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.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’sGlobal Consumer Banking businesses andInstitutional Clients Group; and Citi Holdings, consisting ofBrokerage and Asset Management, Local Consumer Lending andSpecial 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 Web sitewebsite atwww.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 the Citi’s Web sitewebsite by clicking on the “Investors” page and selecting “All SEC Filings.” The SEC’s Web sitewebsite also contains current reports, information statements, and other information regarding Citi atwww.sec.gov.
Within this Form 10-K, please refer to the tables of contents on pages 3 and 129139 for page references to Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements, respectively.At December 31, 2011, Citi had approximately 266,000 full-time employees compared to approximately 260,000 full-time employees at December 31, 2010.
Please see “Risk Factors” below for a discussion ofcertain risks and uncertainties that could materially impactCitigroup’s financial condition and results of operations.
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 Lendingto 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:
* Effective in the first quarter of 2012, Citi will transfer the substantial majority of the retail partner cards business (approximately $45 billion of assets, including approximately $41 billion of loans) from Citi Holdings –Local Consumer Lending to Citicorp—North America RCB.
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, andAsia includes Japan.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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. 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 Lendingto 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. 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. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND CITI HOLDINGS BALANCE SHEET REVIEW 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. 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 Lendingto 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. 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. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND EXECUTIVE SUMMARY Overview 2012—Ongoing Transformation of Citigroup 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 6 2012 Summary Results Citigroup 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 inLocal Consumer Lending in Citi Holdings as well as spread compression inNorth America andAsia 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 inSecurities and Banking and higher mortgage revenues inNorth America RCB, partially offset by lower revenues in theSpecial Asset Pool within Citi Holdings. Operating Expenses 7 Credit Costs Capital and Loan Loss Reserve Positions Citicorp5 8 The internationalRCB revenue growth year-over-year, excluding the impact of FX translation, was driven by 9% revenue growth inLatin America RCB and 2% revenue growth inEMEA 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. InternationalRCB 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. Citi Holdings8 9 Statement continues on the next page, including notes to the table. 10 Note: The following accounting changes were adopted by Citi during the respective years: 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 NM Not meaningful 12 CITIGROUP REVENUES NM Not meaningful 13 CITICORP NM Not meaningful 14 GLOBAL CONSUMER BANKING Global Consumer Banking (GCB) consists of Citigroup’s four geographicalRegional 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. 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 inNorth America and further concentrate its presence in major metropolitan areas. At December 31, 2012, NA RCBhad approximately 12.4 million customer accounts, $42.7 billion of retail banking loans and $165.2 billion of deposits. In addition,NA RCBhad approximately 102.1 million Citi-branded and Citi retail services credit card accounts, with $111.5 billion in outstanding card loan balances. NM Not meaningful 16 2012 vs. 2011 2011 vs. 2010 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 whichEMEA 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. 18 The discussion of the results of operations forEMEA 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 ofEMEA 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 2011 vs. 2010 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 throughoutLatin 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. 20 The discussion of the results of operations forLatin America RCBbelow 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 ofLatin 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 2011 vs. 2010 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 RCBhad 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. 22 The discussion of the results of operations forAsia 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 ofAsia 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 2011 vs. 2010 23 INSTITUTIONAL CLIENTS GROUP Institutional Clients Group (ICG)includesSecurities and BankingandTransaction Services.ICGprovides 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 withinTransaction Servicesin over 95 countries and jurisdictions. At December 31, 2012,ICGhad approximately $1.1 trillion of assets and $523 billion of deposits. 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. NM Not meaningful 25 2012 vs. 2011 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 inS&B announced in the fourth quarter of 2012 are designed to streamlineS&B’s client coverage model and improve overall productivity. 26 2011 vs. 2010 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 inS&B was largely completed at the end of 2011. 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. 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 2011 vs. 2010 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). 2012 vs. 2011 2011 vs. 2010 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 ofBrokerage and Asset Management, Local Consumer Lending andSpecial Asset Pool. 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 inBAM consist of other retail alternative investments. NM Not meaningful 2012 vs. 2011 2011 vs. 2010 32 LOCAL CONSUMER LENDING Local Consumer Lending (LCL) includes a substantial portion of Citigroup’sNorth 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 inNorth America), or approximately 81% of Citi Holdings assets, and thus represents the largest segment within Citi Holdings. TheNorth America assets primarily consist of residential mortgages (residential first mortgages and home equity loans), which stood at $92 billion as of December 31, 2012. 2012 vs. 2011 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. 33 of $146 million related to the national mortgage settlement. Citi expects that net credit losses inLCL 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). 2011 vs. 2010 34 Japan Consumer Finance Payment Protection Insurance 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). 35 SPECIAL ASSET POOL TheSpecial 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. NM Not meaningful 2012 vs. 2011 2011 vs. 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. ASSETS Cash and Deposits with Banks 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. 37 Federal Funds Sold and Securities Borrowed or Trading Account Assets Investments 38 Loans Other Assets 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. 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 Lendingto 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. 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. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND EXECUTIVE SUMMARY Overview 2012—Ongoing Transformation of Citigroup 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 6 2012 Summary Results Citigroup 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 inLocal Consumer Lending in Citi Holdings as well as spread compression inNorth America andAsia 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 inSecurities and Banking and higher mortgage revenues inNorth America RCB, partially offset by lower revenues in theSpecial Asset Pool within Citi Holdings. Operating Expenses 7 Credit Costs Capital and Loan Loss Reserve Positions Citicorp5 8 The internationalRCB revenue growth year-over-year, excluding the impact of FX translation, was driven by 9% revenue growth inLatin America RCB and 2% revenue growth inEMEA 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. InternationalRCB 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. Citi Holdings8 9 Statement continues on the next page, including notes to the table. 10 Note: The following accounting changes were adopted by Citi during the respective years: 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 NM Not meaningful 12 CITIGROUP REVENUES NM Not meaningful 13 CITICORP NM Not meaningful 14 GLOBAL CONSUMER BANKING Global Consumer Banking (GCB) consists of Citigroup’s four geographicalRegional 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. 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 inNorth America and further concentrate its presence in major metropolitan areas. At December 31, 2012, NA RCBhad approximately 12.4 million customer accounts, $42.7 billion of retail banking loans and $165.2 billion of deposits. In addition,NA RCBhad approximately 102.1 million Citi-branded and Citi retail services credit card accounts, with $111.5 billion in outstanding card loan balances. NM Not meaningful 16 2012 vs. 2011 2011 vs. 2010 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 whichEMEA 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. 18 The discussion of the results of operations forEMEA 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 ofEMEA 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 2011 vs. 2010 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 throughoutLatin 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. 20 The discussion of the results of operations forLatin America RCBbelow 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 ofLatin 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 2011 vs. 2010 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 RCBhad 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. 22 The discussion of the results of operations forAsia 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 ofAsia 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 2011 vs. 2010 23 INSTITUTIONAL CLIENTS GROUP Institutional Clients Group (ICG)includesSecurities and BankingandTransaction Services.ICGprovides 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 withinTransaction Servicesin over 95 countries and jurisdictions. At December 31, 2012,ICGhad approximately $1.1 trillion of assets and $523 billion of deposits. 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. NM Not meaningful 25 2012 vs. 2011 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 inS&B announced in the fourth quarter of 2012 are designed to streamlineS&B’s client coverage model and improve overall productivity. 26 2011 vs. 2010 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 inS&B was largely completed at the end of 2011. 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. 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 2011 vs. 2010 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). 2012 vs. 2011 2011 vs. 2010 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 ofBrokerage and Asset Management, Local Consumer Lending andSpecial Asset Pool. 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 inBAM consist of other retail alternative investments. NM Not meaningful 2012 vs. 2011 2011 vs. 2010 32 LOCAL CONSUMER LENDING Local Consumer Lending (LCL) includes a substantial portion of Citigroup’sNorth 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 inNorth America), or approximately 81% of Citi Holdings assets, and thus represents the largest segment within Citi Holdings. TheNorth America assets primarily consist of residential mortgages (residential first mortgages and home equity loans), which stood at $92 billion as of December 31, 2012. 2012 vs. 2011 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. 33 of $146 million related to the national mortgage settlement. Citi expects that net credit losses inLCL 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). 2011 vs. 2010 34 Japan Consumer Finance Payment Protection Insurance 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). 35 SPECIAL ASSET POOL TheSpecial 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. NM Not meaningful 2012 vs. 2011 2011 vs. 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. ASSETS Cash and Deposits with Banks 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. 37 Federal Funds Sold and Securities Borrowed or Trading Account Assets Investments 38 Loans Other Assets CAPITAL RESOURCES AND LIQUIDITY 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. 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 Lendingto 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. 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. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND EXECUTIVE SUMMARY Overview 2012—Ongoing Transformation of Citigroup 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 6 2012 Summary Results Citigroup 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 inLocal Consumer Lending in Citi Holdings as well as spread compression inNorth America andAsia 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 inSecurities and Banking and higher mortgage revenues inNorth America RCB, partially offset by lower revenues in theSpecial Asset Pool within Citi Holdings. Operating Expenses 7 Credit Costs Capital and Loan Loss Reserve Positions Citicorp5 8 The internationalRCB revenue growth year-over-year, excluding the impact of FX translation, was driven by 9% revenue growth inLatin America RCB and 2% revenue growth inEMEA 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. InternationalRCB 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. Citi Holdings8 9 Statement continues on the next page, including notes to the table. 