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).
92
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.
93
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.
94
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 repurchase claims based on
estimated losses arising from those claims received that appear to be based on a
review of the underlying loan files. During 2012, Citi recorded a reserve of
$244 million (of which $9 million was in the fourth quarter of 2012) relating to
such claims. The estimation reflected in this reserve is based on currently
available information and relies on various assumptions that involve numerous
estimates and judgments that are inherently uncertain and subject to change. If
actual experiences differ from Citi's assumptions, future provisions may differ
substantially from Citi's current reserve.
The table below sets forth the activity in the repurchase reserve for each of the quarterly periods below:
Three Months Ended | ||||||||||||||||||||
In millions of dollars | December 31, 2012 | September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||||
Balance, beginning of period | $ | 1,516 | $ | 1,476 | $ | 1,376 | $ | 1,188 | $ | 1,076 | ||||||||||
Additions for new sales (1) | 6 | 7 | 4 | 6 | 7 | |||||||||||||||
Change in estimate (2) | 173 | 200 | 242 | 335 | 306 | |||||||||||||||
Utilizations | (130 | ) | (167 | ) | (146 | ) | (153 | ) | (201 | ) | ||||||||||
Balance, end of period | $ | 1,565 | $ | 1,516 | $ | 1,476 | $ | 1,376 | $ | 1,188 |
(1) | Reflects new whole loan sales, primarily to the GSEs. | |
(2) | Change in estimate for the fourth quarter of 2012 includes $164 million related to whole loan sales to the GSEs and private investors and $9 million related to loans sold through private-label securitizations. |
The following table sets forth the unpaid principal balance of loans repurchased due to representation and warranty claims during each of the quarterly periods below:
Three Months Ended | |||||||||||||||
In millions of dollars | December 31, 2012 | September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | ||||||||||
GSEs and others (1) | $157 | $105 | $202 | $101 | $110 |
(1) Predominantly related to claims from the GSEs.
In addition to the amounts set forth in the table above, Citi recorded make-whole payments of $92 million, $118 million, $91 million, $107 million and $148 million for the quarterly periods ended December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011, respectively. Nearly all of these make-whole payments were to the GSEs.
95
Representations and Warranty Claims by
Claimant
The following table sets forth
the original principal balance of representation and warranty claims by
claimant, as well as the original principal balance of unresolved claims by
claimant, for each of the quarterly periods below:
Claims during the three months ended | |||||||||||||||
In millions of dollars | December 31, 2012 | September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | ||||||||||
GSEs and others (1) | $ | 769 | $ | 863 | $ | 860 | $ | 755 | $ | 699 | |||||
Private-label securitizations | 294 | 3 | 626 | 536 | 13 | ||||||||||
Mortgage insurers (2) | 18 | 21 | 90 | 23 | 35 | ||||||||||
Total | $ | 1,081 | $ | 887 | $ | 1,576 | $ | 1,314 | $ | 747 | |||||
Unresolved claims at | |||||||||||||||
In millions of dollars | December 31, 2012 | September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | ||||||||||
GSEs and others (1) | $ | 1,224 | $ | 1,371 | $ | 1,263 | $ | 1,222 | $ | 1,270 | |||||
Private-label securitizations | 1,717 | 1,423 | 1,422 | 797 | 266 | ||||||||||
Mortgage insurers (2) | 5 | 4 | 15 | 8 | 15 | ||||||||||
Total | $ | 2,946 | $ | 2,798 | $ | 2,700 | $ | 2,027 | $ | 1,551 |
(1) | Predominantly related to claims from the GSEs. | |
(2) | Represents the insurer's rejection of a claim for loss reimbursement that has yet to be resolved and includes only GSE whole loan activity. To the extent that mortgage insurance will not cover the claim on a loan, Citi may have to make the GSE whole. Failure to collect from mortgage insurers is considered in determining the repurchase reserve. Citi does not believe the inability to collect reimbursement from mortgage insurers is likely to have a material impact on its repurchase reserve. |
For additional information regarding Citi's potential mortgage repurchase liability, see Notes 27 and 28 to the Consolidated Financial Statements below.
96
North America Cards
Overview
Citi's North America cards portfolio primarily consists of its Citi-branded cards
and Citi retail services portfolios in Citicorp. As of December 31, 2012, the
Citicorp Citi-branded cards portfolio totaled approximately $73 billion, while
the Citi retail services portfolio was approximately $39 billion.
See Note
16 to the Consolidated Financial Statements for additional information on Citi's North America cards modifications.
North America Cards Quarterly Credit
Trends-Delinquencies and Net Credit Losses
The following charts detail the quarterly trends in delinquencies and net
credit losses for Citigroup's North
America Citi-branded cards and Citi retail
services portfolios in Citicorp. Assuming no significant downturn in the
economic environment, Citi believes the improvement in credit trends in its card
portfolios had largely stabilized as of the end of 2012, and delinquencies and net
credit losses in these portfolios could begin to increase in line with portfolio
growth.
Citi-Branded Cards-Citigroup |
In billions of
dollars
EOP Loans: 4Q11-$77.2 3Q12-$72.2 4Q12-$72.9
Citi Retail Services-Citigroup |
In billions of
dollars
EOP Loans: 4Q11-$39.9 3Q12-$36.6 4Q12-$38.6
97
CONSUMER LOAN DETAILS
Consumer Loan Delinquency Amounts and Ratios
Total | ||||||||||||||||||||||||||||
loans | (1) | 90+ days past due | (2) | 30–89 days past due | (2) | |||||||||||||||||||||||
December 31, | December 31, | December 31, | ||||||||||||||||||||||||||
In millions of dollars, except EOP loan amounts in billions and ratios | 2012 | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | |||||||||||||||||||||
Citicorp (3)(4) | ||||||||||||||||||||||||||||
Total | $ | 295.4 | $ | 3,082 | $ | 3,406 | $ | 4,453 | $ | 3,509 | $ | 4,072 | $ | 5,014 | ||||||||||||||
Ratio | 1.05 | % | 1.19 | % | 1.63 | % | 1.19 | % | 1.42 | % | 1.84 | % | ||||||||||||||||
Retail banking | ||||||||||||||||||||||||||||
Total | $ | 145.8 | $ | 880 | $ | 769 | $ | 761 | $ | 1,112 | $ | 1,040 | $ | 1,148 | ||||||||||||||
Ratio | 0.61 | % | 0.58 | % | 0.66 | % | 0.77 | % | 0.78 | % | 1.00 | % | ||||||||||||||||
North America | 42.7 | 280 | 235 | 228 | 223 | 213 | 212 | |||||||||||||||||||||
Ratio | 0.68 | % | 0.63 | % | 0.76 | % | 0.54 | % | 0.57 | % | 0.71 | % | ||||||||||||||||
EMEA | 5.1 | 48 | 59 | 84 | 77 | 94 | 136 | |||||||||||||||||||||
Ratio | 0.94 | % | 1.40 | % | 2.00 | % | 1.51 | % | 2.24 | % | 3.24 | % | ||||||||||||||||
Latin America | 28.3 | 324 | 253 | 224 | 353 | 289 | 267 | |||||||||||||||||||||
Ratio | 1.14 | % | 1.07 | % | 1.13 | % | 1.25 | % | 1.22 | % | 1.35 | % | ||||||||||||||||
Asia | 69.7 | 228 | 222 | 225 | 459 | 444 | 533 | |||||||||||||||||||||
Ratio | 0.33 | % | 0.33 | % | 0.37 | % | 0.66 | % | 0.66 | % | 0.87 | % | ||||||||||||||||
Citi-branded cards | ||||||||||||||||||||||||||||
Total | $ | 149.6 | $ | 2,202 | $ | 2,637 | $ | 3,692 | $ | 2,397 | $ | 3,032 | $ | 3,866 | ||||||||||||||
Ratio | 1.47 | % | 1.72 | % | 2.35 | % | 1.60 | % | 1.98 | % | 2.46 | % | ||||||||||||||||
North America- Citi-branded | 72.9 | 786 | 1,016 | 1,597 | 771 | 1,078 | 1,540 | |||||||||||||||||||||
Ratio | 1.08 | % | 1.32 | % | 2.03 | % | 1.06 | % | 1.40 | % | 1.95 | % | ||||||||||||||||
North America- Citi retail services | 38.6 | 721 | 951 | 1,351 | 789 | 1,175 | 1,458 | |||||||||||||||||||||
Ratio | 1.87 | % | 2.38 | % | 3.20 | % | 2.04 | % | 2.94 | % | 3.45 | % | ||||||||||||||||
EMEA | 2.9 | 48 | 44 | 58 | 63 | 59 | 72 | |||||||||||||||||||||
Ratio | 1.66 | % | 1.63 | % | 2.07 | % | 2.17 | % | 2.19 | % | 2.57 | % | ||||||||||||||||
Latin America | 14.8 | 413 | 412 | 446 | 432 | 399 | 456 | |||||||||||||||||||||
Ratio | 2.79 | % | 3.01 | % | 3.33 | % | 2.92 | % | 2.91 | % | 3.40 | % | ||||||||||||||||
Asia | 20.4 | 234 | 214 | 240 | 342 | 321 | 340 | |||||||||||||||||||||
Ratio | 1.15 | % | 1.08 | % | 1.22 | % | 1.68 | % | 1.61 | % | 1.73 | % | ||||||||||||||||
Citi Holdings- Local Consumer Lending (5)(6) | ||||||||||||||||||||||||||||
Total | $ | 112.7 | $ | 4,611 | $ | 5,849 | $ | 8,864 | $ | 4,228 | $ | 5,148 | $ | 7,935 | ||||||||||||||
Ratio | 4.42 | % | 4.66 | % | 5.17 | % | 4.05 | % | 4.10 | % | 4.63 | % | ||||||||||||||||
International | 7.6 | 345 | 422 | 657 | 393 | 499 | 848 | |||||||||||||||||||||
Ratio | 4.54 | % | 3.91 | % | 3.00 | % | 5.17 | % | 4.62 | % | 3.87 | % | ||||||||||||||||
North America | 105.1 | 4,266 | 5,427 | 8,207 | 3,835 | 4,649 | 7,087 | |||||||||||||||||||||
Ratio | 4.41 | % | 4.73 | % | 5.49 | % | 3.96 | % | 4.05 | % | 4.74 | % | ||||||||||||||||
Total Citigroup (excluding Special Asset Pool ) | $ | 408.1 | $ | 7,693 | $ | 9,255 | $ | 13,317 | $ | 7,737 | $ | 9,220 | $ | 12,949 | ||||||||||||||
Ratio | 1.93 | % | 2.25 | % | 3.00 | % | 1.94 | % | 2.24 | % | 2.93 | % |
(1) | Total loans include interest and fees on credit cards. | |
(2) | The ratios of 90+ days past due and 30–89 days past due are calculated based on end-of-period (EOP) loans. | |
(3) | The 90+ days past due balances for North America -Citi-branded cards and North America -Citi retail services cards are generally still accruing interest. Citigroup's policy is generally to accrue interest on credit card loans until 180 days past due, unless notification of bankruptcy filing has been received earlier. | |
(4) | The 90+ days and 30–89 days past due and related ratios for North America Regional Consumer Banking exclude U.S. mortgage loans that are guaranteed by U.S. government agencies since the potential loss predominantly resides with the U.S. agencies. The amounts excluded for loans 90+ days past due (and EOP loans) are $742 million ($1.4 billion), $611 million ($1.3 billion) and $235 million ($0.8 billion) at December 31, 2012, December 31, 2011 and December 31, 2010, respectively. The amounts excluded for loans 30–89 days past due (end-of-period loans have the same adjustment as above) are $122 million, $121 million and $30 million, as of December 31, 2012, December 31, 2011 and December 31, 2010, respectively. | |
(5) | The 90+ days and 30–89 days past due and related ratios for North America LCL exclude U.S. mortgage loans that are guaranteed by U.S. government agencies since the potential loss predominantly resides with the U.S. agencies. The amounts excluded for loans 90+ days past due (and EOP loans) for each period are $4.0 billion ($7.1 billion), $4.4 billion ($7.9 billion) and $5.2 billion ($8.4 billion) at December 31, 2012, December 31, 2011 and December 31, 2010, respectively. The amounts excluded for loans 30–89 days past due (end-of-period loans have the same adjustment as above) for each period are $1.2 billion, $1.5 billion and $1.6 billion, as of December 31, 2012, December 31, 2011 and December 31, 2010, respectively. | |
(6) | The December 31, 2012, December 31, 2011 and December 31, 2010 loans 90+ days past due and 30–89 days past due and related ratios for North America exclude $1.2 billion, $1.3 billion and $1.7 billion, respectively, of loans that are carried at fair value. |
98
Consumer Loan Net Credit Losses and Ratios
Average | ||||||||||||||||
loans | (1) | Net credit losses | (2) | |||||||||||||
In millions of dollars, except average loan amounts in billions and ratios | 2012 | 2012 | 2011 | 2010 | ||||||||||||
Citicorp | ||||||||||||||||
Total | $ | 286.4 | $ | 8,452 | $ | 10,840 | $ | 16,328 | ||||||||
Ratio | 2.95 | % | 3.93 | % | 6.22 | % | ||||||||||
Retail banking | ||||||||||||||||
Total | $ | 140.9 | $ | 1,258 | $ | 1,190 | $ | 1,281 | ||||||||
Ratio | 0.89 | % | 0.94 | % | 1.17 | % | ||||||||||
North America | 41.3 | 247 | 302 | 341 | ||||||||||||
Ratio | 0.60 | % | 0.88 | % | 1.12 | % | ||||||||||
EMEA | 4.7 | 46 | 87 | 166 | ||||||||||||
Ratio | 0.98 | % | 1.98 | % | 3.84 | % | ||||||||||
Latin America | 26.3 | 648 | 475 | 439 | ||||||||||||
Ratio | 2.46 | % | 2.14 | % | 2.42 | % | ||||||||||
Asia | 68.6 | 317 | 326 | 335 | ||||||||||||
Ratio | 0.46 | % | 0.50 | % | 0.59 | % | ||||||||||
Cards | ||||||||||||||||
Total | $ | 145.5 | $ | 7,194 | $ | 9,650 | $ | 15,047 | ||||||||
Ratio | 4.94 | % | 6.48 | % | 9.84 | % | ||||||||||
North America-Citi-branded | 71.9 | 3,187 | 4,668 | 7,683 | ||||||||||||
Ratio | 4.43 | % | 6.28 | % | 9.86 | % | ||||||||||
North America-Citi retail services | 36.9 | 2,322 | 3,131 | 5,108 | ||||||||||||
Ratio | 6.29 | % | 8.13 | % | 12.10 | % | ||||||||||
EMEA | 2.8 | 59 | 85 | 149 | ||||||||||||
Ratio | 2.09 | % | 2.98 | % | 5.32 | % | ||||||||||
Latin America | 14.1 | 1,102 | 1,209 | 1,429 | ||||||||||||
Ratio | 7.84 | % | 8.82 | % | 11.67 | % | ||||||||||
Asia | 19.8 | 524 | 557 | 678 | ||||||||||||
Ratio | 2.65 | % | 2.85 | % | 3.83 | % | ||||||||||
Citi Holdings- Local Consumer Lending | ||||||||||||||||
Total (3)(4) | $ | 124.3 | $ | 5,870 | $ | 7,504 | $ | 11,928 | ||||||||
Ratio | 4.72 | % | 4.69 | % | 5.16 | % | ||||||||||
International | 9.4 | 536 | 1,057 | 1,927 | ||||||||||||
Ratio | 5.72 | % | 6.30 | % | 7.36 | % | ||||||||||
North America (3)(4) | 114.9 | 5,334 | 6,447 | 10,001 | ||||||||||||
Ratio | 4.64 | % | 4.50 | % | 4.88 | % | ||||||||||
Total Citigroup (excluding Special Asset Pool ) (3)(4) | $ | 410.7 | $ | 14,322 | $ | 18,344 | $ | 28,256 | ||||||||
Ratio | 3.49 | % | 4.21 | % | 5.72 | % |
(1) | Average loans include interest and fees on credit cards. | |
(2) | The ratios of net credit losses are calculated based on average loans, net of unearned income. | |
(3) | 2012 includes approximately $635 million of incremental charge-offs related to OCC guidance issued in the third quarter of 2012, which required mortgage loans to borrowers that have gone through Chapter 7 of the U.S. Bankruptcy Code to be written down to collateral value. There was a corresponding approximately $600 million release in the third quarter of 2012 allowance for loan 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. | |
(4) | 2012 includes approximately $370 million of incremental charge-offs related to previously deferred principal balances on modified mortgages in the first quarter of 2012. These charge-offs were related to anticipated forgiveness of principal in connection with the national mortgage settlement. There was a corresponding approximately $350 million reserve release in the first quarter of 2012 related to these charge-offs. See also "Credit Risk-National Mortgage Settlement" below. |
99
CORPORATE LOAN DETAILS
For corporate clients and investment
banking activities across Citigroup, the credit process is grounded in a series
of fundamental policies, in addition to those described under "Managing Global
Risk-Risk Management-Overview" above. These include:
For additional information on Citi's Corporate loan portfolio, including allowance for loan losses, coverage ratios and Corporate non-accrual loans, see "Credit Risk-Loans Outstanding, Details of Credit Loss Experience, Allowance for Loan Losses and Non-Accrual Loans and Assets" above.
Corporate Credit
Portfolio
The following table represents
the Corporate credit portfolio (excluding Private Bank in Securities and Banking )
before consideration of collateral, by maturity at December 31, 2012 and 2011.
The Corporate credit portfolio is broken out by direct outstandings, which
include drawn loans, overdrafts, interbank placements, bankers' acceptances and
leases, and unfunded lending commitments, which include unused commitments to
lend, letters of credit and financial guarantees.
At December 31, 2012 | At December 31, 2011 | |||||||||||||||||||||||
Greater | Greater | |||||||||||||||||||||||
Due | than 1 year | Greater | Due | than 1 year | Greater | |||||||||||||||||||
within | but within | than | Total | within | but within | than | Total | |||||||||||||||||
In billions of dollars | 1 year | 5 years | 5 years | Exposure | 1 year | 5 years | 5 years | exposure | ||||||||||||||||
Direct outstandings | $ | 198 | $ | 70 | $ | 18 | $ | 286 | $ | 177 | $ | 62 | $ | 13 | $ | 252 | ||||||||
Unfunded lending commitments | 123 | 180 | 12 | 315 | 144 | 151 | 21 | 316 | ||||||||||||||||
Total | $ | 321 | $ | 250 | $ | 30 | $ | 601 | $ | 321 | $ | 213 | $ | 34 | $ | 568 |
Portfolio Mix-Geography,
Counterparty and Industry
Citi's Corporate
credit portfolio is diverse across geography and counterparty. The following
table shows the percentage of direct outstandings and unfunded lending
commitments by region:
December 31, | December 31, | |||||
2012 | 2011 | |||||
North America | 45 | % | 47 | % | ||
EMEA | 29 | 27 | ||||
Asia | 18 | 18 | ||||
Latin America | 8 | 8 | ||||
Total | 100 | % | 100 | % |
The maintenance of accurate and consistent risk ratings across the Corporate credit portfolio facilitates the comparison of credit exposure across all lines of business, geographic regions and products. Counterparty risk ratings reflect an estimated probability of default for a counterparty and are derived primarily through the use of validated statistical models, scorecard models and external agency ratings (under defined circumstances), in combination with consideration of factors specific to the obligor or market, such as management experience, competitive position and regulatory environment. Facility risk ratings are assigned that reflect the probability of default of the obligor and factors that affect the loss-given-default of the facility, such as support or collateral. Internal obligor ratings that generally correspond to BBB and above are considered investment grade, while those below are considered non-investment grade.
100
Citigroup also has incorporated climate risk assessment criteria for
certain obligors, as necessary. Factors evaluated include consideration of
climate risk to an obligor's business and physical assets and, when relevant,
consideration of cost-effective options to reduce greenhouse gas
emissions.
The following
table presents the Corporate credit portfolio by facility risk rating at
December 31, 2012 and 2011, as a percentage of the total portfolio:
Direct outstandings and | |||||
unfunded lending commitments | |||||
December 31, | December 31, | ||||
2012 | 2011 | ||||
AAA/AA/A | 56 | % | 55 | % | |
BBB | 29 | 29 | |||
BB/B | 13 | 13 | |||
CCC or below | 2 | 2 | |||
Unrated | - | 1 | |||
Total | 100 | % | 100 | % |
Citi's Corporate credit portfolio is also diversified by industry, with a concentration in the financial sector, broadly defined, and including banks, other financial institutions, insurance companies, investment banks and government and central banks. The following table shows the allocation of direct outstandings and unfunded lending commitments to industries as a percentage of the total Corporate portfolio:
Direct outstandings and | |||||
unfunded lending commitments | |||||
December 31, | December 31, | ||||
2012 | 2011 | ||||
Public sector | 19 | % | 19 | % | |
Transportation and industrial | 18 | 16 | |||
Petroleum, energy, chemical and metal | 17 | 17 | |||
Banks/broker-dealers | 12 | 13 | |||
Consumer retail and health | 12 | 13 | |||
Technology, media and telecom | 8 | 8 | |||
Insurance and special purpose entities | 5 | 5 | |||
Real estate | 4 | 3 | |||
Hedge funds | 3 | 4 | |||
Other industries | 2 | 2 | |||
Total | 100 | % | 100 | % |
Credit Risk
Mitigation
As part of its
overall risk management activities, Citigroup uses credit derivatives and other
risk mitigants to hedge portions of the credit risk in its Corporate credit
portfolio, in addition to outright asset sales. The purpose of these
transactions is to transfer credit risk to third parties. The results of the
mark to market and any realized gains or losses on credit derivatives are
reflected in Principal
transactions on the Consolidated
Statement of Income.
At December 31, 2012 and December 31, 2011, $41.6
billion and $41.5 billion, respectively, of credit risk exposures were
economically hedged. Citigroup's expected loss model used in the calculation of
its loan loss reserve does not include the favorable impact of credit
derivatives and other mitigants that are marked to market. In addition, the
reported amounts of direct outstandings and unfunded lending commitments in the
tables above do not reflect the impact of these hedging transactions. At
December 31, 2012 and December 31, 2011, the credit protection was economically
hedging underlying credit exposure with the following risk rating
distribution:
Rating of Hedged Exposure
December 31, | December 31, | ||||
2012 | 2011 | ||||
AAA/AA/A | 29 | % | 41 | % | |
BBB | 49 | 45 | |||
BB/B | 19 | 13 | |||
CCC or below | 3 | 1 | |||
Total | 100 | % | 100 | % |
At December 31, 2012 and December 31, 2011, the credit protection was economically hedging underlying credit exposures with the following industry distribution:
Industry of Hedged Exposure
December 31, | December 31, | ||||
2012 | 2011 | ||||
Petroleum, energy, chemical and metal | 22 | % | 22 | % | |
Transportation and industrial | 22 | 22 | |||
Public sector | 21 | 12 | |||
Consumer retail and health | 11 | 15 | |||
Technology, media and telecom | 10 | 12 | |||
Banks/broker-dealers | 9 | 10 | |||
Insurance and special purpose entities | 4 | 5 | |||
Other industries | 1 | 2 | |||
Total | 100 | % | 100 | % |
101
MARKET RISK
Market risk encompasses liquidity risk and price risk, both of which arise in the normal course of business of a global financial intermediary such as Citi. 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.
Market Risk
Management
Each business is
required to establish, with approval from Citi's market risk management, a
market risk limit framework for identified risk factors that clearly defines
approved risk profiles and is within the parameters of Citi's overall risk
tolerance. These limits are monitored by independent market risk, Citi's country
and business Asset and Liability Committees and the Global Finance and Asset and
Liability Committee. In all cases, the businesses are ultimately responsible for
the market risks taken and for remaining within their defined limits.
Market Risk Management and Stress
Testing
Market (price) risks
are measured in accordance with established standards to ensure consistency
across businesses and the ability to aggregate risk. The measurement used for
non-trading and trading portfolios, as well as associated stress testing
processes, are described below.
Price Risk-Non-Trading
Portfolios
Net Interest
Revenue and Interest Rate Risk
One of Citi's primary business functions is providing financial products
that meet the needs of its customers. Loans and deposits are tailored to
customer requirements with regard to tenor, index (if applicable) and rate type.
Net interest revenue (NIR), for interest rate exposure purposes, is the
difference between the yield earned on the non-trading portfolio assets
(including customer loans) and the rate paid on the liabilities (including
customer deposits or company borrowings). NIR is affected by changes in the
level of interest rates. For example:
NIR
in any particular period is the result of customer transactions and the related
contractual rates originated in prior periods, as well as new transactions in
the current period; those prior-period transactions will be impacted by changes
in rates on floating-rate assets and liabilities in the current
period.
Due to the
long-term nature of portfolios, NIR will vary from quarter to quarter even
assuming no change in the shape or level of the yield curve as assets and
liabilities reprice. These repricings are a function of implied forward interest
rates, which represent the overall market's estimate of future interest rates
and incorporate possible changes in the federal funds rates, as well as the
shape of the yield curve.
Interest Rate Risk
Measurement
Citi's principal
measure of risk to NIR is interest rate exposure (IRE). IRE measures the change
in expected NIR in each currency resulting solely from unanticipated changes in
forward interest rates. Factors such as changes in volumes, credit spreads,
margins and the impact of prior-period pricing decisions are not captured by
IRE. IRE also assumes that businesses make no additional changes in pricing or
balances in response to the unanticipated rate changes.
For example, if the current 90-day LIBOR
rate is 3% and the one-year-forward rate (i.e., the estimated 90-day LIBOR rate
in one year) is 5%, the +100 bps IRE scenario measures the impact on the
company's NIR of a 100 bps instantaneous change in the 90-day LIBOR to 6% in one
year.
The impact of changing
prepayment rates on loan portfolios is incorporated into the results. For
example, in the declining interest rate scenarios, it is assumed that mortgage
portfolios prepay faster and that income is reduced. In addition, in a rising
interest rate scenario, portions of the deposit portfolio are assumed to
experience rate increases that may be less than the change in market interest
rates.
Mitigation and Hedging of
Risk
In order to manage
changes in interest rates effectively, Citi may modify pricing on new customer
loans and deposits, enter into transactions with other institutions or enter
into off-balance-sheet derivative transactions that have the opposite risk
exposures. Citi regularly assesses the viability of these and other strategies
to reduce its interest rate risks and implements such strategies when it
believes those actions are prudent.
Stress
Testing
Citigroup employs
additional measurements, including stress testing the impact of non-linear
interest rate movements on the value of the balance sheet; the analysis of
portfolio duration and volatility, particularly as they relate to mortgage loans
and mortgage-backed securities; and the potential impact of the change in the
spread between different market indices.
102
Non-Trading
Portfolios-Interest Rate Exposure
The exposures in the following table represent the approximate annualized
risk to NIR assuming an unanticipated parallel instantaneous 100 bps change in
interest rates compared with the market forward interest rates in selected
currencies.
December 31, 2012 | December 31, 2011 | ||||||||||
In millions of dollars | Increase | Decrease | Increase | Decrease | |||||||
U.S. dollar (1) | $ | 842 | NM | $ | 97 | NM | |||||
Mexican peso | $ | 29 | $ | (29 | ) | $ | 87 | $ | (87) | ||
Euro | $ | 12 | NM | $ | 69 | NM | |||||
Japanese yen | $ | 65 | NM | $ | 105 | NM | |||||
Pound sterling | $ | 45 | NM | $ | 35 | NM |
(1) | Certain trading-oriented businesses within Citi have accrual-accounted positions that are excluded from the table. The U.S. dollar IRE associated with these businesses was $(107) million for a 100 bps instantaneous increase in interest rates as of December 31, 2012 and $61 million as of December 31, 2011. |
NM | Not meaningful. A 100 bps decrease in interest rates would imply negative rates for the yield curve. |
The following table shows the approximate annualized risk to NIR from six different changes in the implied-forward rates for the U.S. dollar. Each scenario assumes that the rate change will occur simultaneously.
Scenario 1 | Scenario 2 | Scenario 3 | Scenario 4 | Scenario 5 | Scenario 6 | |||||||
Overnight rate change (bps) | - | 100 | 200 | (200 | ) | (100 | ) | - | ||||
10-year rate change (bps) | (100 | ) | - | 100 | (100 | ) | - | 100 | ||||
Impact to net interest revenue increase (decrease) (in millions of dollars) | (166 | ) | 823 | 1,592 | NM | NM | 163 |
103
Price Risk-Trading
Portfolios
Price risk in
Citi's trading portfolios is monitored using a series of measures, including but
not limited to:
Each trading portfolio across Citi's business segments (Citicorp, Citi Holdings and Corporate/Other ) has its own market risk limit framework encompassing these measures and other controls, including trading mandates, permitted product lists and a new product approval process for complex products. All trading positions are marked to market, with the results reflected in earnings.
The following histogram of total daily trading-related revenue (loss) captures trading volatility and shows the number of days in which revenues for Citi's trading businesses fell within particular ranges. As shown in the histogram, positive trading-related revenue was achieved for 96% of the trading days in 2012.
Histogram of Daily Trading-Related Revenue (1) -Twelve Months Ended December 31, 2012 |
In millions of dollars |
(1) | Daily trading-related revenue includes trading, net interest and other revenue associated with Citi's trading businesses. It excludes DVA and CVA, net of associated hedges. In addition, it excludes fees and other revenue associated with capital markets origination activities. |
Value at
Risk
Value at risk (VAR)
estimates, at a 99% confidence level, the potential decline in the value of a
position or a portfolio under normal market conditions. VAR statistics can be
materially different across firms due to differences in portfolio composition,
differences in VAR methodologies, and differences in model parameters. Citi
believes VAR statistics can be used more effectively as indicators of trends in
risk taking within a firm, rather than as a basis for inferring differences in
risk taking across firms.
Citi uses a single, independently approved Monte
Carlo simulation VAR model (see "VAR Model Review and Validation" below) that
has been designed to capture material risk sensitivities (such as first- and
second-order sensitivities of positions to changes in market prices) of various
asset classes/risk types (such as interest rate, foreign exchange, equity and
commodity risks). Citi's VAR includes all positions that are measured at fair
value; it does not include
investment securities classified as available-for-sale or held-to-maturity. For
information on these securities, see Note 15 to the Consolidated Financial
Statements.
Citi believes its VAR model is
conservatively calibrated to incorporate the greater of short-term (most recent
month) and long-term (three years) market volatility. The Monte Carlo simulation
involves approximately 300,000 market factors, making use of 180,000 time
series, with sensitivities updated daily and model parameters updated weekly.
The conservative features of the VAR calibration contribute approximately 15%
add-on to what would be a VAR estimated under the assumption of stable and
perfectly normally distributed markets.
104
The table below summarizes VAR for Citi-wide trading portfolios at year end and during 2012 and 2011, including yearly averages. Citi's total trading and credit portfolios VAR was $118 million at December 31, 2012 and $183 million at December 31, 2011. Daily total trading and credit portfolios VAR averaged $148 million in 2012 and ranged from $111 million to $199 million. The change in total trading and credit portfolios VAR year-over-year was driven by the fact that the relatively higher volatilities from 2008 and 2009 are no longer included in the three-year volatility time horizon used for VAR, as well as reduced risk in the credit portfolios related to CVA and Corporate Treasury.
Dec. 31, | 2012 | Dec. 31, | 2011 | ||||||||||
In millions of dollars | 2012 | Average | 2011 | Average | |||||||||
Interest rate | $ | 116 | $ | 122 | $ | 147 | $ | 187 | |||||
Foreign exchange | 33 | 38 | 37 | 45 | |||||||||
Equity | 32 | 29 | 36 | 46 | |||||||||
Commodity | 11 | 15 | 16 | 22 | |||||||||
Covariance adjustment (1) | (76 | ) | (82 | ) | (89 | ) | (124 | ) | |||||
Total trading VAR- | |||||||||||||
all market risk factors, | |||||||||||||
including general | |||||||||||||
and specific risk | |||||||||||||
(excluding credit portfolios) (2) | $ | 116 | $ | 122 | $ | 147 | $ | 176 | |||||
Specific risk-only | |||||||||||||
component (3) | $ | 31 | $ | 24 | $ | 21 | $ | 25 | |||||
Total trading VAR-general | |||||||||||||
market factors only | |||||||||||||
(excluding credit portfolios) (2) | $ | 85 | $ | 98 | $ | 126 | $ | 151 | |||||
Incremental impact of | |||||||||||||
credit portfolios (4) | $ | 2 | $ | 26 | $ | 36 | $ | 13 | |||||
Total trading and | |||||||||||||
credit portfolios VAR | $ | 118 | $ | 148 | $ | 183 | $ | 189 |
(1) | Covariance adjustment (also known as diversification benefit) equals the difference between the total VAR and the sum of the VARs tied to each individual risk type. The benefit reflects the fact that the risks within each and across risk types are not perfectly correlated and, consequently, the total VAR on a given day will be lower than the sum of the VARs relating to each individual risk type. The determination of the primary drivers of changes to the covariance adjustment is made by an examination of the impact of both model parameter and position changes. |
(2) | The total trading VAR includes trading positions from S&B , Citi Holdings and Corporate Treasury, but excludes hedges to the loan portfolio, fair value option loans, and DVA/CVA, net of hedges. Available for sale securities and accrual exposures are not included. |
(3) | The specific risk-only component represents the level of equity and fixed income issuer-specific risk embedded in VAR. |
(4) | The credit portfolios are composed of mark-to-market positions associated with non-trading business units including Corporate Treasury, the derivative counterparty CVA, net of hedges. Derivative own-credit CVA and DVA are not included. It also includes hedges to the loan portfolio, fair value option loans, and tail hedges that are not explicitly hedging the trading book. |
The table below provides the range of market factor VARs, inclusive of specific risk that was experienced during 2012 and 2011.
2012 | 2011 | |||||||||||
In millions of dollars | Low | High | Low | High | ||||||||
Interest rate | $ | 101 | $ | 149 | $ | 138 | $ | 238 | ||||
Foreign exchange | 25 | 53 | 28 | 72 | ||||||||
Equity | 17 | 59 | 19 | 85 | ||||||||
Commodity | 9 | 21 | 14 | 36 |
The following table provides the VAR for S&B during 2012, excluding hedges to the loan portfolio, fair value option loans and DVA/CVA, net of hedges.
In millions of dollars | Dec. 31, 2012 | ||
Total-all market risk | |||
factors, including | |||
general and specific risk | $ | 112 | |
Average-during year | $ | 115 | |
High-during year | 145 | ||
Low-during year | 92 |
VAR Model Review and
Validation
Generally, Citi's
VAR review and model validation process entails reviewing the model framework,
major assumptions, and implementation of the mathematical algorithm. In
addition, as part of the model validation process, product specific back-testing
on hypothetical portfolios are periodically completed and reviewed with Citi's
U.S. banking regulators. Furthermore, back-testing is performed against the
actual change in market value of transactions on a quarterly basis at multiple
levels of the organization (trading desk level, ICG business segment and Citigroup), and the results are also shared with the
U.S. banking regulators.
Significant VAR model and assumption changes must be independently
validated within Citi's risk management organization. This validation process
includes a review by Citi's model validation group and further approval from its
model validation review committee, which is composed of senior quantitative risk
management officers. In the event of significant model changes, parallel model
runs are undertaken prior to implementation. In addition, significant model and
assumption changes are subject to periodic reviews and approval by Citi's U.S.
banking regulators.
Citi uses the same independently validated VAR model for both regulatory
capital and external market risk disclosure purposes and, as such, the model
review and oversight process for both purposes is as described above. While the
scope of positions included in the VAR model calculations for regulatory capital
purposes differs from the scope of positions for external market risk
105
disclosure purposes, these differences are due to the fact that certain positions included for external market risk purposes are not eligible for market risk treatment under the U.S. regulatory capital rules, either as currently in effect under Basel I or under the final market risk capital rules under Basel II.5/III (e.g., the interest rate sensitivity of repos and reverse repos and the credit and market sensitivities of the derivatives CVA are included for external market risk disclosure purposes, but are not included for regulatory capital purposes). The applicability of the VAR model for positions eligible for market risk treatment under U.S. regulatory capital rules is periodically reviewed and approved by Citi's U.S. banking regulators.
Back-Testing of Trading
Market Risk
Back-testing is
the process in which the daily VAR of the trading portfolio is compared to the
buy-and-hold profit and loss (e.g., the profit and loss
impact if the portfolio is
held constant at the end of the day and re-priced the following day). Based on
the 99% confidence level of Citi's VAR model, Citi would expect two to three
days in any one year where buy-and-hold losses exceed the VAR of the portfolio.
Given the conservative calibration of its VAR model, Citi would expect fewer
exceptions under normal and stable market conditions. Periods of unstable market
conditions could increase the number of these exceptions. In 2012, no
back-testing exceptions were observed for Citi's total trading
VAR.
The
following graph shows the daily buy-and-hold trading revenue compared to the
value at risk for Citi's total trading VAR during 2012.
Buy-and-Hold Profit and Loss of Trading Businesses Compared to Prior-Day Citigroup Total Trading VAR (1)(2) |
In millions of dollars |
(1) | Citi changed its methodology for back-testing in the fourth quarter of 2012 from using actual profit and loss to buy-and-hold profit and loss, which Citi believes is more accurate for purposes of back-testing the VAR model. The above histogram uses the buy-and-hold profit and loss for all of 2012. |
(2) | Buy-and-hold profit and loss represents the daily mark-to-market revenue movement attributable to trading positions from the close of the previous business day. Buy-and-hold profit and loss excludes realized trading revenue, net interest, fees and commissions, intra-day trading profit and loss on new and terminated trades and changes in reserves and is not comparable to the trading-related revenue presented in the histogram of Daily Trading-Related Revenue set forth above. |
Stress
Testing
Stress testing is
performed on trading portfolios on a regular basis to estimate the impact of
extreme market movements. It is performed on both individual trading portfolios
and on aggregations of portfolios and businesses. Independent market risk management, in conjunction
with the businesses, develops both systemic and specific stress scenarios,
reviews the output of periodic stress-testing exercises, and uses the
information to make judgments on the ongoing appropriateness of exposure levels
and limits.
Factor
Sensitivities
Factor
sensitivities are expressed as the change in the value of a position for a
defined change in a market risk factor, such as a change in the value of a
Treasury bill for a one-basis-point change in interest rates. Citi's independent
market risk management ensures that factor sensitivities are calculated,
monitored, and in most cases, limited, for all relevant risks taken in a trading
portfolio.
106
INTEREST REVENUE/EXPENSE AND YIELDS |
Average Rates-Interest Revenue, Interest Expense and Net Interest Margin |
Change | Change | |||||||||||||
In millions of dollars, except as otherwise noted | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||
Interest revenue (1) | $ | 68,680 | $ | 73,201 | $ | 79,801 | (6 | )% | (8 | )% | ||||
Interest expense (2) | 20,484 | 24,229 | 25,096 | (15 | ) | (3 | ) | |||||||
Net interest revenue (3) | $ | 48,196 | $ | 48,972 | $ | 54,705 | (2 | )% | (10 | )% | ||||
Interest revenue-average rate | 4.10 | % | 4.27 | % | 4.55 | % | (17 | ) bps | (28 | ) bps | ||||
Interest expense-average rate | 1.46 | 1.63 | 1.61 | (17 | ) bps | 2 | bps | |||||||
Net interest margin | 2.88 | 2.86 | 3.12 | 2 | bps | (26 | ) bps | |||||||
Interest-rate benchmarks | ||||||||||||||
Two-year U.S. Treasury note-average rate | 0.28 | % | 0.45 | % | 0.70 | % | (17 | ) bps | (25 | ) bps | ||||
10-year U.S. Treasury note-average rate | 1.80 | 2.78 | 3.21 | (98 | ) bps | (43 | ) bps | |||||||
10-year vs. two-year spread | 152 | bps | 233 | bps | 251 | bps |
(1) | Interest revenue includes the taxable equivalent adjustments (based on the U.S. federal statutory tax rate of 35%) of $542 million, $520 million, and $519 million for 2012, 2011 and 2010, respectively. |
(2) | Interest expense includes the taxable equivalent adjustments (based on the U.S. federal statutory tax rate of 35%) of $51 million, $5 million and $0 million for 2012, 2011 and 2010, respectively. |
(3) | Excludes expenses associated with certain hybrid financial instruments. These obligations are classified as Long-term debt and accounted for at fair value with changes recorded in Principal transactions . |
A
significant portion of Citi's business activities are based upon gathering
deposits and borrowing money and then lending or investing those funds, or
participating in market-making activities in tradable securities. Citi's net
interest margin (NIM) is calculated by dividing gross interest revenue less
gross interest expense by average interest earning assets.
During 2012, Citi's NIM remained
relatively stable as compared to the prior year at 288 basis points. Citi
continued to experience pressure on its loan and investment portfolio yields
reflecting the low rate environment. In aggregate, this pressure negatively
impacted NIM by approximately 17 basis points in 2012 versus the prior year.
Ongoing pressure from the low rate environment was offset by the pay-downs of
higher-cost long-term debt and redemptions of trust preferred securities during
the year, which positively impacted NIM by approximately 10 basis points in
2012. In addition, as
discussed under "Capital
Resources and Liquidity-Funding and Liquidity" above, during 2012, Citi reduced
its deposit funding costs, partially through increasing the share of
non-interest bearing deposits, which contributed approximately 10 basis points
of NIM benefit in 2012. Decreased deposit costs and lower outstanding long-term
debt, as well as an increase in Citi's trading book portfolio yields,
contributed to the increase in NIM quarter-over-quarter.
Absent any significant changes or events,
Citi expects its NIM will likely continue to reflect the pressure of a low
interest rate environment and subsequent changes in its portfolios, including
its trading book portfolio, although continued improvement in Citi's cost of
funds and lower levels of outstanding long-term debt will both continue to
positively impact NIM. As such, Citi currently believes that its 2013 NIM should
be relatively stable to its full-year 2012 level, with some quarterly
fluctuations.
107
AVERAGE BALANCES AND INTEREST RATES-ASSETS (1)(2)(3)(4)
Taxable Equivalent Basis
Average volume | Interest revenue | % Average rate | |||||||||||||||||||||||
In millions of dollars, except rates | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | ||||||||||||||||
Assets | |||||||||||||||||||||||||
Deposits with banks (5) | $ | 157,997 | $ | 169,688 | $ | 166,120 | $ | 1,269 | $ | 1,750 | $ | 1,252 | 0.80 | % | 1.03 | % | 0.75 | % | |||||||
Federal funds sold and securities borrowed or | |||||||||||||||||||||||||
purchased under agreements to resell (6) | |||||||||||||||||||||||||
In U.S. offices | $ | 156,837 | $ | 158,154 | $ | 162,799 | $ | 1,471 | $ | 1,487 | $ | 1,774 | 0.94 | % | 0.94 | % | 1.09 | % | |||||||
In offices outside the U.S. (5) | 120,400 | 116,681 | 86,926 | 1,947 | 2,144 | 1,382 | 1.62 | 1.84 | 1.59 | ||||||||||||||||
Total | $ | 277,237 | $ | 274,835 | $ | 249,725 | $ | 3,418 | $ | 3,631 | $ | 3,156 | 1.23 | % | 1.32 | % | 1.26 | % | |||||||
Trading account assets (7)(8) | |||||||||||||||||||||||||
In U.S. offices | $ | 124,633 | $ | 122,234 | $ | 128,443 | $ | 3,899 | $ | 4,270 | $ | 4,352 | 3.13 | % | 3.49 | % | 3.39 | % | |||||||
In offices outside the U.S. (5) | 126,203 | 147,417 | 151,717 | 3,077 | 4,033 | 3,819 | 2.44 | 2.74 | 2.52 | ||||||||||||||||
Total | $ | 250,836 | $ | 269,651 | $ | 280,160 | $ | 6,976 | $ | 8,303 | $ | 8,171 | 2.78 | % | 3.08 | % | 2.92 | % | |||||||
Investments | |||||||||||||||||||||||||
In U.S. offices | |||||||||||||||||||||||||
Taxable | $ | 169,307 | $ | 170,196 | $ | 169,218 | $ | 2,880 | $ | 3,313 | $ | 4,806 | 1.70 | % | 1.95 | % | 2.84 | % | |||||||
Exempt from U.S. income tax | 16,405 | 13,592 | 14,876 | 816 | 922 | 918 | 4.97 | 6.78 | 6.17 | ||||||||||||||||
In offices outside the U.S. (5) | 114,549 | 122,298 | 136,713 | 4,156 | 4,478 | 5,678 | 3.63 | 3.66 | 4.15 | ||||||||||||||||
Total | $ | 300,261 | $ | 306,086 | $ | 320,807 | $ | 7,852 | $ | 8,713 | $ | 11,402 | 2.62 | % | 2.85 | % | 3.55 | % | |||||||
Loans (net of unearned income) (9) | |||||||||||||||||||||||||
In U.S. offices | $ | 359,794 | $ | 369,656 | $ | 430,685 | $ | 27,077 | $ | 29,111 | $ | 34,773 | 7.53 | % | 7.88 | % | 8.07 | % | |||||||
In offices outside the U.S. (5) | 289,371 | 274,035 | 255,168 | 21,508 | 21,180 | 20,312 | 7.43 | 7.73 | 7.96 | ||||||||||||||||
Total | $ | 649,165 | $ | 643,691 | $ | 685,853 | $ | 48,585 | $ | 50,291 | $ | 55,085 | 7.48 | % | 7.81 | % | 8.03 | % | |||||||
Other interest-earning assets | $ | 40,766 | $ | 49,467 | $ | 50,936 | $ | 580 | $ | 513 | $ | 735 | 1.42 | % | 1.04 | % | 1.44 | % | |||||||
Total interest-earning assets | $ | 1,676,262 | $ | 1,713,418 | $ | 1,753,601 | $ | 68,680 | $ | 73,201 | $ | 79,801 | 4.10 | % | 4.27 | % | 4.55 | % | |||||||
Non-interest-earning assets (7) | $ | 234,437 | $ | 238,550 | $ | 225,271 | |||||||||||||||||||
Total assets from discontinued operations | - | 668 | 18,989 | ||||||||||||||||||||||
Total assets | $ | 1,910,699 | $ | 1,952,636 | $ | 1,997,861 |
(1) | Interest revenue includes the taxable equivalent adjustments (based on the U.S. federal statutory tax rate of 35%) of $542 million, $520 million, and $519 million for 2012, 2011 and 2010, respectively. |
(2) | Interest rates and amounts include the effects of risk management activities associated with the respective asset and liability categories. |
(3) | Monthly or quarterly averages have been used by certain subsidiaries where daily averages are unavailable. |
(4) | Detailed average volume, Interest revenue and Interest expense exclude Discontinued operations . See Note 3 to the Consolidated Financial Statements. |
(5) | Average rates reflect prevailing local interest rates, including inflationary effects and monetary corrections in certain countries. |
(6) | Average volumes of securities borrowed or purchased under agreements to resell are reported net pursuant to FIN 41 (ASC 210-20-45). However, Interest revenue excludes the impact of FIN 41 (ASC 210-20-45). |
(7) | The fair value carrying amounts of derivative contracts are reported in Non-interest-earning assets and Other non-interest-bearing liabilities . |
(8) | Interest expense on Trading account liabilities of ICG is reported as a reduction of Interest revenue . Interest revenue and Interest expense on cash collateral positions are reported in interest on Trading account assets and Trading account liabilities , respectively. |
(9) | Includes cash-basis loans. |
108
AVERAGE BALANCES AND INTEREST
RATES-LIABILITIES AND EQUITY,
AND NET INTEREST REVENUE (1)(2)(3)(4)
Taxable Equivalent Basis
Average volume | Interest expense | % Average rate | |||||||||||||||||||||||
In millions of dollars, except rates | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | ||||||||||||||||
Liabilities | |||||||||||||||||||||||||
Deposits | |||||||||||||||||||||||||
In U.S. offices (5) | $ | 233,100 | 222,796 | 235,549 | $ | 1,954 | $ | 2,171 | $ | 2,284 | 0.84 | % | 0.97 | 0.97 | |||||||||||
In offices outside the U.S. (6) | 488,166 | 485,101 | 483,796 | 5,659 | 6,385 | 6,087 | 1.16 | 1.32 | 1.26 | ||||||||||||||||
Total | $ | 721,266 | $ | 707,897 | $ | 719,345 | $ | 7,613 | $ | 8,556 | $ | 8,371 | 1.06 | % | 1.21 | % | 1.16 | % | |||||||
Federal funds purchased and securities loaned | |||||||||||||||||||||||||
or sold under agreements to repurchase (7) | |||||||||||||||||||||||||
In U.S. offices | $ | 121,843 | $ | 120,039 | $ | 123,425 | $ | 852 | $ | 776 | $ | 797 | 0.70 | % | 0.65 | % | 0.65 | % | |||||||
In offices outside the U.S. (6) | 101,928 | 99,848 | 88,892 | 1,965 | 2,421 | 2,011 | 1.93 | 2.42 | 2.26 | ||||||||||||||||
Total | $ | 223,771 | $ | 219,887 | $ | 212,317 | $ | 2,817 | $ | 3,197 | $ | 2,808 | 1.26 | % | 1.45 | % | 1.32 | % | |||||||
Trading account liabilities (8)(9) | |||||||||||||||||||||||||
In U.S. offices | $ | 29,486 | $ | 37,279 | $ | 36,115 | $ | 116 | $ | 266 | $ | 283 | 0.39 | % | 0.71 | % | 0.78 | % | |||||||
In offices outside the U.S. (6) | 44,639 | 49,162 | 43,501 | 74 | 142 | 96 | 0.17 | 0.29 | 0.22 | ||||||||||||||||
Total | $ | 74,125 | $ | 86,441 | $ | 79,616 | $ | 190 | $ | 408 | $ | 379 | 0.26 | % | 0.47 | % | 0.48 | % | |||||||
Short-term borrowings | |||||||||||||||||||||||||
In U.S. offices | $ | 78,747 | $ | 87,472 | $ | 119,262 | $ | 203 | $ | 139 | $ | 674 | 0.26 | % | 0.16 | % | 0.57 | % | |||||||
In offices outside the U.S. (6) | 31,897 | 39,052 | 35,533 | 524 | 511 | 243 | 1.64 | 1.31 | 0.68 | ||||||||||||||||
Total | $ | 110,644 | $ | 126,524 | $ | 154,795 | $ | 727 | $ | 650 | $ | 917 | 0.66 | % | 0.51 | % | 0.59 | % | |||||||
Long-term debt (10) | |||||||||||||||||||||||||
In U.S. offices | $ | 255,093 | $ | 325,709 | $ | 370,819 | $ | 8,845 | $ | 10,697 | $ | 11,757 | 3.47 | % | 3.28 | % | 3.17 | % | |||||||
In offices outside the U.S. (6) | 14,603 | 17,970 | 22,176 | 292 | 721 | 864 | 2.00 | 4.01 | 3.90 | ||||||||||||||||
Total | $ | 269,696 | $ | 343,679 | $ | 392,995 | $ | 9,137 | $ | 11,418 | $ | 12,621 | 3.39 | % | 3.32 | % | 3.21 | % | |||||||
Total interest-bearing liabilities | $ | 1,399,502 | $ | 1,484,428 | $ | 1,559,068 | $ | 20,484 | $ | 24,229 | $ | 25,096 | 1.46 | % | 1.63 | % | 1.61 | % | |||||||
Demand deposits in U.S. offices | $ | 13,170 | $ | 16,410 | $ | 16,117 | |||||||||||||||||||
Other non-interest-bearing liabilities (8) | 311,529 | 275,408 | 245,481 | ||||||||||||||||||||||
Total liabilities from discontinued operations | - | 10 | 18,410 | ||||||||||||||||||||||
Total liabilities | $ | 1,724,201 | $ | 1,776,256 | $ | 1,839,076 | |||||||||||||||||||
Citigroup stockholders' equity (11) | $ | 184,592 | $ | 174,351 | $ | 156,478 | |||||||||||||||||||
Noncontrolling interest | 1,906 | 2,029 | 2,307 | ||||||||||||||||||||||
Total equity (11) | $ | 186,498 | $ | 176,380 | $ | 158,785 | |||||||||||||||||||
Total liabilities and stockholders' equity | $ | 1,910,699 | $ | 1,952,636 | $ | 1,997,861 | |||||||||||||||||||
Net interest revenue as a percentage of average | |||||||||||||||||||||||||
interest-earning assets (12) | |||||||||||||||||||||||||
In U.S. offices | $ | 941,367 | $ | 971,792 | $ | 1,044,486 | $ | 24,800 | $ | 25,723 | $ | 30,928 | 2.63 | % | 2.65 | % | 2.96 | % | |||||||
In offices outside the U.S. (6) | 734,895 | 741,626 | 709,115 | 23,396 | 23,249 | 23,777 | 3.18 | 3.13 | 3.35 | ||||||||||||||||
Total | $ | 1,676,262 | $ | 1,713,418 | $ | 1,753,601 | $ | 48,196 | $ | 48,972 | $ | 54,705 | 2.88 | % | 2.86 | % | 3.12 | % |
(1) | Interest expense includes the taxable equivalent adjustments (based on the U.S. federal statutory tax rate of 35%) of $51 million, $5 million and $0 million for 2012, 2011 and 2010, respectively. |
(2) | Interest rates and amounts include the effects of risk management activities associated with the respective asset and liability categories. |
(3) | Monthly or quarterly averages have been used by certain subsidiaries where daily averages are unavailable. |
(4) | Detailed average volume, Interest revenue and Interest expense exclude Discontinued operations . See Note 3 to the Consolidated Financial Statements. |
(5) | Consists of other time deposits and savings deposits. Savings deposits are made up of insured money market accounts, NOW accounts, and other savings deposits. The interest expense on savings deposits includes FDIC deposit insurance fees and charges. |
(6) | Average rates reflect prevailing local interest rates, including inflationary effects and monetary corrections in certain countries. |
(7) | 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). |
(8) | The fair value carrying amounts of derivative contracts are reported in Non-interest-earning assets and Other non-interest-bearing liabilities . |
(9) | Interest expense on Trading account liabilities of ICG is reported as a reduction of Interest revenue . Interest revenue and Interest expense on cash collateral positions are reported in interest on Trading account assets and Trading account liabilities , respectively. |
(10) | Excludes hybrid financial instruments and beneficial interests in consolidated VIEs that are classified as Long-term debt , as these obligations are accounted for in changes in fair value recorded in Principal transactions . |
(11) | Includes stockholders' equity from discontinued operations. |
(12) | Includes allocations for capital and funding costs based on the location of the asset. |
109
ANALYSIS OF CHANGES IN INTEREST REVENUE (1)(2)(3)
2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||||||
Increase (decrease) | Increase (decrease) | ||||||||||||||||||
due to change in: | due to change in: | ||||||||||||||||||
Average | Average | Net | Average | Average | Net | ||||||||||||||
In millions of dollars | volume | rate | change | volume | rate | change | |||||||||||||
Deposits with banks (4) | $ | (114 | ) | $ | (367 | ) | $ | (481 | ) | $ | 27 | $ | 471 | $ | 498 | ||||
Federal funds sold and securities borrowed or | |||||||||||||||||||
purchased under agreements to resell | |||||||||||||||||||
In U.S. offices | $ | (12 | ) | $ | (4 | ) | $ | (16 | ) | $ | (49 | ) | $ | (238 | ) | $ | (287 | ) | |
In offices outside the U.S. (4) | 67 | (264 | ) | (197 | ) | 524 | 238 | 762 | |||||||||||
Total | $ | 55 | $ | (268 | ) | $ | (213 | ) | $ | 475 | $ | - | $ | 475 | |||||
Trading account assets (5) | |||||||||||||||||||
In U.S. offices | $ | 82 | $ | (453 | ) | $ | (371 | ) | $ | (214 | ) | $ | 132 | $ | (82 | ) | |||
In offices outside the U.S. (4) | (544 | ) | (412 | ) | (956 | ) | (111 | ) | 325 | 214 | |||||||||
Total | $ | (462 | ) | $ | (865 | ) | $ | (1,327 | ) | $ | (325 | ) | $ | 457 | $ | 132 | |||
Investments (1) | |||||||||||||||||||
In U.S. offices | $ | 44 | $ | (583 | ) | $ | (539 | ) | $ | (9 | ) | $ | (1,480 | ) | $ | (1,489 | ) | ||
In offices outside the U.S. (4) | (281 | ) | (41 | ) | (322 | ) | (565 | ) | (635 | ) | (1,200 | ) | |||||||
Total | $ | (237 | ) | $ | (624 | ) | $ | (861 | ) | $ | (574 | ) | $ | (2,115 | ) | $ | (2,689 | ) | |
Loans (net of unearned income) (6) | |||||||||||||||||||
In U.S. offices | $ | (764 | ) | $ | (1,270 | ) | $ | (2,034 | ) | $ | (4,824 | ) | $ | (838 | ) | $ | (5,662 | ) | |
In offices outside the U.S. (4) | 1,158 | (830 | ) | 328 | 1,471 | (603 | ) | 868 | |||||||||||
Total | $ | 394 | $ | (2,100 | ) | $ | (1,706 | ) | $ | (3,353 | ) | $ | (1,441 | ) | $ | (4,794 | ) | ||
Other interest-earning assets | $ | (101 | ) | $ | 168 | $ | 67 | $ | (21 | ) | $ | (201 | ) | $ | (222 | ) | |||
Total interest revenue | $ | (465 | ) | $ | (4,056 | ) | $ | (4,521 | ) | $ | (3,771 | ) | $ | (2,829 | ) | $ | (6,600 | ) |
(1) | The taxable equivalent adjustment is based on the U.S. federal statutory tax rate of 35% and is included in this presentation. | |
(2) | Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total net change. | |
(3) | Detailed average volume, Interest revenue and Interest expense exclude Discontinued operations . See Note 3 to the Consolidated Financial Statements. | |
(4) | Changes in average rates reflect changes in prevailing local interest rates, including inflationary effects and monetary corrections in certain countries. | |
(5) | Interest expense on Trading account liabilities of ICG is reported as a reduction of Interest revenue . Interest revenue and Interest expense on cash collateral positions are reported in interest on Trading account assets and Trading account liabilities, respectively. | |
(6) | Includes cash-basis loans. |
110
ANALYSIS OF CHANGES IN INTEREST EXPENSE AND NET INTEREST REVENUE (1)(2)(3)
2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||||||
Increase (decrease) | Increase (decrease) | ||||||||||||||||||
due to change in: | due to change in: | ||||||||||||||||||
Average | Average | Net | Average | Average | Net | ||||||||||||||
In millions of dollars | volume | rate | change | volume | rate | change | |||||||||||||
Deposits | |||||||||||||||||||
In U.S. offices | $ | 97 | $ | (314 | ) | $ | (217 | ) | $ | (124 | ) | $ | 11 | $ | (113 | ) | |||
In offices outside the U.S. (4) | 40 | (766 | ) | (726 | ) | 16 | 282 | 298 | |||||||||||
Total | $ | 137 | $ | (1,080 | ) | $ | (943 | ) | $ | (108 | ) | $ | 293 | $ | 185 | ||||
Federal funds purchased and securities loaned | |||||||||||||||||||
or sold under agreements to repurchase | |||||||||||||||||||
In U.S. offices | $ | 12 | $ | 64 | $ | 76 | $ | (22 | ) | $ | 1 | $ | (21 | ) | |||||
In offices outside the U.S. (4) | 49 | (505 | ) | (456 | ) | 259 | 151 | 410 | |||||||||||
Total | $ | 61 | $ | (441 | ) | $ | (380 | ) | $ | 237 | $ | 152 | $ | 389 | |||||
Trading account liabilities (5) | |||||||||||||||||||
In U.S. offices | $ | (48 | ) | $ | (102 | ) | $ | (150 | ) | $ | 9 | $ | (26 | ) | $ | (17 | ) | ||
In offices outside the U.S. (4) | (12 | ) | (56 | ) | (68 | ) | 14 | 32 | 46 | ||||||||||
Total | $ | (60 | ) | $ | (158 | ) | $ | (218 | ) | $ | 23 | $ | 6 | $ | 29 | ||||
Short-term borrowings | |||||||||||||||||||
In U.S. offices | $ | (15 | ) | $ | 79 | $ | 64 | $ | (145 | ) | $ | (390 | ) | $ | (535 | ) | |||
In offices outside the U.S. (4) | (104 | ) | 117 | 13 | 26 | 242 | 268 | ||||||||||||
Total | $ | (119 | ) | $ | 196 | $ | 77 | $ | (119 | ) | $ | (148 | ) | $ | (267 | ) | |||
Long-term debt | |||||||||||||||||||
In U.S. offices | $ | (2,422 | ) | $ | 570 | $ | (1,852 | ) | $ | (1,470 | ) | $ | 410 | $ | (1,060 | ) | |||
In offices outside the U.S. (4) | (117 | ) | (312 | ) | (429 | ) | (168 | ) | 25 | (143 | ) | ||||||||
Total | $ | (2,539 | ) | $ | 258 | $ | (2,281 | ) | $ | (1,638 | ) | $ | 435 | $ | (1,203 | ) | |||
Total interest expense | $ | (2,520 | ) | $ | (1,225 | ) | $ | (3,745 | ) | $ | (1,605 | ) | $ | 738 | $ | (867 | ) | ||
Net interest revenue | $ | 2,055 | $ | (2,831 | ) | $ | (776 | ) | $ | (2,166 | ) | $ | (3,567 | ) | $ | (5,733 | ) |
(1) | The taxable equivalent adjustment is based on the U.S. federal statutory tax rate of 35% and is included in this presentation. | |
(2) | Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total net change. | |
(3) | Detailed average volume, Interest revenue and Interest expense exclude Discontinued operations . See Note 3 to the Consolidated Financial Statements. | |
(4) | Changes in average rates reflect changes in prevailing local interest rates, including inflationary effects and monetary corrections in certain countries. | |
(5) | Interest expense on Trading account liabilities of ICG is reported as a reduction of Interest revenue . Interest revenue and Interest expense on cash collateral positions are reported in interest on Trading account assets and Trading account liabilities , respectively. |
111
OPERATIONAL RISK
Operational risk is the risk of loss resulting from inadequate or failed internal processes, systems or human factors, or from external events. It includes the reputation and franchise risk associated with business practices or market conduct in which Citi is involved. Operational risk is inherent in Citigroup's global business activities, as well as its internal processes that support those business activities, and can result in losses arising from events related to the following, among others:
fraud, theft and unauthorized activities; employment practices and workplace environment; clients, products and business practices; physical assets and infrastructure; and execution, delivery and process management. Operational Risk
Management
Citi's operational risk is
managed through an overall framework designed to balance strong corporate
oversight with well-defined independent risk management. This framework
includes:
The goal is
to keep operational risk at appropriate levels relative to the characteristics
of Citigroup's businesses, the markets in which it operates, its capital and
liquidity, and the competitive, economic and regulatory environment.
To
monitor, mitigate and control operational risk, Citigroup maintains a system of
policies and has established a consistent framework for assessing and
communicating operational risks and the overall effectiveness of the internal
control environment across Citigroup. As part of this framework, Citi has
established a "Manager's Control Assessment" program to help managers
self-assess key operational risks and controls and identify and address
weaknesses in the design and/or effectiveness of internal controls that mitigate
significant operational risks.
As
noted above, each major business segment must implement an operational risk
process consistent with the requirements of this framework. The process for
operational risk management includes the following steps:
As new products and business
activities are developed, processes are designed, modified or sourced through
alternative means and operational risks are considered.
An
Operational Risk Council provides oversight for operational risk across
Citigroup. The Council's membership includes senior members of Citi's Franchise
Risk and Strategy group and the Chief Risk Officer's organization covering
multiple dimensions of risk management, with representatives of the Business and
Regional Chief Risk Officers' organizations. The Council's focus is on
identification and mitigation of operational risk and related incidents. The
Council works with the business segments and the control functions (e.g.,
Compliance, Finance, Human Resources and Legal) with the objective of ensuring a
transparent, consistent and comprehensive framework for managing operational
risk globally.
In addition, Enterprise Risk Management, within Citi's
independent risk management, proactively assists the businesses, operations and
technology and the other independent control groups in enhancing the
effectiveness of controls and managing operational risks across products,
business lines and regions.
Operational Risk Measurement and
Stress Testing
As noted above, information
about the businesses' operational risk, historical operational risk losses and
the control environment is reported by each major business segment and
functional area and is summarized and reported to senior management, as well as
to the Audit Committee of Citi's Board of Directors.
Operational risk is measured and assessed through risk capital (see "Managing Global Risk-Risk Capital" above).
The approach to capital modeling is designed to be generally consistent with
Basel II advanced measurement approaches standards (see "Capital Resources and
Liquidity-Capital Resources-Regulatory Capital Standards" above). Projected
operational risk losses under stress scenarios are also required as part of the
Federal Reserve Board's CCAR process.
112
COUNTRY AND CROSS-BORDER
RISK
COUNTRY RISK
Overview
Country risk is the risk that an event in a country
(precipitated by developments within or external to a country) could directly or
indirectly impair the value of Citi's franchise or adversely affect the ability
of obligors within that country to honor their obligations to Citi, any of which
could negatively impact Citi's results of operations or financial condition.
Country risk events could include sovereign volatility or defaults, banking
failures or defaults, redenomination events (which could be accompanied by a
revaluation (either devaluation or appreciation) of the affected currency),
currency crises, foreign exchange and/or capital controls and/or political
events and instability. Country risk events could result in mandatory loan loss
and other reserve requirements imposed by U.S. regulators due to a particular
country's economic situation. See also "Risk Factors-Market and Economic Risks"
above.
Citi has
instituted a risk management process to monitor, evaluate and manage the
principal risks it assumes in conducting its activities, which include the
credit, market and operations risks associated with Citi's country risk
exposures. The risk management organization is structured to facilitate the
management of risk across three dimensions: businesses, regions and critical
products. The Chief Risk Officer monitors and controls major risk exposures and
concentrations across the organization, and subjects those risks to alternative
stress scenarios in order to assess the potential economic impact they may have
on Citi. Citi's independent risk management, working with input from the
businesses and finance, provides periodic updates to senior management on
significant potential areas of concern across Citi that can arise from risk
concentrations, financial market participants and other systemic issues
including, for example, Eurozone debt issues and other developments in the
European Monetary Union (EMU). These areas of focus are intended to be
forward-looking assessments of the potential economic impacts to Citi that may
arise from these exposures. For a discussion of Citi's risk management policies
and practices generally, see "Managing Global Risk-Risk Management-Overview"
above.
While Citi continues to work to mitigate its exposures to
potential country risk events, the impact of any such event is highly uncertain
and will 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.
Several European countries, including Greece, Ireland, Italy, Portugal, Spain (GIIPS) and France, have been the subject of credit deterioration due to weaknesses in their economic and fiscal situations. Moreover, the ongoing Eurozone debt and economic crisis and other developments in the EMU could lead to the withdrawal of one or more countries from the EMU or a partial or complete break-up of the EMU. Given investor interest in this area, the narrative and tables below set forth certain information regarding Citi's country risk exposures on these topics as of December 31, 2012.
Credit Risk
Generally, credit risk measures Citi's net exposure to a
credit or market risk event. Citi's credit risk reporting is based on Citi's
internal risk management measures and systems. The country designation in Citi's
internal risk management systems is based on the country to which the client
relationship, taken as a whole, is most directly exposed to economic, financial,
sociopolitical or legal risks. As a result, Citi's reported credit risk
exposures in a particular country may include exposures to subsidiaries within
the client relationship that are actually domiciled outside of the country
(e.g., Citi's Greece credit risk exposures may include loans, derivatives and
other exposures to a U.K. subsidiary of a Greece-based corporation).
Citi
believes that the risk of loss associated with the exposures set forth below,
which are based on Citi's internal risk management measures and systems, is
likely materially lower than the exposure amounts disclosed below and is sized
appropriately relative to its franchise in these countries. In addition, the
sovereign entities of the countries disclosed below, as well as the financial
institutions and corporations domiciled in these countries, are important
clients in the global Citi franchise. Citi fully expects to maintain its
presence in these markets to service all of its global customers. As such,
Citi's credit risk exposure in these countries may vary over time based on its
franchise, client needs and transaction structures.
113
Sovereign, Financial Institution and Corporate Exposures
In billions of U.S. dollars as of December 31, 2012 | GIIPS | (1) | Greece | Ireland | Italy | Portugal | Spain | France | ||||||||||||||
Funded loans, before reserves (2) | $ | 8.0 | $ | 1.1 | $ | 0.3 | $ | 1.8 | $ | 0.3 | $ | 4.5 | $ | 5.4 | ||||||||
Derivative counterparty mark-to-market, inclusive of CVA (3) | 13.6 | 0.6 | 0.5 | 9.6 | 0.2 | 2.6 | 6.0 | |||||||||||||||
Gross funded credit exposure | $ | 21.6 | $ | 1.7 | $ | 0.8 | $ | 11.4 | $ | 0.5 | $ | 7.1 | $ | 11.5 | ||||||||
Less: margin and collateral (4) | $ | (5.5 | ) | $ | (0.3 | ) | $ | (0.3 | ) | $ | (1.2 | ) | $ | (0.1 | ) | $ | (3.5 | ) | $ | (5.0 | ) | |
Less: purchased credit protection (5) | (10.1 | ) | (0.3 | ) | (0.0 | ) | (7.6 | ) | (0.2 | ) | (2.0 | ) | (2.6 | ) | ||||||||
Net current funded credit exposure | $ | 6.0 | $ | 1.2 | $ | 0.5 | $ | 2.6 | $ | 0.2 | $ | 1.5 | $ | 3.9 | ||||||||
Net trading exposure | $ | 2.6 | $ | 0.0 | $ | (0.0 | ) | $ | 1.4 | $ | 0.1 | $ | 1.1 | $ | (0.2 | ) | ||||||
AFS exposure | 0.3 | 0.0 | 0.0 | 0.2 | 0.0 | 0.0 | 0.3 | |||||||||||||||
Net trading and AFS exposure | $ | 2.9 | $ | 0.0 | $ | (0.0 | ) | $ | 1.6 | $ | 0.1 | $ | 1.2 | $ | 0.1 | |||||||
Net current funded exposure | $ | 8.9 | $ | 1.2 | $ | 0.5 | $ | 4.2 | $ | 0.3 | $ | 2.7 | $ | 4.0 | ||||||||
Additional collateral received, not reducing amounts above | $ | (2.1 | ) | $ | (0.9 | ) | $ | (0.2 | ) | $ | (0.6 | ) | $ | (0.0 | ) | $ | (0.4 | ) | $ | (4.0 | ) | |
Net current funded credit exposure detail | ||||||||||||||||||||||
Sovereigns | $ | 1.1 | $ | 0.2 | $ | 0.0 | $ | 1.1 | $ | 0.0 | $ | (0.3 | ) | $ | 0.0 | |||||||
Financial institutions | 0.8 | 0.0 | 0.0 | 0.2 | 0.0 | 0.6 | 1.9 | |||||||||||||||
Corporations | 4.1 | 1.0 | 0.5 | 1.3 | 0.1 | 1.2 | 2.0 | |||||||||||||||
Net current funded credit exposure | $ | 6.0 | $ | 1.2 | $ | 0.5 | $ | 2.6 | $ | 0.2 | $ | 1.5 | $ | 3.9 | ||||||||
Net unfunded commitments (6) | ||||||||||||||||||||||
Sovereigns | $ | 0.0 | $ | 0.0 | $ | 0.0 | $ | 0.0 | $ | 0.0 | $ | 0.0 | $ | 0.1 | ||||||||
Financial institutions | 0.4 | 0.0 | 0.0 | 0.1 | 0.0 | 0.3 | 3.2 | |||||||||||||||
Corporations, net | 6.9 | 0.8 | 0.5 | 3.0 | 0.2 | 2.3 | 11.2 | |||||||||||||||
Total net unfunded commitments | $ | 7.3 | $ | 0.8 | $ | 0.5 | $ | 3.1 | $ | 0.2 | $ | 2.6 | $ | 14.4 |
Note: | Totals may not sum due to rounding. The exposures in the table above do not include retail, small business and Citi Private Bank exposures in the GIIPS. See "GIIPS-Retail, Small Business and Citi Private Bank" below. Retail, small business and Citi Private Bank exposure in France was not material as of December 31, 2012. Citi has exposures to obligors located within the GIIPS and France that are not included in the table above because Citi's internal risk management systems determine that the client relationship, taken as a whole, is not in GIIPS or France (e.g., a funded loan to a Greece subsidiary of a Switzerland-based corporation). However, the total amount of such exposures was less than $1.3 billion of funded loans and $1.8 billion of unfunded commitments across the GIIPS and in France as of December 31, 2012. |
(1) | Greece, Ireland, Italy, Portugal and Spain. | |
(2) | As of December 31, 2012, Citi held $0.3 billion and $0.1 billion in reserves against these loans in the GIIPS and France, respectively. | |
(3) | Includes the net credit exposure arising from secured financing transactions, such as repurchase agreements and reverse repurchase agreements. See "Secured Financing Transactions" below. | |
(4) | For derivatives and loans, includes margin and collateral posted under legally enforceable margin agreements. Does not include collateral received on secured financing transactions. | |
(5) | Credit protection purchased primarily from investment grade, global financial institutions predominantly outside of the GIIPS and France. See "Credit Default Swaps" below. | |
(6) | Unfunded commitments net of approximately $0.7 billion and $1.2 billion of purchased credit protection as of December 31, 2012 on unfunded commitments in the GIIPS and France, respectively. |
114
GIIPS
Sovereign, Financial Institution and
Corporate Exposures
As noted in the table
above, Citi's gross funded credit exposure to sovereign entities, financial
institutions and multinational and local corporations designated in the GIIPS
under Citi's risk management systems was $21.6 billion at December 31, 2012,
compared to $21.3 billion at September 30, 2012. This $21.6 billion of gross
funded credit exposure at December 31, 2012 was made up of $8.0 billion in gross
funded loans, before reserves (compared to $8.4 billion at September 30, 2012),
and $13.6 billion in derivative counterparty mark-to-market exposure, inclusive
of CVA (compared to $13.0 billion at September 30, 2012). The increase in
derivative counterparty mark-to-market exposure quarter-over-quarter was
primarily due to an increase in exposure in Italy due to market
movements.
Further, as of December 31, 2012, Citi's net current funded exposure to
sovereigns, financial institutions and corporations designated in the GIIPS
under Citi's risk management systems was $8.9 billion, compared to $9.5 billion
at September 30, 2012, reflecting a decrease in net current funded credit
exposure partially offset by an increase in net trading and AFS exposure, each
as discussed below.
Net Trading and AFS Exposure-$2.9
billion
Included in the net current funded
exposure at December 31, 2012 was a net position of $2.9 billion in securities
and derivatives with GIIPS sovereigns, financial institutions and corporations
as the issuer or reference entity. This compared to $2.0 billion of net trading
and AFS exposures as of September 30, 2012. These securities and derivatives are
marked to market daily. Citi's trading exposure levels vary as it maintains
inventory consistent with customer needs.
Included within the net position of $2.9 billion as of December 31, 2012
was a net position of $(0.1) billion of indexed and tranched credit derivatives
(compared to a net position of $(0.05) billion at September 30,
2012).
Net Current Funded Credit Exposure-$6.0
billion
As of December 31, 2012, Citi's
net current funded credit exposure to GIIPS sovereigns, financial institutions
and corporations was $6.0 billion, the majority of which was to corporations
designated in the GIIPS. This compared to $7.4 billion as of September 30, 2012.
The decrease in Citi's net current funded credit exposure quarter-over-quarter
was due to an increase in margin and collateral netted against Citi's gross
funded credit exposure in the GIIPS, as discussed below.
Consistent with its internal risk management measures and as set forth in
the table above, Citi's gross funded credit exposure as of December 31, 2012 has
been reduced by $5.5 billion of margin and collateral posted under legally
enforceable margin agreements, compared to $3.8 billion as of September 30,
2012. The quarter-over-quarter increase in margin and collateral netted against
Citi's gross funded credit exposure to the GIIPS was largely due to a
reallocation of approximately $1.4 billion of non-GIIPS government bonds from
"Additional collateral received, not reducing amounts above" to margin and
collateral netted against Citi's gross funded credit exposures as of December
31, 2012. The reallocation resulted from
additional analysis of Citi's collateral
rights and the legal enforceability of those rights. As of December 31, 2012,
the majority of Citi's margin and collateral netted against its gross funded
credit exposure to the GIIPS was in the form of cash, with the remainder in
predominantly non-GIIPS securities, which are included at fair value.
Gross
funded credit exposure as of December 31, 2012 has also been reduced by $10.1
billion in purchased credit protection (flat to the September 30, 2012 amount),
predominantly from financial institutions outside the GIIPS (see "Credit Default
Swaps" below). Included within the $10.1 billion of purchased credit protection
as of December 31, 2012 was $0.5 billion of indexed and tranched credit
derivatives (compared to $0.9 billion at September 30, 2012) executed to hedge
Citi's exposure on funded loans and CVA on derivatives, a significant portion of
which is reflected in Italy and Spain.
Purchased credit protection generally pays out only upon the occurrence
of certain credit events with respect to the country or borrower covered by the
protection, as determined by a committee composed of dealers and other market
participants. In addition to general counterparty credit risks, the credit
protection may not fully cover all situations that may adversely affect the
value of Citi's exposure and, accordingly, Citi could still experience losses
despite the existence of the credit protection.
As of
December 31, 2012, Citi also held $2.1 billion of collateral that has not been
netted against its gross funded credit exposure to the GIIPS, a decrease from
$3.6 billion at September 30, 2012. The quarter-over-quarter decrease was due to
the reallocation of the non-GIIPS government bonds referenced above. Collateral
received but not netted against Citi's gross funded credit exposure in the GIIPS
may take a variety of forms, including securities, receivables and physical
assets, and is held under a variety of collateral arrangements.
Unfunded Commitments-$7.3
billion
As of December 31, 2012, Citi had
$7.3 billion of unfunded commitments to GIIPS sovereigns, financial institutions
and corporations, with $6.9 billion of this amount to corporations. This
compared to $6.6 billion of unfunded commitments as of September 30, 2012, with
$6.3 billion of such amount to corporations. As of December 31, 2012, net
unfunded commitments in the GIIPS included approximately $5.2 billion of
unfunded loan commitments that generally have standard conditions that must be
met before they can be drawn, and $2.0 billion of letters of credit (compared to
$4.4 billion and $2.2 billion, respectively, at September 30, 2012).
Other Activities
In addition to the exposures described above, like other
banks, Citi also provides settlement and clearing facilities for a variety of
clients in these countries and actively monitors and manages these intra-day
exposures.
115
Retail, Small Business and Citi Private
Bank
As of December 31, 2012, Citi had
approximately $6.2 billion of mostly locally funded accrual loans to retail,
small business and Citi Private Bank customers in the GIIPS, the vast majority
of which was in Citi Holdings. This compared to $6.3 billion as of September 30,
2012. Of the $6.2 billion, approximately (i) $3.8 billion consisted of retail
and small business exposures in Spain of $2.7 billion and Greece of $1.1
billion, (ii) $1.5 billion related to held-to-maturity securitized retail assets
(primarily mortgage-backed securities in Spain), and (iii) $0.8 billion related
to Private Bank customers, substantially all in Spain. This compared to
approximately (i) $4.0 billion of retail and small business exposures in Spain
of $2.8 billion and Greece of $1.2 billion, (ii) $1.5 billion related to
held-to-maturity securitized retail assets, and (iii) $0.8 billion related to
Private Bank customers as of September 30,
2012.
In
addition, Citi had approximately $4.1 billion of unfunded commitments to GIIPS
retail customers as of December 31, 2012, unchanged from September 30, 2012.
Citi's unfunded commitments to GIIPS retail customers, in the form of unused
credit card lines, are generally cancellable upon the occurrence of significant
credit events, including redenomination events.
France
Sovereign, Financial Institution and
Corporate Exposures
Citi's gross funded
credit exposure to the sovereign entity of France, as well as financial
institutions and multinational and local corporations designated in France under
Citi's risk management systems, was $11.5 billion at December 31, 2012, compared
to $13.3 billion at September 30, 2012. This $11.5 billion of gross funded
credit exposure at December 31, 2012 was made up of $5.4 billion in gross funded
loans, before reserves (compared to $6.4 billion at September 30, 2012), and
$6.0 billion in derivative counterparty mark-to-market exposure, inclusive of
CVA (compared to $6.9 billion at September 30, 2012).
Further, as of December 31, 2012, Citi's net current funded exposure to
the French sovereign and financial institutions and corporations designated in
France under Citi's risk management systems was $4.0 billion, compared to $3.6
billion at September 30, 2012.
Net Trading and AFS Exposure-$0.1
billion
Included in the net current funded
exposure at December 31, 2012 was a net position of $0.1 billion in securities
and derivatives with the French sovereign, financial institutions and
corporations as the issuer or reference entity. This compared to a net position
of $(0.5) billion of net trading and AFS exposures as of September 30, 2012.
These securities and derivatives are marked to market daily. Citi's trading
exposure levels vary as it maintains inventory consistent with customer
needs.
Included within the net position of $0.1 billion as of
December 2012 was a net position of $0.4 billion of indexed and tranched credit
derivatives (compared to a net position of $0.03 billion at September 30,
2012).
Net Current Funded Credit
Exposure-$3.9 billion
As of December 31,
2012, the net current funded credit exposure to the French sovereign, financial
institutions and corporations was $3.9 billion. Of this amount, none was to the
sovereign entity (compared to $0.8 billion at September 30, 2012), $1.9 billion
was to financial institutions (compared to $2.1 billion at September 30, 2012)
and $2.0 billion to corporations (compared to $1.1 billion at September 30,
2012).
Consistent with its internal risk management measures and as
set forth in the table above, Citi's gross funded credit exposure has been
reduced by $5.0 billion of margin and collateral posted under legally
enforceable margin agreements (compared to $5.5 billion at September 30, 2012).
As of December 31, 2012, the majority of Citi's margin and collateral netted
against its gross funded credit exposure to France was in the form of cash, with
the remainder in predominantly non-French securities, which are included at fair
value.
Gross funded credit exposure as of December 31, 2012 has also
been reduced by $2.6 billion in purchased credit protection (compared to $3.7
billion at September 30, 2012), predominantly from financial institutions
outside France (see "Credit Default Swaps" below). Included within the $2.6
billion of purchased credit protection as of December 31, 2012 was $0.6 billion
of indexed and tranched credit derivatives executed to hedge Citi's exposure on
funded loans and CVA on derivatives (compared to $1.4 billion at September 30,
2012).
Purchased credit protection generally pays out only upon the
occurrence of certain credit events with respect to the country or borrower
covered by the protection, as determined by a committee composed of dealers and
other market participants. In addition to general counterparty credit risks, the
credit protection may not fully cover all situations that may adversely affect
the value of Citi's exposure and, accordingly, Citi could still experience
losses despite the existence of the credit protection.
As of
December 31, 2012, Citi also held $4.0 billion of collateral that has not been
netted against its gross funded credit exposure to France, an increase from $3.5
billion as of September 30, 2012. As described above, this collateral can take a
variety of forms and is held under a variety of collateral
arrangements.
Unfunded Commitments-$14.4
billion
As of December 31, 2012, Citi had
$14.4 billion of unfunded commitments to the French sovereign, financial
institutions and corporations, with $11.2 billion of this amount to
corporations. This compared to $13.7 billion of unfunded commitments as of
September 30, 2012, with $10.6 billion of such amount to corporations. As of
December 31, 2012, net unfunded commitments in France included $11.7 billion of
unfunded loan commitments that generally have standard conditions that must be
met before they can be drawn, and $2.7 billion of letters of credit (compared to
$10.6 billion and $3.1 billion, respectively, as of September 30,
2012).
116
Other Activities
In addition to the exposures described above, like other
banks, Citi also provides settlement and clearing facilities for a variety of
clients in France and actively monitors and manages these intra-day
exposures.
Credit Default Swaps-GIIPS and
France
Citi buys and sells credit
protection, through credit default swaps (CDS), on underlying GIIPS and French
entities as part of its market-making activities for clients in its trading
portfolios. Citi also purchases credit protection, through CDS, to hedge its own
credit exposure to these underlying entities that arises from loans to these
entities or derivative transactions with these entities.
Citi
buys and sells CDS as part of its market-making activity, and purchases CDS for
credit protection, primarily with investment grade, global financial
institutions predominantly outside the GIIPS and France. The
counterparty credit exposure that can
arise from the purchase or sale of CDS, including any GIIPS or French
counterparties, is managed and mitigated through legally enforceable netting and
margining agreements with a given counterparty. Thus, the credit exposure to
that counterparty is measured and managed in aggregate across all products
covered by a given netting or margining agreement.
The
notional amount of credit protection purchased or sold on GIIPS and French
underlying single reference entities as of December 31, 2012 is set forth in the
table below. The net notional contract amounts, less mark-to-market adjustments,
are included in "Net current funded exposure" in the table under "Sovereign,
Financial Institution and Corporate Exposures" above, and appear in either "Net
trading exposure" when part of a trading strategy or in "Purchased credit
protection" when purchased as a hedge against a credit
exposure.
CDS purchased or sold on underlying single reference entities in these countries | ||||||||||||||||||||||
In billions of U.S. dollars as of December 31, 2012 | GIIPS | Greece | Ireland | Italy | Portugal | Spain | France | |||||||||||||||
Notional CDS contracts on underlying reference entities | ||||||||||||||||||||||
Net purchased (1) | $ | (15.9 | ) | $ | (0.5 | ) | $ | (0.7 | ) | $ | (10.6 | ) | $ | (2.2 | ) | $ | (5.9 | ) | $ | (9.0 | ) | |
Net sold (1) | 6.1 | 0.4 | 0.7 | 3.0 | 2.1 | 3.9 | 6.0 | |||||||||||||||
Sovereign underlying reference entity | ||||||||||||||||||||||
Net purchased (1) | (11.9 | ) | - | (0.6 | ) | (8.7 | ) | (1.7 | ) | (3.8 | ) | (3.8 | ) | |||||||||
Net sold (1) | 4.7 | - | 0.6 | 2.0 | 1.6 | 3.3 | 4.0 | |||||||||||||||
Financial institution underlying reference entity | ||||||||||||||||||||||
Net purchased (1) | (2.6 | ) | (0.0 | ) | (0.0 | ) | (1.5 | ) | (0.3 | ) | (1.2 | ) | (1.7 | ) | ||||||||
Net sold (1) | 2.2 | 0.0 | 0.0 | 1.4 | 0.3 | 1.0 | 1.4 | |||||||||||||||
Corporate underlying reference entity | ||||||||||||||||||||||
Net purchased (1) | (3.9 | ) | (0.5 | ) | (0.2 | ) | (2.0 | ) | (0.7 | ) | (1.9 | ) | (5.4 | ) | ||||||||
Net sold (1) | 1.7 | 0.4 | 0.1 | 1.2 | 0.6 | 0.7 | 2.5 |
(1) | The summation of notional amounts for each GIIPS country does not equal the notional amount presented in the GIIPS total column in the table above, as additional netting is achieved at the agreement level with a specific counterparty across various GIIPS countries. |
When Citi purchases CDS as a hedge against a credit exposure, it generally seeks to purchase products from counterparties that would not be correlated with the underlying credit exposure it is hedging. In addition, Citi generally seeks to purchase products with a maturity date similar to the exposure against which the protection is purchased. While certain exposures may have longer maturities that extend beyond the CDS tenors readily available in the market, Citi generally will purchase credit protection with a maximum tenor that is readily available in the market.
The above table contains all net CDS purchased or sold on GIIPS and French underlying single reference entities, whether part of a trading strategy or as purchased credit protection. With respect to the $15.9 billion net purchased CDS contracts on underlying GIIPS reference entities, approximately 91% was purchased from non-GIIPS counterparties and 83% was purchased from investment grade counterparties as of December 31, 2012. With respect to the $9.0 billion net purchased CDS contracts on underlying French reference entities, approximately 97% was purchased from non-French counterparties and 93% was purchased from investment grade counterparties as of December 31, 2012.
117
Secured Financing Transactions-GIIPS
and France
As part of its banking
activities with its clients, Citi enters into secured financing transactions,
such as repurchase agreements and reverse repurchase agreements. These
transactions typically involve the lending of cash, against which securities are
taken as collateral. The amount of cash loaned against the securities collateral
is a function of the liquidity and quality of the collateral as well as the
credit quality of the counterparty. The collateral is typically marked to market
daily, and Citi has the ability to call for additional collateral (usually in
the form of cash) if the value of the securities falls below a pre-defined
threshold.
As shown in
the table below, at December 31, 2012, Citi had loaned $13.0 billion in cash
through secured financing transactions with GIIPS and French counterparties,
usually through reverse repurchase agreements. This compared to $12.6 billion as
of September 30, 2012. Against those loans, it held approximately $16.6 billion
fair value of securities collateral. In addition, Citi held $1.2 billion in
variation margin, most of which was in cash, against all secured financing
transactions.
Consistent with Citi's risk management systems, secured financing
transactions are included in the counterparty derivative mark-to-market exposure
at their net credit exposure value, which is typically small or zero given the
over-collateralized structure of these transactions.
In billions of dollars as of December 31, 2012 | Cash financing out | Securities collateral in | (1) | ||||
Lending to GIIPS and French counterparties through secured financing transactions | $ | 13.0 | $ | 16.6 |
(1) | Citi has also received approximately $1.2 billion in variation margin, predominantly cash, associated with secured financing transactions with these counterparties. |
Collateral taken in against secured financing transactions is generally high quality, marketable securities, consisting of government debt, corporate debt, or asset-backed securities. The table below sets forth
the fair value of the securities collateral taken in by Citi against secured financing transactions as of December 31, 2012.
Government | Municipal or Corporate | Asset-backed | ||||||||||
In billions of dollars as of December 31, 2012 | Total | bonds | bonds | bonds | ||||||||
Securities pledged by GIIPS and French counterparties in secured financing transaction lending (1) | $ | 16.6 | $ | 2.9 | $ | 2.7 | $ | 11.0 | ||||
Investment grade | $ | 16.4 | $ | 2.7 | $ | 2.6 | $ | 11.0 | ||||
Non-investment grade | 0.2 | 0.1 | 0.1 | 0.0 |
(1) | Total includes approximately $3.1 billion in correlated risk collateral, predominantly French and Spanish sovereign debt pledged by French counterparties. |
Secured financing transactions can be short term or can extend beyond one year. In most cases, Citi has the right to call for additional margin daily, and can terminate the transaction and liquidate the collateral if
the counterparty fails to post the additional margin. The table below sets forth the remaining transaction tenor for these transactions as of December 31, 2012.
Remaining transaction tenor | ||||||||||||
In billions of dollars as of December 31, 2012 | Total | <1 year | 1-3 years | >3 years | ||||||||
Cash extended to GIIPS and French counterparties in secured financing transactions lending (1) | $ | 13.0 | $ | 8.8 | $ | 2.6 | $ | 1.6 |
(1) | The longest remaining tenor trades mature November 2018. |
118
Redenomination and Devaluation
Risk
As referenced above, the ongoing
Eurozone debt crisis and other developments in the European Monetary Union (EMU)
could lead to the withdrawal of one or more countries from the EMU or a partial
or complete break-up of the EMU. See also "Risk Factors-Market and Economic
Risks." If one or more countries were to leave the EMU, certain obligations
relating to the exiting country could be redenominated from the Euro to a new
country currency. While alternative scenarios could develop, redenomination
could be accompanied by immediate devaluation of the new currency as compared to
the Euro and the U.S.
dollar.
Citi, like other financial institutions with substantial operations in
the EMU, is exposed to potential redenomination and devaluation risks arising
from (i) Euro-denominated assets and/or liabilities located or held within the
exiting country that are governed by local country law ("local exposures"), as
well as (ii) other Euro-denominated assets and liabilities, such as loans,
securitized products or derivatives, between entities outside of the exiting
country and a client within the country that are governed by local country law
("offshore exposures"). However, the actual assets and liabilities that could be
subject to redenomination and devaluation risk are subject to substantial legal
and other uncertainty.
Citi
has been, and will continue to be, engaged in contingency planning for such
events, particularly with respect to Greece, Ireland, Italy, Portugal and Spain.
Generally, to the extent that Citi's local and offshore assets are approximately
equal to its liabilities within the exiting country, and assuming both assets
and liabilities are symmetrically redenominated and devalued, Citi believes that
its risk of loss as a result of a redenomination and devaluation event would not
be material. However, to the extent its local and offshore assets and
liabilities are not equal, or there is asymmetrical redenomination of assets
versus liabilities, Citi could be exposed to losses in the event of a
redenomination and devaluation. Moreover, a number of events that could
accompany a redenomination and devaluation, including a drawdown of unfunded
commitments or "deposit flight," could exacerbate any mismatch of assets and
liabilities within the exiting country.
Citi's redenomination and devaluation exposures to the GIIPS as of
December 31, 2012 are not additive to its credit risk exposures to such
countries as described under "Credit Risk" above. Rather, Citi's credit risk
exposures in the affected country would generally be reduced to the extent of
any redenomination and devaluation of assets.
As of December 31, 2012, Citi
estimates that it had net asset exposure subject to redenomination and
devaluation in Italy, principally relating to derivatives contracts. Citi also
estimates that, as of such date, it had net asset exposure subject to
redenomination and devaluation in Spain, principally related to offshore
exposures related to held-to-maturity securitized retail assets (primarily
mortgage-backed securities) and exposures to Private Bank customers (see
"GIIPS-Retail, Small Business and Citi Private Bank" above). However, as of
December 31, 2012, Citi's estimated redenomination and devaluation exposure to
Italy was less than Citi's net current funded credit exposure to Italy (before
purchased credit protection) as reflected under "Credit Risk" above. Further, as
of December 31, 2012, Citi's estimated redenomination and devaluation exposure
to Spain was less than Citi's net current funded credit exposure to Spain
(before purchased credit protection), as reflected under "Credit Risk" above. As
of December 31, 2012, Citi had a net liability position in each of Greece,
Ireland and Portugal.
As
referenced above, Citi's estimated redenomination and devaluation exposure does
not include purchased credit protection. As described under "Credit Risk" above,
Citi has purchased credit protection primarily from investment grade, global
financial institutions predominantly outside of the GIIPS. To the extent the
purchased credit protection is available in a redenomination/devaluation event,
any redenomination/devaluation exposure could be reduced.
Any
estimates of redenomination/devaluation exposure are subject to ongoing review
and necessarily involve numerous assumptions, including which assets and
liabilities would be subject to redenomination in any given case, the
availability of purchased credit protection and the extent of any utilization of
unfunded commitments, each as referenced above. In addition, other events
outside of Citi's control-such as the extent of any deposit flight and
devaluation, the imposition of exchange and/or capital controls, the requirement
by U.S. regulators of mandatory loan loss and other reserve requirements or any
required timing of functional currency changes and the accounting impact thereof
-could further negatively impact Citi in such an event. Accordingly, in an
actual redenomination and devaluation scenario, Citi's exposures could vary
considerably based on the specific facts and circumstances.
119
CROSS-BORDER RISK
Overview
Cross-border risk is the risk that actions taken by a non-U.S. government
may prevent the conversion of local currency into non-local currency and/or the
transfer of funds outside the country, among other risks, thereby impacting the
ability of Citigroup and its customers to transact business across borders.
Examples of cross-border risk include actions taken by foreign governments such
as exchange controls and restrictions on the remittance of funds. These actions
might restrict the transfer of funds or the ability of Citigroup to obtain
payment from customers on their contractual obligations. Management of
cross-border risk at Citi is performed through a formal review process that
includes annual setting of cross-border limits and ongoing monitoring of
cross-border exposures as well as monitoring of economic conditions globally
through Citi's independent risk management. See also "Risk Factors-Market and
Economic Risks" above.
Methodology
Under
Federal Financial Institutions Examination Council (FFIEC) regulatory
guidelines, total reported cross-border outstandings include cross-border claims
on third parties, as well as investments in and funding of local
franchises. Cross-border
claims on third parties (trade and short-, medium- and long-term claims) include
cross-border loans, securities, deposits with banks, investments in affiliates,
and other monetary assets, as well as net revaluation gains on foreign exchange
and derivative products.
FFIEC cross-border risk measures exposure to the immediate obligors or
counterparties domiciled in the given country or, if applicable, by the location
of collateral or guarantors of the legally binding guarantees. Cross-border
outstandings are reported based on the country of the obligor or guarantor.
Outstandings backed by cash collateral are assigned to the country in which the
collateral is held. For securities received as collateral, cross-border
outstandings are reported in the domicile of the issuer of the securities.
Cross-border resale agreements are presented based on the domicile of the
counterparty.
Investments in and funding of
local franchises represent the excess of local country assets over local country
liabilities. Local country assets are claims on local residents recorded by
branches and majority-owned subsidiaries of Citigroup domiciled in the country,
adjusted for externally guaranteed claims and certain collateral. Local country
liabilities are obligations of non-U.S. branches and majority-owned subsidiaries
of Citigroup for which no cross-border guarantee has been issued by another
Citigroup office.
The table below sets forth the countries where Citigroup's total cross-border outstandings, as defined by FFIEC guidelines, exceeded 0.75% of total Citigroup assets as of December 31, 2012 and December 31, 2011:
December 31, 2012 | December 31, 2011 | ||||||||||||||||||||||||||||||
Cross-Border Claims on Third Parties | |||||||||||||||||||||||||||||||
Investments | |||||||||||||||||||||||||||||||
in, and | Total | ||||||||||||||||||||||||||||||
Trading and | funding of | Total | cross- | ||||||||||||||||||||||||||||
short-term | local | cross-border | border | ||||||||||||||||||||||||||||
In billions of U.S. dollars | Banks | Public | Private | Total | claims | (1) | franchises | outstandings | (2) | Commitments | (3) | outstandings | (2) | Commitments | (3) | ||||||||||||||||
United Kingdom | $ | 25.2 | $ | 0.3 | $ | 25.6 | $ | 51.1 | $ | 45.2 | $ | - | $ | 51.1 | $ | 85.0 | $ | 42.1 | $ | 90.3 | |||||||||||
Germany | 14.6 | 18.0 | 7.6 | 40.2 | 37.4 | 7.4 | 47.6 | 66.8 | 36.2 | 64.7 | |||||||||||||||||||||
France | 14.6 | 4.8 | 25.5 | 44.9 | 41.7 | - | 44.9 | 71.0 | 38.6 | 69.3 | |||||||||||||||||||||
Cayman Islands | 0.2 | - | 33.5 | 33.7 | 30.1 | - | 33.7 | 2.3 | 32.0 | 1.4 | |||||||||||||||||||||
India | 4.8 | 1.6 | 7.9 | 14.3 | 12.2 | 18.4 | 32.7 | 5.5 | 30.9 | 5.3 | |||||||||||||||||||||
Netherlands (4) | 6.9 | 3.0 | 13.7 | 23.6 | 18.1 | 2.2 | 25.8 | 24.9 | 18.3 | 24.8 | |||||||||||||||||||||
Brazil | 1.4 | 4.1 | 9.3 | 14.8 | 9.5 | 6.9 | 21.7 | 19.2 | 20.4 | 22.9 | |||||||||||||||||||||
Italy (5) | 2.0 | 15.2 | 1.9 | 19.1 | 18.2 | 0.3 | 19.4 | 49.8 | 11.4 | 37.0 | |||||||||||||||||||||
Japan (6) | 9.8 | 1.1 | 1.8 | 12.7 | 12.6 | 6.4 | 19.1 | 23.8 | 6.0 | 20.0 | |||||||||||||||||||||
Switzerland (7) | 2.6 | 2.7 | 3.8 | 9.1 | 7.2 | 9.9 | 19.0 | 18.7 | 8.6 | 18.9 | |||||||||||||||||||||
Mexico | 2.4 | 1.1 | 4.6 | 8.1 | 5.2 | 8.1 | 16.2 | 12.4 | 17.9 | 12.2 | |||||||||||||||||||||
Korea | 1.4 | 0.9 | 4.1 | 6.4 | 3.8 | 9.1 | 15.5 | 26.4 | 16.3 | 24.5 | |||||||||||||||||||||
Australia (8) | 3.3 | 1.7 | 3.5 | 8.5 | 5.6 | 6.8 | 15.3 | 25.9 | 7.2 | 26.4 |
(1) | Included in total cross-border claims on third parties. | |
(2) | Cross-border outstandings, as described above and as required by FFIEC guidelines, generally do not recognize the benefit of margin received or hedge positions and recognize offsetting exposures only for certain products and relationships. As a result, market volatility in interest rates, foreign exchange rates and credit spreads will cause the level of reported cross-border outstandings to increase, all else being equal. | |
(3) | Commitments (not included in total cross-border outstandings) include legally binding cross-border letters of credit and other commitments and contingencies as defined by the FFIEC. The FFIEC definition of commitments includes commitments to local residents to be funded with local currency liabilities originated within the country. | |
(4) | Total cross-border outstandings increased 41%, driven by a $2.1 billion increase in funding of local franchises, primarily in placements with banks, and a $2.6 billion increase in the private sector, primarily in AFS and trading securities. | |
(5) | Total cross-border outstandings increased 70%, driven by a $7.4 billion increase in the public sector, primarily in trading accounts and revaluation gains. | |
(6) | Total cross-border outstandings increased 218%, driven by a $7.7 billion increase in the bank sector, primarily in resale agreements, and a $5.2 billion increase in funding of local franchises, primarily in placements with banks. | |
(7) | Total cross-border outstandings increased 121%, driven by a $9.0 billion increase in funding of local franchises, primarily in placements with banks due to business liquidity strategy. | |
(8) | Total cross-border outstandings increased 115%, driven by a $7.0 billion increase in investments of local franchises, primarily in non-U.S. equity, consumer loans, commercial loans and revaluation gains booked as trading. |
120
As described in more detail in the sections above, there are significant differences between the reporting of country risk and cross-border risk. A general summary of the more significant differences is as follows:
The differences between the presentation of country risk and cross-border risk can be substantial, including the identification of the country of risk, as described above. In addition, some of the more significant differences by product are described below:
For country risk, net derivative receivables are generally reported based on fair value, netting receivables and payables under the same legally binding netting agreement, and recognizing the benefit of margin received under legally enforceable margin agreements and any hedge positions in place. For cross-border risk, these items are also reported based on fair value and allow for netting of receivables and payables if a legally binding netting agreement is in place, but only with the same specific counterparty, and do not recognize the benefit of margin received or hedges in place. For country risk, secured financing transactions, such as repurchase agreements and reverse repurchase agreements, as well as securities loaned and borrowed, are reported based on the net credit exposure arising from the transaction, which is typically small or zero given the over-collateralized structure of these transactions. For cross-border risk, reverse repurchase agreements and securities borrowed are reported based on notional amounts and do not include the value of any collateral received (repurchase agreements and securities loaned are not included in cross-border risk reporting). Argentina and Venezuela
Developments
Citi
operates in several countries 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.
