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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
For the quarterly period ended March 31, 2012
Commission file number 1-9924
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 March 31, 2012: 2,932,157,453
Available on the web at www.citigroup.com
FIRST QUARTER 2012FORM 10-Q
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. 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 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, 2011 (2011 Annual Report on Form 10-K). Additional information about Citigroup is available on Citi's Web site 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 U.S. Securities and Exchange Commission (SEC), are available free of charge through the Citi's Web site by clicking on the "Investors" page and selecting "All SEC Filings." The SEC's Web site also contains current reports, information statements, and other information regarding Citi at www.sec.gov.
Within this Form 10-Q, please refer to the tables of contents on pages 2 and 88 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 classifications, including the transfer of the substantial majority of Citi's retail partner cards businesses (which is now referred to as Citi retail services) from Citi HoldingsLocal Consumer Lending to CiticorpNorth America Regional Consumer Banking, which was effective January 1, 2012, see Citi's Form 8-K furnished to the SEC on March 26, 2012.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER OF 2012 EXECUTIVE SUMMARY
Citigroup reported first quarter of 2012 net income of $2.9 billion, or $0.95 per diluted share. Citi's reported net income declined by 2%, or $68 million, from the first quarter of 2011. Results for the first quarter of 2012 included a net negative credit valuation adjustment (CVA) on derivatives (excluding monolines), net of hedges, and debt valuation adjustment (DVA) on Citi's fair value option debt of $1.3 billion, compared to negative $256 million in the first quarter of 2011, as Citi's credit spreads tightened during the quarter. Results for the first quarter of 2012 also included a net pretax gain of $477 million from minority investments, which included pretax gains of $1.1 billion and $542 million on the sale of Citi's remaining stake in the Housing Development Finance Corporation Ltd. (HDFC) and its stake in Shanghai Pudong Development Bank (SPDB), respectively, partially offset by the pretax impairment charge relating to Akbank T.A.S. (Akbank) of $1.2 billion. Excluding CVA/DVA and the net gain on minority investments, Citi earned $3.4 billion in the first quarter of 2012, or $1.11 per diluted share, compared to $1.04 per diluted share (excluding CVA/DVA) in the prior-year period. The year-over-year increase in earnings per share, excluding CVA/DVA and the net gain from minority investments, primarily reflected higher revenues, a decline in credit costs and a lower effective tax rate as compared to the prior-year period.
Citi's revenues, net of interest expense, were $19.4 billion, down 2% versus the prior-year period. Excluding CVA/DVA and the net gain on minority investments, revenues were $20.2 billion, up $235 million, or 1%, from the first quarter of 2011 (excluding CVA/DVA) as growth in Citicorp's three businesses (Global Consumer Banking (GCB), Securities and Banking and Transaction Services) exceeded the continued revenue declines in Citi Holdings. Net interest revenues of $11.9 billion were 1% lower than the prior-year period, largely due to continued declining loan balances and lower interest-earning assets (particularly in the Special Asset Pool) in Citi Holdings. Non-interest revenues were $7.5 billion, down 2% from the prior-year period, principally due to the higher negative CVA/DVA versus the prior-year period, partially offset by the net gain on minority investments. Excluding CVA/DVA and the net gain on minority investments, non-interest revenues were $8.3 billion, a 5% increase compared to the first quarter 2011 (excluding CVA/DVA), as growth in Citicorp outpaced a decline in Citi Holdings.
Citigroup expenses were essentially flat versus the prior-year period at $12.3 billion. Both periods included a similar combined level of legal and related costs and repositioning charges of approximately $600 million. Excluding these items, as well as the impact of foreign exchange translation (as used throughout this Form 10-Q, FX translation) (approximately $100 million in the first quarter of 2012), operating expenses grew less than 1% versus the prior-year period. Investment spending was $0.4 billion higher than in the first quarter of 2011 and was more than offset by approximately $0.6 billion in efficiency savings year-over-year.