10 Note: The following accounting changes were adopted by Citi during the respective years: 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 NM Not meaningful 12 CITIGROUP REVENUES NM Not meaningful 13 CITICORP NM Not meaningful 14 GLOBAL CONSUMER BANKING Global Consumer Banking (GCB) consists of Citigroup’s four geographicalRegional 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. 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 inNorth America and further concentrate its presence in major metropolitan areas. At December 31, 2012, NA RCBhad approximately 12.4 million customer accounts, $42.7 billion of retail banking loans and $165.2 billion of deposits. In addition,NA RCBhad approximately 102.1 million Citi-branded and Citi retail services credit card accounts, with $111.5 billion in outstanding card loan balances. NM Not meaningful 16 2012 vs. 2011 2011 vs. 2010 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 whichEMEA 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. 18 The discussion of the results of operations forEMEA 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 ofEMEA 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 2011 vs. 2010 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 throughoutLatin 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. 20 The discussion of the results of operations forLatin America RCBbelow 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 ofLatin 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 2011 vs. 2010 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 RCBhad 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. 22 The discussion of the results of operations forAsia 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 ofAsia 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 2011 vs. 2010 23 INSTITUTIONAL CLIENTS GROUP Institutional Clients Group (ICG)includesSecurities and BankingandTransaction Services.ICGprovides 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 withinTransaction Servicesin over 95 countries and jurisdictions. At December 31, 2012,ICGhad approximately $1.1 trillion of assets and $523 billion of deposits. 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. NM Not meaningful 25 2012 vs. 2011 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 inS&B announced in the fourth quarter of 2012 are designed to streamlineS&B’s client coverage model and improve overall productivity. 26 2011 vs. 2010 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 inS&B was largely completed at the end of 2011. 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. 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 2011 vs. 2010 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). 2012 vs. 2011 2011 vs. 2010 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 ofBrokerage and Asset Management, Local Consumer Lending andSpecial Asset Pool. 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 inBAM consist of other retail alternative investments. NM Not meaningful 2012 vs. 2011 2011 vs. 2010 32 LOCAL CONSUMER LENDING Local Consumer Lending (LCL) includes a substantial portion of Citigroup’sNorth 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 inNorth America), or approximately 81% of Citi Holdings assets, and thus represents the largest segment within Citi Holdings. TheNorth America assets primarily consist of residential mortgages (residential first mortgages and home equity loans), which stood at $92 billion as of December 31, 2012. 2012 vs. 2011 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. 33 of $146 million related to the national mortgage settlement. Citi expects that net credit losses inLCL 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). 2011 vs. 2010 34 Japan Consumer Finance Payment Protection Insurance 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). 35 SPECIAL ASSET POOL TheSpecial 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. NM Not meaningful 2012 vs. 2011 2011 vs. 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. ASSETS Cash and Deposits with Banks 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. 37 Federal Funds Sold and Securities Borrowed or Trading Account Assets Investments 38 Loans Other Assets LIABILITIES Deposits Federal Funds Purchased and Securities Loaned or Sold Trading Account Liabilities Debt Other Liabilities 39 SEGMENT BALANCE SHEET AT DECEMBER 31, 2012 (1) 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. 40 CAPITAL RESOURCES AND LIQUIDITY CAPITAL RESOURCES Overview Capital Ratios Under Current Regulatory Guidelines 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. 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 42 Basel II.5 and III 43 Components of Tier 1 Common Capital and Risk-Weighted Assets Under Basel III Common Stockholders’ Equity 44 Tangible Common Equity and Tangible Book Value Per Share Capital Resources of Citigroup’s Subsidiary U.S. Depository Institutions 45 Impact of Changes on Capital Ratios Under Current Regulatory Guidelines Broker-Dealer Subsidiaries 46 Regulatory Capital Standards Basel II 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 III 47 Basel III NPR 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. 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.” Standardized Approach NPR Advanced Approaches NPR 49 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. 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 Lendingto 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. 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. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND EXECUTIVE SUMMARY Overview 2012—Ongoing Transformation of Citigroup 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 6 2012 Summary Results Citigroup 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 inLocal Consumer Lending in Citi Holdings as well as spread compression inNorth America andAsia 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 inSecurities and Banking and higher mortgage revenues inNorth America RCB, partially offset by lower revenues in theSpecial Asset Pool within Citi Holdings. Operating Expenses 7 Credit Costs Capital and Loan Loss Reserve Positions Citicorp5 8 The internationalRCB revenue growth year-over-year, excluding the impact of FX translation, was driven by 9% revenue growth inLatin America RCB and 2% revenue growth inEMEA 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. InternationalRCB 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. Citi Holdings8 9 Statement continues on the next page, including notes to the table. 10 Note: The following accounting changes were adopted by Citi during the respective years: 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 NM Not meaningful 12 CITIGROUP REVENUES NM Not meaningful 13 CITICORP NM Not meaningful 14 GLOBAL CONSUMER BANKING Global Consumer Banking (GCB) consists of Citigroup’s four geographicalRegional 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. 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 inNorth America and further concentrate its presence in major metropolitan areas. At December 31, 2012, NA RCBhad approximately 12.4 million customer accounts, $42.7 billion of retail banking loans and $165.2 billion of deposits. In addition,NA RCBhad approximately 102.1 million Citi-branded and Citi retail services credit card accounts, with $111.5 billion in outstanding card loan balances. NM Not meaningful 16 2012 vs. 2011 2011 vs. 2010 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 whichEMEA 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. 18 The discussion of the results of operations forEMEA 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 ofEMEA 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 2011 vs. 2010 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 throughoutLatin 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. 20 The discussion of the results of operations forLatin America RCBbelow 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 ofLatin 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 2011 vs. 2010 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 RCBhad 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. 22 The discussion of the results of operations forAsia 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 ofAsia 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 2011 vs. 2010 23 INSTITUTIONAL CLIENTS GROUP Institutional Clients Group (ICG)includesSecurities and BankingandTransaction Services.ICGprovides 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 withinTransaction Servicesin over 95 countries and jurisdictions. At December 31, 2012,ICGhad approximately $1.1 trillion of assets and $523 billion of deposits. 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. NM Not meaningful 25 2012 vs. 2011 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 inS&B announced in the fourth quarter of 2012 are designed to streamlineS&B’s client coverage model and improve overall productivity. 26 2011 vs. 2010 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 inS&B was largely completed at the end of 2011. 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. 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 2011 vs. 2010 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). 2012 vs. 2011 2011 vs. 2010 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 ofBrokerage and Asset Management, Local Consumer Lending andSpecial Asset Pool. 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 inBAM consist of other retail alternative investments. NM Not meaningful 2012 vs. 2011 2011 vs. 2010 32 LOCAL CONSUMER LENDING Local Consumer Lending (LCL) includes a substantial portion of Citigroup’sNorth 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 inNorth America), or approximately 81% of Citi Holdings assets, and thus represents the largest segment within Citi Holdings. TheNorth America assets primarily consist of residential mortgages (residential first mortgages and home equity loans), which stood at $92 billion as of December 31, 2012. 2012 vs. 2011 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. 33 of $146 million related to the national mortgage settlement. Citi expects that net credit losses inLCL 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). 2011 vs. 2010 34 Japan Consumer Finance Payment Protection Insurance 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). 35 SPECIAL ASSET POOL TheSpecial 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. NM Not meaningful 2012 vs. 2011 2011 vs. 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. ASSETS Cash and Deposits with Banks 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. 37 Federal Funds Sold and Securities Borrowed or Trading Account Assets Investments 38 Loans Other Assets LIABILITIES Deposits Federal Funds Purchased and Securities Loaned or Sold Trading Account Liabilities Debt Other Liabilities 39 SEGMENT BALANCE SHEET AT DECEMBER 31, 2012 (1) 40 CAPITAL RESOURCES AND LIQUIDITY CAPITAL RESOURCES Overview Capital Ratios Under Current Regulatory Guidelines 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. 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 42 Basel II.5 and III 43 Components of Tier 1 Common Capital and Risk-Weighted Assets Under Basel III Common Stockholders’ Equity 44 Tangible Common Equity and Tangible Book Value Per Share Capital Resources of Citigroup’s Subsidiary U.S. Depository Institutions 45 Impact of Changes on Capital Ratios Under Current Regulatory Guidelines Broker-Dealer Subsidiaries 46 Regulatory Capital Standards Basel II 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 III 47 Basel III NPR 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. 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.” Standardized Approach NPR Advanced Approaches NPR 49 RISK FACTORS 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. 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 Lendingto 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. 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. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND EXECUTIVE SUMMARY Overview 2012—Ongoing Transformation of Citigroup 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 6 2012 Summary Results Citigroup 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 inLocal Consumer Lending in Citi Holdings as well as spread compression inNorth America andAsia 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 inSecurities and Banking and higher mortgage revenues inNorth America RCB, partially offset by lower revenues in theSpecial Asset Pool within Citi Holdings. Operating Expenses 7 Credit Costs Capital and Loan Loss Reserve Positions Citicorp5 8 The internationalRCB revenue growth year-over-year, excluding the impact of FX translation, was driven by 9% revenue growth inLatin America RCB and 2% revenue growth inEMEA 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. InternationalRCB 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. Citi Holdings8 9 Statement continues on the next page, including notes to the table. 10 Note: The following accounting changes were adopted by Citi during the respective years: 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 NM Not meaningful 12 CITIGROUP REVENUES NM Not meaningful 13 CITICORP NM Not meaningful 14 GLOBAL CONSUMER BANKING Global Consumer Banking (GCB) consists of Citigroup’s four geographicalRegional 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. 