Argentina
Since 2011,
the Argentine government has been tightening its foreign exchange controls. As a
result, Citi's access to U.S. dollars and other foreign currencies, which apply
to capital repatriation efforts, certain operating expenses, and discretionary
investments offshore, has become limited. In addition, beginning in January
2012, the Central Bank of Argentina increased its minimum capital requirements,
which affects Citi's ability to remit profits out of the country.
As of December 31, 2012, Citi's net investment in
its Argentine operations was approximately $740 million, compared to $740
million as of December 31, 2011 and down from $800 million as of September 30,
2012. The decrease quarter-over-quarter was primarily the result of a dividend
of approximately $65 million received by Citi in the fourth quarter of 2012. For
the full year of 2012, Citi received dividends of $125 million.
Citi uses the Argentine peso as the functional
currency in Argentina and translates its financial statements into U.S. dollars
using the official exchange rate as published by the Central Bank of Argentina,
which continued to devalue its currency during the fourth quarter of 2012, from
4.70 Argentine pesos to one U.S. dollar at September 30, 2012 to 4.90 Argentine
pesos to one U.S. dollar at December 31, 2012. It is generally expected that the
devaluation of the Argentine peso could continue.
The impact of devaluations of the Argentine peso
on Citi's net investment in Argentina is reported as a translation loss in
stockholders' equity offset, to the extent hedged, by:
121
At December 31, 2012, Citi had
cumulative translation losses related to its investment in Argentina, net of
qualifying net investment hedges, of approximately $1.04 billion (pretax), which
were recorded in stockholders' equity. The cumulative translation losses would
not be reclassified into earnings unless realized upon sale or liquidation of
Citi's Argentine operations.
While Citi currently uses the Argentine peso as the functional currency
for its operations in Argentina, an increase in inflation resulting in a
cumulative three-year inflation rate of 100% or more would result in a change in
the functional currency to the U.S. dollar. Official inflation statistics
published by INDEC, the Argentine government's statistics institute, suggest an
annual inflation rate of approximately 10% for each of the three years ended
December 31, 2012, whereas private institutions, economists, and local labor
unions calculate the inflation rate to be closer to 25% annually over the same
period. Additionally, the International Monetary Fund (IMF) issued a declaration
of censure against Argentina on February 1, 2013 in connection with its
inaccurate inflation statistics and has called on Argentina to adopt remedial
measures to address those inaccuracies. A change in the functional currency to
the U.S. dollar would result in future devaluations of the Argentine peso being
recorded in earnings for Citi's Argentine peso-denominated assets and
liabilities.
As noted above, Citi hedges
currency risk in its net investment in Argentina to the extent possible and
prudent. Suitable hedging alternatives have become less available and more
expensive and may not be available to offset any future currency devaluations
that could occur. At December 31, 2012, Citi hedged approximately $200 million
of its net investment using foreign currency forwards that are recorded as net
investment hedges under ASC 815. This compared to approximately $230 million and
$300 million as of December 31, 2011 and September 30, 2012, respectively. The
decrease in the net investment hedge year-over-year and sequentially was driven
by significantly increased hedging costs.
In addition, as of December 31, 2012, Citi hedged foreign currency risk
associated with its net investment by holding in its Argentine operations both
U.S.-dollar-denominated net monetary assets of approximately $280 million
(compared to $110 million and $200 million as of December 31, 2011 and September
30, 2012, respectively) and foreign currency futures with a notional value of
approximately $170 million (compared to $100 million as of September 30, 2012),
neither of which qualify as net investment hedges under ASC 815.
The ongoing economic and political situation in
Argentina could lead to further governmental intervention or regulatory
restrictions on foreign investments in Argentina, including the potential
redenomination of certain U.S.-dollar assets and liabilities into Argentine
pesos, which could be accompanied by a devaluation of the Argentine peso. Any
redenomination
could occur at different rates (asymmetric redenomination) and/or rates other than the official foreign exchange rate. The U.S.-dollar assets and liabilities subject to redenomination, as well as any gains or losses resulting from redenomination, are subject to substantial uncertainty (see "Country Risk-Redenomination and Devaluation Risk" above for a general discussion of redenomination and devaluation risk). As of December 31, 2012, Citi had aggregate U.S.-dollar-denominated assets in Argentina of approximately $1.5 billion.
Venezuela
Since 2003,
the Venezuelan government has enacted foreign exchange controls. Under these
controls, the Venezuelan government's Foreign Currency Administration Commission
(CADIVI) purchases and sells foreign currency at an official foreign exchange
rate fixed by the government (as of December 31, 2012, the official exchange
rate was fixed at 4.3 bolivars to one U.S. dollar). These restrictions have
limited Citi's ability to obtain U.S. dollars in Venezuela at the official
foreign currency rate. Citi has not been able to acquire U.S. dollars from
CADIVI since 2008.
Citi uses the official exchange rate to re-measure foreign currency
transactions in the financial statements of its Venezuelan operations (which use
the U.S. dollar as the functional currency) into U.S. dollars, as the official
exchange rate is the only rate legally available in the country, despite the
limited availability of U.S. dollars from CADIVI and although the official rate
may not necessarily be reflective of economic reality. Re-measurement of Citi's
bolivar-denominated assets and liabilities due to change in the official
exchange rate is recorded in earnings.
At December 31, 2012, Citi's net investment in Venezuela was
approximately $340 million (compared to $250 million at December 31, 2011 and
$300 million at September 30, 2012), which included net monetary assets
denominated in Venezuelan bolivars of approximately $290 million (compared to
$240 million at December 31, 2011 and $270 million at September 30,
2012).
On February 8,
2013 the Venezuelan government devalued the official exchange rate from 4.3
bolivars per dollar to 6.3 bolivars per dollar. This devaluation resulted in a
foreign exchange loss of approximately $100 million (pretax) on Citi Venezuela's
net bolivar-denominated assets that will be recorded in earnings in the first
quarter of 2013. Subsequent to the devaluation, Citi's net investment in
Venezuela declined to approximately $240 million, and Citi's net
bolivar-denominated assets declined to approximately $190
million.
122
FAIR VALUE ADJUSTMENTS FOR DERIVATIVES AND STRUCTURED DEBT
The following discussion relates to the derivative obligor information and the fair valuation for derivatives and structured debt. See Note 23 to the Consolidated Financial Statements for additional information on Citi's derivative activities.
Fair Valuation Adjustments for
Derivatives
The fair value
adjustments applied by Citigroup to its derivative carrying values consist of
the following items:
Citi's CVA methodology is composed of two steps. First, the exposure
profile for each counterparty is determined using the terms of all individual
derivative positions and a Monte Carlo simulation or other quantitative analysis
to generate a series of expected cash flows at future points in time. The
calculation of this exposure profile considers the effect of credit risk
mitigants, including pledged cash or other collateral and any legal right of
offset that exists with a counterparty through arrangements such as netting
agreements. Individual derivative contracts that are subject to an enforceable
master netting agreement with a counterparty are aggregated for this purpose,
since it is those aggregate net cash flows that are subject to nonperformance
risk. This process identifies specific, point-in-time future cash flows that are
subject to nonperformance risk, rather than using the current recognized net
asset or liability as a basis to measure the CVA.
Second, market-based views of default
probabilities derived from observed credit spreads in the credit default swap
(CDS) market are applied to the expected future cash flows determined in step
one. Citi's own-credit CVA is determined using Citi-specific CDS spreads for the
relevant tenor. Generally, counterparty CVA is determined using CDS spread
indices for each credit rating and tenor. For certain identified netting sets
where individual analysis is practicable (e.g., exposures to counterparties with
liquid CDS), counterparty-specific CDS spreads are used.
The CVA adjustment is designed to incorporate a
market view of the credit risk inherent in the derivative portfolio. However,
most derivative instruments are negotiated bilateral contracts and are not
commonly transferred to third parties. Derivative instruments are normally
settled contractually or, if
terminated early, are
terminated at a value negotiated bilaterally between the counterparties.
Therefore, the CVA (both counterparty and own-credit) may not be realized upon a
settlement or termination in the normal course of business. In addition, all or
a portion of the CVA may be reversed or otherwise adjusted in future periods in
the event of changes in the credit risk of Citi or its counterparties, or
changes in the credit mitigants (collateral and netting agreements) associated
with the derivative instruments.
The table below summarizes the CVA applied to the fair value of
derivative instruments for the periods indicated:
Credit valuation adjustment | ||||||
contra-liability (contra-asset) | ||||||
December 31, | December 31, | |||||
In millions of dollars | 2012 | 2011 | ||||
Non-monoline counterparties | $ | (2,971 | ) | $ | (5,392 | ) |
Citigroup (own) | 918 | 2,176 | ||||
Total CVA-derivative instruments | $ | (2,053 | ) | $ | (3,216 | ) |
Own Debt Valuation Adjustments for
Structured Debt
Own debt
valuation adjustments (DVA) are recognized on Citi's debt liabilities for which
the fair value option (FVO) has been elected using Citi's credit spreads
observed in the bond market. Accordingly, the fair value of debt liabilities for
which the fair value option has been elected (other than non-recourse and
similar liabilities) is impacted by the narrowing or widening of Citi's credit
spreads. Changes in fair value resulting from changes in Citi's
instrument-specific credit risk are estimated by incorporating Citi's current
credit spreads observable in the bond market into the relevant valuation
technique used to value each liability.
The table below summarizes pretax gains (losses) related to changes in
CVA on derivative instruments, net of hedges, and DVA on own FVO debt for the
periods indicated:
Credit/debt valuation | ||||||
adjustment gain | ||||||
(loss) | ||||||
In millions of dollars | 2012 | 2011 | ||||
Derivative counterparty CVA, excluding monolines | $ | 805 | $ | (830 | ) | |
Derivative own-credit CVA | (1,126 | ) | 863 | |||
Total CVA-derivative instruments (1) | $ | (321 | ) | $ | 33 | |
DVA related to own FVO debt | $ | (2,009 | ) | $ | 1,773 | |
Total CVA and DVA excluding monolines | $ | (2,330 | ) | $ | 1,806 | |
CVA related to monoline counterparties | 2 | 179 | ||||
Total CVA and DVA | $ | (2,328 | ) | $ | 1,985 |
(1) | Net of hedges |
The CVA and DVA amounts shown in the table above do not include the effect of counterparty credit risk embedded in non-derivative instruments. Losses on non-derivative instruments, such as bonds and loans, related to counterparty credit risk are also not included in the table above.
123
CREDIT DERIVATIVES
Citigroup makes markets in and
trades a range of credit derivatives on behalf of clients and in connection with
its risk management activities. Through these contracts, Citi either purchases
or writes protection on either a single-name or portfolio basis. Citi primarily
uses credit derivatives to help mitigate credit risk in its corporate loan
portfolio and other cash positions, and to facilitate client
transactions.
Credit derivatives generally
require that the seller of credit protection make payments to the buyer upon the
occurrence of predefined events (settlement triggers). These settlement
triggers, which are defined by the form of the derivative and the referenced
credit, are generally limited to the market standard of failure to pay
indebtedness and bankruptcy (or comparable events) of the reference credit and,
in a more limited range of transactions, debt restructuring.
Credit derivative transactions referring to
emerging market reference credits will also typically include additional
settlement triggers to cover the acceleration of indebtedness and the risk of
repudiation or a payment moratorium. In certain transactions on a portfolio of
referenced credits or asset-backed securities, the seller of protection may not
be required to make payment until a specified amount of losses has occurred with
respect to the portfolio and/or may only be required to pay for losses up to a
specified amount.
The fair values shown below are prior to
the application of any netting agreements, cash collateral, and market or credit
valuation adjustments.
Citi actively participates in trading a variety of credit derivatives
products as both an active two-way market-maker for clients and to manage credit
risk. The majority of this activity was transacted with other financial
intermediaries, including both banks and broker-dealers. Citi generally has a
mismatch between the total notional amounts of protection purchased and sold and
it may hold the reference assets directly, rather than entering into offsetting
credit derivative contracts as and when desired. The open risk exposures from
credit derivative contracts are largely matched after certain cash positions in
reference assets are considered and after notional amounts are adjusted, either
to a duration-based equivalent basis or to reflect the level of subordination in
tranched structures.
Citi actively monitors its counterparty credit risk in credit derivative
contracts. As of December 31, 2012 and December 31, 2011, approximately 96% of
the gross receivables are from counterparties with which Citi maintains
collateral agreements. A majority of Citi's top 15 counterparties (by receivable
balance owed to Citi) are banks, financial institutions or other dealers.
Contracts with these counterparties do not include ratings-based termination
events. However, counterparty ratings downgrades may have an incremental effect
by lowering the threshold at which Citi may call for additional
collateral.
124
The following tables summarize the key characteristics of Citi's credit derivatives portfolio by counterparty and derivative form as of December 31, 2012 and December 31, 2011:
December 31, 2012 | Fair values | Notionals | |||||||||
In millions of dollars | Receivable | Payable | Beneficiary | Guarantor | |||||||
By industry/counterparty | |||||||||||
Bank | $ | 34,189 | $ | 31,960 | $ | 914,542 | $ | 863,411 | |||
Broker-dealer | 13,302 | 14,098 | 321,418 | 304,968 | |||||||
Monoline | 5 | - | 141 | - | |||||||
Non-financial | 210 | 164 | 4,022 | 3,241 | |||||||
Insurance and other financial institutions | 6,671 | 6,486 | 194,166 | 174,874 | |||||||
Total by industry/counterparty | $ | 54,377 | $ | 52,708 | $ | 1,434,289 | $ | 1,346,494 | |||
By instrument | |||||||||||
Credit default swaps and options | $ | 54,275 | $ | 51,316 | $ | 1,421,122 | $ | 1,345,162 | |||
Total return swaps and other | 102 | 1,392 | 13,167 | 1,332 | |||||||
Total by instrument | $ | 54,377 | $ | 52,708 | $ | 1,434,289 | $ | 1,346,494 | |||
By rating | |||||||||||
Investment grade | $ | 17,236 | $ | 16,252 | $ | 694,590 | $ | 637,343 | |||
Non-investment grade (1) | 37,141 | 36,456 | 739,699 | 709,151 | |||||||
Total by rating | $ | 54,377 | $ | 52,708 | $ | 1,434,289 | $ | 1,346,494 | |||
By maturity | |||||||||||
Within 1 year | $ | 4,826 | $ | 5,324 | $ | 311,202 | $ | 287,670 | |||
From 1 to 5 years | 37,911 | 37,357 | 1,014,459 | 965,059 | |||||||
After 5 years | 11,640 | 10,027 | 108,628 | 93,765 | |||||||
Total by maturity | $ | 54,377 | $ | 52,708 | $ | 1,434,289 | $ | 1,346,494 | |||
December 31, 2011 | Fair values | Notionals | |||||||||
In millions of dollars | Receivable | Payable | Beneficiary | Guarantor | |||||||
By industry/counterparty | |||||||||||
Bank | $ | 57,175 | $ | 53,638 | $ | 981,085 | $ | 929,608 | |||
Broker-dealer | 21,963 | 21,952 | 343,909 | 321,293 | |||||||
Monoline | 10 | - | 238 | - | |||||||
Non-financial | 95 | 130 | 1,797 | 1,048 | |||||||
Insurance and other financial institutions | 11,611 | 9,132 | 185,861 | 142,579 | |||||||
Total by industry/counterparty | $ | 90,854 | $ | 84,852 | $ | 1,512,890 | $ | 1,394,528 | |||
By instrument | |||||||||||
Credit default swaps and options | $ | 89,998 | $ | 83,419 | $ | 1,491,053 | $ | 1,393,082 | |||
Total return swaps and other | 856 | 1,433 | 21,837 | 1,446 | |||||||
Total by instrument | $ | 90,854 | $ | 84,852 | $ | 1,512,890 | $ | 1,394,528 | |||
By rating | |||||||||||
Investment grade | $ | 26,457 | $ | 23,846 | $ | 681,406 | $ | 611,447 | |||
Non-investment grade (1) | 64,397 | 61,006 | 831,484 | 783,081 | |||||||
Total by rating | $ | 90,854 | $ | 84,852 | $ | 1,512,890 | $ | 1,394,528 | |||
By maturity | |||||||||||
Within 1 year | $ | 5,707 | $ | 5,244 | $ | 281,373 | $ | 266,723 | |||
From 1 to 5 years | 56,740 | 54,553 | 1,031,575 | 947,211 | |||||||
After 5 years | 28,407 | 25,055 | 199,942 | 180,594 | |||||||
Total by maturity | $ | 90,854 | $ | 84,852 | $ | 1,512,890 | $ | 1,394,528 |
(1) | Also includes not-rated credit derivative instruments. |
125
SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Note 1 to the Consolidated Financial Statements contains a summary of Citigroup's significant accounting policies, including a discussion of recently issued accounting pronouncements. These policies, as well as estimates made by management, are integral to the presentation of Citi's results of operations and financial condition. While all of these policies require a certain level of management judgment and estimates, this section highlights and discusses the significant accounting policies that require management to make highly difficult, complex or subjective judgments and estimates at times regarding matters that are inherently uncertain and susceptible to change (see also "Risk Factors-Business and Operational Risks"). Management has discussed each of these significant accounting policies, the related estimates, and its judgments with the Audit Committee of the Board of Directors. Additional information about these policies can be found in Note 1 to the Consolidated Financial Statements.
Valuations of Financial
Instruments
Citigroup holds
debt and equity securities, derivatives, retained interests in securitizations,
investments in private equity and other financial instruments. In addition, Citi
purchases securities under agreements to resell (reverse repos) and sells
securities under agreements to repurchase (repos). Citigroup holds its
investments, trading assets and liabilities, and resale and repurchase
agreements on the Consolidated Balance Sheet to meet customer needs and to
manage liquidity needs, interest rate risks and private equity
investing.
Substantially all of the
assets and liabilities described in the preceding paragraph are reflected at
fair value on Citi's Consolidated Balance Sheet. In addition, certain loans,
short-term borrowings, long-term debt and deposits as well as certain securities
borrowed and loaned positions that are collateralized with cash are carried at
fair value. Approximately 42.6% and 38.9% of total assets, and 16.0% and 15.0%
of total liabilities, were accounted for at fair value as of December 31, 2012
and 2011, respectively.
When available, Citi generally uses quoted market prices to determine
fair value and classifies such items within Level 1 of the fair value hierarchy
established under ASC 820-10, Fair
Value Measurements and Disclosures (see Note 25 to the Consolidated Financial Statements). If quoted market
prices are not available, fair value is based upon internally developed
valuation models that use, where possible, current market-based or independently
sourced market parameters, such as interest rates, currency rates and option
volatilities. Where a model is internally developed and used to price a
significant product, it is subject to validation and testing by Citi's separate
model verification group. Such models are often based on a discounted cash flow
analysis. In addition, items valued using such internally generated valuation
techniques are classified according to the lowest level input or value driver
that is significant to the valuation. Thus, an item may be classified in Level 3
even though there may be some significant inputs that are readily
observable.
The credit crisis caused some markets to become illiquid, thus reducing the availability of certain observable data used by Citi's valuation techniques. This illiquidity, in at least certain markets, continued through 2012. When or if liquidity returns to these markets, the valuations will revert to using the related observable inputs in verifying internally calculated values. For additional information on Citigroup's fair value analysis, see Notes 25 and 26 to the Consolidated Financial Statements.
Recognition of Changes in
Fair Value
Changes in the
valuation of the trading assets and liabilities, as well as all other assets
(excluding available-for-sale securities (AFS) and derivatives in qualifying
cash flow hedging relationships) and liabilities carried at fair value, are
recorded in the Consolidated Statement of Income. Changes in the valuation of
AFS, other than write-offs and credit impairments, and the effective portion of
changes in the valuation of derivatives in qualifying cash flow hedging
relationships generally are recorded in Accumulated other comprehensive income (loss) (AOCI), which is a component of Stockholders' equity on the Consolidated Balance Sheet. A full
description of Citi's policies and procedures relating to recognition of changes
in fair value can be found in Notes 1, 25 and 26 to the Consolidated Financial
Statements.
Evaluation of
Other-than-Temporary Impairment
Citi conducts and documents periodic reviews of all securities with
unrealized losses to evaluate whether the impairment is other-than-temporary.
Under the guidance for debt securities, other-than-temporary impairment (OTTI)
is recognized in earnings in the Consolidated Statement of Income for debt
securities that Citi has an intent to sell or that Citi believes it is
more-likely-than-not that it will be required to sell prior to recovery of the
amortized cost basis. For those securities that Citi does not intend to sell nor
expect to be required to sell, credit-related impairment is recognized in
earnings, with the non-credit-related impairment recorded in AOCI.
An unrealized loss exists when the current fair
value of an individual security is less than its amortized cost basis.
Unrealized losses that are determined to be temporary in nature are recorded,
net of tax, in AOCI for AFS securities, while such losses related to
held-to-maturity (HTM) securities are not recorded, as these investments are
carried at their amortized cost (less any OTTI). For securities transferred to
HTM from Trading account
assets , amortized cost is defined
as the fair value amount of the securities at the date of transfer plus any
accretion income and less any impairments recognized in earnings subsequent to
transfer. For securities transferred to HTM from AFS, amortized cost is defined
as the original purchase cost, plus or minus any accretion or amortization of a
purchase discount or premium, less any impairment recognized in
earnings.
126
Regardless of the classification of the securities as AFS or HTM, Citi
assesses each position with an unrealized loss for OTTI.
Management assesses equity method investments with
fair value less than carrying value for OTTI, as discussed in Note 15 to the
Consolidated Financial Statements. For investments that management does not plan
to sell prior to recovery of value, or Citi is not likely to be required to
sell, various factors are considered in assessing OTTI. For investments that
Citi plans to sell prior to recovery of value, or would likely be required to
sell and there is no expectation that the fair value will recover prior to the
expected sale date, the full impairment would be recognized in the Consolidated
Statement of Income. The following paragraphs discuss Citi's significant OTTI
equity method investments during 2012.
Akbank
In March 2012, Citi decided to reduce its
ownership interest in Akbank T.A.S., an equity investment in Turkey (Akbank), to
below 10%. As of March 31, 2012, Citi held a 20% equity interest in Akbank,
which it purchased in January 2007, accounted for as an equity method
investment. As a result of its decision to sell its share holdings in Akbank, in
the first quarter of 2012 Citi recorded an impairment charge related to its
total investment in Akbank amounting to approximately $1.2 billion pretax ($763
million after-tax). This impairment charge was primarily driven by the
recognition of all respective net investment foreign currency hedging and
translation losses previously reflected in AOCI as well as a reduction in
carrying value of the investment to reflect the market price of Akbank's shares.
The impairment charge was recorded in other-than-temporary impairment losses on
investments in the Consolidated Statement of Income. During the second quarter
of 2012, Citi sold a 10.1% stake in Akbank, resulting in a loss on sale of $424
million ($274 million after-tax), recorded within other revenue. As of December
31, 2012, the remaining 9.9% stake in Akbank is recorded within marketable
equity securities available-for-sale.
MSSB
On September 17, 2012, Citi sold to Morgan Stanley
a 14% interest (14% Interest) in MSSB to which Morgan Stanley exercised its
purchase option on June 1, 2012. Morgan Stanley paid to Citi $1.89 billion in
cash as the purchase price of the 14% Interest. The purchase price was based on
an implied 100% valuation of MSSB of $13.5 billion, as agreed between Morgan
Stanley and Citi pursuant to an agreement dated September 11, 2012 (for
additional information, see Citi's Form 8-K filed with the U.S. Securities and
Exchange Commission on September 11, 2012 and "Citi Holdings-Brokerage and Asset
Management" above). The related approximate $4.5 billion in deposits were
transferred to Morgan Stanley at no premium, as agreed between the
parties.
In addition, Morgan Stanley
has agreed, subject to obtaining regulatory approval, to purchase Citi's
remaining 35% interest in MSSB no later than June 1, 2015 at a purchase price of
$4.725 billion, which is based on the same implied 100% valuation of MSSB of
$13.5 billion.
Prior to the September 2012 sale, Citi's
carrying value of its 49% interest in MSSB was approximately $11.3 billion. As a
result of the agreement entered into with Morgan Stanley on September 11, 2012,
Citi recorded a charge to net income in the third quarter of 2012 of
approximately $2.9 billion after-tax ($4.7 billion pretax), consisting of (i) a
charge recorded within Other
revenue of approximately $800
million after-tax ($1.3 billion pretax), representing a loss on sale of the 14%
Interest, and (ii) an other-than-temporary impairment of the carrying value of
its remaining 35% interest in MSSB of approximately $2.1 billion after-tax ($3.4
billion pretax).
As of December 31, 2012, Citi
continues to account for its remaining 35% interest in MSSB under the equity
method, with the carrying value capped at the agreed selling price of $4.725
billion.
CVA/DVA
Methodology
ASC 820-10
requires that Citi's own credit risk be considered in determining the market
value of any Citi liability carried at fair value. These liabilities include
derivative instruments as well as debt and other liabilities for which the fair
value option has been elected. The credit valuation adjustment (CVA) is
recognized on the Consolidated Balance Sheet as a reduction or increase in the
associated derivative asset or liability to arrive at the fair value (carrying
value) of the derivative asset or liability. The debt valuation adjustment (DVA)
is recognized on the balance sheet as a reduction or increase in the associated
fair value option debt liability to arrive at the fair value of the liability.
For additional information, see "Fair Value Adjustments for Derivatives and
Structured Debt" above.
Allowance for Credit Losses
Allowance for Funded
Lending Commitments
Management
provides reserves for an estimate of probable losses inherent in the funded loan
portfolio on the Consolidated Balance Sheet in the form of an allowance for loan
losses. These reserves are established in accordance with Citigroup's credit
reserve policies, as approved by the Audit Committee of the Board of Directors.
Citi's Chief Risk Officer and Chief Financial Officer review the adequacy of the
credit loss reserves each quarter with representatives from the risk management
and finance staffs for each applicable business area. Applicable business areas
include those having classifiably managed portfolios, where internal credit-risk
ratings are assigned (primarily Institutional Clients Group and Global Consumer
Banking ), or modified Consumer
loans, where concessions were granted due to the borrowers' financial
difficulties.
The above-mentioned
representatives covering these respective business areas present recommended
reserve balances for their funded and unfunded lending portfolios along with
supporting quantitative and qualitative data. The quantitative data
include:
127
Estimated Probable Losses
for Non-Performing, Non-Homogeneous Exposures Within a Business Line's
Classifiably Managed Portfolio and Impaired Smaller-Balance Homogeneous Loans
Whose Terms Have Been Modified Due to the Borrowers' Financial Difficulties,
Where It Was Determined That a Concession Was Granted to the
Borrower.
Consideration may be
given to the following, as appropriate, when determining this estimate: (i) the
present value of expected future cash flows discounted at the loan's original
effective rate; (ii) the borrower's overall financial condition, resources and
payment record; and (iii) the prospects for support from financially responsible
guarantors or the realizable value of any collateral. When impairment is
measured based on the present value of expected future cash flows, the entire
change in present value is recorded in the Provision for loan losses .
Statistically Calculated
Losses Inherent in the Classifiably Managed Portfolio for Performing and De
Minimus Non-Performing Exposures.
The calculation is based upon: (i) Citigroup's internal system of
credit-risk ratings, which are analogous to the risk ratings of the major credit
rating agencies; and (ii) historical default and loss data, including rating
agency information regarding default rates from 1983 to 2011, and internal data
dating to the early 1970s on severity of losses in the event of default.
Adjustments may be made to this data. Such adjustments include: (i)
statistically calculated estimates to cover the historical fluctuation of the
default rates over the credit cycle, the historical variability of loss severity
among defaulted loans, and the degree to which there are large obligor
concentrations in the global portfolio; and (ii) adjustments made for
specifically known items, such as current environmental factors and credit
trends.
In addition, representatives
from both the risk management and finance staffs that cover business areas with
delinquency-managed portfolios containing smaller homogeneous loans present
their recommended reserve balances based upon leading credit indicators,
including loan delinquencies and changes in portfolio size, as well as economic
trends, including housing prices, unemployment and GDP. This methodology is
applied separately for each individual product within each different geographic
region in which these portfolios exist.
This evaluation process is subject to numerous estimates and judgments.
The frequency of default, risk ratings, loss recovery rates, the size and
diversity of individual large credits, and the ability of borrowers with foreign
currency obligations to obtain the foreign currency necessary for orderly debt
servicing, among other things, are all taken into account during this review.
Changes in these estimates could have a direct impact on Citi's credit costs in
any quarter and could result in a change in the allowance. Changes to the
allowance are recorded in the Provision for loan losses .
Allowance for Unfunded
Lending Commitments
A similar
approach to the allowance for loan losses is used for calculating a reserve for
the expected losses related to unfunded loan commitments and standby letters of
credit. This reserve is classified on the Consolidated Balance Sheet in Other liabilities . Changes to the allowance for unfunded lending
commitments are recorded in the Provision for unfunded lending commitments .
For a further description of the loan loss reserve and related accounts,
see Notes 1 and 17 to the Consolidated Financial Statements.
Securitizations
Citigroup securitizes a number of different asset
classes as a means of strengthening its balance sheet and accessing competitive
financing rates in the market. Under these securitization programs, assets are
transferred into a trust and used as collateral by the trust to obtain
financing. The cash flows from assets in the trust service to the corresponding
trust liabilities and equity interests. If the structure of the trust meets
certain accounting guidelines, trust assets are treated as sold and are no
longer reflected as assets of Citi. If these guidelines are not met, the assets
continue to be recorded as Citi's assets, with the financing activity recorded
as liabilities on Citi's Consolidated Balance Sheet.
Citigroup also assists its clients in securitizing
their financial assets and packages and securitizes financial assets purchased
in the financial markets. Citi may also provide administrative, asset
management, underwriting, liquidity facilities and/or other services to the
resulting securitization entities and may continue to service some of these
financial assets.
Goodwill
Citigroup has recorded on its Consolidated Balance
Sheet goodwill of $25.7 billion (1.4% of assets) and $25.4 billion (1.4% of
assets) at December 31, 2012 and December 31, 2011, respectively. Goodwill is
tested for impairment annually on July 1. Citi is also required to test goodwill
for impairment whenever events or circumstances make it more-likely-than-not
that impairment may have occurred, such as a significant adverse change in the
business climate, a decision to sell or dispose of all or a significant portion
of a reporting unit, or a significant decline in Citi's stock price. No goodwill
impairment was recorded during 2010, 2011 and 2012.
128
As
discussed in Note 4 to the Consolidated Financial Statements, as of December 31,
2012, Citigroup consists of the following business segments: Global Consumer Banking, Institutional Clients
Group, Corporate/Other and Citi Holdings . Goodwill impairment testing is performed at the
level below the business segment (referred to as a reporting unit). Goodwill is
allocated to Citi's reporting units at the date the goodwill is initially
recorded. Once goodwill has been allocated to the reporting units, it generally
no longer retains its identification with a particular acquisition, but instead
becomes identified with the reporting unit as a whole. As a result, all of the
fair value of each reporting unit is available to support the allocated
goodwill. Citi's nine reporting units at December 31, 2012 were North America Regional Consumer Banking, EMEA
Regional Consumer Banking, Asia Regional Consumer Banking, Latin America
Regional Consumer Banking, Securities and Banking, Transaction Services,
Brokerage and Asset Management, Local Consumer Lending-Cards and Local Consumer Lending-Other .
Citi's reporting unit
structure in 2012 was the same as the reporting unit structure in 2011, although
certain underlying businesses were transferred between certain reporting units
in the first quarter of 2012. As of January 1, 2012, a substantial majority of
the Citi retail services business previously included within the Local Consumer Lending-Cards reporting unit was transferred to North America-Regional Consumer
Banking . In addition, certain
small businesses included within the Local Consumer Lending-Cards reporting unit were transferred to Local Consumer Lending-Other . Additionally, an insurance business in El
Salvador within Brokerage and
Asset Management was transferred
to Latin America Regional Consumer
Banking . Goodwill affected by
these transfers was reassigned from Local Consumer Lending-Cards and Brokerage and Asset
Management , respectively, to
those reporting units that received the businesses using a relative fair value
approach. Subsequent to January 1, 2012, goodwill has been allocated to
disposals and tested for impairment under the reporting unit structure
reflecting these transfers. An interim goodwill impairment test was performed on
the impacted reporting units as of January 1, 2012, resulting in no
impairment.
Under ASC 350, Intangibles-Goodwill and Other , the Company has an option to assess qualitative
factors to determine if it is necessary to perform the goodwill impairment test.
If, after assessing the totality of events or circumstances, the Company
determines that it is not more-likely-than-not that the fair value of a
reporting unit is less than its carrying amount, no further testing is
necessary. If, however, the Company determines that it is more-likely-than-not
that the fair value of a reporting unit is less than its carrying amount, then
the Company is required to perform the two-step goodwill impairment
test.
The first step requires a comparison of
the fair value of the individual reporting unit to its carrying value, including
goodwill. If the fair value of the reporting unit is in excess of the carrying
value, the related goodwill is considered not to be impaired and no further
analysis is necessary. If the carrying value of the reporting unit exceeds the
fair value, there is an indication of potential impairment and a second step of
testing is performed to measure the amount of impairment, if any, for that
reporting unit.
If required, the second step
involves calculating the implied fair value of goodwill for each of the affected
reporting units. The implied fair value of goodwill is determined in the same
manner as the amount of goodwill recognized in a business combination. The implied fair
value is the excess of the fair value of the reporting unit determined in step
one over the fair value of the net assets and identifiable intangibles. If the
amount of goodwill allocated to the reporting unit exceeds the implied fair
value of the goodwill in the pro forma purchase price allocation, an impairment charge is recorded for the excess. A
recognized impairment charge cannot exceed the amount of goodwill allocated to a
reporting unit and cannot subsequently be reversed even if the fair value of the
reporting unit recovers.
The carrying value used in both steps of the impairment test for each
reporting unit is derived by allocating Citigroup's total stockholders' equity
to each of Citi's components (defined below) based on the risk capital assessed
for each component. Refer to the "Risk Capital" section above for further
discussion. The assigned carrying value of the nine reporting units, the Special Asset Pool and Corporate/Other (together
the "components") is equal to Citigroup's total stockholders' equity. In
allocating Citigroup's total stockholders' equity to each component, the
reported goodwill and intangibles associated with each reporting unit are
specifically included in the carrying amount of the respective reporting units
and the remaining stockholders' equity is then allocated to each component based
on the relative risk capital associated with each component.
Goodwill impairment testing involves management
judgment, requiring an assessment of whether the carrying value of the reporting
unit can be supported by the fair value of the individual reporting unit using
widely accepted valuation techniques, such as the market approach (earnings
multiples and/or transaction multiples) and/or the income approach (discounted
cash flow (DCF) method). In applying these methodologies, Citi utilizes a number
of factors, including actual operating results, future business plans, economic
projections, and market data. Citi prepares a formal three-year strategic plan
for its businesses on an annual basis. These projections incorporate certain
external economic projections developed at the point in time the plan is
developed. For the purpose of performing any impairment test, the most recent
three-year forecast available is updated by Citi to reflect current economic
conditions as of the testing date. Citi used the updated long-range financial
forecasts as a basis for its annual goodwill impairment test on July 1,
2012.
129
Management may
engage an independent valuation specialist to assist in Citi's valuation
process. Citigroup engaged an independent valuation specialist in 2011 and 2012
to assist in Citi's valuation for most of the reporting units employing both the
market approach and DCF method. Citi believes that the DCF method, using
management projections for the selected reporting units and an appropriate
risk-adjusted discount rate, is most reflective of a market participant's view
of fair values given current market conditions. For the reporting units where
both methods were utilized in 2011 and 2012, the resulting fair values were
relatively consistent and appropriate weighting was given to outputs from both
methods.
The DCF method used at the time of each impairment test used discount
rates that Citi believes adequately reflected the risk and uncertainty in the
financial markets generally and specifically in the internally generated cash
flow projections. The DCF method employs a capital asset pricing model in
estimating the discount rate. Citi continues to value the remaining reporting
units where it believes the risk of impairment to be low, using primarily the
market approach.
Citi performed its annual goodwill impairment test as of July
1, 2012. The results of the 2012 annual impairment test validated that the fair
values exceeded the carrying values for the reporting units that had goodwill at
the testing date. No interim goodwill impairment tests were required to be
performed during 2012, outside of the test performed as of January 1, 2012, as
discussed above.
Since none of Citi's reporting units are publicly traded,
individual reporting unit fair value determinations cannot be directly
correlated to Citigroup's common stock price. The sum of the fair values of the
reporting units at July 1, 2012 exceeded the overall market capitalization of
Citi as of July 1, 2012. However, Citi believes that it was not meaningful to
reconcile the sum of the fair values of its reporting units to its market
capitalization due to several factors. The market capitalization of Citigroup
reflects the execution risk in a transaction involving Citigroup due to its
size. However, the individual reporting units' fair values are not subject to
the same level of execution risk or a business model that is perceived to be as
complex.
While no impairment was noted in step one of Citi's Local Consumer Lending-Cards reporting unit impairment test as of July 1, 2012, goodwill present in
the reporting unit may be particularly sensitive to further deterioration in
economic conditions. Under the market approach for valuing this reporting unit,
the key assumption is the price multiple. The selection of the multiple
considers operating performance and financial condition such as return on equity
and net income growth of Local Consumer
Lending-Cards as compared to those of
selected guideline companies. Among other factors, the level and expected growth
in return on tangible equity relative to those of the guideline companies is
considered. Since the guideline company prices used are on a minority interest
basis, the selection of the multiple considers the guideline acquisition prices,
which reflect control rights and privileges in arriving at a multiple that
reflects an appropriate control premium.
For the Local Consumer
Lending-Cards valuation under the income
approach, the assumptions used as the basis for the model include cash flows for
the forecasted period, assumptions embedded in arriving at an estimation of the
terminal year value and discount rate. The cash flows are estimated based on
management's most recent projections available as of the testing date, giving
consideration to target equity capital requirements based on selected guideline
companies for the reporting unit. In arriving at a terminal value for Local Consumer Lending-Cards , using 2015 as the terminal year, the assumptions used
included a long-term growth rate. The discount rate used in the analysis is
based on the reporting units' estimated cost of equity capital computed under
the capital asset pricing model.
If the future were to differ adversely
from management's best estimate of key economic assumptions and associated cash
flows were to decrease by a small margin, Citi could potentially experience
future impairment charges with respect to the $111 million of goodwill remaining
in its Local Consumer
Lending-Cards reporting unit. Any such
charge, by itself, would not negatively affect the Company's regulatory capital
ratios, tangible common equity (TCE) or liquidity position.
See Note
18 to the Consolidated Financial Statements for additional information on
goodwill, including the changes in the goodwill balance period-over-period and
the reporting unit goodwill balances as of December 31, 2012.
Income Taxes
Overview
Citi is subject to the income tax laws of the U.S. and its states and
local municipalities, and the foreign jurisdictions in which Citi operates.
These tax laws are complex and are subject to differing interpretations by the
taxpayer and the relevant governmental taxing authorities. Disputes over
interpretations of the tax laws may be subject to review and adjudication by the
court systems of the various tax jurisdictions or may be settled with the taxing
authority upon audit.
In establishing a provision for income tax
expense, Citi must make judgments and interpretations about the application of
these inherently complex tax laws. Citi must also make estimates about when in
the future certain items will affect taxable income in the various tax
jurisdictions, both domestic and foreign. Deferred taxes are recorded for the
future consequences of events that have been recognized in the financial
statements or tax returns, based upon enacted tax laws and rates. Deferred tax
assets (DTAs) are recognized subject to management's judgment that realization
is more-likely-than-not. See Note 10 to the Consolidated Financial Statements
for a further discussion of Citi's tax provision and related income tax assets
and liabilities.
130
At December 31, 2012, Citi had recorded net DTAs of $55.3 billion, an increase of $3.8 billion from $51.5 billion at December 31, 2011. The increase in total DTAs year-over-year was due, in large part, to the continued negative impact of Citi Holdings on U.S. taxable income, including the MSSB loss and other-than-temporary impairment in the third quarter of 2012. The following table summarizes Citi's net DTAs balance at December 31, 2012 and 2011:
Jurisdiction/Component
DTAs balance | DTAs balance | |||||
In billions of dollars | December 31, 2012 | December 31, 2011 | ||||
U.S. federal (1) | ||||||
Consolidated tax return net operating | ||||||
loss (NOL) | $ | - | $ | - | ||
Consolidated tax return foreign tax | ||||||
credit (FTC) | 22.0 | 15.8 | ||||
Consolidated tax return general | ||||||
business credit (GBC) | 2.6 | 2.1 | ||||
Future tax deductions and credits | 22.0 | 23.0 | ||||
Other (2) | 0.9 | 1.4 | ||||
Total U.S. federal | $ | 47.5 | $ | 42.3 | ||
State and local | ||||||
New York NOLs | $ | 1.3 | $ | 1.3 | ||
Other state NOLs | 0.6 | 0.7 | ||||
Future tax deductions | 2.6 | 2.2 | ||||
Total state and local | $ | 4.5 | $ | 4.2 | ||
Foreign | ||||||
APB 23 subsidiary NOLs | $ | 0.2 | $ | 0.5 | ||
Non-APB 23 subsidiary NOLs | 1.2 | 1.8 | ||||
Future tax deductions | 1.9 | 2.7 | ||||
Total foreign | $ | 3.3 | $ | 5.0 | ||
Total (3) | $ | 55.3 | $ | 51.5 |
(1) | Included in the net U.S. federal DTAs of $47.5 billion at December 31, 2012 are deferred tax liabilities of $2 billion that will reverse in the relevant carry-forward period and may be used to support the DTAs. | |
(2) | Includes $0.8 billion and $1.2 billion for 2012 and 2011, respectively, of subsidiary tax carry-forwards that are expected to be utilized separately from Citigroup's consolidated tax carry-forwards. | |
(3) | Approximately $40 billion of the total DTAs was deducted in calculating Citi's Tier 1 Common and Tier 1 Capital as of December 31, 2012. |
While Citi's net total DTAs increased year-over-year, the time remaining for utilization has shortened, given the passage of time, particularly with respect to the foreign tax credit (FTC) component of the DTAs (see discussion below). Realization of the DTAs will continue to be driven by Citi's ability to generate U.S. taxable earnings in the carry-forward periods, including through actions that optimize Citi's U.S. taxable earnings. Citi does not expect a significant reduction in the balance of its net DTAs during 2013.
Although
realization is not assured, Citi believes that the realization of the recognized
net DTAs of $55.3 billion at December 31, 2012 is more-likely-than-not based
upon (i) expectations as to future taxable income in the jurisdictions in which
the DTAs arise, and (ii) available tax planning strategies (as defined in ASC
740, Income Taxes ) that would be implemented, if necessary, to prevent a carry-forward
from expiring, each as discussed further below. In general, Citi would need to
generate approximately $112 billion of U.S. taxable income during the respective
carry-forward periods, substantially all of which must be generated during the
FTC carry-forward periods (as discussed below), to fully realize its U.S.
federal, state and local DTAs.
As referenced above, Citi has concluded
that there are two components of positive evidence that support the full
realizability of its DTAs. First, Citi forecasts sufficient U.S. taxable income
in the carry-forward periods, exclusive of ASC 740 tax planning strategies,
although Citi's estimated future taxable income has decreased due to the ongoing
challenging economic environment, which will continue to be subject to overall
market and global economic conditions. Citi's forecasted taxable income
incorporates geographic business forecasts and taxable income adjustments to
those forecasts (e.g., U.S. tax exempt income, loan loss reserves deductible for
U.S. tax reporting in subsequent years), and actions intended to optimize its
U.S. taxable earnings.
Second, Citi has sufficient tax planning
strategies available to it under ASC 740 that would be implemented, if
necessary, to prevent a carry-forward from expiring. These strategies include
repatriating low-taxed foreign source earnings for which an assertion that the
earnings have been indefinitely reinvested has not been made, accelerating U.S.
taxable income into, or deferring U.S. tax deductions out of, the latter years
of the carry-forward period (e.g., selling appreciated intangible assets,
electing straight-line depreciation), accelerating deductible temporary
differences outside the U.S., and selling certain assets that produce tax-exempt
income, while purchasing assets that produce fully taxable income. Also, the
sale or restructuring of certain businesses can produce significant U.S. taxable
income within the relevant carry-forward periods.
In
addition, Citi monitors the level of its investments in foreign subsidiaries for
which it has made an indefinite investment assertion under ASC 740 (see Note 10
to the Consolidated Financial Statements for information on the amount of such
assertions as of December 31, 2012). Citi could decide to indefinitely reinvest
a lesser amount of its future earnings in these foreign subsidiaries. Such a
decision would increase Citi's tax provision on these foreign subsidiary
earnings to the higher U.S. tax rate and thus reduce Citi's after-tax
earnings.
131
Based upon the
foregoing discussion, Citi believes the U.S. federal and New York state and city
NOL carry-forward period of 20 years provides enough time to fully utilize the
DTAs pertaining to the existing NOL carry-forwards, as set forth in the table
above, and any NOL that would be created by the reversal of the future net
deductions that have not yet been taken on a tax return.
As noted
in the table above, Citi's FTC carry-forwards were $22.0 billion as of December
31, 2012, compared to $15.8 billion as of December 31, 2011. Over half of the
FTC increase year-over-year was due to specific tax planning actions involving
the payment of dividends from Citi's foreign subsidiaries.
The U.S.
FTC carry-forward period is 10 years and represents the most time-sensitive
component of Citi's DTAs. The table below sets forth the expiration dates for
Citi's FTCs as of December 31, 2012 and 2011:
In billions of dollars | ||||||
Dec. 31, | Dec. 31, | |||||
Year of expiration | 2012 | 2011 | ||||
U.S. consolidated tax return FTC carry-forwards | ||||||
2016 | $ | 0.4 | $ | 0.4 | ||
2017 (1) | 6.6 | 4.9 | ||||
2018 | 5.3 | 5.3 | ||||
2019 | 1.3 | 1.3 | ||||
2020 | 2.3 | 2.2 | ||||
2021 | 1.9 | 1.7 | ||||
2022 | 4.2 | - | ||||
Total U.S. consolidated tax return FTC carry-forwards | $ | 22.0 | $ | 15.8 |
(1) | Increase is due to the conclusion of Citi's 2006–2008 U.S. federal tax audit. |
Utilization of
FTCs in any year is restricted to 35% of foreign source taxable income in that
year. However, overall domestic losses that Citi has incurred of approximately
$63 billion as of December 31, 2012 are allowed to be reclassified as foreign
source income to the extent of 50% of domestic source income produced in
subsequent years, and such resulting foreign source income would cover the FTCs
being carried forward. As such, Citi believes the foreign source taxable income
limitation will not be an impediment to the FTC carry-forward usage as long as
Citi can generate sufficient domestic taxable income within the 10-year
carry-forward period.
Citi believes that it will generate
sufficient U.S. taxable income within the 10-year carry-forward period
referenced above to be able to fully utilize the FTC carry-forward, in addition
to any FTC produced in such period.
First Quarter of 2013-Tax
Benefit
On January 2, 2013, the American
Taxpayer Relief Act of 2012 was signed into law. Among other provisions
contained in the Act was a retroactive extension to the beginning of 2012 of the
"active financing exception." As a result of the enactment of this new tax law,
Citigroup expects to have a tax benefit of approximately $45 million in the
first quarter of 2013.
For additional information on income
taxes, see Note 10 to the Consolidated Financial Statements.
Litigation
Accruals
See the discussion in Note 28 to
the Consolidated Financial Statements for information regarding Citi's policies
on establishing accruals for legal and regulatory contingencies.
Accounting Changes and Future
Application of Accounting Standards
See
Note 1 to the Consolidated Financial Statements for a discussion of "Accounting
Changes" and the "Future Application of Accounting
Standards."
132
DISCLOSURE CONTROLS AND PROCEDURES
Citi's disclosure controls and procedures
are designed to ensure that information required to be disclosed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, including
without limitation that information required to be disclosed by Citi in its SEC
filings is accumulated and communicated to management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO) as appropriate to
allow for timely decisions regarding required
disclosure.
Citi's
Disclosure Committee assists the CEO and CFO in their responsibilities to
design, establish, maintain and evaluate the effectiveness of Citi's disclosure
controls and procedures. The Disclosure Committee is responsible for, among
other things, the oversight, maintenance and implementation of the disclosure
controls and procedures, subject to the supervision and oversight of the CEO and
CFO.
Citi's
management, with the participation of its CEO and CFO, has evaluated the
effectiveness of Citigroup's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act) as of December 31, 2012 and, based on
that evaluation, the CEO and CFO have concluded that at that date Citigroup's
disclosure controls and procedures were effective.
133
MANAGEMENT'S ANNUAL REPORT ON INTERNAL
CONTROL OVER FINANCIAL
REPORTING
Citi's management is responsible for establishing and maintaining adequate internal control over financial reporting. Citi's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Citi's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of Citi's assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that Citi's receipts and expenditures are made only in accordance with authorizations of Citi's management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Citi's assets that could have a material effect on its financial statements.
Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. In addition, given Citi's large size,
complex operations and global footprint, lapses or deficiencies in internal
controls may occur from time to time.
Citi management assessed the effectiveness
of Citigroup's internal control over financial reporting as of December 31, 2012
based on the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based
on this assessment, management believes that, as of December 31, 2012, Citi's
internal control over financial reporting was effective. In addition, there were
no changes in Citi's internal control over financial reporting during the fiscal
quarter ended December 31, 2012 that materially affected, or are reasonably
likely to materially affect, Citi's internal control over financial
reporting.
The effectiveness of Citi's internal control over financial
reporting as of December 31, 2012 has been audited by KPMG LLP, Citi's
independent registered public accounting firm, as stated in their report below,
which expressed an unqualified opinion on the effectiveness of Citi's internal
control over financial reporting as of December 31, 2012.
134
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K,
including but not limited to statements included within the Management's
Discussion and Analysis of Financial Condition and Results of Operations, are
"forward-looking statements" within the meaning of the rules and regulations of
the SEC. In addition, Citigroup also may make forward-looking statements in its
other documents filed or furnished with the SEC, and its management may make
forward-looking statements orally to analysts, investors, representatives of the
media and others.
Generally, forward-looking statements are not based on historical facts
but instead represent Citigroup's and its management's beliefs regarding future
events. Such statements may be identified by words such as believe, expect, anticipate, intend, estimate, may increase,
may fluctuate , and similar expressions, or
future or conditional verbs such as will,
should, would and could .
Such
statements are based on management's current expectations and are subject to
uncertainty and changes in circumstances. Actual results and capital and other
financial condition may differ materially from those included in these
statements due to a variety of factors, including without limitation the
precautionary statements included throughout this Form 10-K and the factors and
uncertainties listed and described under "Risk Factors" above and summarized
below:
the potential impact to Citi and its businesses of additional regulations with respect to securitizations; the potential impact of the ongoing Eurozone debt and economic crisis, directly or indirectly, on Citi's businesses, results of operations or financial condition, including the exit of one or more countries from the European Monetary Union; the uncertainty relating to the sustainability and pace of economic recovery in the U.S. and globally and the impact any continued uncertainty could have on Citi's businesses results of operations and financial condition; any significant global economic downturn or disruption, including a significant decline in global trade volumes, on Citi's businesses, results of operations and financial condition, particularly as compared to Citi's competitors; the uncertainty regarding the level of U.S. government debt and potential downgrade of the U.S. government credit rating on Citi's businesses, results of operations, capital, funding and liquidity; risks arising from Citi's extensive operations outside of the U.S., particularly in emerging markets, including among others foreign exchange controls, limitations on foreign investments, sociopolitical instability, nationalization, closure of branches or subsidiaries and confiscation of assets, as well as increased compliance and regulatory risks and costs; the potential impact on Citi's liquidity and/or costs of funding as a result of external factors, such as market disruptions and changes in Citi's credit spreads; the potential impact on Citi's funding and liquidity, as well as the results of operations for certain of its businesses, resulting from a reduction in Citi's or its more significant subsidiaries' credit ratings; the potential impact on Citi's businesses, business practices, reputation, financial condition or results of operations from the extensive legal and regulatory proceedings, investigations and inquiries to which Citi is subject, including among others those related to Citi's U.S. mortgage-related activities, interbank offered rates submissions and anti-money laundering programs; the impact of Citi Holdings on Citi's results of operations, and its ability to utilize the capital supporting the remaining assets of Citi Holdings for more productive purposes; Citi's ability to return capital to shareholders and the potential market impact if it is not able to do so, whether as a result of the CCAR process, required supervisory stress tests or otherwise;
135
Citi's ability to achieve its announced or anticipated expense reductions, including as a result of external factors outside of its control; Citi's ability to utilize DTAs, including its ability to generate U.S. taxable earnings during the relevant carry-forward periods, particularly the FTC carry-forward periods; the potential impact on the value of Citi's DTAs if U.S., state or foreign tax rates are reduced, or if other changes are made to the U.S. tax system, such as changes to the tax treatment of foreign business income; Citi's failure to maintain its contractual relationships with various retailers and merchants within its U.S. credit card businesses in NA RCB , such as the Citi-AAdvantage card program, and the potential impact any such failure could have on the results of operations or financial condition of those businesses; the potential impact to Citi from continually evolving cybersecurity and other technological risks and attacks, including additional costs, reputational damage, regulatory penalties and financial losses;
Any forward-looking statements made by or on behalf of Citigroup speak only as to the date they are made, and Citi does not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements were made.
136
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM -
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and
Stockholders
Citigroup Inc.:
We have audited Citigroup Inc. and
subsidiaries' (the "Company" or "Citigroup") internal control over financial
reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying management's
annual report on internal control over financial reporting. Our responsibility
is to express an opinion on the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A company's
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's
internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Citigroup maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2012, based on criteria
established in Internal Control-Integrated
Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Citigroup as
of December 31, 2012 and 2011, and the related consolidated statements of
income, comprehensive income, changes in stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 2012, and our
report dated March 1, 2013 expressed an unqualified opinion on those
consolidated financial statements.
New York, New York
March 1, 2013
137
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM -
CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and
Stockholders
Citigroup Inc.:
We have audited the accompanying
consolidated balance sheets of Citigroup Inc. and subsidiaries (the "Company" or
"Citigroup") as of December 31, 2012 and 2011, and the related consolidated
statements of income, comprehensive income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
2012. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our
audits.
We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made
by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Citigroup as of December 31, 2012 and 2011, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 2012, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Citigroup's internal
control over financial reporting as of December 31, 2012, based on criteria
established in Internal Control-Integrated
Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
March 1, 2013 expressed an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
New York, New York
March 1, 2013
138
FINANCIAL STATEMENTS AND NOTES TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS | ||
Consolidated Statement of
Income- For the Years Ended December 31, 2012, 2011 and 2010 | 140 | |
Consolidated Statement of
Comprehensive Income- For the Years Ended December 31, 2012, 2011 and 2010 | 141 | |
Consolidated Balance Sheet-December 31, 2012 and 2011 | 142 | |
Consolidated Statement of
Changes in Stockholders'
Equity- For the Years Ended December 31, 2012, 2011 and 2010 | 144 | |
Consolidated Statement of Cash
Flows- For the Years Ended December 31, 2012, 2011 and 2010 | 145 |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Note 1 – Summary of Significant Accounting Policies | 146 | |
Note 2 – Business Divestitures | 161 | |
Note 3 – Discontinued Operations | 161 | |
Note 4 – Business Segments | 163 | |
Note 5 – Interest Revenue and Expense | 164 | |
Note 6 – Commissions and Fees | 164 | |
Note 7 – Principal Transactions | 165 | |
Note 8 – Incentive Plans | 165 | |
Note 9 – Retirement Benefits | 171 | |
Note 10 – Income Taxes | 183 | |
Note 11 – Earnings per Share | 187 | |
Note 12 – Federal Funds/Securities Borrowed, Loaned and Subject to Repurchase Agreements | 188 | |
Note 13 – Brokerage Receivables and Brokerage Payables | 189 | |
Note 14 – Trading Account Assets and Liabilities | 189 | |
Note 15 – Investments | 190 | |
Note 16 – Loans | 201 | |
Note 17 – Allowance for Credit Losses | 212 | |
Note 18 – Goodwill and Intangible Assets | 214 | |
Note 19 – Debt | 217 |
Note 20 – Regulatory Capital and Citigroup Inc. Parent Company Information | 219 | |
Note 21 – Changes in Accumulated Other Comprehensive Income (Loss) | 222 | |
Note 22 – Securitizations and Variable Interest Entities | 223 | |
Note 23 – Derivatives Activities | 241 | |
Note 24 – Concentrations of Credit Risk | 250 | |
Note 25 – Fair Value Measurement | 250 | |
Note 26 – Fair Value Elections | 269 | |
Note 27 – Pledged Assets, Collateral, Commitments and Guarantees | 274 | |
Note 28 – Contingencies | 280 | |
Note 29 – Selected Quarterly Financial Data (Unaudited) | 288 |
139
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME | Citigroup Inc. and Subsidiaries | |||||||||
Years Ended December 31, | ||||||||||
In millions of dollars, except per share amounts | 2012 | 2011 | 2010 | |||||||
Revenues | ||||||||||
Interest revenue | $ | 68,138 | $ | 72,681 | $ | 79,282 | ||||
Interest expense | 20,535 | 24,234 | 25,096 | |||||||
Net interest revenue | $ | 47,603 | $ | 48,447 | $ | 54,186 | ||||
Commissions and fees | $ | 12,926 | $ | 12,850 | $ | 13,658 | ||||
Principal transactions | 4,781 | 7,234 | 7,517 | |||||||
Administration and other fiduciary fees | 4,012 | 3,995 | 4,005 | |||||||
Realized gains (losses) on sales of investments, net | 3,251 | 1,997 | 2,411 | |||||||
Other-than-temporary impairment losses on investments | ||||||||||
Gross impairment losses (1) | (5,037 | ) | (2,413 | ) | (1,495 | ) | ||||
Less: Impairments recognized in AOCI | 66 | 159 | 84 | |||||||
Net impairment losses recognized in earnings | $ | (4,971 | ) | $ | (2,254 | ) | $ | (1,411 | ) | |
Insurance premiums | $ | 2,476 | $ | 2,647 | $ | 2,684 | ||||
Other revenue (2) | 95 | 3,437 | 3,551 | |||||||
Total non-interest revenues | $ | 22,570 | $ | 29,906 | $ | 32,415 | ||||
Total revenues, net of interest expense | $ | 70,173 | $ | 78,353 | $ | 86,601 | ||||
Provisions for credit losses and for benefits and claims | ||||||||||
Provision for loan losses | $ | 10,848 | $ | 11,773 | $ | 25,194 | ||||
Policyholder benefits and claims | 887 | 972 | 965 | |||||||
Provision (release) for unfunded lending commitments | (16 | ) | 51 | (117 | ) | |||||
Total provisions for credit losses and for benefits and claims | $ | 11,719 | $ | 12,796 | $ | 26,042 | ||||
Operating expenses | ||||||||||
Compensation and benefits | $ | 25,204 | $ | 25,688 | $ | 24,430 | ||||
Premises and equipment | 3,282 | 3,326 | 3,331 | |||||||
Technology/communication | 5,914 | 5,133 | 4,924 | |||||||
Advertising and marketing | 2,224 | 2,346 | 1,645 | |||||||
Other operating | 13,894 | 14,440 | 13,045 | |||||||
Total operating expenses (3) | $ | 50,518 | $ | 50,933 | $ | 47,375 | ||||
Income (loss) from continuing operations before income taxes | $ | 7,936 | $ | 14,624 | $ | 13,184 | ||||
Provision for income taxes (benefit) | 27 | 3,521 | 2,233 | |||||||
Income from continuing operations | $ | 7,909 | $ | 11,103 | $ | 10,951 | ||||
Discontinued operations | ||||||||||
Income (loss) from discontinued operations | $ | (219 | ) | $ | 23 | $ | 72 | |||
Gain (loss) on sale | (1 | ) | 155 | (702 | ) | |||||
Provision (benefit) for income taxes | (71 | ) | 66 | (562 | ) | |||||
Income (loss) from discontinued operations, net of taxes | $ | (149 | ) | $ | 112 | $ | (68 | ) | ||
Net income before attribution of noncontrolling interests | $ | 7,760 | $ | 11,215 | $ | 10,883 | ||||
Noncontrolling interests | 219 | 148 | 281 | |||||||
Citigroup's net income | $ | 7,541 | $ | 11,067 | $ | 10,602 | ||||
Basic earnings per share (4) | ||||||||||
Income from continuing operations | $ | 2.56 | $ | 3.69 | $ | 3.66 | ||||
Income (loss) from discontinued operations, net of taxes | (0.05 | ) | 0.04 | (0.01 | ) | |||||
Net income | $ | 2.51 | $ | 3.73 | $ | 3.65 | ||||
Weighted average common shares outstanding | 2,930.6 | 2,909.8 | 2,877.6 | |||||||
Diluted earnings per share (4) | ||||||||||
Income from continuing operations | $ | 2.49 | $ | 3.59 | $ | 3.55 | ||||
Income (loss) from discontinued operations, net of taxes | (0.05 | ) | 0.04 | (0.01 | ) | |||||
Net income | $ | 2.44 | $ | 3.63 | $ | 3.54 | ||||
Adjusted weighted average common shares outstanding (4) | 3,015.5 | 2,998.8 | 2,967.8 |
(1) | 2012 includes the recognition of a $3,340 million impairment charge related to the carrying value of Citi's remaining 35% interest in the Morgan Stanley Smith Barney joint venture (MSSB), as well as the recognition of a $1,181 million impairment charge related to Citi's investment in Akbank. See Note 15 to the Consolidated Financial Statements. | |
(2) | Other revenue for 2012 includes a $1,344 million loss related to the sale of a 14% interest in MSSB, as well as the recognition of a $424 million loss related to the sale of a 10.1% stake in Akbank. | |
(3) | Citigroup recorded repositioning charges of $1,375 million for 2012, $706 million for 2011 and $507 million for 2010. | |
(4) | 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. | |
The Notes to the Consolidated Financial Statements are an integral part of these Consolidated Financial Statements. |
140
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Citigroup Inc. and Subsidiaries | ||||||||||
Years Ended December 31, | ||||||||||
In millions of dollars | 2012 | 2011 | 2010 | |||||||
Net income before attribution of noncontrolling interests | $ | 7,760 | $ | 11,215 | $ | 10,883 | ||||
Citigroup's other comprehensive income (loss) | ||||||||||
Net change in unrealized gains and losses on investment securities, net of taxes | $ | 632 | $ | 2,360 | $ | 1,952 | ||||
Net change in cash flow hedges, net of taxes | 527 | (170 | ) | 532 | ||||||
Net change in foreign currency translation adjustment, net of taxes and hedges | 721 | (3,524 | ) | 820 | ||||||
Pension liability adjustment, net of taxes (1) | (988 | ) | (177 | ) | (644 | ) | ||||
Citigroup's total other comprehensive income (loss) | $ | 892 | $ | (1,511 | ) | $ | 2,660 | |||
Other comprehensive income (loss) attributable to noncontrolling interests | ||||||||||
Net change in unrealized gains and losses on investment securities, net of taxes | $ | 32 | $ | (5 | ) | $ | 1 | |||
Net change in foreign currency translation adjustment, net of taxes | 58 | (87 | ) | (27 | ) | |||||
Total other comprehensive income (loss) attributable to noncontrolling interests | $ | 90 | $ | (92 | ) | $ | (26 | ) | ||
Total comprehensive income before attribution of noncontrolling interests | $ | 8,742 | $ | 9,612 | $ | 13,517 | ||||
Total comprehensive income attributable to noncontrolling interests | 309 | 56 | 255 | |||||||
Citigroup's comprehensive income | $ | 8,433 | $ | 9,556 | $ | 13,262 |
(1) | Primarily reflects adjustments based on the year-end actuarial valuations of the Company's pension and postretirement plans and amortization of amounts previously recognized in Other comprehensive income . | |
The Notes to the Consolidated Financial Statements are an integral part of these Consolidated Financial Statements. |
141
CONSOLIDATED BALANCE SHEET | Citigroup Inc. and Subsidiaries | |||||||
December 31, | ||||||||
In millions of dollars | 2012 | 2011 | ||||||
Assets | ||||||||
Cash and due from banks (including segregated cash and other deposits) | $ | 36,453 | $ | 28,701 | ||||
Deposits with banks | 102,134 | 155,784 | ||||||
Federal funds sold and securities borrowed or purchased under agreements to resell (including $160,589 and | ||||||||
$142,862 as of December 31, 2012 and December 31, 2011, respectively, at fair value) | 261,311 | 275,849 | ||||||
Brokerage receivables | 22,490 | 27,777 | ||||||
Trading account assets (including $105,458 and $119,054 pledged to creditors at December 31, 2012 and December 31, 2011, respectively) | 320,929 | 291,734 | ||||||
Investments (including $21,423 and $14,940 pledged to creditors at December 31, 2012 and December 31, 2011, respectively, | ||||||||
and $294,463 and $274,040 as of December 31, 2012 and December 31, 2011, respectively, at fair value) | 312,326 | 293,413 | ||||||
Loans, net of unearned income | ||||||||
Consumer (including $1,231 and $1,326 as of December 31, 2012 and December 31, 2011, respectively, at fair value) | 408,671 | 423,340 | ||||||
Corporate (including $4,056 and $3,939 as of December 31, 2012 and December 31, 2011, respectively, at fair value) | 246,793 | 223,902 | ||||||
Loans, net of unearned income | $ | 655,464 | $ | 647,242 | ||||
Allowance for loan losses | (25,455 | ) | (30,115 | ) | ||||
Total loans, net | $ | 630,009 | $ | 617,127 | ||||
Goodwill | 25,673 | 25,413 | ||||||
Intangible assets (other than MSRs) | 5,697 | 6,600 | ||||||
Mortgage servicing rights (MSRs) | 1,942 | 2,569 | ||||||
Other assets (including $13,299 and $13,360 as of December 31, 2012 and December 31, 2011, respectively, at fair value) | 145,660 | 148,911 | ||||||
Assets of discontinued operations held for sale | 36 | - | ||||||
Total assets | $ | 1,864,660 | $ | 1,873,878 |
The following table presents certain assets of consolidated variable interest entities (VIEs), which are included in the Consolidated Balance Sheet above. The assets in the table below include only those assets that can be used to settle obligations of consolidated VIEs on the following page, and are in excess of those obligations. Additionally, the assets in the table below include third-party assets of consolidated VIEs only, and exclude intercompany balances that eliminate in consolidation.
December 31, | |||||||
In millions of dollars | 2012 | 2011 | |||||
Assets of consolidated VIEs that can only be used to settle obligations of consolidated VIEs | |||||||
Cash and due from banks | $ | 498 | $ | 591 | |||
Trading account assets | 481 | 567 | |||||
Investments | 10,751 | 12,509 | |||||
Loans, net of unearned income | |||||||
Consumer (including $1,191 and $1,292 as of December 31, 2012 and December 31, 2011, respectively, at fair value) | 93,936 | 103,275 | |||||
Corporate (including $157 and $198 as of December 31, 2012 and December 31, 2011, respectively, at fair value) | 23,684 | 23,780 | |||||
Loans, net of unearned income | $ | 117,620 | $ | 127,055 | |||
Allowance for loan losses | (5,854 | ) | (8,000 | ) | |||
Total loans, net | $ | 111,766 | $ | 119,055 | |||
Other assets | 674 | 874 | |||||
Total assets of consolidated VIEs that can only be used to settle obligations of consolidated VIEs | $ | 124,170 | $ | 133,596 |
Statement continues on the next page.
142
CONSOLIDATED BALANCE SHEET | Citigroup Inc. and Subsidiaries | |||||||
(Continued) | December 31, | |||||||
In millions of dollars, except shares and per share amounts | 2012 | 2011 | ||||||
Liabilities | ||||||||
Non-interest-bearing deposits in U.S. offices | $ | 129,657 | $ | 119,437 | ||||
Interest-bearing deposits in U.S. offices (including $889 and $848 as of December 31, 2012 and | ||||||||
December 31, 2011, respectively, at fair value) | 247,716 | 223,851 | ||||||
Non-interest-bearing deposits in offices outside the U.S. | 65,024 | 57,357 | ||||||
Interest-bearing deposits in offices outside the U.S. (including $558 and $478 as of December 31, 2012 and | ||||||||
December 31, 2011, respectively, at fair value) | 488,163 | 465,291 | ||||||
Total deposits | $ | 930,560 | $ | 865,936 | ||||
Federal funds purchased and securities loaned or sold under agreements to repurchase | ||||||||
(including $116,689 and $97,712 as of December 31, 2012 and December 31, 2011, respectively, at fair value) | 211,236 | 198,373 | ||||||
Brokerage payables | 57,013 | 56,696 | ||||||
Trading account liabilities | 115,549 | 126,082 | ||||||
Short-term borrowings (including $818 and $1,354 as of December 31, 2012 and December 31, 2011, respectively, at fair value) | 52,027 | 54,441 | ||||||
Long-term debt (including $29,764 and $24,172 as of December 31, 2012 and December 31, 2011, respectively, at fair value) | 239,463 | 323,505 | ||||||
Other liabilities (including $2,910 and $3,742 as of December 31, 2012 and December 31, 2011, respectively, at fair value) | 67,815 | 69,272 | ||||||
Liabilities of discontinued operations held for sale | - | - | ||||||
Total liabilities | $ | 1,673,663 | $ | 1,694,305 | ||||
Stockholders' equity | ||||||||
Preferred stock ($1.00 par value; authorized shares: 30 million), issued shares: 102,038 as of | ||||||||
December 31, 2012 and 12,038 as of December 31, 2011, at aggregate liquidation value | $ | 2,562 | $ | 312 | ||||
Common stock ($0.01 par value; authorized shares: 6 billion), issued shares: 3,043,153,204 as of | ||||||||
December 31, 2012 and 2,937,755,921 as of December 31, 2011 | 30 | 29 | ||||||
Additional paid-in capital | 106,391 | 105,804 | ||||||
Retained earnings | 97,809 | 90,520 | ||||||
Treasury stock, at cost: December 31, 2012-14,269,301 shares and December 31, 2011-13,877,688 shares | (847 | ) | (1,071 | ) | ||||
Accumulated other comprehensive income (loss) | (16,896 | ) | (17,788 | ) | ||||
Total Citigroup stockholders' equity | $ | 189,049 | $ | 177,806 | ||||
Noncontrolling interest | 1,948 | 1,767 | ||||||
Total equity | $ | 190,997 | $ | 179,573 | ||||
Total liabilities and equity | $ | 1,864,660 | $ | 1,873,878 |
The following table presents certain liabilities of consolidated VIEs, which are included in the Consolidated Balance Sheet above. The liabilities in the table below include third-party liabilities of consolidated VIEs only, and exclude intercompany balances that eliminate in consolidation. The liabilities also exclude amounts where creditors or beneficial interest holders have recourse to the general credit of Citigroup.
December 31, | |||||||
In millions of dollars | 2012 | 2011 | |||||
Liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have | |||||||
recourse to the general credit of Citigroup | |||||||
Short-term borrowings | $ | 15,637 | $ | 21,009 | |||
Long-term debt (including $1,330 and $1,558 as of December 31, 2012 and December 31, 2011, respectively, at fair value) | 26,346 | 50,451 | |||||
Other liabilities | 1,224 | 1,051 | |||||
Total liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have | |||||||
recourse to the general credit of Citigroup | $ | 43,207 | $ | 72,511 |
The Notes to the Consolidated Financial Statements are an integral part of these Consolidated Financial Statements.
143
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY | Citigroup Inc. and Subsidiaries |
Years ended December 31, | ||||||||||||||||
Amounts | Shares | |||||||||||||||
In millions of dollars, except shares in thousands | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | ||||||||||
Preferred stock at aggregate liquidation value | ||||||||||||||||
Balance, beginning of year | $ | 312 | $ | 312 | $ | 312 | 12 | 12 | 12 | |||||||
Issuance of new preferred stock | 2,250 | - | - | 90 | - | - | ||||||||||
Balance, end of period | $ | 2,562 | $ | 312 | $ | 312 | 102 | 12 | 12 | |||||||
Common stock and additional paid-in capital | ||||||||||||||||
Balance, beginning of year | $ | 105,833 | $ | 101,316 | $ | 98,428 | 2,937,756 | 2,922,402 | 2,862,610 | |||||||
Employee benefit plans | 597 | 766 | (736 | ) | 9,037 | 3,540 | 46,703 | |||||||||
Issuance of shares and T-DECs for TARP repayment | - | - | - | 96,338 | - | 1,270 | ||||||||||
ADIA Upper DECs equity units purchase contract | - | 3,750 | 3,750 | - | 11,781 | 11,781 | ||||||||||
Other | (9 | ) | 1 | (126 | ) | 22 | 33 | 38 | ||||||||
Balance, end of period | $ | 106,421 | $ | 105,833 | $ | 101,316 | 3,043,153 | 2,937,756 | 2,922,402 | |||||||
Retained earnings | ||||||||||||||||
Balance, beginning of year | $ | 90,520 | $ | 79,559 | $ | 77,440 | ||||||||||
Adjustment to opening balance, net of taxes (1)(2) | (107 | ) | - | (8,483 | ) | |||||||||||
Adjusted balance, beginning of period | $ | 90,413 | $ | 79,559 | $ | 68,957 | ||||||||||
Citigroup's net income | 7,541 | 11,067 | 10,602 | |||||||||||||
Common dividends (3) | (120 | ) | (81 | ) | 10 | |||||||||||
Preferred dividends | (26 | ) | (26 | ) | (9 | ) | ||||||||||
Other | 1 | 1 | (1 | ) | ||||||||||||
Balance, end of period | $ | 97,809 | $ | 90,520 | $ | 79,559 | ||||||||||
Treasury stock, at cost | ||||||||||||||||
Balance, beginning of year | $ | (1,071 | ) | $ | (1,442 | ) | $ | (4,543 | ) | (13,878 | ) | (16,566 | ) | (14,283 | ) | |
Issuance of shares pursuant to employee benefit plans | 229 | 372 | 3,106 | (253 | ) | 2,714 | (2,128 | ) | ||||||||
Treasury stock acquired (4) | (5 | ) | (1 | ) | (6 | ) | (138 | ) | (26 | ) | (162 | ) | ||||
Other | - | - | 1 | - | - | 7 | ||||||||||
Balance, end of period | $ | (847 | ) | $ | (1,071 | ) | $ | (1,442 | ) | (14,269 | ) | (13,878 | ) | (16,566 | ) | |
Citigroup's accumulated other comprehensive income (loss) | ||||||||||||||||
Balance, beginning of year | $ | (17,788 | ) | $ | (16,277 | ) | $ | (18,937 | ) | |||||||
Net change in Citigroup's Accumulated other comprehensive income (loss) | 892 | (1,511 | ) | 2,660 | ||||||||||||
Balance, end of period | $ | (16,896 | ) | $ | (17,788 | ) | $ | (16,277 | ) | |||||||
Total Citigroup common stockholders' equity | $ | 186,487 | $ | 177,494 | $ | 163,156 | 3,028,884 | 2,923,878 | 2,905,836 | |||||||
Total Citigroup stockholders' equity | $ | 189,049 | $ | 177,806 | $ | 163,468 | ||||||||||
Noncontrolling interest | ||||||||||||||||
Balance, beginning of year | $ | 1,767 | $ | 2,321 | $ | 2,273 | ||||||||||
Initial origination of a noncontrolling interest | 88 | 28 | 412 | |||||||||||||
Transactions between Citigroup and the noncontrolling-interest shareholders | 41 | (274 | ) | (231 | ) | |||||||||||
Net income attributable to noncontrolling-interest shareholders | 219 | 148 | 281 | |||||||||||||
Dividends paid to noncontrolling-interest shareholders | (33 | ) | (67 | ) | (99 | ) | ||||||||||
Net change in Accumulated other comprehensive income (loss) | 90 | (92 | ) | (26 | ) | |||||||||||
Other | (224 | ) | (297 | ) | (289 | ) | ||||||||||
Net change in noncontrolling interests | $ | 181 | $ | (554 | ) | $ | 48 | |||||||||
Balance, end of period | $ | 1,948 | $ | 1,767 | $ | 2,321 | ||||||||||
Total equity | $ | 190,997 | $ | 179,573 | $ | 165,789 |
(1) | The adjustment to the opening balance for Retained earnings in 2012 represents the cumulative effect of adopting ASU 2010-26, Financial Services - Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts . See Note 1 to the Consolidated Financial Statements. | |
(2) | The adjustment to the opening balance for Retained earnings in 2010 represents the cumulative effect of initially adopting ASC 810, Consolidation (SFAS 167) and ASU 2010-11 (Scope Exception Related to Embedded Credit Derivatives). See Note 1 to the Consolidated Financial Statements. | |
(3) | Common dividends declared were $0.01 per share in each of the first, second, third and fourth quarters of 2012, and second, third and fourth quarters of 2011. Common dividends in 2010 represent a reversal of dividends accrued on forfeitures of previously issued but unvested employee stock awards related to employees who have left Citigroup. | |
(4) | All open market repurchases were transacted under an existing authorized share repurchase plan and relate to customer fails/errors. |
The Notes to the Consolidated Financial Statements are an integral part of these Consolidated Financial Statements.
144
CONSOLIDATED STATEMENT OF CASH FLOWS | Citigroup Inc. and Subsidiaries |
Years ended December 31, | ||||||||||
In millions of dollars | 2012 | 2011 | 2010 | |||||||
Cash flows from operating activities of continuing operations | ||||||||||
Net income before attribution of noncontrolling interests | $ | 7,760 | $ | 11,215 | $ | 10,883 | ||||
Net income attributable to noncontrolling interests | 219 | 148 | 281 | |||||||
Citigroup's net income | $ | 7,541 | $ | 11,067 | $ | 10,602 | ||||
(Loss) income from discontinued operations, net of taxes | (148 | ) | 17 | 215 | ||||||
(Loss) gain on sale, net of taxes | (1 | ) | 95 | (283 | ) | |||||
Income from continuing operations-excluding noncontrolling interests | $ | 7,690 | $ | 10,955 | $ | 10,670 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities of continuing operations | ||||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 203 | 250 | 302 | |||||||
(Additions) reductions to deferred policy acquisition costs | 85 | (54 | ) | (98 | ) | |||||
Depreciation and amortization | 2,507 | 2,872 | 2,664 | |||||||
Deferred tax benefit | (4,091 | ) | (74 | ) | (964 | ) | ||||
Provision for credit losses | 10,832 | 11,824 | 25,077 | |||||||
Realized gains from sales of investments | (3,251 | ) | (1,997 | ) | (2,411 | ) | ||||
Net impairment losses recognized in earnings | 4,971 | 2,254 | 1,411 | |||||||
Change in trading account assets | (29,195 | ) | 38,238 | 15,601 | ||||||
Change in trading account liabilities | (10,533 | ) | (2,972 | ) | (8,458 | ) | ||||
Change in federal funds sold and securities borrowed or purchased under agreements to resell | 14,538 | (29,132 | ) | (24,695 | ) | |||||
Change in federal funds purchased and securities loaned or sold under agreements to repurchase | 12,863 | 8,815 | 35,277 | |||||||
Change in brokerage receivables net of brokerage payables | 945 | 8,383 | (6,676 | ) | ||||||
Change in loans held-for-sale | (1,106 | ) | 1,021 | 2,483 | ||||||
Change in other assets | (524 | ) | 14,933 | (7,538 | ) | |||||
Change in other liabilities | (1,457 | ) | (3,814 | ) | (293 | ) | ||||
Other, net | 9,794 | 3,277 | (6,666 | ) | ||||||
Total adjustments | $ | 6,581 | $ | 53,824 | $ | 25,016 | ||||
Net cash provided by operating activities of continuing operations | $ | 14,271 | $ | 64,779 | $ | 35,686 | ||||
Cash flows from investing activities of continuing operations | ||||||||||
Change in deposits with banks | $ | 53,650 | $ | 6,653 | $ | 4,977 | ||||
Change in loans | (28,817 | ) | (31,597 | ) | 60,730 | |||||
Proceeds from sales and securitizations of loans | 7,287 | 10,022 | 9,918 | |||||||
Purchases of investments | (256,907 | ) | (314,250 | ) | (406,046 | ) | ||||
Proceeds from sales of investments | 143,853 | 182,566 | 183,688 | |||||||
Proceeds from maturities of investments | 102,020 | 139,959 | 189,814 | |||||||
Capital expenditures on premises and equipment and capitalized software | (3,604 | ) | (3,448 | ) | (2,363 | ) | ||||
Proceeds from sales of premises and equipment, subsidiaries and affiliates, and repossessed assets | 1,089 | 1,323 | 2,619 | |||||||
Net cash provided by (used in) investing activities of continuing operations | $ | 18,571 | $ | (8,772 | ) | $ | 43,337 | |||
Cash flows from financing activities of continuing operations | ||||||||||
Dividends paid | $ | (143 | ) | $ | (107 | ) | $ | (9 | ) | |
Issuance of preferred stock | 2,250 | - | - | |||||||
Issuance of ADIA Upper DECs equity units purchase contract | - | 3,750 | 3,750 | |||||||
Treasury stock acquired | (5 | ) | (1 | ) | (6 | ) | ||||
Stock tendered for payment of withholding taxes | (194 | ) | (230 | ) | (806 | ) | ||||
Issuance of long-term debt | 27,843 | 30,242 | 33,677 | |||||||
Payments and redemptions of long-term debt | (117,575 | ) | (89,091 | ) | (75,910 | ) | ||||
Change in deposits | 64,624 | 23,858 | 9,065 | |||||||
Change in short-term borrowings | (2,164 | ) | (25,067 | ) | (47,189 | ) | ||||
Net cash used in financing activities of continuing operations | $ | (25,364 | ) | $ | (56,646 | ) | $ | (77,428 | ) | |
Effect of exchange rate changes on cash and cash equivalents | $ | 274 | $ | (1,301 | ) | $ | 691 | |||
Discontinued operations | ||||||||||
Net cash provided by discontinued operations | $ | - | $ | 2,669 | $ | 214 | ||||
Change in cash and due from banks | $ | 7,752 | $ | 729 | $ | 2,500 | ||||
Cash and due from banks at beginning of year | 28,701 | 27,972 | 25,472 | |||||||
Cash and due from banks at end of year | $ | 36,453 | $ | 28,701 | $ | 27,972 | ||||
Supplemental disclosure of cash flow information for continuing operations | ||||||||||
Cash paid during the year for income taxes | $ | 3,900 | $ | 2,705 | $ | 4,307 | ||||
Cash paid during the year for interest | $ | 19,739 | $ | 21,230 | $ | 23,209 | ||||
Non-cash investing activities | ||||||||||
Transfers to OREO and other repossessed assets | $ | 500 | $ | 1,284 | $ | 2,595 | ||||
Transfers to trading account assets from investments (available-for-sale) | - | - | $ | 12,001 | ||||||
Transfers to trading account assets from investments (held-to-maturity) | - | $ | 12,700 | - |
The Notes to the Consolidated Financial Statements are an integral part of these Consolidated Financial Statements.
145
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of
Consolidation
The Consolidated Financial
Statements include the accounts of Citigroup and its subsidiaries prepared in
accordance with U.S. Generally Accepted Accounting Principles (GAAP). The
Company consolidates subsidiaries in which it holds, directly or indirectly,
more than 50% of the voting rights or where it exercises control. Entities where
the Company holds 20% to 50% of the voting rights and/or has the ability to
exercise significant influence, other than investments of designated venture
capital subsidiaries or investments accounted for at fair value under the fair
value option, are accounted for under the equity method, and the pro rata share
of their income (loss) is included in Other
revenue . Income from investments in less than
20%-owned companies is recognized when dividends are received. As discussed in
more detail in Note 22 to the Consolidated Financial Statements, Citigroup
consolidates entities deemed to be variable interest entities when Citigroup is
determined to be the primary beneficiary. Gains and losses on the disposition of
branches, subsidiaries, affiliates, buildings, and other investments are
included in Other revenue .
Throughout these Notes, "Citigroup,"
"Citi" and the "Company" refer to Citigroup Inc. and its consolidated
subsidiaries.
Certain reclassifications have been
made to the prior periods' financial statements and notes to conform to the
current period's presentation.
Citibank, N.A.
Citibank, N.A. is a commercial bank and wholly owned
subsidiary of Citigroup Inc. Citibank's principal offerings include: Consumer
finance, mortgage lending, and retail banking products and services; investment
banking, commercial banking, cash management, trade finance and e-commerce
products and services; and private banking products and services.
Variable Interest
Entities
An entity is referred to as a
variable interest entity (VIE) if it meets the criteria outlined in ASC 810, Consolidation (formerly SFAS No. 167, Amendments to
FASB Interpretation No. 46(R) ) (SFAS 167), which are: (i)
the entity has equity that is insufficient to permit the entity to finance its
activities without additional subordinated financial support from other parties;
or (ii) the entity has equity investors that cannot make significant decisions
about the entity's operations or that do not absorb their proportionate share of
the entity's expected losses or expected returns.
The Company
consolidates a VIE when it has both the power to direct the activities that most
significantly impact the VIE's economic success and a right to receive benefits
or absorb losses of the entity that could be potentially significant to the VIE
(that is, it is the primary beneficiary).
Along with the VIEs that are
consolidated in accordance with these guidelines, the Company has variable
interests in other VIEs that are not consolidated because the Company is not the
primary beneficiary. These include multi-seller finance companies, certain
collateralized debt obligations (CDOs), many structured finance transactions,
and various investment funds.
However, these VIEs and all other
unconsolidated VIEs are monitored by the Company to determine if any events have
occurred that could cause its primary beneficiary status to change. These events
include:
All other entities not deemed to be VIEs with which the Company has involvement are evaluated for consolidation under other subtopics of ASC 810 (formerly Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements , SFAS No. 94, Consolidation of All Majority-Owned Subsidiaries , and EITF Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights ).
Foreign Currency
Translation
Assets and liabilities of
Citi's foreign operations are translated from their respective functional
currencies into U.S. dollars using period-end spot foreign-exchange rates. The
effects of those translation adjustments are reported in Accumulated other comprehensive income (loss) , a component of stockholders' equity, along with related
hedge and tax effects, until realized upon sale or substantial liquidation of
the foreign operation. Revenues and expenses of Citi's foreign operations are
translated monthly from their respective functional currencies into U.S. dollars
at amounts that approximate weighted average exchange rates.
For
transactions whose terms are denominated in a currency other than the functional
currency, including transactions denominated in the local currencies of foreign
operations with the U.S. dollar as their functional currency, the effects of
changes in exchange rates are primarily included in Principal transactions , along with the
related hedge effects. Instruments used to hedge foreign currency exposures
include foreign currency forward, option and swap contracts and designated
issues of non-U.S. dollar debt. Foreign operations in countries with highly
inflationary economies designate the U.S. dollar as their functional currency,
with the effects of changes in exchange rates primarily included in Other revenue .
146
Investment
Securities
Investments include fixed
income and equity securities. Fixed income instruments include bonds, notes and
redeemable preferred stocks, as well as certain loan-backed and structured
securities that are subject to prepayment risk. Equity securities include common
and nonredeemable preferred stock.
Investment securities are classified
and accounted for as follows:
For investments in fixed income
securities classified as held-to-maturity or available-for-sale, accrual of
interest income is suspended for investments that are in default or on which it
is likely that future interest payments will not be made as
scheduled.
The Company uses a number of
valuation techniques for investments carried at fair value, which are described
in Note 25 to the Consolidated Financial Statements. Realized gains and losses
on sales of investments are included in earnings.
Trading Account Assets and
Liabilities
Trading account
assets include debt and marketable equity
securities, derivatives in a receivable position, residual interests in
securitizations and physical commodities inventory. In addition, as described in
Note 26 to the Consolidated Financial Statements, certain assets that Citigroup
has elected to carry at fair value under the fair value option, such as loans
and purchased guarantees, are also included in Trading account assets .
Trading account
liabilities include 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 (as
described in Note 26 to the Consolidated Financial Statements).
Other than
physical commodities inventory, all trading account assets and liabilities are
carried at fair value. Revenues generated from trading assets and trading
liabilities are generally reported in Principal transactions and include
realized gains and losses as well as unrealized gains and losses resulting from
changes in the fair value of such instruments. Interest income on trading assets
is recorded in Interest
revenue reduced by interest expense on
trading liabilities.
Physical commodities inventory is
carried at the lower of cost or market with related losses reported in Principal transactions . Realized gains and losses on sales of commodities inventory
are included in Principal
transactions . Investments in unallocated
precious metals accounts (gold, silver, platinum and palladium) are accounted
for as hybrid instruments containing a debt host contract and an embedded
non-financial derivative instrument indexed to the price of the relevant
precious metal. The embedded derivative instrument is separated from the debt
host contract and accounted for at fair value. The debt host contract is
accounted for at fair value under the fair value option, as described in Note 26
to the Consolidated Financial Statements.
Derivatives used for
trading purposes include interest rate, currency, equity, credit, and commodity
swap agreements, options, caps and floors, warrants, and financial and commodity
futures and forward contracts. Derivative asset and liability positions are
presented net by counterparty on the Consolidated Balance Sheet when a valid
master netting agreement exists and the other conditions set out in ASC 210-20, Balance Sheet-Offsetting are met.
The Company uses a number of
techniques to determine the fair value of trading assets and liabilities, which
are described in Note 25 to the Consolidated Financial
Statements.
147
Securities Borrowed and Securities
Loaned
Securities borrowing and lending
transactions generally do not constitute a sale of the underlying securities for
accounting purposes, and are treated as collateralized financing transactions.
Such transactions are recorded at the amount of proceeds advanced or received
plus accrued interest. As described in Note 26 to the Consolidated Financial
Statements, the Company has elected to apply fair value accounting to a number
of securities borrowing and lending transactions. Fees paid or received for all
securities lending and borrowing transactions are recorded in Interest expense or Interest revenue at the contractually specified
rate.
The
Company monitors the fair value of securities borrowed or loaned on a daily
basis and obtains or posts additional collateral in order to maintain
contractual margin protection.
As
described in Note 25 to the Consolidated Financial Statements, the Company uses
a discounted cash flow technique to determine the fair value of securities
lending and borrowing transactions.
Repurchase and Resale
Agreements
Securities sold under agreements to
repurchase (repos) and securities purchased under agreements to resell (reverse
repos) generally do not constitute a sale for accounting purposes of the
underlying securities and are treated as collateralized financing transactions.
As described in Note 26 to the Consolidated Financial Statements, the Company
has elected to apply fair value accounting to a majority of such transactions,
with changes in fair value reported in earnings. Any transactions for which fair
value accounting has not been elected are recorded at the amount of cash
advanced or received plus accrued interest. Irrespective of whether the Company
has elected fair value accounting, interest paid or received on all repo and
reverse repo transactions is recorded in Interest
expense or Interest
revenue at the contractually specified
rate.
Where the conditions of ASC 210-20-45-11, Balance
Sheet-Offsetting: Repurchase and Reverse Repurchase Agreements , are met, repos and reverse repos are presented net on the Consolidated
Balance Sheet.
The Company's policy is to take possession of securities purchased under
reverse repurchase agreements. The Company monitors the fair value of securities
subject to repurchase or resale on a daily basis and obtains or posts additional
collateral in order to maintain contractual margin protection.
As described in Note 25
to the Consolidated Financial Statements, the Company uses a discounted cash
flow technique to determine the fair value of repo and reverse repo
transactions.
Repurchase and Resale
Agreements, and Securities Lending and Borrowing Agreements, Accounted for as
Sales
Where certain conditions are met under ASC
860-10, Transfers and Servicing (formerly FASB Statement No. 166, Accounting for
Transfers of Financial Assets ), the Company accounted
for certain repurchase agreements and securities lending agreements as sales.
The key distinction resulting in these agreements being accounted for as sales
was a reduction in initial margin or restriction in daily maintenance margin. At
December 31, 2011, a nominal amount of these transactions were accounted for as
sales that reduced Trading account assets . See related discussion of the assessment of the effective control for
repurchase agreements in "Accounting Changes" below.
Loans
Loans are reported at their
outstanding principal balances net of any unearned income and unamortized
deferred fees and costs except that credit card receivable balances also include
accrued interest and fees. Loan origination fees and certain direct origination
costs are generally deferred and recognized as adjustments to income over the
lives of the related loans.
As described in Note 26
to the Consolidated Financial Statements, Citi has elected fair value accounting
for certain loans. Such loans are carried at fair value with changes in fair
value reported in earnings. Interest income on such loans is recorded in Interest revenue at the
contractually specified rate.
Loans for which the
fair value option has not been elected are classified upon origination or
acquisition as either held-for-investment or held-for-sale. This classification
is based on management's initial intent and ability with regard to those
loans.
Loans that are held-for-investment are classified as Loans, net of unearned income on the Consolidated
Balance Sheet, and the related cash flows are included within the cash flows
from the investing activities category in the Consolidated Statement of Cash
Flows on the line Change in loans . However, when the initial intent for holding a loan has changed from
held-for-investment to held-for-sale, the loan is reclassified to held-for-sale,
but the related cash flows continue to be reported in cash flows from investing
activities in the Consolidated Statement of Cash Flows on the line Proceeds from sales and securitizations of
loans .
148
Consumer loans
Consumer loans represent loans and leases managed primarily by
the Global Consumer Banking and Local Consumer Lending businesses.
Non-accrual and re-aging
policies
As a general rule, interest
accrual ceases for installment and real estate (both open- and closed-end) loans
when payments are 90 days contractually past due. For credit cards and unsecured
revolving loans, however, Citi generally accrues interest until payments are 180
days past due. As a result of OCC guidance issued in the first quarter of 2012,
home equity loans in regulated bank entities are classified as non-accrual if
the related residential first mortgage is 90 days or more past due. As a result
of OCC guidance issued in the third quarter of 2012, mortgage loans in regulated
bank entities discharged through Chapter 7 bankruptcy, other than FHA-insured
loans, are classified as non-accrual. Commercial market loans are placed on a
cash (non-accrual) basis when it is determined, based on actual experience and a
forward-looking assessment of the collectability of the loan in full, that the
payment of interest or principal is doubtful or when interest or principal is 90
days past due.
Loans that have been modified to grant a short-term or long-term
concession to a borrower who is in financial difficulty may not be accruing
interest at the time of the modification. The policy for returning such modified
loans to accrual status varies by product and/or region. In most cases, a
minimum number of payments (ranging from one to six) are required, while in
other cases the loan is never returned to accrual status. For regulated bank
entities, such modified loans are returned to accrual status if a credit
evaluation at the time of or subsequent to the modification indicates the
borrower's ability to meet the restructured terms, and the borrower is current
and has demonstrated a reasonable period of sustained payment performance
(minimum six months of consecutive payments).
For
U.S. Consumer loans, generally one of the conditions to qualify for modification
is that a minimum number of payments (typically ranging from one to three) must
be made. Upon modification, the loan is re-aged to current status. However,
re-aging practices for certain open-ended Consumer loans, such as credit cards,
are governed by Federal Financial Institutions Examination Council (FFIEC)
guidelines. For open-ended Consumer loans subject to FFIEC guidelines, one of
the conditions for the loan to be re-aged to current status is that at least
three consecutive minimum monthly payments, or the equivalent amount, must be
received. In addition, under FFIEC guidelines, the number of times that such a
loan can be re-aged is subject to limitations (generally once in 12 months and
twice in five years). Furthermore, Federal Housing Administration (FHA) and
Department of Veterans Affairs (VA) loans are modified under those respective
agencies' guidelines and payments are not always required in order to re-age a
modified loan to current.
Charge-off policies
Citi's charge-off policies follow the general guidelines
below:
Corporate loans
Corporate loans represent loans and leases managed by ICG or
the Special Asset Pool . Corporate loans are identified as impaired and placed on a
cash (non-accrual) basis when it is determined, based on actual experience and a
forward-looking assessment of the collectability of the loan in full, that the
payment of interest or principal is doubtful or when interest or principal is 90
days past due, except when the loan is well collateralized and in the process of
collection. Any interest accrued on impaired Corporate loans and leases is
reversed at 90 days and charged against current earnings, and interest is
thereafter included in earnings only to the extent actually received in cash.
When there is doubt regarding the ultimate collectability of principal, all cash
receipts are thereafter applied to reduce the recorded investment in the
loan.
149
Impaired Corporate loans and leases are written down to the extent that principal is deemed to be uncollectable. Impaired collateral-dependent loans and leases, where repayment is expected to be provided solely by the sale of the underlying collateral and there are no other available and reliable sources of repayment, are written down to the lower of cost or collateral value. Cash-basis loans are returned to an accrual status when all contractual principal and interest amounts are reasonably assured of repayment and there is a sustained period of repayment performance in accordance with the contractual terms.
Loans
Held-for-Sale
Corporate and Consumer loans
that have been identified for sale are classified as loans held-for-sale and
included in Other assets . The practice of Citi's U.S. prime mortgage business has been
to sell substantially all of its conforming loans. As such, U.S. prime mortgage
conforming loans are classified as held-for-sale and the fair value option is
elected at origination, with changes in fair value recorded in Other revenue . With the
exception of these loans for which the fair value option has been elected,
held-for-sale loans are accounted for at the lower of cost or market value, with
any write-downs or subsequent recoveries charged to Other revenue . The related cash flows
are classified in the Consolidated Statement of Cash Flows in the cash flows
from operating activities category on the line Change in loans held-for-sale .
Allowance for Loan
Losses
Allowance for loan losses
represents management's best estimate of probable losses inherent in the
portfolio, including probable losses related to large individually evaluated
impaired loans and troubled debt restructurings. Attribution of the allowance is
made for analytical purposes only, and the entire allowance is available to
absorb probable loan losses inherent in the overall portfolio. Additions to the
allowance are made through the Provision for
loan losses . Loan losses are deducted from
the allowance and subsequent recoveries are added. Assets received in exchange
for loan claims in a restructuring are initially recorded at fair value, with
any gain or loss reflected as a recovery or charge-off to the
allowance.
Corporate loans
In the Corporate portfolios, the Allowance for loan losses includes an
asset-specific component and a statistically based component. The asset-specific
component is calculated under ASC 310-10-35, Receivables-Subsequent Measurement (formerly SFAS 114) on an individual basis for larger-balance, non-homogeneous
loans, which are considered impaired. An asset-specific allowance is established
when the discounted cash flows, collateral value (less disposal costs), or
observable market price of the impaired loan is lower than its carrying value.
This allowance considers the borrower's overall financial condition, resources,
and payment record, the prospects for support from any financially responsible
guarantors (discussed further below)
and, if appropriate, the realizable value
of any collateral. The asset-specific component of the allowance for smaller
balance impaired loans is calculated on a pool basis considering historical loss
experience.
The
allowance for the remainder of the loan portfolio is determined under ASC 450, Contingencies (formerly SFAS 5) using a statistical methodology, supplemented by
management judgment. The statistical analysis considers the portfolio's size,
remaining tenor, and credit quality as measured by internal risk ratings
assigned to individual credit facilities, which reflect probability of default
and loss given default. The statistical analysis considers historical default
rates and historical loss severity in the event of default, including historical
average levels and historical variability. The result is an estimated range for
inherent losses. The best estimate within the range is then determined by
management's quantitative and qualitative assessment of current conditions,
including general economic conditions, specific industry and geographic trends,
and internal factors including portfolio concentrations, trends in internal
credit quality indicators, and current and past underwriting standards.