Citicorp's expenses were $10.3 billion, up 1% from $10.2 billion in the prior-year period, driven primarily by the higher volumes in each of GCB and Transaction Services. Citi Holdings expenses were down 16% year-over-year to $1.2 billion, principally due to the continued decline in assets and thus lower operating expenses, partially offset by higher legal and related costs.
Citi's total provisions for credit losses and for benefits and claims of $3.0 billion declined $165 million, or 5%, from the prior-year period. Net credit losses of $4.0 billion were down $2.3 billion, or 37%, from the first quarter of 2011. Consumer net credit losses declined $1.4 billion, or 25%, to $4.0 billion, driven by continued credit improvement in Citicorp North America Citi-branded cards and Citi retail services (formerly retail partner cards) and in Local Consumer Lending within Citi Holdings. Corporate net credit losses decreased $932 million year-over-year to a net credit recovery of $83 million, driven by a series of recoveries in both Securities and Banking and in the Special Asset Pool in Citi Holdings.
The net release of allowance for loan losses and unfunded lending commitments was $1.2 billion in the first quarter of 2012, compared to a net release of $3.3 billion in the first quarter of 2011. Of the $1.2 billion net reserve release, $1.3 billion related to Consumer and was mainly driven by North America Citi-branded cards and Citi retail services and North America mortgages in Citi Holdings. The $112 million net Corporate reserve build reflected continued growth in the Corporate loan portfolio in Citicorp.
$588 million of the net credit reserve release was attributable to Citicorp and compared to a $1.8 billion release in the prior-year period. The decline in the Citicorp reserve release year-over-year reflected a net build within international GCB (which encompasses Asia, Latin America and EMEA) and Securities and Banking, reflecting continued loan growth in these businesses. The $576 million net credit release in Citi Holdings was down from $1.5 billion in the prior-year period due primarily to lower releases in the Special Asset Pool.
Capital and Loan Loss Reserve Positions
Citigroup's Tier 1 Capital ratio was 14.3% at quarter-end and its Tier 1 Common ratio was 12.5%, up approximately 100 and 120 basis points, respectively, from the prior-year period.
Citigroup's total allowance for loan losses was $29.0 billion at quarter end, or 4.5% of total loans, compared to $36.6 billion, or 5.8%, at the end of the prior-year period. The decline in the total allowance for loan losses reflected asset sales in Citi Holdings, lower non-accrual loans, and overall continued improvement in the credit quality of the loan portfolios.
The Consumer allowance for loan losses was $26.0 billion, or 6.3% of total Consumer loans, at quarter-end, compared to $32.7 billion, or 7.5% of total loans, at March 31, 2011. Total non-accrual assets declined 25% to $12.3 billion compared to the first quarter 2011. Corporate non-accrual loans declined 46% to $3.0 billion, and Consumer non-accrual loans declined 6% to $8.7 billion.
Citicorp net income decreased 3% from the prior-year period to $4.3 billion, largely reflecting a decline in reported revenues as well as higher credit costs, primarily as a result of lower loan loss reserve releases. Reported revenues of $18.0 billion were down 1% from the prior-year period, primarily stemming from negative CVA/DVA in Securities and Banking of $1.4 billion, compared to a negative $229 million in the prior-year period. Excluding CVA/DVA, Citicorp net income increased 13% from the prior-year period to $5.2 billion, mainly reflecting revenue growth across all of Citicorp's businesses.
Excluding CVA/DVA, Citicorp revenues were $19.4 billion, 6% higher than the first quarter 2011. Global Consumer Banking revenues of $10.0 billion grew 5% year-over-year. North America GCB revenues grew 5% to $5.2 billion while international GCB revenues grew 4% to $4.8 billion, each compared to the first quarter 2011. Average retail banking loans increased 16% year-over-year to $139.3 billion, and average deposits increased 3% to $318.6 billion, both driven by North America, Asia and Latin America. Citi-branded and retail services average card loans decreased 1% year-over-year to $148.3 billion, as continued growth in Asia and Latin America was offset by lower average balances in North America (for both Citi-branded cards and Citi retail services) and EMEA. Cards purchase sales grew 6% from the prior-year period to $85.4 billion, and international investment sales decreased 6% to $19.0 billion on weaker retail investor sentiment versus the prior-year period.
Securities and Banking revenues were $5.3 billion in the first quarter of 2012, down 12% year-on-year, driven by the higher negative CVA/DVA. Excluding the impact of CVA/DVA, Securities and Banking revenues were $6.7 billion, 6% higher than the prior-year period. Fixed income markets revenues of $4.7 billion in the first quarter of 2012, excluding CVA/DVA,(1) increased 19% from the prior-year period, primarily reflecting strong performance in rates and currencies across all products and regions as overall market conditions improved in the first quarter of 2012 and client activity increased. Credit and securitized products were down versus the prior-year period, however, largely reflecting lower risk levels in the business. Equity markets revenues of $902 million in the first quarter of 2012, excluding CVA/DVA, were 18% below the prior-year period, largely related to lower industry volumes, particularly in cash equities. Investment banking revenues grew 2% from the prior-year period to $865 million as growth in debt underwriting offset declines in advisory and equity underwriting revenues. Lending revenues of $56 million were down from $255 million in the prior-year period, as higher net interest revenues were more than offset by greater hedge losses in the first quarter of 2012. Private bank revenues of $576 million, excluding CVA/DVA, were up 11% year-over-year due to higher loan and deposit balances as well as stronger capital markets activity.
Transaction Services revenues were $2.7 billion, up 7% from the prior-year period, as growth in Treasury and Trade Solutions (TTS) offset declines in Securities and Fund Services (SFS). TTS revenue growth reflected strong growth in deposits and average assets, particularly in trade finance, while the decline in SFS revenues reflected lower settlement volumes. Transaction Services average deposits and other customer liabilities grew 6% year-over-year to $377 billion, while assets under custody decreased 1% year-over-year to $12.6 trillion.
Citicorp end-of-period loans increased 12% year-over-year to $514 billion, with 6% growth in Consumer loans and 23% growth in Corporate loans.
Citi Holdings net loss of $1.0 billion in the first quarter of 2012 was slightly higher than the loss reported in the first quarter of 2011, as revenue declines and lower credit reserve releases exceeded expense declines and a continued improvement in net credit losses.
Citi Holdings revenues decreased 47% from the prior-year period to $874 million. Excluding CVA/DVA of positive $88 million in the first quarter of 2012, compared to a negative $27 million in the prior-year period, Citi Holdings revenues were $786 million, 53% lower than the first quarter 2011. Net interest revenues declined 32% year-over-year to $701 million, largely driven by declining loan balances in Local Consumer Lending and lower interest-earning assets in the Special Asset Pool. Non-interest revenues, excluding CVA/DVA, decreased 87% to $84 million from the prior-year period, primarily reflecting the absence of positive private equity marks recorded in the Special Asset Pool in the first quarter of 2011 combined with a repurchase reserve build related to private-label mortgage securitizations in the Special Asset Pool in the current quarter.
Citi Holdings assets declined 29% year-over-year to $209 billion at March 31, 2012, and comprised approximately 11% of total Citigroup GAAP assets and 19% of risk-weighted assets as of such date. Local Consumer Lending continued to represent the largest segment within Citi Holdings, with $147 billion of assets. Over 70% of Local Consumer Lending assets, or approximately $104 billion, were mortgage loans in North America real estate lending. At March 31, 2012, approximately $9.4 billion of loan loss reserves were allocated to North America real estate lending in Citi Holdings.
(1) For the summary of CVA/DVA by business within Securities and Banking, for the first quarter of 2012 and comparable periods, see "CiticorpInstitutional Clients GroupSecurities and Banking" below.
Statement continues on the next page, including notes to the table.
