allowance for loan losses at end of period (6) | ||||||||||||||||||||
Citicorp | $ | 14,623 | $ | 12,656 | $ | 17,075 | $ | 10,731 | $ | 8,202 | ||||||||||
Citi Holdings | 10,832 | 17,459 | 23,580 | 25,302 | 21,414 | |||||||||||||||
Total Citigroup | $ | 25,455 | $ | 30,115 | $ | 40,655 | $ | 36,033 | $ | 29,616 | ||||||||||
Allowance by type | ||||||||||||||||||||
Consumer | $ | 22,679 | $ | 27,236 | $ | 35,406 | $ | 28,347 | $ | 22,204 | ||||||||||
Corporate | 2,776 | 2,879 | 5,249 | 7,686 | 7,412 | |||||||||||||||
Total Citigroup | $ | 25,455 | $ | 30,115 | $ | 40,655 | $ | 36,033 | $ | 29,616 |
See footnotes on the next page.
76
(1) | 2012 includes approximately $635 million of incremental charge-offs related to the Office of the Comptroller of the Currency (OCC) guidance issued in the third quarter of 2012, which required mortgage loans to borrowers that have gone through Chapter 7 U.S. Bankruptcy Code to be written down to collateral value. There was a corresponding approximate $600 million release in the third quarter of 2012 allowance for loans losses related to these charge-offs. 2012 also includes a benefit to charge-offs of approximately $40 million related to finalizing the impact of the OCC guidance in the fourth quarter of 2012. |
(2) | 2012 includes approximately $370 million of incremental charge-offs related to previously deferred principal balances on modified loans in the first quarter of 2012. The charge-offs were related to anticipated forgiveness of principal in connection with the national mortgage settlement. There was a corresponding approximate $350 million release in the first quarter of 2012 allowance for loan losses related to these charge-offs. |
(3) | 2012 includes reductions of approximately $875 million related to the sale or transfer to held-for-sale of various U.S. loan portfolios. 2011 includes reductions of approximately $1.6 billion related to the sale or transfer to held-for-sale of various U.S. loan portfolios, approximately $240 million related to the sale of the Egg Banking PLC credit card business, approximately $72 million related to the transfer of the Citi Belgium business to held-for-sale and approximately $290 million related to FX translation. 2010 primarily includes an addition of $13.4 billion related to the impact of consolidating entities in connection with Citi's adoption of SFAS 166/167, partially offset by reductions of approximately $2.7 billion related to the sale or transfer to held-for-sale of various U.S. loan portfolios and approximately $290 million related to the transfer of a U.K. first mortgage portfolio to held-for-sale. 2009 primarily includes reductions to the loan loss reserve of approximately $543 million related to securitizations, approximately $402 million related to the sale or transfer to held-for-sale of U.S. real estate lending loans, and $562 million related to the transfer of the U.K. cards portfolio to held-for-sale. 2008 primarily includes reductions to the loan loss reserve of approximately $800 million related to FX translation, $102 million related to securitizations, $244 million for the sale of the German retail banking operation, and $156 million for the sale of CitiCapital, partially offset by additions of $106 million related to the Cuscatlán and Bank of Overseas Chinese acquisitions. |
(4) | December 31, 2012, December 31, 2011 and December 31, 2010 exclude $5.3 billion, $5.3 billion and $4.4 billion, respectively, of loans that are carried at fair value. |
(5) | Represents additional credit loss reserves for unfunded lending commitments and letters of credit recorded in Other liabilities on the Consolidated Balance Sheet. |
(6) | Allowance for loan losses represents management's best estimate of probable losses inherent in the portfolio, as well as probable losses related to large individually evaluated impaired loans and TDRs. See "Significant Accounting Policies and Significant Estimates" and Note 1 to the Consolidated Financial Statements below. Attribution of the allowance is made for analytical purposes only, and the entire allowance is available to absorb probable credit losses inherent in the overall portfolio. |
Allowance for Loan Losses
(continued)
The following table details information on Citi's allowance for loan losses,
loans and coverage ratios as of December 31, 2012 and 2011:
December 31, 2012 | |||||||||||
In billions of dollars | Allowance for loan losses | Loans, net of unearned income | Allowance as a percentage of loans | (1) | |||||||
North America cards (2) | $ | 7.3 | $ | 112.0 | 6.5 | % | |||||
North America mortgages (3) | 8.6 | 125.4 | 6.9 | ||||||||
North America other | 1.5 | 22.1 | 6.8 | ||||||||
International cards | 2.9 | 40.7 | 7.0 | ||||||||
International other (4) | 2.4 | 108.5 | 2.2 | ||||||||
Total Consumer | $ | 22.7 | $ | 408.7 | 5.6 | % | |||||
Total Corporate | 2.8 | 246.8 | 1.1 | ||||||||
Total Citigroup | $ | 25.5 | $ | 655.5 | 3.9 | % | |||||
December 31, 2011 | |||||||||||
In billions of dollars | Allowance for loan losses | Loans, net of unearned income | Allowance as a percentage of loans | (1) | |||||||
North America cards (2) | $ | 10.1 | $ | 118.7 | 8.5 | % | |||||
North America mortgages | 10.0 | 138.9 | 7.3 | ||||||||
North America other | 1.6 | 23.5 | 6.8 | ||||||||
International cards | 2.8 | 40.1 | 7.0 | ||||||||
International other (4) | 2.7 | 102.5 | 2.6 | ||||||||
Total Consumer | $ | 27.2 | $ | 423.7 | 6.5 | % | |||||
Total Corporate | 2.9 | 223.5 | 1.3 | ||||||||
Total Citigroup | $ | 30.1 | $ | 647.2 | 4.7 | % |
(1) | Allowance as a percentage of loans excludes loans that are carried at fair value. |
(2) | Includes both Citi-branded cards and Citi retail services. The $7.3 billion of loan loss reserves for North America cards as of December 31, 2012 represented approximately 18 months of coincident net credit loss coverage. |
(3) | Of the $8.6 billion, approximately $8.4 billion was allocated to North America mortgages in Citi Holdings. Excluding the $40 million benefit related to finalizing the impact of the OCC guidance in the fourth quarter of 2012, the $8.6 billion of loans loss reserves for North America mortgages as of December 31, 2012 represented approximately 33 months of coincident net credit loss coverage. |
(4) | Includes mortgages and other retail loans. |
77
Non-Accrual Loans and Assets and
Renegotiated Loans
The following pages
include information on Citi's "Non-Accrual Loans and Assets" and "Renegotiated
Loans." There is a certain amount of overlap among these categories. The
following general summary provides a basic description of each
category:
Non-Accrual Loans and Assets:
Corporate and Consumer (commercial market) non-accrual status is based on the determination that payment of interest or principal is doubtful. Consumer non-accrual status is based on aging, i.e., the borrower has fallen behind in payments. As a result of OCC guidance received in the third quarter of 2012, mortgage loans discharged through Chapter 7 bankruptcy are classified as non-accrual. This guidance added approximately $1.5 billion of Consumer loans to non-accrual status at September 30, 2012, of which approximately $1.3 billion was current. See also Note 1 to the Consolidated Financial Statements. North America Citi-branded cards and Citi retail services are not included as, under industry standards, credit card loans accrue interest until such loans are charged off, which typically occurs at 180 days contractual delinquency.Renegotiated Loans:
Both Corporate and Consumer loans whose terms have been modified in a troubled debt restructuring (TDR). Includes both accrual and non-accrual TDRs. Non-Accrual Loans and
Assets
The table below summarizes
Citigroup's non-accrual loans as of the periods indicated. As summarized above,
non-accrual loans are loans in which the borrower has fallen behind in interest
payments or, for Corporate and Consumer (commercial market) loans, where Citi
has determined that the payment of interest or principal is doubtful and
therefore considered impaired. In situations where Citi reasonably expects that
only a portion of the principal owed will ultimately be collected, all payments
received are reflected as a reduction of principal and not as interest income.
Corporate and Consumer (commercial market) non-accrual loans may still be
current on interest payments but are considered non-accrual as Citi has
determined that the future payment of interest and/or principal is doubtful.