For
both the asset-specific and the statistically based components of the Allowance for loan losses , management may incorporate guarantor support. The financial
wherewithal of the guarantor is evaluated, as applicable, based on net worth,
cash flow statements and personal or company financial statements which are
updated and reviewed at least annually. Citi seeks performance on guarantee
arrangements in the normal course of business. Seeking performance entails
obtaining satisfactory cooperation from the guarantor or borrower in the
specific situation. This regular cooperation is indicative of pursuit and
successful enforcement of the guarantee; the exposure is reduced without the
expense and burden of pursuing a legal remedy. A guarantor's reputation and
willingness to work with Citigroup is evaluated based on the historical
experience with the guarantor and the knowledge of the marketplace. In the rare
event that the guarantor is unwilling or unable to perform or facilitate
borrower cooperation, Citi pursues a legal remedy; however, enforcing a
guarantee via legal action against the guarantor is not the primary means of
resolving a troubled loan situation and rarely occurs. If Citi does not pursue a
legal remedy, it is because Citi does not believe that the guarantor has the
financial wherewithal to perform regardless of legal action or because there are
legal limitations on simultaneously pursuing guarantors and foreclosure. A
guarantor's reputation does not impact Citi's decision or ability to seek
performance under the guarantee.
In
cases where a guarantee is a factor in the assessment of loan losses, it is
included via adjustment to the loan's internal risk rating, which in turn is the
basis for the adjustment to the statistically based component of the Allowance for loan losses . To date, it is only in rare circumstances that an impaired
commercial loan or commercial real estate loan is carried at a value in excess
of the appraised value due to a guarantee.
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When Citi's monitoring of the loan indicates that the guarantor's wherewithal to pay is uncertain or has deteriorated, there is either no change in the risk rating, because the guarantor's credit support was never initially factored in, or the risk rating is adjusted to reflect that uncertainty or deterioration. Accordingly, a guarantor's ultimate failure to perform or a lack of legal enforcement of the guarantee does not materially impact the allowance for loan losses, as there is typically no further significant adjustment of the loan's risk rating at that time. Where Citi is not seeking performance under the guarantee contract, it provides for loans losses as if the loans were non-performing and not guaranteed.
Consumer loans
For Consumer loans, each portfolio of non-modified
smaller-balance, homogeneous loans is independently evaluated by product type
(e.g., residential mortgage, credit card, etc.) for impairment in accordance
with ASC 450-20. The allowance for loan losses attributed to these loans is
established via a process that estimates the probable losses inherent in the
specific portfolio. This process includes migration analysis, in which
historical delinquency and credit loss experience is applied to the current
aging of the portfolio, together with analyses that reflect current and
anticipated economic conditions, including changes in housing prices and
unemployment trends. Citi's allowance for loan losses under ASC 450-20 only
considers contractual principal amounts due, except for credit card loans where
estimated loss amounts related to accrued interest receivable are also
included.
Management also considers overall portfolio indicators,
including historical credit losses, delinquent, non-performing, and classified
loans, trends in volumes and terms of loans, an evaluation of overall credit
quality, the credit process, including lending policies and procedures, and
economic, geographical, product and other environmental factors.
Separate valuation allowances are determined for impaired smaller-balance
homogeneous loans whose terms have been modified in a troubled debt
restructuring (TDR). Long-term modification programs as well as short-term (less
than 12 months) modifications originated beginning January 1, 2011 that provide
concessions (such as interest rate reductions) to borrowers in financial
difficulty are reported as TDRs. In addition, loans included in the U.S.
Treasury's Home Affordable Modification Program (HAMP) trial period at December
31, 2011 are reported as TDRs. The allowance for loan losses for TDRs is
determined in accordance with ASC 310-10-35 considering all available evidence,
including, as appropriate, the present value of the expected future cash flows
discounted at the loan's original contractual effective rate, the secondary
market value of the loan and the fair value of collateral less disposal costs.
These expected cash flows incorporate modification program default rate
assumptions. The original contractual effective rate for credit card loans is
the pre-modification rate, which may include interest rate increases under the
original contractual agreement with the borrower.
Where short-term concessions have
been granted prior to January 1, 2011, the allowance for loan losses is
materially consistent with the requirements of ASC 310-10-35.
Valuation allowances for commercial market loans, which are classifiably
managed Consumer loans, are determined in the same manner as for Corporate loans
and are described in more detail in the following section. Generally, an
asset-specific component is calculated under ASC 310-10-35 on an individual
basis for larger-balance, non-homogeneous loans that are considered impaired and
the allowance for the remainder of the classifiably managed Consumer loan
portfolio is calculated under ASC 450 using a statistical methodology,
supplemented by management adjustment.
Reserve Estimates and
Policies
Management provides reserves for
an estimate of probable losses inherent in the funded loan portfolio on the
Consolidated Balance Sheet in the form of an allowance for loan losses. These
reserves are established in accordance with Citigroup's credit reserve policies,
as approved by the Audit Committee of the Board of Directors. Citi's Chief Risk
Officer and Chief Financial Officer review the adequacy of the credit loss
reserves each quarter with representatives from the risk management and finance
staffs for each applicable business area. Applicable business areas include
those having classifiably managed portfolios, where internal credit-risk ratings
are assigned (primarily Institutional Clients
Group and Global Consumer Banking ) or modified
Consumer loans, where concessions were granted due to the borrowers' financial
difficulties.
The above-mentioned representatives for these business areas
present recommended reserve balances for their funded and unfunded lending
portfolios along with supporting quantitative and qualitative data. The
quantitative data include:
Estimated probable losses for non-performing, non-homogeneous exposures within a business line's classifiably managed portfolio and impaired smaller-balance homogeneous loans whose terms have been modified due to the borrowers' financial difficulties, and it was determined that a concession was granted to the borrower. Consideration may be given to the following, as appropriate, when determining this estimate: (i) the present value of expected future cash flows discounted at the loan's original effective rate; (ii) the borrower's overall financial condition, resources and payment record; and (iii) the prospects for support from financially responsible guarantors or the realizable value of any collateral. In the determination of the allowance for loan losses for TDRs, management considers a combination of historical re-default rates, the current economic environment and the nature of the modification program when forecasting expected cash flows. When impairment is measured based on the present value of expected future cash flows, the entire change in present value is recorded in the Provision for loan losses .
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Statistically calculated losses
inherent in the classifiably managed portfolio for performing and de minimis
non-performing exposures. The calculation is
based upon: (i) Citigroup's internal system of credit-risk ratings, which are
analogous to the risk ratings of the major rating agencies; and (ii) historical
default and loss data, including rating agency information regarding default
rates from 1983 to 2010 and internal data dating to the early 1970s on severity
of losses in the event of default. Adjustments may be made to this data. Such
adjustments include: (i) statistically calculated estimates to cover the
historical fluctuation of the default rates over the credit cycle, the
historical variability of loss severity among defaulted loans, and the degree to
which there are large obligor concentrations in the global portfolio; and (ii)
adjustments made for specific known items, such as current environmental factors
and credit trends.
In addition, representatives from each of the risk management and finance
staffs that cover business areas with delinquency-managed portfolios containing
smaller-balance homogeneous loans present their recommended reserve balances
based upon leading credit indicators, including loan delinquencies and changes
in portfolio size as well as economic trends, including current and future
housing prices, unemployment, length of time in foreclosure, costs to sell and
GDP. This methodology is applied separately for each individual product within
each geographic region in which these portfolios exist.
This
evaluation process is subject to numerous estimates and judgments. The frequency
of default, risk ratings, loss recovery rates, the size and diversity of
individual large credits, and the ability of borrowers with foreign currency
obligations to obtain the foreign currency necessary for orderly debt servicing,
among other things, are all taken into account during this review. Changes in
these estimates could have a direct impact on the credit costs in any period and
could result in a change in the allowance.
Allowance for Unfunded
Lending Commitments
A similar
approach to the allowance for loan losses is used for calculating a reserve for
the expected losses related to unfunded loan commitments and standby letters of
credit. This reserve is classified on the balance sheet in Other liabilities . Changes to the allowance for
unfunded lending commitments are recorded in the Provision for unfunded lending commitments .
Mortgage Servicing
Rights
Mortgage
servicing rights (MSRs) are recognized as intangible assets when purchased or
when the Company sells or securitizes loans acquired through purchase or
origination and retains the right to service the loans. Mortgage servicing
rights are accounted for at fair value, with changes in value recorded in Other revenue in the Company's
Consolidated Statement of Income.
Additional information
on the Company's MSRs can be found in 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).
Whole Loan Sales
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:
In the case of a repurchase, Citi will bear any subsequent credit loss on the mortgage loan and the loan is typically considered a credit-impaired loan and accounted for under SOP 03-3, "Accounting for Certain Loans and Debt Securities Acquired in a Transfer" (now incorporated into ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality ) (SOP 03-3). These repurchases have not had a material impact on Citi's non-performing loan statistics because credit-impaired purchased SOP 03-3 loans are not included in non-accrual loans, since they generally continue to accrue interest until write-off. Citi's repurchases have primarily been due to GSE repurchase claims.
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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:
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 that is included in Other liabilities in the
Consolidated Balance Sheet. 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.
Repurchase Reserve-Whole Loan
Sales
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: (i) the
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.
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. Therefore, Citi estimates
and discloses the range of reasonably possible loss for whole loan sale
representation and warranty claims in excess of amounts accrued. This estimate
is derived by modifying the key assumptions discussed above to reflect
management's judgment regarding reasonably possible
In the case of a repurchase of a credit-impaired SOP 03-3 loan, the difference between the loan's fair value and unpaid principal balance at the time of the repurchase is recorded as a utilization of the repurchase reserve. Make-whole payments to the investor are also treated as utilizations and charged directly against the reserve. The repurchase reserve is estimated when Citi sells loans (recorded as an adjustment to the gain on sale, which is included in Other revenue in the Consolidated Statement of Income) and is updated quarterly. Any change in estimate is recorded in Other revenue .
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.
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 repurchase claims based on
estimated losses arising from those claims received that appear to be based on a
review of the underlying loan files. These reserves are recorded in Principal transactions in the Consolidated Statement of Income.
Goodwill
Goodwill represents the
excess of acquisition cost over the fair value of net tangible and intangible
assets acquired. Goodwill is subject to annual impairment testing and between
annual tests if an event occurs or circumstances change that would
more-likely-than-not reduce the fair value of a reporting unit below its
carrying amount. The Company has an option to assess qualitative factors to
determine if it is necessary to perform the goodwill impairment test. If, after
assessing the totality of events or circumstances, the Company determines that
it is not more-likely-than-not that the fair value of a reporting unit is less
than its carrying amount, no further testing is necessary. If, however, the
Company determines that it is more-likely-than-not that the fair value of a
reporting unit is less than its carrying amount, then the Company is required to
perform the first step of the two-step goodwill impairment test. Furthermore, on
any business dispositions, goodwill is allocated to the business disposed of
based on the ratio of the fair value of the business disposed of to the fair
value of the reporting unit.
Additional information on Citi's goodwill impairment testing can be found
in Note 18 to the Consolidated Financial Statements.
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Intangible
Assets
Intangible
assets -including core deposit intangibles,
present value of future profits, purchased credit card relationships, other
customer relationships, and other intangible assets, but excluding MSRs-are
amortized over their estimated useful lives. Intangible assets deemed to have
indefinite useful lives, primarily certain asset management contracts and trade
names, are not amortized and are subject to annual impairment tests. An
impairment exists if the carrying value of the indefinite-lived intangible asset
exceeds its fair value. For other intangible assets subject to amortization, an
impairment is recognized if the carrying amount is not recoverable and exceeds
the fair value of the intangible asset.
Other Assets and Other
Liabilities
Other
assets include, among other items, loans
held-for-sale, deferred tax assets, equity method investments, interest and fees
receivable, premises and equipment, repossessed assets, and other receivables. Other liabilities include, among other items, accrued expenses and other payables,
deferred tax liabilities, and reserves for legal claims, taxes, unfunded lending
commitments, repositioning reserves, and other matters.
Other Real Estate Owned and
Repossessed Assets
Real estate or other
assets received through foreclosure or repossession are generally reported in Other assets , net of a valuation allowance for selling costs and subsequent declines
in fair value.
Securitizations
The Company
primarily securitizes credit card receivables and mortgages. Other types of
securitized assets include corporate debt instruments (in cash and synthetic
form) and student loans.
There are two key accounting determinations that must be made
relating to securitizations. Citi first makes a determination as to whether the
securitization entity would be consolidated. Second, it determines whether the
transfer of financial assets to the entity is considered a sale under GAAP. If
the securitization entity is a VIE, the Company consolidates the VIE if it is
the primary beneficiary (as discussed in "Variable Interest Entities" above).
For all other securitization entities determined not to be VIEs in which
Citigroup participates, a consolidation decision is based on who has voting
control of the entity, giving consideration to removal and liquidation rights in
certain partnership structures. Only securitization entities controlled by
Citigroup are consolidated.
Interests in the securitized and sold assets may be retained in the form
of subordinated or senior interest-only strips, subordinated tranches, spread
accounts and servicing rights. In credit card securitizations, the Company
retains a seller's interest in the credit card receivables transferred to the
trusts, which is not in securitized form. In the case of consolidated
securitization entities, including the credit card trusts, these retained
interests are not reported on Citi's Consolidated Balance Sheet; rather, the
securitized loans remain on the balance sheet. Substantially all of the Consumer
loans sold or securitized through non-consolidated trusts by Citigroup are U.S.
prime residential mortgage loans. Retained
interests in non-consolidated mortgage securitization trusts are classified as Trading account assets , except for MSRs, which are included in Mortgage servicing rights on Citigroup's Consolidated Balance Sheet.
Debt
Short-term borrowings and long-term debt are accounted for at
amortized cost, except where the Company has elected to report the debt
instruments, including certain structured notes, at fair value or the debt is in
a fair value hedging relationship.
Transfers of Financial
Assets
For a transfer of financial assets
to be considered a sale: (i) the assets must have been isolated from the
Company, even in bankruptcy or other receivership; (ii) the purchaser must have
the right to pledge or sell the assets transferred or, if the purchaser is an
entity whose sole purpose is to engage in securitization and asset-backed
financing activities and that entity is constrained from pledging the assets it
receives, each beneficial interest holder must have the right to sell the
beneficial interests; and (iii) the Company may not have an option or obligation
to reacquire the assets.
If
these sale requirements are met, the assets are removed from the Company's
Consolidated Balance Sheet. If the conditions for sale are not met, the transfer
is considered to be a secured borrowing, the assets remain on the Consolidated
Balance Sheet, and the sale proceeds are recognized as the Company's liability.
A legal opinion on a sale is generally obtained for complex transactions or
where the Company has continuing involvement with assets transferred or with the
securitization entity. For a transfer to be eligible for sale accounting, those
opinions must state that the asset transfer is considered a sale and that the
assets transferred would not be consolidated with the Company's other assets in
the event of the Company's insolvency.
For a
transfer of a portion of a financial asset to be considered a sale, the portion
transferred must meet the definition of a participating interest. A
participating interest must represent a pro rata ownership in an entire
financial asset; all cash flows must be divided proportionally, with the same
priority of payment; no participating interest in the transferred asset may be
subordinated to the interest of another participating interest holder; and no
party may have the right to pledge or exchange the entire financial asset unless
all participating interest holders agree. Otherwise, the transfer is accounted
for as a secured borrowing.
See Note 22 to the Consolidated
Financial Statements for further discussion.
Risk Management
Activities-Derivatives Used for Hedging Purposes
The Company manages its exposures to market rate movements outside its
trading activities by modifying the asset and liability mix, either directly or
through the use of derivative financial products, including interest-rate swaps,
futures, forwards, and purchased options, as well as foreign-exchange contracts.
These end-user derivatives are carried at fair value in Other assets, Other liabilities, Trading account
assets and Trading account liabilities .
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To qualify as an accounting hedge under
the hedge accounting rules (versus an economic hedge where hedge accounting is
not sought), a derivative must be highly effective in offsetting the risk
designated as being hedged. The hedge relationship must be formally documented
at inception, detailing the particular risk management objective and strategy
for the hedge, which includes the item and risk that is being hedged and the
derivative that is being used, as well as how effectiveness will be assessed and
ineffectiveness measured. The effectiveness of these hedging relationships is
evaluated on a retrospective and prospective basis, typically using quantitative
measures of correlation with hedge ineffectiveness measured and recorded in
current earnings.
If a hedge relationship is found to be ineffective, it no longer
qualifies as an accounting hedge and hedge accounting would not be applied. Any
gains or losses attributable to the derivatives, as well as subsequent changes
in fair value, are recognized in Other
revenue or Principal transactions with no offset
on the hedged item, similar to trading derivatives.
The
foregoing criteria are applied on a decentralized basis, consistent with the
level at which market risk is managed, but are subject to various limits and
controls. The underlying asset, liability or forecasted transaction may be an
individual item or a portfolio of similar items.
For
fair value hedges, in which derivatives hedge the fair value of assets or
liabilities, changes in the fair value of derivatives are reflected in Other revenue or Principal
transactions , together with changes in the
fair value of the hedged item related to the hedged risk. These are expected to,
and generally do, offset each other. Any net amount, representing hedge
ineffectiveness, is reflected in current earnings. Citigroup's fair value hedges
are primarily hedges of fixed-rate long-term debt and available-for-sale
securities.
For cash flow hedges, in which derivatives hedge the
variability of cash flows related to floating- and fixed-rate assets,
liabilities or forecasted transactions, the accounting treatment depends on the
effectiveness of the hedge. To the extent these derivatives are effective in
offsetting the variability of the hedged cash flows, the effective portion of
the changes in the derivatives' fair values will not be included in current
earnings, but is reported in Accumulated other
comprehensive income (loss) . These changes in
fair value will be included in earnings of future periods when the hedged cash
flows impact earnings. To the extent these derivatives are not effective,
changes in their fair values are immediately included in Other revenue . Citigroup's
cash flow hedges primarily include hedges of floating-rate debt and
floating-rate assets including loans, as well as rollovers of short-term
fixed-rate liabilities and floating-rate liabilities and forecasted debt
issuances.
For net investment hedges in which
derivatives hedge the foreign currency exposure of a net investment in a foreign
operation, the accounting treatment will similarly depend on the effectiveness
of the hedge. The effective portion of the change in fair value of the
derivative, including any forward premium or discount, is reflected in Accumulated other comprehensive income
(loss) as part of the foreign currency
translation adjustment.
For
those accounting hedge relationships that are terminated or when hedge
designations are removed, the hedge accounting treatment described in the
paragraphs above is no longer applied. Instead, the end-user derivative is
terminated or transferred to the trading account. For fair value hedges, any
changes in the fair value of the hedged item remain as part of the basis of the
asset or liability and are ultimately reflected as an element of the yield. For
cash flow hedges, any changes in fair value of the end-user derivative remain in Accumulated other comprehensive income
(loss) and are included in earnings of future
periods when the hedged cash flows impact earnings. However, if it becomes
probable that the hedged forecasted transaction will not occur, any amounts that
remain in Accumulated other comprehensive
income (loss) are immediately reflected in Other revenue .
End-user derivatives that are economic hedges, rather than
qualifying for hedge accounting, are also carried at fair value, with changes in
value included in Principal
transactions or Other revenue . Citigroup often uses
economic hedges when qualifying for hedge accounting would be too complex or
operationally burdensome; examples are hedges of the credit risk component of
commercial loans and loan commitments. Citigroup periodically evaluates its
hedging strategies in other areas and may designate either a qualifying hedge or
an economic hedge, after considering the relative cost and benefits. Economic
hedges are also employed when the hedged item itself is marked to market through
current earnings, such as hedges of commitments to originate one-to-four-family
mortgage loans to be held for sale and MSRs.
Employee Benefits
Expense
Employee benefits expense includes
current service costs of pension and other postretirement benefit plans (which
are accrued on a current basis), contributions and unrestricted awards under
other employee plans, the amortization of restricted stock awards and costs of
other employee benefits.
Stock-Based
Compensation
The Company recognizes
compensation expense related to stock and option awards over the requisite
service period, generally based on the instruments' grant date fair value,
reduced by expected forfeitures. Compensation cost related to awards granted to
employees who meet certain age plus years-of-service requirements (retirement
eligible employees) is accrued in the year prior to the grant date, in the same
manner as the accrual for cash incentive compensation. Certain stock awards with
performance conditions or certain clawback provisions are subject to variable
accounting, pursuant to which the associated compensation expense fluctuates
with changes in Citigroup's stock price.
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Income Taxes
The Company is subject to the income tax laws of the U.S. and
its states and municipalities, and the foreign jurisdictions in which it
operates. These tax laws are complex and subject to different interpretations by
the taxpayer and the relevant governmental taxing authorities. In establishing a
provision for income tax expense, the Company must make judgments and
interpretations about the application of these inherently complex tax laws. The
Company must also make estimates about when in the future certain items will
affect taxable income in the various tax jurisdictions, both domestic and
foreign.
Disputes over interpretations of the tax laws may be subject to review
and adjudication by the court systems of the various tax jurisdictions or may be
settled with the taxing authority upon examination or audit. The Company treats
interest and penalties on income taxes as a component of Income tax expense .
Deferred taxes are recorded for the future consequences of
events that have been recognized for financial statements or tax returns, based
upon enacted tax laws and rates. Deferred tax assets are recognized subject to
management's judgment that realization is more-likely-than-not. FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48)
(now incorporated into ASC 740, Income
Taxes ), sets out a consistent framework to
determine the appropriate level of tax reserves to maintain for uncertain tax
positions. This interpretation uses a two-step approach wherein a tax benefit is
recognized if a position is more-likely-than-not to be sustained. The amount of
the benefit is then measured to be the highest tax benefit that is greater than
50% likely to be realized. FIN 48 also sets out disclosure requirements to
enhance transparency of an entity's tax reserves.
See
Note 10 to the Consolidated Financial Statements for a further description of
the Company's tax provision and related income tax assets and
liabilities.
Commissions, Underwriting and
Principal Transactions
Commissions
revenues are recognized in income generally when earned. Underwriting revenues
are recognized in income typically at the closing of the transaction. Principal
transactions revenues are recognized in income on a trade-date basis. See Note 6
to the Consolidated Financial Statements for a description of the Company's
revenue recognition policies for commissions and fees.
Earnings per
Share
Earnings per share (EPS) is computed
after deducting preferred stock dividends. The Company has granted restricted
and deferred share awards with dividend rights that are considered to be
participating securities, which are akin to a second class of common stock.
Accordingly, a portion of Citigroup's earnings is allocated to those
participating securities in the EPS calculation.
Basic earnings per share is computed by dividing income available to common stockholders after the allocation of dividends and undistributed earnings to the participating securities by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised. It is computed after giving consideration to the weighted average dilutive effect of the Company's stock options and warrants, convertible securities and the shares that could have been issued under the Company's Management Committee Long-Term Incentive Plan and after the allocation of earnings to the participating securities.
Use of
Estimates
Management must make estimates
and assumptions that affect the Consolidated Financial Statements and the
related footnote disclosures. Such estimates are used in connection with certain
fair value measurements. See Note 25 to the Consolidated Financial Statements
for further discussions on estimates used in the determination of fair value.
The Company also uses estimates in determining consolidation decisions for
special-purpose entities as discussed in Note 22 to the Consolidated Financial
Statements. Moreover, estimates are significant in determining the amounts of
other-than-temporary impairments, impairments of goodwill and other intangible
assets, provisions for probable losses that may arise from credit-related
exposures and probable and estimable losses related to litigation and regulatory
proceedings, and tax reserves. While management makes its best judgment, actual
amounts or results could differ from those estimates. Current market conditions
increase the risk and complexity of the judgments in these estimates.
Cash Flows
Cash equivalents are defined as those amounts included in cash
and due from banks. Cash flows from risk management activities are classified in
the same category as the related assets and liabilities.
Related Party
Transactions
The Company has related party
transactions with certain of its subsidiaries and affiliates. These
transactions, which are primarily short-term in nature, include cash accounts,
collateralized financing transactions, margin accounts, derivative trading,
charges for operational support and the borrowing and lending of funds, and are
entered into in the ordinary course of business.
156
ACCOUNTING CHANGES
OCC Chapter 7 Bankruptcy
Guidance
In the third quarter of 2012, the
Office of the Comptroller of the Currency (OCC) issued guidance relating to the
accounting for mortgage loans discharged through bankruptcy proceedings pursuant
to Chapter 7 of the U.S. Bankruptcy Code (Chapter 7 bankruptcy). Under this OCC
guidance, the discharged loans are accounted for as troubled debt restructurings
(TDRs). These TDRs, other than FHA-insured loans, are written down to their
collateral value less cost to sell. FHA-insured loans are reserved for, based on
a discounted cash flow model. As a result of implementing this guidance,
Citigroup recorded an incremental $635 million of charge-offs in the third
quarter of 2012, the vast majority of which related to loans that were current.
These charge-offs were substantially offset by a related loan loss reserve
release of approximately $600 million, with a net reduction in pretax income of
$35 million. In the fourth quarter of 2012, Citigroup recorded a benefit to
charge-offs of approximately $40 million related to finalizing the impact of
this OCC guidance. Furthermore, as a result of this OCC guidance, TDRs increased
by $1.7 billion, and non-accrual loans increased by $1.5 billion in the third
quarter of 2012 ($1.3 billion of which was current).
Presentation of Comprehensive
Income
In June 2011, the FASB issued ASU
No. 2011-05, Comprehensive Income (Topic 220):
Presentation of Comprehensive Income . The ASU
requires an entity to present the total of comprehensive income, the components
of net income, and the components of other comprehensive income (OCI) either in
a single continuous statement of comprehensive income or in two separate but
consecutive statements. Citigroup has selected the two-statement approach. Under
this approach, Citi is required to present components of net income and total
net income in the Statement of Income. The Statement of Comprehensive Income
follows the Statement of Income and includes the components of OCI and a total
for OCI, along with a total for comprehensive income. The ASU removed the option
of reporting other comprehensive income in the statement of changes in
stockholders' equity. This ASU became effective for Citigroup on January 1, 2012
and a Statement of Comprehensive Income is included in these Consolidated
Financial Statements. See "Future Application of Accounting Standards" below for
further discussion.
Credit Quality and Allowance for
Credit Losses Disclosures
In July 2010,
the FASB issued ASU No. 2010-20, Receivables
(Topic 310): Disclosures about Credit Quality of Financing Receivables and
Allowance for Credit Losses . The ASU required
a greater level of disaggregated information about the allowance for credit
losses and the credit quality of financing receivables. The period-end balance
disclosure requirements for loans and the allowance for loan losses were
effective for reporting periods ended on or after December 15, 2010 and were
included in the Company's 2010 Annual Report on Form 10-K, while disclosures for
activity during a reporting period in the loan and allowance for
loan losses accounts were effective for reporting periods beginning on or after December 15, 2010 and were included in the Company's Forms 10-Q beginning with the first quarter of 2011 (see Notes 16 and 17 to the Consolidated Financial Statements). The troubled debt restructuring disclosure requirements that were part of this ASU became effective in the third quarter of 2011 (see below).
Troubled Debt Restructurings
(TDRs)
In April 2011, the FASB issued ASU
No. 2011-02, Receivables (Topic 310): A
Creditor's Determination of whether a Restructuring Is a Troubled Debt
Restructuring , to clarify the guidance for
accounting for troubled debt restructurings. The ASU clarified the guidance on a
creditor's evaluation of whether it has granted a concession and whether a
debtor is experiencing financial difficulties, such as:
Effective in the third quarter of 2011, as a result of the Company's adoption of ASU 2011-02, certain loans modified under short-term programs beginning January 1, 2011 that were previously measured for impairment under ASC 450 are now measured for impairment under ASC 310-10-35. At the end of the first interim period of adoption (September 30, 2011), the recorded investment in receivables previously measured under ASC 450 was $1,170 million and the allowance for credit losses associated with those loans was $467 million. The effect of adopting the ASU was an approximate $60 million reduction in pretax income for the quarter ended September 30, 2011.
Repurchase Agreements-Assessment
of Effective Control
In April 2011, the
FASB issued ASU No. 2011-03, Transfers and
Servicing (Topic 860): Reconsideration of Effective Control for Repurchase
Agreements . The amendments in the ASU remove
from the assessment of effective control: (i) the criterion requiring the
transferor to have the ability to repurchase or redeem the financial assets on
substantially the agreed terms, even in the event of default by the transferee,
and (ii) the collateral maintenance implementation guidance related to that
criterion. Other criteria applicable to the assessment of effective control are
not changed by the amendments in the ASU.
157
The ASU became effective for Citigroup on January 1, 2012. The guidance has been applied prospectively to transactions or modifications of existing transactions occurring on or after January 1, 2012. The ASU has not had a material effect on the Company's financial statements. A nominal amount of the Company's repurchase transactions that would previously have been accounted for as sales is now accounted for as financing transactions.
Fair Value
Measurement
In May 2011, the FASB issued
ASU No. 2011-04, Fair Value Measurement (Topic
820): Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRS . The ASU
created a common definition of fair value for U.S. GAAP and IFRS and aligned the
measurement and disclosure requirements. It required significant additional
disclosures both of a qualitative and quantitative nature, particularly for
those instruments measured at fair value that are classified in Level 3 of the
fair value hierarchy. Additionally, the ASU provided guidance on when it is
appropriate to measure fair value on a portfolio basis and expanded the
prohibition on valuation adjustments where the size of the Company's position is
a characteristic of the adjustment from Level 1 to all levels of the fair value
hierarchy.
The ASU became effective for Citigroup on January 1, 2012. As
a result of implementing the prohibition on valuation adjustments where the size
of the Company's position is a characteristic, the Company released reserves of
approximately $125 million, increasing pretax income in the first quarter of
2012.
Deferred Asset Acquisition
Costs
In October 2010, the FASB issued ASU
No. 2010-26, Financial Services – Insurance
(Topic 944): Accounting for Costs Associated with Acquiring or Renewing
Insurance Contracts . The ASU amended the
guidance for insurance entities that required deferral and subsequent
amortization of
certain costs incurred during the
acquisition of new or renewed insurance contracts, commonly referred to as
deferred acquisition costs (DAC). The new guidance limited DAC to those costs
directly related to the successful acquisition of insurance contracts; all other
acquisition-related costs must be expensed as incurred. Under prior guidance,
DAC consisted of those costs that vary with, and primarily relate to, the
acquisition of insurance contracts.
The ASU became effective for Citigroup on
January 1, 2012 and was adopted using the retrospective method. As a result of
implementing the ASU, DAC was reduced by approximately $165 million and a $58
million deferred tax asset was recorded with an offset to opening retained
earnings of $107 million (net of tax).
Change in Accounting for Embedded
Credit Derivatives
In March 2010, the FASB
issued ASU No. 2010-11, Scope Exception
Related to Embedded Credit Derivatives . The
ASU clarifies that certain embedded derivatives, such as those contained in
certain securitizations, CDOs and structured notes, should be considered
embedded credit derivatives subject to potential bifurcation and separate fair
value accounting. The ASU allows any beneficial interest issued by a
securitization vehicle to be accounted for under the fair value option at
transition on July 1, 2010.
As set forth in the table below, the
Company elected to account for certain beneficial interests issued by
securitization vehicles under the fair value option beginning July 1, 2010.
Beneficial interests previously classified as held-to-maturity (HTM) were
reclassified to available-for-sale (AFS) on June 30, 2010 because, as of that
reporting date, the Company did not have the intent to hold the beneficial
interests until maturity. The following table also shows the gross gains and
gross losses that make up the pretax cumulative-effect adjustment to retained
earnings for reclassified beneficial interests, recorded on July 1,
2010:
July 1, 2010 | ||||||||||||||||||||
Pretax cumulative effect adjustment to Retained earnings | ||||||||||||||||||||
Gross unrealized losses | Gross unrealized gains | |||||||||||||||||||
In millions of dollars at June 30, 2010 | Amortized cost | recognized in AOCI | (1) | recognized in AOCI | Fair value | |||||||||||||||
Mortgage-backed securities | ||||||||||||||||||||
Prime | $ | 390 | $ | - | $ | 49 | $ | 439 | ||||||||||||
Alt-A | 550 | - | 54 | 604 | ||||||||||||||||
Subprime | 221 | - | 6 | 227 | ||||||||||||||||
Non-U.S. residential | 2,249 | - | 38 | 2,287 | ||||||||||||||||
Total mortgage-backed securities | $ | 3,410 | $ | - | $ | 147 | $ | 3,557 | ||||||||||||
Asset-backed securities | ||||||||||||||||||||
Auction rate securities | $ | 4,463 | $ | 401 | $ | 48 | $ | 4,110 | ||||||||||||
Other asset-backed | 4,189 | 19 | 164 | 4,334 | ||||||||||||||||
Total asset-backed securities | $ | 8,652 | $ | 420 | $ | 212 | $ | 8,444 | ||||||||||||
Total reclassified debt securities | $ | 12,062 | $ | 420 | $ | 359 | $ | 12,001 |
(1) | All reclassified debt securities with gross unrealized losses were assessed for other-than-temporary-impairment as of June 30, 2010, including an assessment of whether the Company intends to sell the security. For securities that the Company intends to sell, impairment charges of $176 million were recorded in earnings in the second quarter of 2010. |
158
The Company elected to account for these beneficial interests under the fair value option beginning July 1, 2010 for various reasons, including:
To reduce the operational burden of assessing beneficial interests for bifurcation under the guidance in the ASU; Where bifurcation would otherwise be required under the ASU, to avoid the complicated operational requirements of bifurcating the embedded derivatives from the host contracts and accounting for each separately. The Company reclassified substantially all beneficial interests where bifurcation would otherwise be required under the ASU; and To permit more economic hedging strategies without generating volatility in reported earnings. Additional Disclosures Regarding
Fair Value Measurements
In January 2010,
the FASB issued ASU No. 2010-06, Improving
Disclosures about Fair Value Measurements .
The ASU requires disclosure of the amounts of significant transfers in and out
of Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers.
The disclosures were effective for reporting periods beginning after December
15, 2009. Additionally, disclosures of the gross purchases, sales, issuances and
settlements activity in Level 3 of the fair value measurement hierarchy were
required for fiscal years beginning after December 15, 2010. The Company adopted
ASU 2010-06 as of January 1, 2010. The required disclosures are included in Note
25 to the Consolidated Financial Statements.
Non-Consolidation of Certain
Investment Funds
The FASB issued
ASU No. 2010-10, Consolidation (Topic 810): Amendments for Certain Investment
Funds in the first quarter of
2010. ASU 2010-10 provides a deferral of the requirements of SFAS 167 where the
following criteria are met:
– | a securitization entity; | |
– | an asset-backed financing entity; or | |
– | an entity that was formerly considered a qualifying special-purpose | |
entity. |
The Company has
determined that a majority of the investment entities managed by Citigroup are
provided a deferral from the requirements of SFAS 167 because they meet these
criteria. These entities continue to be evaluated under the requirements of FIN 46(R) (ASC 810-10), prior to the implementation of SFAS 167.
Where the
Company has determined that certain investment vehicles are subject to the
consolidation requirements of SFAS 167, the consolidation conclusions reached
upon initial application of SFAS 167 are consistent with the consolidation
conclusions reached under the requirements of ASC 810-10, prior to the
implementation of SFAS 167.
159
FUTURE APPLICATION OF ACCOUNTING STANDARDS
Reclassification out of
Accumulated Other Comprehensive Income
In
February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out
of Accumulated Other Comprehensive Income .
The Accounting Standards Update (ASU) requires new footnote disclosures of items
reclassified from accumulated OCI to net income. The requirements will be effective for the first
quarter of 2013.
Testing Indefinite-Lived
Intangible Assets for Impairment
In July
2012, the FASB issued Accounting Standards Update No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing
Indefinite-Lived Intangible Assets for Impairment . The ASU is intended to simplify the guidance for testing the decline in
the realizable value (impairment) of indefinite-lived intangible assets other
than goodwill. Some examples of intangible assets subject to the guidance
include indefinite-lived trademarks, licenses and distribution rights. The ASU
allows companies to perform a qualitative assessment about the likelihood of
impairment of an indefinite-lived intangible asset to determine whether further
impairment testing is necessary, similar in approach to the goodwill impairment
test.
The ASU became
effective for annual and interim impairment tests performed for fiscal years
beginning after September 15, 2012.
Offsetting
In December 2011, the FASB issued Accounting Standards Update
No. 2011-11, Balance Sheet (Topic 210):
Disclosures about Offsetting Assets and Liabilities . The standard requires new disclosures about certain financial
instruments and derivative instruments that are either offset in the balance
sheet (presented on a net basis) or subject to an enforceable master netting
arrangement or similar arrangement. The standard requires disclosures that
provide both gross and net information in the notes to the financial statements
for relevant assets and liabilities. This ASU does not change the existing
offsetting eligibility criteria or the permitted balance sheet presentation for
those instruments that meet the eligibility
criteria.
Citi
believes the new disclosure requirements should enhance comparability between
those companies that prepare their financial statements on the basis of U.S.
GAAP and those that prepare their financial statements in accordance with IFRS.
For many financial institutions, the differences in the offsetting requirements
between U.S. GAAP and IFRS result in a significant difference in the amounts
presented in the balance sheets prepared in accordance with U.S. GAAP and IFRS.
The disclosure standard will become effective for annual and quarterly periods
beginning January 1, 2013. The disclosures are required retrospectively for all
comparative periods presented.
In December 2012, the FASB issued a proposed Accounting Standards Update (ASU), Financial Instruments-Credit Losses. This proposed ASU, or exposure draft, was issued for public comment in order to allow stakeholders the opportunity to review the proposal and provide comments to the FASB, and does not constitute accounting guidance until such a final ASU is issued.
The exposure draft contains accounting guidance developed by the FASB with the goal of improving financial reporting about expected credit losses on loans, securities and other financial assets held by banks, financial institutions, and other public and private organizations. The exposure draft proposes a new accounting model intended to require earlier recognition of credit losses, while also providing additional transparency about credit risk.
The FASB's proposed model would utilize a single "expected credit loss" measurement objective for the recognition of credit losses, replacing the multiple existing impairment models in U.S. GAAP, which generally require that a loss be "incurred" before it is recognized.
The FASB's proposed model represents a significant departure from existing U.S. GAAP, and may result in material changes to the Company's accounting for financial instruments. The impact of the FASB's final ASU to the Company's financial statements will be assessed when it is issued. The exposure draft does not contain a proposed effective date; this would be included in the final ASU, when issued.
Other Potential Amendments to
Current Accounting Standards
The FASB and
IASB, either jointly or separately, are currently working on several major
projects, including amendments to existing accounting standards governing
financial instruments, leases, consolidation and investment companies. As part
of the joint financial instruments project, the FASB has issued a proposed ASU
that would result in significant changes to the guidance for recognition and
measurement of financial instruments, in addition to the proposed ASU that would
change the accounting for credit losses on financial instruments discussed
above.
The FASB is
also working on a joint project that would require all leases to be capitalized
on the balance sheet. Additionally, the FASB has issued a proposal on
principal-agent considerations that would change the way the Company needs to
evaluate whether to consolidate VIEs and non-VIE partnerships. Furthermore, the
FASB has issued a proposed ASU that would change the criteria used to determine
whether an entity is subject to the accounting and reporting requirements of an
investment company.
The principal-agent consolidation proposal would require all VIEs,
including those that are investment companies, to be evaluated for consolidation
under the same requirements. All these projects may have significant impacts for
the Company. Upon completion of the standards, the Company will need to
re-evaluate its accounting and disclosures. However, due to ongoing
deliberations of the standard-setters, the Company is currently unable to
determine the effect of future amendments or proposals.
160
2. BUSINESS DIVESTITURES
The following divestitures
occurred in 2011 and 2010 and did not qualify as Discontinued operations . Divestitures that qualified as Discontinued operations are discussed in Note 3 to the Consolidated
Financial Statements.
In April 2010, Citi completed the IPO of
Primerica, which was part of Citi Holdings, and sold approximately 34% to public
investors. Also in April 2010, Citi completed the sale of approximately 22% of
Primerica to Warburg Pincus, a private equity firm. Citi contributed 4% of the
Primerica shares to Primerica for employee and agent stock-based awards
immediately prior to the sales. Citi retained an approximate 40% interest in
Primerica after the sales and recorded the investment under the equity method.
Citi recorded an after-tax gain on sale of $26 million. Concurrent with the sale
of the shares, Citi entered into co-insurance agreements with Primerica to
reinsure up to 90% of the risk associated with the in-force insurance
policies.
During 2011, Citi sold its
remaining shares in Primerica for an after-tax loss of $11
million.
3. DISCONTINUED OPERATIONS
Sale of Certain Citi Capital
Advisors Business
During the third quarter
of 2012, the Company executed definitive agreements to transition a carve-out of
its liquid strategies business within Citi Capital Advisors (CCA), which is part
of the Institutional Clients
Group segment, to certain employees
responsible for managing those operations. This transition will occur pursuant
to two separate transactions, creating two separate management companies. Each transaction will be accounted for as a sale. The first transaction closed on February 28, 2013 and Citigroup retained a 24.9% passive equity interest in the management company (which will continue to be held in Citi's Institutional Clients Group segment). The second transaction is expected to be completed in the first half of 2013.
This sale
is reported as discontinued operations for the second half of 2012 only. Prior
periods were not reclassified due to the immateriality of the impact in those
periods.
The following is a summary as of December 31, 2012 of the assets held for
sale on the Consolidated Balance Sheet for the operations related to the CCA
business to be sold:
In millions of dollars | 2012 | |
Assets | ||
Deposits at interest with banks | $ | 4 |
Goodwill | 13 | |
Intangible assets | 19 | |
Total assets | $ | 36 |
Summarized financial information for Discontinued operations for the operations related to CCA follows:
In millions of dollars | 2012 | ||
Total revenues, net of interest expense | $ | 60 | |
Income (loss) from discontinued operations | $ | (123 | ) |
Gain on sale | - | ||
Benefit for income taxes | (44 | ) | |
Income (loss) from discontinued operations, net of taxes | $ | (79 | ) |
Sale of Egg Banking plc Credit
Card Business
On March 1, 2011, the
Company announced that Egg Banking plc (Egg), an indirect subsidiary that was
part of Citi Holdings, entered into a definitive agreement to sell its credit
card business to Barclays PLC. The sale closed on April 28,
2011.
This sale is
reported as discontinued operations for 2011 and 2012 only. 2010 was not
reclassified, due to the immateriality of the impact in that period. An
after-tax gain on sale of $126 million was recognized upon closing. Egg
operations had total assets and total liabilities of approximately $2.7 billion
and $39 million, respectively, at the time of
sale.
161
Summarized financial information for Discontinued operations , including cash flows, for the credit card operations related to Egg follows:
In millions of dollars | 2012 | 2011 | ||||
Total revenues, net of interest expense | $ | 1 | $ | 340 | ||
Income (loss) from discontinued operations | $ | (96 | ) | $ | 24 | |
Gain (loss) on sale | (1 | ) | 143 | |||
(Benefit) provision for income taxes | (34 | ) | 58 | |||
Income (loss) from discontinued operations, net of taxes | $ | (63 | ) | $ | 109 |
Cash Flows from Discontinued Operations
In millions of dollars | 2012 | 2011 | ||||
Cash flows from operating activities | $ | - | $ | (146 | ) | |
Cash flows from investing activities | - | 2,827 | ||||
Cash flows from financing activities | - | (12 | ) | |||
Net cash provided by discontinued operations | $ | - | $ | 2,669 |
Sale of The Student Loan
Corporation
On September 17, 2010, the
Company announced that The Student Loan Corporation (SLC), an indirect
subsidiary that was 80% owned by Citibank and 20% owned by public shareholders,
and which was part of Citi Holdings, entered into definitive agreements that
resulted in the divestiture of Citi's private student loan business and
approximately $31 billion of its approximate $40 billion in assets to Discover
Financial Services (Discover) and SLM Corporation (Sallie Mae). The transaction
closed on December 31, 2010. As part of the transaction, Citi provided Sallie
Mae with $1.1 billion of seller-financing. Additionally, as part of the
transactions, Citibank, N.A. purchased approximately $8.6 billion of assets from
SLC prior to the sale of SLC.
This sale was reported as discontinued operations for the
third and fourth quarters of 2010 only. Prior periods were not reclassified, due
to the immateriality of the impact in those periods. The total 2010 impact from
the sale of SLC resulted in an after-tax loss of $427 million. SLC operations
had total assets and total liabilities of approximately $31 billion and $29
billion, respectively, at the time of sale.
Summarized financial information for discontinued
operations, including cash flows, related to the sale of SLC follows:
In millions of dollars | 2012 | 2011 | 2010 | |||||||
Total revenues, net of interest expense | $ | - | $ | - | $ | (577 | ) | |||
Income from discontinued operations | $ | - | $ | - | $ | 97 | ||||
Gain (loss) on sale | - | - | (825 | ) | ||||||
Benefit for income taxes | - | - | (339 | ) | ||||||
Income (loss) from discontinued operations, | ||||||||||
net of taxes | $ | - | $ | - | $ | (389 | ) |
Cash Flows from Discontinued Operations
In millions of dollars | 2012 | 2011 | 2010 | |||||||
Cash flows from operating activities | $ | - | $ | - | $ | 5,106 | ||||
Cash flows from investing activities | - | - | 1,532 | |||||||
Cash flows from financing activities | - | - | (6,483 | ) | ||||||
Net cash provided by discontinued operations | $ | - | $ | - | $ | 155 |
Combined Results for Discontinued
Operations
The following is summarized
financial information for the CCA business, the Egg credit card business, The
Student Loan Corporation business and previous discontinued operations, for
which Citi continues to have minimal residual costs associated with the
sales.
In millions of dollars | 2012 | 2011 | 2010 | ||||||||
Total revenues, net of interest expense | $ | 61 | $ | 352 | $ | (410 | ) | ||||
Income (loss) from discontinued operations | $ | (219 | ) | $ | 23 | $ | 72 | ||||
Gain (loss) on sale | (1 | ) | 155 | (702 | ) | ||||||
Provision (benefit) for income taxes | (71 | ) | 66 | (562 | ) | ||||||
Income (loss) from discontinued | |||||||||||
operations, net of taxes | $ | (149 | ) | $ | 112 | $ | (68 | ) |
Cash Flows from Discontinued Operations
In millions of dollars | 2012 | 2011 | 2010 | ||||||||
Cash flows from operating activities | $ | - | $ | (146 | ) | $ | 4,974 | ||||
Cash flows from investing activities | - | 2,827 | 1,726 | ||||||||
Cash flows from financing activities | - | (12 | ) | (6,486 | ) | ||||||
Net cash provided by discontinued operations | $ | - | $ | 2,669 | $ | 214 |
162
4. BUSINESS SEGMENTS
Citigroup is a diversified bank
holding company whose businesses provide a broad range of financial services to
Consumer and Corporate customers around the world. The Company's activities are
conducted through the Global Consumer
Banking (GCB), Institutional Clients Group (ICG),
Corporate/Other and Citi Holdings business
segments.
The Global Consumer Banking segment includes a global, full-service Consumer franchise
delivering a wide array of banking, credit card lending and investment services
through a network of local branches, offices and electronic delivery systems and
is composed of four Regional Consumer Banking
(RCB) businesses: North America, EMEA, Latin America and Asia .
The
Company's ICG segment is composed of Securities and
Banking and Transaction Services and provides
corporate, institutional, public sector and high net-worth clients in
approximately 100 countries with a broad range of banking and financial products
and services.
Corporate/Other includes net treasury results, unallocated corporate
expenses, offsets to certain line-item reclassifications (eliminations), the
results of discontinued operations and unallocated
taxes.
The Citi
Holdings segment is composed of Brokerage and
Asset Management, Local Consumer Lending and Special Asset Pool .
The
accounting policies of these reportable segments are the same as those disclosed
in Note 1 to the Consolidated Financial
Statements.
The
prior-period balances reflect reclassifications to conform the presentation in
those periods to the current period's presentation. Reclassifications during the first quarter
of 2012 related to the transfer of the substantial majority of the Company's
retail partner cards business (which Citi now refers to as "Citi retail
services") from Citi Holdings- Local Consumer
Lending to Citicorp- North America Regional Consumer Banking . Additionally, certain consolidated expenses were
re-allocated to the respective businesses receiving the
services.
The
following table presents certain information regarding the Company's continuing
operations by segment:
Revenues, | Provision (benefit) | Income (loss) from | |||||||||||||||||||||||||||||||
net of interest expense | (1) | for income taxes | continuing operations | (2) | Identifiable assets | ||||||||||||||||||||||||||||
In millions of dollars, except | |||||||||||||||||||||||||||||||||
identifiable assets in billions | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | 2012 | 2011 | ||||||||||||||||||||||
Global Consumer Banking | $ | 40,214 | $ | 39,195 | $ | 39,369 | $ | 3,733 | $ | 3,509 | $ | 1,551 | $ | 8,104 | $ | 7,672 | $ | 4,969 | $ | 402 | $ | 385 | |||||||||||
Institutional Clients Group | 30,600 | 32,002 | 33,207 | 2,102 | 2,820 | 3,490 | 7,990 | 8,262 | 10,173 | 1,059 | 980 | ||||||||||||||||||||||
Corporate/Other | 192 | 885 | 1,754 | (1,396 | ) | (681 | ) | 7 | (1,625 | ) | (728 | ) | 242 | 248 | 284 | ||||||||||||||||||
Total Citicorp | $ | 71,006 | $ | 72,082 | $ | 74,330 | $ | 4,439 | $ | 5,648 | $ | 5,048 | $ | 14,469 | $ | 15,206 | $ | 15,384 | $ | 1,709 | $ | 1,649 | |||||||||||
Citi Holdings | (833 | ) | 6,271 | 12,271 | (4,412 | ) | (2,127 | ) | (2,815 | ) | (6,560 | ) | (4,103 | ) | (4,433 | ) | 156 | 225 | |||||||||||||||
Total | $ | 70,173 | $ | 78,353 | $ | 86,601 | $ | 27 | $ | 3,521 | $ | 2,233 | $ | 7,909 | $ | 11,103 | $ | 10,951 | $ | 1,865 | $ | 1,874 |
(1) | Includes Citicorp (excluding Corporate/Other ) total revenues, net of interest expense, in North America of $29.8 billion, $30.1 billion and $33.6 billion; in EMEA of $11.5 billion, $12.3 billion and $11.8 billion; in Latin America of $14.5 billion, $13.6 billion and $12.8 billion; and in Asia of $15.0 billion, $15.2 billion and $14.4 billion in 2012, 2011 and 2010, respectively. Regional numbers exclude Citi Holdings and Corporate/Other , which largely operate within the U.S. | |
(2) | Includes pretax provisions (credits) for credit losses and for benefits and claims in the GCB results of $6.6 billion, $6.6 billion and $14.0 billion; in the ICG results of $276 million, $152 million and $(82) million; and in the Citi Holdings results of $4.9 billion, $6.0 billion and $12.1 billion for 2012, 2011 and 2010, respectively. |
163
5. INTEREST REVENUE AND EXPENSE
For the years ended December 31, 2012, 2011 and 2010, respectively, Interest revenue and Interest expense consisted of the following:
In millions of dollars | 2012 | 2011 | 2010 | ||||||
Interest revenue | |||||||||
Loan interest, including fees | $ | 48,544 | $ | 50,281 | $ | 55,056 | |||
Deposits with banks | 1,269 | 1,750 | 1,252 | ||||||
Federal funds sold and securities borrowed or | |||||||||
purchased under agreements to resell | 3,418 | 3,631 | 3,156 | ||||||
Investments, including dividends | 7,525 | 8,320 | 11,004 | ||||||
Trading account assets (1) | 6,802 | 8,186 | 8,079 | ||||||
Other interest | 580 | 513 | 735 | ||||||
Total interest revenue | $ | 68,138 | $ | 72,681 | $ | 79,282 | |||
Interest expense | |||||||||
Deposits (2) | $ | 7,613 | $ | 8,556 | $ | 8,371 | |||
Federal funds purchased and securities loaned or | |||||||||
sold under agreements to repurchase | 2,817 | 3,197 | 2,808 | ||||||
Trading account liabilities (1) | 190 | 408 | 379 | ||||||
Short-term borrowings | 727 | 650 | 917 | ||||||
Long-term debt | 9,188 | 11,423 | 12,621 | ||||||
Total interest expense | $ | 20,535 | $ | 24,234 | $ | 25,096 | |||
Net interest revenue | $ | 47,603 | $ | 48,447 | $ | 54,186 | |||
Provision for loan losses | 10,848 | 11,773 | 25,194 | ||||||
Net interest revenue after | |||||||||
provision for loan losses | $ | 36,755 | $ | 36,674 | $ | 28,992 |
(1) | Interest expense on Trading account liabilities of ICG is reported as a reduction of interest revenue from Trading account assets . | |
(2) | Includes deposit insurance fees and charges of $1,262 million, $1,332 million and $981 million for the years ended December 31, 2012, December 31, 2011 and December 31, 2010, respectively. |
6. COMMISSIONS AND FEES
The table below sets forth
Citigroup's Commissions and
fees revenue for the years ended
December 31, 2012, 2011 and 2010, respectively. The primary components of Commissions and
fees revenue for the year ended
December 31, 2012 were credit card and bank card fees, investment banking fees
and trading-related fees.
Credit card and bank card fees are primarily
composed of interchange revenue and certain card fees, including annual fees,
reduced by reward program costs. Interchange revenue and fees are recognized
when earned, except for annual card fees, which are deferred and amortized on a
straight-line basis over a 12-month period. Reward costs are recognized when
points are earned by the customers.
Investment banking fees are substantially composed of underwriting and
advisory revenues. Investment banking fees are recognized when Citigroup's
performance under the terms of the contractual arrangements is completed, which
is typically at the closing of the transaction. Underwriting revenue is recorded
in Commissions and
fees , net of both reimbursable
and non-reimbursable expenses, consistent with the AICPA Audit and Accounting
Guide for Brokers and Dealers in Securities (codified in ASC 940-605-05-1).
Expenses associated with advisory transactions are recorded in Other operating expenses, net of client reimbursements. Out-of-pocket
expenses are deferred and recognized at the time the related revenue is
recognized. In general, expenses incurred related to investment banking
transactions that fail to close (are not consummated) are recorded gross in Other operating
expenses .
Trading-related fees primarily include commissions
and fees from the following: executing transactions for clients on exchanges and
over-the-counter markets; sale of mutual funds, insurance and other annuity
products; and assisting clients in clearing transactions, providing brokerage
services and other such activities. Trading-related fees are recognized when
earned in Commissions and
fees . Gains or losses, if any, on
these transactions are included in Principal transactions (see Note 7 to the Consolidated Financial Statements).
The following table presents Commissions and fees revenue for the years ended December
31:
In millions of dollars | 2012 | 2011 | 2010 | ||||||
Credit cards and bank cards | $ | 3,526 | $ | 3,603 | $ | 3,774 | |||
Investment banking | 2,991 | 2,451 | 2,977 | ||||||
Trading-related | 2,296 | 2,587 | 2,368 | ||||||
Transaction services | 1,441 | 1,520 | 1,454 | ||||||
Other Consumer (1) | 878 | 931 | 1,156 | ||||||
Checking-related | 907 | 926 | 1,023 | ||||||
Primerica | - | - | 91 | ||||||
Loan servicing | 313 | 251 | 353 | ||||||
Corporate finance (2) | 516 | 519 | 439 | ||||||
Other | 58 | 62 | 23 | ||||||
Total commissions and fees | $ | 12,926 | $ | 12,850 | $ | 13,658 |
(1) | Primarily consists of fees for investment fund administration and management, third-party collections, commercial demand deposit accounts and certain credit card services. | |
(2) | Consists primarily of fees earned from structuring and underwriting loan syndications. |
164
7. PRINCIPAL TRANSACTIONS
Principal transactions revenue consists of realized and unrealized gains and losses
from trading activities. Trading activities include revenues from fixed income,
equities, credit and commodities products, and foreign exchange transactions.
Not included in the table below is the impact of net interest revenue related to
trading activities, which is an integral part of trading activities'
profitability. See Note 5 to the Consolidated Financial Statements for
information about net interest revenue related to trading
activity. Principal transactions include CVA and DVA.
The
following table presents principal transactions revenue for the years ended
December 31:
In millions of dollars | 2012 | 2011 | 2010 | |||||||||
Global Consumer Banking | $ | 812 | $ | 716 | $ | 533 | ||||||
Institutional Clients Group | 4,130 | 4,873 | 5,566 | |||||||||
Corporate/Other | (192 | ) | 45 | (406 | ) | |||||||
Subtotal Citicorp | $ | 4,750 | $ | 5,634 | $ | 5,693 | ||||||
Local Consumer Lending | $ | (69 | ) | $ | (102 | ) | $ | (217 | ) | |||
Brokerage and Asset Management | 5 | (11 | ) | (37 | ) | |||||||
Special Asset Pool | 95 | 1,713 | 2,078 | |||||||||
Subtotal Citi Holdings | $ | 31 | $ | 1,600 | $ | 1,824 | ||||||
Total Citigroup | $ | 4,781 | $ | 7,234 | $ | 7,517 | ||||||
Interest rate contracts (1) | $ | 2,301 | $ | 5,136 | $ | 3,231 | ||||||
Foreign exchange contracts (2) | 2,403 | 2,309 | 1,852 | |||||||||
Equity contracts (3) | 158 | 3 | 995 | |||||||||
Commodity and other contracts (4) | 92 | 76 | 126 | |||||||||
Credit derivatives (5) | (173 | ) | (290 | ) | 1,313 | |||||||
Total | $ | 4,781 | $ | 7,234 | $ | 7,517 |
(1) | Includes revenues from government securities and corporate debt, municipal securities, preferred stock, mortgage securities and other debt instruments. Also includes spot and forward trading of currencies and exchange-traded and over-the-counter (OTC) currency options, options on fixed income securities, interest rate swaps, currency swaps, swap options, caps and floors, financial futures, OTC options and forward contracts on fixed income securities. | |
(2) | Includes revenues from foreign exchange spot, forward, option and swap contracts, as well as FX translation gains and losses. | |
(3) | Includes revenues from common, preferred and convertible preferred stock, convertible corporate debt, equity-linked notes and exchange-traded and OTC equity options and warrants. | |
(4) | Primarily includes revenues from crude oil, refined oil products, natural gas and other commodities trades. | |
(5) | Includes revenues from structured credit products. | |
8. INCENTIVE PLANS
Overview
The Company makes
restricted or deferred stock and/or deferred cash awards, as well as stock payments, as part of its discretionary annual
incentive award programs involving a large segment of Citigroup's employees
worldwide.
Stock awards and grants of stock options
may also be made at various times during the year as sign-on awards to induce new hires to join the Company, or to
high-potential employees as long-term retention awards.
Long-term
restricted stock awards and salary stock payments have also been used to fulfill specific regulatory requirements to deliver
annual salary and incentive awards to certain officers and highly-compensated employees in the form of equity.
Consistent
with long-standing practice, a portion of annual compensation for non-employee directors is also delivered in the form of
equity awards.
In
addition, equity awards are made occasionally as additional incentives to retain and motivate officers or employees. Various
other incentive award programs are made on an annual or other regular basis to retain and motivate certain employees who
do not participate in Citigroup's annual discretionary incentive awards.
Recipients
of Citigroup stock awards generally do not have any stockholder rights until shares are delivered upon vesting or exercise,
or after the expiration of applicable restricted periods. Recipients of restricted or deferred stock awards, however, may
be entitled to receive dividends or dividend-equivalent payments during the vesting period, unless the award is subject to
performance criteria. (Citigroup's 2009 Stock Incentive Plan currently does not permit the payment or accrual of
dividend equivalents on stock awards subject to performance criteria.) Additionally, because unvested shares of restricted
stock are considered issued and outstanding, recipients of such awards are generally entitled to vote the shares in their
award during the vesting period. Once a stock award vests, the shares are freely transferable, unless they are subject to a
restriction on sale or transfer for a specified period. Pursuant to a stock ownership commitment, certain executives have committed to holding most of their vested shares indefinitely.
All
equity awards granted since April 19, 2005, have been made pursuant to stockholder-approved stock incentive plans that are
administered by the Personnel and Compensation Committee of the Citigroup Board of Directors (the Committee), which is
composed entirely of independent non-employee directors.
At
December 31, 2012, approximately 86.9 million shares of Citigroup common stock were authorized and available for grant under
Citigroup's 2009 Stock Incentive Plan, the only plan from which equity awards are currently granted.
The
2009 Stock Incentive Plan and predecessor plans permit the use of treasury stock or newly issued shares in connection with
awards granted under the plans. Until recently, Citigroup's practice has been to deliver shares from treasury stock
upon the exercise or vesting of equity awards. However, newly issued shares were issued to settle certain awards in April
2010, and the vesting of annual deferred stock awards in January 2011, 2012 and 2013. The newly issued shares in April 2010
and January 2011 were specifically intended to increase the Company's equity capital. The practice of issuing new
shares
165
to settle the annual vesting of deferred
stock awards is expected to continue in the absence of a share repurchase
program by which treasury shares can be replenished. The use of treasury stock
or newly issued shares to settle stock awards does not affect the amortization
recorded in the Consolidated Income Statement for equity
awards.
The following
table shows components of compensation expense relating to the Company's
stock-based compensation programs and deferred cash award programs as recorded
during 2012, 2011 and 2010:
In millions of dollars | 2012 | 2011 | 2010 | ||||||
Charges for estimated awards to | |||||||||
retirement-eligible employees | $ | 444 | $ | 338 | $ | 366 | |||
Option expense | 99 | 161 | 197 | ||||||
Amortization of deferred cash awards and | |||||||||
deferred cash stock units | 198 | 208 | 280 | ||||||
Salary stock award expense | - | - | 173 | ||||||
Immediately vested stock award expense (1) | 60 | 52 | 174 | ||||||
Amortization of restricted and deferred | |||||||||
stock awards (2) | 864 | 871 | 747 | ||||||
Total | $ | 1,665 | $ | 1,630 | $ | 1,937 |
(1) | This represents expense for immediately vested stock awards that generally were stock payments in lieu of cash compensation. The expense is generally accrued as cash incentive compensation in the year prior to grant. | |
(2) | All periods include amortization expense for all unvested awards to non-retirement-eligible employees. Amortization is recognized net of estimated forfeitures of awards. |
Annual Incentive
Awards
Most of the shares of common stock
issued by Citigroup as part of its equity compensation programs are to settle
the vesting of restricted and deferred stock awards granted as part of annual
incentive awards. These annual incentive awards generally also include immediate
cash bonus payments and deferred cash awards, and in the European Union (EU),
immediately vested stock payments.
Annual incentives are generally awarded in the first quarter
of the year based upon previous years' performance. Awards valued at less than US$100,000 (or local currency
equivalent) are generally paid entirely in the form of an immediate cash bonus.
Pursuant to Citigroup policy and/or regulatory requirements, employees and
officers with higher incentive award values are subject to mandatory deferrals
of incentive pay, and generally receive 25%-60% of their award in a combination
of restricted or deferred stock and deferred cash awards. In some cases, reduced
deferral requirements apply to awards valued at less than US$100,000 (or local
currency equivalent). Annual incentive awards made to many employees in the EU
are subject to deferral requirements between 40%-60%, regardless of the total
award value, with 50% of the immediate incentive delivered in the form of a
stock payment subject to a restriction on sale or transfer (generally, for six
months).
Deferred annual incentive awards are generally delivered as two awards-a
restricted or deferred stock award under the Company's Capital Accumulation
Program (CAP) and a deferred cash award. The applicable mix of CAP and deferred
cash awards may vary based on the employee's minimum deferral requirement and
the country of employment. In some cases, the entire deferral will be in the
form of either a CAP award or deferred cash.
Subject to
certain exceptions (principally, for retirement-eligible employees), continuous
employment within Citigroup is required to vest in CAP and deferred cash awards.
Post-employment vesting by retirement-eligible employees and participants who
meet other conditions is generally conditioned upon their refraining from
competition with Citigroup during the remaining vesting period, unless the
employment relationship has been terminated by Citigroup under certain
conditions.
Generally, the CAP and deferred cash awards vest in equal
annual installments over three- or four-year periods. Vested CAP awards are
delivered in shares of common stock. Dividend equivalent payments are paid to
participants during the vesting period, unless the CAP award is subject to the
performance-vesting condition described below. Deferred cash awards are payable
in cash and earn a fixed notional rate of interest that is paid only if and when
the underlying principal award amount vests. Generally, in the EU, vested CAP
shares are subject to a restriction on sale or transfer after vesting, and
vested deferred cash awards are subject to hold-back (generally, for six months
in each case).
Unvested CAP and deferred cash awards made in January 2011 or
later are subject to one or more clawback provisions that apply in certain
circumstances, including in the case of employee risk-limit violations or other
misconduct or where the awards were based on earnings that were misstated.
Deferred cash awards made to certain employees in February 2013 are subject to a
discretionary performance-based vesting condition under which an amount
otherwise scheduled to vest may be reduced in the event of a "material adverse
outcome" for which a participant has "significant responsibility."
CAP awards made to certain employees in
February 2013 and deferred cash awards made to certain employees in January 2012
are subject to a formulaic performance-based vesting condition pursuant to which
amounts otherwise scheduled to vest will be reduced based on the amount of any
pre-tax loss by a participant's business in the calendar year preceding the
scheduled vesting date. For the February 2013 CAP awards, a minimum reduction of
20% applies for the first dollar of loss.
The annual
incentive award structure and terms and conditions described above apply
generally to awards made in 2011 and later, except where indicated otherwise. Annual incentive awards in January
2009 and 2010 of US$100,000 or more (or local currency equivalent) were
generally subject to deferral requirements between 25%-40%. In 2010, because an
insufficient number of shares were available for grant under the 2009 Stock
Incentive Plan, an alternative award structure was applied, primarily for
deferrals of incentive awards in the U.S. and U.K. Under this structure,
portions of the amounts that would normally have been deferred in the form of
CAP awards were instead awarded as two types of deferred cash awards-one subject
to a four-year vesting schedule and earning a LIBOR-based return, and the other
subject to a two-year vesting schedule and denominated in stock units, the value
of which fluctuated based on the price of Citigroup common stock. Other terms
and conditions of these awards were the same as the CAP awards granted in 2010.
In 2009, some deferrals were also in the form of a deferred cash award subject
to a four-year vesting schedule and earning a LIBOR-based return, in addition to
a CAP award.
166
Prior to 2009, a mandatory deferral
requirement of at least 25% applied to incentive awards valued as low as US$20,000. Deferrals were in the form of CAP
awards. In some cases, participants were entitled to elect to receive stock options in lieu of some or all of the value
that would otherwise have been awarded as restricted or deferred stock. CAP awards granted prior to 2011 were not subject to
clawback provisions or performance criteria.
The
total expense recognized for stock awards represents the fair value of Citigroup common stock at the award date. Generally,
the expense is recognized as a charge to income ratably over the vesting period, except for awards to retirement-eligible
employees, and stock payments (e.g., salary stock and other immediately vested awards). Whenever awards are made or are
expected to be made to retirement-eligible employees, the charge to income is accelerated based on the dates the applicable
conditions to retirement eligibility are or will be met. If the employee is retirement eligible on the grant date, the
entire expense is recognized in the year prior to the grant. For employees who become retirement eligible during the vesting
period, expense is recognized from the grant date until the date eligibility conditions are met.
Expense
for immediately vested stock awards that generally were made in lieu of cash compensation (salary stock and other stock
payments) is also recognized in the year prior to the grant in accordance with U.S. GAAP. (See "Other EESA-related
Stock Compensation" below for additional information regarding salary stock.)
Annual
incentive awards made in January 2011 and January 2010 to certain executive officers and other highly compensated employees
were administered in accordance with the Emergency Economic Stabilization Act of 2008, as amended (EESA), pursuant to
structures approved by the Special Master for TARP Executive Compensation (Special Master). Generally the affected
executives and employees did not participate in CAP and instead received equity compensation in the form of fully vested
stock payments, long-term restricted stock (LTRS), and/or restricted and deferred stock awards, all of which were subject
to vesting requirements over periods of up to three years, and/or sale restrictions. Certain of these awards are subject to
discretionary performance-based vesting conditions. These awards, and CAP awards to participants in the EU that are subject
to certain clawback provisions, are subject to variable accounting, pursuant to which the associated charges fluctuate with
changes in Citigroup's common stock price over the applicable vesting periods. For these awards, the total amount that
will be recognized as expense cannot be determined in full until the awards vest. For stock awards subject to discretionary
performance conditions, compensation expense was accrued based on Citigroup's common stock price at the end of the
reporting period, and the estimated outcome of meeting the performance conditions.
In
January 2009, certain senior executives received 30% of their annual incentive awards as performance-vesting equity awards
conditioned primarily on stock-price performance. Because the price targets were not met, only a fraction of the awards
vested. The fraction of awarded shares that vested was determined based on a ratio of the price of Citigroup's common
stock on January 14, 2013, to the award's price targets of $106.10 and $178.50. None of the shares awarded or vested
were entitled to any payment or accrual of dividend equivalents. The fair value of the awards was recognized as compensation
expense ratably over the vesting period.
This fair value was determined using the following assumptions:
Weighted-average per-share fair value | $22.97 | ||
Weighted-average expected life | 3.85 years | ||
Valuation assumptions | |||
Expected volatility | 36.07 | % | |
Risk-free interest rate | 1.21 | % | |
Expected dividend yield | 0.88 | % |
From 2003 to 2007, Citigroup granted annual stock awards under its Citigroup Ownership Program (COP) to a broad base of employees who were not eligible for CAP. The COP awards of restricted or deferred stock vest after three years, but otherwise have terms similar to CAP. Amortization of restricted and deferred stock awards shown in the table above for 2010 included expense associated with these awards.
Sign-on and Long-Term
Awards
As referenced above, from time to
time, restricted or deferred stock awards, and/or stock option grants are made
outside of Citigroup's annual incentive programs to induce employees to join
Citigroup or as special retention awards to key employees. Vesting periods vary,
but are generally two to four years. Generally, recipients must remain employed
through the vesting dates to vest in the awards, except in cases of death,
disability, or involuntary termination other than for "gross misconduct." Unlike
CAP awards, these awards do not usually provide for post-employment vesting by
retirement-eligible participants. If these stock awards are subject to certain
clawback provisions or performance conditions, they may be subject to variable
accounting.
Deferred cash awards are often granted to induce new hires to
join the Company, and are usually intended to replace deferred incentives
awarded by prior employers that were forfeited when the employees joined
Citigroup. As such, the vesting schedules and terms and conditions of these
awards are generally structured to match the vesting schedules and terms and
conditions of the forfeited awards. Expense taken in 2012 for these awards was
$147 million.
A retention award of deferred stock to then-CEO Vikram Pandit
was made on May 17, 2011, and was scheduled to vest in three equal installments
on December 31, 2013, 2014, and 2015. The award was cancelled in its entirety
when Mr. Pandit resigned in October 2012. Because of discretionary performance
vesting conditions, the award was subject to variable accounting until its
cancellation in the fourth quarter of 2012.
Other EESA-related Stock
Compensation
Pursuant to structures
approved by the Special Master in 2009, and in January and September 2010,
certain executives and highly-compensated employees received stock payments in
lieu of salary that would have otherwise been paid in cash (salary stock).
Shares awarded as salary stock are immediately vested but become transferrable
in monthly installments over periods of one to three years. There are no
provisions for early release of the transfer restrictions on salary stock in the
event of retirement, involuntary termination of employment, change in control,
or any other reason.
167
Director
Compensation
Non-employee directors
receive part of their compensation in the form of deferred stock awards that
vest in two years, and may elect to receive part of their retainer in the form
of a stock payment, which they may elect to
defer.
A summary
of the status of Citigroup's unvested stock awards that are not subject to
variable accounting at December 31, 2012 and changes during the 12 months ended
December 31, 2012 are presented below:
Weighted-average | |||||
grant date | |||||
Unvested stock awards | Shares | fair value | |||
Unvested at January 1, 2012 | 50,213,124 | $ | 50.90 | ||
New awards | 33,452,028 | 30.51 | |||
Cancelled awards | (2,342,822 | ) | 39.15 | ||
Vested awards (1) | (17,345,405 | ) | 62.12 | ||
Unvested at December 31, 2012 | 63,976,925 | $ | 37.62 |
(1) | The weighted-average fair value of the vestings during 2012 was approximately $32.78 per share. |
A summary of the status of Citigroup's unvested stock awards that are subject to variable accounting at December 31, 2012, and changes during the 12 months ended December 31, 2012, are presented below:
Weighted-average | |||||
award issuance | |||||
Unvested stock awards | Shares | fair value | |||
Unvested at January 1, 2012 | 5,290,798 | $ | 49.30 | ||
New awards | 2,219,213 | 30.55 | |||
Cancelled awards | (377,358 | ) | 43.92 | ||
Vested awards (1) | (1,168,429 | ) | 50.16 | ||
Unvested at December 31, 2012 | 5,964,224 | $ | 42.50 |
(1) | The weighted-average fair value of the vestings during 2012 was approximately $29.18 per share. |
At December 31, 2012, there was $886 million of total unrecognized compensation cost related to unvested stock awards, net of the forfeiture provision. That cost is expected to be recognized over a weighted-average period of 2.1 years. However, the cost of awards subject to variable accounting will fluctuate with changes in Citigroup's common stock price.
Stock Option
Programs
While the Company no longer
grants options as part of its annual incentive award programs, Citigroup may grant
stock options to employees or directors on a one-time basis, as sign-on awards
or as retention awards, as referenced above. All stock options are granted on
Citigroup common stock with exercise prices that are no less than the fair
market value at the time of grant (which is defined under the 2009 Stock
Incentive Plan to be the NYSE closing price on the trading day immediately
preceding the grant date or on the grant date for grants to executive officers).
Vesting periods and other terms and conditions of sign-on and retention option
grants tend to vary by grant. Beginning in 2009, Citigroup eliminated the stock
option election for all directors and employees (except certain CAP participants
who were permitted to make a stock option election for awards made in 2009).
This stock option election allowed participants to trade a certain percentage of
their annual incentive that would otherwise be granted in CAP shares and elect
to have the award delivered instead as a stock option.
On February 14, 2011, Citigroup
granted options exercisable for approximately 2.9 million shares of Citigroup
common stock to certain of its executive officers. The options have six-year
terms and vest in three equal annual installments beginning on February 14,
2012. The exercise price of the options is $49.10, which was the closing price
of a share of Citigroup common stock on the grant date. On any exercise of the
options before the fifth anniversary of the grant date, the shares received on
exercise (net of the amount required to pay taxes and the exercise price) are
subject to a one-year transfer restriction.
On
April 20, 2010, Citigroup made an option grant to a group of employees who were
not eligible for the October 29, 2009 broad-based grant described below. The
options were awarded with an exercise price equal to the NYSE closing price of a
share of Citigroup common stock on the trading day immediately preceding the
date of grant ($48.80). The options vest in three annual installments beginning
on October 29, 2010. The options have a six-year term.
On
October 29, 2009, Citigroup made a broad-based option grant to employees
worldwide. The options have a six-year term, and generally vest in three equal
installments over three years, beginning on the first anniversary of the grant
date. The options were awarded with an exercise price equal to the NYSE closing
price on the trading day immediately preceding the date of grant ($40.80). The
CEO and other employees whose 2009 compensation was subject to structures
approved by the Special Master did not participate in this grant.
In
January 2009, members of Citigroup's Management Executive Committee received 10%
of their awards as performance-priced stock options, with an exercise price that
placed the awards significantly "out of the money" on the date of grant. Half of
each executive's options have an exercise price of $178.50 and half have an
exercise price of $106.10. The options were granted on a day on which the NYSE
closing price of a share of Citigroup common stock was $45.30. The options have
a 10-year term and vest ratably over a four-year period.
Generally, all other options granted from 2003 through 2009 have six-year
terms and vest ratably over three- or four-year periods; however, options
granted to directors provided for cliff vesting. All outstanding options granted
prior to 2009 are significantly out of the money.
Prior
to 2003, Citigroup options had 10-year terms and generally vested at a rate of
20% per year over five years (with the first vesting date occurring 12 to 18
months following the grant date). All outstanding options that were granted
prior to 2003 expired in 2012.
From
1997 to 2002, a broad base of employees participated in annual option grant
programs. The options vested over five-year periods, or cliff vested after five
years, and had 10-year terms but no reload features. No grants have been made
under these programs since 2002 and all options that remained outstanding
expired in 2012.
All
unvested options granted to former CEO Vikram Pandit, including premium-priced
stock options granted on May 17, 2011, were cancelled upon his resignation in
October 2012.
168
Information with respect to stock option activity under Citigroup stock option programs for the years ended December 31, 2012, 2011 and 2010 is as follows:
2012 | 2011 | 2010 | ||||||||||||||||||||||
Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||
average | Intrinsic | average | Intrinsic | average | Intrinsic | |||||||||||||||||||
exercise | value | exercise | value | exercise | value | |||||||||||||||||||
Options | price | per share | Options | price | per share | Options | price | per share | ||||||||||||||||
Outstanding, beginning of period | 37,596,029 | $ | 69.60 | $ | - | 37,486,011 | $ | 93.70 | $ | - | 40,404,481 | $ | 127.50 | $ | - | |||||||||
Granted-original | - | - | - | 3,425,000 | 48.86 | - | 4,450,017 | 47.80 | - | |||||||||||||||
Forfeited or exchanged | (858,906 | ) | 83.84 | - | (1,539,227 | ) | 176.41 | - | (4,368,086 | ) | 115.10 | - | ||||||||||||
Expired | (1,716,726 | ) | 438.14 | - | (1,610,450 | ) | 487.24 | - | (2,935,863 | ) | 458.70 | - | ||||||||||||
Exercised | - | - | - | (165,305 | ) | 40.80 | 6.72 | (64,538 | ) | 40.80 | 3.80 | |||||||||||||
Outstanding, end of period | 35,020,397 | $ | 51.20 | $ | - | 37,596,029 | $ | 69.60 | $ | - | 37,486,011 | $ | 93.70 | $ | - | |||||||||
Exercisable, end of period | 32,973,444 | 23,237,069 | 15,189,710 |
The following table summarizes the information about stock options outstanding under Citigroup stock option programs at December 31, 2012:
Options outstanding | Options exercisable | |||||||||||
Weighted-average | ||||||||||||
Number | contractual life | Weighted-average | Number | Weighted-average | ||||||||
Range of exercise prices | outstanding | remaining | exercise price | exercisable | exercise price | |||||||
$29.70–$49.99 (1) | 33,392,541 | 3.1 years | $ | 42.40 | 31,431,666 | $ | 42.02 | |||||
$50.00–$99.99 | 69,956 | 8.1 years | 56.76 | 69,132 | 56.64 | |||||||
$100.00–$199.99 | 516,577 | 5.9 years | 147.33 | 431,323 | 148.33 | |||||||
$200.00–$299.99 | 754,375 | 1.7 years | 243.85 | 754,375 | 243.85 | |||||||
$300.00–$399.99 | 206,627 | 4.9 years | 335.97 | 206,627 | 335.97 | |||||||
$400.00–$557.00 | 80,321 | 0.1 years | 543.69 | 80,321 | 543.69 | |||||||
Total at December 31, 2012 | 35,020,397 | 3.1 years | $ | 51.20 | 32,973,444 | $ | 51.13 |
(1) | A significant portion of the outstanding options are in the $40 to $45 range of exercise prices. |
As of December 31, 2012, there was $8.7 million of total unrecognized compensation cost related to stock options; this cost is expected to be recognized over a weighted-average period of 0.3 years.
Valuation and related assumption information for Citigroup option programs is presented below. Citigroup uses a lattice-type model to value stock options.
For options granted during | 2012 | 2011 | 2010 | ||||||
Weighted-average per-share fair value, | |||||||||
at December 31 | N/A | $ | 13.90 | $ | 16.60 | ||||
Weighted-average expected life | |||||||||
Original grants | N/A | 4.95 yrs. | 6.06 yrs. | ||||||
Valuation assumptions | |||||||||
Expected volatility | N/A | 35.64 | % | 36.42 | % | ||||
Risk-free interest rate | N/A | 2.33 | % | 2.88 | % | ||||
Expected dividend yield | N/A | 0.00 | % | 0.00 | % | ||||
Expected annual forfeitures | |||||||||
Original and reload grants | N/A | 9.62 | % | 9.62 | % |
N/A Not applicable
169
Profit Sharing
Plan
In October 2010, the Committee
approved awards under the 2010 Key Employee Profit Sharing Plan (KEPSP), which
may entitle participants to profit-sharing payments based on an initial
performance measurement period of January 1, 2010 through December 31, 2012.
Generally, if a participant remains employed and all other conditions to vesting
and payment are satisfied, the participant will be entitled to an initial
payment in 2013, as well as a holdback payment in 2014 that may be reduced based
on performance during the subsequent holdback period (generally, January 1, 2013
through December 31, 2013). If the vesting and performance conditions are
satisfied, a participant's initial payment will equal two-thirds of the product
of the cumulative pretax income of Citicorp (as defined in the KEPSP) for the
initial performance period and the participant's applicable percentage. The
initial payment will be paid after January 20, 2013 but no later than March 15,
2013.
The
participant's holdback payment, if any, will equal the product of (i) the lesser
of cumulative pretax income of Citicorp for the initial performance period and
cumulative pretax income of Citicorp for the initial performance period and the
holdback period combined (generally, January 1, 2010 through December 31, 2013),
and (ii) the participant's applicable percentage, less the initial payment;
provided that the holdback payment may not be less than zero. The holdback
payment, if any, will be paid after January 20, 2014 but no later than March 15,
2014. The holdback payment, if any, will be credited with notional interest
during the holdback period. It is intended that the initial payment and holdback
payment will be paid in cash; however, awards may be paid in Citigroup common
stock if required by regulatory authority. Regulators have required that U.K.
participants receive at least 50% of their initial payment and at least 50% of
their holdback payment, if any, in shares of Citigroup common stock that will be
subject to a six-month sales restriction. Clawbacks apply to the award.
Independent risk function employees were not eligible to participate in
the KEPSP, as the independent risk function participates in the determination of
whether payouts will be made under the KEPSP. Instead, key employees in the independent risk function were eligible to receive deferred cash retention awards, which vest two-thirds on January 20, 2013 and one-third on January 20, 2014. The deferred cash awards incentivize key risk employees to contribute to the Company's long-term profitability by ensuring that the Company's risk profile is properly aligned with its long-term strategies, objectives and risk appetite, thereby, aligning the employees' interests with those of Company shareholders.
On
February 14, 2011, the Committee approved grants of awards under the 2011 KEPSP
to certain executive officers, and on May 17, 2011 to the then-CEO Vikram
Pandit. These awards have a performance period of January 1, 2011 to December
31, 2012 and other terms of the awards are similar to the 2010 KEPSP. The KEPSP
award granted to Mr. Pandit was cancelled upon his resignation in October
2012.
Expense recognized in 2012 in respect of the KEPSP was $246
million.
Performance Share
Units
Certain executive officers were
awarded a target number of performance share units (PSUs) on February 19, 2013
for performance in 2012. PSUs will be earned only to the extent that Citigroup
attains specified performance goals relating to Citigroup's return on assets and
relative total shareholder return against peers over a three-year period
covering 2013, 2014 and 2015. The actual number of PSUs ultimately earned could
vary from zero, if performance goals are not met, to as much as 150% of target,
if performance goals are meaningfully exceeded. The value of each PSU is equal to the value of one share of Citi common stock. The value of the award will fluctuate with changes in Citigroup's share price and the attainment of the specified performance goals, until it is settled solely in cash after the end of the performance period.
Variable Incentive
Compensation
Citigroup has various
incentive plans globally that are used to motivate and reward performance
primarily in the areas of sales, operational excellence and customer
satisfaction. These programs are reviewed on a periodic basis to ensure that
they are structured appropriately, aligned to shareholder interests and
adequately risk balanced. For the years ended December 31, 2012 and 2011,
Citigroup expensed $670 million and $1.0 billion, respectively, for these plans
globally.
170
9. RETIREMENT BENEFITS
Pension and Postretirement
Plans
The Company has several
non-contributory defined benefit pension plans covering certain U.S. employees
and has various defined benefit pension and termination indemnity plans covering
employees outside the United States. The U.S. qualified defined benefit plan was
frozen effective January 1, 2008 for most employees. Accordingly, no additional
compensation-based contributions were credited to the cash balance portion of
the plan for existing plan participants after 2007. However, certain employees
covered
under the prior final pay plan formula
continue to accrue benefits. The Company also offers postretirement health care
and life insurance benefits to certain eligible U.S. retired employees, as well
as to certain eligible employees outside the United
States.
The
following table summarizes the components of net (benefit) expense recognized in
the Consolidated Statement of Income for the Company's U.S. qualified and
nonqualified pension plans, postretirement plans and plans outside the United
States. The Company uses a December 31 measurement date for its U.S. and
non-U.S. plans.
Net (Benefit) Expense
Pension plans | Postretirement benefit plans | ||||||||||||||||||||||||||||||||||||
U.S. plans | Non-U.S. plans | U.S. plans | Non-U.S. plans | ||||||||||||||||||||||||||||||||||
In millions of dollars | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | |||||||||||||||||||||||||
Qualified Plans | |||||||||||||||||||||||||||||||||||||
Benefits earned during the year | $ | 12 | $ | 13 | $ | 14 | $ | 199 | $ | 203 | $ | 167 | $ | - | $ | - | $ | 1 | $ | 29 | $ | 28 | $ | 23 | |||||||||||||
Interest cost on benefit obligation | 565 | 612 | 644 | 367 | 382 | 342 | 44 | 53 | 59 | 116 | 118 | 105 | |||||||||||||||||||||||||
Expected return on plan assets | (897 | ) | (890 | ) | (874 | ) | (399 | ) | (422 | ) | (378 | ) | (4 | ) | (6 | ) | (8 | ) | (108 | ) | (117 | ) | (100 | ) | |||||||||||||
Amortization of unrecognized | |||||||||||||||||||||||||||||||||||||
Net transition obligation | - | - | - | - | (1 | ) | (1 | ) | - | - | - | - | - | - | |||||||||||||||||||||||
Prior service cost (benefit) | (1 | ) | (1 | ) | (1 | ) | 4 | 4 | 4 | (1 | ) | (3 | ) | (3 | ) | - | - | - | |||||||||||||||||||
Net actuarial loss | 96 | 64 | 47 | 77 | 72 | 57 | 4 | 3 | 11 | 25 | 24 | 20 | |||||||||||||||||||||||||
Curtailment (gain) loss | - | - | - | 10 | 4 | 1 | - | - | - | - | - | - | |||||||||||||||||||||||||
Settlement (gain) loss | - | - | - | 35 | 10 | 7 | - | - | - | - | - | - | |||||||||||||||||||||||||
Special termination benefits | - | - | - | 1 | 27 | 5 | - | - | - | - | - | - | |||||||||||||||||||||||||
Net qualified (benefit) expense | $ | (225 | ) | $ | (202 | ) | $ | (170 | ) | $ | 294 | $ | 279 | $ | 204 | $ | 43 | $ | 47 | $ | 60 | $ | 62 | $ | 53 | $ | 48 | ||||||||||
Nonqualified plans expense | $ | 42 | $ | 42 | $ | 41 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||
Total net (benefit) expense | $ | (183 | ) | $ | (160 | ) | $ | (129 | ) | $ | 294 | $ | 279 | $ | 204 | $ | 43 | $ | 47 | $ | 60 | $ | 62 | $ | 53 | $ | 48 |
Contributions
The Company's funding practice for U.S. and non-U.S. pension
plans is generally to fund to minimum funding requirements in accordance with
applicable local laws and regulations. The Company may increase its
contributions above the minimum required contribution, if appropriate. In
addition, management has the ability to change its funding practices. For
the U.S. pension plans, there were no minimum required cash contributions for 2012 or 2011. The following table summarizes the actual Company contributions for the years ended December 31, 2012 and 2011, as well as estimated expected Company contributions for 2013. Expected contributions are subject to change since contribution decisions are affected by various factors, such as market performance and regulatory requirements.
Pension plans | (1) | Postretirement plans | (1) | ||||||||||||||||||||||||||||||||||
U.S. plans | (2) | Non-U.S. plans | U.S. plans | Non-U.S. plans | |||||||||||||||||||||||||||||||||
In millions of dollars | 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||||||||
Cash contributions paid by the Company | $ | - | $ | - | $ | - | $ | 177 | $ | 270 | $ | 342 | $ | - | $ | - | $ | - | $ | 82 | $ | 88 | $ | 70 | |||||||||||||
Benefits paid directly by the Company | 54 | 54 | 51 | 47 | 82 | 47 | 57 | 54 | 53 | 5 | 4 | 5 | |||||||||||||||||||||||||
Total Company contributions | $ | 54 | $ | 54 | $ | 51 | $ | 224 | $ | 352 | $ | 389 | $ | 57 | $ | 54 | $ | 53 | $ | 87 | $ | 92 | $ | 75 |
(1) | Payments reported for 2013 are expected amounts. | |
(2) | The U.S. pension plans include benefits paid directly by the Company for the nonqualified pension plan. |
171
The estimated net actuarial loss and prior service cost that will be amortized from Accumulated other comprehensive income (loss) into net expense in 2013 are approximately $226 million and $3 million, respectively, for defined benefit pension plans. For postretirement plans, the estimated 2013 net actuarial loss and prior service cost amortizations are approximately $45 million and $(1) million, respectively.
The following table summarizes the funded status and amounts recognized in the Consolidated Balance Sheet for the Company's U.S. qualified and nonqualified pension plans, postretirement plans and plans outside the United States.
Net Amount Recognized
Pension plans | Postretirement plans | ||||||||||||||||||||||||
U.S. plans | (1) | Non-U.S. plans | U.S. plans | Non-U.S. plans | |||||||||||||||||||||
In millions of dollars | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |||||||||||||||||
Change in projected benefit obligation | |||||||||||||||||||||||||
Projected benefit obligation at beginning of year | $ | 12,377 | $ | 11,730 | $ | 6,262 | $ | 6,189 | $ | 1,127 | $ | 1,179 | $ | 1,368 | $ | 1,395 | |||||||||
Benefits earned during the year | 12 | 13 | 199 | 203 | - | - | 29 | 28 | |||||||||||||||||
Interest cost on benefit obligation | 565 | 612 | 367 | 382 | 44 | 53 | 116 | 118 | |||||||||||||||||
Plan amendments | (13 | ) | - | 17 | 2 | - | - | - | - | ||||||||||||||||
Actuarial (gain) loss | 965 | 655 | 923 | 59 | (24 | ) | (44 | ) | 457 | 29 | |||||||||||||||
Benefits paid, net of participating contributions | (638 | ) | (633 | ) | (306 | ) | (282 | ) | (85 | ) | (79 | ) | (54 | ) | (54 | ) | |||||||||
Expected Medicare Part D subsidy | - | - | - | - | 10 | 10 | - | - | |||||||||||||||||
Settlements | - | - | (254 | ) | (44 | ) | - | - | - | - | |||||||||||||||
Curtailment (gain) loss | - | - | (8 | ) | 3 | - | - | - | - | ||||||||||||||||
Special/contractual termination benefits | - | - | 1 | 27 | - | - | - | - | |||||||||||||||||
Foreign exchange impact and other | - | - | 198 | (277 | ) | - | 8 | 86 | (148 | ) | |||||||||||||||
Projected benefit obligation at year end | $ | 13,268 | $ | 12,377 | $ | 7,399 | $ | 6,262 | $ | 1,072 | $ | 1,127 | $ | 2,002 | $ | 1,368 | |||||||||
Change in plan assets | |||||||||||||||||||||||||
Plan assets at fair value at beginning of year | $ | 11,991 | $ | 11,561 | $ | 6,421 | $ | 6,145 | $ | 74 | $ | 95 | $ | 1,096 | $ | 1,176 | |||||||||
Actual return on plan assets | 1,303 | 1,063 | 786 | 526 | 7 | 5 | 277 | 40 | |||||||||||||||||
Company contributions | - | - | 352 | 389 | 54 | 53 | 92 | 75 | |||||||||||||||||
Plan participants contributions | - | - | 6 | 6 | 58 | 65 | - | - | |||||||||||||||||
Settlements | - | - | (254 | ) | (44 | ) | - | - | - | - | |||||||||||||||
Benefits paid | (638 | ) | (633 | ) | (312 | ) | (288 | ) | (143 | ) | (144 | ) | (54 | ) | (54 | ) | |||||||||
Foreign exchange impact and other | - | - | 155 | (313 | ) | - | - | 86 | (141 | ) | |||||||||||||||
Plan assets at fair value at year end | $ | 12,656 | $ | 11,991 | $ | 7,154 | $ | 6,421 | $ | 50 | $ | 74 | $ | 1,497 | $ | 1,096 | |||||||||
Funded status of the plan at year end (2) | $ | (612 | ) | $ | (386 | ) | $ | (245 | ) | $ | 159 | $ | (1,022 | ) | $ | (1,053 | ) | $ | (505 | ) | (272 | ) | |||
Net amount recognized | |||||||||||||||||||||||||
Benefit asset | $ | - | $ | - | $ | 763 | $ | 874 | $ | - | $ | - | $ | - | $ | - | |||||||||
Benefit liability | (612 | ) | (386 | ) | (1,008 | ) | (715 | ) | (1,022 | ) | (1,053 | ) | (505 | ) | (272 | ) | |||||||||
Net amount recognized on the balance sheet | $ | (612 | ) | $ | (386 | ) | $ | (245 | ) | $ | 159 | $ | (1,022 | ) | $ | (1,053 | ) | $ | (505 | ) | $ | (272 | ) | ||
Amounts recognized in Accumulated | |||||||||||||||||||||||||
other comprehensive income (loss) | |||||||||||||||||||||||||
Net transition obligation | $ | - | $ | - | $ | (2 | ) | $ | 1 | $ | - | $ | - | $ | (1 | ) | $ | (1 | ) | ||||||
Prior service cost (benefit) | 13 | 1 | (33 | ) | (23 | ) | 1 | 3 | 5 | 5 | |||||||||||||||
Net actuarial loss | (4,904 | ) | (4,440 | ) | (1,936 | ) | (1,454 | ) | (123 | ) | (152 | ) | (802 | ) | (509 | ) | |||||||||
Net amount recognized in equity-pretax | $ | (4,891 | ) | $ | (4,439 | ) | $ | (1,971 | ) | $ | (1,476 | ) | $ | (122 | ) | $ | (149 | ) | $ | (798 | ) | (505 | ) | ||
Accumulated benefit obligation at year end | $ | 13,246 | $ | 12,337 | $ | 6,369 | $ | 5,463 | $ | 1,072 | $ | 1,127 | $ | 2,002 | $ | 1,368 |
(1) | The U.S. plans exclude nonqualified pension plans, for which the aggregate projected benefit obligation was $769 million and $713 million and the aggregate accumulated benefit obligation was $738 million and $694 million at December 31, 2012 and 2011, respectively. These plans are unfunded. As such, the funded status of these plans is $(769) million and $(713) million at December 31, 2012 and 2011, respectively. Accumulated other comprehensive income (loss) reflects pretax charges of $298 million and $231 million at December 31, 2012 and 2011, respectively, that primarily relate to net actuarial loss. | |
(2) | The U.S. qualified pension plan is fully funded under specified ERISA funding rules as of January 1, 2013 and no minimum required funding is expected for 2012 or 2013. |
172
The following table shows the change in Accumulated other comprehensive income (loss) for the years ended December 31, 2012 and 2011:
In millions of dollars | 2012 | 2011 | |||||
Balance, January 1, net of tax (1) | $ | (4,282 | ) | $ | (4,105 | ) | |
Actuarial assumptions changes and plan experience (2) | (2,400 | ) | (820 | ) | |||
Net asset gain due to actual returns | |||||||
exceeding expected returns | 963 | 197 | |||||
Net amortizations | 214 | 183 | |||||
Foreign exchange impact and other | (155 | ) | 28 | ||||
Change in deferred taxes, net | 390 | 235 | |||||
Change, net of tax | $ | (988 | ) | $ | (177 | ) | |
Balance, December 31, net of tax (1) | $ | (5,270 | ) | $ | (4,282 | ) |
(1) | See Note 21 to the Consolidated Financial Statements for further discussion of net Accumulated other comprehensive income (loss) balance. | |
(2) | Includes $62 million and $70 million in net actuarial losses related to U.S. nonqualified pension plans for 2012 and 2011, respectively. |
At December 31, 2012 and 2011, for both qualified and nonqualified plans and for both funded and unfunded plans, the aggregate projected benefit obligation (PBO), the aggregate accumulated benefit obligation (ABO), and the aggregate fair value of plan assets are presented for pension plans with a projected benefit obligation in excess of plan assets and for pension plans with an accumulated benefit obligation in excess of plan assets as follows:
PBO exceeds fair value of plan assets | ABO exceeds fair value plan assets | |||||||||||||||||||||||
U.S. plans | (1) | Non-U.S. plans | U.S. plans | (1) | Non-U.S. plans | |||||||||||||||||||
In millions of dollars | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | ||||||||||||||||
Projected benefit obligation | $ | 14,037 | $ | 13,089 | $ | 4,792 | $ | 2,386 | $ | 14,037 | $ | 13,089 | $ | 2,608 | $ | 1,970 | ||||||||
Accumulated benefit obligation | 13,984 | 13,031 | 3,876 | 1,992 | 13,984 | 13,031 | 2,263 | 1,691 | ||||||||||||||||
Fair value of plan assets | 12,656 | 11,991 | 3,784 | 1,671 | 12,656 | 11,991 | 1,677 | 1,139 |
(1) | In 2012, the PBO and ABO of the U.S. plans include $13,268 million and $13,246 million, respectively, relating to the qualified plan and $769 million and $738 million, respectively, relating to the nonqualified plans. In 2011, the PBO and ABO of the U.S. plans include $12,377 million and $12,337 million, respectively, relating to the qualified plan and $712 million and $694 million, respectively, relating to the nonqualified plans. |
At December 31, 2012, combined accumulated benefit obligations for the U.S. and non-U.S. pension plans, excluding U.S. nonqualified plans, were less than plan assets by $0.2 billion. At December 31, 2011, combined accumulated benefit obligations for the U.S. and non-U.S. pension plans, excluding U.S. nonqualified plans, exceeded plan assets by $0.6 billion.
173
Plan
Assumptions
The Company utilizes a number
of assumptions to determine plan obligations and expense. Changes in one or a
combination of these assumptions will have an impact on the Company's pension
and postretirement PBO, funded status and benefit expense. Changes in the plans'
funded status resulting from changes in the PBO and fair value of plan assets
will have a corresponding impact on Accumulated other comprehensive income (loss) .
Certain
assumptions used in determining pension and postretirement benefit obligations
and net benefit expenses for the Company's plans are shown in the following
table:
At year end | 2012 | 2011 | |||
Discount rate | |||||
U.S. plans (1) | |||||
Pension | 3.90 | % | 4.70 | % | |
Postretirement | 3.60 | 4.30 | |||
Non-U.S. pension plans | |||||
Range | 1.50 to 28.00 | 1.75 to 13.25 | |||
Weighted average | 5.24 | 5.94 | |||
Future compensation increase rate | |||||
U.S. plans (2) | N/A | N/A | |||
Non-U.S. pension plans | |||||
Range | 1.20 to 26.00 | 1.60 to 13.30 | |||
Weighted average | 3.93 | 4.04 | |||
Expected return on assets | |||||
U.S. plans | 7.00 | 7.50 | |||
Non-U.S. pension plans | |||||
Range | 0.90 to 11.50 | 1.00 to 12.50 | |||
Weighted average | 5.76 | 6.25 | |||
During the year | 2012 | 2011 | |||
Discount rate | |||||
U.S. plans (1) | |||||
Pension | 4.70 | % | 5.45 | % | |
Postretirement | 4.30 | 5.10 | |||
Non-U.S. pension plans | |||||
Range | 1.75 to 13.25 | 1.75 to 14.00 | |||
Weighted average | 5.94 | 6.23 | |||
Future compensation increase rate | |||||
U.S. plans (2) | N/A | N/A | |||
Non-U.S. pension plans | |||||
Range | 1.60 to 13.30 | 1.00 to 11.00 | |||
Weighted average | 4.04 | 4.66 | |||
Expected return on assets | |||||
U.S. plans | 7.50 | 7.50 | |||
Non-U.S. pension plans | |||||
Range | 1.00 to 12.50 | 1.00 to 12.50 | |||
Weighted average | 6.25 | 6.89 |
(1) | Weighted-average rates for the U.S. plans equal the stated rates. | |
(2) | Since the U.S. qualified pension plan was frozen, a compensation increase rate applies only to certain small groups of grandfathered employees accruing benefits under a final pay plan formula. Only the future compensation increases for these grandfathered employees will affect future pension expense and obligations. Compensation increase rates for these small groups of participants range from 3.00% to 4.00%. |
A discussion of certain key assumptions follows.
Discount Rate
The discount rates for the U.S. pension and postretirement
plans were selected by reference to a Citigroup-specific analysis using each
plan's specific cash flows and compared with high-quality corporate bond indices
for reasonableness. Citigroup's policy is to round to the nearest five
hundredths of a percent.
Accordingly, at December 31, 2012, the discount rate was set at 3.90% for
the pension plans and 3.60% for the postretirement plans. At December 31, 2011,
the discount rate was set at 4.70% for the pension plans and 4.30% for the
postretirement plans.
The
discount rates for the non-U.S. pension and postretirement plans are selected by
reference to high-quality corporate bond rates in countries that have developed
corporate bond markets. However, where developed corporate bond markets do not
exist, the discount rates are selected by reference to local government bond
rates with a premium added to reflect the additional risk for corporate bonds in
certain countries.
The Company determines its assumptions for the expected rate of return on plan assets for its U.S. pension and postretirement plans using a "building block" approach, which focuses on ranges of anticipated rates of return for each asset class. A weighted range of nominal rates is then determined based on target allocations to each asset class. Market performance over a number of earlier years is evaluated covering a wide range of economic conditions to determine whether there are sound reasons for projecting any past trends.