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The following tables show the income (loss) and revenues for Citigroup on a segment and business view:
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. 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 continues to believe represent a strong area of growth. At March 31, 2012, Citicorp had approximately $1.4 trillion of assets and $839 billion of deposits, representing approximately 73% of Citi's total assets and approximately 93% of its deposits.
At March 31, 2012, Citicorp consisted of the following businesses: Global Consumer Banking (which included retail banking and Citi-branded cards in four regionsNorth America, EMEA, Latin America and Asia, as well as Citi retail services in North America) and Institutional Clients Group (which includes Securities and Banking and Transaction Services).
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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, local commercial banking, Citi-branded cards and Citi retail services. GCB is a globally diversified business with 4,150 branches in 39 countries around the world. At March 31, 2012, GCB had $389 billion of assets and $323 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 and Citi retail services to retail customers and small to mid-size businesses in the U.S. NA RCB's 1,020 retail bank branches and 12.5 million customer accounts, as of March 31, 2012, 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 March 31, 2012, NA RCB had $40.6 billion of retail banking loans and $153.5 billion of deposits. In addition, NA RCB had 103.6 million Citi-branded and Citi retail services credit card accounts, with $109.4 billion in outstanding card loan balances.
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1Q12 vs. 1Q11
Net income increased 41% as compared to the prior-year period, driven by lower net credit losses and higher revenues from higher gains on sale of mortgages, partly offset by lower loan loss reserve releases and higher expenses.
Revenues increased 5% year-over-year as lower net interest margin and loan balances in the cards businesses were more than offset by higher non-interest revenue on sale of mortgages. Net interest revenue decreased 2% year-over-year, driven primarily by lower cards net interest margin which continued to be negatively impacted by the look-back provision of The Credit Card Accountability Responsibility and Disclosure Act (CARD Act). (The CARD Act requires a review 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 APR.) In addition, net interest revenues for cards was negatively impacted by higher low margin revenue promotional balances and lower total average loans. NA RCB believes the negative impact of the CARD Act and promotional balances should dissipate over the course of 2012 as the population of card accounts subject to the CARD Act look-back provisions declines and promotional balances convert or close. Non-interest revenue increased 46% year-over-year primarily due to the higher gains on sale of mortgages.
Expenses increased 3%, primarily driven by the higher investment spending in the business, particularly in cards marketing and new branches and technology, partially offset by efficiency savings and the absence of a litigation reserve relating to the interchange litigation recorded in the first quarter of 2011.
Provisions decreased 32%, primarily due to lower credit losses in the cards portfolio, partly offset by the continued lower loan loss reserve releases ($1.2 billion in the first quarter of 2011 compared to $841 million in the current quarter).
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. EMEA RCB had 286 retail bank branches with 4.0 million customer accounts, $4.5 billion in retail banking loans and $12.8 billion in deposits. In addition, the business had 2.6 million Citi-branded card accounts with $2.9 billion in outstanding card loan balances.
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1Q12 vs. 1Q11
Net income declined by $65 million year-over-year, due to lower revenues and higher operating expenses and credit costs. Effective January 1, 2012, Akbank, Citi's equity investment in Turkey, was moved from EMEA RCB to Corporate/Other due to Citi's announced potential reduction in share holdings in Akbank. The decline in net income year-over-year was driven by lower revenues, including the absence of Akbank, and higher expenses, partially offset by lower net credit losses.
Revenues decreased 10% from the prior-year period, driven by the impact of FX translation (negative 4%), as well as the absence of Akbank. Net interest revenue increased 8% driven by the removal of Akbank investment funding costs in the current quarter, partially offset by the impact of FX translation. Excluding these items, net interest revenue was essentially flat, as better spreads on deposits and retail loan growth were mostly offset by loan spread compression. Interest rate caps on credit cards, particularly in Turkey, and the continued liquidation of the higher yielding non-strategic retail banking portfolio were the main contributors to the lower spreads. Non-interest revenue decreased 35%, reflecting the absence of the Akbank contribution in the current quarter. Cards purchase sales grew 17%.
Expenses increased 13%, primarily due to the impact of continued account acquisition-focused investment spending, increased volumes and repositioning charges in Poland and Egypt.
Provisions increased 53%, primarily due to lower loan loss reserve releases, partially offset by continued lower net credit losses. Net credit losses declined 41% due to the ongoing improvement in credit quality and the move towards lower risk products. Provisions will likely continue to negatively impact the results of operations of EMEA RCB during 2012 as net credit losses have largely stabilized and loan loss reserve releases will generally remain lower than comparable prior-year period levels.
LATIN AMERICA REGIONAL CONSUMER BANKING
Latin America Regional Consumer Banking (LATAM RCB) provides traditional banking and branded card services to retail customers and small to mid-size businesses, with the largest presence in Mexico and Brazil. LATAM 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. At March 31, 2012, LATAM RCB had 2,201 retail branches, with 31.1 million customer accounts, $26.1 billion in retail banking loans and $46.1 billion in deposits. In addition, the business had 13.1 million Citi-branded card accounts with $14.3 billion in outstanding loan balances.
1Q12 vs. 1Q11
Net income declined 21% as higher cost of credit more than offset increased operating margin as revenues grew 6% with expenses remaining flat.
Revenues increased 6%, which included a negative 500 basis point impact of FX translation. Revenue growth was driven by growth in personal and card loans, primarily in Mexico. Net interest revenue increased 6% as growth in lending volumes of 16% offset reduced spreads as new loan origination was focused in higher credit quality customer segments. Non-interest revenue increased 7%, predominantly driven by an increase in fees resulting from higher banking transactions and Cards purchase sales, which grew 12%.
Expenses remained flat as compared to the first quarter of 2011 as higher account and transaction volumes, increased compensation due to increased sales incentives and legal and related items were offset by the impact of FX translation and ongoing savings initiatives across the region.
Provisions increased 97% from the prior-year period, reflecting a loan loss reserve build of $113 million in the current period versus a $147 million release in the prior-year period. The build was driven by higher volumes and portfolio seasoning in the personal loans portfolio. Net credit losses were 6% higher, resulting from portfolio growth.
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 South Korea, Australia, Singapore, Japan, Taiwan, Hong Kong, India and Indonesia. Citi's Japan Consumer Finance business, which Citi has been exiting since 2008, is included in Citi Holdings. At March 31, 2012, Asia RCB had 643 retail branches, 16.5 million customer accounts, $68.8 billion in retail banking loans and $110.7 billion in deposits. In addition, the business had 15.7 million Citi-branded card accounts with $19.6 billion in outstanding loan balances.
1Q12 vs. 1Q11
Net income increased 11% year-over-year, driven by higher revenues and lower net credit losses, partially offset by lower loan loss reserve releases and marginally higher expenses.
Revenues increased 5% year-over-year, primarily driven by higher business volumes and the absence of charges relating to the repurchase of certain Lehman structured notes ($70 million) recorded in the prior-year period, partially offset by continued spread compression. Net interest revenue was flat year-over-year as continued increases in lending and deposit volumes were offset by spread compression. Spread compression continued to be driven by stricter underwriting criteria arising from a lowering of the risk profile for personal and other loans, and this will likely continue to have a negative impact on net interest revenue in the near-term. Non-interest revenue increased 17%, reflecting growth in Citi-branded cards purchase sales and higher revenues from foreign exchange products and the absence of the above mentioned Lehman related charges, partially offset by a 26% decrease in investment sales year-over-year. Investment sales increased 40% from the fourth quarter of 2011.
Expenses increased 2%, largely due to growth in business volumes, partially offset by ongoing productivity savings.
Provisions increased 7% as lower loan loss reserve releases were partially offset by continued lower net credit losses, although the pace of improvement in net credit losses has slowed. The increase in credit provisions reflected the increasing volumes in the region, partially offset by continued credit quality improvement, particularly in Japan and India. India remained a significant driver of the improvement in credit quality, as it continued to de-risk elements of its legacy portfolio. Assuming the underlying core portfolio continues to grow and season in 2012, Citi expects credit costs could continue to increase marginally in line with portfolio growth.
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, 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 March 31, 2012, ICG had approximately $1.0 trillion of assets and $516 billion of deposits.
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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 retail investors, 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.
1Q12 vs. 1Q11
Net income of $1.2 billion decreased 28%, primarily due to negative $1.4 billion of CVA/DVA in the current quarter (see table below). Excluding CVA/DVA, net income increased 13%, primarily driven by an increase in revenues. The decline in expenses year-over-year was more than offset by higher provisions.
Revenues of $5.3 billion decreased 12% from the prior year due to the negative CVA/DVA. Excluding CVA/DVA, S&B revenues increased 6%, reflecting better results in fixed income markets, private bank, and a slight increase in investment banking, partially offset by lower revenues in equity markets and lending.
Fixed income markets revenues increased 19% excluding CVA/DVA. The results primarily reflected strong performance in rates and currencies across all products and regions, as overall market conditions improved in the first quarter of 2012 and client activity increased. While a return of liquidity and two-way flows in the credit markets in the first quarter of 2012 resulted in strong performance from credit and securitized products, revenues declined in these areas relative to the prior-year period, largely reflecting lower risk levels in the business.
Equity markets revenues decreased 18% excluding CVA/DVA, driven by lower industry volumes, particularly in cash equities.
Investment banking revenues increased 2%, as growth in debt underwriting revenues offset declines in advisory and equity underwriting revenues. The growth in debt underwriting was due to volume growth in certain products and gains in market share, while the lower results in advisory and equity underwriting revenues reflected market wide declines in activity levels.
Lending revenues decreased 78%, mainly as a result of losses on credit default swap hedges as credit spreads narrowed during the quarter (see the table below). Excluding the impact of these hedging losses, lending revenues increased 24%, primarily driven by increased volumes in the Corporate loan portfolio.
Private bank revenues increased 11% excluding CVA/DVA due to higher loan and deposit balances, spread improvement, and stronger capital markets activity.
Expenses decreased 2%, driven by efficiency savings from ongoing reengineering programs.
Provisions increased by $245 million to a positive $58 million, primarily due to reserve builds as a result of portfolio growth compared to releases in the prior-year period, partially offset by a specific recovery in the first quarter of 2012 which resulted in net credit recoveries for the quarter.
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 and 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.
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1Q12 vs. 1Q11
Net income increased 10% year-over-year, reflecting growth in revenues, partially offset by growth in expenses.
Revenues grew 7% year-over-year as increased customer balances and higher fees more than offset spread compression on deposits. Treasury and Trade Solutions revenues increased 11% primarily attributable to growth in the trade services and finance business as average trade loans grew 50% and spreads in the portfolio widened. Cash management revenues also increased year-over-year as growth in fees and deposit balances more than offset the impact of the continued low rate environment. Securities and Fund Services revenues declined 4% year-over-year driven by lower transaction and settlement volumes, reflecting lower levels of market activity, which resulted in decreased fee revenues.
Expenses increased 3% year-over-year, primarily driven by higher volumes.
Average deposits grew 6% from the prior-year period, driven by North America reflecting market demand for the U.S. dollar deposits. (For additional information on potential impacts of credit rating downgrades to Transaction Services deposits, see "Capital MarketsFunding and LiquidityCredit Ratings" below.)
Citi Holdings contains businesses and portfolios of assets that Citigroup has determined are not central to its core Citicorp businesses. Citi Holdings consists of the following: 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. 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 revenue marks as and when appropriate.
As of March 31, 2012, Citi Holdings' GAAP assets were approximately $209 billion, a decrease of approximately 29% year-over-year and a decrease of 7% from year end 2011. The decline in assets from year end 2011 was comprised of approximately $4 billion of asset sales and business dispositions, $11 billion of run-off and pay-downs, and $1 billion of charge-offs and revenue marks. Citi Holdings represented approximately 11% of Citi's GAAP assets as of March 31, 2012, while Citi Holdings' risk-weighted assets of approximately $187 billion at March 31, 2012 represented approximately 19% of Citi's risk-weighted assets as of such date.
BROKERAGE AND ASSET MANAGEMENT
Brokerage and Asset Management (BAM) primarily consists of Citi's investment in, and assets related to, the Morgan Stanley Smith Barney Joint Venture (MSSB JV). At March 31, 2012, BAM had approximately $26 billion of assets, or approximately 12% of Citi Holdings' assets, of which approximately $25 billion related to the MSSB JV. The remaining assets in BAM consist of other retail alternative investments.
For information on the terms and conditions of the MSSB JV, see the Forms 8-K filed with the Securities and Exchange Commission on January 16, 2009 and June 3, 2009. See also Note 11 to the Consolidated Financial Statements.
1Q12 vs. 1Q11
The net loss increased by $125 million from the prior-year period to $137 million in the current quarter, as lower revenues were only partly offset by lower expenses.
Revenues decreased by $183 million year-over-year driven by higher funding costs for MSSB JV assets and lower revenues from the MSSB JV.
Expenses decreased 10% year-over-year driven by divestitures.
Provisions decreased by $9 million due to the absence of certain benefits and claims in the prior-year period.
LOCAL CONSUMER LENDING
Local Consumer Lending (LCL) included 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 March 31, 2012, LCL consisted of approximately $147 billion of assets (with approximately $133 billion in North America), or approximately 71% of Citi Holdings assets, and thus represents the largest segment within Citi Holdings. The North America assets primarily consisted of residential mortgages (residential first mortgages and home equity loans) ($104 billion at March 31, 2012).
1Q12 vs. 1Q11
The net loss decreased 37% year-over-year, driven primarily by the continued improving credit environment, including lower net credit losses in both the North America and international portfolios.
Revenues decreased 13%, driven primarily by a 9% decline year-over-year in net interest revenue due to lower loan balances driven by asset sales, divestitures and run-offs, partially offset by a reserve release related to customer refunds in the Japan Consumer Finance business (see "Citi HoldingsLocal Consumer LendingJapan Consumer Finance" in Citi's 2011 Annual Report of Form 10-K for additional information).
Non-interest revenue decreased 21% from the prior-year period primarily due to the impact of divestitures and a higher reserve build relating to the repurchase reserve ($185 million in the current quarter compared to $122 million in the first quarter of 2011) (see "CitigroupResidential MortgagesRepresentations and Warranties" below).
Expenses decreased 16% year-over-year, driven by lower volumes and divestitures. The decrease in overall LCL expenses was partly offset by increased expenses in the current quarter relating to the independent foreclosure review process required by the Consent Orders entered into by Citi (and other large financial institutions) with the Federal Reserve and OCC in April 2011. To comply with this requirement, Citi has retained an independent consultant to conduct a review of a sample of foreclosure actions pending, or foreclosure sales that occurred, between January 1, 2009 and December 31, 2010 and is required to remediate potential financial injury to borrowers caused by any deficiencies identified through the review. In addition, pursuant to the independent foreclosure reviews, Citi is required to proactively contact borrowers included within the group above and offer them an opportunity to complain against improper foreclosure actions. Any such complaints will be reviewed by the independent consultant and Citi will be required to remediate potential financial injury. Borrower outreach commenced in November 2011 and the outreach process (excluding the subsequent review period) was to be completed by April 2012; however, the OCC has extended the borrower outreach process to July 2012 and has made other changes to expand the scope and size of the review. Citi expects its expenses relating to this aspect of the Consent Orders will remain elevated during the remainder of 2012 and will also be dependent on future changes, if any, in the size and scope of the process (e.g., borrower response rates). Citi continues to believe its ongoing expenses associated with the implementation of the servicing standards required by the Consent Orders, as well as the incremental servicing standards required by the national mortgage settlement approved in April 2012, will not be material. See also "Managing Global RiskCredit RiskNational Mortgage Settlement" below.
Provisions decreased 29% year-over-year driven by lower credit losses. Net credit losses decreased 25% driven by credit improvements in both the North America ($425 million) and international ($170 million) portfolios. North America mortgage net credit losses included approximately $370 million of incremental charge-offs related to previously deferred principal balances on modified mortgages, substantially all of which were offset by a specific reserve release. These charge-offs were
related to anticipated forgiveness of principal in connection with the national mortgage settlement, and Citi expects mortgage net credit losses will continue to be impacted by principal forgiveness related to the national mortgage settlement. See also "Managing Global RiskCredit RiskNational Mortgage Settlement" below. However, Citi also continues to believe that its loan loss reserves will be sufficient to cover these charge-offs. Excluding the incremental charge-offs, net credit losses in LCL would have declined 41%. Loan loss reserve releases decreased 6%. This decrease was partly offset by the aforementioned reserve release related to the charge-offs on previously deferred principal balances on modified mortgages.
Assets declined 25% from the prior-year period, driven by the impact of asset sales and portfolio run-off, including declines in North America mortgages ($17 billion) and international loans ($8 billion).
SPECIAL ASSET POOL
Special Asset Pool (SAP) had approximately $36 billion of assets as of March 31, 2012, which constituted approximately 17% of Citi Holdings assets as of such date. 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.
1Q12 vs. 1Q11
Net income decreased $258 million year-over-year, driven by the decline in revenues due to lower asset balances as well as lower loan loss reserve releases, partially offset by lower expenses and lower net credit losses.
Revenues decreased $399 million from the prior-year period driven by a net interest revenue decline of $161 million and a non-interest revenue decline of $238 million. The decrease in net interest revenue was driven by the continued decline in interest-earning assets. Citi continues to expect to incur negative carrying costs in SAP going forward as the non-interest-earning assets in SAP, which require funding, represent the larger portion of the total asset pool. The decrease in non-interest revenue was driven by lower positive private equity marks as compared to the prior-year period and a repurchase reserve build of $150 million related to private-label mortgage securitizations, partly offset by lower losses on asset sales and the absence of a $709 million pretax net loss from the transfer of $12.7 billion of securities out of investments held-to-maturity during the first quarter of 2011.
Expenses decreased 23%, driven by lower volume and asset levels, as well as lower legal and related costs.
Provisions increased 76% year-over-year as a decrease in loan loss reserve releases ($29 million in the current quarter compared to a release of $1 billion in the prior-year period) was partially offset by a $688 million decrease in net credit losses.
Assets in SAP declined 51% year-over-year, primarily driven by sales, amortization and prepayments.
Corporate/Other includes unallocated global staff functions (including finance, risk, human resources, legal and compliance), other corporate expense and unallocated global operations and technology expenses, Corporate Treasury and Corporate items and discontinued operations. At March 31, 2012, this segment had approximately $312 billion of assets, or 16% of Citigroup's total assets, consisting primarily of Citi's liquidity portfolio.
1Q12 vs. 1Q11
The net loss of $380 million improved by $59 million year-over-year. The improvement in the net loss was primarily due to an increase in revenues that was offset by an increase in expenses as well as the absence of a net pretax gain of $40 million on the announced sale of the Egg Banking PLC credit card business recorded in discontinued operations in the prior-year period.
Revenues increased $561 million year-over-year, primarily driven by the net pretax gain of $477 million from minority investments (see the "Executive Summary" above for details on the net gain/(loss) from minority investments in the first quarter of 2012). Gains from portfolio repositioning, primarily from the sale of available-for-sale securities, were offset by losses on hedging activities.
Expenses increased by 23%, largely driven by higher legal and related costs.
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 during the first quarter of 2012. For additional information on Citigroup's deposits, short-term and long-term debt and secured financing transactions, see "Capital Resources and LiquidityFunding and Liquidity" below.
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