78
Non-Accrual Loans
In millions of dollars | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||
Citicorp | $ | 4,096 | $ | 4,018 | $ | 4,909 | $ | 5,353 | $ | 3,282 | |||||
Citi Holdings | 7,433 | 7,050 | 14,498 | 26,387 | 19,015 | ||||||||||
Total non-accrual loans (NAL) | $ | 11,529 | $ | 11,068 | $ | 19,407 | $ | 31,740 | $ | 22,297 | |||||
Corporate non-accrual loans (1) | |||||||||||||||
North America | $ | 735 | $ | 1,246 | $ | 2,112 | $ | 5,621 | $ | 2,660 | |||||
EMEA | 1,131 | 1,293 | 5,337 | 6,308 | 6,330 | ||||||||||
Latin America | 128 | 362 | 701 | 569 | 229 | ||||||||||
Asia | 339 | 335 | 470 | 981 | 513 | ||||||||||
Total Corporate non-accrual loans | $ | 2,333 | $ | 3,236 | $ | 8,620 | $ | 13,479 | $ | 9,732 | |||||
Citicorp | $ | 1,909 | $ | 2,217 | $ | 3,091 | $ | 3,238 | $ | 1,453 | |||||
Citi Holdings | 424 | 1,019 | 5,529 | 10,241 | 8,279 | ||||||||||
Total Corporate non-accrual loans | $ | 2,333 | $ | 3,236 | $ | 8,620 | $ | 13,479 | $ | 9,732 | |||||
Consumer non-accrual loans (1) | |||||||||||||||
North America (2)(3) | $ | 7,148 | $ | 5,888 | $ | 8,540 | $ | 15,111 | $ | 9,617 | |||||
EMEA | 380 | 387 | 652 | 1,159 | 948 | ||||||||||
Latin America | 1,285 | 1,107 | 1,019 | 1,340 | 1,290 | ||||||||||
Asia | 383 | 450 | 576 | 651 | 710 | ||||||||||
Total Consumer non-accrual loans (2) | $ | 9,196 | $ | 7,832 | $ | 10,787 | $ | 18,261 | $ | 12,565 | |||||
Citicorp | $ | 2,187 | $ | 1,801 | $ | 1,818 | $ | 2,115 | $ | 1,829 | |||||
Citi Holdings (2) | 7,009 | 6,031 | 8,969 | 16,146 | 10,736 | ||||||||||
Total Consumer non-accrual loans (2) | $ | 9,196 | $ | 7,832 | $ | 10,787 | $ | 18,261 | $ | 12,565 |
(1) | Excludes purchased distressed loans, as they are generally accreting interest. The carrying value of these loans was $538 million at December 31, 2012, $511 million at December 31, 2011, $469 million at December 31, 2010, $920 million at December 31, 2009, and $1.510 billion at December 31, 2008. |
(2) | During 2012, there was an increase in Consumer non-accrual loans in North America of approximately $1.5 billion as a result of OCC guidance issued in the third quarter of 2012 regarding mortgage loans where the borrower has gone through Chapter 7 bankruptcy. Of the $1.5 billion in non-accrual loans, $1.3 billion were current. Additionally, during 2012, there was an increase in non-accrual Consumer loans in North America during the first quarter of 2012 which was attributable to a $0.8 billion reclassification from accrual to non-accrual status of home equity loans where the related residential first mortgage was 90 days or more past due. The vast majority of these loans were current at the time of reclassification. The reclassification reflected regulatory guidance issued on January 31, 2012. The reclassification had no impact on Citi's delinquency statistics or its loan loss reserves. |
79
Non-Accrual Loans and Assets
(continued)
The table below summarizes
Citigroup's other real estate owned (OREO) assets as of the periods indicated.
This represents the carrying value of all real estate property acquired by
foreclosure or other legal proceedings when Citi has taken possession of the
collateral.
In millions of dollars | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
OREO | ||||||||||||||||||||
Citicorp | $ | 47 | $ | 71 | $ | 826 | $ | 874 | $ | 371 | ||||||||||
Citi Holdings | 391 | 480 | 863 | 615 | 1,022 | |||||||||||||||
Corporate/Other | 2 | 15 | 14 | 11 | 40 | |||||||||||||||
Total OREO | $ | 440 | $ | 566 | $ | 1,703 | $ | 1,500 | $ | 1,433 | ||||||||||
North America | $ | 299 | $ | 441 | $ | 1,440 | $ | 1,294 | $ | 1,349 | ||||||||||
EMEA | 99 | 73 | 161 | 121 | 66 | |||||||||||||||
Latin America | 40 | 51 | 47 | 45 | 16 | |||||||||||||||
Asia | 2 | 1 | 55 | 40 | 2 | |||||||||||||||
Total OREO | $ | 440 | $ | 566 | $ | 1,703 | $ | 1,500 | $ | 1,433 | ||||||||||
Other repossessed assets | $ | 1 | $ | 1 | $ | 28 | $ | 73 | $ | 78 | ||||||||||
Non-accrual assets-Total Citigroup | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Corporate non-accrual loans | $ | 2,333 | $ | 3,236 | $ | 8,620 | $ | 13,479 | $ | 9,732 | ||||||||||
Consumer non-accrual loans (1) | 9,196 | 7,832 | 10,787 | 18,261 | 12,565 | |||||||||||||||
Non-accrual loans (NAL) | $ | 11,529 | $ | 11,068 | $ | 19,407 | $ | 31,740 | $ | 22,297 | ||||||||||
OREO | 440 | 566 | 1,703 | 1,500 | 1,433 | |||||||||||||||
Other repossessed assets | 1 | 1 | 28 | 73 | 78 | |||||||||||||||
Non-accrual assets (NAA) | $ | 11,970 | $ | 11,635 | $ | 21,138 | $ | 33,313 | $ | 23,808 | ||||||||||
NAL as a percentage of total loans | 1.76 | % | 1.71 | % | 2.99 | % | 5.37 | % | 3.21 | % | ||||||||||
NAA as a percentage of total assets | 0.64 | 0.62 | 1.10 | 1.79 | 1.23 | |||||||||||||||
Allowance for loan losses as a percentage of NAL (2) | 221 | 272 | 209 | 114 | 133 | |||||||||||||||
Non-accrual assets-Total Citicorp | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Non-accrual loans (NAL) | $ | 4,096 | $ | 4,018 | $ | 4,909 | $ | 5,353 | $ | 3,282 | ||||||||||
OREO | 47 | 71 | 826 | 874 | 371 | |||||||||||||||
Other repossessed assets | N/A | N/A | N/A | N/A | N/A | |||||||||||||||
Non-accrual assets (NAA) | $ | 4,143 | $ | 4,089 | $ | 5,735 | $ | 6,227 | $ | 3,653 | ||||||||||
NAA as a percentage of total assets | 0.24 | % | 0.25 | % | 0.43 | % | 0.53 | % | 0.34 | % | ||||||||||
Allowance for loan losses as a percentage of NAL (2) | 357 | 416 | 456 | 232 | 250 | |||||||||||||||
Non-accrual assets-Total Citi Holdings | ||||||||||||||||||||
Non-accrual loans (NAL) (1) | $ | 7,433 | $ | 7,050 | $ | 14,498 | $ | 26,387 | $ | 19,015 | ||||||||||
OREO | 391 | 480 | 863 | 615 | 1,022 | |||||||||||||||
Other repossessed assets | N/A | N/A | N/A | N/A | N/A | |||||||||||||||
Non-accrual assets (NAA) | $ | 7,824 | $ | 7,530 | $ | 15,361 | $ | 27,002 | $ | 20,037 | ||||||||||
NAA as a percentage of total assets | 5.02 | % | 3.35 | % | 4.91 | % | 5.90 | % | 3.08 | % | ||||||||||
Allowance for loan losses as a percentage of NAL (2) | 146 | 190 | 126 | 90 | 113 |
(1) | During 2012, there was an increase in Consumer non-accrual loans in North America of approximately $1.5 billion as a result OCC guidance regarding mortgage loans where the borrower has gone through Chapter 7 bankruptcy. Additionally, during 2012, there was an increase in non-accrual Consumer loans in North America of $0.8 billion related to a reclassification from accrual to non-accrual status of home equity loans where the related residential first mortgage was 90 days or more past due. For additional information on each of these items, see footnote 2 to the "Non-Accrual Loans" table above. |
(2) | The allowance for loan losses includes the allowance for Citi's credit card portfolios and purchased distressed loans, while the non-accrual loans exclude credit card balances (with the exception of certain international portfolios) and purchased distressed loans as these continue to accrue interest until charge-off. |
N/A | Not available at the Citicorp or Citi Holdings level. |
80
Renegotiated
Loans
The following table presents Citi's
loans modified in TDRs.