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 inNorth America and further concentrate its presence in major metropolitan areas. At December 31, 2012, NA RCBhad approximately 12.4 million customer accounts, $42.7 billion of retail banking loans and $165.2 billion of deposits. In addition,NA RCBhad approximately 102.1 million Citi-branded and Citi retail services credit card accounts, with $111.5 billion in outstanding card loan balances. NM Not meaningful 16 2012 vs. 2011 2011 vs. 2010 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 whichEMEA 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. 18 The discussion of the results of operations forEMEA 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 ofEMEA 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 2011 vs. 2010 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 throughoutLatin 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. 20 The discussion of the results of operations forLatin America RCBbelow 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 ofLatin 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 2011 vs. 2010 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 RCBhad 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. 22 The discussion of the results of operations forAsia 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 ofAsia 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 2011 vs. 2010 23 INSTITUTIONAL CLIENTS GROUP Institutional Clients Group (ICG)includesSecurities and BankingandTransaction Services.ICGprovides 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 withinTransaction Servicesin over 95 countries and jurisdictions. At December 31, 2012,ICGhad approximately $1.1 trillion of assets and $523 billion of deposits. 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. NM Not meaningful 25 2012 vs. 2011 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 inS&B announced in the fourth quarter of 2012 are designed to streamlineS&B’s client coverage model and improve overall productivity. 26 2011 vs. 2010 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 inS&B was largely completed at the end of 2011. 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. 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 2011 vs. 2010 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). 2012 vs. 2011 2011 vs. 2010 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 ofBrokerage and Asset Management, Local Consumer Lending andSpecial Asset Pool. 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 inBAM consist of other retail alternative investments. NM Not meaningful 2012 vs. 2011 2011 vs. 2010 32 LOCAL CONSUMER LENDING Local Consumer Lending (LCL) includes a substantial portion of Citigroup’sNorth 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 inNorth America), or approximately 81% of Citi Holdings assets, and thus represents the largest segment within Citi Holdings. TheNorth America assets primarily consist of residential mortgages (residential first mortgages and home equity loans), which stood at $92 billion as of December 31, 2012. 2012 vs. 2011 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. 33 of $146 million related to the national mortgage settlement. Citi expects that net credit losses inLCL 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). 2011 vs. 2010 34 Japan Consumer Finance Payment Protection Insurance 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). 35 SPECIAL ASSET POOL TheSpecial 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. NM Not meaningful 2012 vs. 2011 2011 vs. 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. ASSETS Cash and Deposits with Banks 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. 37 Federal Funds Sold and Securities Borrowed or Trading Account Assets Investments 38 Loans Other Assets LIABILITIES Deposits Federal Funds Purchased and Securities Loaned or Sold Trading Account Liabilities Debt Other Liabilities 39 SEGMENT BALANCE SHEET AT DECEMBER 31, 2012 (1) 40 CAPITAL RESOURCES AND LIQUIDITY CAPITAL RESOURCES Overview Capital Ratios Under Current Regulatory Guidelines 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. 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 42 Basel II.5 and III 43 Components of Tier 1 Common Capital and Risk-Weighted Assets Under Basel III Common Stockholders’ Equity 44 Tangible Common Equity and Tangible Book Value Per Share Capital Resources of Citigroup’s Subsidiary U.S. Depository Institutions 45 Impact of Changes on Capital Ratios Under Current Regulatory Guidelines Broker-Dealer Subsidiaries 46 Regulatory Capital Standards Basel II 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 III 47 Basel III NPR 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. 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.” Standardized Approach NPR Advanced Approaches NPR 49 FUNDING AND LIQUIDITY Overview 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. Aggregate Liquidity Resources All amounts in the table above are as of period-end and may increase or decrease intra-period in the ordinary course of business. 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. 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. Aggregate Liquidity Resources—By Type 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 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 inEMEA and 10% growth inLatin 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, particularlyGlobal 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. Long-Term Debt 52 Long-Term Debt Outstanding 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. Long-Term Debt Issuances and Maturities 53 The table below shows Citi’s aggregate expected annual long-term debt maturities as of December 31, 2012: 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 54 Secured Financing Commercial Paper Other Short-Term Borrowings Liquidity Management, Measures and Stress Testing Liquidity Management Liquidity Measures Stress Testing 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. Credit Ratings NR Not rated. Recent Credit Rating Developments Potential Impacts of Ratings Downgrades 56 Citigroup Inc. and Citibank, N.A.—Potential Derivative Triggers Citibank, N.A.—Additional Potential Impacts 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: 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. Types of Off-Balance-Sheet Arrangements Disclosures in this Form 10-K 58 CONTRACTUAL OBLIGATIONS The following table includes information on Citigroup’s contractual obligations, as specified and aggregated pursuant to SEC requirements. 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). 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. 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. 60 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 CapitalRequirements 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. 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. 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. 61 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 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. 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. 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. 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. MANAGING GLOBAL RISK 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. 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 Lendingto 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. 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. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND EXECUTIVE SUMMARY Overview 2012—Ongoing Transformation of Citigroup 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 6 2012 Summary Results Citigroup 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 inLocal Consumer Lending in Citi Holdings as well as spread compression inNorth America andAsia 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 inSecurities and Banking and higher mortgage revenues inNorth America RCB, partially offset by lower revenues in theSpecial Asset Pool within Citi Holdings. Operating Expenses 7 Credit Costs Capital and Loan Loss Reserve Positions Citicorp5 8 The internationalRCB revenue growth year-over-year, excluding the impact of FX translation, was driven by 9% revenue growth inLatin America RCB and 2% revenue growth inEMEA 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. InternationalRCB 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. Citi Holdings8 9 Statement continues on the next page, including notes to the table. 10 Note: The following accounting changes were adopted by Citi during the respective years: 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 NM Not meaningful 12 CITIGROUP REVENUES NM Not meaningful 13 CITICORP NM Not meaningful 14 GLOBAL CONSUMER BANKING Global Consumer Banking (GCB) consists of Citigroup’s four geographicalRegional 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. 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 inNorth America and further concentrate its presence in major metropolitan areas. At December 31, 2012, NA RCBhad approximately 12.4 million customer accounts, $42.7 billion of retail banking loans and $165.2 billion of deposits. In addition,NA RCBhad approximately 102.1 million Citi-branded and Citi retail services credit card accounts, with $111.5 billion in outstanding card loan balances. NM Not meaningful 16 2012 vs. 2011 2011 vs. 2010 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 whichEMEA 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. 18 The discussion of the results of operations forEMEA 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 ofEMEA 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 2011 vs. 2010 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 throughoutLatin 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. 20 The discussion of the results of operations forLatin America RCBbelow 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 ofLatin 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 2011 vs. 2010 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 RCBhad 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. 22 The discussion of the results of operations forAsia 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 ofAsia 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 2011 vs. 2010 23 INSTITUTIONAL CLIENTS GROUP Institutional Clients Group (ICG)includesSecurities and BankingandTransaction Services.ICGprovides 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 withinTransaction Servicesin over 95 countries and jurisdictions. At December 31, 2012,ICGhad approximately $1.1 trillion of assets and $523 billion of deposits. 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. NM Not meaningful 25 2012 vs. 2011 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 inS&B announced in the fourth quarter of 2012 are designed to streamlineS&B’s client coverage model and improve overall productivity. 26 2011 vs. 2010 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 inS&B was largely completed at the end of 2011. 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. 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 2011 vs. 2010 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). 2012 vs. 2011 2011 vs. 2010 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 ofBrokerage and Asset Management, Local Consumer Lending andSpecial Asset Pool. 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 inBAM consist of other retail alternative investments. NM Not meaningful 2012 vs. 2011 2011 vs. 2010 32 LOCAL CONSUMER LENDING Local Consumer Lending (LCL) includes a substantial portion of Citigroup’sNorth 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 inNorth America), or approximately 81% of Citi Holdings assets, and thus represents the largest segment within Citi Holdings. TheNorth America assets primarily consist of residential mortgages (residential first mortgages and home equity loans), which stood at $92 billion as of December 31, 2012. 2012 vs. 2011 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. 33 of $146 million related to the national mortgage settlement. Citi expects that net credit losses inLCL 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). 2011 vs. 2010 34 Japan Consumer Finance Payment Protection Insurance 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). 35 SPECIAL ASSET POOL TheSpecial 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. NM Not meaningful 2012 vs. 2011 2011 vs. 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. ASSETS Cash and Deposits with Banks 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. 37 Federal Funds Sold and Securities Borrowed or Trading Account Assets Investments 38 Loans Other Assets LIABILITIES Deposits Federal Funds Purchased and Securities Loaned or Sold Trading Account Liabilities Debt Other Liabilities 39 SEGMENT BALANCE SHEET AT DECEMBER 31, 2012 (1) 40 CAPITAL RESOURCES AND LIQUIDITY CAPITAL RESOURCES Overview Capital Ratios Under Current Regulatory Guidelines 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. 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 42 Basel II.5 and III 43 Components of Tier 1 Common Capital and Risk-Weighted Assets Under Basel III Common Stockholders’ Equity 44 Tangible Common Equity and Tangible Book Value Per Share Capital Resources of Citigroup’s Subsidiary U.S. Depository Institutions 45 Impact of Changes on Capital Ratios Under Current Regulatory Guidelines Broker-Dealer Subsidiaries 46 Regulatory Capital Standards Basel II 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 III 47 Basel III NPR 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. 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.” Standardized Approach NPR Advanced Approaches NPR 49 FUNDING AND LIQUIDITY Overview 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. Aggregate Liquidity Resources All amounts in the table above are as of period-end and may increase or decrease intra-period in the ordinary course of business. 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. 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. Aggregate Liquidity Resources—By Type 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 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 inEMEA and 10% growth inLatin 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, particularlyGlobal 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. Long-Term Debt 52 Long-Term Debt Outstanding 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. Long-Term Debt Issuances and Maturities 53 The table below shows Citi’s aggregate expected annual long-term debt maturities as of December 31, 2012: 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 54 Secured Financing Commercial Paper Other Short-Term Borrowings Liquidity Management, Measures and Stress Testing Liquidity Management Liquidity Measures Stress Testing 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. Credit Ratings NR Not rated. Recent Credit Rating Developments Potential Impacts of Ratings Downgrades 56 Citigroup Inc. and Citibank, N.A.—Potential Derivative Triggers Citibank, N.A.—Additional Potential Impacts 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: 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. Types of Off-Balance-Sheet Arrangements Disclosures in this Form 10-K 58 CONTRACTUAL OBLIGATIONS The following table includes information on Citigroup’s contractual obligations, as specified and aggregated pursuant to SEC requirements. 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). 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. 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. 60 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 CapitalRequirements 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. 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. 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. 61 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 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. 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. 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. 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. MANAGING GLOBAL RISK 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. 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 Lendingto 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. 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. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND EXECUTIVE SUMMARY Overview 2012—Ongoing Transformation of Citigroup 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 6 2012 Summary Results Citigroup 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 inLocal Consumer Lending in Citi Holdings as well as spread compression inNorth America andAsia 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 inSecurities and Banking and higher mortgage revenues inNorth America RCB, partially offset by lower revenues in theSpecial Asset Pool within Citi Holdings. Operating Expenses 7 Credit Costs Capital and Loan Loss Reserve Positions Citicorp5 8 The internationalRCB revenue growth year-over-year, excluding the impact of FX translation, was driven by 9% revenue growth inLatin America RCB and 2% revenue growth inEMEA 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. InternationalRCB 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. Citi Holdings8 9 Statement continues on the next page, including notes to the table. 10 Note: The following accounting changes were adopted by Citi during the respective years: 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 NM Not meaningful 12 CITIGROUP REVENUES NM Not meaningful 13 CITICORP NM Not meaningful 14 GLOBAL CONSUMER BANKING Global Consumer Banking (GCB) consists of Citigroup’s four geographicalRegional 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. 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 inNorth America and further concentrate its presence in major metropolitan areas. At December 31, 2012, NA RCBhad approximately 12.4 million customer accounts, $42.7 billion of retail banking loans and $165.2 billion of deposits. In addition,NA RCBhad approximately 102.1 million Citi-branded and Citi retail services credit card accounts, with $111.5 billion in outstanding card loan balances. NM Not meaningful 16 2012 vs. 2011 2011 vs. 2010 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 whichEMEA 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. 18 The discussion of the results of operations forEMEA 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 ofEMEA 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 2011 vs. 2010 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 throughoutLatin 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. 20 The discussion of the results of operations forLatin America RCBbelow 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 ofLatin 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 2011 vs. 2010 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 RCBhad 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. 22 The discussion of the results of operations forAsia 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 ofAsia 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 2011 vs. 2010 23 INSTITUTIONAL CLIENTS GROUP Institutional Clients Group (ICG)includesSecurities and BankingandTransaction Services.ICGprovides 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 withinTransaction Servicesin over 95 countries and jurisdictions. At December 31, 2012,ICGhad approximately $1.1 trillion of assets and $523 billion of deposits. 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. NM Not meaningful 25 2012 vs. 2011 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 inS&B announced in the fourth quarter of 2012 are designed to streamlineS&B’s client coverage model and improve overall productivity. 26 2011 vs. 2010 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 inS&B was largely completed at the end of 2011. 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. 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 2011 vs. 2010 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). 2012 vs. 2011 2011 vs. 2010 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 ofBrokerage and Asset Management, Local Consumer Lending andSpecial Asset Pool. 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 inBAM consist of other retail alternative investments. NM Not meaningful 2012 vs. 2011 2011 vs. 2010 32 LOCAL CONSUMER LENDING Local Consumer Lending (LCL) includes a substantial portion of Citigroup’sNorth 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 inNorth America), or approximately 81% of Citi Holdings assets, and thus represents the largest segment within Citi Holdings. TheNorth America assets primarily consist of residential mortgages (residential first mortgages and home equity loans), which stood at $92 billion as of December 31, 2012. 2012 vs. 2011 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. 33 of $146 million related to the national mortgage settlement. Citi expects that net credit losses inLCL 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). 2011 vs. 2010 34 Japan Consumer Finance Payment Protection Insurance 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). 35 SPECIAL ASSET POOL TheSpecial 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. NM Not meaningful 2012 vs. 2011 2011 vs. 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. ASSETS Cash and Deposits with Banks 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. 37 Federal Funds Sold and Securities Borrowed or Trading Account Assets Investments 38 Loans Other Assets LIABILITIES Deposits Federal Funds Purchased and Securities Loaned or Sold Trading Account Liabilities Debt Other Liabilities 39 SEGMENT BALANCE SHEET AT DECEMBER 31, 2012 (1) 40 CAPITAL RESOURCES AND LIQUIDITY CAPITAL RESOURCES Overview Capital Ratios Under Current Regulatory Guidelines 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. 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 42 Basel II.5 and III 43 Components of Tier 1 Common Capital and Risk-Weighted Assets Under Basel III Common Stockholders’ Equity 44 Tangible Common Equity and Tangible Book Value Per Share Capital Resources of Citigroup’s Subsidiary U.S. Depository Institutions 45 Impact of Changes on Capital Ratios Under Current Regulatory Guidelines Broker-Dealer Subsidiaries 46 Regulatory Capital Standards Basel II 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 III 47 Basel III NPR 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. 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.” Standardized Approach NPR Advanced Approaches NPR 49 FUNDING AND LIQUIDITY Overview 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. Aggregate Liquidity Resources All amounts in the table above are as of period-end and may increase or decrease intra-period in the ordinary course of business. 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. 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. Aggregate Liquidity Resources—By Type 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 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 inEMEA and 10% growth inLatin 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, particularlyGlobal 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. Long-Term Debt 52 Long-Term Debt Outstanding 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. Long-Term Debt Issuances and Maturities 53 The table below shows Citi’s aggregate expected annual long-term debt maturities as of December 31, 2012: 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 54 Secured Financing Commercial Paper Other Short-Term Borrowings Liquidity Management, Measures and Stress Testing Liquidity Management Liquidity Measures Stress Testing 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. Credit Ratings NR Not rated. Recent Credit Rating Developments Potential Impacts of Ratings Downgrades 56 Citigroup Inc. and Citibank, N.A.—Potential Derivative Triggers Citibank, N.A.—Additional Potential Impacts 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: 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. Types of Off-Balance-Sheet Arrangements Disclosures in this Form 10-K 58 CONTRACTUAL OBLIGATIONS The following table includes information on Citigroup’s contractual obligations, as specified and aggregated pursuant to SEC requirements. 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). 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. 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. 60 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 CapitalRequirements 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. 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. 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. 61 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 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. 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. 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. 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. 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. 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 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. 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. 64 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. 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. 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. 65 require additional collateral based on these market perceptions or market conditions, which could further impair Citi’s access to and cost of funding. 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. 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. 66 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. 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. 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. 67 Citi May Be Unable to Reduce Its Level of Expenses as It Expects, and Investments in Its Businesses May Not Be Productive. 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. 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. 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. 68 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. 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. 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. 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. 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. 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. MANAGING GLOBAL RISK Risk Management—Overview 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”: 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: The risk management organization is structured so as to facilitate the management of risk across three dimensions: businesses, regions and critical products. Risk Aggregation and Stress Testing Risk Capital The drivers of economic losses are risks which, for Citi, are broadly categorized as credit risk, market risk and operational risk. Citi’s risk capital framework is reviewed and enhanced on a regular basis in light of market developments and evolving practices. 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: 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 Measurement and Stress Testing CREDIT RISK Loans Outstanding Details of Credit Loss Experience See footnotes on the next page. Allowance for Loan Losses (continued) Non-Accrual Loans and Assets and Renegotiated Loans Non-Accrual Loans and Assets: Renegotiated Loans: Non-Accrual Loans and Assets Non-Accrual Loans Non-Accrual Loans and Assets (continued) Renegotiated Loans 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, Forgone Interest Revenue on Loans(1) Loan Maturities and Fixed/Variable Pricing Corporate Loans U.S. Consumer North America Consumer Mortgage Lending Overview Citi’s allowance for loan loss calculations takes into consideration the impact of North America Consumer Mortgage Quarterly Credit Trends—Delinquencies and Net Credit Losses—Residential First Mortgages 83 EOP Loans: 4Q11-$95.4 3Q12-$89.7 4Q12-$88.2 North America Residential First EOP Loans: 4Q11-$67.5 3Q12-$59.9 4Q12-$57.7 84 North America Residential First Mortgage 85 North America Residential First As evidenced by the Foreclosures The decline in 86 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 North America Consumer Mortgage Quarterly Credit Trends—Delinquencies and Net Credit Losses—Home Equity Loans 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. The following charts detail the quarterly trends in delinquencies and net credit losses for Citi’s home equity loan portfolio inNorth America. North America Home Equity EOP Loans: 4Q11-$43.5 3Q12-$38.6 4Q12-$37.2 North America Home Equity EOP Loans: 4Q11-$40.0 3Q12-$35.4 4Q12-$34.1 North America Home Equity Loan As evidenced by the tables above, 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 North America Home Equity 89 Similar to residential first mortgages National Mortgage Settlement Loan Modifications/Loss Mitigation for Delinquent Borrowers 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 Refinancing Concessions for Current Borrowers 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 Consumer Mortgage FICO and LTV Residential First Mortgages Home Equity Loans 91 Mortgage Servicing Rights Citigroup Residential Mortgages—Representations and Warranties Overview 92 Whole Loan Sales (principally reflected in Citi Holdings—Local Consumer Lending) 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. Private-Label Residential Mortgage Securitizations During the period 2005 through 2008, Citi sold loans into and sponsored private-label securitizations through both its Consumer business in CitiMortgage and its legacyS&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) 93 Legacy S&B Securitizations (principally reflected in Citi Holdings—Special Asset Pool) Repurchase Reserve Repurchase Reserve—Whole Loan Sales 94 Repurchase Reserve—Private-Label Securitizations 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. The table below sets forth the activity in the repurchase reserve for each of the quarterly periods below: 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: (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 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 North America Cards Quarterly Credit Trends—Delinquencies and Net Credit Losses CONSUMER LOAN DETAILS Consumer Loan Delinquency Amounts and Ratios Consumer Loan Net Credit Losses and Ratios CORPORATE LOAN DETAILS 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 Portfolio 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. the probability of default of the obligor and factors that affect the 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 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: Credit Risk Mitigation At December 31, Rating of Hedged Exposure At December 31, Industry of Hedged Exposure MARKET RISK Market risk encompasses liquidity risk and price risk, both of which arise in the normal course of business of a global financial Market Market Risk Management and Stress Testing Price Risk—Non-Trading Portfolios 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 Interest Rate Risk Measurement Mitigation and Hedging of Risk Stress Testing Non-Trading Portfolios— The changes in the U.S. dollar IRE Price Risk—Trading Portfolios Each trading portfolio across Citi’s business segments (Citicorp, Citi Holdings andCorporate/ All trading positions are marked to market, with the The following histogram of total daily Value at Risk 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. 104 The table below summarizes VAR for Citi-wide trading portfolios at year end and during 2012 and 2011, The table below provides the range of market factor VARs, inclusive of specific risk that was experienced during The following table provides the VAR forS&B during VAR Model Review and Validation 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 Back-Testing of 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. Stress Testing Factor Sensitivities 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 AVERAGE BALANCES AND INTEREST RATES—ASSETS(1)(2)(3)(4) Taxable Equivalent Basis AVERAGE BALANCES AND INTEREST RATES—LIABILITIES AND EQUITY, Taxable Equivalent Basis ANALYSIS OF CHANGES IN INTEREST REVENUE(1)(2)(3) ANALYSIS OF CHANGES IN INTEREST EXPENSE AND NET INTEREST REVENUE (1)(2)(3) 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 Operational Risk Management 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. COUNTRY AND CROSS-BORDER RISK COUNTRY RISK 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 Credit Risk Sovereign, Financial Institution and GIIPS Sovereign, Financial Institution and Corporate Exposures Net Trading and AFS Net Current Funded Credit additional analysis of Citi’s collateral rights and the legal enforceability of those rights. As of December 31, 2012, the majority of Unfunded Commitments—$7.3 billion Other Activities 115 Retail, Small Business and Citi Private Bank France Sovereign, Financial Institution and Corporate Exposures Net Trading and AFS Net Current Funded Credit Unfunded Commitments—$ 116 Other Activities Credit Default counterparty credit exposure that can arise from the purchase or sale of When Citi purchases The above table contains all net 117 Secured Financing As 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, 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, 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. 119 CROSS-BORDER RISK Overview Methodology 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. 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, Differences Between Country Risk and Cross-Border Risk 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: Argentina 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. 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 FAIR VALUE ADJUSTMENTS FOR DERIVATIVES AND STRUCTURED DEBT The following Fair Valuation Adjustments for Derivatives 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. Own (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. CREDIT DERIVATIVES Citigroup makes markets in and trades a range of credit derivatives The fair values shown below are prior to the application of any netting agreements, cash collateral, and market or credit valuation adjustments. The following tables summarize the key characteristics of Citi’s credit derivatives portfolio by counterparty and derivative form as of December 31, 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 Valuations of Financial Instruments 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 Recognition of Changes in Fair Value Evaluation of Other-than-Temporary Impairment Regardless of the classification of the securities as Akbank MSSB 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 withinOther 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). CVA/DVA Methodology Allowance for Credit Losses Allowance for Funded Lending Commitments 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 Statistically 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 theProvision for loan Allowance for Unfunded Lending Commitments Securitizations Goodwill 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 andCiti 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 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. 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. 129 Management may engage an independent valuation specialist to assist in Citi’s valuation process. Since none of For theLocal 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 forLocal 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. Income Taxes Overview 130 DTAs Jurisdiction/Component 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 As 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. 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. First Quarter of 2013—Tax Benefit Litigation Accruals Accounting Changes and Future Application of Accounting Standards 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. MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL 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. 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. 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. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM— The Board of Directors and Stockholders We have audited Citigroup Inc. and subsidiaries’ (the “Company” or “Citigroup”) internal control over financial reporting as of December 31, 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. New York, New York REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM— The Board of Directors and Stockholders We have audited the accompanying consolidated balance sheets of Citigroup Inc. and subsidiaries (the “Company” or “Citigroup”) as of December 31, 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, New York, New York FINANCIAL STATEMENTS AND NOTES TABLE OF CONTENTS CONSOLIDATED FINANCIAL STATEMENTS 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. 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. Citigroup recorded repositioning charges of $1,375 million for 2012, $706 million for 2011 and $507 million for 2010. All per share amounts and CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME The Notes to the Consolidated Financial Statements are an integral part of these Consolidated Financial Statements. 141 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. Statement continues on the next page. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation Citibank, N.A. Variable Interest Entities 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. 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, Foreign Currency Translation Investment Securities 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. Trading Account Assets and Liabilities 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). 147 Securities Borrowed and Securities Loaned Repurchase and Resale Agreements are treated as collateralized financing transactions. As Repurchase and Resale Agreements, and Securities Lending and Borrowing Agreements, Accounted for as Sales Loans Loans that are held-for-investment are classified asLoans, 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 lineChange 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 lineProceeds from sales and securitizations of loans. Consumer loans Non-accrual and re-aging policies Charge-off policies Corporate loans Impaired Corporate loans and leases are written down to the extent that principal is Loans Held-for-Sale Allowance for Loan Losses Corporate loans 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. 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. 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 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. 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. Reserve Estimates and Policies portfolios, where internal credit-risk ratings are assigned (primarily Estimated probable losses for non-performing, non-homogeneousexposures within a business line’s classifiably managed portfolioand impaired smaller-balance homogeneous loans whose termshave been modified due to the borrowers’ financial difficulties, andit was determined that a concession was granted to the Statistically calculated losses inherent in the classifiably managedportfolio for performing and de minimis non-performing 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. Allowance for Unfunded Lending Commitments Mortgage Servicing Rights Overview Whole Loan Sales Private-Label Residential Mortgage Securitizations Repurchase Reserve Repurchase Reserve—Whole Loan Sales 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. Goodwill Intangible Assets 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 Other Assets and Other Liabilities Other Real Estate Owned and Repossessed Assets Securitizations Debt Transfers of Financial Assets Risk Management To qualify as an accounting hedge under the hedge accounting rules (versus 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. 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 inAccumulated other comprehensive income (loss) as part of the foreign currency translation adjustment. Employee Benefits Expense Stock-Based Compensation Income Taxes 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 Commissions, Underwriting and Principal Transactions Earnings per Share 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 Use of Estimates Cash Flows Related Party Transactions ACCOUNTING CHANGES OCC Chapter 7 Bankruptcy Guidance Presentation of Comprehensive Income Credit Quality and Allowance for Credit Losses 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) Effective in the third quarter of 2011, as a result of Repurchase Agreements—Assessment of Effective Control 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 Deferred Asset Acquisition Costs 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. Change in Accounting for Embedded Credit Derivatives Additional Disclosures Regarding Fair Value Non-Consolidation of Certain Investment Funds The Company has determined that a majority of the investment FUTURE APPLICATION OF ACCOUNTING STANDARDS Testing Indefinite-Lived Intangible Assets for Impairment Offsetting Accounting for Financial Instruments—Credit Losses Other Potential Amendments to Current Accounting Standards 2. BUSINESS DIVESTITURES The following divestitures occurred in 3. DISCONTINUED OPERATIONS Sale of Certain Citi Capital Advisors Business Summarized financial information forDiscontinued operations for the operations related to CCA follows: Sale of Egg Banking 161 Summarized financial information forDiscontinued operations, including cash flows, for the credit card operations related to Egg follows: Cash Flows from Discontinued Operations Sale of The Student Loan Corporation Combined Results for Discontinued Operations 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 theGlobal Consumer Banking (GCB), Institutional Clients Group (ICG), 5. INTEREST REVENUE AND EXPENSE For the years ended December 31, 2012, 2011 and 2010, respectively,Interest revenueand 6. COMMISSIONS AND FEES The table below sets forth Citigroup’sCommissions and fees revenue for the 7. PRINCIPAL TRANSACTIONS Principal transactionsrevenue consists of realized and unrealized gains and losses from trading activities. Trading activities include revenues from fixed income, equities, credit and commodities products, 8. INCENTIVE PLANS Overview 165 to settle the annual vesting of deferred stock awards 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. 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 This fair value was determined using the following assumptions: 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 Sign-on and Long-Term Other EESA-related Stock Compensation Director Compensation A summary of the status of Citigroup’s unvested stock awards that are not subject to variable accounting at December 31, The weighted-average fair value of the vestings during A summary of the status of Citigroup’s unvested stock awards that are subject to variable accounting at December 31, At December 31, Stock Option Programs On February 14, 2011, Citigroup granted options exercisable for approximately 2.9 million shares of Information with respect to stock option activity under Citigroup stock option programs for the years ended December 31, 2012, 2011 The following table summarizes the information about stock options outstanding under Citigroup stock option programs at December 31, N/A Not applicable 169 Profit Sharing Plan 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 Performance Share Units 9. RETIREMENT BENEFITS Pension and Postretirement Plans 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. Net (Benefit) Expense Contributions the U.S. pension plans, The estimated net actuarial loss and prior service cost 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 The following table shows the change in Accumulated other comprehensive income (loss)for the years ended December 31, At 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. Plan Assumptions A discussion of certain key assumptions follows. Discount Rate Expected Rate of Return 174 The following table shows the expected rate of return during the year versus actual rate of return on plan assets for 2012, 2011 For the non-U.S. plans, pension expense for Sensitivities of Certain Key Assumptions Health-Care Cost-Trend Rate A one-percentage-point change in assumed health-care cost-trend rates would have the following 175 Plan Assets 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 Fair Value Disclosure 177 Level 3 Roll Forward Investment Strategy Significant Concentrations of Risk in Plan Assets Oversight and Risk Management Practices Estimated Future Benefit Payments 181 Prescription Drugs 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 following table shows the estimated future benefit payments without the effect of the subsidy and the amounts of the expected subsidy in future years: 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. Early Retiree Reinsurance Program
RESULTS OF OPERATIONSEXECUTIVE SUMMARYCITI HOLDINGS31 MarketBrokerage and Economic Environment
Asset ManagementDuring 2011, Citigroup remained focused on executing its strategy of growth through increasing the returns on and investments in its core businesses of Citicorp—Global Consumer Banking andInstitutional Clients Group—while continuing to reduce the assets and businesses within Citi Holdings in an economically rational manner. While Citi continued to make progress in these areas during the year, its 2011 operating results were impacted by the ongoing challenging operating environment, particularly in the second half of the year, as macroeconomic concerns, including in the U.S. and the Eurozone, weighed heavily on investor and corporate confidence. Market activity was down globally, with a particular impact on capital markets-related activities in the fourth quarter of 2011. This affected Citigroup’s results of operations in many businesses, including not onlySecurities and Banking, but also the Securities and Fund Services business inTransaction Services and investment sales inGlobal Consumer Banking. Citi believes that the European sovereign debt crisis and its potential impact on the global markets and growth will likely continue to create macro uncertainty and remain an issue until the market, investors and Citi’s clients and customers believe that a comprehensive resolution to the crisis is structured, and achievable. Such uncertainty could have a continued negative impact on investor activity, and thus on Citi’s activity levels and results of operations, in 2012.Compounding this continuing macroeconomic uncertainty is the ongoing uncertainty facing Citigroup and its businesses as a result of the numerous regulatory initiatives underway, both in the U.S. and internationally. As of December 31, 2011, regulatory changes in significant areas, such as Citi’s future capital requirements and prudential standards, the proposed implementation of the “Volcker Rule” and the proposed regulation of the derivatives markets, were incomplete and significant rulemaking and interpretation remained. See “Risk Factors—Regulatory Risks” below. The continued uncertainty, including the potential costs, associated with the actual implementation of these changes will continue to require significant attention by Citi’s management. In addition, it is also not clear what the cumulative impact of regulatory reform will be.2011 Summary Results32 CitigroupCitigroup reported net income of $11.1 billion and diluted EPS of $3.63 per share in 2011, compared to $10.6 billion and $3.54 per share, respectively, in 2010. In 2011, results included a net positive impact of $1.8 billion from credit valuation adjustments (CVA) on derivatives (excluding monolines), net of hedges, and debt valuation adjustments (DVA) on Citigroup’s fair value option debt, compared to a net negative impact of $(469) million in 2010. In addition, Citi has adjusted its 2011 results of operations that were previously announced on January 17, 2012 for an additional $209 million (after tax) charge. This charge relates to the agreement in principle with the United States and state attorneys general announced on February 9, 2012 regarding the settlement of a number of investigations into residential loan servicing and origination litigation, as well as the resolution of related mortgage litigation (see Notes 29, 30 and 32 to the Consolidated Financial Statements). Excluding CVA/DVA, Citi’s net income declined $952 million, or 9%, to $9.9 billion in 2011, reflecting lower revenues and higher operating expenses as compared to 2010, partially offset by a significant decline in credit costs.Citi’s revenues of $78.4 billion were down $8.2 billion, or 10%, compared to 2010. Excluding CVA/DVA, revenues of $76.5 billion were down $10.5 billion, or 12%, as lower revenues in Citi Holdings andSecurities and Banking more than offset growth inGlobal Consumer Banking andTransaction Services. Net interest revenues decreased by $5.7 billion, or 11%, to $48.4 billion in 2011 as compared to 2010, primarily due to continued declining loan balances and lower interest-earning assets in Citi Holdings. Non-interest revenues, excluding CVA/DVA, declined by $4.8 billion, or 15%, to $28.1 billion in 2011 as compared to 2010, driven by lower revenues in Citi Holdings andSecurities and Banking.Because of Citi’s extensive global operations, foreign exchange translation also impacts Citi’s results of operations as Citi translates revenues, expenses, loan balances and other metrics from foreign currencies to U.S. dollars in preparing its financial statements. During 2011, the U.S. dollar generally depreciated versus local currencies in which Citi operates. As a result, the impact of foreign exchange translation (as used throughout this Form 10-K, FX translation) accounted for an approximately 1% growth in Citi’s revenues and 2% growth in expenses, while contributing less than 1% to Citi’s pretax net income for the year.6ExpensesCitigroup expenses were $50.9 billion in 2011, up $3.6 billion, or 8%, compared to 2010. Over two-thirds of this increase resulted from higher legal and related costs (approximately $1.5 billion) and higher repositioning charges (approximately $200 million, including severance) as compared to 2010, as well as the impact of FX translation (approximately $800 million). Excluding these items, expenses were up $1.0 billion, or 2%, compared to the prior year.Investment spending was $3.9 billion higher in 2011, of which roughly half was funded with efficiency savings, primarily in operations and technology, labor reengineering and business support functions (e.g., call centers and collections) of $1.9 billion. The $3.9 billion increase in investment spending in 2011 included higher investments inGlobal Consumer Banking ($1.6 billion, including incremental cards marketing campaigns and new branch openings),Securities and Banking (approximately $800 million, including new hires and technology investments) andTransaction Services (approximately $600 million, including new mandates and platform enhancements), as well as additional firm-wide initiatives and investments to comply with regulatory requirements. All other expense increases, including higher volume-related costs in Citicorp, were more than offset by a decline in Citi Holdings expenses. While Citi will continue some level of incremental investment spending in its businesses going forward, Citi currently believes these increases in investments will be self-funded through ongoing reengineering and efficiency savings. Accordingly, Citi believes that the increased level of investment spending incurred during the latter part of 2010 and 2011 was largely completed by year end 2011.Citicorp expenses were $39.6 billion in 2011, up $3.5 billion, or 10%, compared to 2010. Over one-third of this increase resulted from higher legal and related costs and higher repositioning charges (including severance) as compared to 2010, as well as the impact of FX translation. The remainder of the increase was primarily driven by investment spending (as described above), partially offset by ongoing productivity savings and other expense reductions.Citi Holdings expenses were $8.8 billion in 2011, down $824 million, or 9%, principally due to the continued decline in assets, partially offset by higher legal and related costs.Credit CostsCredit trends for Citigroup continued to improve in 2011, particularly for Citi’sNorth America Citi-branded and retail partner cards businesses, as well as itsNorth America mortgage portfolios in Citi Holdings, although the pace of improvement in these businesses slowed. Citi’s total provisions for credit losses and for benefits and claims of $12.8 billion declined $13.2 billion, or 51%, from 2010. Net credit losses of $20.0 billion in 2011 were down $10.8 billion, or 35%, reflecting improvement in both Consumer and Corporate credit trends. Consumer net credit losses declined $10.0 billion, or 35%, to $18.4 billion, driven by continued improvement in credit inNorth America Citi-branded cards and retail partner cards andNorth America real estate lending in Citi Holdings. Corporate net credit losses decreased $810 million, or 33%, to $1.6 billion, as credit quality continued to improve in the Corporate portfolio.The net release of allowance for loan losses and unfunded lending commitments was $8.2 billion in 2011, compared to a net release of $5.8 billion in 2010. Of the $8.2 billion net reserve release in 2011, $5.9 billion related to Consumer and was mainly driven byNorth America Citi-branded cards and retail partner cards. The $2.3 billion net Corporate reserve release reflected continued improvement in Corporate credit trends, partially offset by loan growth.More than half of the net credit reserve release in 2011, or $4.8 billion, was attributable to Citi Holdings. The $3.5 billion net credit release in Citicorp increased from $2.2 billion in the prior year, as a higher net release in Citi-branded cards inNorth America was partially offset by lower net releases in internationalRegional Consumer Banking and the Corporate portfolio, each driven by loan growth.7Capital and Loan Loss Reserve PositionsCitigroup’s capital and loan loss reserve positions remained strong at year end 2011. Citigroup’s Tier 1 Capital ratio was 13.6% and the Tier 1 Common ratio was 11.8%. Citigroup’s total allowance for loan losses was $30.1 billion at year end 2011, or 4.7% of total loans, down from $40.7 billion, or 6.3% of total loans, at the end of the prior year. The decline in the total allowance for loan losses reflected asset sales, lower non-accrual loans, and overall continued improvement in the credit quality of Citi’s loan portfolios. The Consumer allowance for loan losses was $27.2 billion, or 6.45%, of total Consumer loans at year end 2011, compared to $35.4 billion, or 7.80%, of total Consumer loans at year end 2010. See details of “Credit Loss Experience—Allowance for Loan Losses” below for additional information on Citi’s loan loss coverage ratios as of December 31, 2011.Citigroup’s non-accrual loans of $11.2 billion at year end 2011 declined 42% from the prior year, and the allowance for loan losses represented 268% of non-accrual loans.CiticorpCiticorp net income of $14.4 billion in 2011 decreased by $269 million, or 2%, from the prior year. Excluding CVA/DVA, Citicorp’s net income declined $1.6 billion, or 10.6%, to $13.4 billion in 2011, reflecting lower revenues and higher operating expenses, partially offset by the significantly lower credit costs.Asia andLatin Americacontributed roughly half of Citicorp’s net income for the year.Citicorp revenues were $64.6 billion, down $989 million, or 2%, from 2010. Excluding CVA/DVA, revenues of $62.8 billion were down $3.1 billion, or 5%, as compared to 2010. Net interest revenues decreased by $450 million, or 1%, to $38.1 billion, as lower revenues inNorth America Regional Consumer Banking andSecurities and Banking more than offset growth inLatin America andAsia Regional Consumer Banking andTransaction Services. Non-interest revenues, excluding CVA/DVA, declined by $2.7 billion, or 10%, to $24.7 billion in 2011 as compared to 2010, driven by lower revenues inSecurities and Banking.Global Consumer Banking revenues of $32.6 billion were up $211 million year-over-year, as continued growth inAsia andLatin America Regional Consumer Banking was partially offset by lower revenues inNorth America Regional Consumer Banking. The 2011 results inGlobal Consumer Banking included continued momentum in Citi’s international regions, as well as early signs of growth in itsNorth America business:InternationalRegional Consumer Bankingrevenues of $19.0 billionwere up 8% year-over-year (5% excluding the impact of FX translation).International average loans were up 15% and average deposits grew 11%(11% and 8% excluding the impact of FX translation, respectively).International card purchase sales grew 19% (13% excluding the impact ofFX translation).Asiaachieved positive operating leverage (with year-over-year revenuegrowth in excess of expense growth) in the third and fourth quarters of2011, andLatin Americaachieved positive operating leverage in thefourth quarter.North America Regional Consumer Bankinggrew revenues, cardaccounts and card loans sequentially in the second, third and fourthquarters of 2011.Securities and Banking revenues of $21.4 billion decreased 7% year-over-year. Excluding CVA/DVA (for details onSecurities and Banking CVA/DVA amounts, see “Institutional Clients Group—Securities and Banking” below), revenues were $19.7 billion, down 16% from the prior year, due primarily to the continued challenging macroeconomic environment, which resulted in lower revenues across fixed income and equity markets as well as investment banking. Fixed income markets revenues, which constituted over 50% ofSecurities and Banking revenues in 2011, of $10.9 billion, excluding CVA/DVA, decreased 24% in 2011 as compared to 2010, driven primarily by a decline in credit-related and securitized products and, to a lesser extent, a decline in rates and currencies. Equity markets revenues of $2.4 billion, excluding CVA/DVA, were down 35% year-over-year, mainly driven by weak trading performance in equity derivatives as well as losses in equity proprietary trading resulting from the wind down of this business, which was complete as of December 31, 2011. Investment banking revenues of $3.3 billion were down 14% in 2011 as compared to 2010, driven by lower market activity levels across all products. Lending revenues of $1.8 billion were up $840 million, from $962 million in 2010, primarily due to net hedging gains of $73 million in 2011, as compared to net hedging losses of $711 million in 2010, driven by spread tightening in Citi’s lending portfolio.Transaction Services revenues were $10.6 billion in 2011, up 5% from the prior year, driven by growth in Treasury and Trade Solutions as well as Securities and Fund Services. Revenues grew in 2011 in all international regions as strong growth in business volumes was partially offset by continued spread compression. Average deposits and other customer liabilities grew 9% in 2011, while assets under custody remained relatively flat year over year.Citicorp end of period loans increased 14% in 2011 to $465.4 billion, with 7% growth in Consumer loans and 24% growth in Corporate loans.8Citi HoldingsCiti Holdings’ net loss of $(2.6) billion in 2011 improved by $1.6 billion as compared to the net loss in 2010. The improvement in 2011 reflected a significant decline in credit costs and lower operating expenses, given the continued decline in assets, partially offset by lower revenues.While Citi Holdings’ impact on Citi has been declining, it will likely continue to present a headwind for Citi’s overall performance due to, among other factors, the lower percentage of interest-earning assets remaining in Citi Holdings, the slower pace of asset reductions and the transfer of the substantial majority of retail partner cards out of Citi Holdings into Citicorp—North America Regional Consumer Banking in the first quarter of 2012. During the first quarter of 2012, Citi will republish its historical segment reporting for Citicorp and Citi Holdings to reflect this transfer in prior periods. The adjusted net loss in Citi Holdings for these historical periods will be higher than previously reported, as the retail partner cards business inLocal Consumer Lending33 was the primary source of profitability in Citi Holdings. Citi Holdings’ revenues declined 33% to $12.9 billion from the prior year. Net interest revenues decreased by $4.5 billion, or 30%, to $10.3 billion, primarily due to the decline in assets, including lower interest-earning assets in theSpecial Asset Pool36 . Non-interest revenues declined by $1.9 billion, or 42%,BALANCE SHEET REVIEW37 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 $2.6 billion in 2011, driven by lower gains on asset salesSection 219 of theIran Threat Reduction and other revenue marks as compared to 2010, as well as divestitures.Syria Human Rights Act291 Citi Holdings’ assets declined $90 billion, or 25%, to $269 billion at the end of 2011, although Citi believes the pace of asset wind-down in Citi Holdings will decrease going forward. The decline during 2011 reflected nearly $49 billion in asset sales and business dispositions, $35 billion in net run-off and amortization and approximately $6 billion in net cost of credit and net asset marks. As of December 31, 2011,Customers292 Local Consumer LendingCompetition292 Properties 293 LEGAL PROCEEDINGS 293 UNREGISTERED SALES OF EQUITY, continued to represent the largest segment within Citi Holdings, with $201 billion of assets. Over half ofLocal Consumer Lending assets, or approximately $109 billion, were related toNorth America real estate lending. As of December 31, 2011, there were approximately $10 billion of loan loss reserves allocated toNorth America real estate lending in Citi Holdings, representing roughly 31 months of coincident net credit loss coverage.PURCHASES OF EQUITY SECURITIES,
DIVIDENDS294 At the end of 2011, Citi Holdings assets comprised approximately 14% of total PERFORMANCE GRAPH295 CORPORATE INFORMATION 296 Citigroup GAAP assets and 25% of its risk-weighted assets. The first quarter of 2012 transfer of the substantial majority of the retail partner cards business (approximately $45 billion of assets, including approximately $41 billion of loans) will result in Citi Holdings comprising approximately 12% of total Citigroup GAAP assets and 21% of risk-weighted assets.Executive Officers9RESULTS OF OPERATIONSFIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA—PAGE 1 Citigroup Inc. and Consolidated Subsidiaries In millions of dollars, except per-share amounts, ratios and direct staff 2011 (1) 2010 (2)(3) 2009 (3) 2008 (3) 2007 (3) Net interest revenue $ 48,447 $ 54,186 $ 48,496 $ 53,366 $ 45,300 Non-interest revenue 29,906 32,415 31,789 (1,767 ) 32,000 Revenues, net of interest expense $ 78,353 $ 86,601 $ 80,285 $ 51,599 $ 77,300 Operating expenses 50,933 47,375 47,822 69,240 58,737 Provisions for credit losses and for benefits and claims 12,796 26,042 40,262 34,714 17,917 Income (loss) from continuing operations before income taxes $ 14,624 $ 13,184 $ (7,799 ) $ (52,355 ) $ 646 Income taxes (benefits) 3,521 2,233 (6,733 ) (20,326 ) (2,546 ) Income (loss) from continuing operations $ 11,103 $ 10,951 $ (1,066 ) $ (32,029 ) $ 3,192 Income (loss) from discontinued operations, net of taxes(4) 112 (68 ) (445 ) 4,002 708 Net income (loss) before attribution of noncontrolling interests $ 11,215 $ 10,883 $ (1,511 ) $ (28,027 ) $ 3,900 Net income (loss) attributable to noncontrolling interests 148 281 95 (343 ) 283 Citigroup’s net income (loss) $ 11,067 $ 10,602 $ (1,606 ) $ (27,684 ) $ 3,617 Less: Preferred dividends—Basic $ 26 $ 9 $ 2,988 $ 1,695 $ 36 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 offer — — 3,242 — — Dividends and undistributed earnings allocated to employee restricted and deferred shares that contain nonforfeitable rights to dividends, applicable to Basic EPS 186 90 2 221 261 Income (loss) allocated to unrestricted common shareholders for Basic EPS $ 10,855 $ 10,503 $ (9,246 ) $ (29,637 ) $ 3,320 Less: Convertible preferred stock dividends(5) — — (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 17 2 — — — Income (loss) allocated to unrestricted common shareholders for diluted EPS(5) $ 10,872 $ 10,505 $ (8,706 ) $ (28,760 ) $ 3,320 Earnings per share(6) Basic Income (loss) from continuing operations 3.69 3.66 (7.61 ) (63.89 ) 5.32 Net income (loss) 3.73 3.65 (7.99 ) (56.29 ) 6.77 Diluted(5) Income (loss) from continuing operations $ 3.59 $ 3.55 $ (7.61 ) $ (63.89 ) $ 5.30 Net income (loss) 3.63 3.54 (7.99 ) (56.29 ) 6.74 Dividends declared per common share 0.03 0.00 0.10 11.20 21.60 Statement continues on the next page, including notes to the table.10FIVE-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 2011 (1) 2010 (2) 2009 (3) 2008 (3) 2007 (3) At December 31 Total assets $ 1,873,878 $ 1,913,902 $ 1,856,646 $ 1,938,470 $ 2,187,480 Total deposits 865,936 844,968 835,903 774,185 826,230 Long-term debt 323,505 381,183 364,019 359,593 427,112 Mandatorily redeemable securities of subsidiary trusts (included in long-term debt) 16,057 18,131 19,345 24,060 23,756 Common stockholders’ equity 177,494 163,156 152,388 70,966 113,447 Total Citigroup stockholders’ equity 177,806 163,468 152,700 141,630 113,447 Direct staff(in thousands) 266 260 265 323 375 Ratios Return on average common stockholders’ equity(7) 6.3 % 6.8 % (9.4 )% (28.8 )% 2.9 % Return on average total stockholders’ equity(7) 6.3 6.8 (1.1 ) (20.9 ) 3.0 Tier 1 Common(8) 11.80 % 10.75 % 9.60 % 2.30 % 5.02 % Tier 1 Capital 13.55 12.91 11.67 11.92 7.12 Total Capital 16.99 16.59 15.25 15.70 10.70 Leverage(9) 7.19 6.60 6.87 6.08 4.03 Common stockholders’ equity to assets 9.47 % 8.52 % 8.21 % 3.66 % 5.19 % Total Citigroup stockholders’ equity to assets 9.49 8.54 8.22 7.31 5.19 Dividend payout ratio(10) 0.8 NM NM NM 320.5 Book value per common share(6) $ 60.70 $ 56.15 $ 53.50 $ 130.21 $ 227.12 Ratio of earnings to fixed charges and preferred stock dividends 1.59 x 1.51 x NM NM 1.01 x (1)As noted in the “Executive Summary” above, Citi has adjusted its 2011 results of operations that were previously announced on January 17, 2012 for an additional $209 million (after tax) charge. This charge relates to the agreement in principle with the United States and state attorneys general announced on February 9, 2012 regarding the settlement of a number of investigations into residential loan servicing and origination litigation, as well as the resolution of related mortgage litigation. The impact of these adjustments was a $275 million (pretax) increase inOther operating expenses, a $209 million (after-tax) reduction inNet incomeand a $0.06 (after-tax) reduction inDiluted earnings per share, for the full year of 2011. See Notes 29, 30 and 32 to the Consolidated Financial Statements.296 (2)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.(3)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.(4)Discontinued operations for 2007 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 2007 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 and, for 2011, primarily reflect the sale of the Egg Banking PLC credit card business. See Note 3 to the Consolidated Financial Statements.(5)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.(6)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.(7)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.(8)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 qualifying mandatorily redeemable securities of subsidiary trusts divided by risk-weighted assets.(9)The Leverage ratio represents Tier 1 Capital divided by adjusted average total assets.(10)Dividends declared per common share as a percentage of net income per diluted share.NMNot meaningful11SEGMENT AND BUSINESS—INCOME (LOSS) AND REVENUESThe following tables show the income (loss) and revenues for Citigroup on a segment and business view:
CITIGROUP INCOME (LOSS)BOARD OF DIRECTORS% Change % Change In millions of dollars 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 Income (loss) from continuing operations CITICORP Global Consumer Banking North America $ 2,589 $ 650 $ 789 NM (18 )% EMEA 79 91 (220 ) (13 )% NM Latin America 1,601 1,789 429 (11 ) NM Asia 1,927 2,131 1,391 (10 ) 53 Total $ 6,196 $ 4,661 $ 2,389 33 % 95 % Securities and Banking North America $ 1,011 $ 2,465 $ 2,369 (59 )% 4 % EMEA 2,008 1,805 3,414 11 (47 ) Latin America 978 1,091 1,558 (10 ) (30 ) Asia 898 1,138 1,854 (21 ) (39 ) Total $ 4,895 $ 6,499 $ 9,195 (25 )% (29 )% Transaction Services North America $ 447 $ 529 $ 609 (16 )% (13 )% EMEA 1,142 1,225 1,299 (7 ) (6 ) Latin America 645 664 616 (3 ) 8 Asia 1,173 1,255 1,254 (7 ) — Total $ 3,407 $ 3,673 $ 3,778 (7 )% (3 )% Institutional Clients Group $ 8,302 $ 10,172 $ 12,973 (18 )% (22 )% Total Citicorp $ 14,498 $ 14,833 $ 15,362 (2 )% (3 )% CITI HOLDINGS Brokerage and Asset Management $ (286 ) $ (226 ) $ 6,850 (27 )% NM Local Consumer Lending (2,834 ) (4,988 ) (10,484 ) 43 52 % Special Asset Pool 596 1,158 (5,425 ) (49 ) NM Total Citi Holdings $ (2,524 ) $ (4,056 ) $ (9,059 ) 38 % 55 % Corporate/Other $ (871 ) $ 174 $ (7,369 ) NM NM Income (loss) from continuing operations $ 11,103 $ 10,951 $ (1,066 ) 1 % NM Discontinued operations $ 112 $ (68 ) $ (445 ) Net income attributable to noncontrolling interests 148 281 95 (47 )% NM Citigroup’s net income (loss) $ 11,067 $ 10,602 $ (1,606 ) 4 % NM NM Not meaningful12CITIGROUP REVENUES% Change % Change In millions of dollars 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 CITICORP Global Consumer Banking North America $ 13,614 $ 14,790 $ 8,575 (8 )% 72 % EMEA 1,479 1,503 1,550 (2 ) (3 ) Latin America 9,483 8,685 7,883 9 10 Asia 8,009 7,396 6,746 8 10 Total $ 32,585 $ 32,374 $ 24,754 1 % 31 % Securities and Banking North America $ 7,558 $ 9,393 $ 8,836 (20 )% 6 % EMEA 7,221 6,849 10,056 5 (32 ) Latin America 2,364 2,547 3,435 (7 ) (26 ) Asia 4,274 4,326 4,813 (1 ) (10 ) Total $ 21,417 $ 23,115 $ 27,140 (7 )% (15 )% Transaction Services North America $ 2,442 $ 2,485 $ 2,525 (2 )% (2 )% EMEA 3,486 3,356 3,389 4 (1 ) Latin America 1,705 1,516 1,391 12 9 Asia 2,936 2,714 2,513 8 8 Total $ 10,569 $ 10,071 $ 9,818 5 % 3 % Institutional Clients Group $ 31,986 $ 33,186 $ 36,958 (4 )% (10 )% Total Citicorp $ 64,571 $ 65,560 $ 61,712 (2 )% 6 % CITI HOLDINGS Brokerage and Asset Management $ 282 $ 609 $ 14,623 (54 )% (96 )% Local Consumer Lending 12,067 15,826 17,765 (24 ) (11 ) Special Asset Pool 547 2,852 (3,260 ) (81 ) NM Total Citi Holdings $ 12,896 $ 19,287 $ 29,128 (33 )% (34 )% Corporate/Other $ 886 $ 1,754 $ (10,555 ) (49 )% NM Total net revenues $ 78,353 $ 86,601 $ 80,285 (10 )% 8 % NM Not meaningful13CITICORPCiticorp 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 December 31, 2011, Citicorp had approximately $1.3 trillion of assets and $797 billion of deposits, representing approximately 70% of Citi’s total assets and approximately 92% of its deposits.At December 31, 2011, Citicorp consisted of the following businesses:Global Consumer Banking (which included retail banking and Citi-branded cards in four regions—North America, EMEA, Latin Americaand Asia) andInstitutional Clients Group (which includedSecurities and Banking andTransaction Services).% Change % Change In millions of dollars 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 Net interest revenue $ 38,135 $ 38,585 $ 34,197 (1 )% 13 % Non-interest revenue 26,436 26,975 27,515 (2 ) (2 ) Total revenues, net of interest expense $ 64,571 $ 65,560 $ 61,712 (2 )% 6 % Provisions for credit losses and for benefits and claims Net credit losses $ 8,307 $ 11,789 $ 6,155 (30 )% 92 % Credit reserve build (release) (3,544 ) (2,167 ) 2,715 (64 ) NM Provision for loan losses $ 4,763 $ 9,622 $ 8,870 (50 )% 8 % Provision for benefits and claims 152 151 164 1 (8 ) Provision for unfunded lending commitments 92 (32 ) 138 NM NM Total provisions for credit losses and for benefits and claims $ 5,007 $ 9,741 $ 9,172 (49 )% 6 % Total operating expenses $ 39,620 $ 36,144 $ 32,698 10 % 11 % Income from continuing operations before taxes $ 19,944 $ 19,675 $ 19,842 1 % (1 )% Provisions for income taxes 5,446 4,842 4,480 12 8 % Income from continuing operations $ 14,498 $ 14,833 $ 15,362 (2 )% (3 )% Net income attributable to noncontrolling interests 56 122 68 (54 ) 79 Citicorp’s net income $ 14,442 $ 14,711 $ 15,294 (2 )% (4 )% Balance sheet data(in billions of dollars) Total EOP assets $ 1,319 $ 1,284 $ 1,138 3 % 13 % Average assets $ 1,358 $ 1,257 $ 1,088 8 % 16 % Total EOP deposits 797 760 734 5 4 NM Not meaningful14GLOBAL CONSUMER BANKINGGlobal Consumer Banking (GCB) consists of Citigroup’s four geographicalRegional Consumer Banking (RCB) businesses that provide traditional banking services to retail customers. As of December 31, 2011, GCB also contained Citigroup’s branded cards and local commercial banking businesses and, effective in the first quarter of 2012, will also include its retail partner cards business. GCB is a globally diversified business with nearly 4,200 branches in 39 countries around the world. At December 31, 2011, GCB had $340 billion of assets and $313 billion of deposits.% Change % Change In millions of dollars 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 Net interest revenue $ 23,090 $ 23,184 $ 16,353 — 42 % Non-interest revenue 9,495 9,190 8,401 3 % 9 Total revenues, net of interest expense $ 32,585 $ 32,374 $ 24,754 1 % 31 % Total operating expenses $ 18,933 $ 16,547 $ 15,125 14 % 9 % Net credit losses $ 7,688 $ 11,216 $ 5,395 (31 )% NM Credit reserve build (release) (2,988 ) (1,541 ) 1,823 (94 ) NM Provisions for unfunded lending commitments 3 (3 ) — NM — Provision for benefits and claims 152 151 164 1 (8 )% Provisions for credit losses and for benefits and claims $ 4,855 $ 9,823 $ 7,382 (51 )% 33 % Income (loss) from continuing operations before taxes $ 8,797 $ 6,004 $ 2,247 47 % NM Income taxes (benefits) 2,601 1,343 (142 ) 94 NM Income (loss) from continuing operations $ 6,196 $ 4,661 $ 2,389 33 % 95 % Net income (loss) attributable to noncontrolling interests — (9 ) — 100 — Net income (loss) $ 6,196 $ 4,670 $ 2,389 33 % 95 % Average assets(in billions of dollars) $ 335 $ 309 $ 242 8 % 28 % Return on assets 1.85 % 1.51 % 0.99 % Total EOP assets $ 340 $ 328 $ 255 4 29 Average deposits(in billions of dollars) 311 295 275 5 7 Net credit losses as a percentage of average loans 3.25 % 5.11 % 3.62 % Revenue by business Retail banking $ 16,229 $ 15,767 $ 14,782 3 % 7 % Citi-branded cards 16,356 16,607 9,972 (2 ) 67 Total $ 32,585 $ 32,374 $ 24,754 1 % 31 % Income (loss) from continuing operations by business Retail banking $ 2,529 $ 3,082 $ 2,387 (18 )% 29 % Citi-branded cards 3,667 1,579 2 NM NM Total $ 6,196 $ 4,661 $ 2,389 33 % 95 % NM Not meaningful15NORTH AMERICA REGIONAL CONSUMER BANKINGNorth 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. Effective in the first quarter of 2012,NA RCBwill also include the substantial majority of Citi’s retail partner cards business, which will add approximately $45 billion of assets, including $41 billion of loans, toNA RCB.NA RCB’s1,016 retail bank branches and 12.7 million customer accounts, as of December 31, 2011, 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 December 31, 2011,NA RCBhad $38.9 billion of retail banking loans and $148.8 billion of deposits. In addition,NA RCBhad 22.0 million Citi-branded credit card accounts, with $75.9 billion in outstanding card loan balances.% Change % Change In millions of dollars 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 Net interest revenue $ 10,367 $ 11,216 $ 5,206 (8 )% NM Non-interest revenue 3,247 3,574 3,369 (9 ) 6 % Total revenues, net of interest expense $ 13,614 $ 14,790 $ 8,575 (8 )% 72 % Total operating expenses $ 7,329 $ 6,163 $ 5,890 19 % 5 % Net credit losses $ 4,949 $ 8,019 $ 1,152 (38 )% NM Credit reserve build (release) (2,740 ) (312 ) 527 NM NM Provisions for benefits and claims 22 24 50 (8 ) (52 )% Provisions for loan losses and for benefits and claims $ 2,231 $ 7,731 $ 1,729 (71 )% NM Income from continuing operations before taxes $ 4,054 $ 896 956 NM (6 )% Income taxes 1,465 246 167 NM 47 Income from continuing operations $ 2,589 $ 650 $ 789 NM (18 )% Net income attributable to noncontrolling interests — — — — — Net income $ 2,589 $ 650 $ 789 NM (18 )% Average assets(in billions of dollars) $ 123 $ 119 $ 73 3 % 63 % Average deposits(in billions of dollars) 145 145 141 — 3 Net credit losses as a percentage of average loans 4.60 % 7.48 % 2.43 % Revenue by business Retail banking $ 5,111 $ 5,325 $ 5,236 (4 )% 2 % Citi-branded cards 8,503 9,465 3,339 (10 ) NM Total $ 13,614 $ 14,790 $ 8,575 (8 )% 72 % Income (loss) from continuing operations by business Retail banking $ 488 $ 762 $ 751 (36 )% 1 % Citi-branded cards 2,101 (112 ) 38 NM NM Total $ 2,589 $ 650 $ 789 NM (18 )% Total GAAP revenues $ 13,614 $ 14,790 $ 8,575 (8 )% 72 % Net impact of credit card securitizations activity(1) — — 6,672 Total managed revenues $ 13,614 $ 14,790 $ 15,247 (3 )% Total GAAP net credit losses $ 4,949 $ 8,019 $ 1,152 (38 )% NM Impact of credit card securitizations activity(1) — — 6,931 Total managed net credit losses $ 4,949 $ 8,019 $ 8,083 (1 )% (1)See Note 1 to the Consolidated Financial Statements for a discussion of the impact of SFAS 166/167.299 NMNot meaningful2011 vs. 2010Net incomeincreased $1.9 billion as compared to the prior year, driven by higher loan loss reserve releases and an improvement in net credit losses, partly offset by lower revenues and higher expenses. Citi does not expect the same level of loan loss reserve releases inNA RCBin 2012 as it believes credit costs in the business have generally stabilized.Revenuesdecreased 8% mainly due to lower net interest margin and loan balances in the Citi-branded cards business as well as lower mortgage-related revenues, primarily relating to lower refinancing activity and lower margins as compared to the prior year.16Net interest revenuedecreased 8%, driven primarily by lower cards net interest margin which was negatively impacted by the look-back provision of The Credit Card Accountability Responsibility and Disclosure Act (CARD Act). As previously disclosed, 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. In addition, net interest margin for cards was negatively impacted by higher promotional balances and lower total average loans. As a result, cards net interest revenue as a percentage of average loans decreased to 9.48% from 10.28% in the prior year. Citi expects margin growth to remain under pressure into 2012 given the continued investment spending in the business during 2012, which largely began in the second half of 2011.Non-interest revenuedecreased 9%, primarily due to lower gains from the sale of mortgage loans as Citi held more loans on-balance sheet. In addition, the decline in non-interest revenue reflected lower banking fee income.Expensesincreased 19%, primarily driven by the 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 litigation (see Note 29 to the Consolidated Financial Statements).Provisions decreased $5.5 billion, or 71%, primarily due to a loan loss reserve release of $2.7 billion in 2011, compared to a loan loss reserve release of $0.3 billion in 2010, and lower net credit losses in the Citi-branded cards portfolio. Cards net credit losses were down $3.0 billion, or 39%, from 2010, and the net credit loss ratio decreased 366 basis points to 6.36% for 2011. The decline in credit costs was driven by improving credit conditions as well as continued stricter underwriting criteria, which lowered the cards risk profile. As referenced above, Citi believes the improvements in, and Citi’s resulting benefit from, declining credit costs in NA RCB will likely slow into 2012.2010 vs. 2009Net incomedeclined by $139 million, or 18%, as compared to the prior year, driven by higher credit costs due to Citi’s adoption of SFAS 166/167, partially offset by higherrevenues.Revenues increased 72% from the prior year, primarily due to the consolidation of securitized credit card receivables pursuant to the adoption of SFAS 166/167 effective January 1, 2010. On a comparable basis, revenues declined 3% from the prior year, mainly due to lower volumes in Citi-branded cards as well as the net impact of the CARD Act on cards revenues. This decrease was partially offset by better mortgage-related revenues driven by higher refinancing activity.Net interest revenuewas down 6% on a comparable basis driven primarily by lower volumes in cards, with average managed loans down 7% from the prior year, and in retail banking, where average loans declined 11%. The decline in cards was driven by the stricter underwriting criteria referenced above as well as the impact of CARD Act. The increase in deposit volumes, up 3% from the prior year, was offset by lower spreads due to the then-current interest rate environment.Non-interest revenueincreased 6% on a comparable basis from the prior year mainly driven by better servicing hedge results and higher gains on sale from the sale of mortgage loans.Expensesincreased 5% from the prior year, driven by the impact of higher litigation accruals, primarily in the first quarter of 2010, and higher marketing costs.Provisionsincreased $6.0 billion, primarily due to the consolidation of securitized credit card receivables pursuant to the adoption of SFAS 166/167. On a comparable basis, provisions decreased $0.9 billion, or 11%, primarily due to a net loan loss reserve release of $0.3 billion in 2010 compared to a $0.5 billion loan loss reserve build in the prior year coupled with lower net credit losses in the cards portfolio. Also on a comparable basis, the cards net credit loss ratio increased 61 basis points to 10.02%, driven by lower average loans.17EMEA REGIONAL CONSUMER BANKINGEMEA 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 whichEMEA RCB has the largest presence are Poland, Turkey, Russia and the United Arab Emirates. At December 31, 2011,EMEA RCB had 292 retail bank branches with 3.7 million customer accounts, $4.2 billion in retail banking loans and $9.5 billion in deposits. In addition, the business had 2.6 million Citi-branded card accounts with $2.7 billion in outstanding card loan balances.% Change % Change In millions of dollars 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 Net interest revenue $ 893 $ 923 $ 974 (3 )% (5 )% Non-interest revenue 586 580 576 1 1 Total revenues, net of interest expense $ 1,479 $ 1,503 $ 1,550 (2 )% (3 )% Total operating expenses $ 1,287 $ 1,179 $ 1,120 9 % 5 % