Citigroup - 10-Q quarterly report FY2011 Q3

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

Commission file number 1-9924

Citigroup Inc.
(Exact name of registrant as specified in its charter)

        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. Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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). Yes ý    No o

        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.

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No  ý

        Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:

Common stock outstanding as of September 30, 2011: 2,923,708,189

Available on the web at www.citigroup.com

CITIGROUP INC.

THIRD QUARTER 2011—FORM 10-Q

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OVERVIEW

Introduction

        Citigroup operates, for management reporting purposes, via two primary business segments: Citicorp, consisting of Citi's Regional Consumer Banking businesses and Institutional Clients Group; and Citi Holdings, consisting of Citi's Brokerage and Asset Management and Local Consumer Lending businesses, and a Special Asset Pool. There is also a third segment, Corporate/Other. 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 3 to the Consolidated Financial Statements.

        Throughout this report, "Citigroup," "Citi" and "the Company" refer to Citigroup Inc. and its consolidated subsidiaries.

        This Quarterly Report on Form 10-Q should be read in conjunction with Citigroup's Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Annual Report on Form 10-K) and Citigroup's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2011 and June 30, 2011. Additional information about Citigroup is available on the company's Web site at www.citigroup.com. Citigroup's recent annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, as well as its other filings with the SEC are available free of charge through the company's Web site by clicking on the "Investors" page and selecting "All SEC Filings." The SEC's Web site also contains periodic and current reports, proxy and information statements, and other information regarding Citi at www.sec.gov.

        Certain reclassifications have been made to the prior periods' financial statements to conform to the current period's presentation. All per share amounts and Citigroup shares outstanding for the third quarter of 2011 and all prior periods reflect Citigroup's 1-for-10 reverse stock split, which was effective May 6, 2011.

        Within this Form 10-Q, please refer to the tables of contents on pages 2 and 92 for page references to Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements, respectively.

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As described above, Citigroup is managed pursuant to the following segments:

*

As announced on October 17, 2011, Citi will transfer the substantial majority of the retail partner cards business from Citi Holdings—Local Consumer Lending to Citicorp—North America RCB. While Citi previously announced this transfer would be completed during the fourth quarter of 2011, it now intends to complete this transfer during the first quarter of 2012.

        The following are the four regions in which Citigroup operates. The regional results are fully reflected in the segment results above.

(1)

Asia includes Japan, Latin America includes Mexico, and the U.S., Canada and Puerto Rico comprise North America.

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

THIRD QUARTER 2011 EXECUTIVE SUMMARY

Citigroup

        Citigroup reported third quarter of 2011 net income of $3.8 billion, or $1.23 per diluted share. Citigroup's income increased by 74%, or $1.6 billion, from the third quarter of 2010. Results for the third quarter of 2011 included a significant positive credit valuation adjustment (CVA) of $1.9 billion, compared to $115 million in the third quarter of 2010, driven by Citigroup's credit spreads widening during the quarter. Excluding CVA, Citigroup earned $2.6 billion in the third quarter of 2011, or $0.84 per diluted share, compared to $0.70 per diluted share in the prior-year period. The year-over-year increase in earnings per share, excluding CVA, primarily reflects a significant decline in credit costs, offset by the impact of lower revenues (excluding CVA) and an increase in operating expenses as compared to the prior-year period. Net income in the prior-year period was also affected by a loss on the announced sale of The Student Loan Corporation recorded in Discontinued Operations.

        Citigroup revenues, net of interest expense, were $20.8 billion, or roughly flat versus the prior-year period. Excluding CVA, revenues were down $1.7 billion, or 8%, from the third quarter of 2010 as continued growth in international Regional Consumer Banking and Transaction Services was more than offset by lower revenues in Citi Holdings, Securities and Banking and North America Regional Consumer Banking. Net interest revenues of $12.1 billion were 8% lower than the prior-year period, largely due to continued declining loan balances and lower interest-earning assets in Citi Holdings. Non-interest revenues were $8.7 billion, up 15% from the prior-year period, principally driven by significant positive CVA in the third quarter of 2011. Excluding CVA, non-interest revenues of $6.8 billion decreased by 10%, due primarily to lower revenues in Securities and Banking.

        Year-over-year, the U.S. dollar generally depreciated versus local currencies in which Citi generates revenues and incurs expenses. In the third quarter of 2011, the impact of foreign exchange in the translation of local currency results into U.S. dollars (as used throughout this Form 10-Q, FX translation) accounted for 2% of the growth in Citi's revenues and expenses, respectively, while contributing 1% to net income growth over the prior-year period.

Operating Expenses

        Citigroup expenses increased $940 million, or 8%, year-over-year to $12.5 billion. Roughly three-quarters of the increase was driven by FX translation, higher legal and related costs and the absence of one-time benefits recorded in the prior period. Excluding these items, operating expenses grew 2% year-over-year in the third quarter, driven by higher investment spending, which was partially offset by ongoing productivity savings and other expense reductions.

        For the first nine months of 2011, Citigroup expenses were $37.7 billion, up $2.8 billion, or 8%, from the prior-year period. Nearly two-thirds of this increase, or approximately $1.8 billion, resulted primarily from the impact of FX translation and higher legal and related costs in the first nine months of 2011 as compared to the same period in 2010. Excluding these items, operating expenses were up $1.0 billion, or 3%, versus the prior-year period. Investment spending was $2.8 billion higher in the first nine months of 2011, of which roughly half was funded with efficiency savings of $1.4 billion. All other expenses, including higher volume-related costs, were more than offset by a decline in Citi Holdings expenses. The impact of FX translation and legal and related costs will likely continue to affect Citigroup's operating expenses in the near term and will remain difficult to predict.

        Citicorp expenses of $9.8 billion in the third quarter of 2011 grew 9% from the third quarter of 2010. Roughly a quarter of this increase resulted from the impact of FX translation, and the remainder was primarily driven by investment spending, which was partially offset by ongoing productivity savings and other expense reductions.

        Citi Holdings expenses were down 6% year-over-year to $2.1 billion, principally due to the continued decline in assets and thus lowered operating expenses. As the pace of asset decline in Citi Holdings continues to slow, Citi's ability to continue to reduce its expenses in Citi Holdings will likely also decline.

Credit Costs

        Citigroup total provisions for credit losses and for benefits and claims of $3.4 billion declined $2.6 billion, or 43%, from the prior-year period. Net credit losses of $4.5 billion were down $3.1 billion, or 41%, from the third quarter of 2010. Consumer net credit losses declined $2.5 billion, or 37%, to $4.2 billion, driven by continued improvement in credit in North America Citi-branded cards in Citicorp and retail partner cards and residential real estate lending in Citi Holdings. Corporate net credit losses decreased $650 million year-over-year to $272 million, as credit quality continued to improve in the Corporate portfolio.

        The net release of allowance for loan losses and unfunded lending commitments was $1.4 billion in the third quarter of 2011, compared to a net release of $2.0 billion in the third quarter of 2010. Of the $1.4 billion net reserve release, $1.2 billion related to Consumer and was mainly driven by North America Citi-branded cards and retail partner cards. The $186 million net Corporate reserve release reflected continued improvement in Corporate credit trends, partially offset by growth in the Corporate loan portfolio.

        More than half of the net credit reserve release in the third quarter of 2011, or $838 million, was attributable to Citi Holdings. The $585 million net credit release in Citicorp was up from $426 million in the prior-year period and was due primarily to higher net releases in Citi-branded cards, partially offset by lower releases in international Regional Consumer

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Banking and a net build in the Corporate portfolio, each driven by continued loan growth. Citi continues to expect international Regional Consumer Banking and Corporate credit costs in Citicorp to increase, reflecting growing loan portfolios.

Capital and Loan Loss Reserve Positions

        Citigroup's Tier 1 Capital ratio was 13.5% at quarter-end, and its Tier 1 Common ratio was 11.7%.

        Citigroup's total allowance for loan losses was $32.1 billion at quarter-end, or 5.1% of total loans, down from $43.7 billion, or 6.7% of total loans, at the end of the prior-year period. The decline in the total allowance for loan losses reflected asset sales, lower non-accrual loans, and overall continued improvement in the credit quality of the loan portfolios.

        The Consumer allowance for loan losses was $28.9 billion, or 6.82% of total Consumer loans at quarter-end, compared to $37.6 billion, or 8.19% of total loans, at September 30, 2010.

        Citigroup's non-accrual loans of $12.1 billion declined 46% from the prior-year period. At the end of the third quarter of 2011, the allowance for loan losses was 265% of non-accrual loans.

Citicorp

        Citicorp net income of $4.6 billion in the third quarter of 2011 increased by $1.1 billion, or 32%, from the prior-year period, driven by the significant positive CVA, lower net credit losses and a higher net loan loss reserve release, offset by lower revenues (excluding CVA) and an increase in operating expenses.

        Citicorp revenues were $17.7 billion, up $1.4 billion from the third quarter of 2010, driven by the CVA of $1.9 billion in the third quarter of 2011, compared to CVA of $99 million in the prior-year period. Excluding CVA, Citicorp revenues of $15.8 billion were down 2% year-over-year, as growth in international Regional Consumer Banking and Transaction Services was more than offset by lower revenues in North America Regional Consumer Banking and Securities and Banking. Net interest revenues of $9.7 billion increased 3% from the prior-year period, reflecting continuing growth in international business volumes, and non-interest revenues of $8.0 billion were up $1.2 billion, or 17%, driven by CVA.

        Regional Consumer Banking revenues of $8.3 billion were 2% higher year-over-year, mostly due to continued growth in business volumes across international regions as well as the impact of FX translation. This growth was partly offset by lower credit card balances in North America, the impact in North America of the look-back provisions of The Credit Card Accountability Responsibility and Disclosure Act (CARD Act) (see "Regional Consumer Banking—North America Regional Consumer Banking" below) and continued spread compression. Average retail banking loans increased 18% year-over-year to $128.6 billion, and average deposits increased 6% to $313.2 billion, both driven by Asia and Latin America. Citi-branded cards average loans increased 1% year-over-year to $110.2 billion, as growth in Asia and Latin America was offset by lower balances in North America. Cards purchase sales grew 9% from the prior-year period to $71.4 billion, and international investment sales increased 1% to $21.5 billion.

        Securities and Banking revenues of $6.7 billion increased 20% year-over-year and 23% sequentially, driven by the positive CVA (for details on S&B CVA amounts, see "Institutional Clients Group—Securities and Banking" below). Excluding CVA, revenues were $4.8 billion, down 12% from the prior-year period and 9% sequentially, driven by lower fixed income markets, equity markets and investment banking revenues, partially offset by higher lending revenues. Fixed income markets revenues of $2.3 billion, excluding CVA, decreased 33% year-over-year and 22% sequentially, as growth in rates and currencies was more than offset by lower revenues in credit-related and securitized products. Equity markets revenues of $289 million, excluding CVA, were down 73% year-over-year and 63% sequentially, mainly driven by weak trading revenues in derivatives, as well as losses in equity proprietary trading (which Citi also refers to as equity principal strategies). Investment banking revenues of $736 million were down 21% year-over-year and 32% sequentially, driven by lower activity levels across all products. Lending revenues were $1.0 billion, up from negative $11 million in the prior-year period and positive $356 million in the second quarter of 2011, due to hedging gains.

        Transaction Services revenues were $2.7 billion, up 7% from the prior-year period, driven by growth in Treasury and Trade Solutions as well as Securities and Fund Services. Revenues grew year-over-year in all international regions, as strong growth in business volumes was partially offset by continued spread compression. Average deposits and other customer liabilities grew 7% year-over-year to $365 billion. Assets under custody grew 1% year-over-year to $12.5 trillion, but were down 7% from the prior quarter due to a negative impact of FX translation and lower market values.

        Citicorp end of period loans increased 13% year-over-year to $443.6 billion, with 6% growth in Consumer loans and 21% growth in Corporate loans.

Citi Holdings

        Citi Holdings net loss of $802 million in the third quarter of 2011 improved by $344 million, or 30%, from a net loss of $1.1 billion in the third quarter of 2010, as continued improvement in net credit losses and lower operating expenses offset lower revenues and a lower net loan loss reserve release.

        Citi Holdings revenues declined 27% to $2.8 billion from the prior-year period, primarily due to lower assets. Net interest revenues declined 30% year-over-year to $2.5 billion, largely driven by declining loan balances in Local Consumer Lending and lower interest-earning assets in the Special Asset Pool. Non-interest revenues increased 6% to $353 million from the prior-year period.

        Citi Holdings assets declined 31% from the third quarter of 2010 to $289 billion at the end of the third quarter of 2011. The decline reflected $86 billion in asset sales and business dispositions, $40 billion in net run-off and amortization, and $6 billion in net cost of credit and net asset marks. On October 17, 2011, Citi announced it will transfer the substantial majority of the retail partner cards business from Local Consumer Lending to Citicorp—North America Regional Consumer Banking, which Citi intends to complete during the first quarter of 2012. This transfer will further decrease the assets within Citi Holdings as well as materially impact the earnings profile of Citi Holdings.

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        At September 30, 2011, Local Consumer Lending continued to represent the largest segment within Citi Holdings, with $218 billion of assets. Over half of Local Consumer Lending assets, or approximately $117 billion, were related to North America real estate lending. As of the end of the third quarter of 2011, there were approximately $10 billion of loan loss reserves allocated to North America real estate lending in Citi Holdings, representing over 30 months of coincident net credit loss coverage.

        At the end of the third quarter of 2011, Citi Holdings assets comprised approximately 15% of total Citigroup GAAP assets and 27% of risk-weighted assets.

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RESULTS OF OPERATIONS

SUMMARY OF SELECTED FINANCIAL DATA

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(1)

Discontinued operations primarily reflects the sale of the Egg Banking PLC credit card business and the sale of The Student Loan Corporation business. Additionally, there continues to be minimal residual costs associated with the sale of Nikko Cordial Securities, the sale of Citigroup's German retail banking operations and the sale of CitiCapital's equipment finance unit to General Electric. See Note 2 to the Consolidated Financial Statements.

(2)

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.

(3)

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

(4)

As defined by the banking regulators, the Tier 1 Common ratio represents Tier 1 Capital less qualifying perpetual preferred stock, qualifying noncontrolling interests in subsidiaries and junior subordinated debentures owned by trust issuers of mandatorily redeemable securities (included in long-term debt) divided by risk-weighted assets.

(5)

The Leverage ratio represents Tier 1 Capital divided by adjusted average total assets.

(6)

Tangible book value per share is considered a non-GAAP financial measure for SEC reporting purposes. For additional information and a reconciliation of this measure to the most directly comparable GAAP measure, see "Capital Resources and Liquidity—Capital Resources—Tangible Common Equity and Tangible Book Value Per Share" below.

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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 (LOSS)

(1)

The prior period balances reflect reclassifications to conform the presentation in those periods to the current period's presentation. These reclassifications related to Citi's re-allocation of certain expenses between businesses and segments and the transfer of certain commercial market loans from RCB to ICG.

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CITIGROUP REVENUES

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CITICORP

        Citicorp is the Company'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. 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 large multinational clients and for meeting the needs of retail, private banking, commercial, public sector and institutional clients around the world. Citigroup's global footprint provides coverage of the world's emerging economies, which Citi believes represent a strong area of growth. At September 30, 2011, Citicorp had approximately $1.4 trillion of assets and $776 billion of deposits, representing approximately 70% of Citi's total assets and approximately 91% of its deposits.

        At September 30, 2011, Citicorp consisted of the following businesses: Regional Consumer Banking (which includes retail banking and Citi-branded cards in four regions—North America, EMEA, Latin America and Asia) and Institutional Clients Group (which includes Securities and Banking and Transaction Services).

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REGIONAL CONSUMER BANKING

        Regional Consumer Banking (RCB) consists of Citigroup's four geographical RCB businesses that provide traditional banking services to retail customers. RCB also contains Citigroup's branded cards business and Citi's local commercial banking business. RCB is a globally diversified business with nearly 4,200 branches in 39 countries around the world. At September 30, 2011, RCB had $335 billion of assets and $310 billion of deposits.

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NORTH AMERICA REGIONAL CONSUMER BANKING

        North America Regional Consumer Banking (NA RCB) provides traditional banking and Citi-branded card services to retail customers and small to mid-size businesses in the U.S. NA RCB's approximate 1,000 retail bank branches and 12.9 million retail customer accounts are largely concentrated in the greater metropolitan areas of New York, Los Angeles, San Francisco, Chicago, Miami, Washington, D.C., Boston, Philadelphia and certain larger cities in Texas. At September 30, 2011, NA RCB had $36.5 billion of retail banking loans and $147.4 billion of deposits. In addition, NA RCB had 21.6 million Citi-branded credit card accounts, with $73.8 billion in outstanding card loan balances.

        As previously announced, Citi will transfer the substantial majority of the retail partner cards business from Citi Holdings—Local Consumer Lending to NA RCB, which Citi intends to complete during the first quarter of 2012.

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3Q11 vs. 3Q10

        Net income increased $515 million as compared to the prior year, driven by improvements in credit costs, in part offset by lower revenues and higher expenses.

        Revenues decreased 9% mainly due to lower loan balances and margin pressure in the cards business as well as lower mortgage-related revenues (primarily lower refinancing activity as compared to the prior-year period). Net interest revenue was down 6% driven primarily by a 4% reduction in average loans. In addition, cards net interest revenue was negatively impacted by the look-back provision of the Credit Card Accountability Responsibility and Disclosure Act (CARD Act) which reduced the net interest margin. (The "look-back" provision of the CARD Act generally requires a review to be done 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.) Cards net interest revenue as a percentage of average loans decreased to 9.38% from 10.06% in the prior year. Non-interest revenue decreased 17% due to lower gains from mortgage loan sales. This was primarily driven by loan originations which were 9% lower than the prior year. Cards purchase sales were up 2% as compared to the prior year.

        Expenses increased 24%, primarily driven by higher investment spending, particularly in cards marketing and technology, and the absence of a $78 million benefit from the renegotiation of a third-party contract in the prior period. Assuming credit continues to improve, investment spending will likely remain at elevated levels, but is expected to be partly offset by continued savings initiatives.

        Provisions decreased $1.5 billion, or 75%, primarily due to a net loan loss reserve release of $653 million in the current quarter and lower net credit losses in the Citi-branded cards portfolio. Cards net credit losses were down $790 million, or 42%, from the prior-year quarter, and the net credit loss ratio decreased 387 basis points to 5.94%. The decline in credit costs was driven by improving credit conditions as well as stricter underwriting criteria, which has lowered the cards risk

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profile. Citi believes the improvements in, and Citi's resulting benefit from, declining credit costs in NA RCB will likely slow during the remainder of 2011 and into 2012 as credit trends begin to approach more normalized levels.

3Q11 YTD vs. 3Q10 YTD

        Year-to-date, NA RCB has experienced similar trends to those described above. Net income increased $1,681 million as compared to the prior year driven by improvements in credit costs partially offset by lower revenues and higher expenses.

        Revenues decreased 10% mainly due to lower loan balances and the margin pressure in the cards business as well as lower mortgage-related revenues, as described above. Net interest revenue was down 8% driven primarily by lower volumes in cards, with average loans lower by 5%. In addition, cards net interest margin was negatively impacted, primarily by the look-back provision of the CARD Act. Non-interest revenuedecreased 16% from the prior year, mainly due to lower gains from mortgage loan sales and lower net mortgage servicing revenues.

        Expenses increased 15%, primarily driven by the higher investment spending described above. This was offset partly by ongoing savings initiatives.

        Provisions decreased $4.4 billion, or 71%, primarily due to a loan loss reserve release of $2.1 billion in the current year-to-date period and lower net credit losses in the Citi-branded cards portfolio. Cards net credit losses were down $2.3 billion, or 39%, from the prior year-to-date, and the net credit loss ratio decreased 370 basis points to 6.72%. The decline in credit costs was driven by the improving credit conditions and stricter underwriting criteria described above.

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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. Remaining retail banking and cards activities in Western Europe are included in Citi Holdings. The countries in which EMEA RCB has the largest presence are Poland, Turkey, Russia and the United Arab Emirates. At September 30, 2011, EMEA RCB had 294 retail bank branches with 3.7 million customer accounts, $4.3 billion in retail banking loans and $9.4 billion in deposits. In addition, the business had 2.6 million Citi-branded card accounts with $2.7 billion in outstanding card loan balances.