Dec. 31, | Dec. 31, | |||||
In millions of dollars | 2012 | 2011 | ||||
Corporate renegotiated loans (1) | ||||||
In U.S. offices | ||||||
Commercial and industrial (2) | $ | 180 | $ | 206 | ||
Mortgage and real estate (3) | 72 | 241 | ||||
Loans to financial institutions | 17 | 85 | ||||
Other | 447 | 546 | ||||
$ | 716 | $ | 1,078 | |||
In offices outside the U.S. | ||||||
Commercial and industrial (2) | $ | 95 | $ | 223 | ||
Mortgage and real estate (3) | 59 | 17 | ||||
Loans to financial institutions | - | 12 | ||||
Other | 3 | 6 | ||||
$ | 157 | $ | 258 | |||
Total Corporate renegotiated loans | $ | 873 | $ | 1,336 | ||
Consumer renegotiated loans (4)(5)(6)(7) | ||||||
In U.S. offices | ||||||
Mortgage and real estate (8) | $ | 22,903 | $ | 21,429 | ||
Cards | 3,718 | 5,766 | ||||
Installment and other | 1,088 | 1,357 | ||||
$ | 27,709 | $ | 28,552 | |||
In offices outside the U.S. | ||||||
Mortgage and real estate | $ | 932 | $ | 936 | ||
Cards | 866 | 929 | ||||
Installment and other | 904 | 1,342 | ||||
$ | 2,702 | $ | 3,207 | |||
Total Consumer renegotiated loans | $ | 30,411 | $ | 31,759 |
(1) | Includes $267 million and $455 million of non-accrual loans included in the non-accrual assets table above at December 31, 2012 and December 31, 2011, respectively. The remaining loans are accruing interest. | |
(2) | In addition to modifications reflected as TDRs at December 31, 2012, Citi also modified $1 million and $293 million of commercial loans risk rated "Substandard Non-Performing" or worse (asset category defined by banking regulators) in U.S. offices and offices outside the U.S., respectively. These modifications were not considered TDRs because the modifications did not involve a concession (a required element of a TDR for accounting purposes). | |
(3) | In addition to modifications reflected as TDRs at December 31, 2012, Citi also modified $7 million of commercial real estate loans risk rated "Substandard Non-Performing" or worse (asset category defined by banking regulators) in U.S. offices. These modifications were not considered TDRs because the modifications did not involve a concession (a required element of a TDR for accounting purposes). | |
(4) | Includes $4,198 million and $2,269 million of non-accrual loans included in the non-accrual assets table above at December 31, 2012 and December 31, 2011, respectively. The remaining loans are accruing interest. | |
(5) | Includes $38 million and $19 million of commercial real estate loans at December 31, 2012 and December 31, 2011, respectively. | |
(6) | Includes $261 million and $257 million of commercial loans at December 31, 2012 and December 31, 2011, respectively. | |
(7) | Smaller-balance homogeneous loans were derived from Citi's risk management systems. | |
(8) | Includes an increase of $1,714 million of TDRs in the third quarter of 2012 as a result of OCC guidance regarding mortgage loans where the borrower has gone through Chapter 7 bankruptcy. See footnote 2 to the "Non-Accrual Loans" table above. |
In certain circumstances, Citigroup modifies certain of its Corporate loans involving a non-troubled borrower. These modifications are subject to Citi's normal underwriting standards for new loans and are made in the normal course of business to match customers' needs with available Citi products or programs (these modifications are not included in the table above). In other cases, loan modifications involve a troubled borrower to whom Citi may grant a concession (modification). Modifications involving troubled borrowers may include extension of maturity date, reduction in the stated interest rate, rescheduling of future cash flows, principal reductions or reduction or waiver of accrued interest or fees. See Note 16 to the Consolidated Financial Statements for a discussion of such modifications.
Forgone Interest Revenue on Loans (1)
In non- | |||||||||
In U.S. | U.S. | 2012 | |||||||
In millions of dollars | offices | offices | total | ||||||
Interest revenue that would have been accrued | |||||||||
at original contractual rates (2) | $ | 3,123 | $ | 965 | $ | 4,088 | |||
Amount recognized as interest revenue (2) | 1,412 | 388 | 1,800 | ||||||
Forgone interest revenue | $ | 1,711 | $ | 577 | $ | 2,288 |
(1) | Relates to Corporate non-accruals, renegotiated loans and Consumer loans on which accrual of interest has been suspended. | |
(2) | Interest revenue in offices outside the U.S. may reflect prevailing local interest rates, including the effects of inflation and monetary correction in certain countries. |
81
Loan Maturities and Fixed/Variable Pricing Corporate Loans
Due | Over 1 year | |||||||||||
within | but within | Over 5 | ||||||||||
In millions of dollars at year end 2012 | 1 year | 5 years | years | Total | ||||||||
Corporate loan portfolio | ||||||||||||
maturities | ||||||||||||
In U.S. offices | ||||||||||||
Commercial and | ||||||||||||
industrial loans | $ | 12,181 | $ | 9,684 | $ | 5,120 | $ | 26,985 | ||||
Financial institutions | 8,197 | 6,517 | 3,445 | 18,159 | ||||||||
Mortgage and real estate | 11,152 | 8,866 | 4,687 | 24,705 | ||||||||
Lease financing | 637 | 506 | 267 | 1,410 | ||||||||
Installment, revolving | ||||||||||||
credit, other | 14,647 | 11,644 | 6,155 | 32,446 | ||||||||
In offices outside the U.S. | 97,709 | 33,686 | 12,490 | 143,885 | ||||||||
Total corporate loans | $ | 144,523 | $ | 70,903 | $ | 32,164 | $ | 247,590 | ||||
Fixed/variable pricing of | ||||||||||||
corporate loans with | ||||||||||||
maturities due after one | ||||||||||||
year (1) | ||||||||||||
Loans at fixed interest rates | $ | 9,255 | $ | 8,483 | ||||||||
Loans at floating or adjustable | ||||||||||||
interest rates | 61,648 | 23,681 | ||||||||||
Total | $ | 70,903 | $ | 32,164 |
(1) | Based on contractual terms. Repricing characteristics may effectively be modified from time to time using derivative contracts. See Note 23 to the Consolidated Financial Statements. |
U.S. Consumer Mortgages and Real Estate Loans
Greater | ||||||||||||
Due | than 1 year | Greater | ||||||||||
within | but within | than 5 | ||||||||||
In millions of dollars at year end 2012 | 1 year | 5 years | years | Total | ||||||||
U.S. Consumer mortgage | ||||||||||||
loan portfolio | ||||||||||||
First mortgages | $ | 121 | $ | 1,352 | $ | 88,448 | $ | 89,921 | ||||
Second mortgages | 1,384 | 18,102 | 16,539 | 36,025 | ||||||||
Total | $ | 1,505 | $ | 19,454 | $ | 104,987 | $ | 125,946 | ||||
Fixed/variable pricing of | ||||||||||||
U.S. Consumer | ||||||||||||
mortgage loans with | ||||||||||||
maturities due after one year | ||||||||||||
Loans at fixed interest rates | $ | 1,048 | $ | 76,410 | ||||||||
Loans at floating or adjustable | ||||||||||||
interest rates | 18,406 | 28,577 | ||||||||||
Total | $ | 19,454 | $ | 104,987 |
82
North America Consumer Mortgage Lending
Overview
Citi's North America Consumer mortgage portfolio consists of both residential
first mortgages and home equity loans. As of December 31, 2012, Citi's North America Consumer residential first mortgage portfolio totaled $88.2 billion,
while the home equity loan portfolio was $37.2 billion. This compared to $95.4
billion and $43.5 billion of residential first mortgages and home equity loans
as of December 31, 2011, respectively. Of the first mortgages at December 31,
2012, $57.7 billion is recorded in LCL within Citi Holdings, with the
remaining $30.5 billion recorded in Citicorp. With respect to the home equity
loan portfolio, $34.1 billion is recorded in LCL , and $3.1 billion is in
Citicorp.
Citi's
residential first mortgage portfolio included $8.5 billion of loans with FHA
insurance or VA guarantees as of December 31, 2012, compared to $9.2 billion as
of December 31, 2011. This portfolio consists of loans to low-to-moderate-income
borrowers with lower FICO (Fair Isaac Corporation) scores and therefore
generally has higher loan-to-value ratios (LTVs). Credit losses on FHA loans are
borne by the sponsoring governmental agency, provided that the insurance terms
have not been rescinded as a result of an origination defect. With respect to VA
loans, the VA establishes a loan-level loss cap, beyond which Citi is liable for
loss. While FHA and VA loans have high delinquency rates, given the insurance
and guarantees, respectively, Citi has experienced negligible credit losses on
these loans.