The Company considers the expected rate of return to be a long-term assessment of return expectations and does not anticipate changing this assumption annually unless there are significant changes in investment strategy or economic conditions. This contrasts with the selection of the discount rate and certain other assumptions, which are reconsidered annually in accordance with generally accepted accounting principles.
The expected rate of return for the U.S. pension and postretirement plans was 7.00% at December 31, 2012, 7.50% at December 31, 2011, and 7.50% at December 31, 2010. Actual returns in 2012, 2011 and 2010 were greater than the expected returns. The expected return on assets reflects the expected annual appreciation of the plan assets and reduces the annual pension expense of the Company. It is deducted from the sum of service cost, interest cost and other components of pension expense to arrive at the net pension (benefit) expense. Net pension (benefit) expense for the U.S. pension plans for 2012, 2011, and 2010 reflects deductions of $897 million, $890 million, and $874 million of expected returns, respectively.
174
The following table shows the expected rate of return during the year versus actual rate of return on plan assets for 2012, 2011 and 2010 for the U.S. pension and postretirement plans:
2012 | 2011 | 2010 | |||||
Expected rate of return (1) | 7.50 | % | 7.50 | % | 7.75 | % | |
Actual rate of return (2) | 11.79 | % | 11.13 | % | 14.11 | % |
(1) | Effective December 31, 2012, the expected rate of return decreased from 7.50% to 7.00%. | |
(2) | Actual rates of return are presented gross of fees. |
For the non-U.S. plans, pension expense for 2012 was reduced by the expected return of $399 million, compared with the actual return of $786 million. Pension expense for 2011 and 2010 was reduced by expected returns of $422 million and $378 million, respectively. Actual returns were higher in 2012, 2011, and 2010 than the expected returns in those years.
Sensitivities of Certain Key
Assumptions
The following tables summarize
the effect on pension expense of a one-percentage-point change in the discount
rate:
One-percentage-point increase | ||||||||||
In millions of dollars | 2012 | 2011 | 2010 | |||||||
U.S. plans | $ | 18 | $ | 19 | $ | 19 | ||||
Non-U.S. plans | (48 | ) | (57 | ) | (49 | ) | ||||
One-percentage-point decrease | ||||||||||
In millions of dollars | 2012 | 2011 | 2010 | |||||||
U.S. plans | $ | (36 | ) | $ | (34 | ) | $ | (34 | ) | |
Non-U.S. plans | 64 | 70 | 56 |
Since the U.S. qualified pension plan was frozen, the majority of the prospective service cost has been eliminated and the gain/loss amortization period was changed to the life expectancy for inactive participants. As a result, pension expense for the U.S. qualified pension plan is driven more by interest costs than service costs, and an increase in the discount rate would increase pension expense, while a decrease in the discount rate would decrease pension expense.
The following tables summarize the effect on pension expense of a one-percentage-point change in the expected rates of return:
One-percentage-point increase | ||||||||||
In millions of dollars | 2012 | 2011 | 2010 | |||||||
U.S. plans | $ | (120 | ) | $ | (118 | ) | $ | (119 | ) | |
Non-U.S. plans | (64 | ) | (62 | ) | (54 | ) |
One-percentage-point decrease | ||||||||||
In millions of dollars | 2012 | 2011 | 2010 | |||||||
U.S. plans | $ | 120 | $ | 118 | $ | 119 | ||||
Non-U.S. plans | 64 | 62 | 54 |
Health-Care Cost-Trend
Rate
Assumed health-care cost-trend rates
were as follows:
2012 | 2011 | |||
Health-care cost increase rate for U.S. plans | ||||
Following year | 8.50 | % | 9.00 | % |
Ultimate rate to which cost increase is assumed to decline | 5.00 | 5.00 | ||
Year in which the ultimate rate is reached | 2020 | 2020 |
A one-percentage-point change in assumed health-care cost-trend rates would have the following effects:
One- | |||||||||||||
One-percentage- | percentage- | ||||||||||||
point increase | point decrease | ||||||||||||
In millions of dollars | 2012 | 2011 | 2012 | 2011 | |||||||||
Effect on benefits earned and | |||||||||||||
interest cost for U.S. plans | $ | 2 | $ | 2 | $ | (1 | ) | $ | (2 | ) | |||
Effect on accumulated | |||||||||||||
postretirement benefit | |||||||||||||
obligation for U.S. plans | 44 | 43 | (39 | ) | (38 | ) |
175
Plan Assets
Citigroup's pension and postretirement plans' asset
allocations for the U.S. plans at December 31, 2012 and 2011, and the target
allocations for 2013 by asset category based on asset fair values, are as
follows:
Target asset | U.S. pension assets | U.S. postretirement assets | ||||||||
allocation | at December 31, | at December 31, | ||||||||
Asset category (1) | 2013 | 2012 | 2011 | 2012 | 2011 | |||||
Equity securities (2) | 0 - 30 | % | 17 | % | 16 | % | 17 | % | 16 | % |
Debt securities | 25 - 73 | 45 | 44 | 45 | 44 | |||||
Real estate | 0 - 7 | 5 | 5 | 5 | 5 | |||||
Private equity | 0 - 15 | 11 | 13 | 11 | 13 | |||||
Other investments | 12 - 29 | 22 | 22 | 22 | 22 | |||||
Total | 100 | % | 100 | % | 100 | % | 100 | % |
(1) | Asset allocations for the U.S. plans are set by investment strategy, not by investment product. For example, private equities with an underlying investment in real estate are classified in the real estate asset category, not private equity. | |
(2) | Equity securities in the U.S. pension plans include no Citigroup common stock at the end of 2012 and 2011. |
Third-party investment managers and advisors provide their services to Citigroup's U.S. pension plans. Assets are rebalanced as the Pension Plan Investment Committee deems appropriate. Citigroup's investment strategy, with respect to its pension assets, is to maintain a globally diversified investment portfolio across several asset classes that, when combined with Citigroup's contributions to the plans, will maintain the plans' ability to meet all required benefit obligations.
Citigroup's pension and postretirement plans' weighted-average asset allocations for the non-U.S. plans and the actual ranges at the end of 2012 and 2011, and the weighted-average target allocations for 2013 by asset category based on asset fair values are as follows:
Non-U.S. pension plans | ||||||||||
Weighted-average | Actual range | Weighted-average | ||||||||
target asset allocation | at December 31, | at December 31, | ||||||||
Asset category | 2013 | 2012 | 2011 | 2012 | 2011 | |||||
Equity securities | 16 | % | 0 to 63 | % | 0 to 65 | % | 16 | % | 19 | % |
Debt securities | 75 | 0 to 100 | 0 to 99 | 72 | 71 | |||||
Real estate | 1 | 0 to 41 | 0 to 42 | 1 | 1 | |||||
Other investments | 8 | 0 to 100 | 0 to 100 | 11 | 9 | |||||
Total | 100 | % | 100 | % | 100 | % |
Non-U.S. postretirement plans | ||||||||||
Weighted-average | Actual range | Weighted-average | ||||||||
target asset allocation | at December 31, | at December 31, | ||||||||
Asset category | 2013 | 2012 | 2011 | 2012 | 2011 | |||||
Equity securities | 27 | % | 0 to 28 | % | 0 to 44 | % | 28 | % | 44 | % |
Debt securities | 55 | 46 to 100 | 45 to 100 | 46 | 45 | |||||
Other investments | 18 | 0 to 26 | 0 to 11 | 26 | 11 | |||||
Total | 100 | % | 100 | % | 100 | % |
176
Fair Value
Disclosure
For information on
fair value measurements, including descriptions of Level 1, 2 and 3 of the fair
value hierarchy and the valuation methodology utilized by the Company, see
"Significant Accounting Policies and Significant Estimates" and Note 25 to the
Consolidated Financial Statements.
Certain investments may transfer between the fair
value hierarchy classifications during the year due to changes in valuation
methodology and pricing sources. There were no significant transfers of
investments between Level 1 and Level 2 during the years ended December 31, 2012
and 2011.
Plan assets by
detailed asset categories and the fair value hierarchy are as
follows:
In millions of dollars | U.S. pension and postretirement benefit plans | (1) | |||||||||||
Fair value measurement at December 31, 2012 | |||||||||||||
Asset categories | Level 1 | Level 2 | Level 3 | Total | |||||||||
Equity securities | |||||||||||||
U.S. equity | $ | 677 | $ | - | $ | - | $ | 677 | |||||
Non-U.S. equity | 412 | 5 | - | 417 | |||||||||
Mutual funds | 177 | - | - | 177 | |||||||||
Commingled funds | - | 1,132 | - | 1,132 | |||||||||
Debt securities | |||||||||||||
U.S. Treasuries | 1,431 | - | - | 1,431 | |||||||||
U.S. agency | - | 112 | - | 112 | |||||||||
U.S. corporate bonds | 1 | 1,396 | - | 1,397 | |||||||||
Non-U.S. government debt | - | 387 | - | 387 | |||||||||
Non-U.S. corporate bonds | 4 | 346 | - | 350 | |||||||||
State and municipal debt | - | 142 | - | 142 | |||||||||
Hedge funds | - | 1,132 | 1,524 | 2,656 | |||||||||
Asset-backed securities | - | 55 | - | 55 | |||||||||
Mortgage-backed securities | - | 52 | - | 52 | |||||||||
Annuity contracts | - | - | 130 | 130 | |||||||||
Private equity | - | - | 2,419 | 2,419 | |||||||||
Derivatives | 593 | 37 | - | 630 | |||||||||
Other investments | - | - | 142 | 142 | |||||||||
Total investments at fair value | $ | 3,295 | $ | 4,796 | $ | 4,215 | $ | 12,306 | |||||
Cash and short-term investments | $ | 130 | $ | 906 | $ | - | $ | 1,036 | |||||
Other investment receivables | - | 6 | 24 | 30 | |||||||||
Total assets | $ | 3,425 | $ | 5,708 | $ | 4,239 | $ | 13,372 | |||||
Other investment liabilities | $ | (607 | ) | $ | (60 | ) | $ | - | $ | (667 | ) | ||
Total net assets | $ | 2,818 | $ | 5,648 | $ | 4,239 | $ | 12,705 |
(1) | The investments of the U.S. pension and postretirement benefit plans are commingled in one trust. At December 31, 2012, the allocable interests of the U.S. pension and postretirement benefit plans were 99.6% and 0.4%, respectively. |
177
In millions of dollars | U.S. pension and postretirement benefit plans | (1) | |||||||||||
Fair value measurement at December 31, 2011 | |||||||||||||
Asset categories | Level 1 | Level 2 | Level 3 | Total | |||||||||
Equity securities | |||||||||||||
U.S. equity | $ | 572 | $ | 5 | $ | 51 | $ | 628 | |||||
Non-U.S. equity | 229 | - | 19 | 248 | |||||||||
Mutual funds | 137 | - | - | 137 | |||||||||
Commingled funds | 440 | 594 | - | 1,034 | |||||||||
Debt securities | |||||||||||||
U.S. Treasuries | 1,760 | - | - | 1,760 | |||||||||
U.S. agency | - | 120 | - | 120 | |||||||||
U.S. corporate bonds | 2 | 1,073 | 5 | 1,080 | |||||||||
Non-U.S. government debt | - | 352 | - | 352 | |||||||||
Non-U.S. corporate bonds | 4 | 271 | - | 275 | |||||||||
State and municipal debt | - | 122 | - | 122 | |||||||||
Hedge funds | - | 1,087 | 870 | 1,957 | |||||||||
Asset-backed securities | - | 19 | - | 19 | |||||||||
Mortgage-backed securities | - | 32 | - | 32 | |||||||||
Annuity contracts | - | - | 155 | 155 | |||||||||
Private equity | - | - | 2,474 | 2,474 | |||||||||
Derivatives | 691 | 36 | - | 727 | |||||||||
Other investments | 92 | 20 | 121 | 233 | |||||||||
Total investments at fair value | $ | 3,927 | $ | 3,731 | $ | 3,695 | $ | 11,353 | |||||
Cash and short-term investments | $ | 412 | $ | 402 | $ | - | $ | 814 | |||||
Other investment receivables | - | 393 | 221 | 614 | |||||||||
Total assets | $ | 4,339 | $ | 4,526 | $ | 3,916 | $ | 12,781 | |||||
Other investment liabilities | $ | (683 | ) | $ | (33 | ) | $ | - | $ | (716 | ) | ||
Total net assets | $ | 3,656 | $ | 4,493 | $ | 3,916 | $ | 12,065 |
(1) | The investments of the U.S. pension and postretirement benefit plans are commingled in one trust. At December 31, 2011, the allocable interests of the U.S. pension and postretirement benefit plans were 99.2% and 0.8%, respectively. |
178
In millions of dollars | Non-U.S. pension and postretirement benefit plans | |||||||||||
Fair value measurement at December 31, 2012 | ||||||||||||
Asset categories | Level 1 | Level 2 | Level 3 | Total | ||||||||
Equity securities | ||||||||||||
U.S. equity | $ | 12 | $ | 12 | $ | - | $ | 24 | ||||
Non-U.S. equity | 88 | 77 | 48 | 213 | ||||||||
Mutual funds | 31 | 4,583 | - | 4,614 | ||||||||
Commingled funds | 26 | - | - | 26 | ||||||||
Debt securities | ||||||||||||
U.S. Treasuries | - | 1 | - | 1 | ||||||||
U.S. corporate bonds | 10 | 478 | - | 488 | ||||||||
Non-U.S. government debt | 1,806 | 144 | 4 | 1,954 | ||||||||
Non-U.S. corporate bonds | 162 | 804 | 4 | 970 | ||||||||
State and municipal debt | - | - | - | - | ||||||||
Hedge funds | - | - | 16 | 16 | ||||||||
Mortgage-backed securities | - | 1 | - | 1 | ||||||||
Annuity contracts | - | 5 | 6 | 11 | ||||||||
Derivatives | - | 40 | - | 40 | ||||||||
Other investments | 3 | 9 | 219 | 231 | ||||||||
Total investments at fair value | $ | 2,138 | $ | 6,154 | $ | 297 | $ | 8,589 | ||||
Cash and short-term investments | $ | 56 | $ | 4 | $ | 3 | $ | 63 | ||||
Total assets | $ | 2,194 | $ | 6,158 | $ | 300 | $ | 8,652 | ||||
In millions of dollars | Non-U.S. pension and postretirement benefit plans | |||||||||||
Fair value measurement at December 31, 2011 | ||||||||||||
Asset categories | Level 1 | Level 2 | Level 3 | Total | ||||||||
Equity securities | ||||||||||||
U.S. equity | $ | 12 | $ | - | $ | - | $ | 12 | ||||
Non-U.S. equity | 48 | 180 | 5 | 233 | ||||||||
Mutual funds | 11 | 4,439 | 32 | 4,482 | ||||||||
Commingled funds | 26 | - | - | 26 | ||||||||
Debt securities | ||||||||||||
U.S. Treasuries | 1 | - | - | 1 | ||||||||
U.S. corporate bonds | 1 | 379 | - | 380 | ||||||||
Non-U.S. government debt | 1,484 | 129 | 5 | 1,618 | ||||||||
Non-U.S. corporate bonds | 5 | 318 | 3 | 326 | ||||||||
State and municipal debt | - | - | - | - | ||||||||
Hedge funds | - | 3 | 12 | 15 | ||||||||
Mortgage-backed securities | 1 | - | - | 1 | ||||||||
Annuity contracts | - | 3 | - | 3 | ||||||||
Derivatives | - | 3 | - | 3 | ||||||||
Other investments | 3 | 6 | 240 | 249 | ||||||||
Total investments at fair value | $ | 1,592 | $ | 5,460 | $ | 297 | $ | 7,349 | ||||
Cash and short-term investments | $ | 168 | $ | - | $ | - | $ | 168 | ||||
Total assets | $ | 1,760 | $ | 5,460 | $ | 297 | $ | 7,517 |
179
Level 3 Roll
Forward
The reconciliations of
the beginning and ending balances during the period for Level 3 assets are as
follows:
In millions of dollars | U.S. pension and postretirement benefit plans | ||||||||||||||||
Beginning Level 3 | Realized | Unrealized | Purchases, | Transfers in | Ending Level 3 | ||||||||||||
fair value at | gains | gains | sales, and | and/or out of | fair value at | ||||||||||||
Asset categories | Dec. 31, 2011 | (losses) | (losses) | issuances | Level 3 | Dec. 31, 2012 | |||||||||||
Equity securities | |||||||||||||||||
U.S. equity | $ | 51 | $ | - | $ | - | $ | - | $ | (51 | ) | $ | - | ||||
Non-U.S. equity | 19 | - | 8 | - | (27 | ) | - | ||||||||||
Debt securities | |||||||||||||||||
U.S. corporate bonds | 5 | - | 1 | - | (6 | ) | - | ||||||||||
Non-U.S. government debt | - | (1 | ) | - | 1 | - | - | ||||||||||
Non-U.S. corporate bonds | - | - | - | - | - | - | |||||||||||
Hedge funds | 870 | (28 | ) | 149 | 199 | 334 | 1,524 | ||||||||||
Annuity contracts | 155 | - | 6 | (31 | ) | - | 130 | ||||||||||
Private equity | 2,474 | 267 | 98 | (484 | ) | 64 | 2,419 | ||||||||||
Other investments | 121 | - | 14 | 12 | (5 | ) | 142 | ||||||||||
Total investments | $ | 3,695 | $ | 238 | $ | 276 | $ | (303 | ) | $ | 309 | $ | 4,215 | ||||
Other investment receivables | 221 | - | - | - | (197 | ) | 24 | ||||||||||
Total assets | $ | 3,916 | $ | 238 | $ | 276 | $ | (303 | ) | $ | 112 | $ | 4,239 | ||||
In millions of dollars | U.S. pension and postretirement benefit plans | ||||||||||||||||
Beginning Level 3 | Realized | Unrealized | Purchases, | Transfers in | Ending Level 3 | ||||||||||||
fair value at | gains | gains | sales, and | and/or out of | fair value at | ||||||||||||
Asset categories | Dec. 31, 2010 | (losses) | (losses) | issuances | Level 3 | Dec. 31, 2011 | |||||||||||
Equity securities | |||||||||||||||||
U.S. equity | $ | - | $ | - | $ | - | $ | - | $ | 51 | $ | 51 | |||||
Non-U.S. equity | - | - | (1 | ) | - | 20 | 19 | ||||||||||
Debt securities | |||||||||||||||||
U.S. corporate bonds | 5 | (2 | ) | (1 | ) | (1 | ) | 4 | 5 | ||||||||
Non-U.S. corporate bonds | 1 | - | - | (1 | ) | - | - | ||||||||||
Hedge funds | 1,014 | 42 | (45 | ) | (131 | ) | (10 | ) | 870 | ||||||||
Annuity contracts | 187 | - | 3 | (35 | ) | - | 155 | ||||||||||
Private equity | 2,920 | 89 | 94 | (497 | ) | (132 | ) | 2,474 | |||||||||
Other investments | 4 | - | (6 | ) | - | 123 | 121 | ||||||||||
Total investments | $ | 4,131 | $ | 129 | $ | 44 | $ | (665 | ) | $ | 56 | $ | 3,695 | ||||
Other investment receivables | - | - | - | 221 | - | 221 | |||||||||||
Total assets | $ | 4,131 | $ | 129 | $ | 44 | $ | (444 | ) | $ | 56 | $ | 3,916 | ||||
In millions of dollars | Non-U.S. pension and postretirement benefit plans | ||||||||||||||||
Beginning Level 3 | Realized | Unrealized | Purchases, | Transfers in | Ending Level 3 | ||||||||||||
fair value at | gains | gains | sales, and | and/or out of | fair value at | ||||||||||||
Asset categories | Dec. 31, 2011 | (losses) | (losses) | issuances | Level 3 | Dec. 31, 2012 | |||||||||||
Equity securities | |||||||||||||||||
Non-U.S. equity | $ | 5 | $ | - | $ | - | $ | 43 | $ | - | $ | 48 | |||||
Mutual funds | 32 | - | - | (10 | ) | (22 | ) | - | |||||||||
Debt securities | |||||||||||||||||
Non-U.S. government bonds | 5 | - | - | - | (1 | ) | 4 | ||||||||||
Non-U.S. corporate bonds | 3 | (3 | ) | - | 2 | 2 | 4 | ||||||||||
Hedge funds | 12 | - | - | - | 4 | 16 | |||||||||||
Annuity contracts | - | - | - | 1 | 5 | 6 | |||||||||||
Other investments | 240 | 7 | 14 | (23 | ) | (19 | ) | 219 | |||||||||
Total investments | $ | 297 | $ | 4 | $ | 14 | $ | 13 | $ | (31 | ) | $ | 297 | ||||
Cash and short-term investments | - | - | - | - | 3 | 3 | |||||||||||
Total assets | $ | 297 | $ | 4 | $ | 14 | $ | 13 | $ | (28 | ) | $ | 300 |
180
In millions of dollars | Non-U.S. pension and postretirement benefit plans | |||||||||||||||||
Beginning Level 3 | Realized | Unrealized | Purchases, | Transfers in | Ending Level 3 | |||||||||||||
fair value at | gains | gains | sales, and | and/or out of | fair value at | |||||||||||||
Asset categories | Dec. 31, 2010 | (losses) | (losses) | issuances | Level 3 | Dec. 31, 2011 | ||||||||||||
Equity securities | ||||||||||||||||||
Non-U.S. equity | $ | 3 | $ | - | $ | 2 | $ | - | $ | - | $ | 5 | ||||||
Mutual funds | - | - | - | - | 32 | 32 | ||||||||||||
Debt securities | ||||||||||||||||||
Non-U.S. government bonds | - | - | - | - | 5 | 5 | ||||||||||||
Non-U.S. corporate bonds | 107 | - | - | 2 | (105 | ) | 4 | |||||||||||
Hedge funds | 14 | (2 | ) | - | - | - | 12 | |||||||||||
Other investments | 189 | 4 | - | (10 | ) | 56 | 239 | |||||||||||
Total assets | $ | 313 | $ | 2 | $ | 2 | $ | (8 | ) | $ | (12 | ) | $ | 297 |
Investment Strategy
The Company's global pension and postretirement
funds' investment strategies are to invest in a prudent manner for the exclusive
purpose of providing benefits to participants. The investment strategies are
targeted to produce a total return that, when combined with the Company's
contributions to the funds, will maintain the funds' ability to meet all
required benefit obligations. Risk is controlled through diversification of
asset types and investments in domestic and international equities, fixed-income
securities and cash and short-term investments. The target asset allocation in
most locations outside the U.S. is to have the majority of the assets in equity
and debt securities. These allocations may vary by geographic region and country
depending on the nature of applicable obligations and various other regional
considerations. The wide variation in the actual range of plan asset allocations
for the funded non-U.S. plans is a result of differing local statutory
requirements and economic conditions. For example, in certain countries local
law requires that all pension plan assets must be invested in fixed-income
investments, government funds, or local-country securities.
Significant Concentrations of Risk in
Plan Assets
The assets of the
Company's pension plans are diversified to limit the impact of any individual
investment. The U.S. qualified pension plan is diversified across multiple asset
classes, with publicly traded fixed income, hedge funds, publicly traded equity,
and private equity representing the most significant asset allocations. Investments
in these four asset classes are further diversified across funds, managers,
strategies, vintages, sectors and geographies, depending on the specific
characteristics of each asset class. The pension assets for the Company's
largest non-U.S. plans are primarily invested in publicly traded fixed income
and publicly traded equity securities.
Oversight and Risk Management
Practices
The framework for
the Company's pensions oversight process includes monitoring of retirement plans
by plan fiduciaries and/or management at the global, regional or country level,
as appropriate. Independent risk management contributes to the risk oversight
and monitoring for the Company's U.S. qualified pension plan and largest
non-U.S. pension plans. Although the specific components of the oversight
process are tailored to the requirements of each region, country and plan, the
following elements are common to the Company's monitoring and risk management
process:
Estimated Future Benefit
Payments
The Company expects
to pay the following estimated benefit payments in future years:
Pension plans | Postretirement benefit plans | ||||||||||
In millions of dollars | U.S. plans | Non-U.S. plans | U.S. plans | Non-U.S. plans | |||||||
2013 | $ | 774 | $ | 366 | $ | 88 | $ | 58 | |||
2014 | 796 | 356 | 86 | 63 | |||||||
2015 | 798 | 373 | 86 | 66 | |||||||
2016 | 811 | 391 | 83 | 71 | |||||||
2017 | 825 | 408 | 81 | 75 | |||||||
2018–2022 | 4,370 | 2,399 | 370 | 483 |
181
In December 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (Act of 2003) was enacted. The Act of 2003 established a prescription drug benefit under Medicare known as "Medicare Part D," and a federal subsidy to sponsors of U.S. retiree health-care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The benefits provided to certain participants are at least actuarially equivalent to Medicare Part D and, accordingly, the Company is entitled to a subsidy.
The expected subsidy reduced the accumulated postretirement benefit obligation (APBO) by approximately $93 million and $96 million as of December 31, 2012 and 2011, respectively, and the postretirement expense by approximately $9 million and $10 million for 2012 and 2011, respectively.
The following table shows the estimated future benefit payments without the effect of the subsidy and the amounts of the expected subsidy in future years:
Expected U.S. | ||||||||
postretirement benefit payments | ||||||||
Before Medicare | Medicare | After Medicare | ||||||
In millions of dollars | Part D subsidy | Part D subsidy | Part D subsidy | |||||
2013 | $ | 98 | $ | 10 | $ | 88 | ||
2014 | 96 | 10 | 86 | |||||
2015 | 94 | 8 | 86 | |||||
2016 | 91 | 8 | 83 | |||||
2017 | 89 | 8 | 81 | |||||
2018–2022 | 399 | 29 | 370 |
The
Patient Protection and Affordable Care Act and the Health Care and Education
Reconciliation Act of 2010 (collectively, the Act of 2010) were signed into law
in the U.S. in March 2010. One provision that impacted Citigroup was the
elimination of the tax deductibility for benefits paid that are related to the
Medicare Part D subsidy, starting in 2013. Citigroup was required to recognize
the full accounting impact in 2010, the period in which the Act of 2010 was
signed. As a result, there was a $45 million reduction in deferred tax assets
with a corresponding charge to earnings from continuing
operations.
Certain provisions
of the Act of 2010 improved the Medicare Part D option known as the Employer
Group Waiver Plan (EGWP), with respect to the Medicare Part D subsidy. The EGWP
provides prescription drug benefits that are more cost effective for
Medicare-eligible participants and large employers. Effective April 1, 2013, the
Company will sponsor and implement an EGWP for eligible retirees. The expected
Company subsidy received under EGWP is expected to be at least actuarially equivalent to the subsidy the
Company would have previously received under the Medicare Part D
benefit.
The other
provisions of the Act of 2010 are not expected to have a significant impact on
Citigroup's pension and postretirement plans.
Early Retiree Reinsurance Program
The Company participates in
the Early Retiree Reinsurance Program (ERRP), which provides federal government
reimbursement to eligible employers to cover a portion of the health benefit
costs associated with early retirees. Of the $8 million the Company received in
reimbursements in 2012, approximately $5 million was used to reduce the health
benefit costs for certain eligible retirees. In accordance with federal
regulations, the remaining reimbursements will be used to reduce retirees'
health benefit costs by December 31, 2014.
Postemployment
Plans
The Company sponsors
U.S. postemployment plans that provide income continuation and health and
welfare benefits to certain eligible U.S. employees on long-term
disability.
As of December 31, 2012 and 2011, the
plans' funded status recognized in the Company's Consolidated Balance Sheet was
$(501) million and $(469) million, respectively. The amounts recognized in Accumulated other comprehensive
income (loss) as of December 31,
2012 and 2011 were $(185) million and $(188) million,
respectively.
The following
table summarizes the components of net expense recognized in the Consolidated
Statement of Income for the Company's U.S. postemployment plans.
Net Expense | ||||||||
In millions of dollars | 2012 | 2011 | 2010 | |||||
Service related expense | ||||||||
Service cost | $ | 22 | $ | 16 | $ | 13 | ||
Interest cost | 13 | 12 | 10 | |||||
Prior service cost | 7 | 7 | 7 | |||||
Net actuarial loss | 13 | 9 | 6 | |||||
Total service related expense | $ | 55 | $ | 44 | $ | 36 | ||
Non-service related expense | $ | 24 | $ | 23 | $ | 33 | ||
Total net expense | $ | 79 | $ | 67 | $ | 69 |
The following table summarizes certain assumptions used in determining the postemployment benefit obligations and net benefit expenses for the Company's U.S. postemployment plans.
2012 | 2011 | ||||
Discount rate | 3.10 | % | 3.95 | % | |
Health-care cost increase rate | |||||
Following year | 8.50 | % | 9.00 | % | |
Ultimate rate to which cost increase is assumed to decline | 5.00 | 5.00 | |||
Year in which the ultimate rate is reached | 2020 | 2020 |
Defined Contribution
Plans
The Company sponsors
defined contribution plans in the U.S. and in certain non-U.S. locations, all of
which are administered in accordance with local laws. The most significant
defined contribution plan is the Citigroup 401(k) Plan sponsored by the Company
in the U.S.
Under the Citigroup 401(k) Plan, eligible U.S. employees received
matching contributions of up to 6% of their eligible compensation for 2012 and
2011, subject to statutory limits. Additionally, for eligible employees whose
eligible compensation is $100,000 or less, a fixed contribution of up to 2% of
eligible compensation is provided. All Company contributions are invested
according to participants' individual elections. The pretax expense associated
with this plan amounted to approximately $389 million, $383 million and $301
million in 2012, 2011 and 2010, respectively.
182
10. INCOME TAXES
In millions of dollars | 2012 | 2011 | 2010 | ||||||
Current | |||||||||
Federal | $ | (71 | ) | $ | (144 | ) | $ | (249 | ) |
Foreign | 3,889 | 3,498 | 3,239 | ||||||
State | 300 | 241 | 207 | ||||||
Total current income taxes | $ | 4,118 | $ | 3,595 | $ | 3,197 | |||
Deferred | |||||||||
Federal | $ | (4,943 | ) | $ | (793 | ) | $ | (933 | ) |
Foreign | 900 | 628 | 279 | ||||||
State | (48 | ) | 91 | (310 | ) | ||||
Total deferred income taxes | $ | (4,091 | ) | $ | (74 | ) | $ | (964 | ) |
Provision (benefit) for income tax on | |||||||||
continuing operations before | |||||||||
noncontrolling interests (1) | $ | 27 | $ | 3,521 | $ | 2,233 | |||
Provision (benefit) for income taxes on | |||||||||
discontinued operations | (71 | ) | 66 | (562 | ) | ||||
Provision (benefit) for income taxes on | |||||||||
cumulative effect of accounting changes | (58 | ) | - | (4,978 | ) | ||||
Income tax expense (benefit) reported | |||||||||
in stockholders' equity related to: | |||||||||
Foreign currency translation | (709 | ) | (609 | ) | (739 | ) | |||
Securities available-for-sale | 369 | 1,495 | 1,167 | ||||||
Employee stock plans | 265 | 297 | 600 | ||||||
Cash flow hedges | 311 | (92 | ) | 325 | |||||
Pension liability adjustments | (390 | ) | (235 | ) | (434 | ) | |||
Income taxes before noncontrolling interests | $ | (256 | ) | $ | 4,443 | $ | (2,388 | ) |
(1) | Includes the effect of securities transactions and OTTI losses resulting in a provision (benefit) of $1,138 million and $(1,740) million in 2012, $699 million and $(789) million in 2011 and $844 million and $(494) million in 2010, respectively. |
The reconciliation of the federal statutory income tax rate to the Company's effective income tax rate applicable to income from continuing operations (before noncontrolling interests and the cumulative effect of accounting changes) for the years ended December 31 was as follows:
2012 | 2011 | 2010 | ||||
Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % |
State income taxes, net of federal benefit | 3.0 | 1.5 | (0.1 | ) | ||
Foreign income tax rate differential | (4.8 | ) | (8.6 | ) | (10.0 | ) |
Audit settlements (1) | (11.7 | ) | - | (0.5 | ) | |
Effect of tax law changes (2) | (0.1 | ) | 2.0 | (0.1 | ) | |
Basis difference in affiliates | (9.1 | ) | - | - | ||
Tax advantaged investments | (12.2 | ) | (6.0 | ) | (6.7 | ) |
Other, net | 0.2 | 0.2 | (0.7 | ) | ||
Effective income tax rate | 0.3 | % | 24.1 | % | 16.9 | % |
(1) | For 2012 and 2010, relates to the conclusion of the audit of various issues in the Company's 2006–2008 and 2003–2005 U.S. federal tax audits, respectively. 2012 also includes an amount related to the conclusion of a New York City tax audit for 2006–2008. | |
(2) | For 2011, includes the results of the Japan tax rate change which resulted in a $300 million DTA charge. |
Deferred income taxes at December 31 related to the following:
In millions of dollars | 2012 | 2011 | ||||
Deferred tax assets | ||||||
Credit loss deduction | $ | 10,947 | $ | 12,481 | ||
Deferred compensation and employee benefits | 4,890 | 4,936 | ||||
Restructuring and settlement reserves | 1,645 | 1,331 | ||||
Unremitted foreign earnings | 5,114 | 7,362 | ||||
Investment and loan basis differences | 3,878 | 2,358 | ||||
Cash flow hedges | 1,361 | 1,673 | ||||
Tax credit and net operating loss carry-forwards | 28,087 | 22,764 | ||||
Other deferred tax assets | 2,651 | 2,127 | ||||
Gross deferred tax assets | $ | 58,573 | $ | 55,032 | ||
Valuation allowance | - | - | ||||
Deferred tax assets after valuation allowance | $ | 58,573 | $ | 55,032 | ||
Deferred tax liabilities | ||||||
Deferred policy acquisition costs | ||||||
and value of insurance in force | $ | (495 | ) | $ | (591 | ) |
Fixed assets and leases | (623 | ) | (1,361 | ) | ||
Intangibles | (1,517 | ) | (710 | ) | ||
Debt valuation adjustment on Citi liabilities | (73 | ) | (533 | ) | ||
Other deferred tax liabilities | (543 | ) | (307 | ) | ||
Gross deferred tax liabilities | $ | (3,251 | ) | $ | (3,502 | ) |
Net deferred tax asset | $ | 55,322 | $ | 51,530 |
183
The following is a roll-forward of the Company's unrecognized tax benefits.
In millions of dollars | 2012 | 2011 | 2010 | ||||||
Total unrecognized tax benefits at January 1 | $ | 3,923 | $ | 4,035 | $ | 3,079 | |||
Net amount of increases for current year's tax positions | 136 | 193 | 1,039 | ||||||
Gross amount of increases for prior years' tax positions | 345 | 251 | 371 | ||||||
Gross amount of decreases for prior years' tax positions | (1,246 | ) | (507 | ) | (421 | ) | |||
Amounts of decreases relating to settlements | (44 | ) | (11 | ) | (14 | ) | |||
Reductions due to lapse of statutes of limitation | (3 | ) | (38 | ) | (11 | ) | |||
Foreign exchange, acquisitions and dispositions | (2 | ) | - | (8 | ) | ||||
Total unrecognized tax benefits at December 31 | $ | 3,109 | $ | 3,923 | $ | 4,035 |
Total amount of unrecognized tax benefits at December 31, 2012, 2011 and 2010 that, if recognized, would affect the effective tax rate are $1.3 billion, $2.2 billion and $2.1 billion, respectively. The remainder of the uncertain tax positions have offsetting amounts in other jurisdictions or are temporary differences, except for $0.9 billion, which would be booked directly to Retained earnings .
Interest and penalties (not included in "unrecognized tax benefits" above) are a component of the Provision for income taxes .
2012 | 2011 | 2010 | ||||||||||||||||
In millions of dollars | Pretax | Net of tax | Pretax | Net of tax | Pretax | Net of tax | ||||||||||||
Total interest and penalties in the Consolidated Balance Sheet at January 1 | $ | 404 | $ | 261 | $ | 348 | $ | 223 | $ | 370 | $ | 239 | ||||||
Total interest and penalties in the Consolidated Statement of Income | 114 | 71 | 61 | 41 | (16 | ) | (12 | ) | ||||||||||
Total interest and penalties in the Consolidated Balance Sheet at December 31 (1) | 492 | 315 | 404 | 261 | 348 | 223 |
(1) | 2012 includes $10 million for foreign penalties and $4 million for state penalties. |
The
Company is currently under audit by the Internal Revenue Service and other major
taxing jurisdictions around the world. It is thus reasonably possible that
significant changes in the gross balance of unrecognized tax benefits may occur
within the next 12 months, but the Company does not expect such audits to result
in amounts that would cause a significant change to its effective tax rate,
other than the following items.
The
Company may resolve certain issues with IRS Appeals for the 2003–2005 and
2006–2008 cycles within the next 12 months. The gross uncertain tax positions at
December 31, 2012 for the items that may be resolved are as much as $655 million
plus gross interest of $92 million. Because of the number and nature of the
issues remaining to be resolved, the potential tax benefit to continuing
operations could be anywhere in a range between $0 and $383 million. In
addition, the audit for the companies in the Germany tax group for the years
2005–2008 may conclude in 2013. The gross uncertain tax positions at December
31, 2012 for this audit is as much as $112 million plus gross interest of $29
million. The potential tax benefit, most of which would go to discontinued
operations, is anywhere in the range from $0 to $137 million.
The following are the major tax
jurisdictions in which the Company and its affiliates operate and the earliest
tax year subject to examination:
Jurisdiction | Tax year |
United States | 2009 |
Mexico | 2008 |
New York State and City | 2005 |
United Kingdom | 2010 |
Japan | 2009 |
Brazil | 2008 |
Singapore | 2007 |
Hong Kong | 2007 |
Ireland | 2008 |
Foreign pretax earnings approximated $14.7 billion in 2012, $13.1 billion
in 2011 and $12.3 billion in 2010 (of which $0.1 billion loss, $0.2 billion
profit and $0.1 billion profit, respectively, are in discontinued operations).
As a U.S. corporation, Citigroup and its U.S. subsidiaries are currently subject
to U.S. taxation on all foreign pretax earnings earned by a foreign branch.
Pretax earnings of a foreign subsidiary or affiliate are subject to U.S.
taxation when effectively repatriated. The Company provides income taxes on the
undistributed earnings of non-U.S. subsidiaries except to the extent that such
earnings are indefinitely reinvested outside the United States. At December 31,
2012, $42.6 billion of accumulated undistributed earnings of non-U.S.
subsidiaries were indefinitely invested. At the existing U.S. federal income tax
rate, additional taxes (net of U.S. foreign tax credits) of $11.5 billion would
have to be provided if such earnings were remitted currently. The current year's
effect on the income tax expense from continuing operations is included in the
"Foreign income tax rate differential" line in the reconciliation of the federal
statutory rate to the Company's effective income tax rate in the table
above.
Income taxes are
not provided for the Company's "savings bank base year bad debt reserves" that
arose before 1988, because under current U.S. tax rules, such taxes will become
payable only to the extent such amounts are distributed in excess of limits
prescribed by federal law. At December 31, 2012, the amount of the base year
reserves totaled approximately $358 million (subject to a tax of $125
million).
184
The Company has no valuation allowance on its deferred tax assets (DTAs) at December 31, 2012 and December 31, 2011.
In billions of dollars | |||||
DTA balance | DTA balance | ||||
Jurisdiction/component | December 31, 2012 | December 31, 2011 | |||
U.S. federal (1) | |||||
Consolidated tax return net | |||||
operating losses (NOLs) | $ | - | $ | - | |
Consolidated tax return | |||||
foreign tax credits (FTCs) | 22.0 | 15.8 | |||
Consolidated tax return | |||||
general business credits (GBCs) | 2.6 | 2.1 | |||
Future tax deductions and credits | 22.0 | 23.0 | |||
Other (2) | 0.9 | 1.4 | |||
Total U.S. federal | $ | 47.5 | $ | 42.3 | |
State and local | |||||
New York NOLs | $ | 1.3 | $ | 1.3 | |
Other state NOLs | 0.6 | 0.7 | |||
Future tax deductions | 2.6 | 2.2 | |||
Total state and local | $ | 4.5 | $ | 4.2 | |
Foreign | |||||
APB 23 subsidiary NOLs | $ | 0.2 | $ | 0.5 | |
Non-APB 23 subsidiary NOLs | 1.2 | 1.8 | |||
Future tax deductions | 1.9 | 2.7 | |||
Total foreign | $ | 3.3 | $ | 5.0 | |
Total | $ | 55.3 | $ | 51.5 |
(1) | Included in the net U.S. federal DTAs of $47.5 billion are deferred tax liabilities of $2 billion that will reverse in the relevant carry-forward period and may be used to support the DTAs. | |
(2) | Includes $0.8 billion and $1.2 billion for 2012 and 2011, respectively, of subsidiary tax carry-forwards related to companies that are expected to be utilized separate from Citigroup's consolidated tax carry-forwards. |
The following table summarizes the amounts of tax carry-forwards and their expiration dates as of December 31, 2012:
In billions of dollars | ||
Year of expiration | Amount | |
U.S. consolidated tax return foreign tax credit carry-forwards | ||
2016 | $ | 0.4 |
2017 | 6.6 | |
2018 | 5.3 | |
2019 | 1.3 | |
2020 | 2.3 | |
2021 | 1.9 | |
2022 | 4.2 | |
Total U.S. consolidated tax return foreign tax credit carry-forwards | $ | 22.0 |
U.S. consolidated tax return general business credit carry-forwards | ||
2027 | $ | 0.3 |
2028 | 0.4 | |
2029 | 0.4 | |
2030 | 0.5 | |
2031 | 0.5 | |
2032 | 0.5 | |
Total U.S. consolidated tax return general business credit carry-forwards | $ | 2.6 |
U.S. subsidiary separate federal net operating loss (NOL) carry-forwards | ||
2027 | $ | 0.2 |
2028 | 0.1 | |
2030 | 0.3 | |
2031 | 1.8 | |
Total U.S. subsidiary separate federal NOL carry-forwards (1) | $ | 2.4 |
New York State NOL carry-forwards | ||
2027 | $ | 0.1 |
2028 | 7.2 | |
2029 | 1.9 | |
2030 | 0.4 | |
Total New York State NOL carry-forwards (1) | $ | 9.6 |
New York City NOL carry-forwards | ||
2027 | $ | 0.1 |
2028 | 3.7 | |
2029 | 1.6 | |
2030 | 0.2 | |
Total New York City NOL carry-forwards (1) | $ | 5.6 |
APB 23 subsidiary NOL carry-forwards | ||
Various | $ | 0.2 |
Total APB 23 subsidiary NOL carry-forwards | $ | 0.2 |
(1) | Pretax. |
185
While Citi's net total DTAs increased
year-over-year, the time remaining for utilization has shortened, given the
passage of time, particularly with respect to the foreign tax credit (FTC)
component of the DTAs. Realization of the DTAs will continue to be driven by
Citi's ability to generate U.S. taxable earnings in the carry-forward periods,
including through actions that optimize Citi's U.S. taxable
earnings.
Although realization is not assured, Citi believes that the realization
of the recognized net DTAs of $55.3 billion at December 31, 2012 is
more-likely-than-not based upon expectations as to future taxable income in the
jurisdictions in which the DTAs arise and available tax planning strategies (as
defined in ASC 740, Income
Taxes ) that would be implemented,
if necessary, to prevent a carry-forward from expiring. In general, Citi would
need to generate approximately $112 billion of U.S. taxable income during the
respective carry-forward periods, substantially all of which must be generated
during the FTC carry-forward periods, to fully realize its U.S. federal, state
and local DTAs. Citi's net DTAs will decline primarily as additional domestic
GAAP taxable income is generated.
Citi
has concluded that there are two components of positive evidence that support
the full realization of its DTAs. First, Citi forecasts sufficient U.S. taxable
income in the carry-forward periods, exclusive of ASC 740 tax planning
strategies, although Citi's estimated future taxable income has decreased due to
the ongoing challenging economic environment, which will continue to be subject
to overall market and global economic conditions. Citi's forecasted taxable
income incorporates geographic business forecasts and taxable income adjustments
to those forecasts (e.g., U.S. tax exempt income, loan loss reserves deductible
for U.S. tax reporting in subsequent years), as well as actions intended to
optimize its U.S. taxable earnings.
Second, Citi has sufficient tax planning
strategies available to it under ASC 740 that would be implemented, if
necessary, to prevent a carry-forward from expiring. These strategies include
repatriating low taxed foreign source earnings for which an assertion that the
earnings have been indefinitely reinvested has not been made, accelerating U.S.
taxable income into, or deferring U.S. tax deductions out of, the latter years
of the carry-forward period (e.g., selling appreciated intangible assets,
electing straight-line depreciation), accelerating deductible temporary
differences outside the U.S., and selling certain assets that produce tax-exempt
income, while purchasing assets that produce fully taxable income. In addition,
the sale or restructuring of certain businesses can produce significant U.S.
taxable income within the relevant carry-forward periods.
Based upon the foregoing discussion, Citi
believes the U.S. federal and New York state and city NOL carry-forward period
of 20 years provides enough time to fully utilize the DTAs pertaining to the
existing NOL carry-forwards and any NOL that would be created by the reversal of
the future net deductions that have not yet been taken on a tax
return.
The U.S. FTC
carry-forward period is 10 years and represents the most time sensitive
component of Citi's DTAs. Utilization of FTCs in any year is restricted to 35%
of foreign source taxable income in that year. However, overall domestic losses
that Citi has incurred of approximately $63 billion as of December 31, 2012 are
allowed to be reclassified as foreign source income to the extent of 50% of
domestic source income produced in subsequent years. Resulting foreign source
income would cover the FTCs being carried forward. Citi believes the foreign
source taxable income limitation will not be an impediment to the FTC
carry-forward usage as long as Citi can generate sufficient domestic taxable
income within the 10-year carry-forward period.
Citi believes that it will generate
sufficient U.S. taxable income within the 10-year carry-forward period
referenced above to be able to fully utilize the FTC carry-forward, in addition
to any FTCs produced in such period.
186
11. EARNINGS PER SHARE
The following is a reconciliation of the income and share data used in the basic and diluted earnings per share (EPS) computations for the years ended December 31:
In millions, except per-share amounts | 2012 | 2011 | (1) | 2010 | (1) | |||||
Income from continuing operations before attribution of noncontrolling interests | $ | 7,909 | $ | 11,103 | $ | 10,951 | ||||
Less: Noncontrolling interests from continuing operations | 219 | 148 | 329 | |||||||
Net income from continuing operations (for EPS purposes) | $ | 7,690 | $ | 10,955 | $ | 10,622 | ||||
Income (loss) from discontinued operations, net of taxes | (149 | ) | 112 | (68 | ) | |||||
Less: Noncontrolling interests from discontinuing operations | - | - | (48 | ) | ||||||
Citigroup's net income | $ | 7,541 | $ | 11,067 | $ | 10,602 | ||||
Less: Preferred dividends | 26 | 26 | 9 | |||||||
Net income available to common shareholders | $ | 7,515 | $ | 11,041 | $ | 10,593 | ||||
Less: Dividends and undistributed earnings allocated to employee restricted and | ||||||||||
deferred shares with nonforfeitable rights to dividends, applicable to basic EPS | 166 | 186 | 90 | |||||||
Net income allocated to common shareholders for basic EPS | $ | 7,349 | $ | 10,855 | $ | 10,503 | ||||
Add: Interest expense, net of tax, on convertible securities and | ||||||||||
adjustment of undistributed earnings allocated to employee | ||||||||||
restricted and deferred shares with nonforfeitable rights | ||||||||||
to dividends, applicable to diluted EPS | 11 | 17 | 2 | |||||||
Net income allocated to common shareholders for diluted EPS | $ | 7,360 | $ | 10,872 | $ | 10,505 | ||||
Weighted-average common shares outstanding applicable to basic EPS | 2,930.6 | 2,909.8 | 2,877.6 | |||||||
Effect of dilutive securities | ||||||||||
T-DECs | 84.2 | 87.6 | 87.8 | |||||||
Other employee plans | 0.6 | 0.5 | 1.9 | |||||||
Convertible securities | 0.1 | 0.1 | 0.1 | |||||||
Options | - | 0.8 | 0.4 | |||||||
Adjusted weighted-average common shares outstanding applicable to diluted EPS | 3,015.5 | 2,998.8 | 2,967.8 | |||||||
Basic earnings per share (2) | ||||||||||
Income from continuing operations | $ | 2.56 | $ | 3.69 | $ | 3.66 | ||||
Discontinued operations | (0.05 | ) | 0.04 | (0.01 | ) | |||||
Net income | $ | 2.51 | $ | 3.73 | $ | 3.65 | ||||
Diluted earnings per share (2) | ||||||||||
Income from continuing operations | $ | 2.49 | $ | 3.59 | $ | 3.55 | ||||
Discontinued operations | (0.05 | ) | 0.04 | (0.01 | ) | |||||
Net income | $ | 2.44 | $ | 3.63 | $ | 3.54 |
(1) | 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. |
(2) | Due to rounding, earnings per share on continuing operations and discontinued operations may not sum to earnings per share on net income. |
During 2012, 2011
and 2010 weighted-average options to purchase 35.8 million, 24.1 million and
38.6 million shares of common stock, respectively, were outstanding but not
included in the computation of earnings per share because the weighted-average
exercise prices of $54.18, $123.47 and $102.89, respectively, were greater than
the average market price of the Company's common stock.
Warrants
issued to the U.S. Treasury as part of the Troubled Asset Relief Program (TARP)
and the loss-sharing agreement (all of which were subsequently sold to the
public in January 2011), with an exercise price of $178.50 and $106.10 for
approximately 21.0 million and 25.5 million shares of common stock,
respectively, were not included in the computation of earnings per share in
2012, 2011 and 2010, because they were anti-dilutive.
The final
tranche of equity units held by the Abu Dhabi Investment Authority (ADIA)
converted into 5.9 million shares of Citigroup common stock during the third
quarter of 2011. Equity units of approximately 11.8 million shares of Citigroup
common stock held by ADIA were not included in the computation of earnings per
share in 2010 because the
exercise price of $318.30 was greater than
the average market price of the Company's common stock.
Pursuant to the
terms of Citi's previously outstanding Tangible Dividend Enhanced Common Stock
Securities (T-DECs), on December 17, 2012, the Company delivered 96,337,772
shares of Citigroup common stock for the final settlement of the prepaid stock
purchase contract. The impact of these additional shares to the weighted-average
common shares outstanding applicable to basic EPS for the year ended 2012 was
negligible due to the timing of when they were issued. The full impact of the
T-DECs settlement will be reflected in the basic earnings per share calculation
for the first quarter of 2013. The impact of the T-DECs was fully reflected in
the diluted shares and the diluted EPS for 2012, 2011 and 2010.
During the
fourth quarter of 2012, Citi issued approximately $2.25 billion of
non-cumulative perpetual preferred stock. If declared by the Board of Directors,
Citi will distribute preferred dividends of approximately $97 million relating
to its preferred stock issuance during 2013.
187
12. FEDERAL FUNDS/SECURITIES
BORROWED,
LOANED, AND SUBJECT TO REPURCHASE
AGREEMENTS
Federal funds sold and securities borrowed or purchased under agreements to resell, at their respective carrying values, consisted of the following at December 31:
In millions of dollars | 2012 | 2011 | ||||
Federal funds sold | $ | 97 | $ | 37 | ||
Securities purchased under agreements to resell (1) | 138,549 | 153,492 | ||||
Deposits paid for securities borrowed | 122,665 | 122,320 | ||||
Total | $ | 261,311 | $ | 275,849 |
(1) | Securities purchased under agreements to resell are reported net by counterparty, when applicable requirements for net presentation are met. The amounts in the table above were reduced for allowable netting by $49.4 billion and $53.0 billion at December 31, 2012 and 2011, respectively. |
Federal funds purchased and securities loaned or sold under agreements to repurchase, at their respective carrying values, consisted of the following at December 31:
In millions of dollars | 2012 | 2011 | ||||
Federal funds purchased | $ | 1,005 | $ | 688 | ||
Securities sold under agreements to repurchase (1) | 182,330 | 164,849 | ||||
Deposits received for securities loaned | 27,901 | 32,836 | ||||
Total | $ | 211,236 | $ | 198,373 |
(1) | Securities sold under agreements to repurchase are reported net by counterparty, when applicable requirements for net presentation are met. The amounts in the table above were reduced for allowable netting by $49.4 billion and $53.0 billion at December 31, 2012 and 2011, respectively. |
The resale and repurchase agreements represent collateralized financing
transactions. The Company executes these transactions through its broker-dealer
subsidiaries to facilitate customer matched-book activity and to fund a portion
of the Company's trading inventory efficiently. Transactions executed by the
Company's bank subsidiaries primarily facilitate customer financing
activity.
It is the Company's policy to take
possession of the underlying collateral, monitor its market value relative to
the amounts due under the agreements and, when necessary, require prompt
transfer of additional collateral in order to maintain contractual margin
protection. Collateral typically consists of government and government-agency
securities, corporate and municipal bonds, and mortgage-backed and other
asset-backed securities. In the event of counterparty default, the financing
agreement provides the Company with the right to liquidate the collateral
held.
The majority of the resale and repurchase agreements are recorded at fair
value. The remaining portion is carried at the amount of cash initially advanced
or received, plus accrued interest, as specified in the respective
agreements.
A majority of securities borrowing and
lending agreements are recorded at the amount of cash advanced or received and
are collateralized principally by government and government-agency securities
and corporate debt and equity securities. The remaining portion is recorded at
fair value as the Company elected the fair value option for certain securities
borrowed and loaned portfolios. With respect to securities loaned, the Company
receives cash collateral in an amount generally in excess of the market value of
the securities loaned. The Company monitors the market value of securities
borrowed and securities loaned on a daily basis and obtains or posts additional
collateral in order to maintain contractual margin
protection.
188
13. BROKERAGE RECEIVABLES AND
BROKERAGE
PAYABLES
The Company seeks to protect itself from the risks associated with customer activities by requiring customers to maintain margin collateral in compliance with regulatory and internal guidelines. Margin levels are monitored daily, and customers deposit additional collateral as required. Where customers cannot meet collateral requirements, the Company will liquidate sufficient underlying financial instruments to bring the customer into compliance with the required margin level.
Exposure to credit risk is impacted by market volatility, which may impair the ability of clients to satisfy their obligations to the Company. Credit limits are established and closely monitored for customers and for brokers and dealers engaged in forwards, futures and other transactions deemed to be credit sensitive.
Brokerage receivables and brokerage payables consisted of the following at December 31:
In millions of dollars | 2012 | 2011 | ||||
Receivables from customers | $ | 12,191 | $ | 19,991 | ||
Receivables from brokers, dealers, and clearing organizations | 10,299 | 7,786 | ||||
Total brokerage receivables (1) | $ | 22,490 | $ | 27,777 | ||
Payables to customers | $ | 38,279 | $ | 40,111 | ||
Payables to brokers, dealers, and clearing organizations | 18,734 | 16,585 | ||||
Total brokerage payables (1) | $ | 57,013 | $ | 56,696 |
(1) | Brokerage receivables and payables are accounted for in accordance with ASC 940-320. |
14. TRADING ACCOUNT ASSETS AND LIABILITIES
Trading account assets and Trading account liabilities , at fair value, consisted of the following at December 31:
In millions of dollars | 2012 | 2011 | ||||
Trading account assets | ||||||
Mortgage-backed securities (1) | ||||||
U.S. government-sponsored agency guaranteed | $ | 31,160 | $ | 27,535 | ||
Prime | 1,248 | 877 | ||||
Alt-A | 801 | 609 | ||||
Subprime | 812 | 989 | ||||
Non-U.S. residential | 607 | 396 | ||||
Commercial | 2,441 | 2,333 | ||||
Total mortgage-backed securities | $ | 37,069 | $ | 32,739 | ||
U.S. Treasury and federal agency securities | ||||||
U.S. Treasury | $ | 17,472 | $ | 18,227 | ||
Agency obligations | 2,884 | 1,172 | ||||
Total U.S. Treasury and federal agency securities | $ | 20,356 | $ | 19,399 | ||
State and municipal securities | $ | 3,806 | $ | 5,364 | ||
Foreign government securities | 89,239 | 79,551 | ||||
Corporate | 35,224 | 37,026 | ||||
Derivatives (2) | 54,620 | 62,327 | ||||
Equity securities | 56,998 | 33,230 | ||||
Asset-backed securities (1) | 5,352 | 7,071 | ||||
Other debt securities | 18,265 | 15,027 | ||||
Total trading account assets | $ | 320,929 | $ | 291,734 | ||
Trading account liabilities | ||||||
Securities sold, not yet purchased | $ | 63,798 | $ | 69,809 | ||
Derivatives (2) | 51,751 | 56,273 | ||||
Total trading account liabilities | $ | 115,549 | $ | 126,082 |
(1) | The Company invests in mortgage-backed and asset-backed securities. These securitizations are generally considered VIEs. The Company's maximum exposure to loss from these VIEs is equal to the carrying amount of the securities, which is reflected in the table above. For mortgage-backed and asset-backed securitizations in which the Company has other involvement, see Note 22 to the Consolidated Financial Statements. | |
(2) | Presented net, pursuant to enforceable master netting agreements. See Note 23 to the Consolidated Financial Statements for a discussion regarding the accounting and reporting for derivatives. |
189
15. INVESTMENTS
Overview
In millions of dollars | 2012 | 2011 | ||||
Securities available-for-sale | $ | 288,695 | $ | 265,204 | ||
Debt securities held-to-maturity (1) | 10,130 | 11,483 | ||||
Non-marketable equity securities carried at fair value (2) | 5,768 | 8,836 | ||||
Non-marketable equity securities carried at cost (3) | 7,733 | 7,890 | ||||
Total investments | $ | 312,326 | $ | 293,413 |
(1) | Recorded at amortized cost less impairment for securities that have credit-related impairment. |
(2) | Unrealized gains and losses for non-marketable equity securities carried at fair value are recognized in earnings. During the third quarter of 2012, the Company sold EMI Music resulting in a total $1.5 billion decrease in non-marketable equity securities carried at fair value. During the second quarter of 2012, the Company sold EMI Music Publishing resulting in a total of $1.3 billion decrease in non-marketable equity securities carried at fair value. |
(3) | Non-marketable equity securities carried at cost primarily consist of shares issued by the Federal Reserve Bank, Federal Home Loan Banks, foreign central banks and various clearing houses of which Citigroup is a member. |
Securities
Available-for-Sale
The amortized cost and
fair value of securities available-for-sale (AFS) at December 31, 2012 and 2011
were as follows:
2012 | 2011 | |||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||
Amortized | unrealized | unrealized | Fair | Amortized | unrealized | unrealized | Fair | |||||||||||||||||
In millions of dollars | cost | gains | losses | value | cost | gains | losses | value | ||||||||||||||||
Debt securities AFS | ||||||||||||||||||||||||
Mortgage-backed securities (1) | ||||||||||||||||||||||||
U.S. government-sponsored agency guaranteed | $ | 46,001 | $ | 1,507 | $ | 163 | $ | 47,345 | $ | 44,394 | $ | 1,438 | $ | 51 | $ | 45,781 | ||||||||
Prime | 85 | 1 | - | 86 | 118 | 1 | 6 | 113 | ||||||||||||||||
Alt-A | 1 | - | - | 1 | 1 | - | - | 1 | ||||||||||||||||
Non-U.S. residential | 7,442 | 148 | - | 7,590 | 4,671 | 9 | 22 | 4,658 | ||||||||||||||||
Commercial | 436 | 16 | 3 | 449 | 465 | 16 | 9 | 472 | ||||||||||||||||
Total mortgage-backed securities | $ | 53,965 | $ | 1,672 | $ | 166 | $ | 55,471 | $ | 49,649 | $ | 1,464 | $ | 88 | $ | 51,025 | ||||||||
U.S. Treasury and federal agency securities | ||||||||||||||||||||||||
U.S. Treasury | $ | 64,456 | $ | 1,172 | $ | 34 | $ | 65,594 | $ | 48,790 | $ | 1,439 | $ | - | $ | 50,229 | ||||||||
Agency obligations | 25,844 | 404 | 1 | 26,247 | 34,310 | 601 | 2 | 34,909 | ||||||||||||||||
Total U.S. Treasury and federal agency securities | $ | 90,300 | $ | 1,576 | $ | 35 | $ | 91,841 | $ | 83,100 | $ | 2,040 | $ | 2 | $ | 85,138 | ||||||||
State and municipal (2) | $ | 20,020 | $ | 132 | $ | 1,820 | $ | 18,332 | $ | 16,819 | $ | 134 | $ | 2,554 | $ | 14,399 | ||||||||
Foreign government | 93,259 | 918 | 130 | 94,047 | 84,360 | 558 | 404 | 84,514 | ||||||||||||||||
Corporate | 9,302 | 398 | 26 | 9,674 | 10,005 | 305 | 53 | 10,257 | ||||||||||||||||
Asset-backed securities (1) | 14,188 | 85 | 143 | 14,130 | 11,053 | 31 | 81 | 11,003 | ||||||||||||||||
Other debt securities | 256 | 2 | - | 258 | 670 | 13 | - | 683 | ||||||||||||||||
Total debt securities AFS | $ | 281,290 | $ | 4,783 | $ | 2,320 | $ | 283,753 | $ | 255,656 | $ | 4,545 | $ | 3,182 | $ | 257,019 | ||||||||
Marketable equity securities AFS | $ | 4,643 | $ | 444 | $ | 145 | $ | 4,942 | $ | 6,722 | $ | 1,658 | $ | 195 | $ | 8,185 | ||||||||
Total securities AFS | $ | 285,933 | $ | 5,227 | $ | 2,465 | $ | 288,695 | $ | 262,378 | $ | 6,203 | $ | 3,377 | $ | 265,204 |
(1) | The Company invests in mortgage-backed and asset-backed securities. These securitizations are generally considered VIEs. The Company's maximum exposure to loss from these VIEs is equal to the carrying amount of the securities, which is reflected in the table above. For mortgage-backed and asset-backed securitizations in which the Company has other involvement, see Note 22 to the Consolidated Financial Statements. |
(2) | The unrealized losses on state and municipal debt securities are primarily attributable to the result of yields on taxable fixed income instruments decreasing relatively faster than the general tax-exempt municipal yields and the effects of fair value hedge accounting. |
At December 31,
2012, the amortized cost of approximately 3,500 investments in equity and
fixed-income securities exceeded their fair value by $2.465 billion. Of the
$2.465 billion, the gross unrealized loss on equity securities was $145 million.
Of the remainder, $238 million represents fixed-income investments that have
been in a gross-unrealized-loss position for less than a year and, of these, 98%
are rated investment grade; $2.082 billion represents fixed-income investments
that have been in a gross-unrealized-loss position for a year or more and, of
these, 92% are rated investment grade.
The AFS mortgage-backed securities
portfolio fair value balance of $55.471 billion consists of $47.345 billion of
government-sponsored agency securities, and $8.126 billion of privately
sponsored securities, of which the majority are backed by mortgages that are not
Alt-A or subprime.
As discussed in more detail below, the Company conducts and documents periodic reviews of all securities with unrealized losses to evaluate whether the impairment is other than temporary. Any credit-related impairment related to debt securities that the Company does not plan to sell and is not likely to be required to sell is recognized in the Consolidated Statement of Income, with the non-credit-related impairment recognized in accumulated other comprehensive income (AOCI). For other impaired debt securities, the entire impairment is recognized in the Consolidated Statement of Income.
190
The table below shows the fair value of AFS securities that have been in an unrealized loss position for less than 12 months or for 12 months or longer as of December 31, 2012 and 2011:
Less than 12 months | 12 months or longer | Total | ||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||
Fair | unrealized | Fair | unrealized | Fair | unrealized | |||||||||||||
In millions of dollars | value | losses | value | losses | value | losses | ||||||||||||
December 31, 2012 | ||||||||||||||||||
Securities AFS | ||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||
U.S. government-sponsored agency guaranteed | $ | 8,759 | $ | 138 | $ | 464 | $ | 25 | $ | 9,223 | $ | 163 | ||||||
Prime | 15 | - | 5 | - | 20 | - | ||||||||||||
Non-U.S. residential | 5 | - | 7 | - | 12 | - | ||||||||||||
Commercial | 29 | - | 24 | 3 | 53 | 3 | ||||||||||||
Total mortgage-backed securities | $ | 8,808 | $ | 138 | $ | 500 | $ | 28 | $ | 9,308 | $ | 166 | ||||||
U.S. Treasury and federal agency securities | ||||||||||||||||||
U.S. Treasury | $ | 10,558 | $ | 34 | $ | - | $ | - | $ | 10,558 | $ | 34 | ||||||
Agency obligations | 496 | 1 | - | - | 496 | 1 | ||||||||||||
Total U.S. Treasury and federal agency securities | $ | 11,054 | $ | 35 | $ | - | $ | - | $ | 11,054 | $ | 35 | ||||||
State and municipal | $ | 10 | $ | - | $ | 11,095 | $ | 1,820 | $ | 11,105 | $ | 1,820 | ||||||
Foreign government | 22,806 | 54 | 3,910 | 76 | 26,716 | 130 | ||||||||||||
Corporate | 1,420 | 8 | 225 | 18 | 1,645 | 26 | ||||||||||||
Asset-backed securities | 1,942 | 4 | 2,888 | 139 | 4,830 | 143 | ||||||||||||
Marketable equity securities AFS | 15 | 1 | 764 | 144 | 779 | 145 | ||||||||||||
Total securities AFS | $ | 46,055 | $ | 240 | $ | 19,382 | $ | 2,225 | $ | 65,437 | $ | 2,465 | ||||||
December 31, 2011 | ||||||||||||||||||
Securities AFS | ||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||
U.S. government-sponsored agency guaranteed | $ | 5,398 | $ | 32 | $ | 51 | $ | 19 | $ | 5,449 | $ | 51 | ||||||
Prime | 27 | 1 | 40 | 5 | 67 | 6 | ||||||||||||
Non-U.S. residential | 3,418 | 22 | 57 | - | 3,475 | 22 | ||||||||||||
Commercial | 35 | 1 | 31 | 8 | 66 | 9 | ||||||||||||
Total mortgage-backed securities | $ | 8,878 | $ | 56 | $ | 179 | $ | 32 | $ | 9,057 | $ | 88 | ||||||
U.S. Treasury and federal agency securities | ||||||||||||||||||
U.S. Treasury | $ | 553 | $ | - | $ | - | $ | - | $ | 553 | $ | - | ||||||
Agency obligations | 2,970 | 2 | - | - | 2,970 | 2 | ||||||||||||
Total U.S. Treasury and federal agency securities | $ | 3,523 | $ | 2 | $ | - | $ | - | $ | 3,523 | $ | 2 | ||||||
State and municipal | $ | 59 | $ | 2 | $ | 11,591 | $ | 2,552 | $ | 11,650 | $ | 2,554 | ||||||
Foreign government | 33,109 | 211 | 11,205 | 193 | 44,314 | 404 | ||||||||||||
Corporate | 2,104 | 24 | 203 | 29 | 2,307 | 53 | ||||||||||||
Asset-backed securities | 4,625 | 68 | 466 | 13 | 5,091 | 81 | ||||||||||||
Other debt securities | 164 | - | - | - | 164 | - | ||||||||||||
Marketable equity securities AFS | 47 | 5 | 1,457 | 190 | 1,504 | 195 | ||||||||||||
Total securities AFS | $ | 52,509 | $ | 368 | $ | 25,101 | $ | 3,009 | $ | 77,610 | $ | 3,377 |
191
The following table presents the amortized cost and fair value of AFS debt securities by contractual maturity dates as of December 31, 2012 and 2011:
2012 | 2011 | |||||||||||
Amortized | Amortized | |||||||||||
In millions of dollars | cost | Fair value | cost | Fair value | ||||||||
Mortgage-backed securities (1) | ||||||||||||
Due within 1 year | $ | 10 | $ | 10 | $ | - | $ | - | ||||
After 1 but within 5 years | 365 | 374 | 422 | 423 | ||||||||
After 5 but within 10 years | 1,992 | 2,124 | 2,757 | 2,834 | ||||||||
After 10 years (2) | 51,598 | 52,963 | 46,470 | 47,768 | ||||||||
Total | $ | 53,965 | $ | 55,471 | $ | 49,649 | $ | 51,025 | ||||
U.S. Treasury and federal agency securities | ||||||||||||
Due within 1 year | $ | 9,492 | $ | 9,499 | $ | 14,615 | $ | 14,637 | ||||
After 1 but within 5 years | 75,967 | 77,267 | 62,241 | 63,823 | ||||||||
After 5 but within 10 years | 2,171 | 2,408 | 5,862 | 6,239 | ||||||||
After 10 years (2) | 2,670 | 2,667 | 382 | 439 | ||||||||
Total | $ | 90,300 | $ | 91,841 | $ | 83,100 | $ | 85,138 | ||||
State and municipal | ||||||||||||
Due within 1 year | $ | 208 | $ | 208 | $ | 142 | $ | 142 | ||||
After 1 but within 5 years | 3,221 | 3,223 | 455 | 457 | ||||||||
After 5 but within 10 years | 155 | 165 | 182 | 188 | ||||||||
After 10 years (2) | 16,436 | 14,736 | 16,040 | 13,612 | ||||||||
Total | $ | 20,020 | $ | 18,332 | $ | 16,819 | $ | 14,399 | ||||
Foreign government | ||||||||||||
Due within 1 year | $ | 34,873 | $ | 34,869 | $ | 34,924 | $ | 34,864 | ||||
After 1 but within 5 years | 49,548 | 49,933 | 41,612 | 41,675 | ||||||||
After 5 but within 10 years | 7,239 | 7,380 | 6,993 | 6,998 | ||||||||
After 10 years (2) | 1,599 | 1,865 | 831 | 977 | ||||||||
Total | $ | 93,259 | $ | 94,047 | $ | 84,360 | $ | 84,514 | ||||
All other (3) | ||||||||||||
Due within 1 year | $ | 1,001 | $ | 1,009 | $ | 4,055 | $ | 4,072 | ||||
After 1 but within 5 years | 11,285 | 11,351 | 9,843 | 9,928 | ||||||||
After 5 but within 10 years | 4,330 | 4,505 | 3,009 | 3,160 | ||||||||
After 10 years (2) | 7,130 | 7,197 | 4,821 | 4,783 | ||||||||
Total | $ | 23,746 | $ | 24,062 | $ | 21,728 | $ | 21,943 | ||||
Total debt securities AFS | $ | 281,290 | $ | 283,753 | $ | 255,656 | $ | 257,019 |
(1) | Includes mortgage-backed securities of U.S. government-sponsored entities. |
(2) | Investments with no stated maturities are included as contractual maturities of greater than 10 years. Actual maturities may differ due to call or prepayment rights. |
(3) | Includes corporate, asset-backed and other debt securities. |
The following table presents interest and dividends on investments:
In millions of dollars | 2012 | 2011 | 2010 | ||||||
Taxable interest | $ | 6,509 | $ | 7,257 | $ | 9,922 | |||
Interest exempt from U.S. federal income tax | 683 | 746 | 760 | ||||||
Dividends | 333 | 317 | 322 | ||||||
Total interest and dividends | $ | 7,525 | $ | 8,320 | $ | 11,004 |
The following table presents realized gains and losses on all investments. The gross realized investment losses exclude losses from other-than-temporary impairment:
In millions of dollars | 2012 | 2011 | 2010 | |||||||
Gross realized investment gains | $ | 3,663 | $ | 2,498 | $ | 2,873 | ||||
Gross realized investment losses | (412 | ) | (501 | ) | (462 | ) | ||||
Net realized gains | $ | 3,251 | $ | 1,997 | $ | 2,411 |
During 2012, 2011 and 2010, the Company sold various debt securities that were classified as held-to-maturity. These sales were in response to a significant deterioration in the creditworthiness of the issuers or securities. In addition, during 2012 certain securities were reclassified to AFS investments in response to significant credit deterioration. The Company intended to sell the securities at the time of reclassification to AFS investments and recorded other-than-temporary impairment reflected in the following table. The securities sold during 2012, 2011 and 2010 had carrying values of $2,110 million, $1,612 million and $413 million respectively, and the Company recorded realized losses of $187 million, $299 million and $49 million, respectively. The securities reclassified to AFS investments during 2012 totaled $244 million and the Company recorded other-than-temporary impairment of $59 million.
192
Debt Securities
Held-to-Maturity
The carrying value and
fair value of debt securities held-to-maturity (HTM) at December 31, 2012 and
2011 were as follows:
Net unrealized | ||||||||||||||||||
loss | Gross | Gross | ||||||||||||||||
Amortized | recognized in | Carrying | unrealized | unrealized | Fair | |||||||||||||
In millions of dollars | cost | (1) | AOCI | value | (2) | gains | losses | value | ||||||||||
December 31, 2012 | ||||||||||||||||||
Debt securities held-to-maturity | ||||||||||||||||||
Mortgage-backed securities (3) | ||||||||||||||||||
Prime | $ | 258 | $ | 49 | $ | 209 | $ | 30 | $ | 4 | $ | 235 | ||||||
Alt-A | 2,969 | 837 | 2,132 | 653 | 250 | 2,535 | ||||||||||||
Subprime | 201 | 43 | 158 | 13 | 21 | 150 | ||||||||||||
Non-U.S. residential | 2,488 | 401 | 2,087 | 50 | 81 | 2,056 | ||||||||||||
Commercial | 123 | - | 123 | 1 | 2 | 122 | ||||||||||||
Total mortgage-backed securities | $ | 6,039 | $ | 1,330 | $ | 4,709 | $ | 747 | $ | 358 | $ | 5,098 | ||||||
State and municipal | $ | 1,278 | $ | 73 | $ | 1,205 | $ | 89 | $ | 37 | $ | 1,257 | ||||||
Foreign government (4) | 2,987 | - | 2,987 | - | - | 2,987 | ||||||||||||
Corporate | 829 | 103 | 726 | 73 | - | 799 | ||||||||||||
Asset-backed securities (3) | 529 | 26 | 503 | 8 | 8 | 503 | ||||||||||||
Total debt securities held-to-maturity | $ | 11,662 | $ | 1,532 | $ | 10,130 | $ | 917 | $ | 403 | $ | 10,644 | ||||||
December 31, 2011 | ||||||||||||||||||
Debt securities held-to-maturity | ||||||||||||||||||
Mortgage-backed securities (3) | ||||||||||||||||||
Prime | $ | 360 | $ | 73 | $ | 287 | $ | 21 | $ | 20 | $ | 288 | ||||||
Alt-A | 4,732 | 1,404 | 3,328 | 20 | 319 | 3,029 | ||||||||||||
Subprime | 383 | 47 | 336 | 1 | 71 | 266 | ||||||||||||
Non-U.S. residential | 3,487 | 520 | 2,967 | 59 | 290 | 2,736 | ||||||||||||
Commercial | 513 | 1 | 512 | 4 | 52 | 464 | ||||||||||||
Total mortgage-backed securities | $ | 9,475 | $ | 2,045 | $ | 7,430 | $ | 105 | $ | 752 | $ | 6,783 | ||||||
State and municipal | $ | 1,422 | $ | 95 | $ | 1,327 | $ | 68 | $ | 72 | $ | 1,323 | ||||||
Foreign government | - | - | - | - | - | - | ||||||||||||
Corporate | 1,862 | 113 | 1,749 | - | 254 | 1,495 | ||||||||||||
Asset-backed securities (3) | 1,000 | 23 | 977 | 9 | 87 | 899 | ||||||||||||
Total debt securities held-to-maturity | $ | 13,759 | $ | 2,276 | $ | 11,483 | $ | 182 | $ | 1,165 | $ | 10,500 |
(1) | For securities transferred to HTM from Trading account assets , amortized cost is defined as the fair value of the securities at the date of transfer plus any accretion income and less any impairments recognized in earnings subsequent to transfer. For securities transferred to HTM from AFS, amortized cost is defined as the original purchase cost, plus or minus any accretion or amortization of a purchase discount or premium, less any impairment recognized in earnings. |
(2) | HTM securities are carried on the Consolidated Balance Sheet at amortized cost, plus or minus any unamortized unrealized gains and losses recognized in AOCI prior to reclassifying the securities from AFS to HTM. The changes in the values of these securities are not reported in the financial statements, except for other-than-temporary impairments. For HTM securities, only the credit loss component of the impairment is recognized in earnings, while the remainder of the impairment is recognized in AOCI. |
(3) | The Company invests in mortgage-backed and asset-backed securities. These securitizations are generally considered VIEs. The Company's maximum exposure to loss from these VIEs is equal to the carrying amount of the securities, which is reflected in the table above. For mortgage-backed and asset-backed securitizations in which the Company has other involvement, see Note 22 to the Consolidated Financial Statements. |
(4) | In 2012, the Company (via its Banamex entity) purchased Mexican government bonds with a par value of $2.6 billion and classified them as held-to-maturity. |
The Company has
the positive intent and ability to hold these securities to maturity absent any
unforeseen further significant changes in circumstances, including deterioration
in credit or with regard to regulatory capital requirements.
The net
unrealized losses classified in AOCI relate to debt securities reclassified from
AFS investments to HTM investments in a prior year. Additionally, for HTM
securities that have suffered credit impairment, declines in fair value for
reasons other than credit losses are recorded in
AOCI, while credit-related impairment is recognized in earnings. The AOCI balance for HTM securities is amortized over the remaining life of the related securities as an adjustment of yield in a manner consistent with the accretion of discount on the same debt securities. This will have no impact on the Company's net income because the amortization of the unrealized holding loss reported in equity will offset the effect on interest income of the accretion of the discount on these securities.
193
During the first quarter of 2011, the Company determined that it no longer had the intent to hold $12.7 billion of HTM securities to maturity. As a result, the Company reclassified $10.0 billion carrying value of mortgage-backed, other asset-backed, state and municipal, and corporate debt securities from Investments held-to-maturity to Trading account assets and sold the remaining $2.7 billion of such securities. As a result of these actions, a net pretax loss of $709 million ($427 million after-tax) was recognized in the Consolidated Statement of Income, composed of gross unrealized gains of $311 million included in Other revenue , gross unrealized losses of $1,387 million included in Other-than-temporary-impairment losses on investments , and net realized gains of $367 million included in Realized gains (losses) on sales of investments . Prior to the reclassification, unrealized losses totaling $1,656 million pretax ($1,012 million after-tax) had been reflected in AOCI and have now been reflected in the Consolidated Statement of Income, as detailed above. During 2011, the Company sold substantially all of the $12.7 billion of HTM securities.
Citigroup reclassified and sold the securities as part of its overall efforts to mitigate its risk-weighted assets (RWA) in order to comply with significant new regulatory capital requirements which, although not yet implemented or formally adopted, are nonetheless currently being used to assess the forecasted capital adequacy of the Company and other large U.S. banking organizations. These regulatory capital changes, which were largely unforeseen when the Company initially reclassified the debt securities from Trading account assets and Investments available-for-sale to Investments held-to-maturity in the fourth quarter of 2008, include: (i) the U.S. Basel II credit and operational risk capital standards; (ii) the Basel Committee's agreed-upon, and the U.S.-proposed, revisions to the market risk capital rules, which significantly increased the risk weightings for certain trading book positions; (iii) the Basel Committee's substantial issuance of Basel III, which raised the quantity and quality of required regulatory capital and materially increased RWA for securitization exposures; and (iv) certain regulatory capital-related provisions in The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
The table below shows the fair value of debt securities in HTM that have been in an unrecognized loss position for less than 12 months or for 12 months or longer as of December 31, 2012 and 2011:
Less than 12 months | 12 months or longer | Total | ||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||
Fair | unrecognized | Fair | unrecognized | Fair | unrecognized | |||||||||||||
In millions of dollars | value | losses | value | losses | value | losses | ||||||||||||
December 31, 2012 | ||||||||||||||||||
Debt securities held-to-maturity | ||||||||||||||||||
Mortgage-backed securities | $ | 88 | $ | 7 | $ | 1,522 | $ | 351 | $ | 1,610 | $ | 358 | ||||||
State and municipal | - | - | 383 | 37 | 383 | 37 | ||||||||||||
Foreign government | 294 | - | - | - | 294 | - | ||||||||||||
Corporate | - | - | - | - | - | - | ||||||||||||
Asset-backed securities | - | - | 406 | 8 | 406 | 8 | ||||||||||||
Total debt securities held-to-maturity | $ | 382 | $ | 7 | $ | 2,311 | $ | 396 | $ | 2,693 | $ | 403 | ||||||
December 31, 2011 | ||||||||||||||||||
Debt securities held-to-maturity | ||||||||||||||||||
Mortgage-backed securities | $ | 735 | $ | 63 | $ | 4,827 | $ | 689 | $ | 5,562 | $ | 752 | ||||||
State and municipal | - | - | 682 | 72 | 682 | 72 | ||||||||||||
Foreign government | - | - | - | - | - | - | ||||||||||||
Corporate | - | - | 1,427 | 254 | 1,427 | 254 | ||||||||||||
Asset-backed securities | 480 | 71 | 306 | 16 | 786 | 87 | ||||||||||||
Total debt securities held-to-maturity | $ | 1,215 | $ | 134 | $ | 7,242 | $ | 1,031 | $ | 8,457 | $ | 1,165 |
Excluded from the gross unrecognized losses presented in the above table are the $1.5 billion and $2.3 billion of gross unrealized losses recorded in AOCI as of December 31, 2012 and December 31, 2011, respectively, mainly related to the HTM securities that were reclassified from AFS investments. Virtually all of these unrecognized losses relate to securities that have been in a loss position for 12 months or longer at December 31, 2012 and December 31, 2011.
194
The following table presents the carrying value and fair value of HTM debt securities by contractual maturity dates as of December 31, 2012 and 2011:
December 31, 2012 | December 31, 2011 | |||||||||||
In millions of dollars | Carrying value | Fair value | Carrying value | Fair value | ||||||||
Mortgage-backed securities | ||||||||||||
Due within 1 year | $ | - | $ | - | $ | - | $ | - | ||||
After 1 but within 5 years | 69 | 67 | 275 | 239 | ||||||||
After 5 but within 10 years | 54 | 54 | 238 | 224 | ||||||||
After 10 years (1) | 4,586 | 4,977 | 6,917 | 6,320 | ||||||||
Total | $ | 4,709 | $ | 5,098 | $ | 7,430 | $ | 6,783 | ||||
State and municipal | ||||||||||||
Due within 1 year | $ | 14 | $ | 15 | $ | 4 | $ | 4 | ||||
After 1 but within 5 years | 36 | 37 | 43 | 46 | ||||||||
After 5 but within 10 years | 58 | 62 | 31 | 30 | ||||||||
After 10 years (1) | 1,097 | 1,143 | 1,249 | 1,243 | ||||||||
Total | $ | 1,205 | $ | 1,257 | $ | 1,327 | $ | 1,323 | ||||
Foreign government | ||||||||||||
Due within 1 year | $ | - | $ | - | $ | - | $ | - | ||||
After 1 but within 5 years | 2,987 | 2,987 | - | - | ||||||||
After 5 but within 10 years | - | - | - | - | ||||||||
After 10 years (1) | - | - | - | - | ||||||||
Total | $ | 2,987 | $ | 2,987 | $ | - | $ | - | ||||
All other (2) | ||||||||||||
Due within 1 year | $ | - | $ | - | $ | 21 | $ | 21 | ||||
After 1 but within 5 years | 728 | 802 | 470 | 438 | ||||||||
After 5 but within 10 years | - | - | 1,404 | 1,182 | ||||||||
After 10 years (1) | 501 | 500 | 831 | 753 | ||||||||
Total | $ | 1,229 | $ | 1,302 | $ | 2,726 | $ | 2,394 | ||||
Total debt securities held-to-maturity | $ | 10,130 | $ | 10,644 | $ | 11,483 | $ | 10,500 |
(1) | Investments with no stated maturities are included as contractual maturities of greater than 10 years. Actual maturities may differ due to call or prepayment rights. |
(2) | Includes corporate and asset-backed securities. |
195
Evaluating Investments for
Other-Than-Temporary
Impairment
Overview
The Company conducts and documents periodic reviews of all securities
with unrealized losses to evaluate whether the impairment is other than
temporary.
An
unrealized loss exists when the current fair value of an individual security is
less than its amortized cost basis. Unrealized losses that are determined to be
temporary in nature are recorded, net of tax, in AOCI for AFS securities. Losses
related to HTM securities are not recorded, as these investments are carried at
amortized cost. For securities transferred to HTM from Trading account assets ,
amortized cost is defined as the fair value of the securities at the date of
transfer, plus any accretion income and less any impairment recognized in
earnings subsequent to transfer. For securities transferred to HTM from AFS,
amortized cost is defined as the original purchase cost, plus or minus any
accretion or amortization of a purchase discount or premium, less any impairment
recognized in earnings.
Regardless of the classification of the
securities as AFS or HTM, the Company has assessed each position with an
unrealized loss for other-than-temporary impairment (OTTI). Factors considered
in determining whether a loss is temporary include:
The Company's review for impairment generally entails:
identification and evaluation of investments that have indications of possible impairment; analysis of individual investments that have fair values less than amortized cost, including consideration of the length of time the investment has been in an unrealized loss position and the expected recovery period; discussion of evidential matter, including an evaluation of factors or triggers that could cause individual investments to qualify as having other-than-temporary impairment and those that would not support other-than-temporary impairment; and documentation of the results of these analyses, as required under business policies. Debt
Under the guidance for debt securities, OTTI is recognized in earnings
for debt securities that the Company has an intent to sell or that the Company
believes it is more-likely-than-not that it will be required to sell prior to
recovery of the amortized cost basis. For those securities that the Company does
not intend to sell or expect to be required to sell, credit-related impairment
is recognized in earnings, with the non-credit-related impairment recorded in
AOCI.
For debt securities that are not deemed to be credit impaired, management
assesses whether it intends to sell or whether it is more-likely-than-not that
it would be required to sell the investment before the expected recovery of the
amortized cost basis. In most cases, management has asserted that it has no
intent to sell and that it believes it is not likely to be required to sell the
investment before recovery of its amortized cost basis. Where such an assertion
cannot be made, the security's decline in fair value is deemed to be other than
temporary and is recorded in earnings.
For debt securities, a critical component
of the evaluation for OTTI is the identification of credit impaired securities,
where management does not expect to receive cash flows sufficient to recover the
entire amortized cost basis of the security. For securities purchased and
classified as AFS with the expectation of receiving full principal and interest
cash flows as of the date of purchase, this analysis considers the likelihood of
receiving all contractual principal and interest. For securities reclassified
out of the trading category in the fourth quarter of 2008, the analysis
considers the likelihood of receiving the expected principal and interest cash
flows anticipated as of the date of reclassification in the fourth quarter of
2008. The extent of the Company's analysis regarding credit quality and the
stress on assumptions used in the analysis have been refined for securities
where the current fair value or other characteristics of the security
warrant.
Equity
For equity securities, management considers the various factors described
above, including its intent and ability to hold the equity security for a period
of time sufficient for recovery to cost or whether it is more-likely-than-not
that the Company will be required to sell the security prior to recovery of its
cost basis. Where management lacks that intent or ability, the security's
decline in fair value is deemed to be other-than-temporary and is recorded in
earnings. AFS equity securities deemed other-than-temporarily impaired are
written down to fair value, with the full difference between fair value and cost
recognized in earnings.
Management assesses equity method
investments with fair value less than carrying value for OTTI. Fair value is
measured as price multiplied by quantity if the investee has publicly listed
securities. If the investee is not publicly listed, other methods are used (see
Note 25 to the Consolidated Financial Statements).
For
impaired equity method investments that Citi plans to sell prior to recovery of
value or would likely be required to sell, with no expectation that the fair
value will recover prior to the expected sale date, the full impairment is
recognized in earnings as OTTI regardless of severity and duration. The
measurement of the OTTI does not include partial projected recoveries subsequent
to the balance sheet date.
196
For impaired equity method investments that management does not plan to sell prior to recovery of value and is not likely to be required to sell, the evaluation of whether an impairment is other-than-temporary is based on (i) whether and when an equity method investment will recover in value and (ii) whether the investor has the intent and ability to hold that investment for a period of time sufficient to recover the value. The determination of whether the impairment is considered other-than-temporary is based on all of the following indicators, regardless of the time and extent of impairment:
Cause of the impairment and the financial condition and near-term prospects of the issuer, including any specific events that may influence the operations of the issuer; Intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value; and Length of time and extent to which fair value has been less than the carrying value.The sections below describe current circumstances related to certain of the Company's significant equity method investments, specific impairments and the Company's process for identifying credit-related impairments in its security types with the most significant unrealized losses as of December 31, 2012.
Akbank
In March 2012, Citi decided to reduce its
ownership interest in Akbank T.A.S., an equity investment in Turkey (Akbank), to
below 10%. As of March 31, 2012, Citi held a 20% equity interest in Akbank,
which it purchased in January 2007, accounted for as an equity method
investment. As a result of its decision to sell its share holdings in Akbank, in
the first quarter of 2012 Citi recorded an impairment charge related to its
total investment in Akbank amounting to approximately $1.2 billion pretax ($763
million after-tax). This impairment charge was primarily driven by the
recognition of all net investment foreign currency hedging and translation
losses previously reflected in AOCI as well as a reduction in the carrying value
of the investment to reflect the market price of Akbank's shares. The impairment
charge was recorded in other-than-temporary impairment losses on investments in
the Consolidated Statement of Income. During the second quarter of 2012, Citi
sold a 10.1% stake in Akbank, resulting in a loss on sale of $424 million ($274
million after-tax), recorded in Other revenue . As of
December 31, 2012, the remaining 9.9% stake in Akbank is recorded within
marketable equity securities available-for-sale.
MSSB
On September 17, 2012, Citi sold to Morgan Stanley
a 14% interest (the "14% Interest") in MSSB, to which Morgan Stanley exercised its
purchase option on June 1, 2012. Morgan Stanley paid to Citi $1.89 billion in
cash as the purchase price of the 14% Interest. The purchase price was based on
an implied 100% valuation of MSSB of $13.5 billion, as agreed between Morgan
Stanley and Citi pursuant to
an agreement dated September 11, 2012. The related approximate $4.5 billion
in deposits were transferred to Morgan Stanley at no premium, as agreed between the
parties.
In addition, Morgan Stanley
has agreed, subject to obtaining regulatory approval, to purchase Citi's
remaining 35% interest in MSSB no later than June 1, 2015 at a purchase price of
$4.725 billion, which is based on the same implied 100% valuation of MSSB of
$13.5 billion.
Prior to the September 2012
sale, Citi's carrying value of its 49% interest in MSSB was approximately $11.3
billion. As a result of the agreement entered into with Morgan Stanley on
September 11, 2012, Citi recorded a charge to net income in the third quarter of
2012 of approximately $2.9 billion after-tax ($4.7 billion pretax), consisting
of (i) a charge recorded in Other
revenue of approximately $800
million after-tax ($1.3 billion pretax), representing a loss on sale of the 14%
Interest, and (ii) an other-than-temporary impairment of the carrying value of
its remaining 35% interest in MSSB of approximately $2.1 billion after-tax ($3.4
billion pretax).
As of December 31, 2012, Citi
continues to account for its remaining 35% interest in MSSB under the equity
method, with the carrying value capped at the agreed selling price of $4.725
billion.
Mortgage-backed
securities
For U.S.
mortgage-backed securities (and in particular for Alt-A and other
mortgage-backed securities that have significant unrealized losses as a
percentage of amortized cost), credit impairment is assessed using a cash flow
model that estimates the cash flows on the underlying mortgages, using the
security-specific collateral and transaction structure. The model estimates cash
flows from the underlying mortgage loans and distributes those cash flows to
various tranches of securities, considering the transaction structure and any
subordination and credit enhancements that exist in that structure. The cash
flow model incorporates actual cash flows on the mortgage-backed securities
through the current period and then projects the remaining cash flows using a
number of assumptions, including default rates, prepayment rates and recovery
rates (on foreclosed properties).
Management develops specific assumptions using as much market data as
possible and includes internal estimates as well as estimates published by
rating agencies and other third-party sources. Default rates are projected by
considering current underlying mortgage loan performance, generally assuming the
default of (i) 10% of current loans, (ii) 25% of 30–59 day delinquent loans,
(iii) 70% of 60–90 day delinquent loans and (4) 100% of 91+ day delinquent
loans. These estimates are extrapolated along a default timing curve to estimate
the total lifetime pool default rate. Other assumptions contemplate the actual
collateral attributes, including geographic concentrations, rating agency loss
projections, rating actions and current market prices.
197
The key assumptions for mortgage-backed securities as of December 31, 2012 are in the table below:
December 31, 2012 | |
Prepayment rate (1) | 1%–8% CRR |
Loss severity (2) | 45%–90% |
(1) | Conditional repayment rate (CRR) represents the annualized expected rate of voluntary prepayment of principal for mortgage-backed securities over a certain period of time. | |
(2) | Loss severity rates are estimated considering collateral characteristics and generally range from 45%–60% for prime bonds, 50%–90% for Alt-A bonds and 65%–90% for subprime bonds. |
In addition, cash flow projections are developed using more stressful parameters. Management assesses the results of those stress tests (including the severity of any cash shortfall indicated and the likelihood of the stress scenarios actually occurring based on the underlying pool's characteristics and performance) to assess whether management expects to recover the amortized cost basis of the security. If cash flow projections indicate that the Company does not expect to recover its amortized cost basis, the Company recognizes the estimated credit loss in earnings.
State and municipal
securities
Citigroup's AFS
state and municipal bonds consist mainly of bonds that are financed through
Tender Option Bond programs or were previously financed in this program. The
process for identifying credit impairments for these bonds is largely based on
third-party credit ratings. Individual bond positions that are financed through
Tender Option Bonds are required to meet minimum ratings requirements, which
vary based on the sector of the bond issuer.
Citigroup monitors the bond issuer and insurer ratings on a daily basis.
The average portfolio rating, ignoring any insurance, is Aa3/AA-. In the event
of a rating downgrade, the subject bond is specifically reviewed for potential
shortfall in contractual principal and interest. The remainder of Citigroup's
AFS and HTM state and municipal bonds are specifically reviewed for credit
impairment based on instrument-specific estimates of cash flows, probability of
default and loss given default.
For impaired AFS state and municipal bonds that Citi plans to sell, or
would likely be required to sell with no expectation that the fair value will
recover prior to the expected sale date, the full impairment is recognized in
earnings.
Recognition and Measurement of
OTTI
The following table
presents the total OTTI recognized in earnings for the year ended December 31,
2012:
OTTI on Investments and Other Assets | Year Ended December 31, 2012 | ||||||||||
In millions of dollars | AFS | (1) | HTM | Other Assets | Total | ||||||
Impairment losses related to securities that the Company does not intend to sell nor will | |||||||||||
likely be required to sell: | |||||||||||
Total OTTI losses recognized during the year ended December 31, 2012 | $ | 17 | $ | 365 | $ | - | $ | 382 | |||
Less: portion of impairment loss recognized in AOCI (before taxes) | 1 | 65 | - | 66 | |||||||
Net impairment losses recognized in earnings for securities that the Company does not intend | |||||||||||
to sell nor will likely be required to sell | $ | 16 | $ | 300 | $ | - | $ | 316 | |||
Impairment losses recognized in earnings for securities that the Company intends to sell | |||||||||||
or more-likely-than-not will be required to sell before recovery (2) | 139 | - | 4,516 | 4,655 | |||||||
Total impairment losses recognized in earnings | $ | 155 | $ | 300 | $ | 4,516 | $ | 4,971 |
(1) | Includes OTTI on non-marketable equity securities. | |
(2) | As described under "MSSB" above, the third quarter of 2012 includes the recognition of a $3,340 million impairment charge related to the carrying value of Citi's remaining 35% interest in MSSB. Additionally, as described under "Akbank" above, in the first quarter of 2012, the Company recorded an impairment charge relating to its total investment in Akbank amounting to $1.2 billion pretax ($763 million after-tax). |
198
The following is a 12-month roll-forward of the credit-related impairments recognized in earnings for AFS and HTM debt securities held as of December 31, 2012 that the Company does not intend to sell nor will likely be required to sell:
Cumulative OTTI credit losses recognized in earnings | ||||||||||||||
Credit impairments | ||||||||||||||
Credit impairments | recognized in | Reductions due to | ||||||||||||
recognized in | earnings on | credit-impaired | ||||||||||||
earnings on | securities that have | securities sold, | ||||||||||||
Dec. 31, 2011 | securities not | been previously | transferred or | Dec. 31, 2012 | ||||||||||
In millions of dollars | balance | previously impaired | impaired | matured | balance | |||||||||
AFS debt securities | ||||||||||||||
Mortgage-backed securities | ||||||||||||||
Prime | $ | 292 | $ | - | $ | - | $ | (1 | ) | $ | 291 | |||
Alt-A | 2 | - | - | - | 2 | |||||||||
Commercial real estate | 2 | - | - | - | 2 | |||||||||
Total mortgage-backed securities | $ | 296 | $ | - | $ | - | $ | (1 | ) | $ | 295 | |||
State and municipal securities | 3 | 4 | - | - | 7 | |||||||||
U.S. Treasury securities | 67 | - | - | - | 67 | |||||||||
Foreign government securities | 168 | 6 | - | (5 | ) | 169 | ||||||||
Corporate | 151 | 1 | 4 | (40 | ) | 116 | ||||||||
Asset-backed securities | 10 | - | - | - | 10 | |||||||||
Other debt securities | 52 | 1 | - | - | 53 | |||||||||
Total OTTI credit losses recognized for | ||||||||||||||
AFS debt securities | $ | 747 | $ | 12 | $ | 4 | $ | (46 | ) | $ | 717 | |||
HTM debt securities | ||||||||||||||
Mortgage-backed securities | ||||||||||||||
Prime | $ | 84 | $ | 6 | $ | 15 | $ | (1 | ) | $ | 104 | |||
Alt-A | 2,218 | 45 | 216 | (66 | ) | 2,413 | ||||||||
Subprime | 252 | - | 2 | (2 | ) | 252 | ||||||||
Non-U.S. residential | 96 | - | - | (16 | ) | 80 | ||||||||
Commercial real estate | 10 | - | - | - | 10 | |||||||||
Total mortgage-backed securities | $ | 2,660 | $ | 51 | $ | 233 | $ | (85 | ) | $ | 2,859 | |||
State and municipal securities | 9 | 1 | 1 | - | 11 | |||||||||
Foreign Government | - | - | - | - | - | |||||||||
Corporate | 391 | 3 | 9 | (6 | ) | 397 | ||||||||
Asset-backed securities | 113 | - | - | - | 113 | |||||||||
Other debt securities | 9 | 2 | - | - | 11 | |||||||||
Total OTTI credit losses recognized for | ||||||||||||||
HTM debt securities | $ | 3,182 | $ | 57 | $ | 243 | $ | (91 | ) | $ | 3,391 |
199
Investments in Alternative Investment
Funds That
Calculate Net Asset Value per Share
The Company holds investments in certain
alternative investment funds that calculate net asset value (NAV) per share,
including hedge funds, private equity funds, funds of funds and real estate
funds. The Company's investments include co-investments in funds that are
managed by the
Company and investments in
funds that are managed by third parties. Investments in funds are generally
classified as non-marketable equity securities carried at fair value.
The fair values of these investments are estimated
using the NAV per share of the Company's ownership interest in the funds, where
it is not probable that the Company will sell an investment at a price other
than the NAV.
Redemption frequency | ||||||||||
Fair | (if currently eligible) | |||||||||
In millions of dollars at December 31, 2012 | value | Unfunded commitments | monthly, quarterly, annually | Redemption notice period | ||||||
Hedge funds | $ | 1,316 | $ | - | Generally quarterly | 10–95 days | ||||
Private equity funds (1)(2)(3) | 837 | 342 | - | - | ||||||
Real estate funds (3)(4) | 228 | 57 | - | - | ||||||
Total | $ | 2,381 | (5) | $ | 399 | - | - |
(1) | Includes investments in private equity funds carried at cost with a carrying value of $6 million. | |
(2) | Private equity funds include funds that invest in infrastructure, leveraged buyout transactions, emerging markets and venture capital. | |
(3) | With respect to the Company's investments in private equity funds and real estate funds, distributions from each fund will be received as the underlying assets held by these funds are liquidated. It is estimated that the underlying assets of these funds will be liquidated over a period of several years as market conditions allow. Private equity and real estate funds do not allow redemption of investments by their investors. Investors are permitted to sell or transfer their investments, subject to the approval of the general partner or investment manager of these funds, which generally may not be unreasonably withheld. | |
(4) | Includes several real estate funds that invest primarily in commercial real estate in the U.S., Europe and Asia. | |
(5) | Included in the total fair value of investments above is $0.4 billion of fund assets that are valued using NAVs provided by third-party asset managers. Amounts exclude investments in funds that are consolidated by Citi. |
200
16. LOANS
Citigroup loans are reported in two categories-Consumer and Corporate. These categories are classified primarily according to the segment and subsegment that manages the loans.
Consumer Loans
Consumer loans represent loans and leases managed
primarily by the Global Consumer
Banking and Local Consumer Lending businesses. The following table provides
information by loan type:
In millions of dollars | 2012 | 2011 | ||||
Consumer loans | ||||||
In U.S. offices | ||||||
Mortgage and real estate (1) | $ | 125,946 | $ | 139,177 | ||
Installment, revolving credit, and other | 14,070 | 15,616 | ||||
Cards | 111,403 | 117,908 | ||||
Commercial and industrial | 5,344 | 4,766 | ||||
Lease financing | - | 1 | ||||
$ | 256,763 | $ | 277,468 | |||
In offices outside the U.S. | ||||||
Mortgage and real estate (1) | $ | 54,709 | $ | 52,052 | ||
Installment, revolving credit, and other | 36,182 | 34,613 | ||||
Cards | 40,653 | 38,926 | ||||
Commercial and industrial | 20,001 | 19,975 | ||||
Lease financing | 781 | 711 | ||||
$ | 152,326 | $ | 146,277 | |||
Total Consumer loans | $ | 409,089 | $ | 423,745 | ||
Net unearned income | (418 | ) | (405 | ) | ||
Consumer loans, net of unearned income | $ | 408,671 | $ | 423,340 |
(1) | Loans secured primarily by real estate. |
Included in the loan table above are lending products whose terms may
give rise to additional credit issues. Credit cards with below-market
introductory interest rates and interest-only loans are examples of such
products. These products are closely managed using credit techniques that are
intended to mitigate their additional inherent risk.
During the years ended December 31, 2012 and 2011,
the Company sold and/or reclassified (to held-for-sale) $4.3 billion and $21.0
billion, respectively, of Consumer loans. The Company did not have significant
purchases of Consumer loans during the years ended December 31, 2012 or December
31, 2011.
Citigroup has established a
risk management process to monitor, evaluate and manage the principal risks
associated with its Consumer loan portfolio. Credit quality indicators that are
actively monitored include delinquency status, consumer credit scores (FICO),
and loan to value (LTV) ratios, each as discussed in more detail
below.
Delinquency
Status
Delinquency status is
carefully monitored and considered a key indicator of credit quality of Consumer
loans. Substantially all of the U.S. residential first mortgage loans use the
MBA method of reporting delinquencies, which considers a loan delinquent if a
monthly payment has not been received by the end of the day immediately
preceding the loan's next due date. All other loans use the OTS method of
reporting delinquencies, which considers a loan delinquent if a monthly payment
has not been received by the close of business on the loan's next due
date.
As a general policy,
residential first mortgages, home equity loans and installment loans are
classified as non-accrual when loan payments are 90 days contractually past due.
Credit cards and unsecured revolving loans generally accrue interest until
payments are 180 days past due. As a result of OCC guidance issued in the first
quarter of 2012, home equity loans in regulated bank entities are classified as
non-accrual if the related residential first mortgage is 90 days or more past
due. As a result of OCC guidance issued in the third quarter of 2012, mortgage
loans in regulated bank entities discharged through Chapter 7 bankruptcy, other
than FHA-insured loans, are classified as non-accrual. Commercial market loans
are placed on a cash (non-accrual) basis when it is determined, based on actual
experience and a forward-looking assessment of the collectability of the loan in
full, that the payment of interest or principal is doubtful or when interest or
principal is 90 days past due.
The policy for re-aging modified U.S. Consumer loans to current status
varies by product. Generally, one of the conditions to qualify for these
modifications is that a minimum number of payments (typically ranging from one
to three) be made. Upon modification, the loan is re-aged to current status.
However, re-aging practices for certain open-ended Consumer loans, such as
credit cards, are governed by Federal Financial Institutions Examination Council
(FFIEC) guidelines. For open-ended Consumer loans subject to FFIEC guidelines,
one of the conditions for the loan to be re-aged to current status is that at
least three consecutive minimum monthly payments, or the equivalent amount, must
be received. In addition, under FFIEC guidelines, the number of times that such
a loan can be re-aged is subject to limitations (generally once in 12 months and
twice in five years). Furthermore, Federal Housing Administration (FHA) and
Department of Veterans Affairs (VA) loans are modified under those respective
agencies' guidelines, and payments are not always required in order to re-age a
modified loan to current.
201
The following tables provide details on Citigroup's Consumer loan delinquency and non-accrual loans as of December 31, 2012 and December 31, 2011:
Consumer Loan Delinquency and Non-Accrual Details at December 31, 2012
Past due | ||||||||||||||||||||
Total | 30–89 days | ≥ 90 days | Government | Total | Total | 90 days past due | ||||||||||||||
In millions of dollars | current | (1)(2) | past due | (3) | past due | (3) | guaranteed | (4) | loans | (2) | non-accrual | (5) | and accruing | |||||||
In North America offices | ||||||||||||||||||||
Residential first mortgages | $ | 75,791 | $ | 3,074 | $ | 3,339 | $ | 6,000 | $ | 88,204 | $ | 4,922 | $ | 4,695 | ||||||
Home equity loans (6) | 35,740 | 642 | 843 | - | 37,225 | 1,797 | - | |||||||||||||
Credit cards | 108,892 | 1,582 | 1,527 | - | 112,001 | - | 1,527 | |||||||||||||
Installment and other | 13,319 | 288 | 325 | - | 13,932 | 179 | 8 | |||||||||||||
Commercial market loans | 7,874 | 32 | 19 | - | 7,925 | 210 | 11 | |||||||||||||
Total | $ | 241,616 | $ | 5,618 | $ | 6,053 | $ | 6,000 | $ | 259,287 | $ | 7,108 | $ | 6,241 | ||||||
In offices outside North America | ||||||||||||||||||||
Residential first mortgages | $ | 45,496 | $ | 547 | $ | 485 | $ | - | $ | 46,528 | $ | 807 | $ | - | ||||||
Home equity loans (6) | 4 | - | 2 | - | 6 | 2 | - | |||||||||||||
Credit cards | 38,920 | 970 | 805 | - | 40,695 | 516 | 508 | |||||||||||||
Installment and other | 29,350 | 496 | 167 | - | 30,013 | 254 | - | |||||||||||||
Commercial market loans | 31,263 | 106 | 181 | - | 31,550 | 428 | - | |||||||||||||
Total | $ | 145,033 | $ | 2,119 | $ | 1,640 | $ | - | $ | 148,792 | $ | 2,007 | $ | 508 | ||||||
Total GCB and LCL | $ | 386,649 | $ | 7,737 | $ | 7,693 | $ | 6,000 | $ | 408,079 | $ | 9,115 | $ | 6,749 | ||||||
Special Asset Pool (SAP) | 545 | 18 | 29 | - | 592 | 81 | - | |||||||||||||
Total Citigroup | $ | 387,194 | $ | 7,755 | $ | 7,722 | $ | 6,000 | $ | 408,671 | $ | 9,196 | $ | 6,749 |
(1) | Loans less than 30 days past due are presented as current. | |
(2) | Includes $1.2 billion of residential first mortgages recorded at fair value. | |
(3) | Excludes loans guaranteed by U.S. government entities. | |
(4) | Consists of residential first mortgages that are guaranteed by U.S. government entities that are 30-89 days past due of $1.3 billion and ≥ 90 days past due of $4.7 billion. | |
(5) | 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 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. | |
(6) | Fixed rate home equity loans and loans extended under home equity lines of credit, which are typically in junior lien positions. |
Consumer Loan Delinquency and Non-Accrual Details at December 31, 2011
Past due | ||||||||||||||||||||
Total | 30–89 days | ≥ 90 days | Government | Total | Total | 90 days past due | ||||||||||||||
In millions of dollars | current | (1)(2) | past due | (3) | past due | (3) | guaranteed | (4) | loans | (2) | non-accrual | and accruing | ||||||||
In North America offices | ||||||||||||||||||||
Residential first mortgages | $ | 81,081 | $ | 3,550 | $ | 4,121 | $ | 6,686 | $ | 95,438 | $ | 4,176 | $ | 5,054 | ||||||
Home equity loans (5) | 41,585 | 868 | 1,022 | - | 43,475 | 982 | - | |||||||||||||
Credit cards | 114,022 | 2,344 | 2,058 | - | 118,424 | - | 2,058 | |||||||||||||
Installment and other | 15,215 | 340 | 222 | - | 15,777 | 438 | 10 | |||||||||||||
Commercial market loans | 6,643 | 15 | 207 | - | 6,865 | 220 | 14 | |||||||||||||
Total | $ | 258,546 | $ | 7,117 | $ | 7,630 | $ | 6,686 | $ | 279,979 | $ | 5,816 | $ | 7,136 | ||||||
In offices outside North America | ||||||||||||||||||||
Residential first mortgages | $ | 43,310 | $ | 566 | $ | 482 | $ | - | $ | 44,358 | $ | 744 | $ | - | ||||||
Home equity loans (5) | 6 | - | 2 | - | 8 | 2 | - | |||||||||||||
Credit cards | 38,289 | 930 | 785 | - | 40,004 | 496 | 490 | |||||||||||||
Installment and other | 26,300 | 528 | 197 | - | 27,025 | 258 | - | |||||||||||||
Commercial market loans | 30,491 | 79 | 127 | - | 30,697 | 401 | - | |||||||||||||
Total | $ | 138,396 | $ | 2,103 | $ | 1,593 | $ | - | $ | 142,092 | $ | 1,901 | $ | 490 | ||||||
Total GCB and LCL | $ | 396,942 | $ | 9,220 | $ | 9,223 | $ | 6,686 | $ | 422,071 | $ | 7,717 | $ | 7,626 | ||||||
Special Asset Pool (SAP) | 1,193 | 29 | 47 | - | 1,269 | 115 | - | |||||||||||||
Total Citigroup | $ | 398,135 | $ | 9,249 | $ | 9,270 | $ | 6,686 | $ | 423,340 | $ | 7,832 | $ | 7,626 |
(1) | Loans less than 30 days past due are presented as current. | |
(2) | Includes $1.3 billion of residential first mortgages recorded at fair value. | |
(3) | Excludes loans guaranteed by U.S. government entities. | |
(4) | Consists of residential first mortgages that are guaranteed by U.S. government entities that are 30-89 days past due of $1.6 billion and ≥ 90 days past due of $5.1 billion. | |
(5) | Fixed rate home equity loans and loans extended under home equity lines of credit, which are typically in junior lien positions. |
202
Consumer Credit Scores
(FICO)
In the U.S.,
independent credit agencies rate an individual's risk for assuming debt based on
the individual's credit history and assign every consumer a "FICO" credit score.
These scores are continually updated by the agencies based upon an individual's
credit actions (e.g., taking out a loan or missed or late payments).
The following table provides details on the FICO
scores attributable to Citi's U.S. Consumer loan portfolio as of December 31,
2012 and 2011 (commercial market loans are not included in the table since they
are business-based and FICO scores are not a primary driver in their credit
evaluation). FICO scores are updated monthly for substantially all of the
portfolio or, otherwise, on a quarterly basis.
FICO score distribution in U.S. portfolio (1)(2) | December 31, 2012 |
Equal to or | ||||||||
Less than | ≥ 620 but less | greater | ||||||
In millions of dollars | 620 | than 660 | than 660 | |||||
Residential first mortgages | $ | 16,754 | $ | 8,013 | $ | 50,833 | ||
Home equity loans | 5,439 | 3,208 | 26,820 | |||||
Credit cards | 7,833 | 10,304 | 90,248 | |||||
Installment and other | 4,414 | 2,417 | 5,365 | |||||
Total | $ | 34,440 | $ | 23,942 | $ | 173,266 |
(1) | Excludes loans guaranteed by U.S. government entities, loans subject to LTSCs with U.S. government-sponsored entities and loans recorded at fair value. | |
(2) | Excludes balances where FICO was not available. Such amounts are not material. |
FICO score distribution in U.S. portfolio (1)(2) | December 31, 2011 |
Equal to or | ||||||||
Less than | ≥ 620 but less | greater | ||||||
In millions of dollars | 620 | than 660 | than 660 | |||||
Residential first mortgages | $ | 20,370 | $ | 8,815 | $ | 52,839 | ||
Home equity loans | 6,783 | 3,703 | 30,884 | |||||
Credit cards | 9,621 | 10,905 | 93,234 | |||||
Installment and other | 3,789 | 2,858 | 6,704 | |||||
Total | $ | 40,563 | $ | 26,281 | $ | 183,661 |
(1) | Excludes loans guaranteed by U.S. government entities, loans subject to LTSCs with U.S. government-sponsored entities and loans recorded at fair value. | |
(2) | Excludes balances where FICO was not available. Such amounts are not material. |
Loan to Value Ratios
(LTV)
LTV ratios (loan balance
divided by appraised value) are calculated at origination and updated by
applying market price data.
The following tables provide details on the LTV ratios attributable to
Citi's U.S. Consumer mortgage portfolios as of December 31, 2012 and 2011. LTV
ratios are updated monthly using the most recent Core Logic HPI data available
for substantially all of the portfolio applied at the Metropolitan Statistical
Area level, if available and the state level if not. The remainder of the
portfolio is updated in a similar manner using the Office of Federal Housing
Enterprise Oversight indices.
LTV distribution in U.S. portfolio (1)(2) | December 31, 2012 |
> 80% but less | Greater | |||||||
Less than or | than or equal to | than | ||||||
In millions of dollars | equal to 80% | 100% | 100% | |||||
Residential first mortgages | $ | 41,555 | $ | 19,070 | $ | 14,995 | ||
Home equity loans | 12,611 | 9,529 | 13,153 | |||||
Total | $ | 54,166 | $ | 28,599 | $ | 28,148 |
(1) | Excludes loans guaranteed by U.S. government entities, loans subject to LTSCs with U.S. government-sponsored entities and loans recorded at fair value. | |
(2) | Excludes balances where LTV was not available. Such amounts are not material. |
LTV distribution in U.S. portfolio (1)(2) | December 31, 2011 |
> 80% but less | Greater | |||||||
Less than or | than or equal to | than | ||||||
In millions of dollars | equal to 80% | 100% | 100% | |||||
Residential first mortgages | $ | 36,422 | $ | 21,146 | $ | 24,425 | ||
Home equity loans | 12,724 | 10,232 | 18,226 | |||||
Total | $ | 49,146 | $ | 31,378 | $ | 42,651 |
(1) | Excludes loans guaranteed by U.S. government entities, loans subject to LTSCs with U.S. government-sponsored entities and loans recorded at fair value. | |
(2) | Excludes balances where LTV was not available. Such amounts are not material. |
203
Impaired Consumer
Loans
Impaired loans are those
loans about which Citigroup believes it is probable that it will not collect all
amounts due according to the original contractual terms of the loan. Impaired
Consumer loans include non-accrual commercial market loans, as well as
smaller-balance homogeneous loans whose terms have been modified due to the
borrower's financial difficulties and where Citigroup has granted a concession
to the borrower. These modifications may include interest rate reductions and/or
principal forgiveness. Impaired Consumer loans exclude smaller-balance
homogeneous loans that have not been modified and are carried on a non-accrual
basis. In addition, impaired Consumer loans exclude substantially all loans
modified pursuant to Citi's short-term modification programs (i.e., for periods
of 12 months or less) that were modified prior to January 1,
2011.
As a result of OCC guidance issued in the third quarter of 2012, mortgage loans to borrowers that have gone through Chapter 7 bankruptcy are classified as TDRs. These TDRs, other than FHA-insured loans, are written down to collateral value less cost to sell. FHA-insured loans are reserved based on a discounted cash flow model (see Note 1 to the Consolidated Financial Statements). Approximately $635 million of incremental charge-offs was recorded in the third quarter as a result of this new guidance, the vast majority of which related to current loans, and was substantially offset by a related reserve release of approximately $600 million. The recorded investment in receivables reclassified to TDRs in the third quarter of 2012 as a result of this OCC guidance approximated $1,714 million, composed of $1,327 million of residential first mortgages and $387 million of home equity loans.
The following tables present information about total impaired Consumer loans at and for the years ending December 31, 2012 and 2011, respectively:
Impaired Consumer Loans
At and for the year ended December 31, 2012 | |||||||||||||||
Recorded | Unpaid | Related specific | Average | Interest income | |||||||||||
In millions of dollars | investment | (1)(2) | principal balance | allowance | (3) | carrying value | (4) | recognized | (5)(6) | ||||||
Mortgage and real estate | |||||||||||||||
Residential first mortgages | $ | 20,870 | $ | 22,062 | $ | 3,585 | $ | 19,956 | $ | 875 | |||||
Home equity loans | 2,135 | 2,727 | 636 | 1,911 | 68 | ||||||||||
Credit cards | 4,584 | 4,639 | 1,800 | 5,272 | 308 | ||||||||||
Installment and other | |||||||||||||||
Individual installment and other | 1,612 | 1,618 | 860 | 1,958 | 248 | ||||||||||
Commercial market loans | 439 | 737 | 60 | 495 | 21 | ||||||||||
Total (7) | $ | 29,640 | $ | 31,783 | $ | 6,941 | $ | 29,592 | $ | 1,520 |
(1) | Recorded investment in a loan includes net deferred loan fees and costs, unamortized premium or discount and direct write-downs and includes accrued interest only on credit card loans. | |
(2) | $2,344 million of residential first mortgages, $378 million of home equity loans and $183 million of commercial market loans do not have a specific allowance. | |
(3) | Included in the Allowance for loan losses . | |
(4) | Average carrying value represents the average recorded investment ending balance for the last four quarters and does not include the related specific allowance. | |
(5) | Includes amounts recognized on both an accrual and cash basis. | |
(6) | Cash interest receipts on smaller-balance homogeneous loans are generally recorded as revenue. The interest recognition policy for commercial market loans is identical to that for Corporate loans, as described below. | |
(7) | Prior to 2008, the Company's financial accounting systems did not separately track impaired smaller-balance, homogeneous Consumer loans whose terms were modified due to the borrowers' financial difficulties and where it was determined that a concession was granted to the borrower. Smaller-balance consumer loans modified since January 1, 2008 amounted to $29.2 billion at December 31, 2012. However, information derived from Citi's risk management systems indicates that the amounts of outstanding modified loans, including those modified prior to 2008, approximated $30.1 billion at December 31, 2012. |
At and for the year ended December 31, 2011 | |||||||||||||||
Recorded | Unpaid | Related specific | Average | Interest income | |||||||||||
In millions of dollars | investment | (1)(2) | principal balance | allowance | (3) | carrying value | (4) | recognized | (5)(6) | ||||||
Mortgage and real estate | |||||||||||||||
Residential first mortgages | $ | 19,616 | $ | 20,803 | $ | 3,987 | $ | 18,642 | $ | 888 | |||||
Home equity loans | 1,771 | 1,823 | 669 | 1,680 | 72 | ||||||||||
Credit cards | 6,695 | 6,743 | 3,122 | 6,542 | 387 | ||||||||||
Installment and other | |||||||||||||||
Individual installment and other | 2,264 | 2,267 | 1,032 | 2,644 | 343 | ||||||||||
Commercial market loans | 517 | 782 | 75 | 572 | 21 | ||||||||||
Total (7) | $ | 30,863 | $ | 32,418 | $ | 8,885 | $ | 30,080 | $ | 1,711 |
(1) | Recorded investment in a loan includes net deferred loan fees and costs, unamortized premium or discount and direct write-downs and includes accrued interest only on credit card loans. | |
(2) | $858 million of residential first mortgages, $16 million of home equity loans and $182 million of commercial market loans do not have a specific allowance. | |
(3) | Included in the Allowance for loan losses . | |
(4) | Average carrying value represents the average recorded investment ending balance for last four quarters and does not include related specific allowance. | |
(5) | Includes amounts recognized on both an accrual and cash basis. | |
(6) | Cash interest receipts on smaller-balance homogeneous loans are generally recorded as revenue. The interest recognition policy for commercial market loans is identical to that for Corporate loans, as described below. | |
(7) | Prior to 2008, the Company's financial accounting systems did not separately track impaired smaller-balance, homogeneous Consumer loans whose terms were modified due to the borrowers' financial difficulties and where it was determined that a concession was granted to the borrower. Smaller-balance consumer loans modified since January 1, 2008 amounted to $30.3 billion at December 31, 2011. However, information derived from Citi's risk management systems indicates that the amounts of outstanding modified loans, including those modified prior to 2008, approximated $31.5 billion at December 31, 2011. |
204
The following tables present Consumer TDRs occurring during the years ended December 31, 2012 and 2011:
At and for the year ended December 31, 2012 | |||||||||||||||||||
Chapter 7 | Contingent | Average | |||||||||||||||||
In millions of dollars except | Number of | Post-modification | bankruptcy | Deferred | principal | Principal | interest rate | ||||||||||||
number of loans modified | loans modified | recorded investment | (1)(2) | charge-offs | (2) | principal | (3) | forgiveness | (4) | forgiveness | reduction | ||||||||
North America | |||||||||||||||||||
Residential first mortgages | 59,869 | $ | 8,107 | $ | 154 | $ | 10 | $ | 7 | $ | 553 | 1 | % | ||||||
Home equity loans | 33,586 | 862 | 450 | 5 | - | 78 | 2 | ||||||||||||
Credit cards | 204,999 | 1,053 | - | - | - | - | 16 | ||||||||||||
Installment and other revolving | 64,858 | 469 | - | - | - | - | 6 | ||||||||||||
Commercial markets (5) | 170 | 18 | - | - | - | - | - | ||||||||||||
Total | 363,482 | $ | 10,509 | $ | 604 | $ | 15 | $ | 7 | $ | 631 | ||||||||
International | |||||||||||||||||||
Residential first mortgages | 9,447 | $ | 324 | $ | - | $ | - | $ | - | $ | 2 | 1 | % | ||||||
Home equity loans | 58 | 4 | - | - | - | - | - | ||||||||||||
Credit cards | 206,755 | 632 | - | - | - | 1 | 29 | ||||||||||||
Installment and other revolving | 45,191 | 280 | - | - | - | 1 | 22 | ||||||||||||
Commercial markets (5) | 377 | 171 | - | - | 1 | 2 | - | ||||||||||||
Total | 261,828 | $ | 1,411 | $ | - | $ | - | $ | 1 | $ | 6 |
At and for the year ended December 31, 2011 | ||||||||||||||||
Contingent | Average | |||||||||||||||
In millions of dollars except | Number of | Post-modification | Deferred | principal | Principal | interest rate | ||||||||||
number of loans modified | loans modified | recorded investment | (1) | principal | (3) | forgiveness | (4) | forgiveness | reduction | |||||||
North America | ||||||||||||||||
Residential first mortgages | 33,025 | $ | 5,137 | $ | 66 | $ | 50 | $ | - | 2 | % | |||||
Home equity loans | 18,099 | 923 | 17 | 1 | - | 4 | ||||||||||
Credit cards | 611,715 | 3,554 | - | - | - | 19 | ||||||||||
Installment and other revolving | 101,107 | 756 | - | - | - | 4 | ||||||||||
Commercial markets (5) | 579 | 55 | - | - | 1 | - | ||||||||||
Total | 764,525 | $ | 10,425 | $ | 83 | $ | 51 | $ | 1 | |||||||
International | ||||||||||||||||
Residential first mortgages | 8,206 | $ | 311 | $ | - | $ | - | $ | 5 | 1 | % | |||||
Home equity loans | 61 | 4 | - | - | - | - | ||||||||||
Credit cards | 225,238 | 628 | - | - | 2 | 24 | ||||||||||
Installment and other revolving | 133,062 | 545 | - | - | 8 | 12 | ||||||||||
Commercial markets (5) | 55 | 167 | - | - | 1 | - | ||||||||||
Total | 366,622 | $ | 1,655 | $ | - | $ | - | $ | 16 |
(1) | Post-modification balances include past due amounts that are capitalized at modification date. | |
(2) | Post-modification balances in North America include $2,740 million of residential first mortgages and $497 million of home equity loans to borrowers that have gone through Chapter 7 bankruptcy. These amounts include $1,414 million of residential first mortgages and $409 million of home equity loans that are newly classified as TDRs as a result of this OCC guidance. Chapter 7 bankruptcy column amounts are the incremental charge-offs that were recorded in the year ended December 31, 2012 as a result of this new OCC guidance. | |
(3) | Represents portion of loan principal that is non-interest bearing but still due from borrower. Effective in the first quarter of 2012, such deferred principal is charged-off at the time of modification to the extent that the related loan balance exceeds the underlying collateral value. A significant amount of the reported balances have been charged-off. | |
(4) | Represents portion of loan principal that is non-interest bearing and, depending upon borrower performance, eligible for forgiveness. | |
(5) | Commercial markets loans are generally borrower-specific modifications and incorporate changes in the amount and/or timing of principal and/or interest. |
205
The following table presents Consumer TDRs that defaulted during the years ended December 31, 2012 and 2011, respectively, and for which the payment default occurred within one year of the modification:
Year ended | Year ended | |||||
In millions of dollars | December 31, 2012 | (1) | December 31, 2011 | (1) | ||
North America | ||||||
Residential first mortgages | $ | 1,145 | $ | 1,713 | ||
Home equity loans | 128 | 113 | ||||
Credit cards | 434 | 1,307 | ||||
Installment and other revolving | 121 | 113 | ||||
Commercial markets | - | 3 | ||||
Total | $ | 1,828 | $ | 3,249 | ||
International | ||||||
Residential first mortgages | $ | 64 | $ | 123 | ||
Home equity loans | 1 | 2 | ||||
Credit cards | 209 | 329 | ||||
Installment and other revolving | 117 | 238 | ||||
Commercial markets | 5 | 14 | ||||
Total | $ | 396 | $ | 706 |
(1) | Default is defined as 60 days past due, except for classifiably managed commercial markets loans, where default is defined as 90+ days past due. |
Corporate Loans
Corporate loans represent loans and leases managed
by the Institutional Clients
Group or the Special Asset Pool in Citi Holdings. The following table presents
information by Corporate loan type as of December 31, 2012 and 2011:
December 31, | December 31, | |||||
In millions of dollars | 2012 | 2011 | ||||
Corporate | ||||||
In U.S. offices | ||||||
Commercial and industrial | $ | 26,985 | $ | 20,830 | ||
Financial institutions | 18,159 | 15,113 | ||||
Mortgage and real estate (1) | 24,705 | 21,516 | ||||
Installment, revolving credit and other | 32,446 | 33,182 | ||||
Lease financing | 1,410 | 1,270 | ||||
$ | 103,705 | $ | 91,911 | |||
In offices outside the U.S. | ||||||
Commercial and industrial | $ | 82,939 | $ | 79,764 | ||
Installment, revolving credit and other | 14,958 | 14,114 | ||||
Mortgage and real estate (1) | 6,485 | 6,885 | ||||
Financial institutions | 37,739 | 29,794 | ||||
Lease financing | 605 | 568 | ||||
Governments and official institutions | 1,159 | 1,576 | ||||
$ | 143,885 | $ | 132,701 | |||
Total Corporate loans | $ | 247,590 | $ | 224,612 | ||
Net unearned income (loss) | (797 | ) | (710 | ) | ||
Corporate loans, net of unearned income | $ | 246,793 | $ | 223,902 |
(1) | Loans secured primarily by real estate. |
For the years ended December 31, 2012 and 2011, the Company sold and/or reclassified (to held-for-sale) $4.4 billion and $6.4 billion, respectively, of held-for-investment Corporate loans. The Company did not have significant purchases of Corporate loans classified as held-for-investment for the year ended December 31, 2012 or December 31, 2011.
206
Corporate loans are identified as impaired and placed on a cash (non-accrual) basis when it is determined, based on actual experience and a forward-looking assessment of the collectability of the loan in full, that the payment of interest or principal is doubtful or when interest or principal is 90 days past due, except when the loan is well collateralized and in the process of collection. Any interest accrued on impaired Corporate loans and leases is reversed at 90 days and charged against current earnings,
and interest is thereafter included in earnings only to the extent actually received in cash. When there is doubt regarding the ultimate collectability of principal, all cash receipts are thereafter applied to reduce the recorded investment in the loan. While Corporate loans are generally managed based on their internally assigned risk rating (see further discussion below), the following tables present delinquency information by Corporate loan type as of December 31, 2012 and 2011:
Corporate Loan Delinquency and Non-Accrual Details at December 31, 2012
30–89 days | ≥ 90 days | |||||||||||||||||||||
past due | past due and | Total past due | Total | Total | Total | |||||||||||||||||
In millions of dollars | and accruing | (1) | accruing | (1) | and accruing | non-accrual | (2) | current | (3) | loans | ||||||||||||
Commercial and industrial | $ | 38 | $ | 10 | $ | 48 | $ | 1,078 | $ | 107,650 | $ | 108,776 | ||||||||||
Financial institutions | 5 | - | 5 | 454 | 53,858 | 54,317 | ||||||||||||||||
Mortgage and real estate | 224 | 109 | 333 | 680 | 30,057 | 31,070 | ||||||||||||||||
Leases | 7 | - | 7 | 52 | 1,956 | 2,015 | ||||||||||||||||
Other | 70 | 6 | 76 | 69 | 46,414 | 46,559 | ||||||||||||||||
Loans at fair value | 4,056 | |||||||||||||||||||||
Total | $ | 344 | $ | 125 | $ | 469 | $ | 2,333 | $ | 239,935 | $ | 246,793 |
(1) | Corporate loans that are ≥ 90 days past due are generally classified as non-accrual. Corporate loans are considered past due when principal or interest is contractually due but unpaid. |
(2) | Citi generally does not manage Corporate loans on a delinquency basis. Non-accrual loans generally include those loans that are ≥ 90 days past due or those loans for which Citi believes, based on actual experience and a forward-looking assessment of the collectability of the loan in full, that the payment of interest or principal is doubtful. |
(3) | Corporate loans are past due when principal or interest is contractually due but unpaid. Loans less than 30 days past due are presented as current. |
Corporate Loan Delinquency and Non-Accrual Details at December 31, 2011
30–89 days | ≥ 90 days | |||||||||||||||||||||
past due | past due and | Total past due | Total | Total | Total | |||||||||||||||||
In millions of dollars | and accruing | (1) | accruing | (1) | and accruing | non-accrual | (2) | current | (3) | loans | ||||||||||||
Commercial and industrial | $ | 93 | $ | 30 | $ | 123 | $ | 1,134 | $ | 98,157 | $ | 99,414 | ||||||||||
Financial institutions | - | 2 | 2 | 763 | 42,642 | 43,407 | ||||||||||||||||
Mortgage and real estate | 224 | 125 | 349 | 1,039 | 26,908 | 28,296 | ||||||||||||||||
Leases | 3 | 11 | 14 | 13 | 1,811 | 1,838 | ||||||||||||||||
Other | 225 | 15 | 240 | 287 | 46,481 | 47,008 | ||||||||||||||||
Loans at fair value | 3,939 | |||||||||||||||||||||
Total | $ | 545 | $ | 183 | $ | 728 | $ | 3,236 | $ | 215,999 | $ | 223,902 |
(1) | Corporate loans that are ≥ 90 days past due are generally classified as non-accrual. Corporate loans are considered past due when principal or interest is contractually due but unpaid. |
(2) | Citi generally does not manage Corporate loans on a delinquency basis. Non-accrual loans generally include those loans that are ≥ 90 days past due or those loans for which Citi believes, based on actual experience and a forward-looking assessment of the collectability of the loan in full, that the payment of interest or principal is doubtful. |
(3) | Corporate loans are past due when principal or interest is contractually due but unpaid. Loans less than 30 days past due are presented as current. |
207
Citigroup
has a risk management process to monitor, evaluate and manage the principal
risks associated with its Corporate loan portfolio. As part of its risk
management process, Citi assigns numeric risk ratings to its Corporate loan
facilities based on quantitative and qualitative assessments of the obligor and
facility. These risk ratings are reviewed at least annually or more often if
material events related to the obligor or facility warrant. Factors considered
in assigning the risk ratings include: financial condition of the obligor,
qualitative assessment of management and strategy, amount and sources of
repayment, amount and type of collateral and guarantee arrangements, amount and
type of any contingencies associated with the obligor, and the obligor's
industry and geography.
The
obligor risk ratings are defined by ranges of default probabilities. The
facility risk ratings are defined by ranges of loss norms, which are the product
of the probability of default and the loss given default. The investment grade
rating categories are similar to the category BBB-/Baa3 and above as defined by
S&P and Moody's. Loans classified according to the bank regulatory
definitions as special mention, substandard and doubtful will have risk ratings
within the non-investment grade categories.
Corporate Loans Credit Quality
Indicators at
December 31, 2012 and December 31, 2011
Recorded investment in loans | (1) | ||||||
December 31, | December 31, | ||||||
In millions of dollars | 2012 | 2011 | |||||
Investment grade (2) | |||||||
Commercial and industrial | $ | 73,822 | $ | 67,282 | |||
Financial institutions | 43,895 | 35,159 | |||||
Mortgage and real estate | 12,587 | 10,729 | |||||
Leases | 1,404 | 1,161 | |||||
Other | 42,575 | 42,428 | |||||
Total investment grade | $ | 174,283 | $ | 156,759 | |||
Non-investment grade (2) | |||||||
Accrual | |||||||
Commercial and industrial | $ | 33,876 | $ | 30,998 | |||
Financial institutions | 9,968 | 7,485 | |||||
Mortgage and real estate | 2,858 | 3,812 | |||||
Leases | 559 | 664 | |||||
Other | 3,915 | 4,293 | |||||
Non-accrual | |||||||
Commercial and industrial | 1,078 | 1,134 | |||||
Financial institutions | 454 | 763 | |||||
Mortgage and real estate | 680 | 1,039 | |||||
Leases | 52 | 13 | |||||
Other | 69 | 287 | |||||
Total non-investment grade | $ | 53,509 | $ | 50,488 | |||
Private Banking loans managed on a | |||||||
delinquency basis (2) | $ | 14,945 | $ | 12,716 | |||
Loans at fair value | 4,056 | 3,939 | |||||
Corporate loans, net of unearned income | $ | 246,793 | $ | 223,902 |
(1) | Recorded investment in a loan includes net deferred loan fees and costs, unamortized premium or discount, less any direct write-downs. |
(2) | Held-for-investment loans accounted for on an amortized cost basis. |
Corporate loans and leases identified as impaired and placed on non-accrual status are written down to the extent that principal is judged to be uncollectible. Impaired collateral-dependent loans and leases, where repayment is expected to be provided solely by the sale of the underlying collateral and there are no other available and reliable sources of repayment, are written down to the lower of cost or collateral value, less cost to sell. Cash-basis loans are returned to an accrual status when all contractual principal and interest amounts are reasonably assured of repayment and there is a sustained period of repayment performance, generally six months, in accordance with the contractual terms of the loan.
208
The following tables present non-accrual loan information by Corporate loan type at and for the years ended December 31, 2012, 2011 and 2010, respectively:
Non-Accrual Corporate Loans
At and for the period ended December 31, 2012 | ||||||||||||||||||
Recorded | Unpaid | Related specific | Average | Interest income | ||||||||||||||
In millions of dollars | investment | (1) | principal balance | allowance | carrying value | (2) | recognized | |||||||||||
Non-accrual Corporate loans | ||||||||||||||||||
Commercial and industrial | $ | 1,078 | $ | 1,368 | $ | 155 | $ | 1,076 | $ | 65 | ||||||||
Financial institutions | 454 | 504 | 14 | 518 | - | |||||||||||||
Mortgage and real estate | 680 | 810 | 74 | 811 | 23 | |||||||||||||
Lease financing | 52 | 61 | 16 | 19 | 2 | |||||||||||||
Other | 69 | 245 | 25 | 154 | 8 | |||||||||||||
Total non-accrual Corporate loans | $ | 2,333 | $ | 2,988 | $ | 284 | $ | 2,578 | $ | 98 |
December 31, 2011 | |||||||||||||||||
Recorded | Unpaid | Related specific | Average | Interest Income | |||||||||||||
In millions of dollars | investment | (1) | principal balance | allowance | carrying value | (3) | recognized | ||||||||||
Non-accrual Corporate loans | |||||||||||||||||
Commercial and industrial | $ | 1,134 | $ | 1,455 | $ | 186 | $ | 1,446 | $ | 76 | |||||||
Financial institutions | 763 | 1,127 | 28 | 1,056 | - | ||||||||||||
Mortgage and real estate | 1,039 | 1,245 | 151 | 1,487 | 14 | ||||||||||||
Lease financing | 13 | 21 | - | 25 | 2 | ||||||||||||
Other | 287 | 640 | 55 | 420 | 17 | ||||||||||||
Total non-accrual Corporate loans | $ | 3,236 | $ | 4,488 | $ | 420 | $ | 4,434 | $ | 109 |
At and for the period ended | |||
Dec. 31, | |||
In millions of dollars | 2010 | ||
Average carrying value (3) | $ | 10,643 | |
Interest income recognized | 65 |
December 31, 2012 | December 31, 2011 | ||||||||||||||
Recorded | Related specific | Recorded | Related specific | ||||||||||||
In millions of dollars | investment | (1) | allowance | investment | (1) | allowance | |||||||||
Non-accrual Corporate loans with valuation allowances | |||||||||||||||
Commercial and industrial | $ | 608 | $ | 155 | $ | 501 | $ | 186 | |||||||
Financial institutions | 41 | 14 | 78 | 28 | |||||||||||
Mortgage and real estate | 345 | 74 | 540 | 151 | |||||||||||
Lease financing | 47 | 16 | - | - | |||||||||||
Other | 59 | 25 | 120 | 55 | |||||||||||
Total non-accrual Corporate loans with specific allowance | $ | 1,100 | $ | 284 | $ | 1,239 | $ | 420 | |||||||
Non-accrual Corporate loans without specific allowance | |||||||||||||||
Commercial and industrial | $ | 470 | $ | 633 | |||||||||||
Financial institutions | 413 | 685 | |||||||||||||
Mortgage and real estate | 335 | 499 | |||||||||||||
Lease financing | 5 | 13 | |||||||||||||
Other | 10 | 167 | |||||||||||||
Total non-accrual Corporate loans without specific allowance | $ | 1,233 | N/A | $ | 1,997 | N/A |
(1) | Recorded investment in a loan includes net deferred loan fees and costs, unamortized premium or discount, less any direct write-downs. |
(2) | Average carrying value represents the average recorded investment balance and does not include related specific allowance. |
(3) | Average carrying value does not include related specific allowance. |
N/A | Not Applicable |
209
Corporate Troubled Debt
Restructurings
The following tables
provide details on Corporate TDR activity and default information as of and for
the years ended December 31, 2012 and 2011.
The following table presents Corporate TDRs occurring during the year ended December 31, 2012.
TDRs | |||||||||||||||||||||
TDRs | TDRs | involving changes | |||||||||||||||||||
involving changes | involving changes | in the amount | |||||||||||||||||||
in the amount | in the amount | and/or timing of | Balance of | Net | |||||||||||||||||
Carrying | and/or timing of | and/or timing of | both principal and | principal forgiven | P&L | ||||||||||||||||
In millions of dollars | Value | principal payments | (1) | interest payments | (2) | interest payments | or deferred | impact | (3) | ||||||||||||
Commercial and industrial | $ | 99 | $ | 84 | $ | 4 | $ | 11 | $ | - | $ | 1 | |||||||||
Financial institutions | - | - | - | - | - | - | |||||||||||||||
Mortgage and real estate | 113 | 60 | - | 53 | - | - | |||||||||||||||
Other | - | - | - | - | - | - | |||||||||||||||
Total | $ | 212 | $ | 144 | $ | 4 | $ | 64 | $ | - | $ | 1 |
(1) | TDRs involving changes in the amount or timing of principal payments may involve principal forgiveness or deferral of periodic and/or final principal payments. |
(2) | TDRs involving changes in the amount or timing of interest payments may involve a below-market interest rate. |
(3) | Balances reflect charge-offs and reserves recorded during the years ended December 31, 2012 on loans subject to a TDR during the year then ended. |
The following table presents Corporate TDRs occurring during the year ended December 31, 2011.
TDRs | |||||||||||||||||||||
TDRs | TDRs | involving changes | |||||||||||||||||||
involving changes | involving changes | in the amount | |||||||||||||||||||
in the amount | in the amount | and/or timing of | Balance of | Net | |||||||||||||||||
Carrying | and/or timing of | and/or timing of | both principal and | principal forgiven | P&L | ||||||||||||||||
In millions of dollars | Value | principal payments | (1) | interest payments | (2) | interest payments | or deferred | impact | (3) | ||||||||||||
Commercial and industrial | $ | 126 | $ | - | $ | 16 | $ | 110 | $ | - | $ | 16 | |||||||||
Financial institutions | - | - | - | - | - | - | |||||||||||||||
Mortgage and real estate | 250 | 3 | 20 | 227 | 4 | 37 | |||||||||||||||
Other | 74 | - | 67 | 7 | - | - | |||||||||||||||
Total | $ | 450 | $ | 3 | $ | 103 | $ | 344 | $ | 4 | $ | 53 |
(1) | TDRs involving changes in the amount or timing of principal payments may involve principal forgiveness or deferral of periodic and/or final principal payments. |
(2) | TDRs involving changes in the amount or timing of interest payments may involve a below-market interest rate. |
(3) | Balances reflect charge-offs and reserves recorded during the year ended December 31, 2011 on loans subject to a TDR during the period then ended. |
The following table presents total Corporate loans modified in a TDR at December 31, 2012 and 2011, as well as those TDRs that defaulted during 2012 and 2011, and for which the payment default occurred within one year of the modification:
TDRs | TDRs | ||||||||||||
in payment default | in payment default | ||||||||||||
TDR Balances at | during the year Ended | TDR Balances at | during the year Ended | ||||||||||
In millions of dollars | December 31, 2012 | December 31, 2012 | December 31, 2011 | December 31, 2011 | |||||||||
Commercial and industrial | $ | 275 | $ | 94 | $ | 429 | $ | 7 | |||||
Financial institutions | 17 | - | 564 | - | |||||||||
Mortgage and real estate | 131 | - | 258 | - | |||||||||
Other | 450 | - | 85 | - | |||||||||
Total | $ | 873 | $ | 94 | $ | 1,336 | $ | 7 |
(1) | Payment default constitutes failure to pay principal or interest when due per the contractual terms of the loan. |
210
Included in the Corporate and Consumer loan outstanding tables above are purchased distressed loans, which are loans that have evidenced significant credit deterioration subsequent to origination but prior to acquisition by Citigroup. In accordance with SOP 03-3 (codified as ASC 310-30), the difference between the total expected cash flows for these loans and the initial recorded investment is recognized in income over the life of the loans using a level yield. Accordingly, these loans have been excluded from the impaired loan table information presented above. In addition, per SOP 03-3, subsequent decreases in the expected cash flows for a purchased
distressed loan require a build of an allowance so the loan retains its level yield. However, increases in the expected cash flows are first recognized as a reduction of any previously established allowance and then recognized as income prospectively over the remaining life of the loan by increasing the loan's level yield. Where the expected cash flows cannot be reliably estimated, the purchased distressed loan is accounted for under the cost recovery method. The carrying amount of the Company's purchased distressed loan portfolio at December 31, 2012 was $440 million, net of an allowance of $98 million.
The changes in the accretable yield, related allowance and carrying amount net of accretable yield for 2012 are as follows:
Carrying | ||||||||||||
Accretable | amount of loan | |||||||||||
In millions of dollars | yield | receivable | Allowance | |||||||||
Balance at December 31, 2011 | $ | 2 | $ | 511 | $ | 68 | ||||||
Purchases (1) | 15 | 269 | - | |||||||||
Disposals/payments received | (6 | ) | (171 | ) | (6 | ) | ||||||
Accretion | - | - | - | |||||||||
Builds (reductions) to the allowance | 9 | - | 41 | |||||||||
Increase to expected cash flows | 5 | 1 | - | |||||||||
FX/other | (3 | ) | (72 | ) | (5 | ) | ||||||
Balance at December 31, 2012 (2) | $ | 22 | $ | 538 | $ | 98 |
(1) | The balance reported in the column "Carrying amount of loan receivable" consists of $269 million of purchased loans accounted for under the level-yield method and $0 million under the cost-recovery method. These balances represent the fair value of these loans at their acquisition date. The related total expected cash flows for the level-yield loans were $285 million at their acquisition dates. |
(2) | The balance reported in the column "Carrying amount of loan receivable" consists of $524 million of loans accounted for under the level-yield method and $14 million accounted for under the cost-recovery method. |
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17. ALLOWANCE FOR CREDIT LOSSES
In millions of dollars | 2012 | 2011 | 2010 | |||||||||
Allowance for loan losses at beginning of year | $ | 30,115 | $ | 40,655 | $ | 36,033 | ||||||
Gross credit losses (1)(2) | (17,478 | ) | (23,164 | ) | (34,491 | ) | ||||||
Gross recoveries | 2,902 | 3,126 | 3,632 | |||||||||
Net credit losses (NCLs) | $ | (14,576 | ) | $ | (20,038 | ) | $ | (30,859 | ) | |||
NCLs | $ | 14,576 | $ | 20,038 | $ | 30,859 | ||||||
Net reserve builds (releases) (1) | (1,882 | ) | (8,434 | ) | (6,523 | ) | ||||||
Net specific reserve builds (releases) (2) | (1,846 | ) | 169 | 858 | ||||||||
Total provision for credit losses | $ | 10,848 | $ | 11,773 | $ | 25,194 | ||||||
Other, net (3) | (932 | ) | (2,275 | ) | 10,287 | |||||||
Allowance for loan losses at end of year | $ | 25,455 | $ | 30,115 | $ | 40,655 | ||||||
Allowance for credit losses on unfunded lending commitments at beginning of year (4) | $ | 1,136 | $ | 1,066 | $ | 1,157 | ||||||
Provision for unfunded lending commitments | (16 | ) | 51 | (117 | ) | |||||||
Other, net | (1 | ) | 19 | 26 | ||||||||
Allowance for credit losses on unfunded lending commitments at end of year (4) | $ | 1,119 | $ | 1,136 | $ | 1,066 | ||||||
Total allowance for loans, leases, and unfunded lending commitments | $ | 26,574 | $ | 31,251 | $ | 41,721 |
(1) | 2012 includes approximately $635 million of incremental charge-offs related to OCC guidance issued in the third quarter of 2012, which required mortgage loans to borrowers that have gone through Chapter 7 of the 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 loan losses related to these charge-offs. 2012 also includes a benefit to charge-offs of approximately $40 million related to finalizing the impact of this 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. These charge-offs were related to anticipated forgiveness of principal in connection with the national mortgage settlement. There was a corresponding approximate $350 million reserve release in the first quarter of 2012 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 (see Note 1 to the Consolidated Financial Statements), 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. |
(4) | Represents additional credit loss reserves for unfunded lending commitments and letters of credit recorded in Other liabilities on the Consolidated Balance Sheet. |
Allowance for Credit Losses and Investment in Loans at December 31, 2012
In millions of dollars | Corporate | Consumer | Total | |||||||||
Allowance for loan losses at beginning of year | $ | 2,879 | $ | 27,236 | $ | 30,115 | ||||||
Charge-offs | (640 | ) | (16,838 | ) | (17,478 | ) | ||||||
Recoveries | 417 | 2,485 | 2,902 | |||||||||
Replenishment of net charge-offs | 223 | 14,353 | 14,576 | |||||||||
Net reserve builds (releases) | 2 | (1,884 | ) | (1,882 | ) | |||||||
Net specific reserve builds (releases) | (138 | ) | (1,708 | ) | (1,846 | ) | ||||||
Other | 33 | (965 | ) | (932 | ) | |||||||
Ending balance | $ | 2,776 | $ | 22,679 | $ | 25,455 | ||||||
Allowance for loan losses | ||||||||||||
Determined in accordance with ASC 450-20 | $ | 2,429 | $ | 15,703 | $ | 18,132 | ||||||
Determined in accordance with ASC 310-10-35 | 284 | 6,941 | 7,225 | |||||||||
Determined in accordance with ASC 310-30 | 63 | 35 | 98 | |||||||||
Total allowance for loan losses | $ | 2,776 | $ | 22,679 | $ | 25,455 | ||||||
Loans, net of unearned income | ||||||||||||
Loans collectively evaluated for impairment in accordance with ASC 450-20 | $ | 239,849 | $ | 377,374 | $ | 617,223 | ||||||
Loans individually evaluated for impairment in accordance with ASC 310-10-35 | 2,776 | 29,640 | 32,416 | |||||||||
Loans acquired with deteriorated credit quality in accordance with ASC 310-30 | 112 | 426 | 538 | |||||||||
Loans held at fair value | 4,056 | 1,231 | 5,287 | |||||||||
Total loans, net of unearned income | $ | 246,793 | $ | 408,671 | $ | 655,464 |
212
Allowance for Credit Losses and Investment in Loans at December 31, 2011
In millions of dollars | Corporate | Consumer | Total | |||||||||
Allowance for loan losses at beginning of year | $ | 5,249 | $ | 35,406 | $ | 40,655 | ||||||
Charge-offs | (2,000 | ) | (21,164 | ) | (23,164 | ) | ||||||
Recoveries | 386 | 2,740 | 3,126 | |||||||||
Replenishment of net charge-offs | 1,614 | 18,424 | 20,038 | |||||||||
Net reserve releases | (1,083 | ) | (7,351 | ) | (8,434 | ) | ||||||
Net specific reserve builds (releases) | (1,270 | ) | 1,439 | 169 | ||||||||
Other | (17 | ) | (2,258 | ) | (2,275 | ) | ||||||
Ending balance | $ | 2,879 | $ | 27,236 | $ | 30,115 | ||||||
Allowance for loan losses | ||||||||||||
Determined in accordance with ASC 450-20 | $ | 2,408 | $ | 18,334 | $ | 20,742 | ||||||
Determined in accordance with ASC 310-10-35 | 420 | 8,885 | 9,305 | |||||||||
Determined in accordance with ASC 310-30 | 51 | 17 | 68 | |||||||||
Total allowance for loan losses | $ | 2,879 | $ | 27,236 | $ | 30,115 | ||||||
Loans, net of unearned income | ||||||||||||
Loans collectively evaluated for impairment in accordance with ASC 450-20 | $ | 215,778 | $ | 390,831 | $ | 606,609 | ||||||
Loans individually evaluated for impairment in accordance with ASC 310-10-35 | 3,994 | 30,863 | 34,857 | |||||||||
Loans acquired with deteriorated credit quality in accordance with ASC 310-30 | 191 | 320 | 511 | |||||||||
Loans held at fair value | 3,939 | 1,326 | 5,265 | |||||||||
Total loans, net of unearned income | $ | 223,902 | $ | 423,340 | $ | 647,242 |
213
18. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The changes in Goodwill during 2012 and 2011 were as
follows:
In millions of dollars | ||||
Balance at December 31, 2010 | $ | 26,152 | ||
Foreign exchange translation | (636 | ) | ||
Smaller acquisitions/divestitures, purchase accounting adjustments and other | 44 | |||
Discontinued operations | (147 | ) | ||
Balance at December 31, 2011 | $ | 25,413 | ||
Foreign exchange translation | 294 | |||
Smaller acquisitions/divestitures, purchase accounting adjustments and other | (21 | ) | ||
Discontinued operations | (13 | ) | ||
Balance at December 31, 2012 | $ | 25,673 |
The changes in Goodwill by segment during 2012 and 2011 were as follows:
Global | Institutional | ||||||||||||||||||
Consumer | Clients | Corporate/ | |||||||||||||||||
In millions of dollars | Banking | Group | Citi Holdings | Other | Total | ||||||||||||||
Balance at December 31, 2010 | $ | 10,701 | $ | 10,826 | $ | 4,625 | $ | - | $ | 26,152 | |||||||||
Goodwill acquired during 2011 | $ | - | $ | 19 | $ | - | $ | - | $ | 19 | |||||||||
Goodwill disposed of during 2011 | - | (6 | ) | (153 | ) | - | (159 | ) | |||||||||||
Other (1) | (465 | ) | (102 | ) | (32 | ) | - | (599 | ) | ||||||||||
Balance at December 31, 2011 | $ | 10,236 | $ | 10,737 | $ | 4,440 | $ | - | $ | 25,413 | |||||||||
Goodwill acquired during 2012 | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||
Goodwill disposed of during 2012 | - | - | (8 | ) | - | (8 | ) | ||||||||||||
Other (1) | 20 | 244 | 4 | - | 268 | ||||||||||||||
Intersegment transfers in/(out) (2) | 4,283 | - | (4,283 | ) | - | - | |||||||||||||
Balance at December 31, 2012 | $ | 14,539 | $ | 10,981 | $ | 153 | $ | - | $ | 25,673 |
(1) | Other changes in Goodwill primarily reflect foreign exchange effects on non-dollar-denominated goodwill, discontinued operations in 2012, and purchase accounting adjustments. |
(2) | Primarily includes the transfer of the substantial majority of the Citi retail services business from Citi Holdings-Local Consumer Lending to Citicorp-North America Regional Consumer Banking during the first quarter of 2012. See Note 4 to the Consolidated Financial Statements for a further discussion of this segment transfer. |
As of January 1, 2012, a substantial majority of the Citi retail services business previously included within the Local Consumer Lending-Cards reporting unit was transferred to North America-Regional Consumer Banking . In addition, certain small businesses included within the Local Consumer Lending-Cards reporting unit were transferred to Local Consumer Lending-Other . Additionally, an insurance business in El Salvador within Brokerage and Asset Management was transferred to Latin America Regional Consumer Banking . Goodwill affected by the reorganization was reassigned from Local Consumer Lending-Cards and Brokerage and Asset Management to those reporting units that received businesses using a
The Company performed its annual goodwill impairment test as of July 1, 2012 resulting in no impairment for any of the reporting units.
As per ASC 350, Intangibles-Goodwill and Other management elected to perform a qualitative assessment for the Transaction Services reporting unit. Through consideration of various factors including excess of fair value over the carrying value in prior year, projected growth via positive cash flows, and no adverse changes anticipated in the business and macroeconomic environment, management determined that it is not more-likely-than-not that the fair value of this reporting unit is less than its carrying amount and therefore the two-step impairment test was not required.
No goodwill was deemed impaired in 2010, 2011 and 2012.
214
The following table shows reporting units with goodwill balances as of December 31, 2012 and the excess of fair value as a percentage over allocated book value as of the annual impairment test.
In millions of dollars | ||||||
Fair value as a % of | ||||||
Reporting unit (1) | allocated book value | Goodwill | ||||
North America Regional Consumer Banking | 225 | % | $ | 6,803 | ||
EMEA Regional Consumer Banking | 150 | % | $ | 366 | ||
Asia Regional Consumer Banking | 281 | % | $ | 5,489 | ||
Latin America Regional Consumer Banking | 186 | % | $ | 1,881 | ||
Securities and Banking | 137 | % | $ | 9,378 | ||
Transaction Services | 1,336 | % (2) | $ | 1,603 | ||
Brokerage and Asset Management | 121 | % | $ | 42 | ||
Local Consumer Lending-Cards | 110 | % | $ | 111 |
(1) | Local Consumer Lending-Other is excluded from the table as there is no goodwill allocated to it. |
(2) | Transaction Services: 2011 fair value has been carried forward for this reporting unit for purposes of the 2012 annual impairment test as discussed above. |
Citigroup engaged an independent valuation
specialist in 2011 and 2012 to assist in Citi's valuation for most of the
reporting units employing both the market approach and the discounted cash flow
(DCF) method. Citi believes that the DCF method, using management projections
for the selected reporting units and an appropriate risk-adjusted discount rate,
is the most reflective of a market participant's view of fair values given
current market conditions. For the reporting units where both methods were
utilized in 2011 and 2012, the resulting fair values were relatively consistent
and appropriate weighting was given to outputs from both methods.
While
no impairment was noted in step one of the Local Consumer Lending-Cards reporting
unit impairment test as of July 1, 2012, goodwill present in the reporting unit
may be particularly sensitive to further deterioration in economic
conditions.
Under the market approach for valuing this reporting unit, the
key assumption is the price multiple. The selection of the multiple considers
operating performance and financial condition such as return on equity and net
income growth of Local Consumer
Lending-Cards as compared to those of
selected guideline companies. Among other factors, the level and expected growth
in return on tangible equity relative to those of the guideline companies is
considered. Since the guideline company prices used are on a minority interest
basis, the selection of the multiple considers the guideline acquisition prices
which reflect control rights and privileges in arriving at a multiple that
reflects an appropriate control premium.
For the Local Consumer Lending-Cards valuation under the income approach, the assumptions used as
the basis for the model include cash flows for the forecasted period,
assumptions embedded in arriving at an estimation of the terminal year value and
discount rate. The cash flows are estimated based on management's most recent
projections available as of the testing date, giving consideration to target
equity capital requirements based on selected guideline companies for the
reporting unit. In arriving at a terminal value for Local Consumer Lending-Cards , using
2015 as the terminal year, the assumptions used included a long-term growth
rate. The discount rate used in the analysis is based on the reporting units'
estimated cost of equity capital computed under the capital asset pricing
model.
If the future were to differ adversely from management's best
estimate of key economic assumptions and associated cash flows were to decrease
by a small margin, the Company could potentially experience future impairment
charges with respect to the $111 million goodwill remaining in its Local Consumer Lending-Cards reporting unit. Any such charge, by itself, would not
negatively affect the Company's regulatory capital ratios, tangible common equity or liquidity
position.
215
The components of intangible assets were as follows:
December 31, 2012 | December 31, 2011 | |||||||||||||||||
Gross | Net | Gross | Net | |||||||||||||||
carrying | Accumulated | carrying | carrying | Accumulated | carrying | |||||||||||||
In millions of dollars | amount | amortization | amount | amount | amortization | amount | ||||||||||||
Purchased credit card relationships | $ | 7,632 | $ | 5,726 | $ | 1,906 | $ | 7,616 | $ | 5,309 | $ | 2,307 | ||||||
Core deposit intangibles | 1,315 | 1,019 | 296 | 1,337 | 965 | 372 | ||||||||||||
Other customer relationships | 767 | 380 | 387 | 830 | 356 | 474 | ||||||||||||
Present value of future profits | 239 | 135 | 104 | 235 | 123 | 112 | ||||||||||||
Indefinite-lived intangible assets | 487 | - | 487 | 492 | - | 492 | ||||||||||||
Other (1) | 4,764 | 2,247 | 2,517 | 4,866 | 2,023 | 2,843 | ||||||||||||
Intangible assets (excluding MSRs) | $ | 15,204 | $ | 9,507 | $ | 5,697 | $ | 15,376 | $ | 8,776 | $ | 6,600 | ||||||
Mortgage servicing rights (MSRs) | 1,942 | - | 1,942 | 2,569 | - | 2,569 | ||||||||||||
Total intangible assets | $ | 17,146 | $ | 9,507 | $ | 7,639 | $ | 17,945 | $ | 8,776 | $ | 9,169 |
(1) | Includes contract-related intangible assets. |
Intangible assets amortization expense was $856 million, $898 million and $976 million for 2012, 2011 and 2010, respectively. Intangible assets amortization expense is estimated to be $812 million in 2013, $723 million in 2014, $689 million in 2015, $766 million in 2016, and $550 million in 2017.
The changes in intangible assets during 2012 were as follows:
Net carrying | Net carrying | |||||||||||||||||||||||||
amount at | FX | amount at | ||||||||||||||||||||||||
December 31, | Acquisitions/ | and | Discontinued | December 31, | ||||||||||||||||||||||
In millions of dollars | 2011 | divestitures | Amortization | Impairments | other | (1) | operations | 2012 | ||||||||||||||||||
Purchased credit card relationships | $ | 2,307 | $ | - | $ | (402 | ) | $ | - | $ | 1 | $ | - | $ | 1,906 | |||||||||||
Core deposit intangibles | 372 | - | (84 | ) | - | 8 | - | 296 | ||||||||||||||||||
Other customer relationships | 474 | - | (45 | ) | - | (42 | ) | - | 387 | |||||||||||||||||
Present value of future profits | 112 | - | (9 | ) | - | 1 | - | 104 | ||||||||||||||||||
Indefinite-lived intangible assets | 492 | (8 | ) | - | - | 3 | - | 487 | ||||||||||||||||||
Other | 2,843 | 2 | (316 | ) | (6 | ) | 13 | (19 | ) | 2,517 | ||||||||||||||||
Intangible assets (excluding MSRs) | $ | 6,600 | $ | (6 | ) | $ | (856 | ) | $ | (6 | ) | $ | (16 | ) | $ | (19 | ) | $ | 5,697 | |||||||
Mortgage servicing rights (MSRs) (2) | 2,569 | 1,942 | ||||||||||||||||||||||||
Total intangible assets | $ | 9,169 | $ | 7,639 |
(1) | Includes foreign exchange translation and purchase accounting adjustments. |
(2) | See Note 22 to the Consolidated Financial Statements for the roll-forward of MSRs. |
216
19. DEBT
Short-Term
Borrowings
Short-term
borrowings consist of commercial paper and
other borrowings with weighted average interest rates at December 31 as
follows:
2012 | 2011 | |||||||||||
Weighted | Weighted | |||||||||||
In millions of dollars | Balance | average | Balance | average | ||||||||
Commercial paper | ||||||||||||
Bank | $ | 11,092 | 0.59 | % | $ | 14,872 | 0.32 | % | ||||
Other non-bank | 378 | 0.84 | 6,414 | 0.49 | ||||||||
$ | 11,470 | $ | 21,286 | |||||||||
Other borrowings (1) | 40,557 | 1.06 | % | 33,155 | 1.09 | % | ||||||
Total | $ | 52,027 | $ | 54,441 |
(1) | At December 31, 2012 and December 31, 2011, collateralized short-term advances from the Federal Home Loan Banks were $4 billion and $5 billion, respectively. |
Borrowings under
bank lines of credit may be at interest rates based on LIBOR, CD rates, the
prime rate, or bids submitted by the banks. Citigroup pays commitment fees for
its lines of credit.
Some of Citigroup's non-bank subsidiaries
have credit facilities with Citigroup's subsidiary depository institutions,
including Citibank, N.A. Borrowings under these facilities are secured in
accordance with Section 23A of the Federal Reserve Act.
Citigroup
Global Markets Holdings Inc. (CGMHI) has borrowing agreements consisting of
facilities that CGMHI has been advised are available, but where no contractual
lending obligation exists. These arrangements are reviewed on an ongoing basis
to ensure flexibility in meeting CGMHI's short-term requirements.
Long-Term Debt
Balances at | |||||||||||
December 31, | |||||||||||
Weighted | |||||||||||
average | |||||||||||
In millions of dollars | coupon | Maturities | 2012 | 2011 | |||||||
Citigroup | |||||||||||
Senior notes | 4.29 | % | 2013–2098 | $ | 138,862 | $ | 136,468 | ||||
Subordinated notes (1) | 4.40 | 2013–2036 | 27,581 | 29,177 | |||||||
Junior subordinated notes | |||||||||||
relating to trust preferred | |||||||||||
securities | 7.14 | 2031–2067 | 10,110 | 16,057 | |||||||
Bank (2) | |||||||||||
Senior notes | 1.91 | 2013–2039 | 50,527 | 77,036 | |||||||
Subordinated notes (1) | 3.29 | 2013–2039 | 707 | 859 | |||||||
Non-bank | |||||||||||
Senior notes | 3.64 | 2013–2097 | 11,651 | 63,712 | |||||||
Subordinated notes (1) | 2.26 | 2013–2017 | 25 | 196 | |||||||
Total (3) | $ | 239,463 | $ | 323,505 | |||||||
Senior notes | $ | 201,040 | $ | 277,216 | |||||||
Subordinated notes (1) | 28,313 | 30,232 | |||||||||
Junior subordinated notes | |||||||||||
relating to trust preferred | |||||||||||
securities | 10,110 | 16,057 | |||||||||
Total | $ | 239,463 | $ | 323,505 |
Note: | Citigroup Funding Inc. (CFI) was previously a first-tier subsidiary of Citigroup Inc., issuing commercial paper, medium-term notes and structured equity-linked and credit-linked notes. The debt of CFI was guaranteed by Citigroup Inc. On December 31, 2012, CFI was merged into Citigroup Inc. | |
(1) | Includes notes that are subordinated within certain countries, regions or subsidiaries. | |
(2) | Represents Citibank, N.A., as well as subsidiaries of Citibank and Banamex. At December 31, 2012 and 2011, collateralized long-term advances from the Federal Home Loan Banks were $16.3 billion and $11.0 billion, respectively. | |
(3) | Includes senior notes with carrying values of $186 million issued to Safety First Trust Series 2007-4, 2008-1, 2008-2, 2008-3, 2008-4, 2008-5, 2008-6, 2009-1, 2009-2, and 2009-3 at December 31, 2012 and $215 million issued to Safety First Trust Series 2007-3, 2007-4, 2008-1, 2008-2, 2008-3, 2008-4, 2008-5, 2008-6, 2009-1, 2009-2, and 2009-3 at December 31, 2011. Citigroup owns all of the voting securities of the Safety First Trusts. The Safety First Trusts have no assets, operations, revenues or cash flows other than those related to the issuance, administration and repayment of the Safety First Trust securities and the Safety First Trusts' common securities. |
CGMHI has committed long-term financing facilities with unaffiliated
banks. At December 31, 2012, CGMHI had drawn down $300 million available under
these facilities. Generally, a bank can terminate these facilities by giving
CGMHI one-year prior notice.
The Company issues both fixed and variable
rate debt in a range of currencies. It uses derivative contracts, primarily
interest rate swaps, to effectively convert a portion of its fixed rate debt to
variable rate debt and variable rate debt to fixed rate debt. The maturity
structure of the derivatives generally corresponds to the maturity structure of
the debt being hedged. In addition, the Company uses other derivative contracts
to manage the foreign exchange impact of certain debt issuances. At December 31,
2012, the Company's overall weighted average interest rate for long-term debt
was 3.88% on a contractual basis and 2.71% including the effects of derivative
contracts.
217
Aggregate annual maturities of long-term debt obligations (based on final maturity dates) including trust preferred securities are as follows:
In millions of dollars | 2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | Total | ||||||||||||||
Bank | $ | 16,601 | $ | 9,862 | $ | 8,588 | $ | 6,320 | $ | 2,943 | $ | 6,920 | $ | 51,234 | |||||||
Non-bank | 1,586 | 2,921 | 781 | 800 | 52 | 5,536 | 11,676 | ||||||||||||||
Parent company | 24,464 | 24,243 | 19,677 | 12,737 | 21,156 | 74,276 | 176,553 | ||||||||||||||
Total | $ | 42,651 | $ | 37,026 | $ | 29,046 | $ | 19,857 | $ | 24,151 | $ | 86,732 | $ | 239,463 |
Long-term debt outstanding includes trust preferred securities with a balance sheet carrying value of $10,110 million and $16,057 million at December 31, 2012 and December 31, 2011, respectively. In issuing these trust preferred securities, Citi formed statutory business trusts under the laws of the State of Delaware. The trusts exist for the exclusive purposes of (i) issuing trust preferred securities representing undivided beneficial interests in the assets of the trust; (ii) investing the gross proceeds of the trust preferred securities in junior subordinated deferrable interest debentures (subordinated debentures) of its parent; and (iii) engaging in only those activities necessary or incidental thereto. Generally, upon receipt of certain regulatory approvals, Citigroup has the right to redeem these securities.
As previously disclosed, during the third quarter of 2012, Citi redeemed three series of its trust preferred securities resulting in a pretax gain of $198 million. The redemptions under Citigroup Capital XII and XXI closed on July 18, 2012, while Citigroup Capital XIX closed on August 15, 2012. During the fourth quarter of 2012, Citigroup completed the early redemption of Citigroup Capital XX in the amount of $0.4 billion. The gain recorded upon the redemption was $7 million. The redemption under Citigroup Capital XX closed on December 17, 2012.
The following table summarizes the financial structure of each of the Company's subsidiary trusts at December 31, 2012:
Junior subordinated debentures owned by trust | |||||||||||||||||||
Trust securities | Common | ||||||||||||||||||
with distributions | shares | Redeemable | |||||||||||||||||
guaranteed by | Issuance | Securities | Liquidation | Coupon | issued | by issuer | |||||||||||||
Citigroup | date | issued | value | (1) | rate | to parent | Amount | Maturity | beginning | ||||||||||
In millions of dollars, except share amounts | |||||||||||||||||||
Citigroup Capital III | Dec. 1996 | 194,053 | $ | 194 | 7.625% | 6,003 | $ | 200 | Dec. 1, 2036 | Not redeemable | |||||||||
Citigroup Capital VII | July 2001 | 35,885,898 | 897 | 7.125% | 1,109,874 | 925 | July 31, 2031 | July 31, 2006 | |||||||||||
Citigroup Capital VIII | Sept. 2001 | 43,651,597 | 1,091 | 6.950% | 1,350,050 | 1,125 | Sept. 15, 2031 | Sept. 17, 2006 | |||||||||||
Citigroup Capital IX | Feb. 2003 | 33,874,813 | 847 | 6.000% | 1,047,675 | 873 | Feb. 14, 2033 | Feb. 13, 2008 | |||||||||||
Citigroup Capital X | Sept. 2003 | 14,757,823 | 369 | 6.100% | 456,428 | 380 | Sept. 30, 2033 | Sept. 30, 2008 | |||||||||||
Citigroup Capital XI | Sept. 2004 | 18,387,128 | 460 | 6.000% | 568,675 | 474 | Sept. 27, 2034 | Sept. 27, 2009 | |||||||||||
Citigroup Capital XIII | Sept. 2010 | 89,840,000 | 2,246 | 7.875% | 1,000 | 2,246 | Oct. 30, 2040 | Oct. 30, 2015 | |||||||||||
Citigroup Capital XIV | June 2006 | 12,227,281 | 306 | 6.875% | 40,000 | 307 | June 30, 2066 | June 30, 2011 | |||||||||||
Citigroup Capital XV | Sept. 2006 | 25,210,733 | 630 | 6.500% | 40,000 | 631 | Sept. 15, 2066 | Sept. 15, 2011 | |||||||||||
Citigroup Capital XVI | Nov. 2006 | 38,148,947 | 954 | 6.450% | 20,000 | 954 | Dec. 31, 2066 | Dec. 31, 2011 | |||||||||||
Citigroup Capital XVII | Mar. 2007 | 28,047,927 | 701 | 6.350% | 20,000 | 702 | Mar. 15, 2067 | Mar. 15, 2012 | |||||||||||
Citigroup Capital XVIII | June 2007 | 99,901 | 162 | 6.829% | 50 | 162 | June 28, 2067 | June 28, 2017 | |||||||||||
Citigroup Capital XXXIII (2) | July 2009 | 3,025,000 | 3,025 | 8.000% | 100 | 3,025 | July 30, 2039 | July 30, 2014 | |||||||||||
3 mo. LIB | |||||||||||||||||||
Adam Capital Trust III | Dec. 2002 | 17,500 | 18 | +335 bp. | 542 | 18 | Jan. 7, 2033 | Jan. 7, 2008 | |||||||||||
3 mo. LIB | |||||||||||||||||||
Adam Statutory Trust III | Dec. 2002 | 25,000 | 25 | +325 bp. | 774 | 26 | Dec. 26, 2032 | Dec. 26, 2007 | |||||||||||
3 mo. LIB | |||||||||||||||||||
Adam Statutory Trust IV | Sept. 2003 | 40,000 | 40 | +295 bp. | 1,238 | 41 | Sept. 17, 2033 | Sept. 17, 2008 | |||||||||||
3 mo. LIB | |||||||||||||||||||
Adam Statutory Trust V | Mar. 2004 | 35,000 | 35 | +279 bp. | 1,083 | 36 | Mar. 17, 2034 | Mar. 17, 2009 | |||||||||||
Total obligated | $ | 12,000 | $ | 12,125 |
(1) | Represents the notional value received by investors from the trusts at the time of issuance. | |
(2) | On February 4, 2013, approximately $800 million of the $3,025 million issued under Citigroup Capital XXXIII was exchanged into subordinated debt, leaving approximately $2,225 million of trust preferred securities outstanding as of such date. |
In each case, the coupon rate on the debentures is the same as that on the trust securities. Distributions on the trust securities and interest on the debentures are payable quarterly, except for Citigroup Capital III and Citigroup Capital XVIII on which distributions are payable semiannually.
218
20. REGULATORY CAPITAL AND CITIGROUP INC. PARENT COMPANY INFORMATION
Citigroup is subject
to risk-based capital and leverage guidelines issued by the Federal Reserve
System (FRB). Citi's U.S. insured depository institution subsidiaries, including
Citibank, N.A., are subject to similar guidelines issued by their respective
primary federal bank regulatory agencies. These guidelines are used to evaluate
capital adequacy and include the required minimums shown in the following table.
The regulatory agencies are required by law to take specific prompt actions with
respect to institutions that do not meet minimum capital
standards.
The
following table sets forth Citigroup's and Citibank, N.A.'s regulatory capital
ratios as of December 31, 2012:
Well- | ||||||||||||||
Required | capitalized | |||||||||||||
In millions of dollars | minimum | minimum | Citigroup | Citibank, N.A. | ||||||||||
Tier 1 Common | $ | 123,095 | $ | 116,633 | ||||||||||
Tier 1 Capital | 136,532 | 117,367 | ||||||||||||
Total Capital (1) | 167,686 | 135,513 | ||||||||||||
Tier 1 Common ratio | N/A | N/A | 12.67 | % | 14.12 | % | ||||||||
Tier 1 Capital ratio | 4.0 | % | 6.0 | % | 14.06 | 14.21 | ||||||||
Total Capital ratio | 8.0 | 10.0 | 17.26 | 16.41 | ||||||||||
Leverage ratio | 3.0 | 5.0 | (2) | 7.48 | 8.97 |
(1) | Total Capital includes Tier 1 Capital and Tier 2 Capital. | |
(2) | Applicable only to depository institutions. | |
N/A | Not Applicable |
As indicated in the table above, Citigroup and Citibank, N.A. were well capitalized under the current federal bank regulatory definitions as of December 31, 2012.
Banking Subsidiaries-Constraints
on Dividends
There are various legal
limitations on the ability of Citigroup's subsidiary depository institutions to
extend credit, pay dividends or otherwise supply funds to Citigroup and its
non-bank subsidiaries. The approval of the Office of the Comptroller of the
Currency is required if total dividends declared in any calendar year exceed
amounts specified by the applicable agency's regulations. State-chartered
depository institutions are subject to dividend limitations imposed by
applicable state law.
In determining the dividends, each
depository institution must also consider its effect on applicable risk-based
capital and leverage ratio requirements, as well as policy statements of the
federal regulatory agencies that indicate that banking organizations should
generally pay dividends out of current operating earnings. Citigroup received
$19.1 billion in dividends from Citibank, N.A. in 2012.
Non-Banking
Subsidiaries
Citigroup also receives
dividends from its non-bank subsidiaries. These non-bank subsidiaries are
generally not subject to regulatory restrictions on dividends.
The
ability of CGMHI to declare dividends can be restricted by capital
considerations of its broker-dealer subsidiaries.
In millions of dollars | ||||||||
Net | Excess over | |||||||
capital or | minimum | |||||||
Subsidiary | Jurisdiction | equivalent | requirement | |||||
Citigroup Global Markets Inc. | U.S. Securities and | |||||||
Exchange | ||||||||
Commission | ||||||||
Uniform Net | ||||||||
Capital Rule | ||||||||
(Rule 15c3-1) | $ | 6,250 | $ | 5,659 | ||||
Citigroup Global Markets Limited | United Kingdom's | |||||||
Financial | ||||||||
Services | ||||||||
Authority | $ | 6,212 | $ | 3,594 |
219
Citigroup Inc. Parent Company Only (1) Income Statement and Statement of Comprehensive Income
Years Ended December 31, | ||||||||||||
In millions of dollars | 2012 | 2011 | 2010 | |||||||||
Revenues | ||||||||||||
Interest revenue | $ | 3,384 | $ | 3,684 | $ | 3,237 | ||||||
Interest expense | 6,573 | 7,618 | 7,728 | |||||||||
Net interest revenue | $ | (3,189 | ) | $ | (3,934 | ) | $ | (4,491 | ) | |||
Dividends from subsidiaries | 20,780 | 13,046 | 14,448 | |||||||||
Non-interest revenue | 613 | 939 | 30 | |||||||||
Total revenues, net of interest expense | $ | 18,204 | $ | 10,051 | $ | 9,987 | ||||||
Total operating expenses | $ | 1,497 | $ | 1,503 | $ | 878 | ||||||
Income before taxes and equity in undistributed income of subsidiaries | $ | 16,707 | $ | 8,548 | $ | 9,109 | ||||||
Benefit for income taxes | (2,062 | ) | (1,821 | ) | (2,480 | ) | ||||||
Equity in undistributed income of subsidiaries | (11,228 | ) | 698 | (987 | ) | |||||||
Parent company's net income | $ | 7,541 | $ | 11,067 | $ | 10,602 | ||||||
Comprehensive income | ||||||||||||
Parent company's net income | $ | 7,541 | $ | 11,067 | $ | 10,602 | ||||||
Other comprehensive income (loss) | 892 | (1,511 | ) | 2,660 | ||||||||
Parent company's comprehensive income | $ | 8,433 | $ | 9,556 | $ | 13,262 |
Citigroup Inc. Parent Company Only (1) Balance Sheet
Years Ended December 31, | ||||||
In millions of dollars | 2012 | 2011 | ||||
Assets | ||||||
Cash and deposits from banks | $ | 153 | $ | 3 | ||
Trading account assets | 150 | 99 | ||||
Investments | 1,676 | 37,477 | ||||
Advances to subsidiaries | 107,074 | 108,644 | ||||
Investments in subsidiaries | 184,615 | 194,979 | ||||
Other assets | 102,335 | 65,711 | ||||
Total assets | $ | 396,003 | $ | 406,913 | ||
Liabilities | ||||||
Federal funds purchased and securities loaned or sold under agreements to repurchase | $ | 185 | $ | 185 | ||
Trading account liabilities | 170 | 96 | ||||
Short-term borrowings | 725 | 13 | ||||
Long-term debt | 176,553 | 181,702 | ||||
Advances from subsidiaries other than banks | 12,759 | 17,046 | ||||
Other liabilities | 16,562 | 30,065 | ||||
Total liabilities | $ | 206,954 | $ | 229,107 | ||
Total equity | 189,049 | 177,806 | ||||
Total liabilities and equity | $ | 396,003 | $ | 406,913 |
220
Citigroup Inc. Parent Company Only (1) Cash Flows Statement
Years Ended December 31, | ||||||||||||
In millions of dollars | 2012 | 2011 | 2010 | |||||||||
Net cash provided by operating activities of continuing operations | $ | 1,598 | $ | 1,710 | $ | 8,756 | ||||||
Cash flows from investing activities of continuing operations | ||||||||||||
Purchases of investments | $ | (5,701 | ) | $ | (47,190 | ) | $ | (31,346 | ) | |||
Proceeds from sales of investments | 37,056 | 9,524 | 6,029 | |||||||||
Proceeds from maturities of investments | 4,286 | 22,386 | 16,834 | |||||||||
Changes in investments and advances-intercompany | (397 | ) | 32,419 | 13,363 | ||||||||
Other investing activities | 994 | (10 | ) | (20 | ) | |||||||
Net cash provided by investing activities of continuing operations | $ | 36,238 | $ | 17,129 | $ | 4,860 | ||||||
Cash flows from financing activities of continuing operations | ||||||||||||
Dividends paid | $ | (143 | ) | $ | (113 | ) | $ | (9 | ) | |||
Issuance of preferred stock | 2,250 | - | - | |||||||||
Proceeds/(repayments) from issuance of long-term debt-third-party, net | (33,434 | ) | (16,481 | ) | (8,339 | ) | ||||||
Net change in short-term borrowings and other advances-intercompany | (6,160 | ) | (5,772 | ) | (8,211 | ) | ||||||
Other financing activities | (199 | ) | 3,519 | 2,949 | ||||||||
Net cash used in financing activities of continuing operations | $ | (37,686 | ) | $ | (18,847 | ) | $ | (13,610 | ) | |||
Net increase (decrease) in cash and due from banks | $ | 150 | $ | (8 | ) | $ | 6 | |||||
Cash and due from banks at beginning of period | 3 | 11 | 5 | |||||||||
Cash and due from banks at end of period | $ | 153 | $ | 3 | $ | 11 | ||||||
Supplemental disclosure of cash flow information for continuing operations | ||||||||||||
Cash paid (received) during the year for | ||||||||||||
Income taxes | $ | 78 | $ | (458 | ) | $ | (507 | ) | ||||
Interest | 7,883 | 9,271 | 9,317 |
(1) | "Citigroup Inc. parent company only" refers to the parent holding company Citigroup Inc., excluding consolidated subsidiaries. Citigroup Funding Inc. (CFI) was previously a first-tier subsidiary of Citigroup Inc., issuing commercial paper, medium-term notes and structured equity-linked and credit-linked notes. The debt of CFI was guaranteed by Citigroup Inc. On December 31, 2012, CFI was merged into Citigroup Inc., the parent holding company. |
221
21. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in each component of Accumulated other comprehensive income (loss) for the three-year period ended December 31, 2012 are as follows:
Foreign | ||||||||||||||||||||
Net | currency | |||||||||||||||||||
unrealized | translation | Accumulated | ||||||||||||||||||
gains (losses) | adjustment, | Pension | other | |||||||||||||||||
on investment | net of | Cash flow | liability | comprehensive | ||||||||||||||||
In millions of dollars | securities | hedges | hedges | adjustments | income (loss) | |||||||||||||||
Balance at December 31, 2009 | $ | (4,347 | ) | $ | (7,947 | ) | $ | (3,182 | ) | $ | (3,461 | ) | $ | (18,937 | ) | |||||
Change, net of taxes (1)(2)(3)(4) | 1,952 | 820 | 532 | (644 | ) | 2,660 | ||||||||||||||
Balance at December 31, 2010 | $ | (2,395 | ) | $ | (7,127 | ) | $ | (2,650 | ) | $ | (4,105 | ) | $ | (16,277 | ) | |||||
Change, net of taxes (1)(2)(3)(4) | 2,360 | (3,524 | ) | (170 | ) | (177 | ) | (1,511 | ) | |||||||||||
Balance at December 31, 2011 | $ | (35 | ) | $ | (10,651 | ) | $ | (2,820 | ) | $ | (4,282 | ) | $ | (17,788 | ) | |||||
Change, net of taxes (1)(2)(3)(4)(5)(6) | 632 | 721 | 527 | (988 | ) | 892 | ||||||||||||||
Balance at December 31, 2012 | $ | 597 | $ | (9,930 | ) | $ | (2,293 | ) | $ | (5,270 | ) | $ | (16,896 | ) |
(1) | The after-tax realized gains (losses) on sales and impairments of securities during the years ended December 31, 2012, 2011 and 2010 were $(1,017) million, $(122) million and $657 million, respectively. For details of the realized gains (losses) on sales and impairments on Citigroup's investment securities included in income, see Note 15 to the Consolidated Financial Statements. | |
(2) | Primarily reflects the movements in (by order of impact) the Mexican peso, Japanese yen, Euro, and Brazilian real against the U.S. dollar, and changes in related tax effects and hedges in 2012. Primarily reflects the movements in the Mexican peso, Turkish lira, Brazilian real, Indian rupee and Polish zloty against the U.S. dollar, and changes in related tax effects and hedges in 2011. Primarily reflects the movements in the Australian dollar, Brazilian real, Canadian dollar, Japanese yen, Mexican peso, and Chinese yuan (renminbi) against the U.S. dollar, and changes in related tax effects and hedges in 2010. | |
(3) | For cash flow hedges, primarily driven by Citigroup's pay fixed/receive floating interest rate swap programs that are hedging the floating rates on liabilities. | |
(4) | For the pension liability adjustment, primarily reflects adjustments based on the final year-end actuarial valuations of the Company's pension and postretirement plans and amortization of amounts previously recognized in other comprehensive income. | |
(5) | For net unrealized gains (losses) on investment securities, includes the after-tax impact of realized gains from the sales of minority investments: $672 million from the Company's entire interest in Housing Development Finance Corporation Ltd. (HDFC); and $421 million from the Company's entire interest in Shanghai Pudong Development Bank (SPDB). | |
(6) | The after-tax impact due to impairment charges and the loss related to Akbank, included within the foreign currency translation adjustment, during the six months ended June 30, 2012 was $667 million. See Note 15 to the Consolidated Financial Statements. |
The pretax and after-tax changes in each component of Accumulated other comprehensive income (loss) for the three-year period ended December 31, 2012 are as follows:
In millions of dollars | Pretax | Tax effect | After-tax | |||||||||
Balance, December 31, 2009 | $ | (27,834 | ) | $ | 8,897 | $ | (18,937 | ) | ||||
Change in net unrealized gains (losses) on investment securities | 3,119 | (1,167 | ) | 1,952 | ||||||||
Foreign currency translation adjustment | 81 | 739 | 820 | |||||||||
Cash flow hedges | 857 | (325 | ) | 532 | ||||||||
Pension liability adjustment | (1,078 | ) | 434 | (644 | ) | |||||||
Change | $ | 2,979 | $ | (319 | ) | $ | 2,660 | |||||
Balance, December 31, 2010 | $ | (24,855 | ) | $ | 8,578 | $ | (16,277 | ) | ||||
Change in net unrealized gains (losses) on investment securities | 3,855 | (1,495 | ) | 2,360 | ||||||||
Foreign currency translation adjustment | (4,133 | ) | 609 | (3,524 | ) | |||||||
Cash flow hedges | (262 | ) | 92 | (170 | ) | |||||||
Pension liability adjustment | (412 | ) | 235 | (177 | ) | |||||||
Change | $ | (952 | ) | $ | (559 | ) | $ | (1,511 | ) | |||
Balance, December 31, 2011 | $ | (25,807 | ) | $ | 8,019 | $ | (17,788 | ) | ||||
Change in net unrealized gains (losses) on investment securities | 1,001 | (369 | ) | 632 | ||||||||
Foreign currency translation adjustment | 12 | 709 | 721 | |||||||||
Cash flow hedges | 838 | (311 | ) | 527 | ||||||||
Pension liability adjustment | (1,378 | ) | 390 | (988 | ) | |||||||
Change | $ | 473 | $ | 419 | $ | 892 | ||||||
Balance, December 31, 2012 | $ | (25,334 | ) | $ | 8,438 | $ | (16,896 | ) |
222
22. SECURITIZATIONS AND VARIABLE INTEREST ENTITIES
Uses of SPEs
A special purpose entity (SPE) is an entity designed to
fulfill a specific limited need of the company that organized it. The principal
uses of SPEs are to obtain liquidity and favorable capital treatment by
securitizing certain of Citigroup's financial assets, to assist clients in
securitizing their financial assets and to create investment products for
clients. SPEs may be organized in various legal forms including trusts,
partnerships or corporations. In a securitization, the company transferring
assets to an SPE converts all (or a portion) of those assets into cash before
they would have been realized in the normal course of business through the SPE's
issuance of debt and equity instruments, certificates, commercial paper and
other notes of indebtedness, which are recorded on the balance sheet of the SPE,
which may or may not be consolidated onto the balance sheet of the company that
organized the SPE.
Investors usually only have recourse to the assets in the SPE and often
benefit from other credit enhancements, such as a collateral account or
over-collateralization in the form of excess assets in the SPE, a line of
credit, or from a liquidity facility, such as a liquidity put option or asset
purchase agreement. Because of these enhancements, the SPE issuances can
typically obtain a more favorable credit rating from rating agencies than the
transferor could obtain for its own debt issuances, resulting in less expensive
financing costs than unsecured debt. The SPE may also enter into derivative
contracts in order to convert the yield or currency of the underlying assets to
match the needs of the SPE investors or to limit or change the credit risk of
the SPE. Citigroup may be the provider of certain credit enhancements as well as
the counterparty to any related derivative contracts.
Most
of Citigroup's SPEs are variable interest entities (VIEs), as described
below.
Variable Interest
Entities
VIEs are entities that have
either a total equity investment that is insufficient to permit the entity to
finance its activities without additional subordinated financial support, or
whose equity investors lack the characteristics of a controlling financial
interest (i.e., ability to make significant decisions through voting rights, and
right to receive the expected residual returns of the entity or obligation to
absorb the expected losses of the entity). Investors that finance the VIE
through debt or equity interests or other counterparties that provide other
forms of support, such as guarantees, subordinated fee arrangements, or certain
types of derivative contracts, are variable interest holders in the
entity.
The variable interest holder, if any, that has a controlling
financial interest in a VIE is deemed to be the primary beneficiary and must
consolidate the VIE. Citigroup would be deemed to have a controlling financial
interest and be the primary beneficiary if it has both of the following
characteristics:
The Company must evaluate its
involvement in each VIE and understand the purpose and design of the entity, the
role the Company had in the entity's design and its involvement in the VIE's
ongoing activities. The Company then must evaluate which activities most
significantly impact the economic performance of the VIE and who has the power
to direct such activities.
For
those VIEs where the Company determines that it has the power to direct the
activities that most significantly impact the VIE's economic performance, the
Company then must evaluate its economic interests, if any, and determine whether
it could absorb losses or receive benefits that could potentially be significant
to the VIE. When evaluating whether the Company has an obligation to absorb
losses that could potentially be significant, it considers the maximum exposure
to such loss without consideration of probability. Such obligations could be in
various forms, including, but not limited to, debt and equity investments,
guarantees, liquidity agreements, and certain derivative contracts.
In
various other transactions, the Company may: (i) act as a derivative
counterparty (for example, interest rate swap, cross-currency swap, or purchaser
of credit protection under a credit default swap or total return swap where the
Company pays the total return on certain assets to the SPE); (ii) act as
underwriter or placement agent; (iii) provide administrative, trustee or other
services; or (iv) make a market in debt securities or other instruments issued
by VIEs. The Company generally considers such involvement, by itself, not to be
variable interests and thus not an indicator of power or potentially significant
benefits or losses.
223
Citigroup's involvement with consolidated and unconsolidated VIEs with which the Company holds significant variable interests or has continuing involvement through servicing a majority of the assets in a VIE as of December 31, 2012 and 2011 is presented below:
In millions of dollars | As of December 31, 2012 | |||||||||||||||||||||||||||
Maximum exposure to loss in significant | ||||||||||||||||||||||||||||
unconsolidated VIEs | (1) | |||||||||||||||||||||||||||
Funded exposures | (2) | Unfunded exposures | (3) | |||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||
involvement | Significant | Guarantees | ||||||||||||||||||||||||||
with SPE | Consolidated | unconsolidated | Debt | Equity | Funding | and | ||||||||||||||||||||||
Citicorp | assets | VIE / SPE assets | VIE assets | (4) | investments | investments | commitments | derivatives | Total | |||||||||||||||||||
Credit card securitizations | $ | 79,109 | $ | 79,109 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Mortgage securitizations (5) | ||||||||||||||||||||||||||||
U.S. agency-sponsored | 232,741 | - | 232,741 | 3,042 | - | - | 45 | 3,087 | ||||||||||||||||||||
Non-agency-sponsored | 9,308 | 1,686 | 7,622 | 382 | - | - | - | 382 | ||||||||||||||||||||
Citi-administered asset-backed | ||||||||||||||||||||||||||||
commercial paper conduits (ABCP) | 30,002 | 22,387 | 7,615 | - | - | 7,615 | - | 7,615 | ||||||||||||||||||||
Third-party commercial | ||||||||||||||||||||||||||||
paper conduits | - | - | - | - | - | - | - | - | ||||||||||||||||||||
Collateralized debt obligations (CDOs) | 5,539 | - | 5,539 | 24 | - | - | - | 24 | ||||||||||||||||||||
Collateralized loan obligations (CLOs) | 15,120 | - | 15,120 | 642 | 19 | - | - | 661 | ||||||||||||||||||||
Asset-based financing | 41,399 | 1,125 | 40,274 | 14,798 | 84 | 2,081 | 159 | 17,122 | ||||||||||||||||||||
Municipal securities tender option bond | ||||||||||||||||||||||||||||
trusts (TOBs) | 15,163 | 7,573 | 7,590 | 352 | - | 4,628 | - | 4,980 | ||||||||||||||||||||
Municipal investments | 19,693 | 255 | 19,438 | 2,003 | 3,049 | 1,669 | - | 6,721 | ||||||||||||||||||||
Client intermediation | 2,486 | 151 | 2,335 | 319 | - | - | - | 319 | ||||||||||||||||||||
Investment funds | 4,286 | 2,196 | 2,090 | - | 14 | - | - | 14 | ||||||||||||||||||||
Trust preferred securities | 12,221 | - | 12,221 | - | 126 | - | - | 126 | ||||||||||||||||||||
Other | 2,023 | 115 | 1,908 | 113 | 382 | 22 | 76 | 593 | ||||||||||||||||||||
Total | $ | 469,090 | $ | 114,597 | $ | 354,493 | $ | 21,675 | $ | 3,674 | $ | 16,015 | $ | 280 | $ | 41,644 | ||||||||||||
Citi Holdings | ||||||||||||||||||||||||||||
Credit card securitizations | $ | 838 | $ | 397 | $ | 441 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Mortgage securitizations | ||||||||||||||||||||||||||||
U.S. agency-sponsored | 106,888 | - | 106,888 | 700 | - | - | 163 | 863 | ||||||||||||||||||||
Non-agency-sponsored | 16,693 | 1,628 | 15,065 | 43 | - | - | 2 | 45 | ||||||||||||||||||||
Student loan securitizations | 1,681 | 1,681 | - | - | - | - | - | - | ||||||||||||||||||||
Collateralized debt obligations (CDOs) | 4,752 | - | 4,752 | 139 | - | - | 124 | 263 | ||||||||||||||||||||
Collateralized loan obligations (CLOs) | 4,676 | - | 4,676 | 435 | - | 13 | 108 | 556 | ||||||||||||||||||||
Asset-based financing | 4,166 | 3 | 4,163 | 984 | 6 | 243 | - | 1,233 | ||||||||||||||||||||
Municipal investments | 7,766 | - | 7,766 | 90 | 235 | 992 | - | 1,317 | ||||||||||||||||||||
Client intermediation | 13 | 13 | - | - | - | - | - | - | ||||||||||||||||||||
Investment funds | 1,083 | - | 1,083 | - | 47 | - | - | 47 | ||||||||||||||||||||
Other | 6,005 | 5,851 | 154 | - | 3 | - | - | 3 | ||||||||||||||||||||
Total | $ | 154,561 | $ | 9,573 | $ | 144,988 | $ | 2,391 | $ | 291 | $ | 1,248 | $ | 397 | $ | 4,327 | ||||||||||||
Total Citigroup | $ | 623,651 | $ | 124,170 | $ | 499,481 | $ | 24,066 | $ | 3,965 | $ | 17,263 | $ | 677 | $ | 45,971 |
(1) | The definition of maximum exposure to loss is included in the text that follows this table. | |
(2) | Included in Citigroup's December 31, 2012 Consolidated Balance Sheet. | |
(3) | Not included in Citigroup's December 31, 2012 Consolidated Balance Sheet. | |
(4) | A significant unconsolidated VIE is an entity where the Company has any variable interest considered to be significant, regardless of the likelihood of loss or the notional amount of exposure. | |
(5) | Citicorp mortgage securitizations also include agency and non-agency (private-label) re-securitization activities. These SPEs are not consolidated. See "Re-Securitizations" below for further discussion. |
224
In millions of dollars | As of December 31, 2011 | ||||||||||||||||||||||||||
Maximum exposure to loss in significant | |||||||||||||||||||||||||||
unconsolidated VIEs | (1) | ||||||||||||||||||||||||||
Funded exposures | (2) | Unfunded exposures | (3) | ||||||||||||||||||||||||
Total | |||||||||||||||||||||||||||
involvement | Consolidated | Significant | Guarantees | ||||||||||||||||||||||||
with SPE | VIE / SPE | unconsolidated | Debt | Equity | Funding | and | |||||||||||||||||||||
assets | assets | VIE assets | (4) | investments | investments | commitments | derivatives | Total | |||||||||||||||||||
$ | 87,083 | $ | 87,083 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
232,179 | - | 232,179 | 3,769 | - | - | 26 | 3,795 | ||||||||||||||||||||
9,743 | 1,622 | 8,121 | 348 | - | - | - | 348 | ||||||||||||||||||||
34,987 | 21,971 | 13,016 | - | - | 13,016 | - | 13,016 | ||||||||||||||||||||
7,507 | - | 7,507 | - | - | 298 | - | 298 | ||||||||||||||||||||
3,334 | - | 3,334 | 20 | - | - | - | 20 | ||||||||||||||||||||
8,127 | - | 8,127 | 64 | - | - | - | 64 | ||||||||||||||||||||
19,034 | 1,303 | 17,731 | 7,892 | 2 | 2,891 | 121 | 10,906 | ||||||||||||||||||||
16,849 | 8,224 | 8,625 | 708 | - | 5,413 | - | 6,121 | ||||||||||||||||||||
20,331 | 299 | 20,032 | 2,345 | 3,535 | 1,586 | - | 7,466 | ||||||||||||||||||||
2,110 | 24 | 2,086 | 468 | - | - | - | 468 | ||||||||||||||||||||
4,621 | 2,027 | 2,594 | - | 70 | - | - | 70 | ||||||||||||||||||||
17,882 | - | 17,882 | - | 128 | - | - | 128 | ||||||||||||||||||||
6,210 | 97 | 6,113 | 354 | 172 | 279 | 79 | 884 | ||||||||||||||||||||
$ | 469,997 | $ | 122,650 | $ | 347,347 | $ | 15,968 | $ | 3,907 | $ | 23,483 | $ | 226 | $ | 43,584 | ||||||||||||
$ | 780 | $ | 581 | $ | 199 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
152,265 | - | 152,265 | 1,159 | - | - | 120 | 1,279 | ||||||||||||||||||||
20,821 | 1,764 | 19,057 | 61 | - | - | 2 | 63 | ||||||||||||||||||||
1,822 | 1,822 | - | - | - | - | - | - | ||||||||||||||||||||
6,581 | - | 6,581 | 117 | - | - | 120 | 237 | ||||||||||||||||||||
7,479 | - | 7,479 | 1,125 | - | 6 | 90 | 1,221 | ||||||||||||||||||||
10,490 | 73 | 10,417 | 5,004 | 3 | 250 | - | 5,257 | ||||||||||||||||||||
7,820 | - | 7,820 | 206 | 265 | 1,049 | - | 1,520 | ||||||||||||||||||||
111 | 111 | - | - | - | - | - | - | ||||||||||||||||||||
1,114 | 14 | 1,100 | - | 43 | - | - | 43 | ||||||||||||||||||||
6,762 | 6,581 | 181 | 3 | 36 | 15 | - | 54 | ||||||||||||||||||||
$ | 216,045 | $ | 10,946 | $ | 205,099 | $ | 7,675 | $ | 347 | $ | 1,320 | $ | 332 | $ | 9,674 | ||||||||||||
$ | 686,042 | $ | 133,596 | $ | 552,446 | $ | 23,643 | $ | 4,254 | $ | 24,803 | $ | 558 | $ | 53,258 |
(1) | The definition of maximum exposure to loss is included in the text that follows this table. | |
(2) | Included in Citigroup's December 31, 2011 Consolidated Balance Sheet. | |
(3) | Not included in Citigroup's December 31, 2011 Consolidated Balance Sheet. | |
(4) | A significant unconsolidated VIE is an entity where the Company has any variable interest considered to be significant, regardless of the likelihood of loss or the notional amount of exposure. | |
(5) | Citicorp mortgage securitizations also include agency and non-agency (private-label) re-securitization activities. These SPEs are not consolidated. See "Re-Securitizations" below for further discussion. | |
Reclassified to conform to the current year's presentation. |
225
The previous tables do not include:
certain venture capital investments made by some of the Company's private equity subsidiaries, as the Company accounts for these investments in accordance with the Investment Company Audit Guide; certain limited partnerships that are investment funds that qualify for the deferral from the requirements of ASC 810 where the Company is the general partner and the limited partners have the right to replace the general partner or liquidate the funds; certain investment funds for which the Company provides investment management services and personal estate trusts for which the Company provides administrative, trustee and/or investment management services; VIEs structured by third parties where the Company holds securities in inventory, as these investments are made on arm's-length terms; certain positions in mortgage-backed and asset-backed securities held by the Company, which are classified as Trading account assets or Investments , where the Company has no other involvement with the related securitization entity deemed to be significant (for more information on these positions, see Notes 14 and 15 to the Consolidated Financial Statements); certain representations and warranties exposures in legacy Securities and Banking -sponsored mortgage-backed and asset-backed securitizations, where the Company has no variable interest or continuing involvement as servicer. The outstanding balance of mortgage loans securitized during 2005 to 2008 where the Company has no variable interest or continuing involvement as servicer was approximately $19 billion at December 31, 2012; and certain representations and warranties exposures in Citigroup residential mortgage securitizations, where the original mortgage loan balances are no longer outstanding. The asset
balances for consolidated VIEs represent the carrying amounts of the assets
consolidated by the Company. The carrying amount may represent the amortized
cost or the current fair value of the assets depending on the legal form of the
asset (e.g., security or loan) and the Company's standard accounting policies
for the asset type and line of business.
The asset
balances for unconsolidated VIEs where the Company has significant involvement
represent the most current information available to the Company. In most cases,
the asset balances represent an amortized cost basis without regard to
impairments in fair value, unless fair value information is readily available to
the Company. For VIEs that obtain asset exposures synthetically through
derivative instruments (for example, synthetic CDOs), the tables generally
include the full original notional amount of the derivative as an asset
balance.
The maximum funded exposure represents the balance sheet carrying amount
of the Company's investment in the VIE. It reflects the initial amount of cash
invested in the VIE adjusted for any accrued interest and cash principal
payments received. The carrying amount may also be adjusted for increases or
declines in fair value or any impairment in value recognized in earnings. The
maximum exposure of unfunded positions represents the remaining undrawn
committed amount, including liquidity and credit facilities provided by the
Company, or the notional amount of a derivative instrument considered to be a
variable interest. In certain transactions, the Company has entered into
derivative instruments or other arrangements that are not considered variable
interests in the VIE (e.g., interest rate swaps, cross-currency swaps, or where
the Company is the purchaser of credit protection under a credit default swap or
total return swap where the Company pays the total return on certain assets to
the SPE). Receivables under such arrangements are not included in the maximum
exposure amounts.
226
Funding Commitments for
Significant Unconsolidated VIEs-Liquidity Facilities and Loan
Commitments
The following
table presents the notional amount of liquidity facilities and loan commitments
that are classified as funding commitments in the VIE tables above as of
December 31, 2012:
In millions of dollars | Liquidity facilities | Loan commitments | ||||
Citicorp | ||||||
Citi-administered asset-backed commercial paper conduits (ABCP) | $ | 7,615 | $ | - | ||
Asset-based financing | 6 | 2,075 | ||||
Municipal securities tender option bond trusts (TOBs) | 4,628 | - | ||||
Municipal investments | - | 1,669 | ||||
Other | - | 22 | ||||
Total Citicorp | $ | 12,249 | $ | 3,766 | ||
Citi Holdings | ||||||
Asset-based financing | $ | - | $ | 243 | ||
Collateralized loan obligations (CLOs) | 13 | - | ||||
Municipal investments | - | 992 | ||||
Total Citi Holdings | $ | 13 | $ | 1,235 | ||
Total Citigroup funding commitments | $ | 12,262 | $ | 5,001 |
Citicorp and Citi
Holdings Consolidated VIEs
The Company engages in on-balance-sheet securitizations which are
securitizations that do not qualify for sales treatment; thus, the assets remain
on the Company's balance sheet. The consolidated VIEs included in the tables
below represent hundreds of separate entities with which the Company is
involved. In general, the third-party investors in the obligations of
consolidated VIEs have legal recourse only to the assets of the VIEs and do not
have such recourse to the Company, except where the Company has provided a
guarantee to the investors or is the counterparty to certain derivative
transactions involving the VIE. In addition, the assets are generally restricted
only to pay such liabilities.
The following table presents the carrying amounts and classifications of consolidated assets that are collateral for consolidated VIE and SPE obligations as of December 31, 2012 and December 31, 2011:
In billions of dollars | December 31, 2012 | December 31, 2011 | ||||||||||||||||
Citicorp | Citi Holdings | Citigroup | Citicorp | Citi Holdings | Citigroup | |||||||||||||
Cash | $ | 0.3 | $ | 0.2 | $ | 0.5 | $ | 0.2 | $ | 0.4 | $ | 0.6 | ||||||
Trading account assets | 0.5 | - | 0.5 | 0.4 | 0.1 | 0.5 | ||||||||||||
Investments | 10.7 | - | 10.7 | 12.5 | - | 12.5 | ||||||||||||
Total loans, net | 102.6 | 9.1 | 111.7 | 109.0 | 10.1 | 119.1 | ||||||||||||
Other | 0.5 | 0.2 | 0.7 | 0.5 | 0.3 | 0.8 | ||||||||||||
Total assets | $ | 114.6 | $ | 9.5 | $ | 124.1 | $ | 122.6 | $ | 10.9 | $ | 133.5 | ||||||
Short-term borrowings | $ | 17.9 | $ | - | $ | 17.9 | $ | 22.5 | $ | 0.8 | $ | 23.3 | ||||||
Long-term debt | 23.8 | 2.6 | 26.4 | 44.8 | 5.6 | 50.4 | ||||||||||||
Other liabilities | 1.1 | 0.1 | 1.2 | 0.9 | 0.2 | 1.1 | ||||||||||||
Total liabilities | $ | 42.8 | $ | 2.7 | $ | 45.5 | $ | 68.2 | $ | 6.6 | $ | 74.8 |
227
Citicorp and Citi
Holdings Significant Variable Interests in Unconsolidated VIEs-Balance Sheet
Classification
The
following table presents the carrying amounts and classification of significant
variable interests in unconsolidated VIEs as of December 31, 2012 and December
31, 2011:
In billions of dollars | December 31, 2012 | December 31, 2011 | ||||||||||||||||
Citicorp | Citi Holdings | Citigroup | Citicorp | Citi Holdings | Citigroup | |||||||||||||
Trading account assets | $ | 4.0 | $ | 0.5 | $ | 4.5 | $ | 5.5 | $ | 1.0 | $ | 6.5 | ||||||
Investments | 5.4 | 0.7 | 6.1 | 3.8 | 4.4 | 8.2 | ||||||||||||
Total loans, net | 14.6 | 0.9 | 15.5 | 9.0 | 1.6 | 10.6 | ||||||||||||
Other | 1.4 | 0.5 | 1.9 | 1.6 | 1.0 | 2.6 | ||||||||||||
Total assets | $ | 25.4 | $ | 2.6 | $ | 28.0 | $ | 19.9 | $ | 8.0 | $ | 27.9 | ||||||
Long-term debt | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||
Total liabilities | - | - | - | - | - | - |
Credit Card
Securitizations
The
Company securitizes credit card receivables through trusts that are established
to purchase the receivables. Citigroup transfers receivables into the trusts on
a non-recourse basis. Credit card securitizations are revolving securitizations;
that is, as customers pay their credit card balances, the cash proceeds are used
to purchase new receivables and replenish the receivables in the
trust.
Substantially
all of the Company's credit card securitization activity is through two
trusts-Citibank Credit Card Master Trust (Master Trust) and the Citibank Omni
Master Trust (Omni Trust). Since the adoption of SFAS 167 (ASC 810) on January
1, 2010, these trusts are treated as consolidated entities because, as servicer,
Citigroup has the power to direct the activities
that most significantly impact
the economic performance of the trusts and also holds a seller's interest and
certain securities issued by the trusts, and provides liquidity facilities to
the trusts, which could result in potentially significant losses or benefits
from the trusts. Accordingly, the transferred credit card receivables remain on
the Consolidated Balance Sheet with no gain or loss recognized. The debt issued
by the trusts to third parties is included in the Consolidated Balance
Sheet.
The Company
relies on securitizations to fund a significant portion of its credit card
businesses in North
America . The following table
reflects amounts related to the Company's securitized credit card receivables as
of December 31, 2012 and December 31, 2011:
Citicorp | Citi Holdings | |||||||||||
In billions of dollars | December 31, 2012 | December 31, 2011 | December 31, 2012 | December 31, 2011 | ||||||||
Principal amount of credit card receivables in trusts | $ | 80.7 | $ | 89.8 | $ | 0.4 | $ | 0.6 | ||||
Ownership interests in principal amount of trust credit card receivables | ||||||||||||
Sold to investors via trust-issued securities | $ | 22.9 | $ | 42.7 | $ | 0.1 | $ | 0.3 | ||||
Retained by Citigroup as trust-issued securities | 13.2 | 14.7 | 0.1 | 0.1 | ||||||||
Retained by Citigroup via non-certificated interests | 44.6 | 32.4 | 0.2 | 0.2 | ||||||||
Total ownership interests in principal amount of trust credit card receivables | $ | 80.7 | $ | 89.8 | $ | 0.4 | $ | 0.6 |
228
Credit Card
Securitizations-Citicorp
The
following table summarizes selected cash flow information related to Citicorp's
credit card securitizations for the years ended December 31, 2012, 2011 and
2010:
In billions of dollars | 2012 | 2011 | 2010 | |||||||
Proceeds from new securitizations | $ | 2.4 | $ | 3.9 | $ | 5.5 | ||||
Pay down of maturing notes | (21.7 | ) | (20.5 | ) | (40.3 | ) |
Credit Card
Securitizations-Citi Holdings
The proceeds from Citi Holdings' credit card securitizations were $0.4
billion for the year ended December 31, 2012.
Managed
Loans
After securitization of
credit card receivables, the Company continues to maintain credit card customer
account relationships and provides servicing for receivables transferred to the
trusts. As a result, the Company considers the securitized credit card
receivables to be part of the business it manages. As Citigroup consolidates the
credit card trusts, all managed securitized card receivables are on-balance
sheet.
Funding, Liquidity
Facilities and Subordinated Interests
As noted above, Citigroup securitizes credit card receivables through two
securitization trusts-Master Trust, which is part of Citicorp, and Omni Trust,
which is also substantially part of Citicorp. The liabilities of the trusts are
included in the Consolidated Balance Sheet, excluding those retained by
Citigroup.
Master Trust
issues fixed- and floating-rate term notes. Some of the term notes are issued to
multi-seller commercial paper conduits. The weighted average maturity of the
term notes issued by the Master Trust was 3.8 years as of December 31, 2012 and
3.1 years as of December 31, 2011.
Master Trust Liabilities (at par value)
In billions of dollars | December 31, 2012 | December 31, 2011 | ||||
Term notes issued to
multi-seller commercial paper conduits | $ | - | $ | - | ||
Term notes issued to third parties | 18.6 | 30.4 | ||||
Term notes retained by Citigroup affiliates | 4.8 | 7.7 | ||||
Total Master Trust liabilities | $ | 23.4 | $ | 38.1 |
The Omni Trust issues fixed- and floating-rate term notes, some of which are purchased by multi-seller commercial paper conduits. The weighted average maturity of the third-party term notes issued by the Omni Trust was 1.7 years as of December 31, 2012 and 1.5 years as of December 31, 2011.
Omni Trust Liabilities (at par value)
In billions of dollars | December 31, 2012 | December 31, 2011 | ||||
Term notes issued to
multi-seller commercial paper conduits | $ | - | $ | 3.4 | ||
Term notes issued to third parties | 4.4 | 9.2 | ||||
Term notes retained by Citigroup affiliates | 7.1 | 7.1 | ||||
Total Omni Trust liabilities | $ | 11.5 | $ | 19.7 |
229
Mortgage
Securitizations
The
Company provides a wide range of mortgage loan products to a diverse customer
base. Once originated, the Company often securitizes these loans through the use
of SPEs. These SPEs are funded through the issuance of trust certificates backed
solely by the transferred assets. These certificates have the same average life
as the transferred assets. In addition to providing a source of liquidity and
less expensive funding, securitizing these assets also reduces the Company's
credit exposure to the borrowers. These mortgage loan securitizations are
primarily non-recourse, thereby effectively transferring the risk of future
credit losses to the purchasers of the securities issued by the trust. However,
the Company's Consumer business generally retains the servicing rights and in
certain instances retains investment securities, interest-only strips and
residual interests in future cash flows from the trusts and also provides
servicing for a limited number of Securities and Banking securitizations. Securities and
Banking and Special Asset Pool do not retain servicing for their mortgage
securitizations.
The Company
securitizes mortgage loans generally through either a government-sponsored
agency, such as Ginnie Mae, Fannie Mae or Freddie Mac (U.S. agency-sponsored
mortgages), or private-label (non-agency-
sponsored mortgages)
securitization. The Company is not the primary beneficiary of its U.S.
agency-sponsored mortgage securitizations because Citigroup does not have the
power to direct the activities of the SPE that most significantly impact the
entity's economic performance. Therefore, Citi does not consolidate these U.S.
agency-sponsored mortgage securitizations.
The Company does not consolidate
certain non-agency-sponsored mortgage securitizations because Citi is either not
the servicer with the power to direct the significant activities of the entity
or Citi is the servicer but the servicing relationship is deemed to be a
fiduciary relationship and, therefore, Citi is not deemed to be the primary
beneficiary of the entity.
In certain
instances, the Company has (i) the power to direct the activities and (ii) the
obligation to either absorb losses or right to receive benefits that could be
potentially significant to its non-agency-sponsored mortgage securitizations
and, therefore, is the primary beneficiary and consolidates the
SPE.
Mortgage
Securitizations-Citicorp
The
following tables summarize selected cash flow information related to Citicorp
mortgage securitizations for the years ended December 31, 2012, 2011 and
2010:
2012 | 2011 | 2010 | ||||||||||
In billions of dollars | U.S. agency- sponsored mortgages | Non-agency- sponsored mortgages | Agency- and non-agency- sponsored mortgages | Agency- and non-agency- sponsored mortgages | ||||||||
Proceeds from new securitizations | $ | 54.2 | $ | 2.3 | $ | 57.3 | $ | 65.1 | ||||
Contractual servicing fees received | 0.5 | - | 0.5 | 0.5 | ||||||||
Cash flows received on retained interests and other net cash flows | 0.1 | - | 0.1 | 0.1 |
Gains (losses) recognized on the securitization of U.S. agency-sponsored mortgages during 2012 were $10 million. For the year ended December 31, 2012, gains (losses) recognized on the securitization of non-agency-sponsored mortgages were $20 million.
Agency and non-agency mortgage securitization gains (losses) for the years ended December 31, 2011 and 2010 were $(9) million and $(5) million, respectively.
230
Key assumptions used in measuring the fair value of retained interests at the date of sale or securitization of mortgage receivables for the years ended December 31, 2012 and 2011 were as follows:
December 31, 2012 | |||||||
Non-agency-sponsored mortgages | (1) | ||||||
U.S. agency- sponsored mortgages | Senior interests | Subordinated interests | |||||
Discount rate | 0.2% to 14.4 | % | 1.2% to 24.0 | % | 1.1% to 29.2 | % | |
Weighted average discount rate | 11.4 | % | 8.1 | % | 13.8 | % | |
Constant prepayment rate | 6.7% to 36.4 | % | 1.9% to 22.8 | % | 1.6% to 29.4 | % | |
Weighted average constant prepayment rate | 10.2 | % | 9.3 | % | 10.1 | % | |
Anticipated net credit losses (2) | NM | 37.5% to 80.2 | % | 33.4% to 90.0 | % | ||
Weighted average anticipated net credit losses | NM | 60.3 | % | 54.1 | % | ||
December 31, 2011 | |||||||
Non-agency-sponsored mortgages | (1) | ||||||
U.S. agency- sponsored mortgages | Senior interests | Subordinated interests | |||||
Discount rate | 0.6% to 28.3 | % | 2.4% to 10.0 | % | 8.4% to 17.6 | % | |
Weighted average discount rate | 12.0 | % | 4.5 | % | 11.0 | % | |
Constant prepayment rate | 2.2% to 30.6 | % | 1.0% to 2.2 | % | 5.2% to 22.1 | % | |
Weighted average constant prepayment rate | 7.9 | % | 1.9 | % | 17.3 | % | |
Anticipated net credit losses (2) | NM | 35.0% to 72.0 | % | 11.4% to 58.6 | % | ||
Weighted average anticipated net credit losses | NM | 45.3 | % | 25.0 | % |
(1) | Disclosure of non-agency-sponsored mortgages as senior and subordinated interests is indicative of the interests' position in the capital structure of the securitization. | |
(2) | Anticipated net credit losses represent estimated loss severity associated with defaulted mortgage loans underlying the mortgage securitizations disclosed above. Anticipated net credit losses, in this instance, do not represent total credit losses incurred to date, nor do they represent credit losses expected on retained interests in mortgage securitizations. | |
NM | Not meaningful. Anticipated net credit losses are not meaningful due to U.S. agency guarantees. |
231
The range in the key assumptions is
due to the different characteristics of the interests retained by the Company.
The interests retained range from highly rated and/or senior in the capital
structure to unrated and/or residual interests.
The effect of adverse changes of 10%
and 20% in each of the key assumptions used to determine the fair value of
retained interests and the
sensitivity of the fair value to such adverse changes, each as of December 31, 2012 and 2011, is set forth in the tables below. The negative effect of each change is calculated independently, holding all other assumptions constant. Because the key assumptions may not in fact be independent, the net effect of simultaneous adverse changes in the key assumptions may be less than the sum of the individual effects shown below.
December 31, 2012 | |||||||
Non-agency-sponsored mortgages | (1) | ||||||
U.S. agency- | Senior | Subordinated | |||||
sponsored mortgages | interests | interests | |||||
Discount rate | 0.6% to 17.2 | % | 1.2% to 24.0 | % | 1.1% to 29.2 | % | |
Weighted average discount rate | 6.1 | % | 9.0 | % | 13.8 | % | |
Constant prepayment rate | 9.0% to 57.8 | % | 1.9% to 22.8 | % | 0.5% to 29.4 | % | |
Weighted average constant prepayment rate | 27.7 | % | 12.3 | % | 10.0 | % | |
Anticipated net credit losses (2) | NM | 0.1% to 80.2 | % | 33.4% to 90.0 | % | ||
Weighted average anticipated net credit losses | NM | 47.0 | % | 54.1 | % | ||
December 31, 2011 | |||||||
Non-agency-sponsored mortgages | (1) | ||||||
U.S. agency- | Senior | Subordinated | |||||
sponsored mortgages | interests | interests | |||||
Discount rate | 1.3% to 16.4 | % | 2.2% to 24.4 | % | 1.3% to 28.1 | % | |
Weighted average discount rate | 8.1 | % | 9.6 | % | 13.5 | % | |
Constant prepayment rate | 18.9% to 30.6 | % | 1.7% to 51.8 | % | 0.6% to 29.1 | % | |
Weighted average constant prepayment rate | 28.7 | % | 26.2 | % | 10.5 | % | |
Anticipated net credit losses (2) | NM | 0.0% to 77.9 | % | 29.3% to 90.0 | % | ||
Weighted average anticipated net credit losses | NM | 37.6 | % | 57.2 | % |
(1) | Disclosure of non-agency-sponsored mortgages as senior and subordinated interests is indicative of the interests' position in the capital structure of the securitization. | |
(2) | Anticipated net credit losses represent estimated loss severity associated with defaulted mortgage loans underlying the mortgage securitizations disclosed above. Anticipated net credit losses, in this instance, do not represent total credit losses incurred to date, nor do they represent credit losses expected on retained interests in mortgage securitizations. | |
NM | Not meaningful. Anticipated net credit losses are not meaningful due to U.S. agency guarantees. |
U.S. agency-sponsored | Non-agency-sponsored mortgages | (1) | ||||||||
In millions of dollars at December 31, 2012 | mortgages | Senior interests | Subordinated interests | |||||||
Carrying value of retained interests | $ | 1,987 | $ | 88 | $ | 466 | ||||
Discount rates | ||||||||||
Adverse change of 10% | $ | (46 | ) | $ | (2 | ) | $ | (31 | ) | |
Adverse change of 20% | (90 | ) | (4 | ) | (59 | ) | ||||
Constant prepayment rate | ||||||||||
Adverse change of 10% | (110 | ) | (1 | ) | (11 | ) | ||||
Adverse change of 20% | (211 | ) | (3 | ) | (22 | ) | ||||
Anticipated net credit losses | ||||||||||
Adverse change of 10% | (11 | ) | (1 | ) | (13 | ) | ||||
Adverse change of 20% | (21 | ) | (3 | ) | (24 | ) |
(1) | Disclosure of non-agency-sponsored mortgages as senior and subordinated interests is indicative of the interests' position in the capital structure of the securitization. |
232
Mortgage
Securitizations-Citi Holdings
The following tables summarize selected cash flow information related to
Citi Holdings mortgage securitizations for the years ended December 31, 2012,
2011 and 2010:
2012 | 2011 | 2010 | ||||
In billions of dollars | U.S. agency- sponsored mortgages | Agency- and non-agency- sponsored mortgages | Agency- and non-agency- sponsored mortgages | |||
Proceeds from new securitizations | $0.4 | $1.1 | $0.6 | |||
Contractual servicing fees received | 0.4 | 0.6 | 0.8 | |||
Cash flows received on retained interests and other net cash flows | - | 0.1 | 0.1 |
Gains recognized on the
securitization of U.S. agency-sponsored mortgages were $45 million and $78
million for the years ended December 31, 2012 and 2011, respectively. The
Company did not securitize non-agency-sponsored mortgages during the years ended
December 31, 2012 and 2011.
Similar to
Citicorp mortgage securitizations discussed above, the range in the key
assumptions is due to the different characteristics of the interests retained by
the Company. The interests retained range from highly rated and/or senior in the
capital structure to unrated and/or residual interests.
The effect of adverse changes of 10% and 20% in each of the key assumptions used to determine the fair value of retained interests, and the sensitivity of the fair value to such adverse changes, each as of December 31, 2012 and 2011, is set forth in the tables below. The negative effect of each change is calculated independently, holding all other assumptions constant. Because the key assumptions may not in fact be independent, the net effect of simultaneous adverse changes in the key assumptions may be less than the sum of the individual effects shown below.
December 31, 2012 | |||||||
Non-agency-sponsored mortgages | (1) | ||||||
U.S. agency- | Senior | Subordinated | |||||
sponsored mortgages | interests | interests | |||||
Discount rate | 9.7 | % | 4.1% to 10.0 | % | 3.4% to 12.4 | % | |
Weighted average discount rate | 9.7 | % | 4.2 | % | 8.0 | % | |
Constant prepayment rate | 28.6 | % | 21.7 | % | 12.7% to 18.7 | % | |
Weighted average constant prepayment rate | 28.6 | % | 21.7 | % | 15.7 | % | |
Anticipated net credit losses | NM | 0.5 | % | 50.0% to 50.1 | % | ||
Weighted average anticipated net credit losses | NM | 0.5 | % | 50.1 | % | ||
Weighted average life | 4.1 years | 4.4 years | 6.0 to 7.4 years | ||||
December 31, 2011 | |||||||
Non-agency-sponsored mortgages | (1) | ||||||
U.S. agency- | Senior | Subordinated | |||||
sponsored mortgages | interests | interests | |||||
Discount rate | 6.9 | % | 2.9% to 18.0 | % | 6.7% to 18.2 | % | |
Weighted average discount rate | 6.9 | % | 9.8 | % | 9.2 | % | |
Constant prepayment rate | 30.0 | % | 38.8 | % | 2.0% to 9.6 | % | |
Weighted average constant prepayment rate | 30.0 | % | 38.8 | % | 8.1 | % | |
Anticipated net credit losses | NM | 0.4 | % | 57.2% to 90.0 | % | ||
Weighted average anticipated net credit losses | NM | 0.4 | % | 63.2 | % | ||
Weighted average life | 3.7 years | 3.3 to 4.7 years | 0.0 to 8.1 years |
(1) | Disclosure of non-agency-sponsored mortgages as senior and subordinated interests is indicative of the interests' position in the capital structure of the securitization. | |
NM | Not meaningful. Anticipated net credit losses are not meaningful due to U.S. agency guarantees. |
233
U.S. agency-sponsored | Non-agency-sponsored mortgages | (1) | ||||||||
In millions of dollars at December 31, 2012 | mortgages | Senior interests | Subordinated interests | |||||||
Carrying value of retained interests | $ | 618 | $ | 39 | $ | 16 | ||||
Discount rates | ||||||||||
Adverse change of 10% | $ | (22 | ) | $ | - | $ | (1 | ) | ||
Adverse change of 20% | (42 | ) | (1 | ) | (2 | ) | ||||
Constant prepayment rate | ||||||||||
Adverse change of 10% | (57 | ) | (3 | ) | - | |||||
Adverse change of 20% | (109 | ) | (7 | ) | (1 | ) | ||||
Anticipated net credit losses | ||||||||||
Adverse change of 10% | (32 | ) | (9 | ) | (2 | ) | ||||
Adverse change of 20% | (64 | ) | (19 | ) | (4 | ) |
(1) | Disclosure of non-agency-sponsored mortgages as senior and subordinated interests is indicative of the interests' position in the capital structure of the securitization. |
Mortgage Servicing
Rights
In connection with the
securitization of mortgage loans, the Company's U.S. Consumer mortgage business
generally retains the servicing rights, which entitle the Company to a future
stream of cash flows based on the outstanding principal balances of the loans
and the contractual servicing fee. Failure to service the loans in accordance
with contractual requirements may lead to a termination of the servicing rights
and the loss of future servicing fees.
The fair value of capitalized
mortgage servicing rights (MSRs) was $1.9 billion and $2.6 billion at December
31, 2012 and 2011, respectively. The MSRs correspond to principal loan balances
of $325 billion and $401 billion as of December 31, 2012 and 2011, respectively.
The following table summarizes the changes in capitalized MSRs for the years
ended December 31, 2012 and 2011:
In millions of dollars | 2012 | 2011 | |||||
Balance, beginning of year | $ | 2,569 | $ | 4,554 | |||
Originations | 423 | 611 | |||||
Changes in fair value of MSRs due to
changes in inputs and assumptions | (198 | ) | (1,210 | ) | |||
Other changes (1) | (852 | ) | (1,174 | ) | |||
Sale of MSRs | - | (212 | ) | ||||
Balance, end of year | $ | 1,942 | $ | 2,569 |
(1) | Represents changes due to customer payments and passage of time. |
The fair value of the MSRs is primarily affected by changes in prepayments of mortgages that result from shifts in mortgage interest rates. In managing this risk, the Company 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 .
The Company receives fees during the course of servicing previously securitized mortgages. The amounts of these fees for the years ended December 31, 2012, 2011 and 2010 were as follows:
In millions of dollars | 2012 | 2011 | 2010 | ||||||
Servicing fees | $ | 990 | $ | 1,170 | $ | 1,356 | |||
Late fees | 65 | 76 | 87 | ||||||
Ancillary fees | 122 | 130 | 214 | ||||||
Total MSR fees | $ | 1,177 | $ | 1,376 | $ | 1,657 |
These fees are classified in the Consolidated Statement of Income as Other revenue.
Re-securitizations
The
Company engages in re-securitization transactions in which debt securities are
transferred to a VIE in exchange for new beneficial interests. During the year
ended December 31, 2012, Citi transferred non-agency (private-label) securities
with an original par value of approximately $1.5 billion to re-securitization
entities. These securities are backed by either residential or commercial
mortgages and are often structured on behalf of clients. As of December 31,
2012, the fair value of Citi-retained interests in private-label
re-securitization transactions structured by Citi totaled approximately $380
million ($128 million of which relates to re-securitization transactions
executed in 2012) and are recorded in Trading account assets . Of
this amount, approximately $11 million and $369 million related to senior and
subordinated beneficial interests, respectively. The original par value of
private-label re-securitization transactions in which Citi holds a retained
interest as of December 31, 2012 was approximately $7.1 billion.
234
The Company also re-securitizes U.S.
government-agency guaranteed mortgage-backed (agency) securities. During the 12
months ended December 31, 2012, Citi transferred agency securities with a fair
value of approximately $30.3 billion to re-securitization entities. As of
December 31, 2012, the fair value of Citi-retained interests in agency
re-securitization transactions structured by Citi totaled approximately $1.7
billion ($1.1 billion of which related to re-securitization transactions
executed in 2012) and is recorded in Trading account assets .
The original fair value of agency re-securitization transactions in which Citi
holds a retained interest as of December 31, 2012 was approximately $71.2
billion.
As of
December 31, 2012, the Company did not consolidate any private-label or agency
re-securitization entities.
Citi-Administered
Asset-Backed Commercial Paper Conduits
The Company is active in the asset-backed
commercial paper conduit business as administrator of several multi-seller
commercial paper conduits and also as a service provider to single-seller and
other commercial paper conduits sponsored by third parties.
Citi's multi-seller commercial paper
conduits are designed to provide the Company's clients access to low-cost
funding in the commercial paper markets. The conduits purchase assets from or
provide financing facilities to clients and are funded by issuing commercial
paper to third-party investors. The conduits generally do not purchase assets
originated by the Company. The funding of the conduits is facilitated by the
liquidity support and credit enhancements provided by the
Company.
As
administrator to Citi's conduits, the Company is generally responsible for
selecting and structuring assets purchased or financed by the conduits, making
decisions regarding the funding of the conduits, including determining the tenor
and other features of the commercial paper issued, monitoring the quality and
performance of the conduits' assets, and facilitating the operations and cash
flows of the conduits. In return, the Company earns structuring fees from
customers for individual transactions and earns an administration fee from the
conduit, which is equal to the income from the client program and liquidity fees
of the conduit after payment of conduit expenses. This administration fee is
fairly stable, since most risks and rewards of the underlying assets are passed
back to the clients and, once the asset pricing is negotiated, most ongoing
income, costs and fees are relatively stable as a percentage of the conduit's
size.
The conduits administered by the
Company do not generally invest in liquid securities that are formally rated by
third parties. The assets are privately negotiated and structured transactions
that are designed to be held by the conduit, rather than actively traded and
sold. The yield earned
by the conduit on each asset is generally tied to the
rate on the commercial paper issued by the conduit, thus passing interest rate
risk to the client. Each asset purchased by the conduit is structured with
transaction-specific credit enhancement features provided by the third-party
client seller, including over collateralization, cash and excess spread
collateral accounts, direct recourse or third-party guarantees. These credit
enhancements are sized with the objective of approximating a credit rating of A
or above, based on the Company's internal risk ratings.
Substantially all of the funding of
the conduits is in the form of short-term commercial paper, with a weighted
average life generally ranging from 25 to 45 days. At the respective period ends
December 31, 2012 and December 31, 2011, the weighted average lives of the
commercial paper issued by consolidated and unconsolidated conduits were
approximately 38 and 37 days, respectively.
The primary credit enhancement
provided to the conduit investors is in the form of transaction-specific credit
enhancement described above. In addition, each consolidated conduit has obtained
a letter of credit from the Company, which needs to be sized to at least 8–10%
of the conduit's assets with a floor of $200 million. The letters of credit
provided by the Company to the consolidated conduits total approximately $2.1
billion. The net result across all multi-seller
conduits administered by the Company is that, in the event defaulted assets
exceed the transaction-specific credit enhancements described above, any losses
in each conduit are allocated first to the Company and then the commercial paper
investors.
The Company
also provides the conduits with two forms of liquidity agreements that are used
to provide funding to the conduits in the event of a market disruption, among
other events. Each asset of the conduits is supported by a transaction-specific
liquidity facility in the form of an asset purchase agreement (APA). Under the
APA, the Company has generally agreed to purchase non-defaulted eligible
receivables from the conduit at par. The APA is not generally designed to
provide credit support to the conduit, as it generally does not permit the
purchase of defaulted or impaired assets. Any funding under the APA will likely
subject the underlying borrower to the conduits to increased interest costs. In
addition, the Company provides the conduits with program-wide liquidity in the
form of short-term lending commitments. Under these commitments, the Company has
agreed to lend to the conduits in the event of a short-term disruption in the
commercial paper market, subject to specified conditions. The Company receives
fees for providing both types of liquidity agreements and considers these fees
to be on fair market terms.
235
Finally, the
Company is one of several named dealers in the commercial paper issued by the
conduits and earns a market-based fee for providing such services. Along with
third-party dealers, the Company makes a market in the commercial paper and may
from time to time fund commercial paper pending sale to a third party. On
specific dates with less liquidity in the market, the Company may hold in
inventory commercial paper issued by conduits administered by the Company, as
well as conduits administered by third parties. The amount of commercial paper
issued by its administered conduits held in inventory fluctuates based on market
conditions and activity. As of December 31, 2012, the Company owned $11.7
billion and $131 million of the commercial paper issued by its consolidated and
unconsolidated administered conduits, respectively.
With the exception of the
government-guaranteed loan conduit described below, the asset-backed commercial
paper conduits are consolidated by the Company. The Company determined that
through its role as administrator it had the power to direct the activities that
most significantly impacted the entities' economic performance. These powers
included its ability to structure and approve the assets purchased by the
conduits, its ongoing surveillance and credit mitigation activities, and its
liability management. In addition, as a result of all the Company's involvement
described above, it was concluded that the Company had an economic interest that
could potentially be significant. However, the assets and liabilities of the
conduits are separate and apart from those of Citigroup. No assets of any
conduit are available to satisfy the creditors of Citigroup or any of its other
subsidiaries.
The Company
administers one conduit that originates loans to third-party borrowers and those
obligations are fully guaranteed primarily by AAA-rated government agencies that
support export and development financing programs. The economic performance of
this government-guaranteed loan conduit is most significantly impacted by the
performance of its underlying assets. The
guarantors must approve each loan held by the entity and the guarantors have the
ability (through establishment of the servicing terms to direct default
mitigation and to purchase defaulted loans) to manage the conduit's loans that
become delinquent to improve the economic performance of the conduit. Because
the Company does not have the power to direct the activities of this
government-guaranteed loan conduit that most significantly impact the economic
performance of the entity, it was concluded that the Company should not
consolidate the entity. The total notional exposure under the program-wide
liquidity agreement for the Company's unconsolidated administered conduit as of
December 31, 2012 is $0.6 billion. The program-wide liquidity agreement, along
with each asset APA, is considered in the Company's maximum exposure to loss to
the unconsolidated administered conduit.
As of December 31, 2012, this
unconsolidated government-guaranteed loan conduit held assets and funding
commitments of approximately $7.6 billion.
Third-Party Commercial
Paper Conduits
The Company
also provides liquidity facilities to single- and multi-seller conduits
sponsored by third parties. These conduits are independently owned and managed
and invest in a variety of asset classes, depending on the nature of the
conduit. The facilities provided by the Company typically represent a small
portion of the total liquidity facilities obtained by each conduit, and are
collateralized by the assets of each conduit. The Company is not the party that
has the power to direct the activities of these conduits that most significantly
impact their economic performance and thus does not consolidate them. As of
December 31, 2012, the Company had no involvement in third-party commercial
paper conduits.
Collateralized Debt and
Loan Obligations
A
securitized collateralized debt obligation (CDO) is an SPE that purchases a pool
of assets consisting of asset-backed securities and synthetic exposures through
derivatives on asset-backed securities and issues multiple tranches of equity
and notes to investors.
A cash CDO,
or arbitrage CDO, is a CDO designed to take advantage of the difference between
the yield on a portfolio of selected assets, typically residential
mortgage-backed securities, and the cost of funding the CDO through the sale of
notes to investors. "Cash flow" CDOs are entities in which the CDO passes on
cash flows from a pool of assets, while "market value" CDOs pay to investors the
market value of the pool of assets owned by the CDO at maturity. In these
transactions, all of the equity and notes issued by the CDO are funded, as the
cash is needed to purchase the debt securities.
A synthetic CDO is similar to a cash
CDO, except that the CDO obtains exposure to all or a portion of the referenced
assets synthetically through derivative instruments, such as credit default
swaps. Because the CDO does not need to raise cash sufficient to purchase the
entire referenced portfolio, a substantial portion of the senior tranches of
risk is typically passed on to CDO investors in the form of unfunded liabilities
or derivative instruments. The CDO writes credit protection on select
referenced debt securities to the Company or third
parties and the risk is then passed on to the CDO investors in the form of
funded notes or purchased credit protection through derivative instruments. Any
cash raised from investors is invested in a portfolio of collateral securities
or investment contracts. The collateral is then used to support the obligations
of the CDO on the credit default swaps written to
counterparties.
236
A securitized
collateralized loan obligation (CLO) is substantially similar to the CDO
transactions described above, except that the assets owned by the SPE (either
cash instruments or synthetic exposures through derivative instruments) are
corporate loans and to a lesser extent corporate bonds, rather than asset-backed
debt securities.
A third-party
asset manager is typically retained by the CDO/CLO to select the pool of assets
and manage those assets over the term of the SPE. The Company is the manager for
a limited number of CLO transactions.
The Company earns fees for
warehousing assets prior to the creation of a "cash flow" or "market value"
CDO/CLO, structuring CDOs/CLOs and placing debt securities with investors. In
addition, the Company has retained interests in many of the CDOs/CLOs it has
structured and makes a market in the issued notes.
The Company's continuing involvement
in synthetic CDOs/CLOs generally includes purchasing credit protection through
credit default swaps with the CDO/CLO, owning a portion of the capital structure
of the CDO/CLO in the form of both unfunded derivative positions (primarily
super-senior exposures discussed below) and funded notes, entering into
interest-rate swap and total-return swap transactions with the CDO/CLO, lending
to the CDO/CLO, and making a market in the funded notes.
Where a CDO/CLO entity issues
preferred shares (or subordinated notes that are the equivalent form), the
preferred shares generally represent an insufficient amount of equity (less than
10%) and create the presumption that preferred shares are insufficient to
finance the entity's activities without subordinated financial support. In
addition, although the preferred shareholders generally have full exposure to
expected losses on the collateral and uncapped potential to receive expected
residual returns, they generally do not have the ability to make decisions about
the entity that have a significant effect on the entity's financial results
because of their limited role in making day-to-day decisions and their limited
ability to remove the asset manager. Because one or both of the above conditions
will generally be met, the Company has concluded that, even where a CDO/CLO
entity issued preferred shares, the entity should be classified as a
VIE.
In general, the asset manager,
through its ability to purchase and sell assets or-where the reinvestment period
of a CDO/CLO has expired-the ability to sell assets, will have the power to
direct the activities of the entity that most significantly impact the economic
performance of the CDO/CLO. However, where a CDO/CLO has experienced an event
of default or an optional redemption period has gone into effect, the activities
of the asset manager may be curtailed and/or certain additional rights will
generally be provided to the investors in a CDO/CLO entity, including the right
to direct the liquidation of the CDO/CLO entity.
The
Company has retained significant portions of the "super-senior" positions issued
by certain CDOs. These positions are referred to as "super-senior" because they
represent the most senior positions in the CDO and, at the time of structuring,
were senior to tranches rated AAA by independent rating agencies.
The Company does not generally have the power to
direct the activities of the entity that most significantly impact the economic
performance of the CDOs/CLOs as this power is generally held by a third-party
asset manager of the CDO/CLO. As such, those CDOs/CLOs are not consolidated. The
Company may consolidate the CDO/CLO when: (i) the Company is the asset manager
and no other single investor has the unilateral ability to remove the Company or
unilaterally cause the liquidation of the CDO/CLO, or the Company is not the
asset manager but has a unilateral right to remove the third-party asset manager
or unilaterally liquidate the CDO/CLO and receive the underlying assets, and
(ii) the Company has economic exposure to the entity that could be potentially
significant to the entity.
The Company continues to monitor its involvement in unconsolidated
CDOs/CLOs to assess future consolidation risk. For example, if the Company were
to acquire additional interests in these entities and obtain the right, due to
an event of default trigger being met, to unilaterally liquidate or direct the
activities of a CDO/CLO, the Company may be required to consolidate the asset
entity. For cash CDOs/CLOs, the net result of such consolidation would be to
gross up the Company's balance sheet by the current fair value of the securities
held by third parties and assets held by the CDO/CLO, which amounts are not
considered material. For synthetic CDOs/CLOs, the net result of such
consolidation may reduce the Company's balance sheet, because intercompany
derivative receivables and payables would be eliminated in consolidation, and
other assets held by the CDO/CLO and the securities held by third parties would
be recognized at their current fair values.
Key Assumptions and
Retained Interests-Citi Holdings
The key assumptions, used for the securitization of CDOs and CLOs during
the year ended December 31, 2012, in measuring the fair value of retained
interests were as follows:
CDOs | CLOs | ||||
Discount rate | 46.9% to 51.6 | % | 1.9% to 2.1 | % |
The effect of an adverse change of 10% and 20% in the discount rates used to determine the fair value of retained interests at December 31, 2012 is set forth in the table below:
In millions of dollars | CDOs | CLOs | |||||
Carrying value of retained interests | $ | 16 | $ | 428 | |||
Discount rates | |||||||
Adverse change of 10% | $ | (2 | ) | $ | (2 | ) | |
Adverse change of 20% | (3 | ) | (4 | ) |
237
Asset-Based
Financing
The Company
provides loans and other forms of financing to VIEs that hold assets. Those
loans are subject to the same credit approvals as all other loans originated or
purchased by the Company. Financings in the form of debt securities or
derivatives are, in most circumstances, reported in Trading account assets and accounted for at fair value through earnings.
The Company generally does not have the power to direct the activities that most
significantly impact these VIEs' economic performance and thus it does not
consolidate them.
Asset-Based
Financing-Citicorp
The primary
types of Citicorp's asset-based financings, total assets of the unconsolidated
VIEs with significant involvement and the Company's maximum exposure to loss at
December 31, 2012, are shown below. For the Company to realize that maximum
loss, the VIE (borrower) would have to default with no recovery from the assets
held by the VIE.
Total | Maximum | |||||
unconsolidated | exposure to | |||||
In billions of dollars | VIE assets | unconsolidated VIEs | ||||
Type | ||||||
Commercial and other real estate | $ | 16.1 | $ | 3.1 | ||
Corporate loans | 2.0 | 1.6 | ||||
Hedge funds and equities | 0.6 | 0.4 | ||||
Airplanes, ships and other assets | 21.5 | 12.0 | ||||
Total | $ | 40.2 | $ | 17.1 |
The following table summarizes selected cash flow information related to asset-based financings for the years ended December 31, 2012, 2011 and 2010:
In billions of dollars | 2012 | 2011 | 2010 | ||||||
Cash flows received on retained | |||||||||
interests and other net cash flows | $ | 0.3 | $ | - | $ | - |
The effect of an adverse change of 10% and 20% in the discount rates used to determine the fair value of retained interests at December 31, 2012 is set forth in the table below:
Asset-based | ||||
In millions of dollars | Financing | |||
Carrying value of retained interests | $ | 1,726 | ||
Value of underlying portfolio | ||||
Adverse change of 10% | $ | (22 | ) | |
Adverse change of 20% | (44 | ) |
Asset-Based Financing-Citi
Holdings
The primary types of
Citi Holdings' asset-based financings, total assets of the unconsolidated VIEs
with significant involvement and the Company's maximum exposure to loss at
December 31, 2012, are shown below. For the Company to realize that maximum
loss, the VIE (borrower) would have to default with no recovery from the assets
held by the VIE.
Total | Maximum | |||||
unconsolidated | exposure to | |||||
In billions of dollars | VIE assets | unconsolidated VIEs | ||||
Type | ||||||
Commercial and other real estate | $ | 0.9 | $ | 0.3 | ||
Corporate loans | 0.4 | 0.3 | ||||
Airplanes, ships and other assets | 2.9 | 0.6 | ||||
Total | $ | 4.2 | $ | 1.2 |
The following table summarizes selected cash flow information related to asset-based financings for the years ended December 31, 2012, 2011 and 2010:
In billions of dollars | 2012 | 2011 | 2010 | ||||||
Cash flows received on retained | |||||||||
interests and other net cash flows | $ | 1.7 | $ | 1.4 | $ | 2.8 |
The effect of an adverse change of 10% and 20% in the discount rates used to determine the fair value of retained interests at December 31, 2012 is set forth in the table below:
Asset-based | |||
In millions of dollars | Financing | ||
Carrying value of retained interests | $ | 339 | |
Value of underlying portfolio | |||
Adverse change of 10% | $ | - | |
Adverse change of 20% | - |
Municipal Securities
Tender Option Bond (TOB) Trusts
TOB trusts hold fixed- and floating-rate, taxable and tax-exempt
securities issued by state and local governments and municipalities. The trusts
are typically single-issuer trusts whose assets are purchased from the Company
or from other investors in the municipal securities market. The TOB trusts fund
the purchase of their assets by issuing long-term, putable floating rate
certificates (Floaters) and residual certificates (Residuals). The trusts are
referred to as TOB trusts because the Floater holders have the ability to tender
their interests periodically back to the issuing trust, as described further
below. The Floaters and Residuals evidence beneficial ownership interests in,
and are collateralized by, the underlying assets of the trust. The Floaters are
held by third-party investors, typically tax-exempt money market funds. The
Residuals are typically held by the original owner of the municipal securities
being financed.
238
The Floaters and the Residuals
have a tenor that is equal to or shorter than the tenor of the underlying
municipal bonds. The Residuals entitle their holders to the residual cash flows
from the issuing trust, the interest income generated by the underlying
municipal securities net of interest paid on the Floaters, and trust expenses.
The Residuals are rated based on the long-term rating of the underlying
municipal bond. The Floaters bear variable interest rates that are reset
periodically to a new market rate based on a spread to a high grade, short-term,
tax-exempt index. The Floaters have a long-term rating based on the long-term
rating of the underlying municipal bond and a short-term rating based on that of
the liquidity provider to the trust.
There are two kinds of TOB trusts: customer TOB
trusts and non-customer TOB trusts. Customer TOB trusts are trusts through which
customers finance their investments in municipal securities. The Residuals are
held by customers and the Floaters by third-party investors, typically
tax-exempt money market funds. Non-customer TOB trusts are trusts through which
the Company finances its own investments in municipal securities. In such
trusts, the Company holds the Residuals and third-party investors, typically
tax-exempt money market funds, hold the Floaters.
The Company serves as remarketing agent to the
trusts, placing the Floaters with third-party investors at inception,
facilitating the periodic reset of the variable rate of interest on the Floaters
and remarketing any tendered Floaters. If Floaters are tendered and the Company
(in its role as remarketing agent) is unable to find a new investor within a
specified period of time, it can declare a failed remarketing, in which case the
trust is unwound. The Company may, but is not obligated to, buy the Floaters
into its own inventory. The level of the Company's inventory of Floaters
fluctuates over time. As of December 31, 2012, the Company held $203 million of
Floaters related to both customer and non-customer TOB trusts.
For certain non-customer trusts, the Company also
provides credit enhancement. Approximately $184 million of the municipal bonds
owned by TOB trusts have a credit guarantee provided by the Company.
The Company provides liquidity to many of the
outstanding trusts. If a trust is unwound early due to an event other than a
credit event on the underlying municipal bond, the underlying municipal bonds
are sold in the market. If there is a shortfall in the trust's cash flows
between the redemption price of the tendered Floaters and the proceeds from the
sale of the underlying municipal bonds, the trust draws on a liquidity agreement
in an amount equal to the shortfall. For customer TOBs where the Residual is
less than 25% of the trust's capital structure, the Company has a reimbursement
agreement with the Residual holder under which the Residual holder
reimburses
the Company for any payment made under the liquidity arrangement. Through this
reimbursement agreement, the Residual holder remains economically exposed to
fluctuations in value of the underlying municipal bonds. These reimbursement
agreements are generally subject to daily margining based on changes in value of
the underlying municipal bond. In cases where a third party provides liquidity
to a non-customer TOB trust, a similar reimbursement arrangement is made whereby
the Company (or a consolidated subsidiary of the Company) as Residual holder
absorbs any losses incurred by the liquidity provider.
As of December 31, 2012, liquidity agreements
provided with respect to customer TOB trusts totaled $4.9 billion, of which $3.6
billion was offset by reimbursement agreements. The remaining exposure related
to TOB transactions, where the Residual owned by the customer was at least 25%
of the bond value at the inception of the transaction and no reimbursement agreement was executed. The
Company also provides other liquidity agreements or letters of credit to
customer-sponsored municipal investment funds, which are not variable interest
entities, and municipality-related issuers that totaled $6.4 billion as of
December 31, 2012. These liquidity agreements and letters of credit are offset
by reimbursement agreements with various term-out
provisions.
The Company considers the customer and non-customer TOB trusts to be
VIEs. Customer TOB trusts are not consolidated by the Company. The Company has
concluded that the power to direct the activities that most significantly impact
the economic performance of the customer TOB trusts is primarily held by the
customer Residual holder, who may unilaterally cause the sale of the trust's
bonds.
Non-customer TOB
trusts generally are consolidated. Similar to customer TOB trusts, the Company
has concluded that the power over the non-customer TOB trusts is primarily held
by the Residual holder, which may unilaterally cause the sale of the trust's
bonds. Because the Company holds the Residual interest, and thus has the power
to direct the activities that most significantly impact the trust's economic
performance, it consolidates the non-customer TOB trusts.
Municipal
Investments
Municipal
investment transactions include debt and equity interests in partnerships that
finance the construction and rehabilitation of low-income housing, facilitate
lending in new or underserved markets, or finance the construction or operation
of renewable municipal energy facilities. The Company generally invests in these
partnerships as a limited partner and earns a return primarily through the
receipt of tax credits and grants earned from the investments made by the
partnership. The Company may also provide construction loans or permanent loans
to the development or continuation of real estate properties held by
partnerships. These entities are generally considered VIEs. The power to direct
the activities of these entities is typically held by the general partner.
Accordingly, these entities are not consolidated by the Company.
239
Client intermediation transactions represent a range of transactions designed to provide investors with specified returns based on the returns of an underlying security, referenced asset or index. These transactions include credit-linked notes and equity-linked notes. In these transactions, the VIE typically obtains exposure to the underlying security, referenced asset or index through a derivative instrument, such as a total-return swap or a credit-default swap. In turn the VIE issues notes to investors that pay a return based on the specified underlying security, referenced asset or index. The VIE invests the proceeds in a financial asset or a guaranteed insurance contract that serves as collateral for the derivative contract over the term of the transaction. The Company's involvement in these transactions includes being the counterparty to the VIE's derivative instruments and investing in a portion of the notes issued by the VIE. In certain transactions, the investor's maximum risk of loss is limited and the Company absorbs risk of loss above a specified level. The Company does not have the power to direct the activities of the VIEs that most significantly impact their economic performance and thus it does not consolidate them.
The Company's maximum risk of loss in these transactions is defined as the amount invested in notes issued by the VIE and the notional amount of any risk of loss absorbed by the Company through a separate instrument issued by the VIE. The derivative instrument held by the Company may generate a receivable from the VIE (for example, where the Company purchases credit protection from the VIE in connection with the VIE's issuance of a credit-linked note), which is collateralized by the assets owned by the VIE. These derivative instruments are not considered variable interests and any associated receivables are not included in the calculation of maximum exposure to the VIE.
Investment
Funds
The Company is the
investment manager for certain investment funds that invest in various asset
classes including private equity, hedge funds, real estate, fixed income and
infrastructure. The Company earns a management fee, which is a percentage of
capital under management, and may earn performance fees. In addition, for some
of these funds the Company has an ownership interest in the investment funds.
The Company has also established a number of investment funds as opportunities
for qualified employees to invest in private equity investments. The Company
acts as investment manager to these funds and may provide employees with
financing on both recourse and non-recourse bases for a portion of the
employees' investment commitments.
The Company has determined that a majority of the investment entities
managed by Citigroup are provided a deferral from the requirements of SFAS 167, Amendments to FASB Interpretation
No. 46(R) , because they meet the
criteria in Accounting Standards Update No. 2010-10, Consolidation (Topic 810), Amendments for Certain
Investment Funds (ASU 2010-10).
These entities continue to be evaluated under the requirements of ASC 810-10,
prior to the implementation of SFAS 167 (FIN 46(R), Consolidation of Variable Interest
Entities ), which required that a
VIE be consolidated by the party with a variable interest that will absorb a
majority of the entity's expected losses or residual returns, or
both.
Trust Preferred
Securities
The Company has
raised financing through the issuance of trust preferred securities. In these
transactions, the Company forms a statutory business trust and owns all of the
voting equity shares of the trust. The trust issues preferred equity securities
to third-party investors and invests the gross proceeds in junior subordinated
deferrable interest debentures issued by the Company. The trusts have no assets,
operations, revenues or cash flows other than those related to the issuance,
administration and repayment of the preferred equity securities held by
third-party investors. Obligations of the trusts are fully and unconditionally
guaranteed by the Company.
Because the sole asset of each of the trusts is a receivable from the
Company and the proceeds to the Company from the receivable exceed the Company's
investment in the VIE's equity shares, the Company is not permitted to
consolidate the trusts, even though it owns all of the voting equity shares of
the trust, has fully guaranteed the trusts' obligations, and has the right to
redeem the preferred securities in certain circumstances. The Company recognizes
the subordinated debentures on its Consolidated Balance Sheet as long-term
liabilities. For additional information, see Note 19 to the Consolidated
Financial Statements.
240
23. DERIVATIVES ACTIVITIES
In the ordinary course of business, Citigroup enters into various types of derivative transactions. These derivative transactions include:
Futures and forward contracts, which are commitments to buy or sell at a future date a financial instrument, commodity or currency at a contracted price and may be settled in cash or through delivery. Swap contracts, which are commitments to settle in cash at a future date or dates that may range from a few days to a number of years, based on differentials between specified financial indices, as applied to a notional principal amount. Option contracts, which give the purchaser, for a premium, the right, but not the obligation, to buy or sell within a specified time a financial instrument, commodity or currency at a contracted price that may also be settled in cash, based on differentials between specified indices or prices.Citigroup enters into these derivative contracts relating to interest rate, foreign currency, commodity and other market/credit risks for the following reasons:
Trading Purposes-Customer Needs: Citigroup offers its customers derivatives in connection with their risk-management actions to transfer, modify or reduce their interest rate, foreign exchange and other market/credit risks or for their own trading purposes. As part of this process, Citigroup considers the customers' suitability for the risk involved and the business purpose for the transaction. Citigroup also manages its derivative risk positions through offsetting trade activities, controls focused on price verification, and daily reporting of positions to senior managers. Trading Purposes -Citigroup trades derivatives as an active market maker. Trading limits and price verification controls are key aspects of this activity. Hedging -Citigroup uses derivatives in connection with its risk-management activities to hedge certain risks or reposition the risk profile of the Company. For example, Citigroup issues fixed-rate long-term debt and then enters into a receive-fixed, pay-variable-rate interest rate swap with the same tenor and notional amount to convert the interest payments to a net variable-rate basis. This strategy is the most common form of an interest rate hedge, as it minimizes interest cost in certain yield curve environments. Derivatives are also used to manage risks inherent in specific groups of on-balance-sheet assets and liabilities, including AFS securities and borrowings, as well as other interest-sensitive assets and liabilities. In addition, foreign-exchange contracts are used to hedge non-U.S.-dollar-denominated debt, foreign-currency-denominated AFS securities and net investment exposures.
Derivatives may expose Citigroup to market, credit or liquidity risks in
excess of the amounts recorded on the Consolidated Balance Sheet. Market risk on
a derivative product is the exposure created by potential fluctuations in
interest rates, foreign-exchange rates and other factors and is a function of
the type of product, the volume of transactions, the tenor and terms of the
agreement and the underlying volatility. Credit risk is the exposure to loss in
the event of nonperformance by the other party to the transaction where the
value of any collateral held is not adequate to cover such losses. The
recognition in earnings of unrealized gains on these transactions is subject to
management's assessment as to collectability. Liquidity risk is the potential
exposure that arises when the size of the derivative position may not be able to
be rapidly adjusted at a reasonable cost in periods of high volatility and
financial stress.
Information pertaining to the volume of derivative activity is provided
in the tables below. The notional amounts, for both long and short derivative
positions, of Citigroup's derivative instruments as of December 31, 2012 and
December 31, 2011 are presented in the table below.
241
Derivative Notionals
Hedging instruments under | |||||||||||||||||||
ASC 815 (SFAS 133) | (1)(2) | Other derivative instruments | |||||||||||||||||
Trading derivatives | Management hedges | (3) | |||||||||||||||||
December 31, | December 31, | December 31, | December 31, | December 31, | December 31, | ||||||||||||||
In millions of dollars | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |||||||||||||
Interest rate contracts | |||||||||||||||||||
Swaps | $ | 114,296 | $ | 163,079 | $ | 30,050,856 | $ | 28,069,960 | $ | 99,434 | $ | 119,344 | |||||||
Futures and forwards | - | - | 4,823,370 | 3,549,642 | 45,856 | 43,965 | |||||||||||||
Written options | - | - | 3,752,905 | 3,871,700 | 22,992 | 16,786 | |||||||||||||
Purchased options | - | - | 3,542,048 | 3,888,415 | 7,890 | 7,338 | |||||||||||||
Total interest rate contract notionals | $ | 114,296 | $ | 163,079 | $ | 42,169,179 | $ | 39,379,717 | $ | 176,172 | $ | 187,433 | |||||||
Foreign exchange contracts | |||||||||||||||||||
Swaps | $ | 22,207 | $ | 27,575 | $ | 1,393,368 | $ | 1,182,363 | $ | 16,900 | $ | 22,458 | |||||||
Futures and forwards | 70,484 | 55,211 | 3,484,193 | 3,191,687 | 33,768 | 31,095 | |||||||||||||
Written options | 96 | 4,292 | 781,698 | 591,818 | 989 | 190 | |||||||||||||
Purchased options | 456 | 39,163 | 778,438 | 583,891 | 2,106 | 53 | |||||||||||||
Total foreign exchange contract notionals | $ | 93,243 | $ | 126,241 | $ | 6,437,697 | $ | 5,549,759 | $ | 53,763 | $ | 53,796 | |||||||
Equity contracts | |||||||||||||||||||
Swaps | $ | - | $ | - | $ | 96,039 | $ | 86,978 | $ | - | $ | - | |||||||
Futures and forwards | - | - | 16,171 | 12,882 | - | - | |||||||||||||
Written options | - | - | 320,243 | 552,333 | - | - | |||||||||||||
Purchased options | - | - | 281,236 | 509,322 | - | - | |||||||||||||
Total equity contract notionals | $ | - | $ | - | $ | 713,689 | $ | 1,161,515 | $ | - | $ | - | |||||||
Commodity and other contracts | |||||||||||||||||||
Swaps | $ | - | $ | - | $ | 27,323 | $ | 23,403 | $ | - | $ | - | |||||||
Futures and forwards | - | - | 75,897 | 73,090 | - | - | |||||||||||||
Written options | - | - | 86,418 | 90,650 | - | - | |||||||||||||
Purchased options | - | - | 89,284 | 99,234 | - | - | |||||||||||||
Total commodity and other contract notionals | $ | - | $ | - | $ | 278,922 | $ | 286,377 | $ | - | $ | - | |||||||
Credit derivatives (4) | |||||||||||||||||||
Protection sold | $ | - | $ | - | $ | 1,346,494 | $ | 1,394,528 | $ | - | $ | - | |||||||
Protection purchased | 354 | 4,253 | 1,412,194 | 1,486,723 | 21,741 | 21,914 | |||||||||||||
Total credit derivatives | $ | 354 | $ | 4,253 | $ | 2,758,688 | $ | 2,881,251 | $ | 21,741 | $ | 21,914 | |||||||
Total derivative notionals | $ | 207,893 | $ | 293,573 | $ | 52,358,175 | $ | 49,258,619 | $ | 251,676 | $ | 263,143 |
(1) | The notional amounts presented in this table do not include hedge accounting relationships under ASC 815 (SFAS 133) where Citigroup is hedging the foreign currency risk of a net investment in a foreign operation by issuing a foreign-currency-denominated debt instrument. The notional amount of such debt is $4,888 million and $7,060 million at December 31, 2012 and December 31, 2011, respectively. | |
(2) | Derivatives in hedge accounting relationships accounted for under ASC 815 (SFAS 133) are recorded in either Other assets/Other liabilities or Trading account assets/Trading account liabilities on the Consolidated Balance Sheet. | |
(3) | Management hedges represent derivative instruments used in certain economic hedging relationships that are identified for management purposes, but for which hedge accounting is not applied. These derivatives are recorded in either Other assets/Other liabilities or Trading account assets/Trading account liabilities on the Consolidated Balance Sheet. | |
(4) | Credit derivatives are arrangements designed to allow one party (protection buyer) to transfer the credit risk of a "reference asset" to another party (protection seller). These arrangements allow a protection seller to assume the credit risk associated with the reference asset without directly purchasing that asset. The Company has entered into credit derivative positions for purposes such as risk management, yield enhancement, reduction of credit concentrations and diversification of overall risk. |
242
Derivative Mark-to-Market (MTM) Receivables/Payables
Derivatives classified in trading | Derivatives classified in other | ||||||||||||
account assets/liabilities | (1)(2) | assets/liabilities | (2) | ||||||||||
In millions of dollars at December 31, 2012 | Assets | Liabilities | Assets | Liabilities | |||||||||
Derivative instruments designated as ASC 815 (SFAS 133) hedges | |||||||||||||
Interest rate contracts | $ | 7,795 | $ | 2,263 | $ | 4,574 | $ | 1,178 | |||||
Foreign exchange contracts | 341 | 1,350 | 978 | 525 | |||||||||
Credit derivatives | - | - | - | 16 | |||||||||
Total derivative instruments designated as ASC 815 (SFAS 133) hedges | $ | 8,136 | $ | 3,613 | $ | 5,552 | $ | 1,719 | |||||
Other derivative instruments | |||||||||||||
Interest rate contracts | $ | 895,726 | $ | 890,405 | $ | 449 | $ | 29 | |||||
Foreign exchange contracts | 76,291 | 80,771 | 200 | 112 | |||||||||
Equity contracts | 18,293 | 31,867 | - | - | |||||||||
Commodity and other contracts | 10,907 | 12,142 | - | - | |||||||||
Credit derivatives (3) | 54,275 | 52,300 | 102 | 392 | |||||||||
Total other derivative instruments | $ | 1,055,492 | $ | 1,067,485 | $ | 751 | $ | 533 | |||||
Total derivatives | $ | 1,063,628 | $ | 1,071,098 | $ | 6,303 | $ | 2,252 | |||||
Cash collateral paid/received (4)(5) | 5,597 | 7,923 | 214 | 658 | |||||||||
Less: Netting agreements and market value adjustments (6) | (975,695 | ) | (971,715 | ) | - | - | |||||||
Less: Net cash collateral received/paid (7) | (38,910 | ) | (55,555 | ) | (4,660 | ) | - | ||||||
Net receivables/payables | $ | 54,620 | $ | 51,751 | $ | 1,857 | $ | 2,910 |
(1) | The trading derivatives fair values are presented in Note 14 to the Consolidated Financial Statements. | |
(2) | Derivative mark-to-market receivables/payables related to management hedges are recorded in either Other assets/Other liabilities or Trading account assets/Trading account liabilities . | |
(3) | The credit derivatives trading assets are composed of $34,565 million related to protection purchased and $19,710 million related to protection sold as of December 31, 2012. The credit derivatives trading liabilities are composed of $20,470 million related to protection purchased and $31,830 million related to protection sold as of December 31, 2012. | |
(4) | For the trading assets/liabilities, this is the net amount of the $61,152 million and $46,833 million of gross cash collateral paid and received, respectively. Of the gross cash collateral paid, $55,555 million was used to offset derivative liabilities and, of the gross cash collateral received, $38,910 million was used to offset derivative assets. | |
(5) | For the other assets/liabilities, this is the net amount of the $214 million and $5,318 million of the gross cash collateral paid and received, respectively. Of the gross cash collateral received, $4,660 million was used to offset derivative assets. | |
(6) | Represents the netting of derivative receivable and payable balances for the same counterparty under enforceable netting agreements. | |
(7) | Represents the netting of cash collateral paid and received by counterparty under enforceable credit support agreements. |
Derivatives classified in trading | Derivatives classified in other | |||||||||||||
account assets/liabilities | (1)(2) | assets/liabilities | (2) | |||||||||||
In millions of dollars at December 31, 2011 | Assets | Liabilities | Assets | Liabilities | ||||||||||
Derivative instruments designated as ASC 815 (SFAS 133) hedges | ||||||||||||||
Interest rate contracts | $ | 8,274 | $ | 3,306 | $ | 3,968 | $ | 1,518 | ||||||
Foreign exchange contracts | 3,706 | 1,451 | 1,201 | 863 | ||||||||||
Credit derivatives | - | - | - | - | ||||||||||
Total derivative instruments designated as ASC 815 (SFAS 133) hedges | $ | 11,980 | $ | 4,757 | $ | 5,169 | $ | 2,381 | ||||||
Other derivative instruments | ||||||||||||||
Interest rate contracts | $ | 749,213 | $ | 736,785 | $ | 212 | $ | 96 | ||||||
Foreign exchange contracts | 90,611 | 95,912 | 325 | 959 | ||||||||||
Equity contracts | 20,235 | 33,139 | - | - | ||||||||||
Commodity and other contracts | 13,763 | 14,631 | - | - | ||||||||||
Credit derivatives (3) | 90,424 | 84,726 | 430 | 126 | ||||||||||
Total other derivative instruments | $ | 964,246 | $ | 965,193 | $ | 967 | $ | 1,181 | ||||||
Total derivatives | $ | 976,226 | $ | 969,950 | $ | 6,136 | $ | 3,562 | ||||||
Cash collateral paid/received (4)(5) | 6,634 | 7,870 | 307 | 180 | ||||||||||
Less: Netting agreements and market value adjustments (6) | (875,592 | ) | (870,366 | ) | - | - | ||||||||
Less: Net cash collateral received/paid (7) | (44,941 | ) | (51,181 | ) | (3,462 | ) | - | |||||||
Net receivables/payables | $ | 62,327 | $ | 56,273 | $ | 2,981 | $ | 3,742 |
(1) | The trading derivatives fair values are presented in Note 14 to the Consolidated Financial Statements. | |
(2) | Derivative mark-to-market receivables/payables related to management hedges are recorded in either Other assets/Other liabilities or Trading account assets/Trading account liabilities . | |
(3) | The credit derivatives trading assets are composed of $79,089 million related to protection purchased and $11,335 million related to protection sold as of December 31, 2011. The credit derivatives trading liabilities are composed of $12,235 million related to protection purchased and $72,491 million related to protection sold as of December 31, 2011. | |
(4) | For the trading assets/liabilities, this is the net amount of the $57,815 million and $52,811 million of gross cash collateral paid and received, respectively. Of the gross cash collateral paid, $51,181 million was used to offset derivative liabilities and, of the gross cash collateral received, $44,941 million was used to offset derivative assets. | |
(5) | For the other assets/liabilities, this is the net amount of the $307 million and $3,642 million of the gross cash collateral paid and received, respectively. Of the gross cash collateral received, $3,462 million was used to offset derivative assets. | |
(6) | Represents the netting of derivative receivable and payable balances for the same counterparty under enforceable netting agreements. | |
(7) | Represents the netting of cash collateral paid and received by counterparty under enforceable credit support agreements. |
243
All
derivatives are reported on the Consolidated Balance Sheet at fair value. In addition, where
applicable, all such contracts covered by master netting agreements are reported
net. Gross positive fair values are netted with gross negative fair values by
counterparty pursuant to a valid master netting agreement. In addition, payables
and receivables in respect of cash collateral received from or paid to a given
counterparty are included in this netting. However, non-cash collateral is not
included.
The amounts recognized in Principal transactions in
the Consolidated Statement of Income for the years ended December 31, 2012, 2011
and 2010 related to derivatives not designated in a qualifying hedging
relationship as well as the underlying non-derivative instruments are included
in the table below. Citigroup presents this disclosure by business
classification, showing derivative gains and losses related to its trading
activities together with gains and losses related to non-derivative instruments
within the same trading portfolios, as this represents the way these portfolios
are risk managed.
Year ended December 31, | |||||||||
In millions of dollars | 2012 | 2011 | 2010 | ||||||
Interest rate contracts | $ | 2,301 | $ | 5,136 | $ | 3,231 | |||
Foreign exchange | 2,403 | 2,309 | 1,852 | ||||||
Equity contracts | 158 | 3 | 995 | ||||||
Commodity and other | 92 | 76 | 126 | ||||||
Credit derivatives | (173 | ) | (290 | ) | 1,313 | ||||
Total Citigroup (1) | $ | 4,781 | $ | 7,234 | $ | 7,517 |
(1) | Also see Note 7 to the Consolidated Financial Statements. |
The amounts recognized in Other revenue in the Consolidated Statement of Income for the years ended December 31, 2012, 2011 and 2010 are shown below. The table below does not include the offsetting gains/losses on the hedged items, which amounts are also recorded in Other revenue .
Gains (losses) included in Other revenue | ||||||||||
Year ended December 31, | ||||||||||
In millions of dollars | 2012 | 2011 | 2010 | |||||||
Interest rate contracts | $ | (427 | ) | $ | 1,192 | $ | (205 | ) | ||
Foreign exchange contracts | 182 | 224 | (2,052 | ) | ||||||
Credit derivatives | (1,022 | ) | 115 | (502 | ) | |||||
Total Citigroup (1) | $ | (1,267 | ) | $ | 1,531 | $ | (2,759 | ) |
(1) | Non-designated derivatives are derivative instruments not designated in qualifying hedging relationships. |
Accounting for Derivative
Hedging
Citigroup accounts for
its hedging activities in accordance with ASC 815, Derivatives and Hedging (formerly SFAS 133). As a general rule, hedge
accounting is permitted where the Company is exposed to a particular risk, such
as interest-rate or foreign-exchange risk, that causes changes in the fair value
of an asset or liability or variability in the expected future cash flows of an
existing asset, liability or a forecasted transaction that may affect
earnings.
Derivative contracts hedging the risks associated with the changes in
fair value are referred to as fair value hedges, while contracts hedging the
risks affecting the expected future cash flows are called cash flow hedges.
Hedges that utilize derivatives or debt instruments to manage the foreign
exchange risk associated with equity investments in
non-U.S.-dollar-functional-currency foreign subsidiaries (net investment in a
foreign operation) are called net investment hedges.
If certain hedging criteria specified in ASC 815
are met, including testing for hedge effectiveness, special hedge accounting may
be applied. The hedge effectiveness assessment methodologies for similar hedges
are performed in a similar manner and are used consistently throughout the
hedging relationships. For fair value hedges, the changes in value of the
hedging derivative, as well as the changes in value of the related hedged item
due to the risk being hedged, are reflected in current earnings. For cash flow
hedges and net investment hedges, the changes in value of the hedging derivative
are reflected in Accumulated other
comprehensive income (loss) in
Citigroup's stockholders' equity, to the extent the hedge is effective. Hedge
ineffectiveness, in either case, is reflected in current
earnings.
244
For
asset/liability management hedging, the fixed-rate long-term debt would be
recorded at amortized cost under current U.S. GAAP. However, by electing to use
ASC 815 (SFAS 133) fair value hedge accounting, the carrying value of the debt
is adjusted for changes in the benchmark interest rate, with any such changes in
value recorded in current earnings. The related interest-rate swap is also
recorded on the balance sheet at fair value, with any changes in fair value
reflected in earnings. Thus, any ineffectiveness resulting from the hedging
relationship is recorded in current earnings. Alternatively, a management hedge,
which does not meet the ASC 815 hedging criteria, would involve recording only
the derivative at fair value on the balance sheet, with its associated changes
in fair value recorded in earnings. The debt would continue to be carried at
amortized cost and, therefore, current earnings would be impacted only by the
interest rate shifts and other factors that cause the change in the swap's value
and may change the underlying yield of the debt. This type of hedge is
undertaken when hedging requirements cannot be achieved or management decides
not to apply ASC 815 hedge accounting. Another alternative for the Company is to
elect to carry the debt at fair value under the fair value option. Once the
irrevocable election is made upon issuance of the debt, the full change in fair
value of the debt would be reported in earnings. The related interest rate swap,
with changes in fair value, would also be reflected in earnings, and provides a
natural offset to the debt's fair value change. To the extent the two offsets
are not exactly equal, the difference is reflected in current
earnings.
Key aspects of achieving ASC 815 hedge accounting are documentation of
hedging strategy and hedge effectiveness at the hedge inception and
substantiating hedge effectiveness on an ongoing basis. A derivative must be
highly effective in accomplishing the hedge objective of offsetting either
changes in the fair value or cash flows of the hedged item for the risk being
hedged. Any ineffectiveness in the hedge relationship is recognized in current
earnings. The assessment of effectiveness excludes changes in the value of the
hedged item that are unrelated to the risks being hedged. Similarly, the
assessment of effectiveness may exclude changes in the fair value of a
derivative related to time value that, if excluded, are recognized in current
earnings.
Fair Value Hedges
Hedging of benchmark
interest rate risk
Citigroup hedges exposure to changes in the fair value of outstanding
fixed-rate issued debt and certificates of deposit. Depending on the risk
management objectives, these types of hedges are designated as either fair value
hedges of only the benchmark interest rate risk or fair value hedges of both the
benchmark interest rate and foreign exchange risk. The fixed cash flows from
those financing transactions are converted to benchmark variable-rate cash flows
by entering into, respectively, receive-fixed, pay-variable interest rate swaps
or receive-fixed in non-functional currency, pay variable in functional currency
swaps. These fair value hedge relationships use either regression or
dollar-offset ratio analysis to determine whether the hedging relationships are
highly effective at inception and on an ongoing
basis.
Citigroup also hedges exposure to changes in the fair value of fixed-rate
assets, including available-for-sale debt securities and loans. When certain
interest rates do not qualify as a benchmark interest rate, Citigroup designates
the risk being hedged as the risk of changes in overall fair value of the hedged
AFS securities. The hedging instruments used are receive-variable, pay-fixed
interest rate swaps. These fair value hedging relationships use either
regression or dollar-offset ratio analysis to determine whether the hedging
relationships are highly effective at inception and on an ongoing
basis.
Hedging of foreign
exchange risk
Citigroup
hedges the change in fair value attributable to foreign-exchange rate movements
in available-for-sale securities that are denominated in currencies other than
the functional currency of the entity holding the securities, which may be
within or outside the U.S. The hedging instrument employed is a forward
foreign-exchange contract. In this type of hedge, the change in fair value of
the hedged available-for-sale security attributable to the portion of foreign
exchange risk hedged is reported in earnings and not Accumulated other comprehensive
income -a process that serves to
offset substantially the change in fair value of the forward contract that is
also reflected in earnings. Citigroup considers the premium associated with
forward contracts (differential between spot and contractual forward rates) as
the cost of hedging; this is excluded from the assessment of hedge effectiveness
and reflected directly in earnings. The dollar-offset method is used to assess
hedge effectiveness. Since that assessment is based on changes in fair value
attributable to changes in spot rates on both the available-for-sale securities
and the forward contracts for the portion of the relationship hedged, the amount
of hedge ineffectiveness is not significant.
245
The following table summarizes the gains (losses) on the Company's fair value hedges for the years ended December 31, 2012, 2011 and 2010:
Gains (losses) on fair value hedges | (1) | |||||||||
Year ended December 31, | ||||||||||
In millions of dollars | 2012 | 2011 | 2010 | |||||||
Gain (loss) on derivatives in designated and qualifying fair value hedges | ||||||||||
Interest rate contracts | $ | 122 | $ | 4,423 | $ | 948 | ||||
Foreign exchange contracts | 377 | (117 | ) | 729 | ||||||
Total gain (loss) on derivatives in designated and qualifying fair value hedges | $ | 499 | $ | 4,306 | $ | 1,677 | ||||
Gain (loss) on the hedged item in designated and qualifying fair value hedges | ||||||||||
Interest rate hedges | $ | (371 | ) | $ | (4,296 | ) | $ | (945 | ) | |
Foreign exchange hedges | (331 | ) | 26 | (579 | ) | |||||
Total gain (loss) on the hedged item in designated and qualifying fair value hedges | $ | (702 | ) | $ | (4,270 | ) | $ | (1,524 | ) | |
Hedge ineffectiveness recognized in earnings on designated and qualifying fair value hedges | ||||||||||
Interest rate hedges | $ | (249 | ) | $ | 118 | $ | (23 | ) | ||
Foreign exchange hedges | 16 | 1 | 10 | |||||||
Total hedge ineffectiveness recognized in earnings on designated and qualifying fair value hedges | $ | (233 | ) | $ | 119 | $ | (13 | ) | ||
Net gain (loss) excluded from assessment of the effectiveness of fair value hedges | ||||||||||
Interest rate contracts | $ | - | $ | 9 | $ | 26 | ||||
Foreign exchange contracts | 30 | (92 | ) | 140 | ||||||
Total net gain (loss) excluded from assessment of the effectiveness of fair value hedges | $ | 30 | $ | (83 | ) | $ | 166 |
(1) | Amounts are included in Other revenue on the Consolidated Statement of Income. The accrued interest income on fair value hedges is recorded in Net interest revenue and is excluded from this table. |
Cash Flow Hedges
Hedging of benchmark
interest rate risk
Citigroup hedges variable cash flows resulting from floating-rate
liabilities and rollover (re-issuance) of liabilities. Variable cash flows from
those liabilities are converted to fixed-rate cash flows by entering into
receive-variable, pay-fixed interest rate swaps and receive-variable, pay-fixed
forward-starting interest rate swaps. Citi also hedges variable cash flows from
recognized and forecasted floating-rate assets and origination of short-term
assets. Variable cash flows from those assets are converted to fixed-rate cash
flows by entering into receive-fixed, pay-variable interest rate swaps. These
cash-flow hedging relationships use either regression analysis or dollar-offset
ratio analysis to assess whether the hedging relationships are highly effective
at inception and on an ongoing basis. When certain interest rates do not qualify
as a benchmark interest rate, Citigroup designates the risk being hedged as the
risk of overall changes in the hedged cash flows. Since efforts are made to
match the terms of the derivatives to those of the hedged forecasted cash flows
as closely as possible, the amount of hedge ineffectiveness is not
significant.
Hedging of foreign
exchange risk
Citigroup
locks in the functional currency equivalent cash flows of long-term debt and
short-term borrowings that are denominated in a currency other than the
functional currency of the issuing entity. Depending on the risk management
objectives, these types of hedges are designated as either cash flow hedges of
only foreign exchange risk or cash flow hedges of both foreign exchange and
interest rate risk, and the hedging instruments used are foreign exchange
cross-currency swaps and forward contracts. These cash flow hedge relationships
use dollar-offset ratio analysis to determine whether the hedging relationships
are highly effective at inception and on an ongoing basis.
Hedging of overall
changes in cash flows
Citigroup hedges the overall exposure to variability in cash flows
related to the future acquisition of mortgage-backed securities using "to be
announced" forward contracts. Since the hedged transaction is the gross
settlement of the forward, the assessment of hedge effectiveness is based on
assuring that the terms of the hedging instrument and the hedged forecasted
transaction are the same.
Hedging total
return
Citigroup generally
manages the risk associated with leveraged loans it has originated or in which
it participates by transferring a majority of its exposure to the market through
SPEs prior to or shortly after funding. Retained exposures to leveraged loans
receivable are generally hedged using total return
swaps.
The amount of hedge ineffectiveness on the cash flow hedges recognized in
earnings for the years ended December 31, 2012, 2011 and 2010 is not
significant.
246
The pretax change in Accumulated other comprehensive income (loss) from cash flow hedges is presented below:
Year ended December 31, | ||||||||||
In millions of dollars | 2012 | 2011 | 2010 | |||||||
Effective portion of cash flow hedges included in AOCI | ||||||||||
Interest rate contracts | $ | (322 | ) | $ | (1,827 | ) | $ | (469 | ) | |
Foreign exchange contracts | 143 | 81 | (570 | ) | ||||||
Total effective portion of cash flow hedges included in AOCI | $ | (179 | ) | $ | (1,746 | ) | $ | (1,039 | ) | |
Effective portion of cash flow hedges reclassified from AOCI to earnings | ||||||||||
Interest rate contracts | $ | (837 | ) | $ | (1,227 | ) | $ | (1,396 | ) | |
Foreign exchange contracts | (180 | ) | (257 | ) | (500 | ) | ||||
Total effective portion of cash flow hedges reclassified from AOCI to earnings (1) | $ | (1,017 | ) | $ | (1,484 | ) | $ | (1,896 | ) |
(1) | Included primarily in Other revenue and Net interest revenue on the Consolidated Income Statement. |
For
cash flow hedges, any changes in the fair value of the end-user derivative
remaining in Accumulated other
comprehensive income (loss) on
the Consolidated Balance Sheet will be included in earnings of future periods to
offset the variability of the hedged cash flows when such cash flows affect
earnings. The net loss associated with cash flow hedges expected to be
reclassified from Accumulated
other comprehensive income (loss) within 12 months of December 31, 2012 is approximately $1.0 billion. The maximum
length of time over which forecasted cash flows are hedged is 10
years.
The after-tax impact of cash flow hedges on AOCI is shown in Note 21 to
the Consolidated Financial Statements.
Net Investment
Hedges
Consistent with ASC
830-20, Foreign Currency
Matters-Foreign Currency Transactions (formerly SFAS 52, Foreign
Currency Translation ), ASC 815
allows hedging of the foreign currency risk of a net investment in a foreign
operation. Citigroup uses foreign currency forwards, options and
foreign-currency-denominated debt instruments to manage the foreign exchange
risk associated with Citigroup's equity investments in several
non-U.S.-dollar-functional-currency foreign subsidiaries. Citigroup records the
change in the carrying amount of these investments in the Foreign currency translation
adjustment account within Accumulated other comprehensive
income (loss) . Simultaneously,
the effective portion of the hedge of this exposure is also recorded in the Foreign currency translation
adjustment account and the
ineffective portion, if any, is immediately recorded in
earnings.
For derivatives designated as net investment hedges, Citigroup follows
the forward-rate method from FASB Derivative Implementation Group Issue H8 (now
ASC 815-35-35-16 through 35-26), "Foreign Currency Hedges: Measuring the Amount
of Ineffectiveness in a Net Investment Hedge." According to that method, all
changes in fair value, including changes related to the forward-rate component
of the foreign currency forward contracts and the time value of foreign currency
options, are recorded in the Foreign currency translation adjustment account within Accumulated other comprehensive income
(loss) .
For foreign-currency-denominated debt instruments that are designated as
hedges of net investments, the translation gain or loss that is recorded in the Foreign currency translation
adjustment account is based on
the spot exchange rate between the functional currency of the respective
subsidiary
and the U.S. dollar, which is
the functional currency of Citigroup. To the extent the notional amount of the
hedging instrument exactly matches the hedged net investment and the underlying
exchange rate of the derivative hedging instrument relates to the exchange rate
between the functional currency of the net investment and Citigroup's functional
currency (or, in the case of a non-derivative debt instrument, such instrument
is denominated in the functional currency of the net investment), no
ineffectiveness is recorded in earnings.
The pretax gain (loss) recorded in the Foreign currency translation
adjustment account within Accumulated other comprehensive
income (loss) , related to the
effective portion of the net investment hedges, is $(3,829) million, $904
million, and $(3,620) million, for the years ended December 31, 2012, 2011, and
2010, respectively.
Credit Derivatives
A credit derivative is a bilateral contract
between a buyer and a seller under which the seller agrees to provide protection
to the buyer against the credit risk of a particular entity ("reference entity"
or "reference credit"). Credit derivatives generally require that the seller of
credit protection make payments to the buyer upon the occurrence of predefined
credit events (commonly referred to as "settlement triggers"). These settlement
triggers are defined by the form of the derivative and the reference credit and
are generally limited to the market standard of failure to pay on indebtedness
and bankruptcy of the reference credit and, in a more limited range of
transactions, debt restructuring. Credit derivative transactions referring to
emerging market reference credits will also typically include additional
settlement triggers to cover the acceleration of indebtedness and the risk of
repudiation or a payment moratorium. In certain transactions, protection may be
provided on a portfolio of reference credits or asset-backed securities. The
seller of such protection may not be required to make payment until a specified
amount of losses has occurred with respect to the portfolio and/or may only be
required to pay for losses up to a specified
amount.
The Company makes markets and trades a range of credit derivatives.
Through these contracts, the Company either purchases or writes protection on
either a single name or a portfolio of reference credits. The Company also uses
credit derivatives to help mitigate credit risk in its Corporate and Consumer
loan portfolios and other cash positions, and to facilitate client
transactions.
247
The
range of credit derivatives sold includes credit default swaps, total return
swaps, credit options and credit-linked notes.
A credit default swap is a contract in which, for a fee, a protection
seller agrees to reimburse a protection buyer for any losses that occur due to a
credit event on a reference entity. If there is no credit default event or
settlement trigger, as defined by the specific derivative contract, then the
protection seller makes no payments to the protection buyer and receives only
the contractually specified fee. However, if a credit event occurs as defined in
the specific derivative contract sold, the protection seller will be required to
make a payment to the protection buyer.
A total return swap transfers the total economic performance of a
reference asset, which includes all associated cash flows, as well as capital
appreciation or depreciation. The protection buyer receives a floating rate of
interest and any depreciation on the reference asset from the protection seller
and, in return, the protection seller receives the cash flows associated with
the reference asset plus any appreciation. Thus, according to the total return
swap agreement, the protection seller will be obligated to make a payment any
time the floating interest rate payment and any depreciation of the reference
asset exceed the cash flows associated with the underlying asset. A total return
swap may terminate upon a default of the reference asset subject to the
provisions of the related total return swap agreement between the protection
seller and the protection buyer.
A credit option is a credit derivative that allows investors to trade or
hedge changes in the credit quality of the reference asset. For example, in a
credit spread option, the option writer assumes the obligation to purchase or
sell the reference asset at a specified "strike" spread level. The option
purchaser buys the right to sell the reference asset to, or purchase it from,
the option writer at the strike spread level. The payments on credit spread
options depend either on a particular credit spread or the price of the
underlying credit-sensitive asset. The options usually terminate if the
underlying assets default.
A credit-linked note is a form of credit derivative structured as a debt
security with an embedded credit default swap. The purchaser of the note writes
credit protection to the issuer, and receives a return that will be negatively
affected by credit events on the underlying reference credit. If the reference
entity defaults, the purchaser of the credit-linked note may assume the long
position in the debt security and any future cash flows from it, but will lose
the amount paid to the issuer of the credit-linked note. Thus the maximum amount
of the exposure is the carrying amount of the credit-linked note. As of December
31, 2012 and December 31, 2011, the amount of credit-linked notes held by the
Company in trading inventory was immaterial.
The following tables summarize the key characteristics of the Company's credit derivative portfolio as protection seller as of December 31, 2012 and December 31, 2011:
Maximum potential | Fair | ||||||
In millions of dollars as of | amount of | value | |||||
December 31, 2012 | future payments | payable | (1)(2) | ||||
By industry/counterparty | |||||||
Bank | $ | 863,411 | $ | 18,824 | |||
Broker-dealer | 304,968 | 9,193 | |||||
Non-financial | 3,241 | 87 | |||||
Insurance and other financial institutions | 174,874 | 3,726 | |||||
Total by industry/counterparty | $ | 1,346,494 | $ | 31,830 | |||
By instrument | |||||||
Credit default swaps and options | $ | 1,345,162 | $ | 31,624 | |||
Total return swaps and other | 1,332 | 206 | |||||
Total by instrument | $ | 1,346,494 | $ | 31,830 | |||
By rating | |||||||
Investment grade | $ | 637,343 | $ | 6,290 | |||
Non-investment grade | 200,529 | 15,591 | |||||
Not rated | 508,622 | 9,949 | |||||
Total by rating | $ | 1,346,494 | $ | 31,830 | |||
By maturity | |||||||
Within 1 year | $ | 287,670 | $ | 2,388 | |||
From 1 to 5 years | 965,059 | 21,542 | |||||
After 5 years | 93,765 | 7,900 | |||||
Total by maturity | $ | 1,346,494 | $ | 31,830 |
(1) | In addition, fair value amounts payable under credit derivatives purchased were $20,878 million. |
(2) | In addition, fair value amounts receivable under credit derivatives sold were $19,710 million. |
Maximum potential | Fair | ||||||
In millions of dollars as of | amount of | value | |||||
December 31, 2011 | future payments | payable | (1)(2) | ||||
By industry/counterparty | |||||||
Bank | $ | 929,608 | $ | 45,920 | |||
Broker-dealer | 321,293 | 19,026 | |||||
Non-financial | 1,048 | 98 | |||||
Insurance and other financial institutions | 142,579 | 7,447 | |||||
Total by industry/counterparty | $ | 1,394,528 | $ | 72,491 | |||
By instrument | |||||||
Credit default swaps and options | $ | 1,393,082 | $ | 72,358 | |||
Total return swaps and other | 1,446 | 133 | |||||
Total by instrument | $ | 1,394,528 | $ | 72,491 | |||
By rating | |||||||
Investment grade | $ | 611,447 | $ | 16,913 | |||
Non-investment grade | 226,939 | 28,034 | |||||
Not rated | 556,142 | 27,544 | |||||
Total by rating | $ | 1,394,528 | $ | 72,491 | |||
By maturity | |||||||
Within 1 year | $ | 266,723 | $ | 3,705 | |||
From 1 to 5 years | 947,211 | 46,596 | |||||
After 5 years | 180,594 | 22,190 | |||||
Total by maturity | $ | 1,394,528 | $ | 72,491 |
(1) | In addition, fair value amounts payable under credit derivatives purchased were $12,361 million. |
(2) | In addition, fair value amounts receivable under credit derivatives sold were $11,335 million. |
248
Citigroup evaluates the payment/performance risk of the credit
derivatives for which it stands as a protection seller based on the credit
rating assigned to the underlying referenced credit. Where external ratings by
nationally recognized statistical rating organizations (such as Moody's and
S&P) are used, investment grade ratings are considered to be Baa/BBB or
above, while anything below is considered non-investment grade. The Citigroup
internal ratings are in line with the related external credit rating system. On
certain underlying reference credits, mainly related to over-the-counter credit
derivatives, ratings are not available, and these are included in the not-rated
category. Credit derivatives written on an underlying non-investment grade
reference credit represent greater payment risk to the Company. The
non-investment grade category in the table above primarily includes credit
derivatives where the underlying referenced entity has been downgraded
subsequent to the inception of the derivative.
The maximum potential amount of future payments under credit derivative
contracts presented in the table above is based on the notional value of the
derivatives. The Company believes that the maximum potential amount of future
payments for credit protection sold is not representative of the actual loss
exposure based on historical experience. This amount has not been reduced by the
Company's rights to the underlying assets and the related cash flows. In
accordance with most credit derivative contracts, should a credit event (or
settlement trigger) occur, the Company is usually liable for the difference
between the protection sold and the recourse it holds in the value of the
underlying assets. Thus, if the reference entity defaults, Citi will generally
have a right to collect on the underlying reference credit and any related cash
flows, while being liable for the full notional amount of credit protection sold
to the buyer. Furthermore, this maximum potential amount of future payments for
credit protection sold has not been reduced for any cash collateral paid to a
given counterparty as such payments would be calculated after netting all
derivative exposures, including any credit derivatives with that counterparty in
accordance with a related master netting agreement. Due to such netting
processes, determining the amount of collateral that corresponds to credit
derivative exposures alone is not possible. The Company actively monitors open
credit risk exposures and manages this exposure by using a variety of
strategies, including purchased credit derivatives, cash collateral or direct
holdings of the referenced assets. This risk mitigation activity is not captured
in the table above.
Credit-Risk-Related Contingent Features
in Derivatives
Certain
derivative instruments contain provisions that require the Company to either
post additional collateral or immediately settle any outstanding liability
balances upon the occurrence of a specified credit-risk-related event. These
events, which are defined by the existing derivative contracts, are primarily
downgrades in the credit ratings of the Company and its affiliates. The fair
value (excluding CVA) of all derivative instruments with credit-risk-related
contingent features that are in a net liability position at December 31, 2012
and December 31, 2011 is $36 billion and $33 billion, respectively. The Company
has posted $32 billion and $28 billion as collateral for this exposure in the
normal course of business as of December 31, 2012 and December 31, 2011,
respectively.
Each downgrade
would trigger additional collateral or cash settlement requirements for the
Company and its affiliates. In the event that each legal entity was downgraded a
single notch by the three rating agencies as of December 31, 2012, the Company
would be required to post an additional $4.0 billion, as either collateral or
settlement of the derivative transactions. Additionally, the Company would be
required to segregate with third-party custodians collateral previously received
from existing derivative counterparties in the amount of $1.1 billion upon the
single notch downgrade, resulting in aggregate cash obligations and collateral
requirements of approximately $5.1 billion.
249
24. CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk
exist when changes in economic, industry or geographic factors similarly affect
groups of counterparties whose aggregate credit exposure is material in relation
to Citigroup's total credit exposure. Although Citigroup's portfolio of
financial instruments is broadly diversified along industry, product, and
geographic lines, material transactions are completed with other financial
institutions, particularly in the securities trading, derivatives and foreign
exchange businesses.
In connection with the Company's efforts to
maintain a diversified portfolio, the Company limits its exposure to any one
geographic region, country or individual creditor and monitors this exposure on
a continuous basis. At December 31, 2012, Citigroup's most significant
concentration of credit risk was with the U.S. government and its agencies. The
Company's exposure, which primarily results from trading assets and investments
issued by the U.S. government and its agencies, amounted to $190.7 billion and
$177.9 billion at December 31, 2012 and 2011, respectively. The Japanese and
Mexican governments and their agencies, which are rated investment grade by both
Moody's and S&P, were the next largest exposures. The Company's exposure to
Japan amounted to $38.7 billion and $33.2 billion at December 31, 2012 and 2011,
respectively, and was composed of investment securities, loans and trading
assets. The Company's exposure to Mexico amounted to $33.6 billion and $29.5
billion at December 31, 2012 and 2011, respectively, and was composed of
investment securities, loans and trading assets.
The Company's exposure to states and
municipalities amounted to $35.8 billion and $39.5 billion at December 31, 2012
and 2011, respectively, and was composed of trading assets, investment
securities, derivatives and lending activities.
25. FAIR VALUE MEASUREMENT
ASC 820-10 (formerly SFAS
157) Fair Value
Measurement , defines fair value,
establishes a consistent framework for measuring fair value and requires
disclosures about fair value measurements. Fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Among
other things, the standard requires the Company to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring
fair value.
Under ASC 820-10, the
probability of default of a counterparty is factored into the valuation of
derivative positions and includes the impact of Citigroup's own credit risk on
derivatives and other liabilities measured at fair value.
Fair Value
Hierarchy
ASC 820-10 specifies
a hierarchy of inputs based on whether the inputs are observable or
unobservable. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Company's market assumptions.
These two types of inputs have created the following fair value
hierarchy:
This hierarchy requires the use of
observable market data when available. The Company considers relevant and
observable market prices in its valuations where possible. The frequency of
transactions, the size of the bid-ask spread and the amount of adjustment
necessary when comparing similar transactions are all factors in determining the
liquidity of markets and the relevance of observed prices in those
markets.
The Company's
policy with respect to transfers between levels of the fair value hierarchy is
to recognize transfers into and out of each level as of the end of the reporting
period.
Determination of Fair
Value
For assets and
liabilities carried at fair value, the Company measures such value using the
procedures set out below, irrespective of whether these assets and liabilities
are carried at fair value as a result of an election or whether they are
required to be carried at fair value.
When
available, the Company generally uses quoted market prices to determine fair
value and classifies such items as Level 1. In some cases where a market price
is available, the Company will make use of acceptable practical expedients (such
as matrix pricing) to calculate fair value, in which case the items are
classified as Level 2.
250
If
quoted market prices are not available, fair value is based upon internally
developed valuation techniques that use, where possible, current market-based
parameters, such as interest rates, currency rates, option volatilities, etc.
Items valued using such internally generated valuation techniques are classified
according to the lowest level input or value driver that is significant to the
valuation. Thus, an item may be classified as Level 3 even though there may be
some significant inputs that are readily observable.
The Company may also apply a price-based
methodology, which utilizes, where available, quoted prices or other market
information obtained from recent trading activity in positions with the same or
similar characteristics to the position being valued. The market activity and
the amount of the bid-ask spread are among the factors considered in determining
the liquidity of markets and the relevance of observed prices from those
markets. If relevant and observable prices are available, those valuations may
be classified as Level 2. When less liquidity exists for a security or loan, a
quoted price is stale, a significant adjustment to the price of a similar
security is necessary to reflect differences in the terms of the actual security
or loan being valued, or prices from independent sources are insufficient to
corroborate the valuation, the "price" inputs are considered unobservable and
the fair value measurements are classified as Level 3.
Fair value estimates from internal valuation
techniques are verified, where possible, to prices obtained from independent
vendors or brokers. Vendors and brokers' valuations may be based on a variety of
inputs ranging from observed prices to proprietary valuation models.
The following section describes the valuation
methodologies used by the Company to measure various financial instruments at
fair value, including an indication of the level in the fair value hierarchy in
which each instrument is generally classified. Where appropriate, the
description includes details of the valuation models, the key inputs to those
models and any significant assumptions.
Market valuation
adjustments
Liquidity
adjustments are applied to items in Level 2 and Level 3 of the fair value
hierarchy to ensure that the fair value reflects the liquidity or illiquidity of
the market. The liquidity reserve may utilize the bid-offer spread for an
instrument as one of the factors.
Counterparty credit-risk adjustments are applied to derivatives, such as
over-the-counter uncollateralized derivatives, where the base valuation uses
market parameters based on the relevant base interest rate curves. Not all
counterparties have the same credit risk as that implied by the relevant base
curve, so it is necessary to consider the market view of the credit risk of a
counterparty in order to estimate the fair value of such an
item.
Bilateral or "own" credit-risk adjustments are applied to reflect the
Company's own credit risk when valuing derivatives and liabilities measured at
fair value. Counterparty and own credit adjustments consider the expected future
cash flows between Citi and its counterparties under the terms of the instrument
and the effect of credit risk on the valuation of those cash flows, rather than
a point-in-time assessment of the current recognized net asset or liability.
Furthermore, the credit-risk adjustments take into account the effect of
credit-risk mitigants, such as pledged collateral and any legal right of offset
(to the extent such offset exists) with a counterparty through arrangements such
as netting agreements.
Generally, the unit of account
for a financial instrument is the individual financial instrument. The Company
applies market valuation adjustments that are consistent with the unit of
account, which does not include adjustment due to the size of the Company's
position, except as follows. ASC 820-10 permits an exception, through an
accounting policy election, to measure the fair value of a portfolio of
financial assets and financial liabilities on the basis of the net open risk
position when certain criteria are met. Citi has elected to measure certain
portfolios of financial instruments, such as derivatives, that meet those
criteria on the basis of the net open risk position. The Company applies market
valuation adjustments, including adjustments to account for the size of the net
open risk position, consistent with market participant assumptions and in
accordance with the unit of account.
Valuation Process for Level 3 Fair
Value Measurements
Price
verification procedures and related internal control procedures are governed by
the Citigroup Pricing and Price
Verification Policy and Standards , which is jointly owned by Finance and Risk Management. Finance has
implemented the ICG Securities and
Banking Pricing and Price Verification Standards and Procedures to facilitate compliance with this
policy.
For fair value measurements of
substantially all assets and liabilities held by the Company, individual
business units are responsible for valuing the trading account assets and
liabilities, and Product Control within Finance performs independent price
verification procedures to evaluate those fair value measurements. Product
Control is independent of the individual business units and reports into the
Global Head of Product Control. It has the final authority over the independent
valuation of financial assets and liabilities. Fair value measurements of assets
and liabilities are determined using various techniques, including, but not
limited to, discounted cash flows and internal models, such as option and
correlation models.
Based on the observability of inputs used, Product Control classifies the
inventory as Level 1, Level 2 or Level 3 of the fair value hierarchy. When a
position involves one or more significant inputs that are not directly
observable, additional price verification procedures are applied. These
procedures may include reviewing relevant historical data, analyzing profit and
loss, valuing each component of a structured trade individually, and
benchmarking, among others.
251
Reports of inventory that is classified within Level 3 of the fair value
hierarchy are distributed to senior management in Finance, Risk and the
individual business. This inventory is also discussed in Risk Committees and in
monthly meetings with senior trading management. As deemed necessary, reports
may go to the Audit Committee of the Board of Directors or to the full Board of
Directors. Whenever a valuation adjustment is needed to bring the price of an
asset or liability to its exit price, Product Control reports it to management
along with other price verification results.
In
addition, the pricing models used in measuring fair value are governed by an
independent control framework. Although the models are developed and tested by
the individual business units, they are independently validated by the Model
Validation Group within Risk Management and reviewed by Finance with respect to
their impact on the price verification procedures. The purpose of this
independent control framework is to assess model risk arising from models'
theoretical soundness, calibration techniques where needed, and the
appropriateness of the model for a specific product in a defined market.
Valuation adjustments, if any, go through a similar independent review process
as the valuation models. To ensure their continued applicability, models are
independently reviewed annually. In addition, Risk Management approves and
maintains a list of products permitted to be valued under each approved model
for a given business.
Securities purchased
under agreements to resell and
securities sold under agreements to
repurchase
No quoted
prices exist for such instruments, so fair value is determined using a
discounted cash-flow technique. Cash flows are estimated based on the terms of
the contract, taking into account any embedded derivative or other features.
Expected cash flows are discounted using interest rates appropriate to the
maturity of the instrument as well as the nature of the underlying collateral.
Generally, when such instruments are held at fair value, they are classified
within Level 2 of the fair value hierarchy, as the inputs used in the valuation
are readily observable. However, certain long-dated positions are classified
within Level 3 of the fair value hierarchy.
Trading account assets
and liabilities-trading securities
and trading loans
When available, the Company uses quoted market
prices to determine the fair value of trading securities; such items are
classified as Level 1 of the fair value hierarchy. Examples include some
government securities and exchange-traded equity securities.
For
bonds and secondary market loans traded over the counter, the Company generally
determines fair value utilizing valuation techniques, including discounted cash
flows, price-based and internal models, such as Black-Scholes and Monte Carlo
simulation. Fair value estimates from these internal valuation techniques are
verified, where possible, to prices obtained from independent vendors. Vendors
compile prices from various sources and may apply matrix pricing for similar
bonds or loans where no price is observable. A price-based methodology utilizes,
where available,
quoted prices or other market
information obtained from recent trading activity of assets with similar
characteristics to the bond or loan being valued. The yields used in discounted
cash flow models are derived from the same price information. Trading securities
and loans priced using such methods are generally classified as Level 2.
However, when less liquidity exists for a security or loan, a quoted price is
stale, a significant adjustment to the price of a similar security or loan is
necessary to reflect differences in the terms of the actual security or loan
being valued, or prices from independent sources are insufficient to corroborate
valuation, a loan or security is generally classified as Level 3. The price
input used in a price-based methodology may be zero for a security, such as a
subprime CDO, that is not receiving any principal or interest and is currently
written down to zero.
Where the Company's principal market for a
portfolio of loans is the securitization market, the Company uses the
securitization price to determine the fair value of the portfolio. The
securitization price is determined from the assumed proceeds of a hypothetical
securitization in the current market, adjusted for transformation costs (i.e.,
direct costs other than transaction costs) and securitization uncertainties such
as market conditions and liquidity. As a result of the severe reduction in the
level of activity in certain securitization markets since the second half of
2007, observable securitization prices for certain directly comparable
portfolios of loans have not been readily available. Therefore, such portfolios
of loans are generally classified as Level 3 of the fair value hierarchy.
However, for other loan securitization markets, such as commercial real estate
loans, pricing verification of the hypothetical securitizations has been
possible, since these markets have remained active. Accordingly, this loan
portfolio is classified as Level 2 of the fair value hierarchy.
Trading account assets
and liabilities-derivatives
Exchange-traded derivatives are generally measured at fair value using
quoted market (i.e., exchange) prices and are classified as Level 1 of the fair
value hierarchy.
The majority of derivatives entered into
by the Company are executed over the counter and are valued using internal
valuation techniques, as no quoted market prices exist for such instruments. The
valuation techniques and inputs depend on the type of derivative and the nature
of the underlying instrument. The principal techniques used to value these
instruments are discounted cash flows and internal models, including
Black-Scholes and Monte Carlo simulation. The fair values of derivative
contracts reflect cash the Company has paid or received (for example, option
premiums paid and received).
The key inputs depend upon the type of
derivative and the nature of the underlying instrument and include interest rate
yield curves, foreign-exchange rates, volatilities and correlation. The Company
uses overnight indexed swap (OIS) curves as fair value measurement inputs for
the valuation of certain collateralized interest-rate related derivatives. The
instrument is classified as either Level 2 or Level 3 depending upon the
observability of the significant inputs to the model.
252
Subprime-related direct exposures in CDOs
The valuation of high-grade and mezzanine
asset-backed security (ABS) CDO positions utilizes prices based on the
underlying assets of each high-grade and mezzanine ABS CDO. The high-grade and
mezzanine positions are largely hedged through the ABX and bond short positions.
This results in closer symmetry in the way these long and short positions are
valued by the Company. Citigroup uses trader marks to value this portion of the
portfolio and will do so as long as it remains largely
hedged.
For most of the lending and structuring direct subprime exposures, fair
value is determined utilizing observable transactions where available, other
market data for similar assets in markets that are not active and other internal
valuation techniques.
Investments
The
investments category includes available-for-sale debt and marketable equity
securities, whose fair value is generally determined by utilizing similar
procedures described for trading securities above or, in some cases, using
consensus pricing as the primary source.
Also included in investments are nonpublic investments in private equity
and real estate entities held by the S&B business.
Determining the fair value of nonpublic securities involves a significant degree
of management resources and judgment, as no quoted prices exist and such
securities are generally very thinly traded. In addition, there may be transfer
restrictions on private equity securities. The Company uses an established
process for determining the fair value of such securities, utilizing commonly
accepted valuation techniques, including comparables analysis. In determining
the fair value of nonpublic securities, the Company also considers events such
as a proposed sale of the investee company, initial public offerings, equity
issuances or other observable transactions. As discussed in Note 15 to the
Consolidated Financial Statements, the Company uses net asset value (NAV) to
value certain of these investments.
Private equity securities are generally classified as Level 3 of the fair
value hierarchy.
Short-term borrowings
and long-term debt
Where
fair value accounting has been elected, the fair value of non-structured
liabilities is determined by utilizing internal models using the appropriate
discount rate for the applicable maturity. Such instruments are generally
classified as Level 2 of the fair value hierarchy, as all inputs are readily
observable.
The Company determines the
fair value of structured liabilities (where performance is linked to structured
interest rates, inflation or currency risks) and hybrid financial instruments
(where performance is linked to risks other than interest rates, inflation or
currency risks) using the appropriate derivative valuation methodology
(described above) given the nature of the embedded risk profile. Such
instruments are classified as Level 2 or Level 3 depending on the observability
of significant inputs to the model.
Alt-A mortgage
securities
The
Company classifies its Alt-A mortgage securities as held-to-maturity,
available-for-sale and trading investments. The securities classified as trading
and available-for-sale are recorded at fair value with changes in fair value
reported in current earnings and AOCI, respectively. For these purposes, Citi
defines Alt-A mortgage securities as non-agency residential mortgage-backed
securities (RMBS) where (i) the underlying collateral has weighted average FICO
scores between 680 and 720 or (ii) for instances where FICO scores are greater
than 720, RMBS have 30% or less of the underlying collateral composed of full
documentation loans.
Similar to the valuation methodologies used for other trading securities
and trading loans, the Company generally determines the fair values of Alt-A
mortgage securities utilizing internal valuation techniques. Fair value
estimates from internal valuation techniques are verified, where possible, to
prices obtained from independent vendors. Consensus data providers compile
prices from various sources. Where available, the Company may also make use of
quoted prices for recent trading activity in securities with the same or similar
characteristics to the security being valued.
The valuation techniques used for Alt-A mortgage securities, as with
other mortgage exposures, are price-based and discounted cash flows. The primary
market-derived input is yield. Cash flows are based on current collateral
performance with prepayment rates and loss projections reflective of current
economic conditions of housing price change, unemployment rates, interest rates,
borrower attributes and other market indicators.
Alt-A mortgage securities that are valued using these methods are
generally classified as Level 2. However, Alt-A mortgage securities backed by
Alt-A mortgages of lower quality or subordinated tranches in the capital
structure are mostly classified as Level 3 due to the reduced liquidity that
exists for such positions, which reduces the reliability of prices available
from independent sources.
253
Items Measured at Fair Value on a
Recurring Basis
The following
tables present for each of the fair value hierarchy levels the Company's assets
and liabilities that are measured at fair value on a recurring basis at December
31, 2012 and 2011. The Company's hedging of positions that have been classified
in the Level 3 category is not limited
to other financial instruments (hedging instruments) that have been classified as Level 3, but also instruments classified as Level 1 or Level 2 of the fair value hierarchy. The effects of these hedges are presented gross in the following table.
Fair Value Levels | ||||||||||||||||||
Gross | Net | |||||||||||||||||
In millions of dollars at December 31, 2012 | Level 1 | (1) | Level 2 | (1) | Level 3 | inventory | Netting | (2) | balance | |||||||||
Assets | ||||||||||||||||||
Federal funds sold and securities borrowed or purchased under | ||||||||||||||||||
agreements to resell | $ | - | $ | 198,278 | $ | 5,043 | $ | 203,321 | $ | (42,732 | ) | $ | 160,589 | |||||
Trading securities | ||||||||||||||||||
Trading mortgage-backed securities | ||||||||||||||||||
U.S. government-sponsored agency guaranteed | - | 29,835 | 1,325 | 31,160 | - | 31,160 | ||||||||||||
Residential | - | 1,663 | 1,805 | 3,468 | - | 3,468 | ||||||||||||
Commercial | - | 1,322 | 1,119 | 2,441 | - | 2,441 | ||||||||||||
Total trading mortgage-backed securities | $ | - | $ | 32,820 | $ | 4,249 | $ | 37,069 | $ | - | $ | 37,069 | ||||||
U.S. Treasury and federal agency securities | $ | 15,416 | $ | 4,940 | $ | - | $ | 20,356 | $ | - | $ | 20,356 | ||||||
State and municipal | - | 3,611 | 195 | 3,806 | - | 3,806 | ||||||||||||
Foreign government | 57,831 | 31,097 | 311 | 89,239 | - | 89,239 | ||||||||||||
Corporate | - | 33,194 | 2,030 | 35,224 | - | 35,224 | ||||||||||||
Equity securities | 54,640 | 2,094 | 264 | 56,998 | - | 56,998 | ||||||||||||
Asset-backed securities | - | 899 | 4,453 | 5,352 | - | 5,352 | ||||||||||||
Other debt securities | - | 15,944 | 2,321 | 18,265 | - | 18,265 | ||||||||||||
Total trading securities | $ | 127,887 | $ | 124,599 | $ | 13,823 | $ | 266,309 | $ | - | $ | 266,309 | ||||||
Trading account derivatives | ||||||||||||||||||
Interest rate contracts | $ | 2 | $ | 901,809 | $ | 1,710 | $ | 903,521 | ||||||||||
Foreign exchange contracts | 18 | 75,712 | 902 | 76,632 | ||||||||||||||
Equity contracts | 2,359 | 14,193 | 1,741 | 18,293 | ||||||||||||||
Commodity contracts | 410 | 9,802 | 695 | 10,907 | ||||||||||||||
Credit derivatives | - | 50,109 | 4,166 | 54,275 | ||||||||||||||
Total trading account derivatives | $ | 2,789 | $ | 1,051,625 | $ | 9,214 | $ | 1,063,628 | ||||||||||
Gross cash collateral paid | 61,152 | |||||||||||||||||
Netting agreements and market value adjustments | $ | (1,070,160 | ) | |||||||||||||||
Total trading account derivatives | $ | 2,789 | $ | 1,051,625 | $ | 9,214 | $ | 1,124,780 | $ | (1,070,160 | ) | $ | 54,620 | |||||
Investments | ||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||
U.S. government-sponsored agency guaranteed | $ | 46 | $ | 45,841 | $ | 1,458 | $ | 47,345 | $ | - | $ | 47,345 | ||||||
Residential | - | 7,472 | 205 | 7,677 | - | 7,677 | ||||||||||||
Commercial | - | 449 | - | 449 | - | 449 | ||||||||||||
Total investment mortgage-backed securities | $ | 46 | $ | 53,762 | $ | 1,663 | $ | 55,471 | $ | - | $ | 55,471 | ||||||
U.S. Treasury and federal agency securities | $ | 13,204 | $ | 78,625 | $ | 12 | $ | 91,841 | $ | - | $ | 91,841 |
See footnotes on the next page.
254
Gross | Net | ||||||||||||||||
In millions of dollars at December 31, 2012 | Level 1 | (1) | Level 2 | (1) | Level 3 | inventory | Netting | (2) | balance | ||||||||
State and municipal | $ | - | $ | 17,483 | $ | 849 | $ | 18,332 | $ | - | $ | 18,332 | |||||
Foreign government | 36,048 | 57,616 | 383 | 94,047 | - | 94,047 | |||||||||||
Corporate | - | 9,289 | 385 | 9,674 | - | 9,674 | |||||||||||
Equity securities | 4,037 | 132 | 773 | 4,942 | - | 4,942 | |||||||||||
Asset-backed securities | - | 11,910 | 2,220 | 14,130 | - | 14,130 | |||||||||||
Other debt securities | - | - | 258 | 258 | - | 258 | |||||||||||
Non-marketable equity securities | - | 404 | 5,364 | 5,768 | - | 5,768 | |||||||||||
Total investments | $ | 53,335 | $ | 229,221 | $ | 11,907 | $ | 294,463 | $ | - | $ | 294,463 | |||||
Loans (3) | $ | - | $ | 356 | $ | 4,931 | $ | 5,287 | $ | - | $ | 5,287 | |||||
Mortgage servicing rights | - | - | 1,942 | 1,942 | - | 1,942 | |||||||||||
Nontrading derivatives and other financial assets measured | |||||||||||||||||
on a recurring basis, gross | $ | - | $ | 15,293 | $ | 2,452 | $ | 17,745 | |||||||||
Gross cash collateral paid | 214 | ||||||||||||||||
Netting agreements and market value adjustments | $ | (4,660 | ) | ||||||||||||||
Nontrading derivatives and other financial assets measured | |||||||||||||||||
on a recurring basis | $ | - | $ | 15,293 | $ | 2,452 | $ | 17,959 | $ | (4,660 | ) | $ | 13,299 | ||||
Total assets | $ | 184,011 | $ | 1,619,372 | $ | 49,312 | $ | 1,914,061 | $ | (1,117,552 | ) | $ | 796,509 | ||||
Total as a percentage of gross assets (4) | 9.9 | % | 87.4 | % | 2.7 | % | 100.0 | % | |||||||||
Liabilities | |||||||||||||||||
Interest-bearing deposits | $ | - | $ | 661 | $ | 786 | $ | 1,447 | $ | - | $ | 1,447 | |||||
Federal funds purchased and securities loaned or sold under | |||||||||||||||||
agreements to repurchase | - | 158,580 | 841 | 159,421 | (42,732 | ) | 116,689 | ||||||||||
Trading account liabilities | |||||||||||||||||
Securities sold, not yet purchased | 55,145 | 8,288 | 365 | 63,798 | 63,798 | ||||||||||||
Trading account derivatives | |||||||||||||||||
Interest rate contracts | 1 | 891,138 | 1,529 | 892,668 | |||||||||||||
Foreign exchange contracts | 10 | 81,209 | 902 | 82,121 | |||||||||||||
Equity contracts | 2,664 | 26,014 | 3,189 | 31,867 | |||||||||||||
Commodity contracts | 317 | 10,359 | 1,466 | 12,142 | |||||||||||||
Credit derivatives | - | 47,792 | 4,508 | 52,300 | |||||||||||||
Total trading account derivatives | $ | 2,992 | $ | 1,056,512 | $ | 11,594 | $ | 1,071,098 | |||||||||
Gross cash collateral received | 46,833 | ||||||||||||||||
Netting agreements and market value adjustments | $ | (1,066,180 | ) | ||||||||||||||
Total trading account derivatives | $ | 2,992 | $ | 1,056,512 | $ | 11,594 | $ | 1,117,931 | $ | (1,066,180 | ) | $ | 51,751 | ||||
Short-term borrowings | - | 706 | 112 | 818 | - | 818 | |||||||||||
Long-term debt | - | 23,038 | 6,726 | 29,764 | - | 29,764 | |||||||||||
Nontrading derivatives and other financial liabilities measured | |||||||||||||||||
on a recurring basis, gross | $ | - | $ | 2,228 | $ | 24 | $ | 2,252 | |||||||||
Gross cash collateral received | $ | 5,318 | |||||||||||||||
Netting agreements and market value adjustments | $ | (4,660 | ) | ||||||||||||||
Nontrading derivatives and other financial liabilities measured | |||||||||||||||||
on a recurring basis | $ | - | $ | 2,228 | $ | 24 | $ | 7,570 | $ | (4,660 | ) | $ | 2,910 | ||||
Total liabilities | $ | 58,137 | $ | 1,250,013 | $ | 20,448 | $ | 1,380,749 | $ | (1,113,572 | ) | $ | 267,177 | ||||
Total as a percentage of gross liabilities (4) | 4.4 | % | 94.1 | % | 1.5 | % | 100.0 | % |
(1) | For the year ended December 31, 2012, the Company transferred assets of $1.7 billion from Level 1 to Level 2, primarily related to foreign government bonds, which were not traded with enough frequency to constitute an active market. During the year ended December 31, 2012, the Company transferred assets of $1.2 billion from Level 2 to Level 1 primarily related to foreign government bonds, which were traded with sufficient frequency to constitute an active market. During the year ended December 31, 2012, the Company transferred liabilities of $70 million, from Level 1 to Level 2, and liabilities of $150 million from Level 2 to Level 1. |
(2) | Represents netting of: (i) the amounts due under securities purchased under agreements to resell and the amounts owed under securities sold under agreements to repurchase; and (ii) derivative exposures covered by a qualifying master netting agreement, cash collateral and the market value adjustment. |
(3) | There is no allowance for loan losses recorded for loans reported at fair value. |
(4) | Percentage is calculated based on total assets and liabilities measured at fair value on a recurring basis, excluding collateral paid/received on derivatives. |
255
Fair Value Levels | ||||||||||||||||||
Gross | Net | |||||||||||||||||
In millions of dollars at December 31, 2011 | Level 1 | Level 2 | Level 3 | inventory | Netting | (1) | balance | |||||||||||
Assets | ||||||||||||||||||
Federal funds sold and securities borrowed or purchased under | ||||||||||||||||||
agreements to resell | $ | - | $ | 188,034 | $ | 4,701 | $ | 192,735 | $ | (49,873 | ) | $ | 142,862 | |||||
Trading securities | ||||||||||||||||||
Trading mortgage-backed securities | ||||||||||||||||||
U.S. government-sponsored agency guaranteed | $ | - | $ | 26,674 | $ | 861 | $ | 27,535 | $ | - | $ | 27,535 | ||||||
Residential | - | 1,362 | 1,509 | 2,871 | - | 2,871 | ||||||||||||
Commercial | - | 1,715 | 618 | 2,333 | - | 2,333 | ||||||||||||
Total trading mortgage-backed securities | $ | - | $ | 29,751 | $ | 2,988 | $ | 32,739 | $ | - | $ | 32,739 | ||||||
U.S. Treasury and federal agency securities | $ | 15,612 | $ | 3,784 | $ | 3 | $ | 19,399 | $ | - | $ | 19,399 | ||||||
State and municipal | - | 5,112 | 252 | 5,364 | - | 5,364 | ||||||||||||
Foreign government | 52,429 | 26,601 | 521 | 79,551 | - | 79,551 | ||||||||||||
Corporate | - | 33,786 | 3,240 | 37,026 | - | 37,026 | ||||||||||||
Equity securities | 29,707 | 3,279 | 244 | 33,230 | - | 33,230 | ||||||||||||
Asset-backed securities | - | 1,270 | 5,801 | 7,071 | - | 7,071 | ||||||||||||
Other debt securities | - | 12,284 | 2,743 | 15,027 | - | 15,027 | ||||||||||||
Total trading securities | $ | 97,748 | $ | 115,867 | $ | 15,792 | $ | 229,407 | $ | - | $ | 229,407 | ||||||
Trading account derivatives | ||||||||||||||||||
Interest rate contracts | $ | 67 | $ | 755,473 | $ | 1,947 | $ | 757,487 | ||||||||||
Foreign exchange contracts | - | 93,536 | 781 | 94,317 | ||||||||||||||
Equity contracts | 2,240 | 16,376 | 1,619 | 20,235 | ||||||||||||||
Commodity contracts | 958 | 11,940 | 865 | 13,763 | ||||||||||||||
Credit derivatives | - | 81,123 | 9,301 | 90,424 | ||||||||||||||
Total trading account derivatives | $ | 3,265 | $ | 958,448 | $ | 14,513 | $ | 976,226 | ||||||||||
Gross cash collateral paid | 57,815 | |||||||||||||||||
Netting agreements and market value adjustments | $ | (971,714 | ) | |||||||||||||||
Total trading account derivatives | $ | 3,265 | $ | 958,448 | $ | 14,513 | $ | 1,034,041 | $ | (971,714 | ) | $ | 62,327 | |||||
Investments | ||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||
U.S. government-sponsored agency guaranteed | $ | 59 | $ | 45,043 | $ | 679 | $ | 45,781 | $ | - | $ | 45,781 | ||||||
Residential | - | 4,764 | 8 | 4,772 | - | 4,772 | ||||||||||||
Commercial | - | 472 | - | 472 | - | 472 | ||||||||||||
Total investment mortgage-backed securities | $ | 59 | $ | 50,279 | $ | 687 | $ | 51,025 | $ | - | $ | 51,025 | ||||||
U.S. Treasury and federal agency securities | $ | 11,642 | $ | 73,421 | $ | 75 | $ | 85,138 | $ | - | $ | 85,138 |
See footnotes on the next page.
256
Gross | Net | |||||||||||||||||
In millions of dollars at December 31, 2011 | Level 1 | Level 2 | Level 3 | inventory | Netting | (1) | balance | |||||||||||
State and municipal | $ | - | $ | 13,732 | $ | 667 | $ | 14,399 | $ | - | $ | 14,399 | ||||||
Foreign government | 33,544 | 50,523 | 447 | 84,514 | - | 84,514 | ||||||||||||
Corporate | - | 9,268 | 989 | 10,257 | - | 10,257 | ||||||||||||
Equity securities | 6,634 | 98 | 1,453 | 8,185 | - | 8,185 | ||||||||||||
Asset-backed securities | - | 6,962 | 4,041 | 11,003 | - | 11,003 | ||||||||||||
Other debt securities | - | 563 | 120 | 683 | - | 683 | ||||||||||||
Non-marketable equity securities | - | 518 | 8,318 | 8,836 | - | 8,836 | ||||||||||||
Total investments | $ | 51,879 | $ | 205,364 | $ | 16,797 | $ | 274,040 | $ | - | $ | 274,040 | ||||||
Loans (2) | $ | - | $ | 583 | $ | 4,682 | $ | 5,265 | $ | - | $ | 5,265 | ||||||
Mortgage servicing rights | - | - | 2,569 | 2,569 | - | 2,569 | ||||||||||||
Nontrading derivatives and other financial assets measured | ||||||||||||||||||
on a recurring basis, gross | $ | - | $ | 14,270 | $ | 2,245 | $ | 16,515 | ||||||||||
Gross cash collateral paid | 307 | |||||||||||||||||
Netting agreements and market value adjustments | $ | (3,462 | ) | |||||||||||||||
Nontrading derivatives and other financial assets measured | ||||||||||||||||||
on a recurring basis | $ | - | $ | 14,270 | $ | 2,245 | $ | 16,822 | $ | (3,462 | ) | $ | 13,360 | |||||
Total assets | $ | 152,892 | $ | 1,482,566 | $ | 61,299 | $ | 1,754,879 | $ | (1,025,049 | ) | $ | 729,830 | |||||
Total as a percentage of gross assets (3) | 9.0 | % | 87.4 | % | 3.6 | % | 100.0 | % | ||||||||||
Liabilities | ||||||||||||||||||
Interest-bearing deposits | $ | - | $ | 895 | $ | 431 | $ | 1,326 | $ | - | $ | 1,326 | ||||||
Federal funds purchased and securities loaned or sold under | ||||||||||||||||||
agreements to repurchase | - | 146,524 | 1,061 | 147,585 | (49,873 | ) | 97,712 | |||||||||||
Trading account liabilities | ||||||||||||||||||
Securities sold, not yet purchased | 58,456 | 10,941 | 412 | 69,809 | 69,809 | |||||||||||||
Trading account derivatives | ||||||||||||||||||
Interest rate contracts | $ | 37 | $ | 738,833 | $ | 1,221 | $ | 740,091 | ||||||||||
Foreign exchange contracts | - | 96,020 | 1,343 | 97,363 | ||||||||||||||
Equity contracts | 2,822 | 26,961 | 3,356 | 33,139 | ||||||||||||||
Commodity contracts | 873 | 11,959 | 1,799 | 14,631 | ||||||||||||||
Credit derivatives | - | 77,153 | 7,573 | 84,726 | ||||||||||||||
Total trading account derivatives | $ | 3,732 | $ | 950,926 | $ | 15,292 | $ | 969,950 | ||||||||||
Gross cash collateral received | 52,811 | |||||||||||||||||
Netting agreements and market value adjustments | $ | (966,488 | ) | |||||||||||||||
Total trading account derivatives | $ | 3,732 | $ | 950,926 | $ | 15,292 | $ | 1,022,761 | $ | (966,488 | ) | $ | 56,273 | |||||
Short-term borrowings | - | 855 | 499 | 1,354 | - | 1,354 | ||||||||||||
Long-term debt | - | 17,268 | 6,904 | 24,172 | - | 24,172 | ||||||||||||
Nontrading derivatives and other financial liabilities measured | ||||||||||||||||||
on a recurring basis, gross | $ | - | $ | 3,559 | $ | 3 | $ | 3,562 | ||||||||||
Gross cash collateral received | $ | 3,642 | ||||||||||||||||
Netting agreements and market value adjustments | $ | (3,462 | ) | |||||||||||||||
Nontrading derivatives and other financial liabilities measured | ||||||||||||||||||
on a recurring basis | $ | - | $ | 3,559 | $ | 3 | $ | 7,204 | $ | (3,462 | ) | $ | 3,742 | |||||
Total liabilities | $ | 62,188 | $ | 1,130,968 | $ | 24,602 | $ | 1,274,211 | $ | (1,019,823 | ) | $ | 254,388 | |||||
Total as a percentage of gross liabilities (3) | 5.1 | % | 92.9 | % | 2.0 | % | 100.0 | % |
(1) | Represents netting of: (i) the amounts due under securities purchased under agreements to resell and the amounts owed under securities sold under agreements to repurchase; and (ii) derivative exposures covered by a qualifying master netting agreement, cash collateral and the market value adjustment. |
(2) | There is no allowance for loan losses recorded for loans reported at fair value. |
(3) | Percentage is calculated based on total assets and liabilities measured at fair value on a recurring basis, excluding collateral paid/received on derivatives. |
257
Changes in Level 3 Fair Value
Category
The following tables present the
changes in the Level 3 fair value category for the years ended December 31, 2012
and 2011. The Company classifies financial instruments as Level 3 of the fair
value hierarchy when there is reliance on at least one significant unobservable
input to the valuation model. In addition to these unobservable inputs, the
valuation models for Level 3 financial instruments typically also rely on a
number of inputs that are readily observable either directly or indirectly.
The gains and losses presented below include changes in the fair value
related to both observable and unobservable inputs.
The Company often hedges positions with offsetting positions that are classified in a different level. For example, the gains and losses for assets and liabilities in the Level 3 category presented in the tables below do not reflect the effect of offsetting losses and gains on hedging instruments that have been classified by the Company in the Level 1 and Level 2 categories. In addition, the Company hedges items classified in the Level 3 category with instruments also classified in Level 3 of the fair value hierarchy. The effects of these hedges are presented gross in the following tables.
Level 3 Fair Value Rollforward
Net realized/unrealized | Unrealized | ||||||||||||||||||||||||||||||||||
gains (losses) included in | Transfers | Transfers | gains | ||||||||||||||||||||||||||||||||
Dec. 31, | Principal | into | out of | Dec. 31, | (losses) | ||||||||||||||||||||||||||||||
In millions of dollars | 2011 | transactions | Other | (1)(2) | Level 3 | Level 3 | Purchases | Issuances | Sales | Settlements | 2012 | still held | (3) | ||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||||
Federal funds sold | |||||||||||||||||||||||||||||||||||
and securities | |||||||||||||||||||||||||||||||||||
borrowed
or purchased under agreements to resell | $ | 4,701 | $ | 306 | $ | - | $ | 540 | $ | (444 | ) | $ | - | $ | - | $ | - | $ | (60 | ) | $ | 5,043 | $ | 317 | |||||||||||
Trading securities | |||||||||||||||||||||||||||||||||||
Trading mortgage- | |||||||||||||||||||||||||||||||||||
backed securities | |||||||||||||||||||||||||||||||||||
U.S. government- | |||||||||||||||||||||||||||||||||||
sponsored agency guaranteed | 861 | 38 | - | 1,294 | (735 | ) | 657 | 79 | (735 | ) | (134 | ) | 1,325 | (16 | ) | ||||||||||||||||||||
Residential | 1,509 | 204 | - | 848 | (499 | ) | 1,652 | - | (1,897 | ) | (12 | ) | 1,805 | (27 | ) | ||||||||||||||||||||
Commercial | 618 | (32 | ) | - | 327 | (305 | ) | 1,056 | - | (545 | ) | - | 1,119 | 28 | |||||||||||||||||||||
Total
trading mortgage-backed | |||||||||||||||||||||||||||||||||||
securities | $ | 2,988 | $ | 210 | $ | - | $ | 2,469 | $ | (1,539 | ) | $ | 3,365 | $ | 79 | $ | (3,177 | ) | $ | (146 | ) | $ | 4,249 | $ | (15 | ) | |||||||||
U.S. Treasury and | |||||||||||||||||||||||||||||||||||
federal
agency securities | $ | 3 | $ | - | $ | - | $ | - | $ | - | $ | 13 | $ | - | $ | (16 | ) | $ | - | $ | - | $ | - | ||||||||||||
State
and municipal | $ | 252 | $ | 24 | $ | - | $ | 19 | $ | (18 | ) | $ | 61 | $ | - | $ | (143 | ) | $ | - | $ | 195 | $ | (2 | ) | ||||||||||
Foreign government | 521 | 25 | - | 89 | (875 | ) | 960 | - | (409 | ) | - | 311 | 5 | ||||||||||||||||||||||
Corporate | 3,240 | (90 | ) | - | 464 | (558 | ) | 2,622 | - | (1,942 | ) | (1,706 | ) | 2,030 | (28 | ) | |||||||||||||||||||
Equity securities | 244 | (25 | ) | - | 121 | (47 | ) | 231 | - | (192 | ) | (68 | ) | 264 | (5 | ) | |||||||||||||||||||
Asset-backed securities | 5,801 | 503 | - | 222 | (114 | ) | 6,873 | - | (7,823 | ) | (1,009 | ) | 4,453 | (173 | ) | ||||||||||||||||||||
Other
debt securities | 2,743 | (8 | ) | - | 1,126 | (2,089 | ) | 2,954 | - | (2,092 | ) | (313 | ) | 2,321 | 376 | ||||||||||||||||||||
Total
trading securities | $ | 15,792 | $ | 639 | $ | - | $ | 4,510 | $ | (5,240 | ) | $ | 17,079 | $ | 79 | $ | (15,794 | ) | $ | (3,242 | ) | $ | 13,823 | $ | 158 | ||||||||||
Trading
derivatives, net (4) | |||||||||||||||||||||||||||||||||||
Interest
rate contracts | $ | 726 | $ | (101 | ) | $ | - | $ | 682 | $ | (438 | ) | $ | 311 | $ | - | $ | (194 | ) | $ | (805 | ) | $ | 181 | $ | (298 | ) | ||||||||
Foreign exchange contracts | (562 | ) | 440 | - | (1 | ) | 25 | 196 | - | (213 | ) | 115 | - | (190 | ) | ||||||||||||||||||||
Equity contracts | (1,737 | ) | 326 | - | (34 | ) | 443 | 428 | - | (657 | ) | (217 | ) | (1,448 | ) | (506 | ) | ||||||||||||||||||
Commodity contracts | (934 | ) | 145 | - | (66 | ) | 5 | 100 | - | (89 | ) | 68 | (771 | ) | 114 | ||||||||||||||||||||
Credit derivatives | 1,728 | (2,355 | ) | - | 32 | (188 | ) | 117 | - | (11 | ) | 335 | (342 | ) | (692 | ) | |||||||||||||||||||
Total
trading derivatives, net (4) | $ | (779 | ) | $ | (1,545 | ) | $ | - | $ | 613 | $ | (153 | ) | $ | 1,152 | $ | - | $ | (1,164 | ) | $ | (504 | ) | $ | (2,380 | ) | $ | (1,572 | ) | ||||||
Investments | |||||||||||||||||||||||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||||||||||||||
U.S. government- | |||||||||||||||||||||||||||||||||||
sponsored agency guaranteed | $ | 679 | $ | - | $ | 7 | $ | 894 | $ | (3,742 | ) | $ | 3,622 | $ | - | $ | - | $ | (2 | ) | $ | 1,458 | $ | 43 | |||||||||||
Residential | 8 | - | 6 | 205 | (6 | ) | 46 | - | (54 | ) | - | 205 | - | ||||||||||||||||||||||
Commercial | - | - | - | - | (11 | ) | 11 | - | - | - | - | - | |||||||||||||||||||||||
Total investment | |||||||||||||||||||||||||||||||||||
mortgage- backed securities | $ | 687 | $ | - | $ | 13 | $ | 1,099 | $ | (3,759 | ) | $ | 3,679 | $ | - | $ | (54 | ) | $ | (2 | ) | $ | 1,663 | $ | 43 | ||||||||||
U.S. Treasury and | |||||||||||||||||||||||||||||||||||
federal
agency securities | $ | 75 | $ | - | $ | - | $ | 75 | $ | (150 | ) | $ | 12 | $ | - | $ | - | $ | - | $ | 12 | $ | - | ||||||||||||
State
and municipal | 667 | - | 12 | 129 | (153 | ) | 412 | - | (218 | ) | - | 849 | (20 | ) | |||||||||||||||||||||
Foreign government | 447 | - | 20 | 193 | (297 | ) | 519 | - | (387 | ) | (112 | ) | 383 | 1 | |||||||||||||||||||||
Corporate | 989 | - | (6 | ) | 68 | (698 | ) | 224 | - | (144 | ) | (48 | ) | 385 | 8 | ||||||||||||||||||||
Equity securities | 1,453 | - | 119 | - | - | - | - | (308 | ) | (491 | ) | 773 | (34 | ) | |||||||||||||||||||||
Asset-backed securities | 4,041 | - | (98 | ) | - | (730 | ) | 930 | - | (77 | ) | (1,846 | ) | 2,220 | 1 | ||||||||||||||||||||
Other
debt securities | 120 | - | (53 | ) | - | - | 310 | - | (118 | ) | (1 | ) | 258 | - | |||||||||||||||||||||
Non-marketable | |||||||||||||||||||||||||||||||||||
equity securities | 8,318 | - | 453 | - | - | 1,266 | - | (3,373 | ) | (1,300 | ) | 5,364 | 313 | ||||||||||||||||||||||
Total investments | $ | 16,797 | $ | - | $ | 460 | $ | 1,564 | $ | (5,787 | ) | $ | 7,352 | $ | - | $ | (4,679 | ) | $ | (3,800 | ) | $ | 11,907 | $ | 312 |
258
Net realized/unrealized | Unrealized | ||||||||||||||||||||||||||||||||||
gains (losses) included in | Transfers | Transfers | gains | ||||||||||||||||||||||||||||||||
Dec. 31, | Principal | into | out of | Dec. 31, | (losses) | ||||||||||||||||||||||||||||||
In millions of dollars | 2011 | transactions | Other | (1)(2) | Level 3 | Level 3 | Purchases | Issuances | Sales | Settlements | 2012 | still held | (3) | ||||||||||||||||||||||
Loans | $ | 4,682 | $ | - | $ | (34 | ) | $ | 1,051 | $ | (185 | ) | $ | 301 | $ | 930 | $ | (251 | ) | $ | (1,563 | ) | $ | 4,931 | $ | 156 | |||||||||
Mortgage servicing rights | 2,569 | - | (426 | ) | - | - | 2 | 421 | (5 | ) | (619 | ) | 1,942 | (427 | ) | ||||||||||||||||||||
Other financial
assets measured on a | |||||||||||||||||||||||||||||||||||
recurring basis | 2,245 | - | 366 | 21 | (35 | ) | 4 | 1,700 | (50 | ) | (1,799 | ) | 2,452 | 101 | |||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||||||||
Interest-bearing deposits | $ | 431 | $ | - | $ | (141 | ) | $ | 213 | $ | (36 | ) | $ | - | $ | 268 | $ | - | $ | (231 | ) | $ | 786 | $ | (414 | ) | |||||||||
Federal funds purchased | |||||||||||||||||||||||||||||||||||
and securities loaned | |||||||||||||||||||||||||||||||||||
or sold under
agreements to repurchase | 1,061 | (64 | ) | - | - | (14 | ) | - | - | (179 | ) | (91 | ) | 841 | 43 | ||||||||||||||||||||
Trading account liabilities | |||||||||||||||||||||||||||||||||||
Securities
sold, not
yet purchased | 412 | (1 | ) | - | 294 | (47 | ) | - | - | 216 | (511 | ) | 365 | (42 | ) | ||||||||||||||||||||
Short-term borrowings | 499 | (108 | ) | - | 47 | (20 | ) | - | 268 | - | (790 | ) | 112 | (57 | ) | ||||||||||||||||||||
Long-term debt | 6,904 | 98 | 119 | 2,548 | (2,694 | ) | - | 2,480 | - | (2,295 | ) | 6,726 | (688 | ) | |||||||||||||||||||||
Other financial liabilities | |||||||||||||||||||||||||||||||||||
measured on
a recurring basis | 3 | - | (31 | ) | 2 | (2 | ) | (4 | ) | 6 | - | (12 | ) | 24 | (13 | ) |
(1) | Changes in fair value for available-for-sale investments (debt securities) are recorded in Accumulated other comprehensive income (loss) , unless other-than-temporarily impaired, while gains and losses from sales are recorded in Realized gains (losses) from sales of investments on the Consolidated Statement of Income. | |
(2) | Unrealized gains (losses) on MSRs are recorded in Other revenue on the Consolidated Statement of Income. | |
(3) | Represents the amount of total gains or losses for the period, included in earnings (and Accumulated other comprehensive income (loss) for changes in fair value for available-for-sale investments), attributable to the change in fair value relating to assets and liabilities classified as Level 3 that are still held at December 31, 2012 and 2011. | |
(4) | Total Level 3 derivative assets and liabilities have been netted in these tables for presentation purposes only. |
259
Net realized/unrealized | Transfers | Unrealized | ||||||||||||||||||||||||||||||
gains (losses) included in | into and/or | gains | ||||||||||||||||||||||||||||||
Dec. 31, | Principal | out of | Dec. 31, | (losses) | ||||||||||||||||||||||||||||
In millions of dollars | 2010 | transactions | Other | (1)(2) | Level 3 | Purchases | Issuances | Sales | Settlements | 2011 | still held | (3) | ||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Federal funds sold and | ||||||||||||||||||||||||||||||||
securities borrowed or | ||||||||||||||||||||||||||||||||
purchased
under agreements to resell | $ | 4,911 | $ | 90 | $ | - | $ | (300 | ) | $ | - | $ | - | $ | - | $ | - | $ | 4,701 | $ | 89 | |||||||||||
Trading securities | ||||||||||||||||||||||||||||||||
Trading
mortgage-backed securities | ||||||||||||||||||||||||||||||||
U.S.
government- sponsored agency | ||||||||||||||||||||||||||||||||
guaranteed | $ | 831 | $ | (62 | ) | $ | - | $ | 169 | $ | 677 | $ | 73 | $ | (686 | ) | $ | (141 | ) | $ | 861 | $ | (100 | ) | ||||||||
Residential | 2,328 | 148 | - | (138 | ) | 4,150 | - | (4,901 | ) | (78 | ) | 1,509 | 118 | |||||||||||||||||||
Commercial | 418 | 33 | - | 345 | 418 | - | (570 | ) | (26 | ) | 618 | (57 | ) | |||||||||||||||||||
Total trading mortgage- | ||||||||||||||||||||||||||||||||
backed securities | $ | 3,577 | $ | 119 | $ | - | $ | 376 | $ | 5,245 | $ | 73 | $ | (6,157 | ) | $ | (245 | ) | $ | 2,988 | $ | (39 | ) | |||||||||
U.S. Treasury and federal | ||||||||||||||||||||||||||||||||
agencies securities | $ | 72 | $ | 9 | $ | - | $ | (45 | ) | $ | 8 | $ | - | $ | (41 | ) | $ | - | $ | 3 | $ | - | ||||||||||
State and municipal | $ | 208 | $ | 67 | $ | - | $ | 102 | $ | 1,128 | $ | - | $ | (1,243 | ) | $ | (10 | ) | $ | 252 | $ | (35 | ) | |||||||||
Foreign government | 566 | (33 | ) | - | (243 | ) | 1,556 | - | (797 | ) | (528 | ) | 521 | (22 | ) | |||||||||||||||||
Corporate | 5,004 | (60 | ) | - | 1,452 | 3,272 | - | (3,864 | ) | (2,564 | ) | 3,240 | (680 | ) | ||||||||||||||||||
Equity securities | 776 | (202 | ) | - | (145 | ) | 191 | - | (376 | ) | - | 244 | (143 | ) | ||||||||||||||||||
Asset-backed securities | 7,620 | 128 | - | 606 | 5,198 | - | (6,069 | ) | (1,682 | ) | 5,801 | (779 | ) | |||||||||||||||||||
Other debt securities | 1,833 | (179 | ) | - | (17 | ) | 2,810 | - | (1,700 | ) | (4 | ) | 2,743 | 68 | ||||||||||||||||||
Total trading securities | $ | 19,656 | $ | (151 | ) | $ | - | $ | 2,086 | $ | 19,408 | $ | 73 | $ | (20,247 | ) | $ | (5,033 | ) | $ | 15,792 | $ | (1,630 | ) | ||||||||
Trading derivatives, net (4) | ||||||||||||||||||||||||||||||||
Interest rate contracts | $ | (730 | ) | $ | (242 | ) | $ | - | $ | 1,549 | $ | 111 | $ | - | $ | (21 | ) | $ | 59 | $ | 726 | $ | 52 | |||||||||
Foreign
exchange contracts | (336 | ) | (134 | ) | - | (62 | ) | 11 | - | (3 | ) | (38 | ) | (562 | ) | (100 | ) | |||||||||||||||
Equity contracts | (1,639 | ) | 471 | - | (28 | ) | 362 | - | (242 | ) | (661 | ) | (1,737 | ) | (1,139 | ) | ||||||||||||||||
Commodity contracts | (1,023 | ) | 426 | - | (83 | ) | 2 | - | (104 | ) | (152 | ) | (934 | ) | (48 | ) | ||||||||||||||||
Credit derivatives | 2,296 | 520 | - | 183 | 8 | - | (1 | ) | (1,278 | ) | 1,728 | 1,615 | ||||||||||||||||||||
Total trading derivatives, net (4) | $ | (1,432 | ) | $ | 1,041 | $ | - | $ | 1,559 | $ | 494 | $ | - | $ | (371 | ) | $ | (2,070 | ) | $ | (779 | ) | $ | 380 | ||||||||
Investments | ||||||||||||||||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||||||||||||||||
U.S. government- | ||||||||||||||||||||||||||||||||
sponsored
agency guaranteed | $ | 22 | $ | - | $ | (22 | ) | $ | 416 | $ | 270 | $ | - | $ | (7 | ) | $ | - | $ | 679 | $ | (38 | ) | |||||||||
Residential | 167 | - | (2 | ) | (109 | ) | 7 | - | (54 | ) | (1 | ) | 8 | - | ||||||||||||||||||
Commercial | 527 | - | (4 | ) | (513 | ) | 42 | - | (52 | ) | - | - | - | |||||||||||||||||||
Total investment mortgage- | ||||||||||||||||||||||||||||||||
backed securities | $ | 716 | $ | - | $ | (28 | ) | $ | (206 | ) | $ | 319 | $ | - | $ | (113 | ) | $ | (1 | ) | $ | 687 | $ | (38 | ) | |||||||
U.S. Treasury and federal | ||||||||||||||||||||||||||||||||
agencies securities | $ | 17 | $ | - | $ | - | $ | 60 | $ | - | $ | - | $ | (2 | ) | $ | - | $ | 75 | $ | - | |||||||||||
State and municipal | 504 | - | (10 | ) | (59 | ) | 324 | - | (92 | ) | - | 667 | (20 | ) | ||||||||||||||||||
Foreign government | 358 | - | 13 | (21 | ) | 352 | - | (67 | ) | (188 | ) | 447 | 6 | |||||||||||||||||||
Corporate | 525 | - | (106 | ) | 199 | 732 | - | (56 | ) | (305 | ) | 989 | 6 | |||||||||||||||||||
Equity securities | 2,055 | - | (38 | ) | (31 | ) | - | - | (84 | ) | (449 | ) | 1,453 | - | ||||||||||||||||||
Asset-backed securities | 5,424 | - | 43 | 55 | 106 | - | (460 | ) | (1,127 | ) | 4,041 | 5 | ||||||||||||||||||||
Other debt securities | 727 | - | 26 | 121 | 35 | - | (289 | ) | (500 | ) | 120 | (2 | ) | |||||||||||||||||||
Non-marketable
equity securities | 6,960 | - | 862 | (886 | ) | 4,881 | - | (1,838 | ) | (1,661 | ) | 8,318 | 580 | |||||||||||||||||||
Total investments | $ | 17,286 | $ | - | $ | 762 | $ | (768 | ) | $ | 6,749 | $ | - | $ | (3,001 | ) | $ | (4,231 | ) | $ | 16,797 | $ | 537 |
260
Net realized/unrealized | Transfers | Unrealized | ||||||||||||||||||||||||||||||
gains (losses) included in | into and/or | gains | ||||||||||||||||||||||||||||||
Dec. 31, | Principal | out of | Dec. 31, | (losses) | ||||||||||||||||||||||||||||
In millions of dollars | 2010 | transactions | Other | (1)(2) | Level 3 | Purchases | Issuances | Sales | Settlements | 2011 | still held | (3) | ||||||||||||||||||||
Loans | $ | 3,213 | $ | - | $ | (309 | ) | $ | 425 | $ | 250 | $ | 2,002 | $ | (85 | ) | $ | (814 | ) | $ | 4,682 | $ | (265 | ) | ||||||||
Mortgage servicing rights | 4,554 | - | (1,465 | ) | - | - | 408 | (212 | ) | (716 | ) | 2,569 | (1,465 | ) | ||||||||||||||||||
Other financial assets measured on a | ||||||||||||||||||||||||||||||||
recurring basis | $ | 2,509 | $ | - | $ | 109 | $ | (90 | ) | $ | 57 | $ | 553 | $ | (172 | ) | $ | (721 | ) | $ | 2,245 | $ | 112 | |||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Interest-bearing deposits | $ | 277 | $ | - | $ | 86 | $ | (72 | ) | $ | - | $ | 325 | $ | - | $ | (13 | ) | $ | 431 | $ | (76 | ) | |||||||||
Federal funds purchased and securities | ||||||||||||||||||||||||||||||||
loaned or sold under agreements | ||||||||||||||||||||||||||||||||
to repurchase | 1,261 | (22 | ) | - | 45 | - | - | (117 | ) | (150 | ) | 1,061 | (64 | ) | ||||||||||||||||||
Trading account liabilities | ||||||||||||||||||||||||||||||||
Securities sold, not yet purchased | 187 | 48 | - | 438 | - | - | 413 | (578 | ) | 412 | 42 | |||||||||||||||||||||
Short-term borrowings | 802 | 190 | - | (220 | ) | - | 551 | - | (444 | ) | 499 | 39 | ||||||||||||||||||||
Long-term debt | 8,494 | 160 | 266 | (509 | ) | - | 1,485 | - | (2,140 | ) | 6,904 | (225 | ) | |||||||||||||||||||
Other financial liabilities measured | ||||||||||||||||||||||||||||||||
on a recurring basis | 19 | - | (19 | ) | 7 | 1 | 13 | (1 | ) | (55 | ) | 3 | (3 | ) |
(1) | Changes in fair value for available-for-sale investments (debt securities) are recorded in Accumulated other comprehensive income (loss) unless other-than-temporarily impaired, while gains and losses from sales are recorded in Realized gains (losses) from sales of investments on the Consolidated Statement of Income. | |
(2) | Unrealized gains (losses) on MSRs are recorded in Other revenue on the Consolidated Statement of Income. See Note 15 to the Consolidated Financial Statements for a discussion of other-than-temporary impairment. | |
(3) | Represents the amount of total gains or losses for the period, included in earnings (and Accumulated other comprehensive income (loss) for changes in fair value for available-for-sale investments), attributable to the change in fair value relating to assets and liabilities classified as Level 3 that are still held at December 31, 2012 and 2011. | |
(4) | Total Level 3 derivative assets and liabilities have been netted in these tables for presentation purposes only. |
Level 3 Fair Value
Rollforward
The following were the
significant Level 3 transfers for the period December 31, 2011 to December 31,
2012:
The following were the significant Level 3 transfers for the period December 31, 2010 to December 31, 2011:
In addition to the Level 3 transfers, the Level 3 roll-forward table above for the period December 31, 2010 to December 31, 2011 included:
The reclassification of $4.3 billion of securities from Investments held- to-maturity to Trading account assets . These reclassifications have been included in purchases in the Level 3 roll-forward table above. The Level 3 assets reclassified, and subsequently sold, included $2.8 billion of trading mortgage-backed securities (of which $1.5 billion were Alt-A, $1.0 billion were prime, $0.2 billion were subprime and $0.1 billion were commercial), $0.9 billion of state and municipal debt securities, $0.3 billion of corporate debt securities and $0.2 billion of asset-backed securities. Purchases of non-marketable equity securities classified as Investments included approximately $2.8 billion relating to Citi's acquisition of the share capital of Maltby Acquisitions Limited, the holding company that controls EMI Group Ltd. (which were sold in 2012).261
Valuation Techniques and Inputs
for Level 3 Fair Value Measurements
The
Company's Level 3 inventory consists of both cash securities and derivatives of
varying complexities. The valuation methodologies applied to measure the fair
value of these positions include discounted cash flow analyses, internal models
and comparative analysis. A position is classified within Level 3 of the fair
value hierarchy when at least one input is unobservable and is considered
significant to its valuation. The specific reason an input is deemed
unobservable varies. For example, at least one significant input to the pricing
model is not observable in the market, at least one significant input has been
adjusted to make it more representative of the position being valued, or the
price quote available does not reflect sufficient trading
activities.
The
following table presents the valuation techniques covering the majority of Level
3 inventory and the most significant unobservable inputs used in Level 3 fair
value measurements as of December 31, 2012. Differences between this table and
amounts presented in the Level 3 Fair Value Rollforward table represent
individually immaterial items that have been measured using a variety of
valuation techniques other than those listed.
262
Valuation Techniques and Inputs for Level 3 Fair Value Measurements
Fair Value | (1) | ||||||||||||||
(in millions) | Methodology | Input | Low | (2)(3) | High | (2)(3) | |||||||||
Assets | |||||||||||||||
Federal funds sold and securities | |||||||||||||||
borrowed or purchased under | |||||||||||||||
agreements to resell | $ | 4,786 | Cash flow | Interest rate | 1.09 | % | 1.50 | % | |||||||
Trading and investment securities | |||||||||||||||
Mortgage-backed securities | $ | 4,402 | Price-based | Price | $ | 0.00 | $ | 135.00 | |||||||
1,148 | Yield analysis | Yield | 0.00 | % | 25.84 | % | |||||||||
Prepayment period | 2.16 years | 7.84 years | |||||||||||||
State and municipal, foreign | $ | 4,416 | Price-based | Price | $ | 0.00 | $ | 159.63 | |||||||
government, corporate and other | 1,231 | Cash flow | Yield | 0.00 | % | 30.00 | % | ||||||||
debt securities | 787 | Yield analysis | Credit spread | 35 | bps | 300 | bps | ||||||||
Equity securities | $ | 792 | Cash flow | Yield | 9.00 | % | 10.00 | % | |||||||
147 | Price-based | Prepayment period | 3 years | 3 years | |||||||||||
Price | $ | 0.00 | $ | 750.00 | |||||||||||
Asset-backed securities | $ | 4,253 | Price-based | Price | $ | 0.00 | $ | 136.63 | |||||||
1,775 | Internal model | Yield | 0.00 | % | 27.00 | % | |||||||||
561 | Cash flow | Credit correlation | 15.00 | % | 90.00 | % | |||||||||
Weighted average life | |||||||||||||||
(WAL) | 0.34 years | 16.07 years | |||||||||||||
Non-marketable equity | $ | 2,768 | Price-based | Fund NAV | $ | 1.00 | $ | 456,773,838 | |||||||
1,803 | Comparables analysis | EBITDA multiples | 4.70 | 14.39 | |||||||||||
Price-to-book ratio | 0.77 | 1.50 | |||||||||||||
709 | Cash flow | Discount to price | 0.00 | % | 75.00 | % | |||||||||
Derivatives – Gross (4) | |||||||||||||||
Interest rate contracts (gross) | $ | 3,202 | Internal model | Interest rate (IR)-IR correlation | (98.00 | )% | 90.00 | % | |||||||
Credit spread | 0 | bps | 550.27 | bps | |||||||||||
IR volatility | 0.09 | % | 100.00 | % | |||||||||||
Interest rate | 0 | % | 15.00 | % | |||||||||||
Foreign exchange contracts (gross) | $ | 1,542 | Internal model | Foreign exchange (FX) volatility | 3.20 | % | 67.35 | % | |||||||
IR-FX correlation | 40.00 | % | 60.00 | % | |||||||||||
Credit spread | 0 | bps | 376 | bps | |||||||||||
Equity contracts (gross) (5) | $ | 4,669 | Internal model | Equity volatility | 1.00 | % | 185.20 | % | |||||||
Equity forward | 74.94 | % | 132.70 | % | |||||||||||
Equity-equity correlation | 1.00 | % | 99.90 | % | |||||||||||
Commodity contracts (gross) | $ | 2,160 | Internal model | Forward price | 37.45 | % | 181.50 | % | |||||||
Commodity correlation | (77.00 | )% | 95.00 | % | |||||||||||
Commodity volatility | 5.00 | % | 148.00 | % | |||||||||||
Credit derivatives (gross) | $ | 4,777 | Internal model | Price | $ | 0.00 | $ | 121.16 | |||||||
3,886 | Price-based | Recovery rate | 6.50 | % | 78.00 | % | |||||||||
Credit correlation | 5.00 | % | 99.00 | % | |||||||||||
Credit spread | 0 | bps | 2,236 | bps | |||||||||||
Upfront points | 3.62 | 100.00 | |||||||||||||
Nontrading derivatives and other financial assets and | $ | 2,000 | External model | Price | $ | 100.00 | $ | 100.00 | |||||||
liabilities measured on a recurring basis (gross) (4) | 461 | Internal model | Redemption rate | 30.79 | % | 99.50 | % | ||||||||
Loans | $ | 2,447 | Price-based | Price | $ | 0.00 | $ | 103.32 | |||||||
1,423 | Yield analysis | Credit spread | 55 | bps | 600.19 | bps | |||||||||
888 | Internal model | ||||||||||||||
Mortgage servicing rights | $ | 1,858 | Cash flow | Yield | 0.00 | % | 53.19 | % | |||||||
Prepayment period | 2.16 years | 7.84 years |
263
Liabilities | ||||||||||||||
Interest-bearing deposits | $ | 785 | Internal model | Equity volatility | 11.13 | % | 86.10 | % | ||||||
Forward price | 67.80 | % | 182.00 | % | ||||||||||
Commodity correlation | (76.00 | )% | 95.00 | % | ||||||||||
Commodity volatility | 5.00 | % | 148.00 | % | ||||||||||
Federal funds purchased and securities loaned | ||||||||||||||
or sold under agreements to repurchase | $ | 841 | Internal model | Interest rate | 0.33 | % | 4.91 | % | ||||||
Trading account liabilities | ||||||||||||||
Securities sold, not yet purchased | $ | 265 | Internal model | Price | $ | 0.00 | $ | 166.47 | ||||||
75 | Price-based | |||||||||||||
Short-term borrowings and long-term debt | $ | 5,067 | Internal model | Price | $ | 0.00 | $ | 121.16 | ||||||
1,112 | Price-based | Equity volatility | 12.40 | % | 185.20 | % | ||||||||
649 | Yield analysis | Equity forward | 75.40 | % | 132.70 | % | ||||||||
Equity-equity correlation | 1.00 | % | 99.90 | % | ||||||||||
Equity-FX correlation | (80.50 | )% | 50.40 | % |
(1) | The fair value amounts presented in this table represent the primary valuation technique or techniques for each class of assets or liabilities. | |
(2) | Some inputs are shown as zero due to rounding. | |
(3) | When the low and high inputs are the same, there is either a constant input applied to all positions, or the methodology involving the input applies to one large position only. | |
(4) | Both trading and nontrading account derivatives-assets and liabilities-are presented on a gross absolute value basis. | |
(5) | Includes hybrid products. |
Sensitivity to Unobservable Inputs
and Interrelationships between Unobservable Inputs
The impact of key unobservable inputs on the Level 3 fair
value measurements may not be independent of one another. In addition, the
amount and direction of the impact on a fair value measurement for a given
change in an unobservable input depends on the nature of the instrument as well
as whether the Company holds the instrument as an asset or a liability. For
certain instruments, the pricing hedging and risk management are sensitive to
the correlation between various inputs rather than on the analysis and
aggregation of the individual
inputs.
The
following section describes the sensitivities and interrelationships of the most
significant unobservable inputs used by the Company in Level 3 fair value
measurements.
Correlation
Correlation is a measure of the co-movement between two or
more variables. A variety of correlation-related assumptions are required for a
wide range of instruments, including equity and credit baskets, foreign-exchange
options, CDOs backed by loans or bonds, mortgages, subprime mortgages and many
other instruments. For almost all of these instruments, correlations are not
observable in the market and must be estimated using historical information.
Estimating correlation can be especially difficult where it may vary over time.
Extracting correlation information from market data requires significant
assumptions regarding the informational efficiency of the market (for example,
swaption markets). Changes in correlation levels can have a major impact,
favorable or unfavorable, on the value of an instrument, depending on its
nature. A change in the default correlation of the fair value of the underlying
bonds comprising a CDO structure would affect the fair value of the senior
tranche. For example, an increase in the default correlation of the underlying
bonds would reduce the fair value of the senior tranche, because
highly correlated instruments produce larger losses in the event of default and a part of these losses would become attributable to the senior tranche. That same change in default correlation would have a different impact on junior tranches of the same structure.
Volatility
Volatility represents the speed and severity of market price
changes and is a key factor in pricing options. Typically, instruments can
become more expensive if volatility increases. For example, as an index becomes
more volatile, the cost to Citi of maintaining a given level of exposure
increases because more frequent rebalancing of the portfolio is required.
Volatility generally depends on the tenor of the underlying instrument and the
strike price or level defined in the contract. Volatilities for certain
combinations of tenor and strike are not observable. The general relationship
between changes in the value of a portfolio to changes in volatility also
depends on changes in interest rates and the level of the underlying
index. Generally, long option positions (assets) benefit from increases in
volatility, whereas short option positions (liabilities) will suffer losses.
Some instruments are more sensitive to changes in volatility than others. For
example, an at-the-money option would experience a larger percentage change in
its fair value than a deep-in-the-money option. In addition, the fair value of
an option with more than one underlying security (for example, an option on a
basket of bonds) depends on the volatility of the individual underlying
securities as well as their correlations.
Yield
Adjusted yield is generally used to discount the projected
future principal and interest cash flows on instruments, such as asset-backed
securities. Adjusted yield is impacted by changes in the interest rate
environment and relevant credit spreads.
264
Sometimes, the yield of an instrument is not observable in the market and must be estimated from historical data or from yields of similar securities. This estimated yield may need to be adjusted to capture the characteristics of the security being valued. In other situations, the estimated yield may not represent sufficient market liquidity and must be adjusted as well. Whenever the amount of the adjustment is significant to the value of the security, the fair value measurement is classified as Level 3.
Prepayment
Voluntary unscheduled payments (prepayments) change the future
cash flows for the investor and thereby change the fair value of the security.
The effect of prepayments is more pronounced for residential mortgage-backed
securities. An increase in prepayment-in speed or magnitude-generally creates
losses for the holder of these securities. Prepayment is generally negatively
correlated with delinquency and interest rate. A combination of low prepayment
and high delinquencies amplify each input's negative impact on mortgage
securities' valuation. As prepayment speeds change, the weighted average life of
the security changes, which impacts the valuation either positively or
negatively, depending upon the nature of the security and the direction of the
change in the weighted average life.
Recovery
Recovery is the proportion of the total outstanding balance of
a bond or loan that is expected to be collected in a liquidation scenario. For
many credit securities (such as asset-backed securities), there is no directly
observable market input for recovery, but indications of recovery levels are
available from pricing services. The assumed recovery of a security may differ
from its actual recovery that will be observable in the future. The recovery
rate impacts the valuation of credit securities. Generally, an increase in the
recovery rate assumption increases the fair value of the security. An increase
in loss severity, the inverse of the recovery rate, reduces the amount of
principal available for distribution and, as a result, decreases the fair value
of the security.
Credit
Spread
Credit spread is a component of
the security representing its credit quality. Credit spread reflects the market
perception of changes in prepayment, delinquency and recovery rates, therefore
capturing the impact of other variables on the fair value. Changes in credit spread
affect the fair value of securities differently depending on the characteristics
and maturity profile of the security. For example, credit spread is a more
significant driver of the fair value measurement of a high yield bond as
compared to an investment grade bond. Generally, the credit spread for an
investment grade bond is also more observable and less volatile than its high
yield counterpart.
Qualitative Discussion of the
Ranges of Significant Unobservable Inputs
The following section describes the ranges of the most significant
unobservable inputs used by the Company in Level 3 fair value measurements. The
level of aggregation and the diversity of instruments held by the Company lead
to a wide range of unobservable inputs that may not be evenly distributed across
the Level 3 inventory.
Correlation
There are many different types of correlation inputs,
including credit correlation, cross-asset correlation (such as equity-interest
rate correlation), and same-asset correlation (such as interest rate-interest
rate correlation). Correlation inputs are generally used to value hybrid and
exotic instruments. Generally, same-asset correlation inputs have a narrower
range than cross-asset correlation inputs. However, due to the complex and
unique nature of these instruments, the ranges for correlation inputs can vary
widely across portfolios.
Volatility
Similar to correlation, asset-specific volatility inputs vary
widely by asset type. For example, ranges for foreign exchange volatility are
generally lower and narrower than equity volatility. Equity volatilities are
wider due to the nature of the equities market and the terms of certain exotic
instruments. For most instruments, the interest rate volatility input is on the
lower end of the range; however, for certain structured or exotic instruments
(such as market-linked deposits or exotic interest rate derivatives), the range
is much wider.
Yield
Ranges for the yield inputs vary significantly depending upon
the type of security. For example, securities that typically have lower yields,
such as municipal bonds, will fall on the lower end of the range, while more
illiquid securities or securities with lower credit quality, such as certain
residual tranche asset-backed securities, will have much higher yield
inputs.
Credit
Spread
Credit spread is relevant
primarily for fixed income and credit instruments; however, the ranges for the
credit spread input can vary across instruments. For example, certain fixed
income instruments, such as certificates of deposit, typically have lower credit
spreads, whereas certain derivative instruments with high-risk counterparties
are typically subject to higher credit spreads when they are uncollateralized or
have a longer tenor. Other instruments, such as credit default swaps, also have
credit spreads that vary with the attributes of the underlying obligor. Stronger
companies have tighter credit spreads, and weaker companies have wider credit
spreads.
265
Price
The price input is a significant unobservable input for
certain fixed income instruments. For these instruments, the price input is
expressed as a percentage of the notional amount, with a price of $100 meaning
that the instrument is valued at par. For most of these instruments, the price
varies between zero to $100, or slightly above $100. Relatively illiquid assets
that have experienced significant losses since issuance, such as certain
asset-backed securities, are at the lower end of the range, whereas most
investment grade corporate bonds will fall in the middle to the higher end of
the range. For certain structured debt instruments with embedded derivatives,
the price input may be above $100 to reflect the embedded features of the
instrument (for example, a step-up coupon or a conversion option). For the
following classes of fixed income instruments, the weighted average price input
below provides insight regarding the central tendencies of the ranges of this
input reported for each instrument class as of December 31, 2012:
Mortgage-backed securities | $ | 86.02 |
State and municipal, foreign government, corporate, | ||
and other debt securities | 90.95 | |
Asset-backed securities | 79.71 | |
Loans | 91.25 | |
Short-term borrowings and long-term debt | 93.38 |
The price input is also a significant unobservable input for certain equity securities; however, the range of price inputs varies depending on the nature of the position, the number of shares outstanding and other factors. Because of these factors, the weighted average price input for equity securities does not provide insight regarding the central tendencies of the ranges for equity securities, as equity prices are generally independent of one another and are not subject to a common measurement scale (for example, the zero to $100 range applicable to debt instruments).
Items Measured at Fair Value on a
Nonrecurring Basis
Certain assets and
liabilities are measured at fair value on a nonrecurring basis and therefore are
not included in the tables above. These include assets measured at cost that
have been written down to fair value during the periods as a result of an
impairment. In addition, these assets include loans held-for-sale and other real
estate owned that are measured at the lower of cost or market
(LOCOM).
The following table presents the carrying amounts of all assets that were still held as of December 31, 2012 and 2011, and for which a nonrecurring fair value measurement was recorded during the year then ended:
In millions of dollars | Fair value | Level 2 | Level 3 | ||||||
December 31, 2012 | |||||||||
Loans held-for-sale | $ | 2,647 | $ | 1,159 | $ | 1,488 | |||
Other real estate owned | 201 | 22 | 179 | ||||||
Loans (1) | 5,732 | 5,160 | 572 | ||||||
Other assets (2) | 4,725 | 4,725 | - | ||||||
Total assets at fair value on a | |||||||||
nonrecurring basis | $ | 13,305 | $ | 11,066 | $ | 2,239 |
(1) | Represents impaired loans held for investment whose carrying amount is based on the fair value of the underlying collateral, including primarily real-estate secured loans. | |
(2) | Represents Citi's remaining 35% investment in the Morgan Stanley Smith Barney joint venture whose carrying amount is the agreed purchase price. See Note 15 to the Consolidated Financial Statements. |
In millions of dollars | Fair value | Level 2 | Level 3 | ||||||
December 31, 2011 | |||||||||
Loans held-for-sale | $ | 2,644 | $ | 1,668 | $ | 976 | |||
Other real estate owned | 271 | 88 | 183 | ||||||
Loans (1) | 3,911 | 3,185 | 726 | ||||||
Total assets at fair value on a | |||||||||
nonrecurring basis | $ | 6,826 | $ | 4,941 | $ | 1,885 |
(1) | Represents impaired loans held for investment whose carrying amount is based on the fair value of the underlying collateral, including primarily real-estate secured loans. |
The fair value of
loans-held-for-sale is determined where possible using quoted secondary-market
prices. If no such quoted price exists, the fair value of a loan is determined
using quoted prices for a similar asset or assets, adjusted for the specific
attributes of that loan. Fair value for the other real estate owned is based on
appraisals. For loans whose carrying amount is based on the fair value of the
underlying collateral, the fair values depend on the type of collateral. Fair
value of the collateral is typically estimated based on quoted market prices if
available, appraisals or other internal valuation techniques.
Where
the fair value of the related collateral is based on an unadjusted appraised
value, the loan is generally classified as Level 2. Where significant
adjustments are made to the appraised value, the loan is classified as Level 3.
Additionally, for corporate loans, appraisals of the collateral are often based
on sales of similar assets; however, because the prices of similar assets
require significant adjustments to reflect the unique features of the underlying
collateral, these fair value measurements are generally classified as Level
3.
266
Valuation Techniques and Inputs
for Level 3 Nonrecurring Fair Value Measurements
The following table presents the valuation techniques covering the
majority of Level 3 nonrecurring fair value measurements and the most
significant unobservable inputs used in those measurements as of December 31,
2012:
Fair Value | (1) | |||||||||||||
(in millions) | Methodology | Input | Low | High | ||||||||||
Loans held-for-sale | $ | 747 | Price-based | Price | $ | 63.42 | $ | 100.00 | ||||||
485 | External model | Credit spread | 40 | bps | 40 | bps | ||||||||
174 | Recovery analysis | |||||||||||||
Other real estate owned | 165 | Price-based | Discount to price | 11.00 | % | 50.00 | % | |||||||
Price (2) | $ | 39,774 | $ | 15,457,452 | ||||||||||
Loans (3) | 351 | Price-based | Discount to price | 25.00 | % | 34.00 | % | |||||||
111 | Internal model | Price (2) | $ | 6,272,242 | $ | 86,200,000 | ||||||||
Discount rate | 6.00 | % | 16.49 | % |
(1) | The fair value amounts presented in this table represent the primary valuation technique or techniques for each class of assets or liabilities. | |
(2) | Prices are based on appraised values. | |
(3) | Represents loans held for investment whose carrying amounts are based on the fair value of the underlying collateral. |
Nonrecurring Fair Value
Changes
The following table presents total
nonrecurring fair value measurements for the period, included in earnings,
attributable to the change in fair value relating to assets that are still held
at December 31, 2012 and 2011:
In millions of dollars | December 31, 2012 | ||
Loans held-for-sale | $ | (19 | ) |
Other real estate owned | (29 | ) | |
Loans (1) | (1,489 | ) | |
Other assets (2) | (3,340 | ) | |
Total nonrecurring fair value gains (losses) | $ | (4,877 | ) |
(1) | Represents loans held for investment whose carrying amount is based on the fair value of the underlying collateral, including primarily real-estate loans. | |
(2) | Includes the recognition of a $3,340 million impairment charge related to the carrying value of Citi's remaining 35% interest in the Morgan Stanley Smith Barney joint venture. See Note 15 to the Consolidated Financial Statements. |
In millions of dollars | December 31, 2011 | ||
Loans held-for-sale | $ | (201 | ) |
Other real estate owned | (71 | ) | |
Loans (1) | (973 | ) | |
Total nonrecurring fair value gains (losses) | $ | (1,245 | ) |
(1) | Represents loans held for investment whose carrying amount is based on the fair value of the underlying collateral, including primarily real-estate loans. |
Estimated Fair Value of Financial
Instruments Not Carried at Fair Value
The
table below presents the carrying value and fair value of Citigroup's financial
instruments which are not carried at fair value. The table below therefore
excludes items measured at fair value on a recurring basis presented in the
tables above.
The disclosure also excludes leases, affiliate investments, pension and
benefit obligations and insurance policy claim reserves. In addition,
contract-holder fund amounts exclude certain insurance contracts. Also, as
required, the disclosure excludes the effect of taxes, any premium or discount
that could result from offering for sale at one time the entire holdings of a
particular instrument, excess fair value associated with deposits with no fixed
maturity, and other expenses that would be incurred in a market transaction. In
addition, the table excludes the values of non-financial assets and liabilities,
as well as a wide range of franchise, relationship and intangible values, which
are integral to a full assessment of Citigroup's financial position and the
value of its net assets.
The
fair value represents management's best estimates based on a range of
methodologies and assumptions. The carrying value of short-term financial
instruments not accounted for at fair value, as well as receivables and payables
arising in the ordinary course of business, approximates fair value because of
the relatively short period of time between their origination and expected
realization. Quoted market prices are used when available for investments and
for liabilities, such as long-term debt not carried at fair value. For loans not
accounted for at fair value, cash flows are discounted at quoted secondary
market rates or estimated market rates if available. Otherwise, sales of
comparable loan portfolios or current market origination rates for loans with
similar terms and risk characteristics are used. Expected credit losses are
either embedded in the estimated future cash flows or incorporated as an
adjustment to the discount rate used. The value of collateral is also
considered. For liabilities such as long-term debt not accounted for at fair
value and without quoted market prices, market borrowing rates of interest are
used to discount contractual cash flows.
267
December 31, 2012 | Estimated fair value | ||||||||||||||
In billions of dollars | Carrying value | Estimated fair value | Level 1 | Level 2 | Level 3 | ||||||||||
Assets | |||||||||||||||
Investments | $ | 17.9 | $ | 18.4 | $ | 3.0 | $ | 14.3 | $ | 1.1 | |||||
Federal funds sold and securities borrowed or purchased under agreements to resell | 100.7 | 100.7 | - | 94.8 | 5.9 | ||||||||||
Loans (1)(2) | 621.9 | 612.2 | - | 4.2 | 608.0 | ||||||||||
Other financial assets (2)(3) | 192.8 | 192.8 | 11.4 | 128.3 | 53.1 | ||||||||||
Liabilities | |||||||||||||||
Deposits | $ | 929.1 | $ | 927.4 | $ | - | $ | 765.5 | $ | 161.9 | |||||
Federal funds purchased and securities loaned or sold under agreements to repurchase | 94.5 | 94.5 | - | 94.4 | 0.1 | ||||||||||
Long-term debt (4) | 209.7 | 215.3 | - | 177.0 | 38.3 | ||||||||||
Other financial liabilities (5) | 139.0 | 139.0 | - | 31.1 | 107.9 |
December 31, 2011 | ||||||
Carrying | Estimated | |||||
In billions of dollars | value | fair value | ||||
Assets | ||||||
Investments | $ | 19.4 | $ | 18.4 | ||
Federal funds sold and securities borrowed or purchased | ||||||
under agreements to resell | 133.0 | 133.0 | ||||
Loans (1)(2) | 609.3 | 598.7 | ||||
Other financial assets (2)(3) | 245.7 | 245.7 | ||||
Liabilities | ||||||
Deposits | $ | 864.6 | $ | 864.5 | ||
Federal funds purchased and securities loaned or sold | ||||||
under agreements to repurchase | 100.7 | 100.7 | ||||
Long-term debt (4) | 299.3 | 289.7 | ||||
Other financial liabilities (5) | 141.1 | 141.1 |
(1) | The carrying value of loans is net of the Allowance for loan losses of $25.5 billion for December 31, 2012 and $30.1 billion for December 31, 2011. In addition, the carrying values exclude $2.8 billion and $2.5 billion of lease finance receivables at December 31, 2012 and December 31, 2011, respectively. | |
(2) | Includes items measured at fair value on a nonrecurring basis. | |
(3) | Includes cash and due from banks, deposits with banks, brokerage receivables, reinsurance recoverable and other financial instruments included in Other assets on the Consolidated Balance Sheet, for all of which the carrying value is a reasonable estimate of fair value. | |
(4) | The carrying value includes long-term debt balances carried at fair value under fair value hedge accounting. | |
(5) | Includes brokerage payables, separate and variable accounts, short-term borrowings (carried at cost) and other financial instruments included in Other liabilities on the Consolidated Balance Sheet, for all of which the carrying value is a reasonable estimate of fair value. |
Fair values vary from period to period based on changes in a wide range of factors, including interest rates, credit quality and market perceptions of value, and as existing assets and liabilities run off and new transactions are entered into. The estimated fair values of loans reflect changes in credit status since the loans were made, changes in interest rates in the case of fixed-rate loans, and premium values at origination of certain loans. The carrying values (reduced by the Allowance for loan losses ) exceeded the estimated fair values of Citigroup's loans, in aggregate, by $9.7 billion and by $10.6 billion at December 31, 2012 and December 31, 2011, respectively. At December 31, 2012, the carrying values, net of allowances, exceeded the estimated fair values by $7.4 billion and $2.3 billion for Consumer loans and Corporate loans, respectively.
The estimated fair values of the Company's corporate unfunded lending commitments at December 31, 2012 and December 31, 2011 were liabilities of $4.9 billion and $4.7 billion, respectively, which are substantially fair valued at Level 3. The Company does not estimate the fair values of consumer unfunded lending commitments, which are generally cancelable by providing notice to the borrower.
268
26. FAIR VALUE ELECTIONS
All servicing rights are recognized initially at fair value. The Company has elected fair value accounting for its mortgage servicing rights. See Note 22 to the Consolidated Financial Statements for further discussions regarding the accounting and reporting of MSRs.
The following table presents, as of December 31, 2012 and 2011, the fair value of those positions selected for fair value accounting, as well as the changes in fair value gains and losses for the years ended December 31, 2012 and 2011:
Changes in fair value gains | ||||||||||||||
Fair value at | (losses) for the years | |||||||||||||
December 31, | ended December 31, | |||||||||||||
In millions of dollars | 2012 | 2011 | 2012 | 2011 | ||||||||||
Assets | ||||||||||||||
Federal funds sold and securities borrowed or purchased under agreements to resell | ||||||||||||||
Selected portfolios of securities purchased under agreements to resell and securities borrowed (1) | $ | 160,589 | $ | 142,862 | $ | (409 | ) | $ | (138 | ) | ||||
Trading account assets | 17,206 | 14,179 | 838 | (1,775 | ) | |||||||||
Investments | 443 | 526 | (50 | ) | 233 | |||||||||
Loans | ||||||||||||||
Certain Corporate loans (2) | 4,056 | 3,939 | 77 | 82 | ||||||||||
Certain Consumer loans (2) | 1,231 | 1,326 | (104 | ) | (281 | ) | ||||||||
Total loans | $ | 5,287 | $ | 5,265 | $ | (27 | ) | $ | (199 | ) | ||||
Other assets | ||||||||||||||
MSRs | $ | 1,942 | $ | 2,569 | $ | (427 | ) | $ | (1,465 | ) | ||||
Certain mortgage loans held for sale | 6,879 | 6,213 | 350 | 172 | ||||||||||
Certain equity method investments | 22 | 47 | 3 | (17 | ) | |||||||||
Total other assets | $ | 8,843 | $ | 8,829 | $ | (74 | ) | $ | (1,310 | ) | ||||
Total assets | $ | 192,368 | $ | 171,661 | $ | 278 | $ | (3,189 | ) | |||||
Liabilities | ||||||||||||||
Interest-bearing deposits | $ | 1,447 | $ | 1,326 | $ | (218 | ) | $ | 107 | |||||
Federal funds purchased and securities loaned or sold under agreements to repurchase | ||||||||||||||
Selected portfolios of securities sold under agreements to repurchase and securities loaned (1) | 116,689 | 97,712 | 66 | (108 | ) | |||||||||
Trading account liabilities | 1,461 | 1,763 | (143 | ) | 872 | |||||||||
Short-term borrowings | 818 | 1,354 | (2 | ) | (15 | ) | ||||||||
Long-term debt | 29,764 | 24,172 | (2,225 | ) | 1,611 | |||||||||
Total liabilities | $ | 150,179 | $ | 126,327 | $ | (2,522 | ) | $ | 2,467 |
(1) | Reflects netting of the amounts due from securities purchased under agreements to resell and the amounts owed under securities sold under agreements to repurchase. | |
(2) | Includes mortgage loans held by mortgage loan securitization VIEs consolidated upon the adoption of SFAS 167 on January 1, 2010. |
269
Own Debt Valuation Adjustments for
Structured Debt
Own debt valuation
adjustments are recognized on Citi's debt liabilities for which the fair value
option has been elected using Citi's credit spreads observed in the bond market.
The fair value of debt liabilities for which the fair value option is elected
(other than non-recourse and similar liabilities) is impacted by the narrowing
or widening of the Company's credit spreads. The estimated change in the fair
value of these debt liabilities due to such changes in the Company's own credit
risk (or instrument-specific credit risk) was a loss of $2,009 million and a
gain of $1,774 million for the years ended December 31, 2012 and 2011,
respectively. Changes in fair value resulting from changes in
instrument-specific credit risk were estimated by incorporating the Company's
current credit spreads observable in the bond market into the relevant valuation
technique used to value each liability as described above.
The Fair Value Option for Financial Assets and Financial Liabilities
Selected portfolios of securities
purchased under agreements to resell, securities borrowed, securities sold under
agreements to repurchase, securities loaned and certain non-collateralized
short-term borrowings
The Company
elected the fair value option for certain portfolios of fixed-income securities
purchased under agreements to resell and fixed-income securities sold under
agreements to repurchase, securities borrowed, securities loaned (and certain
non-collateralized short-term borrowings) on broker-dealer entities in the
United States, United Kingdom and Japan. In each case, the election was made
because the related interest-rate risk is managed on a portfolio basis,
primarily with derivative instruments that are accounted for at fair value
through earnings.
Changes in fair value for transactions in these portfolios are recorded
in Principal transactions . The related interest revenue and interest expense are
measured based on the contractual rates specified in the transactions and are
reported as interest revenue and expense in the Consolidated Statement of
Income.
The Company has elected the fair value option for certain letters of credit that are hedged with derivative instruments or participation notes. Citigroup elected the fair value option for these transactions because the risk is managed on a fair value basis and mitigates accounting mismatches.
There was no notional amount of these unfunded letters of credit at December 31, 2012 and $0.6 billion at December 31, 2011. The amount funded was insignificant with no amounts 90 days or more past due or on non-accrual status at December 31, 2012 and 2011.
These items have been classified in Trading account assets or Trading account liabilities on the Consolidated Balance Sheet. Changes in fair value of these items are classified in Principal transactions in the Company's Consolidated Statement of Income.
Certain loans and other credit
products
Citigroup has elected the
fair value option for certain originated and purchased loans, including certain
unfunded loan products, such as guarantees and letters of credit, executed by
Citigroup's lending and trading businesses. None of these credit products are
highly leveraged financing commitments. Significant groups of transactions
include loans and unfunded loan products that are expected to be either sold or
securitized in the near term, or transactions where the economic risks are
hedged with derivative instruments such as purchased credit default swaps or
total return swaps where the Company pays the total return on the underlying
loans to a third party. Citigroup has elected the fair value option to mitigate
accounting mismatches in cases where hedge accounting is complex and to achieve
operational simplifications. Fair value was not elected for most lending
transactions across the Company, including where management objectives would not
be met.
Certain investments in unallocated
precious metals
Citigroup invests in
unallocated precious metals accounts (gold, silver, platinum and palladium) as
part of its commodity trading business or to economically hedge certain
exposures from issuing structured liabilities. Under ASC 815, the investment is
bifurcated into a debt host contract and a commodity forward derivative
instrument. Citigroup elects the fair value option for the debt host contract,
and reports the debt host contract within Trading account assets on the
Company's Consolidated Balance Sheet. The total carrying amount of debt host
contracts across unallocated precious metals accounts at December 31, 2012 was
approximately $5.5 billion. The amounts are expected to fluctuate based on
trading activity in the future periods.
270
The following table provides information about certain credit products carried at fair value at December 31, 2012 and 2011:
December 31, 2012 | December 31, 2011 | |||||||||||||
In millions of dollars | Trading assets | Loans | Trading assets | Loans | ||||||||||
Carrying amount reported on the Consolidated Balance Sheet | $ | 11,658 | $ | 3,893 | $ | 14,150 | $ | 3,735 | ||||||
Aggregate unpaid principal balance in excess of (less than) fair value | 31 | (132 | ) | 540 | (54 | ) | ||||||||
Balance of non-accrual loans or loans more than 90 days past due | 104 | - | 134 | - | ||||||||||
Aggregate unpaid principal balance in excess of fair value for non-accrual | ||||||||||||||
loans or loans more than 90 days past due | 85 | - | 43 | - |
In addition to the amounts reported above, $1,891 million and $648
million of unfunded loan commitments related to certain credit products selected
for fair value accounting were outstanding as of December 31, 2012 and 2011,
respectively.
Changes in fair value of funded and unfunded credit products
are classified in Principal
transactions in the Company's Consolidated
Statement of Income. Related interest revenue is measured based on the
contractual interest rates and reported as Interest revenue on Trading account assets or
loan interest depending on the balance sheet classifications of the credit
products. The changes in fair value for the years ended December 31, 2012 and
2011 due to instrument-specific credit risk totaled to a gain of $39 million and
$53 million, respectively.
Certain investments in private
equity and real estate ventures and certain equity method
investments
Citigroup invests in
private equity and real estate ventures for the purpose of earning investment
returns and for capital appreciation. The Company has elected the fair value
option for certain of these ventures, because such investments are considered
similar to many private equity or hedge fund activities in Citi's investment
companies, which are reported at fair value. The fair value option brings
consistency in the accounting and evaluation of these investments. All
investments (debt and equity) in such private equity and real estate entities
are accounted for at fair value. These investments are classified as Investments on Citigroup's Consolidated Balance Sheet.
Citigroup
also holds various non-strategic investments in leveraged buyout funds and other
hedge funds for which the Company elected fair value accounting to reduce
operational and accounting complexity. Since the funds account for all of their
underlying assets at fair value, the impact of applying the equity method to
Citigroup's investment in these funds was equivalent to fair value accounting.
These investments are classified as Other
assets on Citigroup's Consolidated Balance
Sheet.
Changes in the fair values of these investments are classified in Other revenue in the Company's Consolidated Statement of Income.
Certain mortgage loans
(HFS)
Citigroup has elected the fair
value option for certain purchased and originated prime fixed-rate and
conforming adjustable-rate first mortgage loans HFS. These loans are intended
for sale or securitization and are hedged with derivative instruments. The
Company has elected the fair value option to mitigate accounting mismatches in
cases where hedge accounting is complex and to achieve operational
simplifications.
271
The following table provides information about certain mortgage loans HFS carried at fair value at December 31, 2012 and 2011:
In millions of dollars | December 31, 2012 | December 31, 2011 | ||||
Carrying amount reported on the Consolidated Balance Sheet | $ | 6,879 | $ | 6,213 | ||
Aggregate fair value in excess of unpaid principal balance | 390 | 274 | ||||
Balance of non-accrual loans or loans more than 90 days past due | - | - | ||||
Aggregate unpaid principal balance in excess of fair value for non-accrual loans or loans more than 90 days past due | - | - |
The changes in fair values of these mortgage loans are reported in Other revenue in the Company's Consolidated Statement of Income. There was no change in fair value during the year ended December 31, 2012 due to instrument-specific credit risk. The change in fair value during the year ended December 31, 2011 due to instrument-specific credit risk resulted in a loss of $0.1 million. Related interest income continues to be measured based on the contractual interest rates and reported as such in the Consolidated Statement of Income.
Certain consolidated
VIEs
The Company has elected the fair
value option for all qualified assets and liabilities of certain VIEs that were
consolidated upon the adoption of SFAS 167 on January 1, 2010, including certain
private label mortgage securitizations, mutual fund deferred sales commissions
and collateralized loan obligation VIEs. The Company elected the fair value
option for these VIEs, as the Company believes this method better reflects the
economic risks, since substantially all of the Company's retained interests in
these entities are carried at fair value.
With
respect to the consolidated mortgage VIEs, the Company determined the fair value
for the mortgage loans and long-term debt utilizing internal valuation
techniques. The fair value of the long-term debt measured using internal
valuation techniques is verified, where possible, to prices obtained from
independent vendors. Vendors compile prices from various sources and may apply
matrix pricing for similar securities when no price is observable. Security
pricing associated with long-term debt that is valued using observable inputs is
classified as Level 2, and debt that is valued using one or more significant
unobservable inputs is classified as Level 3. The fair value of mortgage loans
of each VIE is derived from the security pricing. When substantially all of the
long-term debt of a VIE is valued using Level 2 inputs, the corresponding
mortgage loans are classified as Level 2. Otherwise, the mortgage loans of a VIE
are classified as Level 3.
With respect to the consolidated mortgage VIEs for which the fair value
option was elected, the mortgage loans are classified as Loans on Citigroup's
Consolidated Balance Sheet. The changes in fair value of the loans are reported
as Other revenue in the Company's Consolidated Statement of Income. Related interest
revenue is measured based on the contractual interest rates and reported as Interest revenue in the Company's Consolidated Statement of Income. Information about
these mortgage loans is included in the table below. The change in fair value of
these loans due to instrument-specific credit risk was a loss of $107 million
and $275 million for the years ended December 31, 2012 and 2011,
respectively.
The debt issued by these consolidated VIEs is classified as
long-term debt on Citigroup's Consolidated Balance Sheet. The changes in fair
value for the majority of these liabilities are reported in Other revenue in the
Company's Consolidated Statement of Income. Related interest expense is measured
based on the contractual interest rates and reported as such in the Consolidated
Statement of Income. The aggregate unpaid principal balance of long-term debt of
these consolidated VIEs exceeded the aggregate fair value by $869 million and
$984 million as of December 31, 2012 and 2011, respectively.
272
The following table provides information about Corporate and Consumer loans of consolidated VIEs carried at fair value at December 31, 2012 and 2011:
December 31, 2012 | December 31, 2011 | |||||||||||
In millions of dollars | Corporate loans | Consumer loans | Corporate loans | Consumer loans | ||||||||
Carrying amount reported on the Consolidated Balance Sheet | $ | 157 | $ | 1,191 | $ | 198 | $ | 1,292 | ||||
Aggregate unpaid principal balance in excess of fair value | 347 | 293 | 394 | 436 | ||||||||
Balance of non-accrual loans or loans more than 90 days past due | 34 | 123 | 23 | 86 | ||||||||
Aggregate unpaid principal balance in excess of fair value for non-accrual | ||||||||||||
loans or loans more than 90 days past due | 36 | 111 | 42 | 120 |
Certain structured
liabilities
The Company has elected
the fair value option for certain structured liabilities whose performance is
linked to structured interest rates, inflation, currency, equity, referenced
credit or commodity risks (structured liabilities). The Company elected the fair
value option, because these exposures are considered to be trading-related
positions and, therefore, are managed on a fair value basis. These positions
will continue to be classified as debt, deposits or derivatives ( Trading account liabilities ) on the Company's Consolidated Balance Sheet according to their legal
form.
The change in fair value for these structured liabilities is reported in Principal transactions in the Company's Consolidated Statement of Income. Changes in
fair value for these structured liabilities include an economic component for
accrued interest, which is included in the change in fair value reported in Principal transactions .
Certain non-structured
liabilities
The Company has elected
the fair value option for certain non-structured liabilities with fixed and
floating interest rates (non-structured liabilities). The Company has elected
the fair value option where the interest-rate risk of such liabilities is
economically hedged with derivative contracts or the proceeds are used to
purchase financial assets that will also be accounted for at fair value through
earnings. The election has been made to mitigate accounting mismatches and to
achieve operational simplifications. These positions are reported in Short-term borrowings and Long-term
debt on the Company's Consolidated Balance
Sheet. The change in fair value for these non-structured liabilities is reported
in Principal transactions in the Company's Consolidated Statement of Income.
Related
interest expense on non-structured liabilities is measured based on the
contractual interest rates and reported as such in the Consolidated Statement of
Income.
The following table provides information about long-term debt carried at fair value, excluding the debt issued by the consolidated VIEs, at December 31, 2012 and 2011:
In millions of dollars | December 31, 2012 | December 31, 2011 | |||||
Carrying amount reported on the Consolidated Balance Sheet | $ | 28,434 | $ | 22,614 | |||
Aggregate unpaid principal balance in excess of (less than) fair value | (226 | ) | 1,680 |
The following table provides information about short-term borrowings carried at fair value at December 31, 2012 and 2011:
In millions of dollars | December 31, 2012 | December 31, 2011 | |||||
Carrying amount reported on the Consolidated Balance Sheet | $ | 818 | $ | 1,354 | |||
Aggregate unpaid principal balance in excess of (less than) fair value | (232 | ) | 49 |
273
27. PLEDGED ASSETS, COLLATERAL, COMMITMENTS AND GUARANTEES
Pledged Assets
In connection with the Company's financing and trading
activities, the Company has pledged assets to collateralize its obligations
under repurchase agreements, secured financing agreements, secured liabilities
of consolidated VIEs and other borrowings. At December 31, 2012 and 2011, the
approximate carrying values of the significant components of pledged assets
recognized on the Company's Consolidated Balance Sheet include:
In millions of dollars | 2012 | 2011 | ||||
Investment securities | $ | 187,295 | $ | 129,093 | ||
Loans | 234,797 | 235,031 | ||||
Trading account assets | 123,178 | 114,539 | ||||
Total | $ | 545,270 | $ | 478,663 |
In addition,
included in cash and due from banks at December 31, 2012 and 2011 are $13.4
billion and $13.6 billion, respectively, of cash segregated under federal and
other brokerage regulations or deposited with clearing organizations.
At
December 31, 2012 and 2011, the Company had $286 million and $1.4 billion,
respectively, of outstanding letters of credit from third-party banks to satisfy
various collateral and margin requirements.
Collateral
At December 31, 2012 and 2011, the approximate fair value of
collateral received by the Company that may be resold or repledged by the
Company, excluding the impact of allowable netting, was $305.9 billion and
$350.0 billion, respectively. This collateral was received in connection with
resale agreements, securities borrowings and loans, derivative transactions and
margined broker loans.
At December 31, 2012 and 2011, a
substantial portion of the collateral received by the Company had been sold or
repledged in connection with repurchase agreements, securities sold, not yet
purchased, securities borrowings and loans, pledges to clearing organizations,
segregation requirements under securities laws and regulations, derivative
transactions and bank loans.
In addition, at December 31, 2012 and 2011, the Company had pledged $418 billion and $345 billion, respectively, of collateral that may not be sold or repledged by the secured parties.
Lease
Commitments
Rental expense (principally
for offices and computer equipment) was $1.5 billion, $1.6 billion and $1.6
billion for the years ended December 31, 2012, 2011 and 2010,
respectively.
Future minimum annual rentals under noncancelable leases, net
of sublease income, are as follows:
In millions of dollars | |||
2013 | $ | 1,220 | |
2014 | 1,125 | ||
2015 | 1,001 | ||
2016 | 881 | ||
2017 | 754 | ||
Thereafter | 2,293 | ||
Total | $ | 7,274 |
Guarantees
The Company provides a variety of guarantees and
indemnifications to Citigroup customers to enhance their credit standing and
enable them to complete a wide variety of business transactions. For certain
contracts meeting the definition of a guarantee, the guarantor must recognize,
at inception, a liability for the fair value of the obligation undertaken in
issuing the guarantee.
In addition, the guarantor must disclose
the maximum potential amount of future payments that the guarantor could be
required to make under the guarantee, if there were a total default by the
guaranteed parties. The determination of the maximum potential future payments
is based on the notional amount of the guarantees without consideration of
possible recoveries under recourse provisions or from collateral held or
pledged. As such, the Company believes such amounts bear no relationship to the
anticipated losses, if any, on these guarantees. The following tables present
information about the Company's guarantees at December 31, 2012 and December 31,
2011:
Maximum potential amount of future payments | ||||||||||||
Expire within | Expire after | Total amount | Carrying value | |||||||||
In billions of dollars at December 31, 2012 except carrying value in millions | 1 year | 1 year | outstanding | (in millions of dollars) | ||||||||
Financial standby letters of credit | $ | 22.3 | $ | 79.8 | $ | 102.1 | $ | 432.8 | ||||
Performance guarantees | 7.3 | 4.7 | 12.0 | 41.6 | ||||||||
Derivative instruments considered to be guarantees | 11.2 | 45.5 | 56.7 | 2,648.7 | ||||||||
Loans sold with recourse | - | 0.5 | 0.5 | 87.0 | ||||||||
Securities lending indemnifications (1) | 80.4 | - | 80.4 | - | ||||||||
Credit card merchant processing (1) | 70.3 | - | 70.3 | - | ||||||||
Custody indemnifications and other | - | 30.2 | 30.2 | - | ||||||||
Total | $ | 191.5 | $ | 160.7 | $ | 352.2 | $ | 3,210.1 |
(1) | The carrying values of securities lending indemnifications and credit card merchant processing are not material, as the Company has determined that the amount and probability of potential liabilities arising from these guarantees are not significant. |
274
Maximum potential amount of future payments | ||||||||||||
Expire within | Expire after | Total amount | Carrying value | |||||||||
In billions of dollars at December 31, 2011 except carrying value in millions | 1 year | 1 year | outstanding | (in millions of dollars) | ||||||||
Financial standby letters of credit | $ | 25.2 | $ | 79.5 | $ | 104.7 | $ | 417.5 | ||||
Performance guarantees | 7.8 | 4.5 | 12.3 | 43.9 | ||||||||
Derivative instruments considered to be guarantees | 9.8 | 40.0 | 49.8 | 2,686.1 | ||||||||
Loans sold with recourse | - | 0.4 | 0.4 | 89.6 | ||||||||
Securities lending indemnifications (1) | 90.9 | - | 90.9 | - | ||||||||
Credit card merchant processing (1) | 70.2 | - | 70.2 | - | ||||||||
Custody indemnifications and other | - | 40.0 | 40.0 | 30.7 | ||||||||
Total | $ | 203.9 | $ | 164.4 | $ | 368.3 | $ | 3,267.8 |
(1) | The carrying values of securities lending indemnifications and credit card merchant processing are not material, as the Company has determined that the amount and probability of potential liabilities arising from these guarantees are not significant. |
Financial standby letters of
credit
Citigroup issues standby
letters of credit which substitute its own credit for that of the borrower. If a
letter of credit is drawn down, the borrower is obligated to repay Citigroup.
Standby letters of credit protect a third party from defaults on contractual
obligations. Financial standby letters of credit include guarantees of payment
of insurance premiums and reinsurance risks that support industrial revenue bond
underwriting and settlement of payment obligations to clearing houses, and also
support options and purchases of securities or are in lieu of escrow deposit
accounts. Financial standbys also backstop loans, credit facilities, promissory
notes and trade acceptances.
Performance
guarantees
Performance guarantees and
letters of credit are issued to guarantee a customer's tender bid on a
construction or systems-installation project or to guarantee completion of such
projects in accordance with contract terms. They are also issued to support a
customer's obligation to supply specified products, commodities, or maintenance
or warranty services to a third party.
Derivative instruments considered to
be guarantees
Derivatives are
financial instruments whose cash flows are based on a notional amount and an
underlying instrument, where there is little or no initial investment, and whose
terms require or permit net settlement. Derivatives may be used for a variety of
reasons, including risk management, or to enhance returns. Financial
institutions often act as intermediaries for their clients, helping clients
reduce their risks. However, derivatives may also be used to take a risk
position.
The
derivative instruments considered to be guarantees, which are presented in the
tables above, include only those instruments that require Citi to make payments
to the counterparty based on changes in an underlying instrument that is related
to an asset, a liability, or an equity security held by the guaranteed party.
More specifically, derivative instruments considered to be guarantees include
certain over-the-counter written put options where the counterparty is not a
bank, hedge fund or broker-dealer (such counterparties are considered to be
dealers in these markets and may, therefore, not hold the underlying
instruments). However, credit derivatives sold by the Company are excluded from
the tables above as they are disclosed separately in Note 23 to the Consolidated
Financial Statements. In addition, non-credit derivative
contracts that are cash settled and for
which the Company is unable to assert that it is probable the counterparty held
the underlying instrument at the inception of the contract also are excluded
from the tables above.
In instances where the Company's maximum
potential future payment is unlimited, the notional amount of the contract is
disclosed.
Loans sold with
recourse
Loans sold with recourse
represent the Company's obligations to reimburse the buyers for loan losses
under certain circumstances. Recourse refers to the clause in a sales agreement
under which a lender will fully reimburse the buyer/investor for any losses
resulting from the purchased loans. This may be accomplished by the seller
taking back any loans that become delinquent.
In
addition to the amounts shown in the tables above, Citi has recorded a mortgage
repurchase reserve for its potential repurchases or make-whole liability
regarding representation and warranty claims. The repurchase reserve was $1,565
million and $1,188 million at December 31, 2012 and December 31, 2011,
respectively, and these amounts are included in Other liabilities on the Consolidated
Balance Sheet.
Repurchase Reserve-Whole Loan
Sales
The repurchase reserve estimation
process for potential residential mortgage whole loan representation and
warranty claims is based on various assumptions which are primarily based on
Citi's historical repurchase activity with the GSEs. The assumptions used to
calculate this repurchase reserve include numerous estimates and judgments and
thus contain a level of uncertainty and risk that, if different from actual
results, could have a material impact on the reserve amounts.
As of
December 31, 2012, Citi estimates that the range of reasonably possible loss for
whole loan sale representation and warranty claims in excess of amounts accrued
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.
275
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.
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. To date,
Citi has received little or no response to these requests for
information.
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 repurchase
claims based on estimated losses arising from those actual claims received that
appear to be based on a review of the underlying loan files. The estimation
reflected in this reserve is based on currently available information and relies
on various assumptions that involve numerous estimates and judgments that are
inherently uncertain and subject to change. If actual experiences differ from
Citi's assumptions, future provisions may differ substantially from Citi's
current reserves.
Securities lending
indemnifications
Owners of securities
frequently lend those securities for a fee to other parties who may sell them
short or deliver them to another party to satisfy some other obligation. Banks
may administer such securities lending programs for their clients. Securities
lending indemnifications are issued by the bank to guarantee that a securities
lending customer will be made whole in the event that the security borrower does
not return the security subject to the lending agreement and collateral held is
insufficient to cover the market value of the security.
Credit card merchant
processing
Credit card merchant
processing guarantees represent the Company's indirect obligations in connection
with the processing of private label and bank card transactions on behalf of
merchants.
Citigroup's primary credit card business is the issuance of
credit cards to individuals. In addition, the Company: (i) provides transaction
processing services to various merchants with respect to its private-label cards
and (ii) has potential liability for bank card transaction processing services.
The nature of the liability in either case arises as a result of a billing
dispute between a merchant and a cardholder that is ultimately resolved in the
cardholder's favor. The merchant is liable to refund the amount to the
cardholder. In general, if the credit card processing company is unable to
collect this amount from the merchant, the credit card processing company bears
the loss for the amount of the credit or refund paid to the cardholder.
With
regard to (i) above, the Company continues to have the primary contingent
liability with respect to its portfolio of private-label merchants. The risk of
loss is mitigated as the cash flows between the Company and the merchant are
settled on a net basis and the Company has the right to offset any payments with
cash flows otherwise due to the merchant. To further mitigate this risk the
Company may delay settlement, require a merchant to make an escrow deposit,
include event triggers to provide the Company with more financial and
operational control in the event of the financial deterioration of the merchant,
or require various credit enhancements (including letters of credit and bank
guarantees). In the unlikely event that a private-label merchant is unable to
deliver products, services or a refund to its private-label cardholders, the
Company is contingently liable to credit or refund cardholders.
With
regard to (ii) above, the Company has a potential liability for bank card
transactions where Citi provides the transaction processing services as well as
those where a third party provides the services and Citi acts as a secondary
guarantor, should that processor fail to perform.
The
Company's maximum potential contingent liability related to both bank card and
private-label merchant processing services is estimated to be the total volume
of credit card transactions that meet the requirements to be valid charge-back
transactions at any given time. At December 31, 2012 and December 31, 2011, this
maximum potential exposure was estimated to be $70 billion.
However,
the Company believes that the maximum exposure is not representative of the
actual potential loss exposure based on the Company's historical experience.
This contingent liability is unlikely to arise, as most products and services
are delivered when purchased and amounts are refunded when items are returned to
merchants. The Company assesses the probability and amount of its contingent
liability related to merchant processing based on the financial strength of the
primary guarantor, the extent and nature of unresolved charge-backs and its
historical loss experience. At December 31, 2012 and December 31, 2011, the
losses incurred and the carrying amounts of the Company's contingent obligations
related to merchant processing activities were immaterial.
276
Custody
indemnifications
Custody
indemnifications are issued to guarantee that custody clients will be made whole
in the event that a third-party subcustodian or depository institution fails to
safeguard clients' assets.
Other guarantees and indemnifications
Credit Card Protection
Programs
The Company, through its credit
card business, provides various cardholder protection programs on several of its
card products, including programs that provide insurance coverage for rental
cars, coverage for certain losses associated with purchased products, price
protection for certain purchases and protection for lost luggage. These
guarantees are not included in the table, since the total outstanding amount of
the guarantees and the Company's maximum exposure to loss cannot be quantified.
The protection is limited to certain types of purchases and certain types of
losses, and it is not possible to quantify the purchases that would qualify for
these benefits at any given time. The Company assesses the probability and
amount of its potential liability related to these programs based on the extent
and nature of its historical loss experience. At December 31, 2012 and December
31, 2011, the actual and estimated losses incurred and the carrying value of the
Company's obligations related to these programs were immaterial.
Other Representation and Warranty
Indemnifications
In the normal course of
business, the Company provides standard representations and warranties to
counterparties in contracts in connection with numerous transactions and also
provides indemnifications, including indemnifications that protect the
counterparties to the contracts in the event that additional taxes are owed due
either to a change in the tax law or an adverse interpretation of the tax law.
Counterparties to these transactions provide the Company with comparable
indemnifications. While such representations, warranties and indemnifications
are essential components of many contractual relationships, they do not
represent the underlying business purpose for the transactions. The
indemnification clauses are often standard contractual terms related to the
Company's own performance under the terms of a contract and are entered into in
the normal course of business based on an assessment that the risk of loss is
remote. Often these clauses are intended to ensure that terms of a contract are
met at inception. No compensation is received for these standard representations
and warranties, and it is not possible to determine their fair value because
they rarely, if ever, result in a payment. In many cases, there are no stated or
notional amounts included in the indemnification clauses, and the contingencies
potentially triggering the obligation to indemnify have not occurred and are not
expected to occur. These indemnifications are not included in the tables
above.
Value-Transfer
Networks
The Company is a member of, or
shareholder in, hundreds of value-transfer networks (VTNs) (payment, clearing
and settlement systems as well as exchanges) around the world. As a condition of
membership, many of these VTNs require that members stand ready to pay a pro
rata share of the losses incurred by the organization due to another member's
default on its obligations. The Company's potential obligations may be limited
to its membership interests in the VTNs, contributions to the VTN's funds, or,
in limited cases, the obligation may be unlimited. The maximum exposure cannot
be estimated as this would require an assessment of future claims that have not
yet occurred. We believe the risk of loss is remote given historical experience
with the VTNs. Accordingly, the Company's participation in VTNs is not reported
in the Company's guarantees tables above, and there are no amounts reflected on
the Consolidated Balance Sheet as of December 31, 2012 or December 31, 2011 for
potential obligations that could arise from the Company's involvement with VTN
associations.
Long-Term Care Insurance
Indemnification
In the sale of an
insurance subsidiary, the Company provided an indemnification to an insurance
company for policyholder claims and other liabilities relating to a book of
long-term care (LTC) business (for the entire term of the LTC policies) that is
fully reinsured by another insurance company. The reinsurer has funded two
trusts with securities whose fair value (approximately $4.9 billion at December
31, 2012 and $4.4 billion at December 31, 2011) is designed to cover the
insurance company's statutory liabilities for the LTC policies. The assets in
these trusts are evaluated and adjusted periodically to ensure that the fair
value of the assets continues to cover the estimated statutory liabilities
related to the LTC policies, as those statutory liabilities change over time. If
the reinsurer fails to perform under the reinsurance agreement for any reason,
including insolvency, and the assets in the two trusts are insufficient or
unavailable to the ceding insurance company, then Citigroup must indemnify the
ceding insurance company for any losses actually incurred in connection with the
LTC policies. Since both events would have to occur before Citi would become
responsible for any payment to the ceding insurance company pursuant to its
indemnification obligation, and the likelihood of such events occurring is
currently not probable, there is no liability reflected in the Consolidated
Balance Sheet as of December 31, 2012 related to this indemnification. Citi
continues to closely monitor its potential exposure under this indemnification
obligation.
Carrying Value-Guarantees and
Indemnifications
At December 31, 2012 and
December 31, 2011, the total carrying amounts of the liabilities related to the
guarantees and indemnifications included in the tables above amounted to
approximately $3.2 billion and $3.3 billion, respectively. The carrying value of
derivative instruments is included in either Trading account liabilities or Other liabilities , depending upon whether the derivative was entered into for trading or
non-trading purposes. The carrying value of financial and performance guarantees
is included in Other
liabilities . For loans sold with recourse,
the carrying value of the liability is included in Other liabilities . In addition, at
December 31, 2012 and December 31, 2011, Other
liabilities on the Consolidated Balance Sheet
included an allowance for credit losses of $1,119 million and $1,136 million,
respectively, relating to letters of credit and unfunded lending
commitments.
277
Collateral
Cash collateral available to the Company to reimburse losses
realized under these guarantees and indemnifications amounted to $39 billion and
$35 billion at December 31, 2012 and December 31, 2011, respectively. Securities
and other marketable assets held as collateral amounted to $51 billion and $65
billion at December 31, 2012 and December 31, 2011, respectively. The majority
of collateral is held to reimburse losses realized under securities lending
indemnifications. Additionally, letters of credit in favor of the Company held
as collateral amounted to $1.8 billion and $1.5 billion at December 31, 2012 and
December 31, 2011, respectively. Other property may also be available to the
Company to cover losses under certain guarantees and indemnifications; however,
the value of such property has not been determined.
Performance
risk
Citi evaluates the performance
risk of its guarantees based on the assigned referenced counterparty internal or
external ratings. Where external ratings are used, investment-grade ratings are
considered to be Baa/BBB and above, while anything below is considered
non-investment grade. The Citi internal ratings are in line with the related
external rating system. On certain underlying referenced credits or entities,
ratings are not available. Such referenced credits are included in the "not
rated" category. The maximum potential amount of the future payments related to
guarantees and credit derivatives sold is determined to be the notional amount
of these contracts, which is the par amount of the assets guaranteed.
Presented
in the tables below are the maximum potential amounts of future payments that
are classified based upon internal and external credit ratings as of December
31, 2012 and December 31, 2011. As previously mentioned, the determination of
the maximum potential future payments is based on the notional amount of the
guarantees without consideration of possible recoveries under recourse
provisions or from collateral held or pledged. As such, the Company believes
such amounts bear no relationship to the anticipated losses, if any, on these
guarantees.
Maximum potential amount of future payments | ||||||||||||
Investment | Non-investment | Not | ||||||||||
In billions of dollars as of December 31, 2012 | grade | grade | rated | Total | ||||||||
Financial standby letters of credit | $ | 80.9 | $ | 11.0 | $ | 10.2 | $ | 102.1 | ||||
Performance guarantees | 7.3 | 3.0 | 1.7 | 12.0 | ||||||||
Derivative instruments deemed to be guarantees | - | - | 56.7 | 56.7 | ||||||||
Loans sold with recourse | - | - | 0.5 | 0.5 | ||||||||
Securities lending indemnifications | - | - | 80.4 | 80.4 | ||||||||
Credit card merchant processing | - | - | 70.3 | 70.3 | ||||||||
Custody indemnifications and other | 30.1 | 0.1 | - | 30.2 | ||||||||
Total | $ | 118.3 | $ | 14.1 | $ | 219.8 | $ | 352.2 |
Maximum potential amount of future payments | ||||||||||||
Investment | Non-investment | Not | ||||||||||
In billions of dollars as of December 31, 2011 | grade | grade | rated | Total | ||||||||
Financial standby letters of credit | $ | 79.3 | $ | 17.2 | $ | 8.2 | $ | 104.7 | ||||
Performance guarantees | 6.9 | 3.2 | 2.2 | 12.3 | ||||||||
Derivative instruments deemed to be guarantees | - | - | 49.8 | 49.8 | ||||||||
Loans sold with recourse | - | - | 0.4 | 0.4 | ||||||||
Securities lending indemnifications | - | - | 90.9 | 90.9 | ||||||||
Credit card merchant processing | - | - | 70.2 | 70.2 | ||||||||
Custody indemnifications and other | 40.0 | - | - | 40.0 | ||||||||
Total | $ | 126.2 | $ | 20.4 | $ | 221.7 | $ | 368.3 |
278
Credit Commitments and Lines of
Credit
The table below summarizes
Citigroup's credit commitments as of December 31, 2012 and December 31,
2011:
Outside | December 31, | December 31, | ||||||||||
In millions of dollars | U.S. | U.S. | 2012 | 2011 | ||||||||
Commercial and similar letters of credit | $ | 1,427 | $ | 5,884 | $ | 7,311 | $ | 8,910 | ||||
One- to four-family residential mortgages | 2,397 | 1,496 | 3,893 | 3,504 | ||||||||
Revolving open-end loans secured by one- to four-family residential properties | 14,897 | 3,279 | 18,176 | 19,326 | ||||||||
Commercial real estate, construction and land development | 2,067 | 1,429 | 3,496 | 1,968 | ||||||||
Credit card lines | 485,569 | 135,131 | 620,700 | 653,985 | ||||||||
Commercial and other consumer loan commitments | 138,219 | 90,273 | 228,492 | 224,109 | ||||||||
Other commitments and contingencies | 1,175 | 1,084 | 2,259 | 3,201 | ||||||||
Total | $ | 645,751 | $ | 238,576 | $ | 884,327 | $ | 915,003 |
The majority of unused commitments are contingent upon customers' maintaining specific credit standards. Commercial commitments generally have floating interest rates and fixed expiration dates and may require payment of fees. Such fees (net of certain direct costs) are deferred and, upon exercise of the commitment, amortized over the life of the loan or, if exercise is deemed remote, amortized over the commitment period.
Commercial and similar letters of
credit
A commercial letter of credit
is an instrument by which Citigroup substitutes its credit for that of a
customer to enable the customer to finance the purchase of goods or to incur
other commitments. Citigroup issues a letter on behalf of its client to a
supplier and agrees to pay the supplier upon presentation of documentary
evidence that the supplier has performed in accordance with the terms of the
letter of credit. When a letter of credit is drawn, the customer is then
required to reimburse Citigroup.
One- to four-family residential
mortgages
A one- to four-family
residential mortgage commitment is a written confirmation from Citigroup to a
seller of a property that the bank will advance the specified sums enabling the
buyer to complete the purchase.
Revolving open-end loans secured by
one- to four-family residential properties
Revolving open-end loans secured by one- to four-family residential
properties are essentially home equity lines of credit. A home equity line of
credit is a loan secured by a primary residence or second home to the extent of
the excess of fair market value over the debt outstanding for the first
mortgage.
Commercial real estate, construction
and land development
Commercial real
estate, construction and land development include unused portions of commitments
to extend credit for the purpose of financing commercial and multifamily
residential properties as well as land development
projects.
Both
secured-by-real-estate and unsecured commitments are included in this line, as
well as undistributed loan proceeds, where there is an obligation to advance for
construction progress payments. However, this line only includes those
extensions of credit that, once funded, will be classified as Total loans, net on the
Consolidated Balance Sheet.
Credit card
lines
Credit card lines are
unconditionally cancellable by the issuer.
Commercial and other consumer loan
commitments
Commercial and other
consumer loan commitments include overdraft and liquidity facilities, as well as
commercial commitments to make or purchase loans, to purchase third-party
receivables, to provide note issuance or revolving underwriting facilities and
to invest in the form of equity. Amounts include $53 billion and $65 billion
with an original maturity of less than one year at December 31, 2012 and
December 31, 2011, respectively.
In addition, included in this line item
are highly leveraged financing commitments, which are agreements that provide
funding to a borrower with higher levels of debt (measured by the ratio of debt
capital to equity capital of the borrower) than is generally considered normal
for other companies. This type of financing is commonly employed in corporate
acquisitions, management buy-outs and similar transactions.
Other commitments and
contingencies
Other commitments and
contingencies include all other transactions related to commitments and
contingencies not reported on the lines above.
279
28. CONTINGENCIES
In addition to the matters described below, in the ordinary course of business, Citigroup, its affiliates and subsidiaries, and current and former officers, directors and employees (for purposes of this section, sometimes collectively referred to as Citigroup and Related Parties) routinely are named as defendants in, or as parties to, various legal actions and proceedings. Certain of these actions and proceedings assert claims or seek relief in connection with alleged violations of consumer protection, securities, banking, antifraud, antitrust, anti-money laundering, employment and other statutory and common laws. Certain of these actual or threatened legal actions and proceedings include claims for substantial or indeterminate compensatory or punitive damages, or for injunctive relief, and in some instances seek recovery on a class-wide basis.
In the ordinary course of business, Citigroup and Related Parties also are subject to governmental and regulatory examinations, information-gathering requests, investigations and proceedings (both formal and informal), certain of which may result in adverse judgments, settlements, fines, penalties, restitution, disgorgement, injunctions or other relief. In addition, certain affiliates and subsidiaries of Citigroup are banks, registered broker-dealers, futures commission merchants, investment advisers or other regulated entities and, in those capacities, are subject to regulation by various U.S., state and foreign securities, banking, commodity futures, consumer protection and other regulators. In connection with formal and informal inquiries by these regulators, Citigroup and such affiliates and subsidiaries receive numerous requests, subpoenas and orders seeking documents, testimony and other information in connection with various aspects of their regulated activities. From time to time Citigroup and Related Parties also receive grand jury subpoenas and other requests for information or assistance, formal or informal, from federal or state law enforcement agencies, including among others various United States Attorneys' Offices, the Asset Forfeiture and Money Laundering Section and other divisions of the Department of Justice, the Financial Crimes Enforcement Network of the United States Department of the Treasury, and the Federal Bureau of Investigation, relating to Citigroup and its customers.
Because of the global scope of Citigroup's operations, and its presence in countries around the world, Citigroup and Related Parties are subject to litigation and governmental and regulatory examinations, information-gathering requests, investigations and proceedings (both formal and informal) in multiple jurisdictions with legal and regulatory regimes that may differ substantially, and present substantially different risks, from those Citigroup and Related Parties are subject to in the United States. In some instances Citigroup and Related Parties may be involved in proceedings involving the same subject matter in multiple jurisdictions, which may result in overlapping, cumulative or inconsistent outcomes.
Citigroup seeks to resolve all litigation and regulatory matters in the manner management believes is in the best interests of Citigroup and its shareholders, and contests liability, allegations of wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter.
Accounting and Disclosure
Framework
ASC 450 (formerly SFAS 5)
governs the disclosure and recognition of loss contingencies, including
potential losses from litigation and regulatory matters. ASC 450 defines a "loss
contingency" as "an existing condition, situation, or set of circumstances
involving uncertainty as to possible loss to an entity that will ultimately be
resolved when one or more future events occur or fail to occur." It imposes
different requirements for the recognition and disclosure of loss contingencies
based on the likelihood of occurrence of the contingent future event or events.
It distinguishes among degrees of likelihood using the following three terms:
"probable," meaning that "the future event or events are likely to occur";
"remote," meaning that "the chance of the future event or events occurring is
slight"; and "reasonably possible," meaning that "the chance of the future event
or events occurring is more than remote but less than likely." These three terms
are used below as defined in ASC 450.
Accruals . ASC 450 requires accrual for a loss contingency when it is "probable
that one or more future events will occur confirming the fact of loss" and "the
amount of the loss can be reasonably estimated." In accordance with ASC 450,
Citigroup establishes accruals for all litigation and regulatory matters,
including matters disclosed herein, when Citigroup believes it is probable that
a loss has been incurred and the amount of the loss can be reasonably estimated.
When the reasonable estimate of the loss is within a range of amounts, the
minimum amount of the range is accrued, unless some higher amount within the
range is a better estimate than any other amount within the range. Once
established, accruals are adjusted from time to time, as appropriate, in light
of additional information. The amount of loss ultimately incurred in relation to
those matters may be substantially higher or lower than the amounts accrued for
those matters.
Disclosure . ASC 450
requires disclosure of a loss contingency if "there is at least a reasonable
possibility that a loss or an additional loss may have been incurred" and there
is no accrual for the loss because the conditions described above are not met or
an exposure to loss exists in excess of the amount accrued. In accordance with
ASC 450, if Citigroup has not accrued for a matter because Citigroup believes
that a loss is reasonably possible but not probable, or that a loss is probable
but not reasonably estimable, and the matter thus does not meet the criteria for
accrual, and the reasonably possible loss is material, it discloses the loss
contingency. In addition, Citigroup discloses matters for which it has accrued
if it believes a reasonably possible exposure to material loss exists in excess
of the amount accrued. In accordance with ASC 450, Citigroup's disclosure
includes an estimate of the reasonably possible loss or range of loss for those
matters as to which an estimate can be made. ASC 450 does not require disclosure
of an estimate of the reasonably possible loss or range of loss where an
estimate cannot be made. Neither accrual nor disclosure is required for losses
that are deemed remote.
280
Inherent
Uncertainty of the Matters Disclosed. Certain
of the matters disclosed below involve claims for substantial or indeterminate
damages. The claims asserted in these matters typically are broad, often
spanning a multi-year period and sometimes a wide range of business activities,
and the plaintiffs' or claimants' alleged damages frequently are not quantified
or factually supported in the complaint or statement of claim. As a result,
Citigroup is often unable to estimate the loss in such matters, even if it
believes that a loss is probable or reasonably possible, until developments in
the case have yielded additional information sufficient to support a
quantitative assessment of the range of reasonably possible loss. Such
developments may include, among other things, discovery from adverse parties or
third parties, rulings by the court on key issues, analysis by retained experts,
and engagement in settlement negotiations. Depending on a range of factors, such
as the complexity of the facts, the novelty of the legal theories, the pace of
discovery, the court's scheduling order, the timing of court decisions, and the
adverse party's willingness to negotiate in good faith toward a resolution, it
may be months or years after the filing of a case before an estimate of the
range of reasonably possible loss can be made.
Matters
as to Which an Estimate Can Be Made . For some
of the matters disclosed below, Citigroup is currently able to estimate a
reasonably possible loss or range of loss in excess of amounts accrued (if any).
For some of the matters included within this estimation, an accrual has been
made because a loss is believed to be both probable and reasonably estimable,
but an exposure to loss exists in excess of the amount accrued; in these cases,
the estimate reflects the reasonably possible range of loss in excess of the
accrued amount. For other matters included within this estimation, no accrual
has been made because a loss, although estimable, is believed to be reasonably
possible, but not probable; in these cases the estimate reflects the reasonably
possible loss or range of loss. As of December 31, 2012, Citigroup estimates
that the reasonably possible unaccrued loss in future periods for these matters
ranges up to approximately $5 billion in the aggregate.
These
estimates are based on currently available information. As available information
changes, the matters for which Citigroup is able to estimate will change, and
the estimates themselves will change. In addition, while many estimates
presented in financial statements and other financial disclosure involve
significant judgment and may be subject to significant uncertainty, estimates of
the range of reasonably possible loss arising from litigation and regulatory
proceedings are subject to particular uncertainties. For example, at the time of
making an estimate, Citigroup may have only preliminary, incomplete, or
inaccurate information about the facts underlying the claim; its assumptions
about the future rulings of the court or other tribunal on significant issues,
or the behavior and incentives of adverse parties or regulators, may prove to be
wrong; and the outcomes it is attempting to predict are often not amenable to
the use of statistical or other quantitative analytical tools. In addition, from
time to time an outcome may occur that Citigroup had not accounted for in its
estimate because it had deemed such an outcome to be remote. For all these
reasons, the amount of loss in excess of accruals ultimately incurred for the
matters as to which an estimate has been made could be substantially higher or
lower than the range of loss included in the estimate.
Matters as to Which an Estimate Cannot Be Made . For other matters disclosed below, Citigroup is not
currently able to estimate the reasonably possible loss or range of loss. Many
of these matters remain in very preliminary stages (even in some cases where a
substantial period of time has passed since the commencement of the matter),
with few or no substantive legal decisions by the court or tribunal defining the
scope of the claims, the class (if any), or the potentially available damages,
and fact discovery is still in progress or has not yet begun. In many of these
matters, Citigroup has not yet answered the complaint or statement of claim or
asserted its defenses, nor has it engaged in any negotiations with the adverse
party (whether a regulator or a private party). For all these reasons, Citigroup
cannot at this time estimate the reasonably possible loss or range of loss, if
any, for these matters.
Opinion of Management as to Eventual
Outcome. Subject to the foregoing, it is the
opinion of Citigroup's management, based on current knowledge and after taking
into account its current legal accruals, that the eventual outcome of all
matters described in this Note would not be likely to have a material adverse
effect on the consolidated financial condition of Citigroup. Nonetheless, given
the substantial or indeterminate amounts sought in certain of these matters, and
the inherent unpredictability of such matters, an adverse outcome in certain of
these matters could, from time to time, have a material adverse effect on
Citigroup's consolidated results of operations or cash flows in particular
quarterly or annual periods.
Credit Crisis–Related Litigation
and Other Matters
Citigroup and Related
Parties have been named as defendants in numerous legal actions and other
proceedings asserting claims for damages and related relief for losses arising
from the global financial credit crisis that began in 2007. Such matters
include, among other types of proceedings, claims asserted by: (i) individual
investors and purported classes of investors in Citigroup's common and preferred
stock and debt, alleging violations of the federal securities laws, foreign
laws, state securities and fraud law, and the Employee Retirement Income
Security Act (ERISA); and (ii) individual investors and purported classes of
investors in securities and other investments underwritten, issued or marketed
by Citigroup, including securities issued by other public companies,
collateralized debt obligations (CDOs), mortgage-backed securities (MBS),
auction rate securities (ARS), investment funds, and other structured or
leveraged instruments, which have suffered losses as a result of the credit
crisis. These matters have been filed in state and federal courts across the
U.S. and in foreign tribunals, as well as in arbitrations before the Financial
Industry Regulatory Authority (FINRA) and other arbitration
associations.
281
In addition to these litigations and arbitrations, Citigroup continues to cooperate fully in response to subpoenas and requests for information from the Securities and Exchange Commission (SEC), FINRA, state attorneys general, the Department of Justice and subdivisions thereof, bank regulators, and other government agencies and authorities, in connection with various formal and informal (and, in many instances, industry-wide) inquiries concerning Citigroup's mortgage-related conduct and business activities, as well as other business activities affected by the credit crisis. These business activities include, but are not limited to, Citigroup's sponsorship, packaging, issuance, marketing, servicing and underwriting of CDOs and MBS, and its origination, sale or other transfer, servicing, and foreclosure of residential mortgages.
Mortgage-Related Litigation and
Other Matters
Securities
Actions : Beginning in November 2007,
Citigroup and Related Parties were named as defendants in a variety of class
action and individual securities lawsuits filed by investors in Citigroup's
equity and debt securities in state and federal courts relating to the Company's
disclosures regarding its exposure to subprime-related assets.
Citigroup
and Related Parties have been named as defendants in the consolidated putative
class action IN RE CITIGROUP INC. SECURITIES LITIGATION, pending in the United
States District Court for the Southern District of New York. The consolidated
amended complaint asserts claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 on behalf of a putative class of purchasers of
Citigroup common stock from January 1, 2004 through January 15, 2009. On
November 9, 2010, the court issued an opinion and order dismissing all claims
except those arising out of Citigroup's exposure to CDOs for the time period
February 1, 2007 through April 18, 2008. On August 30, 2012, the court entered
an order preliminarily approving the parties' proposed settlement, pursuant to
which Citigroup will pay $590 million in exchange for a release of all claims
asserted on behalf of the settlement class. A fairness hearing is scheduled for
April 8, 2013. Additional information concerning this action is publicly
available in court filings under the consolidated lead docket number 07 Civ.
9901 (S.D.N.Y.) (Stein, J.).
Citigroup and Related Parties also have
been named as defendants in the consolidated putative class action IN RE
CITIGROUP INC. BOND LITIGATION, also pending in the United States District Court
for the Southern District of New York. The plaintiffs assert claims under
Sections 11, 12 and 15 of the Securities Act of 1933 on behalf of a putative
class of purchasers of $71 billion of debt securities and preferred stock issued
by Citigroup between May 2006 and August 2008. On July 12, 2010, the court
issued an opinion and order dismissing plaintiffs' claims under Section 12 of
the Securities Act of 1933, but denying defendants' motion to dismiss certain
claims under Section 11. Fact discovery began in November 2010, and plaintiffs'
motion to certify a class is pending. Additional information concerning this
action is publicly available in court filings under the consolidated lead docket
number 08 Civ. 9522 (S.D.N.Y.) (Stein, J.).
Citigroup
and Related Parties also have been named as defendants in a variety of other
putative class actions and individual actions arising out of similar facts to
those alleged in the actions described above. These actions assert a wide range
of claims, including claims under the federal securities laws, Section 90 of the
Financial Services and Markets Act of 2000 (Eng.), ERISA, and state law.
Additional information concerning these actions is publicly available in court
filings under the docket numbers 09 Civ. 7359 (S.D.N.Y.) (Stein, J.), 09 Civ.
8755 (S.D.N.Y.) (Stein, J.), 11 Civ. 7672 (S.D.N.Y.) (Koeltl, J.), 12 Civ. 6653
(S.D.N.Y.) (Stein, J.), 12 Civ. 9050 (S.D.N.Y.) (Stein, J.), and Case No.
110105028 (Pa. Commw. Ct.) (Sheppard, J.).
Beginning in November 2007, certain Citigroup affiliates also have been
named as defendants arising out of their activities as underwriters of
securities in actions brought by investors in securities of public companies
adversely affected by the credit crisis. Many of these matters have been
dismissed or settled. As a general matter, issuers indemnify underwriters in
connection with such claims, but in certain of these matters Citigroup
affiliates are not being indemnified or may in the future cease to be
indemnified because of the financial condition of the issuer.
Regulatory Actions : On October 19, 2011, in connection with its industry-wide investigation concerning CDO-related business activities, the SEC filed a complaint in the United States District Court for the Southern District of New York regarding Citigroup's structuring and sale of the Class V Funding III CDO transaction (Class V). On the same day, the SEC and Citigroup announced a settlement of the SEC's claims, subject to judicial approval, and the SEC filed a proposed final judgment pursuant to which Citigroup's U.S. broker-dealer Citigroup Global Markets Inc. (CGMI) agreed to disgorge $160 million and to pay $30 million in prejudgment interest and a $95 million penalty. On November 28, 2011, the court issued an order refusing to approve the proposed settlement and ordering trial to begin on July 16, 2012. The parties appealed from this order to the United States Court of Appeals for the Second Circuit, which, on March 15, 2012, granted a stay of the district court proceedings pending resolution of the appeals. The parties have fully briefed their appeals, and the Second Circuit held oral argument on February 8, 2013. Additional information concerning this matter is publicly available in court filings under the docket numbers 11 Civ. 7387 (S.D.N.Y.) (Rakoff, J.) and 11-5227 (2d Cir.).
Mortgage-Backed Securities and CDO Investor Actions and Repurchase Claims : Beginning in July 2010, Citigroup and Related Parties have been named as defendants in complaints filed by purchasers of MBS and CDOs sold or underwritten by Citigroup. The MBS-related complaints generally assert that the defendants made material misrepresentations and omissions about the credit quality of the mortgage loans underlying the securities, such as the underwriting standards to which the loans conformed, the loan-to-value ratio of the loans, and the extent to which the mortgaged properties were owner-occupied, and typically assert claims under Section 11 of the Securities Act of 1933, state blue sky laws, and/or common-law misrepresentation-based causes of action. The CDO-related complaints further allege that the defendants adversely selected or permitted the adverse selection of CDO collateral without full disclosure to investors. The plaintiffs
282
in these actions generally seek rescission of their investments, recovery
of their investment losses, or other damages. Other purchasers of MBS and CDOs sold or underwritten by Citigroup have
threatened to file additional suits, for some of which Citigroup has agreed to toll (extend) the statute of
limitations.
The
filed actions generally are in the early stages of proceedings, and certain of the actions or threatened actions have been
resolved through settlement or otherwise. The aggregate original purchase amount of the purchases at issue in the filed
suits is approximately $10.8 billion, and the aggregate original purchase amount of the purchases covered by tolling
agreements with investors threatening litigation is approximately $6.4 billion. The largest MBS investor claim against
Citigroup and Related Parties, as measured by the face value of purchases at issue, has been asserted by the Federal Housing
Finance Agency, as conservator for Fannie Mae and Freddie Mac. This suit was filed on September 2, 2011, and has been
coordinated in the United States District Court for the Southern District of New York with 15 other related suits brought by
the same plaintiff against various other financial institutions. Motions to dismiss in the coordinated suits have been
denied in large part, and discovery is proceeding. An interlocutory appeal currently is pending in the United States Court
of Appeals for the Second Circuit on issues common to all of the coordinated suits. Additional information concerning
certain of these actions is publicly available in court filings under the docket numbers 11 Civ. 6196 (S.D.N.Y.) (Cote,
J.), 12 Civ. 4000 (S.D.N.Y.) (Swain, J.), 12 Civ. 00790 (M.D. Al.) (Watkins, C.J.), 12 Civ. 4354 (C.D. Cal.) (Pfaezler, J.),
650212/12 (N.Y. Sup. Ct.) (Oing, J.), 652607/2012 (N.Y. Sup. Ct.) (Schweitzer, J.), and CGC-10-501610 (Cal. Super. Ct.)
(Kramer, J.).
In
addition to these actions, various parties to MBS securitizations and other interested parties have asserted that certain
Citigroup affiliates breached representations and warranties made in connection with mortgage loans sold into
securitization trusts (private-label securitizations). In connection with such assertions, Citi has received 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.
Among
these requests, in December 2011, Citigroup received a letter from the law firm Gibbs & Bruns LLP, which purports to
represent a group of investment advisers and holders of MBS issued or underwritten by Citigroup affiliates. Through that
letter and subsequent discussions, Gibbs & Bruns LLP has asserted that its clients collectively hold certificates in 87
MBS trusts purportedly issued and/or underwritten by Citigroup affiliates, and that Citigroup affiliates have repurchase
obligations for certain mortgages in these trusts.
Citi has also 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. 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. 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.
Independent Foreclosure Review : 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 Office of the Comptroller of the Currency (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 to 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 to be satisfied.
Abu Dhabi Investment
Authority
In 2010, Abu Dhabi
Investment Authority (ADIA) commenced an arbitration against Citigroup and
Related Parties alleging statutory and common law claims in connection with its
$7.5 billion investment in Citigroup in December 2007. ADIA sought rescission of
the investment agreement or, in the alternative, more than $4 billion in
damages. Following a hearing in May 2011 and post-hearing proceedings, on
October 14, 2011, the arbitration panel issued a final award and statement of
reasons finding in favor of Citigroup on all claims asserted by ADIA. On January
11, 2012, ADIA filed a petition to vacate the award in New York state court. On
January 13, 2012, Citigroup removed the petition to the United States District
Court for the Southern District of New York. On April 3, 2012, Citigroup filed
an opposition to ADIA's petition and a cross-petition to confirm the award. Both
ADIA's petition and Citigroup's cross-petition are pending. Additional
information concerning this matter is publicly available in court filings under
the docket number 12 Civ. 283 (S.D.N.Y.) (Daniels, J.).
Alternative Investment Fund–Related
Litigation and Other Matters
The SEC
is investigating the management and marketing of the ASTA/ MAT and Falcon funds,
alternative investment funds managed and marketed by certain Citigroup
affiliates that suffered substantial losses during the credit crisis. In
addition to the SEC inquiry, on June 11, 2012, the New York Attorney General
served a subpoena on a Citigroup affiliate seeking documents and information
concerning certain of these funds, and on August 1, 2012, the Massachusetts
Attorney General served a Civil Investigative Demand on a Citigroup affiliate
seeking similar documents and information. Citigroup is cooperating fully with
these inquiries.
In October 2012, Citigroup Alternative Investments LLC (CAI)
was named as a defendant in a putative class action lawsuit filed on behalf of
investors in CSO Ltd., CSO US Ltd., and Corporate Special Opportunities Ltd.,
whose investments were managed indirectly by a CAI affiliate. The plaintiff
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asserts
a variety of state common law claims, alleging that he and other investors were
misled into investing in the funds and were further misled into not redeeming
their investments. The complaint seeks to recover more than $400 million on
behalf of a putative class of investors. Additional information concerning this
action is publicly available in court filings under the docket number 12-cv-7717
(S.D.N.Y.) (Castel, J.).
In addition, numerous investors in the
ASTA/MAT funds have filed lawsuits or arbitrations against Citigroup and Related
Parties seeking damages and related relief. Although most of these investor
disputes have been resolved, some remain pending.
Auction Rate Securities–Related
Litigation and Other Matters
Beginning
in March 2008, Citigroup and Related Parties have been named as defendants in
numerous actions and proceedings brought by Citigroup shareholders and
purchasers or issuers of ARS, asserting claims under the federal securities
laws, Section 1 of the Sherman Act and state law arising from the collapse of
the ARS market in early 2008, which plaintiffs contend Citigroup and other ARS
underwriters foresaw or should have foreseen but failed adequately to disclose.
Most of these matters have been dismissed or settled. Additional information
concerning certain of the pending actions is publicly available in court filings
under the docket numbers 08 Civ. 3095 (S.D.N.Y.) (Swain, J.), 10-722, 10-867,
and 11-1270 (2d Cir.).
KIKOs
Prior to the devaluation of the Korean won in 2008, several
local banks in Korea, including a Citigroup subsidiary (CKI), entered into
foreign exchange derivative transactions with small and medium-size export
businesses (SMEs) to enable the SMEs to hedge their currency risk. The
derivatives had "knock-in, knock-out" features. Following the devaluation of the
won, many of these SMEs incurred significant losses on the derivative
transactions and filed civil lawsuits against the banks, including CKI. The
claims generally allege that the products were not suitable and that the risk
disclosure was inadequate.
As of December 31, 2012, there were 88
civil lawsuits filed by SMEs against CKI. To date, 82 decisions have been
rendered at the district court level, and CKI has prevailed in 64 of those
decisions. In the other 18 decisions, plaintiffs were awarded only a portion of
the damages sought. The damage awards total in the aggregate approximately $28.5
million. CKI is appealing the 18 adverse decisions. A significant number of
plaintiffs that had decisions rendered against them are also filing appeals,
including plaintiffs that were awarded less than all of the damages they
sought.
Of the 82
cases decided at the district court level, 60 have been appealed to the high
court, including the 18 in which an adverse decision was rendered against CKI in
the district court. Of the 17 appeals decided at high court level, CKI prevailed
in 11 cases, and in the other six plaintiffs were awarded partial damages, which
increased the aggregate damages awarded against CKI by a further $10.9 million.
CKI is appealing five of the adverse decisions to the Korean Supreme
Court.
Lehman Structured Notes
Matters
Like many other financial
institutions, certain Citigroup affiliates and subsidiaries distributed
structured notes (Notes) issued and guaranteed by Lehman entities to retail
customers outside the United States, principally in Europe and Asia. After the
relevant Lehman entities filed for bankruptcy protection in September 2008,
certain regulators commenced investigations and some purchasers of the Notes
filed civil actions or otherwise complained about the sales process. Citigroup
has resolved the vast majority of these regulatory proceedings and customer
complaints.
In Belgium, criminal charges were brought against a Citigroup
subsidiary (CBB) and three former employees. On December 1, 2010, the court
acquitted all defendants of fraud and anti-money laundering charges but
convicted all defendants under the Prospectus Act, and convicted CBB under Fair Trade Practices legislation. Both CBB and
the Public Prosecutor appealed the judgment. On May 21, 2012, the Belgian
appellate court dismissed all criminal charges against CBB. The Public
Prosecutor has appealed this decision to the Belgian Supreme Court.
Lehman Brothers Bankruptcy
Proceedings
Beginning in September
2010, Citigroup and Related Parties have been named as defendants in various
adversary proceedings in the Chapter 11 bankruptcy proceedings of Lehman
Brothers Holdings Inc. (LBHI) and the liquidation proceedings of Lehman Brothers
Inc. (LBI).
On March 18, 2011, Citigroup and Related Parties were named as
defendants in an adversary proceeding asserting claims under federal bankruptcy
and state law to recover a $1 billion deposit LBI placed with Citibank, N.A.,
to avoid a setoff taken by Citibank, N.A. against the deposit, and to recover
additional assets of LBI held by Citibank, N.A. and its affiliates. On December
13, 2012, the court entered an order approving a settlement between the parties
resolving all of LBI's claims. Under the settlement, Citibank, N.A. retained
$1.05 billion of assets to set off against its claims and received an allowed
unsecured claim in the amount of $245 million. Additional information concerning
this adversary proceeding is publicly available in court filings under the
docket numbers 11-01681 (Bankr. S.D.N.Y.) (Peck, J.) and 08-01420 (Bankr.
S.D.N.Y.) (Peck, J.).
On February 8, 2012, Citigroup and Related
Parties were named as defendants in an adversary proceeding asserting objections
to proofs of claim filed by Citibank, N.A. and its affiliates totaling
approximately $2.6 billion, and claims under federal bankruptcy and state law to
recover $2 billion deposited by LBHI with Citibank, N.A. against which Citibank,
N.A. asserts a right of setoff. Plaintiffs also seek avoidance of a $500 million
transfer and an amendment to a guarantee in favor of Citibank, N.A., and other
relief. Additional information concerning this adversary proceeding is publicly
available in court filings under the docket numbers 12-01044 (Bankr. S.D.N.Y.)
(Peck, J.) and 08-13555 (Bankr. S.D.N.Y.) (Peck, J.).
284
Terra Firma
Litigation
In December 2009, the
general partners of two related private equity funds filed a complaint in New
York state court, subsequently removed to the United States District Court for
the Southern District of New York, asserting multi-billion-dollar fraud and
other common law claims against certain Citigroup affiliates arising out of the
May 2007 auction of the music company EMI, in which Citigroup acted as advisor
to EMI and as a lender to plaintiffs' acquisition vehicle. Following a jury
trial, a verdict was returned in favor of Citigroup on November 4, 2010.
Plaintiffs have appealed the judgment with respect to certain of their claims to
the United States Court of Appeals for the Second Circuit. Argument was held on
October 4, 2012, and the matter is pending. Additional information concerning
this action is publicly available in court filings under the docket numbers 09
Civ. 10459 (S.D.N.Y.) (Rakoff, J.) and 11-0126 (2d Cir.).
Terra Securities–Related
Litigation
Certain Citigroup
affiliates have been named as defendants in an action brought by seven Norwegian
municipalities, asserting claims for fraud and negligent misrepresentation
arising out of the municipalities' purchase of fund-linked notes acquired from
the now-defunct securities firm, Terra Securities, which in turn acquired those
notes from Citigroup. Plaintiffs seek approximately $120 million in compensatory
damages, plus punitive damages. Defendants' motion for summary judgment is
pending. Additional information related to this action is publicly available in
court filings under the docket number 09 Civ. 7058 (S.D.N.Y.) (Marrero,
J.).
Tribune Company
Bankruptcy
Certain Citigroup
affiliates have been named as defendants in adversary proceedings related to the
Chapter 11 cases of Tribune Company (Tribune) filed in the United States
Bankruptcy Court for the District of Delaware, asserting claims arising out of
the approximately $11 billion leveraged buyout of Tribune in 2007. On July 23,
2012, the Bankruptcy Court confirmed the Fourth Amended Joint Plan of
Reorganization, which provides for releases of claims against Citigroup, other
than those against CGMI relating to its role as advisor to Tribune. Certain
Citigroup affiliates also have been named as defendants in actions brought by
Tribune creditors alleging state law constructive fraudulent conveyance claims.
These matters are pending in the United States District Court for the Southern
District of New York as part of a multi-district litigation. Additional
information concerning these actions is publicly available in court filings
under the docket numbers 08-13141 (Bankr. D. Del.) (Carey, J.), 11 MD 02296
(S.D.N.Y.) (Pauley, J.), and 12 MC 2296 (S.D.N.Y.) (Pauley, J.).
Interbank Offered Rates–Related
Litigation and Other
Matters
Regulatory Actions : Government
agencies in the U.S., including the Department of Justice, the Commodity Futures
Trading Commission, the SEC, and a consortium of state attorneys general, as
well as agencies in other jurisdictions, including the European Commission, the
U.K. Financial Services Authority, the Japanese Financial Services Agency
(JFSA), the Canadian Competition Bureau, the Swiss Competition Commission and
the Monetary Authority of Singapore, are conducting investigations or making
inquiries regarding submissions made by panel banks to bodies that publish
various interbank offered rates and other benchmark rates. As members of a
number of such panels, Citigroup subsidiaries have received requests for
information and documents. Citigroup is cooperating with the investigations and
inquiries and is responding to the requests.
On
December 16, 2011, the JFSA took administrative action against Citigroup Global
Markets Japan Inc. (CGMJ) for, among other things, certain communications made
by two CGMJ traders about the Euroyen Tokyo interbank offered rate (TIBOR) and
the Japanese yen London interbank offered rate (LIBOR). The JFSA issued a
business improvement order and suspended CGMJ's trading in derivatives related
to yen LIBOR and Euroyen and yen TIBOR from January 10 to January 23, 2012. On
the same day, the JFSA also took administrative action against Citibank Japan Ltd. (CJL) for conduct arising out of
CJL's retail business and also noted that the communications made by the CGMJ
traders to employees of CJL about Euroyen TIBOR had not been properly reported
to CJL's management team.
Antitrust and Other Litigation : Citigroup and Citibank, N.A., along with other U.S. Dollar (USD) LIBOR panel banks, are defendants in a multi-district litigation (MDL) proceeding before Judge Buchwald in the United States District Court for the Southern District of New York captioned IN RE LIBOR-BASED FINANCIAL INSTRUMENTS ANTITRUST LITIGATION, appearing under docket number 1:11-md-2262 (S.D.N.Y.). Judge Buchwald has appointed interim lead class counsel for, and consolidated amended complaints have been filed on behalf of, three separate putative classes of plaintiffs: (i) over-the-counter (OTC) purchasers of derivative instruments tied to USD LIBOR; (ii) purchasers of exchange-traded derivative instruments tied to USD LIBOR; and (iii) indirect OTC purchasers of U.S. debt securities. Each of these putative classes alleges that the panel bank defendants conspired to suppress USD LIBOR in violation of the Sherman Act and/or the Commodity Exchange Act, thereby causing plaintiffs to suffer losses on the instruments they purchased. Also consolidated into the MDL proceeding are individual civil actions commenced by various Charles Schwab entities alleging that the panel bank defendants conspired to suppress the USD LIBOR rates in violation of the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act (RICO), and California state law, causing the Schwab entities to suffer losses on USD LIBOR-linked financial instruments they owned. Plaintiffs in these actions seek compensatory damages and restitution for losses caused by the alleged violations, as well as treble damages under the Sherman Act. The Schwab and OTC plaintiffs also seek injunctive relief.
285
Eleven of these actions have been brought on behalf of various putative plaintiff classes, including (i) banks, savings and loans institutions and credit unions that allegedly suffered losses on loans they made at interest rates tied to USD LIBOR, (ii) holders of adjustable-rate mortgages tied to USD LIBOR, and (iii) individual and municipal purchasers of various financial instruments tied to USD LIBOR. The remaining six actions have been brought by individual plaintiffs, including an entity that allegedly purchased municipal bonds and various California counties, municipalities, and related public entities that invested in various derivatives tied to USD LIBOR. Plaintiffs in each of the 17 stayed actions allege that the panel bank defendants manipulated USD LIBOR in violation of the Sherman Act, RICO, and/or state antitrust and racketeering laws, and several plaintiffs also assert common law claims, including fraud, unjust enrichment, negligent misrepresentation, interference with economic advantage, and/or breach of the implied covenant of good faith and fair dealing. Plaintiffs seek compensatory damages and, where authorized by statute, treble damages and injunctive relief.
Additional information concerning the stayed actions is publicly available in court filings under docket numbers 1:12-cv-4205 (S.D.N.Y.) (Buchwald, J.), 1:12-cv-5723 (S.D.N.Y.) (Buchwald, J.), 1:12-cv-5822 (S.D.N.Y.) (Buchwald, J.), 1:12-cv-6056 (S.D.N.Y.) (Buchwald, J.), 1:12-cv-7461 (S.D.N.Y.) (Buchwald, J.), 2:12-cv-10903 (C.D. Calif.) (Snyder, J.), 3:12-cv-6571 (N.D. Calif.) (Conti, J.), 3:13-cv-106 (N.D. Calif.) (Beeler, J.), 4:13-cv-108 (N.D. Calif.) (Ryu, J.), 3:13-cv-109 (N.D. Calif.) (Laporte, J.), 5:13-cv-62 (C.D. Calif.) (Phillips, J.), 3:13-cv-48 (S.D. Calif.) (Huff, J.), 1:13-cv-346 (S.D.N.Y.) (Buchwald, J.), 1:13-cv-407 (S.D.N.Y.) (Buchwald, J.), 5:13-cv-122 (C.D. Calif.) (Bernal, J.), 1:13-cv-981 (S.D.N.Y.) (Buchwald, J.), and 1:13-cv-1016 (S.D.N.Y.) (Buchwald, J.).
In addition, on November 27, 2012, an action captioned MARAGOS V. BANK OF AMERICA CORP. ET AL. was filed on behalf of the County of Nassau against various USD LIBOR panel banks, including Citibank, N.A., and the other defendants with whom the plaintiff had entered into interest rate swap transactions. The action was commenced in state court and subsequently removed to the United States District Court for the Eastern District of New York. The plaintiff asserts claims for fraud and deceptive trade practices under New York law against the panel bank defendants based on allegations that the panel banks colluded to artificially suppress USD LIBOR, thereby lowering the payments the plaintiff received in connection with various interest rate swap transactions. The plaintiff seeks compensatory damages and treble damages. The defendants have sought consolidation of this action with the MDL proceeding. Additional information concerning this action is publicly available in court filings under docket number 2:12-cv-6294 (E.D.N.Y.) (Spatt, J.).
Separately, on April 30, 2012, an action was filed in the United States District Court for the Southern District of New York on behalf of a putative class of persons and entities who transacted in exchange-traded Euroyen futures and option contracts between June 2006 and September 2010. This action is captioned LAYDON V. MIZUHO BANK LTD. ET AL. The plaintiff filed an amended complaint on November 30, 2012, naming as defendants banks that are or were members of the panels making submissions used in the calculation of Japanese yen LIBOR and TIBOR, and certain affiliates of some of those banks, including Citibank, N.A., Citigroup, CJL and CGMJ. The complaint alleges that the plaintiffs were injured as a result of purported manipulation of those reference interest rates, and asserts claims arising under the Commodity Exchange Act and the Sherman Act and for unjust enrichment. Plaintiffs seek compensatory damages, treble damages under the Sherman Act, and injunctive relief. Additional information concerning this action is publicly available in court filings under the docket number 12-cv-3419 (S.D.N.Y.) (Daniels, J.).
Beginning in 2005, several putative class actions were filed against Citigroup and Related Parties, together with Visa, MasterCard and other banks and their affiliates, in various federal district courts and consolidated with other related cases in a multi-district litigation proceeding before Judge Gleeson in the United States District Court for the Eastern District of New York. This proceeding is captioned IN RE PAYMENT CARD INTERCHANGE FEE AND MERCHANT DISCOUNT ANTITRUST LITIGATION.
The plaintiffs, merchants that accept Visa- and MasterCard-branded payment cards as well as membership associations that claim to represent certain groups of merchants, allege, among other things, that defendants have engaged in conspiracies to set the price of interchange and merchant discount fees on credit and debit card transactions and to restrain trade through various Visa and MasterCard rules governing merchant conduct, all in violation of Section 1 of the Sherman Act and certain California statutes. Plaintiffs seek, on behalf of classes of U.S. merchants, treble damages, including all interchange fees paid to all Visa and MasterCard members with respect to Visa and MasterCard transactions in the U.S. since at least January 1, 2004, as well as injunctive relief. Supplemental complaints have also been filed against defendants in the putative class actions alleging that Visa's and MasterCard's respective initial public offerings were anticompetitive and violated Section 7 of the Clayton Act, and that MasterCard's initial public offering constituted a fraudulent conveyance.
On July 13, 2012, all parties to the putative class actions, including Citigroup and Related Parties, entered into a Memorandum of Understanding (MOU) setting forth the material terms of a class settlement. The class settlement contemplated by the MOU provides for, among other things, a total payment by all defendants to the class of $6.05 billion; a rebate to merchants participating in the damages class settlement of 10 basis points on interchange collected for a period of eight months by the Visa and MasterCard networks; changes to certain network rules that would permit merchants to surcharge some payment card transactions subject to certain limitations and conditions, including disclosure to consumers at the point of sale; and broad releases in favor of the defendants. Subsequently, all defendants and certain of the plaintiffs who had entered into the MOU executed a settlement agreement consistent with the terms of the MOU.
286
On November 27, 2012, the court entered an
order granting preliminary approval of the proposed class settlements and
provisionally certified two classes for settlement purposes only. The court
scheduled a final approval hearing for September 12, 2013. Several large
merchants and associations have stated publicly that they intend to object to or
opt out of the settlement, and have appealed from the court's preliminary
approval of the proposed class settlements.
Visa and
MasterCard have also entered into a settlement agreement with merchants that
filed individual, non-class actions. While Citigroup and Related Parties are not
parties to the individual merchant non-class settlement agreement, they are
contributing to that settlement, and the agreement provides for a release of
claims against Citigroup and Related Parties.
Additional
information concerning these consolidated actions is publicly available in court
filings under the docket number MDL 05-1720 (E.D.N.Y.) (Gleeson,
J.).
Regulatory Review of Consumer
"Add-On" Products
Certain of Citi's
consumer businesses, including its Citi-branded and retail services cards
businesses, offer or have in the past offered or participated in the marketing,
distribution, or servicing of products, such as payment protection and identity
monitoring, that are ancillary to the provision of credit to the consumer
(add-on products). These add-on products have been the subject of enforcement
actions against other institutions by regulators, including the Consumer
Financial Protection Bureau (CFPB), the OCC, and the FDIC, that have resulted in
orders to pay restitution to customers and penalties in substantial amounts.
Certain state attorneys general also have filed industry-wide suits under state
consumer protection statutes, alleging deceptive marketing practices in
connection with the sale of payment protection products and demanding
restitution and statutory damages for instate customers. In light of the current
regulatory focus on add-on products and the actions regulators have taken in
relation to other credit card issuers, one or more regulators may order that
Citi pay restitution to customers and/or impose penalties or other relief
arising from Citi's marketing, distribution, or servicing of add-on
products.
Parmalat Litigation and Related
Matters
On July 29, 2004, Dr. Enrico
Bondi, the Extraordinary Commissioner appointed under Italian law to oversee the
administration of various Parmalat companies, filed a complaint in New Jersey
state court against Citigroup and Related Parties alleging, among other things,
that the defendants "facilitated" a number of frauds by Parmalat insiders. On
October 20, 2008, following trial, a jury rendered a verdict in Citigroup's
favor on Parmalat's claims and in favor of Citibank, N.A. on three
counterclaims. Parmalat has exhausted all appeals, and the judgment is now final. Additional
information concerning this matter is publicly available in court filings under
docket number A-2654-08T2 (N.J. Sup. Ct.).
Prosecutors in Parma and Milan, Italy, have commenced criminal proceedings against certain current and former Citigroup employees (along with numerous other investment banks and certain of their current and former employees, as well as former Parmalat officers and accountants). In the event of an adverse judgment against the individuals in question, the authorities could seek administrative remedies against Citigroup. On April 18, 2011, the Milan criminal court acquitted the sole Citigroup defendant of market-rigging charges. The Milan prosecutors have appealed part of that judgment and seek administrative remedies against Citigroup, which may include disgorgement of 70 million Euro and a fine of 900,000 Euro. Additionally, the Parmalat administrator filed a purported civil complaint against Citigroup in the context of the Parma criminal proceedings, which seeks 14 billion Euro in damages. In January 2011, certain Parmalat institutional investors filed a civil complaint seeking damages of approximately 130 million Euro against Citigroup and other financial institutions.
Allied Irish Bank
Litigation
In 2003, Allied Irish Bank
(AIB) filed a complaint in the United States District Court for the Southern
District of New York seeking to hold Citibank, N.A. and Bank of America, N.A.,
former prime brokers for AIB's subsidiary Allfirst Bank (Allfirst), liable for
losses incurred by Allfirst as a result of fraudulent and fictitious foreign
currency trades entered into by one of Allfirst's traders. AIB seeks
compensatory damages of approximately $500 million, plus punitive damages, from
Citibank, N.A. and Bank of America, N.A. collectively. In 2006, the court
granted in part and denied in part defendants' motion to dismiss. In 2009, AIB
filed an amended complaint. In 2012, the parties completed discovery and the
court granted Citibank, N.A.'s motion to strike AIB's demand for a jury trial.
Citibank, N.A. also filed a motion for summary judgment, which is pending. AIB
has announced a settlement with Bank of America, N.A. for an undisclosed amount,
leaving Citibank, N.A. as the sole remaining defendant. Additional information
concerning this matter is publicly available in court filings under docket
number 03 Civ. 3748 (S.D.N.Y.) (Batts, J.).
Settlement
Payments
Payments required in settlement
agreements described above have been made or are covered by existing litigation
accruals.
* * *
Additional matters asserting claims similar to those described above may be filed in the future.
287
29. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2012 | 2011 | ||||||||||||||||||||||
In millions of dollars, except per share amounts | Fourth | Third | Second | First | Fourth | Third | Second | First | |||||||||||||||
Revenues, net of interest expense | $ | 18,174 | $ | 13,951 | $ | 18,642 | $ | 19,406 | $ | 17,174 | $ | 20,831 | $ | 20,622 | $ | 19,726 | |||||||
Operating expenses | 13,845 | 12,220 | 12,134 | 12,319 | 13,211 | 12,460 | 12,936 | 12,326 | |||||||||||||||
Provisions for credit losses and for benefits and claims | 3,199 | 2,695 | 2,806 | 3,019 | 2,874 | 3,351 | 3,387 | 3,184 | |||||||||||||||
Income from continuing operations before income taxes | $ | 1,130 | $ | (964 | ) | $ | 3,702 | $ | 4,068 | $ | 1,089 | $ | 5,020 | $ | 4,299 | $ | 4,216 | ||||||
Income taxes (benefits) | (206 | ) | (1,488 | ) | 715 | 1,006 | 91 | 1,278 | 967 | 1,185 | |||||||||||||
Income from continuing operations | $ | 1,336 | $ | 524 | $ | 2,987 | $ | 3,062 | $ | 998 | $ | 3,742 | $ | 3,332 | $ | 3,031 | |||||||
Income (loss) from discontinued operations, net of taxes | (112 | ) | (31 | ) | (1 | ) | (5 | ) | - | 1 | 71 | 40 | |||||||||||
Net income before attribution of noncontrolling interests | $ | 1,224 | $ | 493 | $ | 2,986 | $ | 3,057 | $ | 998 | $ | 3,743 | $ | 3,403 | $ | 3,071 | |||||||
Noncontrolling interests | 28 | 25 | 40 | 126 | 42 | (28 | ) | 62 | 72 | ||||||||||||||
Citigroup's net income | $ | 1,196 | $ | 468 | $ | 2,946 | $ | 2,931 | $ | 956 | $ | 3,771 | $ | 3,341 | $ | 2,999 | |||||||
Earnings per share (1)(2) | |||||||||||||||||||||||
Basic | |||||||||||||||||||||||
Income from continuing operations | $ | 0.43 | $ | 0.17 | $ | 0.98 | $ | 0.98 | $ | 0.32 | $ | 1.27 | $ | 1.10 | $ | 1.01 | |||||||
Net income | 0.39 | 0.15 | 0.98 | 0.98 | 0.32 | 1.27 | 1.12 | 1.02 | |||||||||||||||
Diluted | |||||||||||||||||||||||
Income from continuing operations | 0.42 | 0.16 | 0.95 | 0.96 | 0.31 | 1.23 | 1.07 | 0.97 | |||||||||||||||
Net income | 0.38 | 0.15 | 0.95 | 0.95 | 0.31 | 1.23 | 1.09 | 0.99 | |||||||||||||||
Common stock price per share (2) | |||||||||||||||||||||||
High | $ | 40.17 | $ | 34.79 | $ | 36.87 | $ | 38.08 | $ | 34.17 | $ | 42.88 | $ | 45.90 | $ | 51.30 | |||||||
Low | 32.75 | 25.24 | 24.82 | 28.17 | 23.11 | 23.96 | 36.81 | 43.90 | |||||||||||||||
Close | 39.56 | 32.72 | 27.41 | 36.55 | 26.31 | 25.62 | 41.64 | 44.20 | |||||||||||||||
Dividends per share of common stock | 0.01 | 0.01 | 0.01 | 0.01 | 0.01 | 0.01 | 0.01 | - |
This Note to the Consolidated Financial Statements is unaudited due to the Company's individual quarterly results not being subject to an audit.
(1) | Due to averaging of shares, quarterly earnings per share may not add up to the totals reported for the full year. | |
(2) | All per-share amounts for all periods reflect Citigroup's 1-for-10 reverse stock split, which was effective May 6, 2011. |
[End of Consolidated Financial Statements and Notes to Consolidated Financial Statements]
288
FINANCIAL DATA SUPPLEMENT (Unaudited)
RATIOS
2012 | 2011 | 2010 | ||||
Citigroup's net income to average assets | 0.39 | % | 0.57 | % | 0.53 | % |
Return on average common stockholders' equity (1) | 4.1 | 6.3 | 6.8 | |||
Return on average total stockholders' equity (2) | 4.1 | 6.3 | 6.8 | |||
Total average equity to average assets (3) | 9.7 | 8.9 | 7.8 | |||
Dividends payout ratio (4) | 1.6 | 0.8 | NM |
(1) | Based on Citigroup's net income less preferred stock dividends as a percentage of average common stockholders' equity. | |
(2) | Based on Citigroup's net income as a percentage of average total Citigroup stockholders' equity. | |
(3) | Based on average Citigroup stockholders' equity as a percentage of average assets. | |
(4) | Dividends declared per common share as a percentage of net income per diluted share. | |
NM | Not Meaningful |
AVERAGE DEPOSIT LIABILITIES IN OFFICES OUTSIDE THE U.S. (1)
2012 | 2011 | 2010 | ||||||||||||
Average | Average | Average | Average | Average | Average | |||||||||
In millions of dollars at year end | interest rate | balance | interest rate | balance | interest rate | balance | ||||||||
Banks | 0.71 | % | $ | 71,624 | 0.78 | % | $ | 50,831 | 0.83 | % | $ | 63,637 | ||
Other demand deposits | 0.84 | 217,806 | 0.91 | 248,925 | 0.75 | 210,465 | ||||||||
Other time and savings deposits (2) | 1.28 | 259,753 | 1.52 | 245,208 | 1.54 | 258,999 | ||||||||
Total | 1.03 | % | $ | 549,183 | 1.17 | % | $ | 544,964 | 1.14 | % | $ | 533,101 |
(1) | Interest rates and amounts include the effects of risk management activities and also reflect the impact of the local interest rates prevailing in certain countries. | |
(2) | Primarily consists of certificates of deposit and other time deposits in denominations of $100,000 or more. |
MATURITY PROFILE OF TIME
DEPOSITS
($100,000 OR MORE) IN U.S. OFFICES
In millions of dollars | Under 3 | Over 3 to 6 | Over 6 to 12 | Over 12 | |||||||
at December 31, 2012 | months | months | months | months | |||||||
Certificates of deposit | $ | 2,991 | $ | 1,580 | $ | 1,156 | $ | 2,201 | |||
Other time deposits | 208 | 4 | 230 | 1,843 |
289
SUPERVISION, REGULATION AND OTHER
Citigroup is subject to regulation under U.S. federal and state laws, as well as applicable laws in the other jurisdictions in which it does business.
General
As a registered bank holding company and financial holding
company, Citigroup is regulated and supervised by the Federal Reserve Board.
Citigroup's nationally chartered subsidiary banks, including Citibank, N.A., are
regulated and supervised by the Office of the Comptroller of the Currency (OCC)
and its state-chartered depository institution by the relevant state's banking
department and the Federal Deposit Insurance Corporation (FDIC). The FDIC also
has back-up enforcement authority for banking subsidiaries whose deposits it
insures. Overseas branches of Citibank, N.A. are regulated and supervised by the
Federal Reserve Board and OCC and overseas subsidiary banks by the Federal
Reserve Board. Such overseas branches and subsidiary banks are also regulated
and supervised by regulatory authorities in the host
countries.
A
U.S. financial holding company and the companies under its control are permitted
to engage in a broader range of activities in the U.S. and abroad than permitted
for bank holding companies and their subsidiaries. Unless otherwise limited by
the Federal Reserve Board, financial holding companies generally can engage,
directly or indirectly in the U.S. and abroad, in financial activities, either
de novo or by acquisition, by providing after-the-fact notice to the Federal
Reserve Board. These financial activities include underwriting and dealing in
securities, insurance underwriting and brokerage and making investments in
non-financial companies for a limited period of time, as long as Citi does not
manage the non-financial company's day-to-day activities, and its banking
subsidiaries engage only in permitted cross-marketing with the non-financial
company. If Citigroup ceases to qualify as a financial holding company, it could
be barred from new financial activities or acquisitions, and have to discontinue
the broader range of activities permitted to financial holding
companies.
Citi is permitted to acquire U.S. depository institutions,
including out-of-state banks, subject to certain restrictions and the prior
approval of federal banking regulators. In addition, intrastate bank mergers are
permitted and banks in states that do not prohibit out-of-state mergers may
merge. A national bank can generally also establish a new branch in any state
(to the same extent as banks organized in the subject state) and state banks may
establish a branch in another state if permitted by the other state. However,
all bank holding companies, including Citigroup, must obtain the prior approval
of the Federal Reserve Board before acquiring more than 5% of any class of
voting stock of a U.S. depository institution or bank holding company. The
Federal Reserve Board must also approve certain additional capital contributions
to an existing non-U.S. investment and certain acquisitions by Citigroup of an
interest in a non-U.S. company, including in a foreign bank, as well as the
establishment by Citibank, N.A. of foreign branches in certain
circumstances.
For more information on U.S. and foreign regulation affecting Citigroup and its subsidiaries, see "Risk Factors-Regulatory Risks" above.
Changes in
Regulation
Proposals to change the laws
and regulations affecting the banking and financial services industries are
frequently introduced in Congress, before regulatory bodies and abroad that may
affect the operating environment of Citigroup and its subsidiaries in
substantial and unpredictable ways. This has been particularly true as a result
of the financial crisis. Citigroup cannot determine whether any such proposals
will be enacted and, if enacted, the ultimate effect that any such potential
legislation or implementing regulations would have upon the financial condition
or results of operations of Citigroup or its subsidiaries. For additional
information regarding recently enacted and proposed legislative and regulatory
initiatives, including significant provisions of the Dodd-Frank Act that have
not been fully implemented by the U.S. banking agencies, see "Risk
Factors-Regulatory Risks" above.
Other Bank and Bank Holding
Company Regulation
Citigroup and its
banking subsidiaries are subject to other regulatory limitations, including
requirements for banks to maintain reserves against deposits, requirements as to
risk-based capital and leverage (see "Capital Resources and Liquidity-Capital
Resources" above and Note 20 to the Consolidated Financial Statements),
restrictions on the types and amounts of loans that may be made and the interest
that may be charged, and limitations on investments that can be made and
services that can be offered. The Federal Reserve Board may also expect
Citigroup to commit resources to its subsidiary banks in certain circumstances.
Citigroup is also subject to anti-money laundering and financial transparency
laws, including standards for verifying client identification at account opening
and obligations to monitor client transactions and report suspicious
activities.
Securities and Commodities
Regulation
Citigroup conducts securities
underwriting, brokerage and dealing activities in the U.S. through Citigroup
Global Markets Inc. (CGMI), its primary broker-dealer, and other broker-dealer
subsidiaries, which are subject to regulations of the SEC, the Financial
Industry Regulatory Authority and certain exchanges, among others. Citigroup
conducts similar securities activities outside the U.S., subject to local
requirements, through various subsidiaries and affiliates, principally Citigroup
Global Markets Limited in London, which is regulated principally by the U.K.
Financial Services Authority, and Citigroup Global Markets Japan Inc. in Tokyo,
which is regulated principally by the Financial Services Agency of
Japan.
290
Citigroup also has subsidiaries that are members of futures exchanges and are registered accordingly. In the U.S., CGMI is a member of the principal U.S. futures exchanges, and Citigroup has subsidiaries that are registered as futures commission merchants and commodity pool operators with the Commodity Futures Trading Commission (CTFC). On December 31, 2012, Citibank, N.A., CGMI, and Citigroup Energy Inc., registered as swap dealers with the CFTC. CGMI is also subject to Rule 15c3-1 of the SEC and Rule 1.17 of the CTFC, which specify uniform minimum net capital requirements. Compliance with these rules could limit those operations of CGMI that require the intensive use of capital, such as underwriting and trading activities and the financing of customer account balances, and also limits the ability of broker-dealers to transfer large amounts of capital to parent companies and other affiliates. See also "Capital Resources-Broker-Dealer Subsidiaries" and Note 20 to the Consolidated Financial Statements for a further discussion of capital considerations of Citigroup's non-banking subsidiaries.
Dividends
Citigroup is currently subject to restrictions on its ability
to pay common stock dividends. See "Risk Factors-Market and Economic Risks"
above. For information on the ability of Citigroup's subsidiary depository
institutions and non-bank subsidiaries to pay dividends, see "Capital
Resources-Capital Resources of Citigroup's Subsidiary U.S. Depository
Institutions" and Note 20 to the Consolidated Financial Statements
above.
Transactions with
Affiliates
The types and amounts of
transactions between Citigroup's U.S. subsidiary depository institutions and
their non-bank affiliates are regulated by the Federal Reserve Board, and are
generally required to be on arm's-length terms. See also "Capital Resources and
Liquidity-Funding and Liquidity" above.
Insolvency of an Insured U.S.
Subsidiary Depository Institution
If the
FDIC is appointed the conservator or receiver of an FDIC-insured U.S. subsidiary
depository institution such as Citibank, N.A., upon its insolvency or certain
other events, the FDIC has the ability to transfer any of the depository
institution's assets and liabilities to a new obligor without the approval of
the depository institution's creditors, enforce the terms of the depository
institution's contracts pursuant to their terms or repudiate or disaffirm
contracts or leases to which the depository institution is a
party.
Additionally, the claims of holders
of deposit liabilities and certain claims for administrative expenses against an
insured depository institution would be afforded priority over other general
unsecured claims against such an institution, including claims of debt holders
of the institution and, under current interpretation, depositors in non-U.S.
offices, in the liquidation or other resolution of such an institution by any
receiver. As a result, such persons would be treated differently from and could
receive, if anything, substantially less than the depositors in U.S. offices of
the depository institution.
An
FDIC-insured financial institution that is affiliated with a failed FDIC-insured
institution may have to indemnify the FDIC for losses resulting from the
insolvency of the failed institution. Such an FDIC indemnity claim is generally
superior in right of payment to claims of the holding company and its affiliates
and depositors against such depository institution.
Privacy and Data
Security
Citigroup is subject to many
U.S., state and international laws and regulations relating to policies and
procedures designed to protect the non-public information of its consumers.
Citigroup must periodically disclose its privacy policy to consumers and must
permit consumers to opt out of Citigroup's ability to use such information to
market to affiliates and third-party non-affiliates under certain circumstances.
See also "Risk Factors-Business and Operational Risks" above.
DISCLOSURE PURSUANT TO SECTION 219
OF THE IRAN THREAT REDUCTION AND SYRIA HUMAN
RIGHTS ACT
Citi, through its wholly owned banking subsidiary, Citibank,
N.A., has branch operations in the United Arab Emirates (Citibank UAE), Bahrain
(Citibank Bahrain), Lebanon (Citibank Lebanon) and Venezuela (Citibank
Venezuela). These branches participate in the local
government-run clearing and settlement exchange networks in each country for
transactions involving automated teller machines (ATM), point-of-sale (POS)
debit card transactions and/or the clearing and settlement of domestic checks.
In addition, as required by the local law and the applicable operating rules for
these exchange networks, all network participants, including these
Citibank branches, must process transactions in which funds are drawn from, or
deposited into, client accounts of other network
participants.
291
The Office of
Foreign Assets Control (OFAC) has been aware of the requirement for financial
institutions operating within a particular country to participate in these local
government-run clearing and exchange networks (including the participation of
these Citi branches in such networks), despite the fact that certain banks that
have been designated for sanctions by OFAC based on their ties to Iran and
involvement in certain activities (OFAC Designated Banks) also participate in
these networks.
Beginning in 2007, Citi, on behalf of its Citibank UAE branches, engaged
with OFAC on a series of license applications. In October 2011, OFAC granted a
license providing relief for check-clearing transactions involving Bank Melli
and Bank Saderat, two OFAC Designated Banks participating in the UAE network,
and in October 2012, OFAC renewed the original license and expanded its scope to
encompass ATM and POS transactions (UAE License). Citi also engaged with OFAC
and filed license applications between 2007 and 2011 on behalf of its Citibank
Bahrain, Citibank Lebanon and Citibank Venezuela branches; these applications
are pending with OFAC.
Prior
to receiving the UAE License, during 2012, Citibank
UAE processed approximately 5,350 ATM and POS transactions (or approximately 0.3% of all ATM
and POS transactions for Citibank UAE during this time period) involving Bank
Melli and Bank Saderat. These transactions resulted in approximately $2,200.00
gross revenues and approximately $1,100.00 net income to Citi.
During 2012, Citibank Bahrain processed approximately 8,800 domestic
check and ATM transactions (or approximately 2.1% of all domestic check and ATM
transactions for Citibank Bahrain during 2012) involving Future Bank, an OFAC
Designated Bank. The domestic check transactions resulted in no revenues or net
income to Citi. The ATM transactions resulted in approximately $250.00 gross
revenues and approximately $125.00 net income to Citi.
During 2012, Citibank Lebanon processed approximately 180 domestic
check transactions (which in aggregate, equaled approximately $890,000.00)
involving Bank Saderat, an OFAC Designated Bank. The transactions resulted
in less than $10.00 in gross revenue and net income to Citi.
During 2012, Citibank Venezuela processed
a total of four domestic check transactions (which in aggregate, equaled
approximately $1,000.00) involving Banco Internacional de Desarrollo, an OFAC
Designated Bank. The transactions resulted in no revenues or net income to
Citi.
In addition to the exchange network transactions described above, Citi, through its subsidiary in Germany (Citi Germany AG), processed one wire transfer in early 2012 that involved Europaisch Iranische Handlesbank (EIH), an OFAC Designated Bank. The transfer was originated by the Central Bank of Germany (Bundesbank) from an EIH account in favor of a customer of Citi Germany AG. The transfer was licensed by the Bundesbank, which directed that the transfer be made. The transfer was also permissible under U.S. law pursuant to an exemption for informational materials under OFAC's Iran sanctions program and involved a German subsidiary, which was not subject to the Iran sanctions program at the time of the transfer. This transaction did not generate any revenue for Citi.
Further, in 2011, a German court ordered the London branch of Citibank, N.A. to transfer a payment, previously blocked by Citi, to Bank Melli through the Bundesbank. The transfer was permissible under EU law and did not require regulatory licenses in either England or Germany, but required OFAC authorization, which was granted to Citi in 2011. The blocked funds were transferred in 2011 pursuant to the OFAC license, but a small amount of accrued interest related to the 2011 payment was made during 2012, pursuant to the same OFAC license. This transaction did not generate any revenue for Citi.
CUSTOMERS
In Citigroup's judgment, no material part of Citigroup's
business depends upon a single customer or group of customers, the loss of which
would have a materially adverse effect on Citi, and no one customer or group of
affiliated customers accounts for at least 10% of Citigroup's consolidated
revenues.
COMPETITION
The financial services industry, including each of Citigroup's
businesses, is highly competitive. Citigroup's competitors include a variety of
other financial services and advisory companies such as banks, thrifts, credit
unions, credit card issuers, mortgage banking companies, trust companies,
investment banking companies, brokerage firms, investment advisory companies,
hedge funds, private equity funds, securities processing companies, mutual fund
companies, insurance companies, automobile financing companies, and
internet-based financial services companies.
Citigroup competes for clients and capital (including deposits and
funding in the short- and long-term debt markets) with some of these competitors
globally and with others on a regional or product basis. Citigroup's competitive
position depends on many factors, including the value of Citi's brand name,
reputation, the types of clients and geographies served, the quality, range,
performance, innovation and pricing of products and services, the effectiveness
of and access to distribution channels, technology advances, customer service
and convenience, effectiveness of transaction execution, interest rates and
lending limits, regulatory constraints and the effectiveness of sales promotion
efforts. Citigroup's ability to compete effectively also depends upon its
ability to attract new employees and retain and motivate existing employees,
while managing compensation and other costs. See "Risk Factors-Business and
Operational Risks" above.
292
In recent years, Citigroup has experienced
intense price competition in some of its businesses. For example, the increased
pressure on trading commissions from growing direct access to automated,
electronic markets may continue to impact Securities and Banking , and
technological advances that enable more companies to provide funds transfers may
diminish the importance of Global Consumer
Banking's role as a financial
intermediary.
Over time, there has been substantial consolidation among companies in
certain sectors of the financial services industry. This consolidation
accelerated in recent years as a result of the financial crisis, through
mergers, acquisitions and bankruptcies, and may produce larger, better
capitalized and more geographically diverse competitors able to offer a wider
array of products and services at more competitive prices around the
world.
PROPERTIES
Citigroup's principal executive offices are located at 399
Park Avenue in New York City. Citigroup, and certain of its subsidiaries, is the
largest tenant, and the offices are the subject of a lease. Citigroup also has
additional office space at 601 Lexington Avenue in New York City, under a
long-term lease. Citibank, N.A. leases one building and owns a commercial
condominium unit in a separate building in Long Island City, New York, each of
which are fully occupied by Citigroup and certain of its subsidiaries. Citigroup
has a long-term lease on a building at 111 Wall Street in New York City and is
the largest tenant.
Citigroup Global Markets Holdings Inc. leases its principal offices at
388 Greenwich Street in New York City, and also leases the neighboring building
at 390 Greenwich Street, both of which are fully occupied by Citigroup and
certain of its subsidiaries.
Citigroup's principal executive offices in EMEA are located at 25 and 33 Canada
Square in London's Canary Wharf, with both buildings subject to long-term
leases. Citigroup is the largest tenant of 25 Canada Square and the sole tenant
of 33 Canada Square.
Citigroup's principal executive offices in Latin America , which also serve as the headquarters of Banamex, are located in Mexico City, in a two-tower complex with six floors each, totaling 257,000 rentable square feet.
Citigroup also owns or leases over 72.7 million square feet of real estate in 100 countries, comprised of 12,074 properties.
Citigroup continues to evaluate its current and projected space requirements and may determine from time to time that certain of its premises and facilities are no longer necessary for its operations. There is no assurance that Citigroup will be able to dispose of any such excess premises or that it will not incur charges in connection with such dispositions. Such disposition costs may be material to Citigroup's operating results in a given period.
Citi has developed programs for its properties to achieve long-term energy efficiency objectives and reduce its greenhouse gas emissions to lessen its impact on climate change. Citi has also integrated a climate change adaptation strategy into its operational strategy, which includes redundancy measures, to address risks from climate change and weather influenced events. These activities could help to mitigate, but will not eliminate, Citi's potential risk from future climate change regulatory requirements or Citi's risk of increased costs from extreme weather events.
For further information concerning leases, see Note 27 to the Consolidated Financial Statements.
LEGAL
PROCEEDINGS
For a discussion of
Citigroup's litigation and related matters, see Note 28 to the Consolidated
Financial Statements.
293
UNREGISTERED SALES OF EQUITY, PURCHASES OF EQUITY SECURITIES, DIVIDENDS
Unregistered Sales of Equity
Securities
None.
Share
Repurchases
Under its currently existing
repurchase program, Citigroup may buy back common shares in the market or
otherwise from time to time. This program may be used for many purposes,
including offsetting dilution from stock-based compensation programs. Any
repurchase program is subject to regulatory approval (see "Risk Factors-Business
and Operational Risks" above). The following table summarizes Citigroup's share
repurchases during 2012:
Approximate dollar | |||||||||
value of shares that | |||||||||
Average | may yet be purchased | ||||||||
Total shares | price paid | under the plan or | |||||||
In millions, except per share amounts | purchased | (1) | per share | programs | |||||
First quarter 2012 | |||||||||
Open market repurchases (1) | 0.1 | $ | 36.58 | $ | 6,726 | ||||
Employee transactions (2) | 1.4 | 29.26 | N/A | ||||||
Total first quarter 2012 | 1.5 | $ | 29.85 | $ | 6,726 | ||||
Second quarter 2012 | |||||||||
Open market repurchases (1) | - | $ | - | $ | 6,726 | ||||
Employee transactions (2) | 0.1 | 32.62 | N/A | ||||||
Total second quarter 2012 | 0.1 | $ | 32.62 | $ | 6,726 | ||||
Third quarter 2012 | |||||||||
Open market repurchases (1) | - | $ | - | $ | 6,726 | ||||
Employee transactions (2) | - | - | N/A | ||||||
Total third quarter 2012 | - | - | $ | 6,726 | |||||
October 2012 | |||||||||
Open market repurchases (1) | - | $ | - | $ | 6,726 | ||||
Employee transactions (2) | - | - | N/A | ||||||
November 2012 | |||||||||
Open market repurchases (1) | - | - | 6,726 | ||||||
Employee transactions (2) | - | - | N/A | ||||||
December 2012 | |||||||||
Open market repurchases (1) | - | - | 6,726 | ||||||
Employee transactions (2) | 0.1 | 36.03 | N/A | ||||||
Fourth quarter 2012 | |||||||||
Open market repurchases (1) | - | $ | - | $ | 6,726 | ||||
Employee transactions (2) | 0.1 | 36.03 | N/A | ||||||
Total fourth quarter 2012 | 0.1 | $ | 36.03 | $ | 6,726 | ||||
Year-to-date 2012 | |||||||||
Open market repurchases (1) | 0.1 | $ | 36.58 | $ | 6,726 | ||||
Employee transactions (2) | 1.6 | 29.68 | N/A | ||||||
Total year-to-date 2012 | 1.7 | $ | 30.17 | $ | 6,726 |
(1) | Open market repurchases are transacted under an existing share repurchase plan, which such repurchase plan is subject to regulatory approval. Since 2000, the Board of Directors has authorized the repurchase of shares in the aggregate amount of $40 billion under Citi's existing share repurchase plan. |
(2) | Consists of shares added to treasury stock related to activity on employee stock option program exercises, where the employee delivers existing shares to cover the option exercise, or under Citi's employee restricted or deferred stock program, where shares are withheld to satisfy tax requirements. |
N/A | Not applicable |
For so long as the FDIC continues to hold any Citigroup trust preferred securities acquired pursuant to the exchange offers consummated in 2009, Citigroup is, subject to certain exemptions, generally restricted from redeeming or repurchasing any of its equity or trust preferred securities, which restriction may be waived.
294
Dividends
For a summary of the cash dividends paid on Citi's outstanding
common stock during 2011 and 2012, see Note 29 to the Consolidated Financial
Statements. For as long as the FDIC continues to hold any Citigroup trust
preferred securities acquired pursuant to the exchange offers consummated in
2009, Citigroup is generally restricted from paying regular cash dividends
in excess of $0.01 per share of common stock per quarter, which restriction may
be waived. Further, any dividend on Citi's outstanding common stock would need
to be made in compliance with Citi's obligations to any remaining outstanding
Citigroup preferred stock.
PERFORMANCE GRAPH
Comparison of Five-Year Cumulative
Total Return
The following graph and table
compare the cumulative total return on Citigroup's common stock with the
cumulative total return of the S&P 500 Index and the S&P Financial Index
over the five-year period through December 31, 2012. The graph and table assume
that $100 was invested on December 31, 2007 in Citigroup's common stock, the
S&P 500 Index and the S&P Financial Index, and that all dividends were
reinvested.
Comparison of Five-Year Cumulative Total Return |
DATE | CITI | S&P 500 | S&P FINANCIALS |
31-Dec-2007 | 100.00 | 100.00 | 100.00 |
31-Dec-2008 | 24.02 | 63.00 | 44.68 |
31-Dec-2009 | 11.88 | 79.67 | 52.38 |
31-Dec-2010 | 16.98 | 91.67 | 58.73 |
30-Dec-2011 | 9.45 | 93.61 | 48.71 |
31-Dec-2012 | 14.23 | 108.59 | 62.75 |
295
CORPORATE INFORMATION
CITIGROUP EXECUTIVE
OFFICERS
Citigroup's executive officers as
of March 1, 2013 are:
Name | Age | Position and office held | ||
Francisco Aristeguieta | 47 | CEO, Latin America | ||
Stephen Bird | 46 | CEO, Asia Pacific | ||
Don Callahan | 56 | Head of Operations and Technology; | ||
Chief Operations and Technology Officer | ||||
Michael L. Corbat | 52 | Chief Executive Officer | ||
James C. Cowles | 57 | CEO, Europe, Middle East and Africa | ||
James A. Forese | 50 | Co-President; | ||
CEO, Institutional Clients Group | ||||
John C. Gerspach | 59 | Chief Financial Officer | ||
Brian Leach | 53 | Head of Franchise Risk and Strategy | ||
Paul McKinnon | 62 | Head of Human Resources | ||
Eugene M. McQuade | 64 | CEO, Citibank, N.A. | ||
Manuel Medina-Mora | 62 | Co-President; | ||
CEO, Global Consumer Banking; | ||||
Chairman, Mexico | ||||
William J. Mills | 57 | CEO, North America | ||
Jeffrey R. Walsh | 55 | Controller and Chief Accounting Officer | ||
Rohan Weerasinghe | 62 | General Counsel and Corporate Secretary |
Each executive officer has held executive or management positions with Citigroup for at least five years, except that:
Mr. Leach became Citi's Head of Franchise Risk and Strategy in January 2013. Prior to that, Mr. Leach was Chief Risk Officer beginning March 2008. Previously, Mr. Leach was a founder and the co-COO of Old Lane, LP, a multi-strategy hedge fund and private equity fund manager that was acquired by Citi in 2007. Earlier, he had worked for his entire financial career at Morgan Stanley, finishing as Risk Manager of the Institutional Securities Business. Code of Conduct, Code of
Ethics
Citigroup has a Code of Conduct
that maintains its commitment to the highest standards of conduct. The Code of
Conduct is supplemented by a Code of Ethics for Financial Professionals
(including accounting, controllers, financial reporting operations, financial
planning and analysis, treasury, tax, strategy and M&A, investor relations
and regional/product finance professionals and administrative staff) that
applies worldwide. The Code of Ethics for Financial Professionals applies to
Citigroup's principal executive officer, principal financial officer and
principal accounting officer. Amendments and waivers, if any, to the Code of
Ethics for Financial Professionals will be disclosed on Citi's website, www.citigroup.com .
Both the Code of Conduct and the Code of Ethics for Financial
Professionals can be found on the Citigroup website by clicking on "About Us,"
and then "Corporate Governance." Citi's Corporate Governance Guidelines can also
be found there, as well as the charters for the Audit Committee, the Nomination,
Governance and Public Affairs Committee, the Personnel and Compensation
Committee and the Risk Management and Finance Committee of the Board. These
materials are also available by writing to Citigroup Inc., Corporate Governance,
601 Lexington Avenue, 19th Floor, New York, New York 10022.
296
Stockholder
Information
Citigroup common stock is
listed on the NYSE under the ticker symbol "C" and on the Tokyo Stock Exchange
and the Mexico Stock Exchange. Citigroup preferred stock Series F, T and AA are
also listed on the NYSE.
Because Citigroup's common stock is listed on the NYSE, the
Chief Executive Officer is required to make an annual certification to the NYSE
stating that he was not aware of any violation by Citigroup of the corporate
governance listing standards of the NYSE. The annual certification to that
effect was made to the NYSE on May 20, 2012.
As of
January 31, 2013, Citigroup had approximately 104,511 common stockholders of
record. This figure does not represent the actual number of beneficial owners of
common stock because shares are frequently held in "street name" by securities
dealers and others for the benefit of individual owners who may vote the
shares.
Transfer Agent
Stockholder address changes and inquiries regarding stock
transfers, dividend replacement, 1099-DIV reporting and lost securities for
common and preferred stock should be directed to:
Computershare
P.O.
Box 43078
Providence, RI
02940-3078
Telephone No.
781 575 4555
Toll-free No.
888 250 3985
E-mail
address: [email protected]
Web address: www.computershare.com/investor
Exchange Agent
Holders of Golden State Bancorp, Associates First Capital
Corporation, Citicorp or Salomon Inc. common stock, Citigroup Inc. Preferred
Stock Series Q, S or T, or Salomon Inc. Preferred Stock Series D should arrange
to exchange their certificates by contacting:
Computershare
P.O. Box 43078
Providence, RI 02940-3078
Telephone No. 781 575 4555
Toll-free No. 888 250 3985
E-mail address: [email protected]
Web address: www.computershare.com/investor
On May 9, 2011, Citi effected a
1-for-10 reverse stock split. All Citi common stock certificates issued prior to
that date must be exchanged for new certificates by contacting Computershare at
the address noted above.
Citi's 2012 Form 10-K filed with the
SEC, as well as other annual and quarterly reports, are available from Citi
Document Services toll free at 877 936 2737 (outside the United States at 716
730 8055), by e-mailing a request to [email protected] , or by writing to:
Citi
Document Services
540 Crosspoint Parkway
Getzville, NY 14068
Stockholder
Inquiries
Information about Citi,
including quarterly earnings releases and filings with the U.S. Securities and
Exchange Commission, can be accessed via its website at www.citigroup.com . Stockholder inquiries can also be directed by e-mail
to [email protected] .
297
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
1st day of March, 2013.
Citigroup
Inc.
(Registrant)
John C. Gerspach
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 1st day of March, 2013.
Citigroup's Principal Executive Officer and a Director:
Michael L. Corbat
Citigroup's Principal Financial Officer:
John C. Gerspach
Citigroup's Principal Accounting Officer:
Jeffrey R. Walsh
The Directors of Citigroup listed below executed a power of attorney appointing John C. Gerspach their attorney-in-fact, empowering him to sign this report on their behalf.
Franz B. Humer | Anthony M. Santomero |
Robert L. Joss, Ph.D. | Joan E. Spero |
Michael E. O'Neill | Diana L. Taylor |
Lawrence R. Ricciardi | William S. Thompson, Jr. |
Judith Rodin | Ernesto Zedillo |
Robert L. Ryan |
John C. Gerspach
298
CITIGROUP BOARD OF DIRECTORS
Michael
L. Corbat Chief Executive Officer Citigroup Inc. Franz B. Humer Chairman Roche Holding Ltd. Robert L. Joss, Ph.D. Professor of Finance Emeritus and Former Dean Stanford University Graduate School of Business | Michael
E. O'Neill Chairman Citigroup Inc.; Former Chairman and Chief Executive Officer Bank of Hawaii Corporation Lawrence R. Ricciardi Senior Advisor IBM Corporation; Jones Day; and Lazard Ltd. Judith Rodin President Rockefeller Foundation | Robert
L. Ryan Chief Financial Officer, Retired Medtronic Inc. Anthony M. Santomero Former President Federal Reserve Bank of Philadelphia Joan E. Spero Senior Research Scholar Columbia University School of International and Public Affairs | Diana L.
Taylor Managing Director Wolfensohn Fund Management, L.P. William S. Thompson, Jr. Chief Executive Officer, Retired Pacific Investment Management Company (PIMCO) Ernesto Zedillo Director, Center for the Study of Globalization; Professor in the Field of International Economics and Politics Yale University |
299
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EXHIBIT INDEX
Exhibit | ||
Number | Description of Exhibit | |
2.01 | Amended and Restated Joint Venture Contribution and Formation Agreement, dated May 29, 2009, by and among the Company, Morgan Stanley and Morgan Stanley Smith Barney Holdings LLC, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 3, 2009 (File No. 1-9924). | |
3.01+ | Restated Certificate of Incorporation of the Company, as amended, as in effect on the date hereof. | |
3.02 | By-Laws of the Company, as amended, as in effect on the date hereof, incorporated by reference to the Company's Current Report on Form 8-K filed January 10, 2013 (File No. 1-9924). | |
4.01 | Warrant Agreement (relating to Warrants (expiring January 4, 2019)), dated as of January 25, 2011, between the Company and Computershare Inc. and Computershare Trust Company, N.A., as Warrant Agent, incorporated by reference to Exhibit 4.1 to the Company's Form 8-A filed January 26, 2011 (File No. 1-9924). | |
4.02 | Specimen Warrant for 255,033,142 Warrants, incorporated by reference to Exhibit 4.2 to the Company's Form 8-A filed January 26, 2011 (File No. 1-9924). | |
4.03 | Warrant Agreement (relating to Warrants (expiring October 28, 2018)), dated as of January 25, 2011, between the Company and Computershare Inc. and Computershare Trust Company, N.A., as Warrant Agent, incorporated by reference to Exhibit 4.1 to the Company's Form 8-A filed January 26, 2011 (File No. 1-9924). | |
4.04 | Specimen Warrant for 210,084,034 Warrants, incorporated by reference to Exhibit 4.2 to the Company's Form 8-A filed January 26, 2011 (File No. 1-9924). | |
4.05 | Tax Benefits Preservation Plan, dated June 9, 2009, between the Company and Computershare Trust Company, N.A., incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed June 10, 2009 (File No. 1-9924). | |
4.06 | Capital Securities Guarantee Agreement, dated as of July 30, 2009, between the Company, as Guarantor, and The Bank of New York Mellon, as Guarantee Trustee, incorporated by reference to Exhibit 4.03 to the Company's Current Report on Form 8-K filed July 30, 2009 (File No. 1-9924). | |
4.07 | Registration Rights Agreement, dated as of January 27, 2011, between the Company and The Bank of New York Mellon, not in its individual capacity but solely as Trustee, incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4 filed March 28, 2011 (File No. 333-173113). | |
4.08 | Termination of the Capital Replacement Covenants agreement, dated April 1, 2011, between the Company and The Bank of New York Mellon, as Institutional Trustee of Citigroup Capital XI, incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed April 4, 2011 (File No. 1-9924). | |
4.09 | Specimen Physical Common Stock Certificate of the Company, incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed May 9, 2011 (File No. 1-9924). |
10.01.1* | Supplemental ERISA Compensation Plan of Citibank, N.A. and Affiliates, as amended and restated (the "Citibank Supplemental ERISA Plan"), incorporated by reference to Exhibit 10.(G) to Citicorp's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 1-5378). | |
10.01.2* | Amendment to the Citibank Supplemental ERISA Plan, incorporated by reference to Exhibit 10.21.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 1-9924) (the "Company's 1999 10-K"). | |
10.01.3* | Amendment to the Citibank Supplemental ERISA Plan, incorporated by reference to Exhibit 10.04.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (File No. 1-9924). | |
10.01.4* | Amendment to the Citibank Supplemental ERISA Plan, incorporated by reference to Exhibit 10.01.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (File No. 1-9924) (the "Company's 2009 10-K"). | |
10.01.5* | Nonqualified Plan Amendment to the Citibank Supplemental ERISA Plan, approved November 19, 2009, incorporated by reference to Exhibit 10.01.5 to the Company's 2009 10-K. | |
10.01.6*+ | Amendment to the Citibank Supplemental ERISA Plan, approved December 21, 2012. | |
10.02* | Citigroup Inc. Amended and Restated Compensation Plan for Non-Employee Directors (as of September 21, 2004), incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005 (File No. 1-9924). | |
10.03.1* | Form of Citigroup Inc. Non-Employee Director Equity Award Agreement (pursuant to the Amended and Restated Compensation Plan for Non-Employee Directors), incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed January 14, 2005 (File No. 1-9924). | |
10.03.2* | Form of Citigroup Inc. Non-Employee Director Equity Award Agreement (effective November 1, 2006), incorporated by reference to Exhibit 10.05 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006 (File No. 1-9924). | |
10.04.1* | Citicorp Directors' Deferred Compensation Plan, Restated May 1, 1988, incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 1-9924). | |
10.04.2* | Amendment to the Citicorp Directors' Deferred Compensation Plan (effective as of December 31, 2001), incorporated by reference to Exhibit 10.22.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 1-9924) (the "Company's 2001 10-K"). | |
10.05* | Citigroup 1999 Stock Incentive Plan (as amended and restated effective January 1, 2009), incorporated by reference to Exhibit 10.15 to the Company's 2008 10-K. |
10.06* | Form of Citigroup Directors' Stock Option Grant Notification, incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 1-9924). | |
10.07.1* | Form of Citigroup Equity or Deferred Cash Award Agreement (effective January 1, 2009), incorporated by reference to Exhibit 10.01 to the Company's September 30, 2008 10-Q. | |
10.07.2* | Form of Citigroup Equity or Deferred Cash Award Agreement (effective November 1, 2009), incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 (File No. 1-9924). | |
10.07.3* | Form of Citigroup Equity or Deferred Cash Award Agreement (effective November 1, 2010), incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 (File No. 1-9924). | |
10.07.4* | Form of Citigroup Inc. 2012 Discretionary Incentive and Retention Award Agreement, incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 (File No. 1-9924) (the "Company's September 30, 2011 10-Q"). | |
10.07.5* | Form of Citigroup Inc. 2013 CAP/DCAP Agreement, incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 (File No. 1-9924). | |
10.08* | Citigroup Management Committee Termination Notice and Non-Solicitation Policy, effective October 2, 2006, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed October 6, 2006 (File No. 1-9924). | |
10.09* | Citigroup Inc. Non-Employee Directors Compensation Plan (effective as of January 1, 2008), incorporated by reference to Exhibit 10.01 to the Company's September 30, 2007 10-Q. | |
10.10.1* | Aircraft Time Sharing Agreement, dated December 12, 2007, between Citiflight, Inc. and Vikram Pandit, incorporated by reference to Exhibit 10.43 to the Company's 2007 10-K. | |
10.10.2*+ | Aircraft Time Sharing Agreement, dated December 19, 2012, between Citiflight, Inc. and Michael Corbat. | |
10.11 | Form of Addendum to Indemnification Agreement dated December 16, 2008 between the Company and each member of its Board of Directors, incorporated by reference to Exhibit 10.44 to the Company's 2008 10-K. | |
10.12* | Form of Citigroup Performance Stock Award Agreement, incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed January 21, 2009 (File No. 1-9924). | |
10.13* | Form of Citigroup Executive Premium Price Option Agreement, incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K filed January 21, 2009 (File No. 1-9924). | |
10.14.1* | Citicorp Deferred Compensation Plan, effective October 1995, incorporated by reference to Exhibit 10 to Citicorp's Registration Statement on Form S-8 filed February 15, 1996 (File No. 333-0983). | |
10.14.2* | Amendment to the Citicorp Deferred Compensation Plan, incorporated by reference to Exhibit 10.18.2 to the Company's 1999 10-K. |
10.14.3* | Amendment to the Citicorp Deferred Compensation Plan, effective as of September 28, 2001, incorporated by reference to Exhibit 10.17.3 to the Company's 2001 10-K. | |
10.14.4* | Nonqualified Plan Amendment to the Citicorp Deferred Compensation Plan, adopted November 19, 2009, incorporated by reference to Exhibit 10.01.5 to the Company's 2009 10-K. | |
10.15* | Form of Citi Long-Term Restricted Stock Award Agreement for awards granted on December 30, 2009, incorporated by reference to Exhibit 10.33 to the Company's 2009 10-K. | |
10.16 | Exchange Agreement, dated June 9, 2009, between the Company and the Federal Deposit Insurance Corporation, incorporated by reference to Exhibit 10.4 to Amendment No. 3 to the Company's Registration Statement on Form S-4 filed June 10, 2009 (File No. 333-158100). | |
10.17 | Amended and Restated Global Selling Agency Agreement, dated December 20, 2012, among, the Company, Citigroup Global Markets Inc., Merrill Lynch, Pierce Fenner & Smith Incorporated, UBS Financial Services Inc. and Wells Fargo Securities, LLC, incorporated by reference to Exhibit 1.1 to the Company's Current Report on Form 8-K filed December 21, 2012. (File No. 1-9924). | |
10.18.1* | Letter Agreement, dated April 5, 2010, between the Company and Dr. Robert L. Joss (the "Joss Letter Agreement"), incorporated by reference to Exhibit 10.03 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010 (File No. 1-9924) (the "Company's March 31, 2010 10-Q"). | |
10.18.2* | Joss Letter Agreement Renewal, dated October 28, 2010, between the Company and Dr. Robert L. Joss, incorporated by reference to Exhibit 10.43.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (File No. 1-9924) (the "Company's 2010 10-K"). | |
10.18.3* | Joss Letter Agreement Renewal, dated January 1, 2012, between the Company and Dr. Robert L. Joss, incorporated by reference to Exhibit 10.28.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (File No. 1-9924) (the "Company's 2011 10-K"). | |
10.18.4*+ | Joss Letter Agreement Renewal, dated December 14, 2012, between the Company and Dr. Robert L. Joss. | |
10.19* | Individual Employment Contract, dated November 8, 1971, between Banco Nacional de Mexico, S.A. and Manuel Medina-Mora (English translation), incorporated by reference to Exhibit 10.07 to the Company's March 31, 2010 10-Q. | |
10.20* | Form of Citi Long-Term Restricted Stock Award Agreement (effective November 1, 2010), incorporated by reference to Exhibit 10.04 to the Company's September 30, 2010 10-Q. | |
10.21* | Citigroup Inc. 2010 Key Employee Profit Sharing Plan, incorporated by reference to Exhibit 10.50 to the Company's 2010 10-K. | |
10.22* | Form of Citigroup Inc. 2010 Key Employee Profit Sharing Plan Award Agreement, incorporated by reference to Exhibit 10.51 to the Company's 2010 10-K. | |
10.23* | Citigroup Inc. 2010 Key Risk Employee Plan, incorporated by reference to Exhibit 10.52 to the Company's 2010 10-K. | |
10.24* | Form of Citigroup Inc. 2010 Key Risk Employee Plan Award Agreement, incorporated by reference to Exhibit 10.53 to the Company's 2010 10-K. |
10.25* | Citigroup Inc. 2011 Key Employee Profit Sharing Plan, incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011 (File No. 1-9924) (the "Company's March 31, 2011 10-Q"). | |
10.26* | Citigroup Inc. 2011 Key Employee Profit Sharing Plan Award Agreement, incorporated by reference to Exhibit 10.02 to the Company's March 31, 2011 10-Q. | |
10.27* | Form of Citigroup Inc. Employee Option Grant Agreement, incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011 (File No. 1-9924) (the "Company's June 30, 2011 10-Q"). | |
10.28*+ | Citigroup 2009 Stock Incentive Plan (as amended and restated effective January 1, 2013). | |
10.29* | 2011 Citigroup Executive Performance Plan, incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed April 26, 2011 (File No. 1-9924). | |
10.30* | Citigroup Inc. 2011 Key Employee Profit Sharing Plan Award Agreement, dated May 17, 2011, between the Company and Vikram S. Pandit, incorporated by reference to Exhibit 10.02 to the Company's June 30, 2011 10-Q. | |
10.31* | Citigroup Inc. Equity Award Agreement, dated May 17, 2011, between the Company and Vikram S. Pandit, incorporated by reference to Exhibit 10.03 to the Company's June 30, 2011 10-Q. | |
10.32* | Citigroup Inc. Executive Option Grant Agreement, dated May 17, 2011, between the Company and Vikram S. Pandit, incorporated by reference to Exhibit 10.04 to the Company's June 30, 2011 10-Q. | |
10.33* | Letter Agreement, dated December 21, 2011, between Citigroup Inc. and Michael Corbat, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed December 22, 2011 (File No. 1-9924). | |
10.34*+ | Citigroup Inc. Deferred Cash Award Plan (As Amended and Restated Effective as of January 1, 2013). | |
10.35*+ | Citi Discretionary Incentive and Retention Award Plan (Amended and Restated Effective as of January 1, 2013). | |
10.36* | Letter Agreement, dated November 9, 2012, between the Company and Vikram Pandit, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed November 9, 2012 (File No. 1-9924). | |
10.37* | Letter Agreement, dated November 9, 2012, between Citigroup Global Markets Inc. and John Havens, incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed November 9, 2012 (File No. 1-9924). | |
12.01+ | Calculation of Ratio of Income to Fixed Charges. | |
12.02+ | Calculation of Ratio of Income to Fixed Charges Including Preferred Stock Dividends. | |
21.01+ | Subsidiaries of the Company. | |
23.01+ | Consent of KPMG LLP, Independent Registered Public Accounting Firm. |
24.01+ | Powers of Attorney. | |
31.01+ | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.02+ | Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.01+ | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
99.01+ | List of Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934. | |
101.01+ | Financial statements from the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2012, filed on March 1, 2013, formatted in XBRL: (i) the Consolidated Statement of Income, (ii) the Consolidated Balance Sheet, (iii) the Consolidated Statement of Changes in Equity, (iv) the Consolidated Statement of Cash Flows and (v) the Notes to Consolidated Financial Statements. |
The total amount of securities authorized pursuant to any instrument defining rights of holders of long-term debt of the Company does not exceed 10% of the total assets of the Company and its consolidated subsidiaries. The Company will furnish copies of any such instrument to the SEC upon request.
Copies of any of the exhibits referred to above will be furnished at a cost of $0.25 per page (although no charge will be made for the 2012 Annual Report on Form 10-K) to security holders who make written request therefor to Citigroup Inc., Corporate Governance, 601 Lexington Avenue, 19th Floor, New York, New York 10022.
+ Filed herewith.