In addition, as of December 31, 2012,
Citi's residential first mortgage portfolio included $1.5 billion of loans with
LTVs above 80%, compared to $1.6 billion as of December 31, 2011, most of which
are insured through mortgage insurance companies. As of December 31, 2012, the
residential first mortgage portfolio also had $1.0 billion of loans subject to
long-term standby commitments (LTSC) with U.S. government-sponsored entities
(GSEs), compared to $1.2 billion as of December 31, 2011, for which Citi has
limited exposure to credit losses. Citi's home equity loan portfolio also
included $0.4 billion of loans subject to LTSCs with GSEs (flat to December 31,
2011) for which Citi also has limited exposure to credit losses. These
guarantees and commitments may be rescinded in the event of loan origination
defects.
Citi's allowance for loan loss calculations takes into consideration the
impact of these guarantees and commitments.
Citi does
not offer option-adjustable rate mortgages/negative amortizing mortgage products
to its customers. As a result, option-adjustable rate mortgages/negative
amortizing mortgages represent an insignificant portion of total balances, since
they were acquired only incidentally as part of prior portfolio and business
purchases.
As of December 31, 2012, Citi's North America residential first mortgage portfolio contained approximately $7.7
billion of adjustable rate mortgages that are currently required to make a
payment only of accrued interest for the payment period, or an interest-only
payment, compared to $8.6 billion at September 30, 2012 and $11.9 billion at
December 31, 2011. The decline quarter over quarter resulted from conversions to
amortizing loans of $471 million and repayments of $296 million, with the
remainder primarily due to foreclosures and related activities and, to a lesser
extent, asset sales. The decline year over year resulted from conversions to
amortizing loans of $2.3 billion and repayments of $1.5 billion, with the
remainder primarily due to foreclosures and related activities and, to a lesser
extent, asset sales. Borrowers who are currently required to make an
interest-only payment cannot select a lower payment that would negatively
amortize the loan. Residential first mortgages with this payment feature are
primarily to high-credit-quality borrowers who have on average significantly
higher origination and refreshed FICO scores than other loans in the residential
first mortgage portfolio, and have exhibited significantly lower 30+ delinquency
rates as compared with residential first mortgages without this payment feature.
As such, Citi does not believe the residential mortgage loans with this payment
feature represent substantially higher risk in the portfolio.
North America Consumer Mortgage
Quarterly Credit Trends-Delinquencies and Net Credit Losses-Residential First
Mortgages
The following charts detail the
quarterly trends in delinquencies and net credit losses for Citigroup's
residential first mortgage portfolio in North
America . Approximately 65% of Citi's
residential first mortgage exposure arises from its portfolio within Citi
Holdings- LCL .
83
North America Residential First Mortgages-Citigroup |
In billions of dollars |
EOP Loans: 4Q11-$95.4 3Q12-$89.7 4Q12-$88.2
North America Residential First Mortgages-Citi Holdings |
In billions of dollars |
EOP Loans: 4Q11-$67.5 3Q12-$59.9 4Q12-$57.7
(1) | The first quarter of 2012 included approximately $315 million of incremental charge-offs related to previously deferred principal balances on modified loans related to anticipated forgiveness of principal in connection with the national mortgage settlement. Excluding the impact of these charge-offs, net credit losses would have been $0.45 billion and $0.43 billion for the Citigroup and Citi Holdings portfolios, respectively. | |
(2) | The second quarter, third quarter and fourth quarter of 2012 include $43 million, $41 million and $62 million, respectively, of charge-offs related to Citi's fulfillment of its obligations under the national mortgage settlement. Citi expects net credit losses in Citi Holdings to continue to be impacted by its fulfillment of the terms of the national mortgage settlement through the second quarter of 2013. See also "National Mortgage Settlement" below. | |
(3) | The third quarter of 2012 included approximately $181 million of charge-offs related to OCC guidance with respect to the treatment of mortgage loans where the borrower has gone through Chapter 7 bankruptcy. The fourth quarter of 2012 includes an approximately $10 million benefit to charge-offs related to finalizing the impact of the OCC guidance. Excluding these impacts, net credit losses would have been $0.47 billion in 3Q'12 and $0.39 billion in 4Q'12 for the Citigroup portfolio, and $0.44 billion in 3Q'12 and $0.38 billion in 4Q'12 for the Citi Holdings portfolio. |
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North America Residential First Mortgage Delinquencies-Citi Holdings |
In billions of dollars |
Note: For each of the tables above, past due exclude (i) U.S. mortgage loans that are guaranteed by U.S. government-sponsored agencies because the potential loss predominantly resides with the U.S. agencies, and (ii) loans recorded at fair value. Totals may not sum due to rounding.
Management
actions, primarily asset sales and to a lesser extent modification programs,
continued to be the primary drivers of the overall improved asset performance
within Citi's residential first mortgage portfolio in Citi Holdings during the
periods presented above (excluding the impacts to net credit losses described in
the notes to the tables above).
Citi sold approximately $2.1 billion of
delinquent residential first mortgages during 2012, including $0.6 billion
during the fourth quarter of 2012. Since the beginning of 2010, Citi has sold
approximately $9.6 billion of delinquent residential
mortgages.
In addition, Citi modified approximately
$0.9 billion and $0.3 billion of residential first mortgage loans during 2012
and in the fourth quarter of 2012, respectively, including loan modifications
pursuant to the national mortgage settlement. (For additional information on
Citi's residential first mortgage loan modifications, see Note 16 to the
Consolidated Financial Statements.) Loan modifications under the national
mortgage settlement have improved Citi's 30+ days past due delinquencies by
approximately
$249 million as of the end of 2012.
While re-defaults of previously modified mortgages under the HAMP and Citi
Supplemental Modification (CSM) programs continued to track favorably versus
expectations as of December 31, 2012, Citi's residential first mortgage
portfolio continued to show some signs of the impact of re-defaults of
previously modified mortgages.
Citi believes that its ability to offset
increasing delinquencies or net credit losses in its residential first mortgage
portfolio, due to any deterioration of the underlying credit performance of
these loans, re-defaults, the lengthening of the foreclosure process (see
"Foreclosures" below) or otherwise, pursuant to asset sales or modifications
could be limited going forward as a result of the lower remaining inventory of
loans to sell or modify or due to lack of market demand for asset sales. Citi
has taken these trends and uncertainties, including the potential for
re-defaults, into consideration in determining its loan loss reserves. See
" North America Consumer Mortgages-Loan Loss Reserve Coverage" below.
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North America Residential First
Mortgages-State Delinquency Trends
The
following tables set forth, for total Citigroup, the six states and/or regions
with the highest concentration of Citi's residential first mortgages as of
December 31, 2012 and December 31, 2011.
In billions of dollars | December 31, 2012 | December 31, 2011 | |||||||||||||||||||
% | % | ||||||||||||||||||||
ENR | 90+DPD | LTV > | Refreshed | ENR | 90+DPD | LTV > | Refreshed | ||||||||||||||
State (1) | ENR | (2) | Distribution | % | 100% | FICO | ENR | (2) | Distribution | % | 100% | FICO | |||||||||
CA | $ | 21.1 | 28 | % | 2.1 | % | 23 | % | 730 | $ | 22.6 | 28 | % | 2.7 | % | 38 | % | 727 | |||
NY/NJ/CT | 11.8 | 16 | 4.0 | 8 | 723 | 11.2 | 14 | 4.9 | 10 | 712 | |||||||||||
IN/OH/MI | 4.0 | 5 | 5.5 | 31 | 655 | 4.6 | 6 | 6.3 | 44 | 650 | |||||||||||
FL | 3.8 | 5 | 8.1 | 43 | 676 | 4.3 | 5 | 10.2 | 57 | 668 | |||||||||||
IL | 3.1 | 4 | 5.8 | 34 | 694 | 3.5 | 4 | 7.2 | 45 | 686 | |||||||||||
AZ/NV | 1.9 | 3 | 4.8 | 50 | 702 | 2.3 | 3 | 5.7 | 73 | 698 | |||||||||||
Other | 29.7 | 39 | 5.4 | 15 | 667 | 33.2 | 41 | 5.8 | 21 | 663 | |||||||||||
Total | $ | 75.4 | 100 | % | 4.4 | % | 20 | % | 692 | $ | 81.7 | 100 | % | 5.1 | % | 30 | % | 689 |
Note: Totals may not sum due to rounding. | ||
(1) | Certain of the states are included as part of a region based on Citi's view of similar home prices (HPI) within the region. | |
(2) | Ending net receivables. Excludes loans in Canada and Puerto Rico, loans guaranteed by U.S. government agencies, loans recorded at fair value and loans subject to LTSCs. Excludes balances for which FICO or LTV data are unavailable. |
As evidenced by the table above, Citi's residential first mortgages portfolio is primarily concentrated in California and the New York/New Jersey/Connecticut region (with New York as the largest of the three states). The improvement in refreshed LTV percentages at December 31, 2012 was primarily the result of improvements in HPI across substantially all metropolitan statistical areas, thereby increasing values used in the determination of LTV. Additionally, asset sales of higher LTV loans during 2012 further reduced the amount of loans with greater than 100% LTV. To a lesser extent, modification programs involving principal forgiveness further reduced the loans in this category during the year. With the continued lengthening of the foreclosure process (see discussion under "Foreclosures" below) in all of these states and regions during 2012, Citi expects it could experience less improvement in the 90+ days past due delinquency rate in certain of these states and/or regions in the future.
Foreclosures
The substantial majority of Citi's foreclosure inventory
consists of residential first mortgages. As of December 31, 2012, approximately
2.0% of Citi's residential first mortgage portfolio was in Citi's foreclosure
inventory (based on the dollar amount of loans in foreclosure inventory as of
such date, excluding loans that are guaranteed by U.S. government agencies and
loans subject to LTSCs), compared to 2.1% as of September 30, 2012 and 2.4% as
of December 31, 2011.
The decline in Citi's foreclosure inventory year-over-year and
quarter-over-quarter was due to fewer loans moving into the foreclosure
inventory. This was due to several factors, including delays associated with
initiating foreclosures due to increased state requirements for foreclosure
filings (e.g., extensive documentation, processing and filing requirements as
well as additional abilities for states to place holds on foreclosures), Citi's
continued asset sales of delinquent first mortgages and Citi's continued efforts
to work with borrowers pursuant to its loan modification programs, including
under the national mortgage settlement.
The foreclosure process
remains stagnant across most states, driven primarily by the additional state
requirements necessary to complete foreclosures referenced above as well as the
continued lengthening of the foreclosure process. Citi continues to experience
average timeframes to foreclosure that are two to three times longer than
historical norms, although some improvement occurred in average timeframes in
certain non-judicial states (see below) in the fourth quarter of 2012. Extended
foreclosure timelines and the low number of loans moving into the foreclosure
inventory resulted in Citi's aged foreclosure inventory (active foreclosures in
process for two years or more) increasing to approximately 29% of Citi's total
foreclosure inventory as of December 31, 2012 (compared to 20% at September 30,
2012 and 10% at December 31, 2011). Extended foreclosure timelines continue to
be more pronounced in the judicial states (i.e., states that require
foreclosures to be processed via court approval), where Citi has a higher
concentration of residential first mortgages in foreclosure (see
" North America Residential First Mortgages-State Delinquency Trends" above).
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Moreover, Citi's servicing agreements associated with its sales of mortgage loans to the GSEs generally provide the GSEs with a high level of servicing oversight, including, among other things, timelines in which foreclosures or modification activities are to be completed. The agreements allow for the GSEs to take action against a servicer for violation of the timelines, which includes imposing compensatory fees. While the GSEs have not historically exercised their rights to impose compensatory fees, they have begun to do so on a regular basis. To date, the imposition of compensatory fees, as a result of the extended foreclosure timelines or otherwise, has not had a material impact on Citi.
North America Consumer Mortgage
Quarterly Credit Trends-Delinquencies and Net Credit Losses-Home Equity
Loans
Citi's home equity loan portfolio
consists of both fixed-rate home equity loans and loans extended under home
equity lines of credit. Fixed-rate home equity loans are fully amortizing. Home
equity lines of credit allow for amounts to be drawn for a period of time with
the payment of interest only and then, at the end of the draw period, the
then-outstanding amount is converted to an amortizing loan (the interest-only
payment feature during the revolving period is standard for this product across
the industry). Prior to June 2010, Citi's originations of home equity lines of
credit typically had a 10-year draw period. Beginning in June 2010, Citi's
originations of home equity lines of credit typically have a five-year draw
period as Citi changed these terms to mitigate risk. After conversion, the home
equity loans typically have a 20-year amortization period.
As of December
31, 2012, Citi's home equity loan portfolio of $37.2 billion included
approximately $22.0 billion of home equity lines of credit that are still within
their revolving period and have not commenced amortization, or "reset." During
the period 2009–2012, approximately only 3% of Citi's home equity loan portfolio
commenced amortization; approximately 75% of Citi's home equity loans extended
under lines of credit as of December 31, 2012 will contractually begin to
amortize during the period 2015–2017. Based on this limited sample of home
equity loans that has begun amortization, Citi has experienced marginally higher
delinquency rates in its amortizing
home equity loan portfolio as compared to
its non-amortizing loan portfolio. However, these resets have occurred during a
period of declining interest rates, which Citi believes has likely reduced the
overall "payment shock" to the borrower. Citi will continue to monitor this
reset risk closely, particularly as it approaches 2015, and Citi will continue
to consider the impact in determining its allowance for loan loss reserves
accordingly. In addition, management is reviewing additional actions to offset
potential reset risk, such as extending offers to non-amortizing home equity
loan borrowers to convert the non-amortizing home equity loan to a fixed-rate
loan.
As of December 31, 2012, the percentage
of U.S. home equity loans in a junior lien position where Citi also owned or
serviced the first lien was approximately 30%. However, for all home equity
loans (regardless of whether Citi owns or services the first lien), Citi manages
its home equity loan account strategy through obtaining and reviewing refreshed
credit bureau scores (which reflect the borrower's performance on all of its
debts, including a first lien, if any), refreshed LTV ratios and other borrower
credit-related information. Historically, the default and delinquency statistics
for junior liens where Citi also owns or services the first lien have been
better than for those where Citi does not own or service the first lien. Citi
believes this is generally attributable to origination channels and better
credit characteristics of the portfolio, including FICO and LTV, for those
junior liens where Citi also owns or services the first
lien.
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The following charts detail the quarterly trends in delinquencies and net credit losses for Citi's home equity loan portfolio in North America . The vast majority of Citi's home equity loan exposure arises from its portfolio within Citi Holdings- LCL .
North America Home Equity Loans-Citigroup |
In billions of dollars |
EOP Loans: 4Q11-$43.5 3Q12-$38.6 4Q12-$37.2
North America Home Equity Loans-Citi Holdings |
In billions of dollars |
EOP Loans: 4Q11-$40.0 3Q12-$35.4 4Q12-$34.1
S&P/Case Shiller Home Price Index (3) | ||||||||
(3.8)% | (4.9)% | (5.4)% | (3.5)% | (3.7)% | (1.3)% | 1.6% | 3.6% | n/a |
(1) | The first quarter of 2012 included approximately $55 million of charge-offs related to previously deferred principal balances on modified loans related to anticipated forgiveness of principal in connection with the national mortgage settlement. Excluding the impact of these charge-offs, net credit losses would have been $0.51 billion and $0.50 billion for the Citigroup and Citi Holdings portfolios, respectively. | |
(2) | The third quarter of 2012 included approximately $454 million of charge-offs related to OCC guidance with respect to the treatment of mortgage loans where the borrower has gone through Chapter 7 bankruptcy. The fourth quarter of 2012 includes an approximately $30 million benefit to charge-offs related to finalizing the impact of the OCC guidance. Excluding these impacts, net credit losses would have been $0.43 billion in 3Q'12 and $0.39 billion in 4Q'12 for the Citigroup portfolio, and $0.41 billion in 3Q'12 and $0.38 billion in 4Q'12 for the Citi Holdings portfolio. | |
(3) | Year-over-year change in the S&P/Case-Shiller U.S. National Home Price Index. |
88
North America Home Equity Loan Delinquencies-Citi Holdings |
In billions of dollars |
Note: For each of the tables above, days past due exclude (i) U.S. mortgage loans that are guaranteed by U.S. government-sponsored agencies, because the potential loss predominantly resides with the U.S. agencies, and (ii) loans recorded at fair value. Totals may not sum due to rounding.
As evidenced by the tables above, home equity loan delinquencies improved during 2012, although the rate of improvement has slowed. Given the lack of a market in which to sell delinquent home equity loans, as well as the relatively smaller number of home equity loan modifications and modification programs (see Note 16 to the Consolidated Financial Statements), Citi's ability to offset increased delinquencies and net credit losses in its home equity loan portfolio in Citi Holdings, whether pursuant
to deterioration of the underlying credit performance of these loans or otherwise, is more limited as compared to residential first mortgages as discussed above. Accordingly, Citi could begin to experience increased delinquencies and thus increased net credit losses in this portfolio going forward. Citi has taken these trends and uncertainties into consideration in determining its loan loss reserves. See " North America Consumer Mortgages-Loan Loss Reserve Coverage" below.
North America Home Equity Loans-State
Delinquency Trends
The following tables
set forth, for total Citigroup, the six states and/or regions with the highest
concentration of Citi's home equity loans as of December 31, 2012 and December
31, 2011.
In billions of dollars | December 31, 2012 | December 31, 2011 | ||||||||||||||||||||
% | % | |||||||||||||||||||||
ENR | 90+DPD | CLTV > | Refreshed | ENR | 90+DPD | CLTV > | Refreshed | |||||||||||||||
State (1) | ENR | (2) | Distribution | % | 100% | (3) | FICO | ENR | (2) | Distribution | % | 100% | (3) | FICO | ||||||||
CA | $ | 9.7 | 28 | % | 2.0 | % | 40 | % | 723 | $ | 11.2 | 27 | % | 2.3 | % | 50 | % | 721 | ||||
NY/NJ/CT | 8.2 | 23 | 2.3 | 20 | 715 | 9.2 | 22 | 2.1 | 19 | 715 | ||||||||||||
FL | 2.4 | 7 | 3.4 | 58 | 698 | 2.8 | 7 | 3.3 | 69 | 698 | ||||||||||||
IL | 1.4 | 4 | 2.1 | 55 | 708 | 1.6 | 4 | 2.3 | 62 | 705 | ||||||||||||
IN/OH/MI | 1.2 | 3 | 2.2 | 55 | 679 | 1.5 | 4 | 2.6 | 66 | 678 | ||||||||||||
AZ/NV | 0.8 | 2 | 3.1 | 70 | 709 | 1.0 | 3 | 4.1 | 83 | 706 | ||||||||||||
Other | 11.5 | 33 | 2.2 | 37 | 695 | 13.7 | 33 | 2.3 | 46 | 695 | ||||||||||||
Total | $ | 35.2 | 100 | % | 2.3 | % | 37 | % | 704 | $ | 41.0 | 100 | % | 2.4 | % | 45 | % | 707 |
Note: Totals may not sum due to rounding. | ||
(1) | Certain of the states are included as part of a region based on Citi's view of similar home prices (HPI) within the region. | |
(2) | Ending net receivables. Excludes loans in Canada and Puerto Rico and loans subject to LTSCs. Excludes balances for which FICO or LTV data are unavailable. | |
(3) | Represents combined loan-to-value (CLTV) for both residential first mortgages and home equity loans. |
89
Similar to residential first mortgages discussed above, the general improvement in refreshed CLTV percentages at December 31, 2012 was primarily the result of improvements in HPI across substantially all metropolitan statistical areas, thereby increasing values used in the determination of CLTV. For the reasons described under " North America Consumer Mortgage Quarterly Credit Trends-Delinquencies and Net Credit Losses-Home Equity Loans" above, Citi has experienced, and could continue to experience, increased delinquencies and thus increased net credit losses in certain of these states and/or regions going forward.
National Mortgage Settlement
Under the national mortgage settlement,
entered into by Citi and other financial institutions in February 2012, Citi is
required to provide (i) customer relief in the form of loan modifications for
delinquent borrowers, including principal reductions, and other loss mitigation
activities to be completed over three years, with a required settlement value of
$1.4 billion; and (ii) refinancing concessions to enable current borrowers whose
properties are worth less than the balance of their loans to reduce their
interest rates, also to be completed over three years, with a required
settlement value of $378 million. Citi commenced loan modifications under the
settlement, including principal reductions, in March 2012 and commenced the
refinancing process in June 2012.
If Citi does not provide the required
amount of financial relief in the form of loan modifications and other loss
mitigation activities for delinquent borrowers or refinancing concessions under
the national mortgage settlement, Citi will be required to make cash payments.
Citi is required to complete 75% of its required relief by March 1, 2014.
Failure to meet 100% of the commitment by March 1, 2015 will result in Citi
paying an amount equal to 125% of the shortfall. Failure to meet the two-year
commitment noted above and then failure to meet the three-year commitment will
result in an amount equal to 140% of the three-year shortfall. Citi continues to
believe that its obligations will be fully met in the form of financial relief
to homeowners; no cash payments are currently expected.
Loan Modifications/Loss Mitigation for
Delinquent Borrowers
All of the loan
modifications for delinquent borrowers receiving relief toward the $1.4 billion
in settlement value are either currently accounted for as TDRs or will become
TDRs at the time of modification. The loan modifications have been, and will
continue to be, primarily performed under the HAMP and Citi's CSM loan
modification programs (see Note 16 to the Consolidated Financial Statements).
The loss mitigation activities include short sales for residential first
mortgages and home equity loans, extinguishments and other loss mitigation
activities. Based on the nature of the loss mitigation activities (e.g., short
sales and extinguishments), these activities have not impacted, nor are they
expected to have an incremental impact on, Citi's TDRs.
Through December 31, 2012, Citi has assisted approximately 34,000
customers under the loan-modification and other loss-mitigation activities
provisions of the national mortgage settlement, resulting in an aggregate
principal reduction of approximately $2.4 billion that is potentially eligible
for inclusion in the settlement value. Net credit losses of approximately $500
million have been incurred to date relating to the loan modifications under the
national mortgage settlement, all of which were offset by loan loss reserve
releases (including approximately $370 million of incremental charge-offs
related to anticipated forgiveness of principal in connection with the national
mortgage settlement in the first quarter). Citi currently anticipates an impact
to net credit losses associated with the national mortgage settlement to
continue into the first half of 2013. Citi continues to believe that its loan
loss reserves as of December 31, 2012 are sufficient to cover the required
customer relief to delinquent borrowers under the national mortgage
settlement.
Like other financial institutions party
to the national mortgage settlement, Citi does not receive dollar-for-dollar
settlement value for the relief it provides under the national mortgage
settlement in all cases. As a result, Citi anticipates that the relief provided
will be higher than the settlement value.
Refinancing Concessions for Current
Borrowers
The refinancing concessions are
to be offered to residential first mortgage borrowers whose properties are worth
less than the value of their loans, who have been current in the prior 12
months, who have not had a modification, bankruptcy or foreclosure proceeding
during the prior 24 months, and whose loans have a current interest rate greater
than 5.25%. As of December 31, 2012, Citi has provided refinance concessions
under the national mortgage settlement to approximately 13,000 customers holding
loans with a total unpaid principal balance of $2.3 billion, thus reducing their
interest rate to 5.25% for the remaining life of the loan.
Citi accounts for the refinancing
concessions under the settlement based on whether the particular borrower is
determined to be experiencing financial difficulty based on certain underwriting
criteria. When a refinancing concession is granted to a borrower who is
experiencing financial difficulty, the loan is accounted for as a TDR.
Otherwise, the impact of the refinancing concessions is recognized over a period
of years in the form of lower interest income. As of December 31, 2012,
approximately 5,000 customers holding loans with a total unpaid principal
balance of $741 million and who were provided refinance concessions have been
accounted for as TDRs. These refinancing concessions have not had a material
impact on the fair value of the modified mortgage loans.
90
As noted above, if the modified loan under the refinancing is not accounted for as a TDR, the impact to Citi of the refinancing concession will be recognized over a period of years in the form of lower interest income. Citi estimates the forgone future interest income as a result of the refinance concessions under the national mortgage settlement was approximately $20 million during 2012, of which $13 million was recorded in the fourth quarter of 2012. Citi estimates the total amount of expected forgone future interest income could be approximately $50 million annually. However, this estimate could change based on the response rate of borrowers who qualify and the subsequent borrower payment behavior.
Independent Foreclosure Review
Settlement
On January 7, 2013, Citi,
along with other major mortgage servicers operating under consent orders dated
April 13, 2011 with the Federal Reserve Board and the OCC, entered into a
settlement agreement with those regulators to modify the requirements of the
independent foreclosure review mandated by the consent orders. Under the
settlement, Citi agreed to pay approximately $305 million into a qualified
settlement fund and offer $487 million of mortgage assistance to borrowers in
accordance with agreed criteria. Upon completion of Citi's payment and mortgage
assistance obligations under the agreement, the Federal Reserve Board and the
OCC have agreed to deem the requirements of the independent foreclosure review
under the consent orders satisfied. As a result of the settlement, Citi recorded
a $305 million charge in the fourth quarter of 2012. Citi believes that its loan
loss reserves as of December 31, 2012 are sufficient to cover any mortgage
assistance under the settlement and there will be no incremental financial
impact.
Consumer Mortgage FICO and
LTV
The following charts detail the
quarterly trends of the unpaid principal balances for Citi's residential first
mortgage and home equity loan portfolios by risk segment (FICO and LTV) and the
90+ day delinquency rates for those risk segments. For example, in the fourth
quarter of 2012, residential first mortgages had $7.1 billion of balances with
refreshed FICO < 660 and refreshed LTV > 100%. Approximately 17.5% of
these loans in this segment were over 90+ days past due.
Residential First Mortgages
In billions of
dollars
In millions of dollars | 4Q11 | 1Q12 | 2Q12 | 3Q12 | 4Q12 | |||||
Res Mortgage-90+ DPD | $ | % | $ | % | $ | % | $ | % | $ | % |
FICO ≥ 660, LTV ≤ 100% | 143 | 0.4% | 128 | 0.3% | 160 | 0.4% | 158 | 0.4% | 167 | 0.4% |
FICO ≥ 660, LTV > 100% | 157 | 1.2% | 164 | 1.2% | 185 | 1.6% | 120 | 1.4% | 113 | 1.4% |
FICO < 660, LTV ≤ 100% | 1,916 | 10.7% | 1,759 | 10.4% | 1,777 | 10.5% | 1,892 | 10.6% | 1,776 | 10.1% |
FICO < 660, LTV > 100% | 1,842 | 16.5% | 1,943 | 17.2% | 1,812 | 18.4% | 1,420 | 18.3% | 1,245 | 17.5% |
Home Equity Loans
In billions of
dollars
In millions of dollars | 4Q11 | 1Q12 | 2Q12 | 3Q12 | 4Q12 | |||||
Home Equity-90+ DPD | $ | % | $ | % | $ | % | $ | % | $ | % |
FICO ≥ 660, CLTV ≤ 100% | 18 | 0.1% | 19 | 0.1% | 23 | 0.1% | 25 | 0.1% | 26 | 0.1% |
FICO ≥ 660, CLTV > 100% | 20 | 0.2% | 23 | 0.2% | 25 | 0.2% | 19 | 0.2% | 21 | 0.2% |
FICO < 660, CLTV ≤ 100% | 381 | 7.6% | 336 | 7.2% | 352 | 7.6% | 394 | 8.0% | 395 | 8.2% |
FICO < 660, CLTV > 100% | 553 | 10.3% | 504 | 9.3% | 454 | 9.5% | 385 | 9.9% | 359 | 9.6% |
Notes: | |
– | Data appearing in the tables above have been sourced from Citi's risk systems and, as such, may not reconcile with disclosures elsewhere generally due to differences in methodology or variations in the manner in which information is captured. Citi has noted such variations in instances where it believes they could be material to reconcile to the information presented elsewhere. |
– | Tables exclude loans in Canada and Puerto Rico, loans guaranteed by U.S. government agencies (residential first mortgages table only), loans recorded at fair value (residential first mortgages table only) and loans subject to LTSCs. |
– | Balances exclude deferred fees/costs. |
– | Tables exclude balances for which FICO or LTV data is unavailable. For residential first mortgages, balances for which such data is unavailable include $0.4 billion in each of the periods presented. For home equity loans, balances for which such data is unavailable include $0.2 billion in each of the periods presented. |
91
Citi's
residential first mortgages with an LTV above 100% has declined by 39% since
year end 2011, and high LTV loans with FICO scores of less than 660 decreased by
37% to $7.1 billion. The residential first mortgage portfolio has migrated to a
higher FICO and lower LTV distribution as a result of asset sales, home price
appreciation and principal forgiveness. Loans 90+ days past due have declined by
approximately 32%, or $0.6 billion, year-over-year to approximately $1.2
billion. The decline in 90+ days past due residential mortgages with refreshed
FICO scores of less than 660 as well as higher LTVs primarily can be attributed
to asset sales and modification programs, offset by the lengthening of the
foreclosure process, as discussed in the sections above. Citi's home equity
loans with a CLTV above 100% have declined by 28% since year end 2011, and high
CLTV loans with FICO scores of less than 660 decreased by 31% to approximately
$3.7 billion. The CLTV improvement was primarily the result of home price
appreciation.
Residential first mortgages historically have experienced
higher delinquency rates, as compared to home equity loans, despite the fact that home
equity loans are typically in junior lien positions and residential first
mortgages are typically in a first lien position. Citi believes this difference
is primarily because residential first mortgages are written down to collateral
value less cost to sell at 180 days past due and remain in the delinquency
population until full disposition through sale, repayment or foreclosure;
however, home equity loans are generally fully charged off at 180 days past due
and thus removed from the delinquency calculation. In addition, due to the
longer timelines to foreclose on a residential first mortgage (see
"Foreclosures" above), these loans tend to remain in the delinquency statistics
for a longer period and, consequently, the 90 days or more delinquencies of
these loans remain higher.
Mortgage Servicing Rights
To minimize credit and liquidity risk,
Citi sells most of the conforming mortgage loans it originates but retains the
servicing rights. These sale transactions create an intangible asset referred to
as mortgage servicing rights (MSRs), which are recorded at fair value on Citi's
Consolidated Balance Sheet. The fair value of MSRs is primarily affected by
changes in prepayments of mortgages that result from shifts in mortgage interest
rates. Specifically, the fair value of MSRs declines with increased prepayments,
and declines in or continued low interest rates tend to lead to increased
prepayments. In managing this risk, Citi economically hedges a significant
portion of the value of its MSRs through the use of interest rate derivative
contracts, forward purchase and sale commitments of mortgage-backed securities
and purchased securities classified as trading account assets.
Citi's MSRs totaled $1.9 billion as of December 31, 2012, compared to
$1.9 billion and $2.6 billion at September 30, 2012 and December 31, 2011,
respectively. The decrease in the value of Citi's MSRs from year-end 2011
primarily reflected the impact from lower interest rates in addition to
amortization as well as an increase in servicing costs related to the servicing
of the loans remaining in Citi Holdings. As the mix of loans remaining in Citi
Holdings has gradually shifted to more delinquent, non-performing loans, the
cost for servicing those loans has increased. As of December 31, 2012,
approximately $1.3 billion of MSRs were specific to Citicorp, with the remainder
to Citi Holdings.
For additional information on Citi's
MSRs, see Note 22 to the Consolidated Financial Statements.
Citigroup Residential Mortgages-Representations and Warranties
Overview
In connection with Citi's sales of residential mortgage loans to the U.S.
government-sponsored entities (GSEs) and, in most cases, other mortgage loan
sales and private-label securitizations, Citi makes representations and
warranties that the loans sold meet certain requirements. The specific
representations and warranties made by Citi in any particular transaction depend
on, among other things, the nature of the transaction and the requirements of
the investor (e.g., whole loan sale to the GSEs versus loans sold through
securitization transactions), as well as the credit quality of the loan (e.g.,
prime, Alt-A or subprime).
These sales expose Citi to potential
claims for breaches of its representations and warranties. In the event of a
breach of its representations and warranties, Citi could be required either to
repurchase the mortgage loans with the identified defects (generally at unpaid
principal balance plus accrued interest) or to indemnify ("make whole") the
investors for their losses on these loans. To the extent Citi made
representation and warranties on loans it purchased from third-party sellers
that remain financially viable, Citi may have the right to seek recovery of
repurchase losses or make whole payments from the third party based on
representations and warranties made by the third party to Citi (a "back-to-back"
claim).
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Whole Loan Sales (principally reflected
in Citi Holdings-Local Consumer Lending)
Citi is exposed to representation and warranty repurchase claims
primarily as a result of its whole loan sales to the GSEs and, to a lesser
extent, private investors through its Consumer business in CitiMortgage. When
selling a loan to these investors, Citi makes various representations and
warranties to, among other things, the following:
To date, the
majority of Citi's repurchases have been due to GSE repurchase claims and
relates to loans originated from 2006 through 2008, which also represent the
vintages with the highest loss severity. An insignificant percentage of
repurchases and make-whole payments have been from vintages pre-2006 and
post-2008. Citi attributes this to better credit performance of these vintages
and to the enhanced underwriting standards implemented beginning in the second
half of 2008.
During the period 2006 through 2008, Citi sold a total of
approximately $321 billion of whole loans, substantially all to the GSEs (this
amount has not been adjusted for subsequent borrower repayments of principal,
defaults or repurchase activity to date). The vast majority of these loans were
either originated by Citi or purchased from third-party sellers that Citi
believes would be unlikely to honor back-to-back claims because they are in
bankruptcy, liquidation or financial distress and, thus, are no longer
financially viable. As discussed below, however, Citi's repurchase reserve takes
into account estimated reimbursements, if any, to be received from third-party
sellers.
Private-Label Residential Mortgage
Securitizations
Citi is also exposed to
representation and warranty repurchase claims as a result of mortgage loans sold
through private-label residential mortgage securitizations. These
representations were generally made or assigned to the issuing trust and related
to, among other things, the following:
During the period 2005 through 2008, Citi sold loans into and sponsored private-label securitizations through both its Consumer business in CitiMortgage and its legacy S&B business. Citi sold approximately $91 billion of mortgage loans through private-label securitizations during this period.
CitiMortgage (principally reflected in
Citi Holdings-Local Consumer Lending)
During the period 2005 through 2008, Citi sold approximately $24.6
billion of loans through private-label mortgage securitization trusts via its
Consumer business in CitiMortgage. These $24.6 billion of securitization trusts
were composed of approximately $15.4 billion in prime trusts and $9.2 billion in
Alt-A trusts, each as classified at issuance.
As of December 31, 2012, approximately
$8.7 billion of the $24.6 billion remained outstanding as a result of repayments
of approximately $14.6 billion and cumulative losses (incurred by the issuing
trusts) of approximately $1.3 billion. The remaining outstanding amount is
composed of approximately $4.4 billion in prime trusts and approximately $4.3
billion in Alt-A trusts, as classified at issuance. As of December 31, 2012, the
remaining outstanding amount had a 90 days or more delinquency rate in the
aggregate of approximately 15.5%. Similar to the whole loan sales discussed
above, the vast majority of these loans either were originated by Citi or
purchased from third-party sellers that Citi believes would be unlikely to honor
back-to-back claims because they are no longer financially viable. Citi's
repurchase reserve takes into account estimated reimbursements, if any, to be
received from third-party sellers.
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Legacy S&B Securitizations
(principally reflected in Citi Holdings-Special Asset Pool)
During the period 2005 through 2008, S&B, through its
legacy business, sold approximately $66.4 billion of loans through private-label
mortgage securitization trusts. These $66.4 billion of securitization trusts
were composed of approximately $15.4 billion in prime trusts, $12.4 billion in
Alt-A trusts and $38.6 billion in subprime trusts, each as classified at
issuance.
As of December 31, 2012, approximately $19.9 billion of the
$66.4 billion remained outstanding as a result of repayments of approximately
$36.0 billion and cumulative losses (incurred by the issuing trusts) of
approximately $10.5 billion (of which approximately $7.9 billion related to
loans in subprime trusts). The remaining outstanding amount is composed of
approximately $5.1 billion in prime trusts, $4.2 billion in Alt-A trusts and
$10.6 billion in subprime trusts, as classified at issuance. As of December 31,
2012, the remaining outstanding amount had a 90 days or more delinquency rate of
approximately 26.1%.
The
mortgages included in the S&B legacy securitizations were primarily
purchased from third-party sellers. In connection with these securitization
transactions, representations and warranties relating to the mortgages were made
by Citi, third-party sellers or both. As of December 31, 2012, where Citi made
representations and warranties and received similar representations and
warranties from third-party sellers, Citi believes that for the majority of the
securitizations backed by prime and Alt-A loan collateral, if Citi received a
repurchase claim for those loans, it would have a back-to-back claim against
financially viable sellers.
The vast majority of the subprime
collateral was purchased from third-party sellers that Citi believes would be
unlikely to honor back-to-back claims because they are no longer financially
viable. Citi's repurchase reserve, to the extent applicable, takes into account
estimated reimbursements to be received, if any, from third-party
sellers.
Repurchase Reserve
Citi has recorded a mortgage repurchase reserve (referred to
as the repurchase reserve) for its potential repurchase or make-whole liability
regarding representation and warranty claims. Citi's repurchase reserve
primarily relates to whole loan sales to the GSEs and is thus calculated
primarily based on Citi's historical repurchase activity with the GSEs. The
repurchase reserve relating to Citi's whole loan sales, and changes in estimate
with respect thereto, are generally recorded in Citi Holdings- Local Consumer Lending . The
repurchase reserve relating to private-label securitizations, and changes in
estimate with respect thereto, are recorded in Citi Holdings- Special Asset Pool .
Repurchase Reserve-Whole Loan
Sales
To date, issues related to (i)
misrepresentation of facts by either the borrower or a third party (e.g.,
income, employment, debts, etc.), (ii) appraisal issues (e.g., an error or
misrepresentation of value), and (iii) program requirements (e.g., a loan that
does not meet investor guidelines, such as contractual interest rate) have been
the primary drivers of Citi's repurchases and make-whole payments to the GSEs.
The type of defect that results in a repurchase or make-whole payment has varied
and will likely continue to vary over time. There has not been a meaningful
difference in Citi's incurred or estimated loss for any particular type of
defect.
The repurchase reserve is based on various assumptions which, as
referenced above, are primarily based on Citi's historical repurchase activity
with the GSEs. As of December 31, 2012, the most significant assumptions used to
calculate the reserve levels are the: (i) probability of a claim based on
correlation between loan characteristics and repurchase claims; (ii) claims
appeal success rates; and (iii) estimated loss per repurchase or make-whole
payment. In addition, Citi considers reimbursements estimated to be received
from third-party sellers, which are generally based on Citi's analysis of its
most recent collection trends and the financial solvency or viability of the
third-party sellers, in estimating its repurchase reserve.
During
2012, Citi recorded an additional reserve of $706 million (of which $164 million
was in the fourth quarter of 2012) relating to its whole loan sales repurchase
exposure. The change in estimate in fourth quarter and full year 2012 primarily
resulted from (i) a continued heightened focus by the GSEs resulting in
increasing estimates of repurchase claims, and (ii) increasing trends in
repurchase claims, repurchases/make-whole payments, and default rates,
especially for higher risk loans associated with servicing sold to a third party
in the fourth quarter of 2010. These increases were partially offset by an
improvement in expected recoveries from third-party sellers. Citi's claims
appeal success rate remained stable during 2012, with approximately half of
repurchase claims successfully appealed and thus resulting in no loss to Citi.
Although the GSEs continued to exhibit elevated loan documentation requests
during 2012, which could ultimately lead to higher claims and repurchases in
future periods, Citi continues to believe the activity in and change in estimate
relating to its repurchase reserve will remain volatile in the near
term.
As referenced above, the repurchase reserve estimation process
for potential whole loan representation and warranty claims relies on various
assumptions that involve numerous estimates and judgments, including with
respect to certain future events, and thus entails inherent uncertainty. Citi
estimates that the range of reasonably possible loss for whole loan sale
representation and warranty claims in excess of amounts accrued as of December
31, 2012 could be up to $0.6 billion. This estimate was derived by modifying
the key assumptions discussed above to reflect management's judgment regarding
reasonably possible adverse changes to those assumptions. Citi's estimate of
reasonably possible loss is based on currently available information,
significant judgment and numerous assumptions that are subject to
change.
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Repurchase Reserve-Private-Label
Securitizations
Investors in
private-label securitizations may seek recovery for alleged breaches of
representations and warranties, as well as losses caused by non-performing loans
more generally, through repurchase claims or through litigation premised on a
variety of legal theories. Citi considers litigation relating to private-label
securitizations as part of its contingencies analysis. For additional
information, see Note 28 to the Consolidated Financial
Statements.
During 2012, Citi continued to receive significant levels of
inquiries and demands for loan files, as well as requests to toll (extend) the
applicable statutes of limitation for, among others, representation and warranty
claims relating to its private-label securitizations. These inquiries, demands
and requests have come from trustees of securitization trusts and others. Citi
also has received repurchase claims for breaches of representations and
warranties related to private-label securitizations. These claims have been
received at an unpredictable rate, although the number of claims increased
substantially during 2012 and is expected to remain elevated, particularly given
the level of inquiries, demands and requests noted above.
Of the
repurchase claims received, Citi believes some are based on a review of the
underlying loan files, while others are not based on such a review. In either
case, upon receipt of a claim, Citi typically requests that it be provided
with the underlying detail supporting the
claim; however, to date, Citi has received little or no response to these
requests for information. As a result, the vast majority of the repurchase
claims received on Citi's private-label securitizations remain unresolved (see
the "Unresolved Claims" table below). Citi expects unresolved repurchase claims
for private-label securitizations to continue to increase because new claims and
requests for loan files continue to be received, while there has been little
progress to date in resolving these repurchase claims.
Citi
cannot reasonably estimate probable losses from future repurchase claims for
private-label securitizations because the claims to date have been received at
an unpredictable rate, the factual basis for those claims is unclear, and very
few such claims have been resolved. Rather, at the present time, Citi records
reserves related to private-label securitizations repurchas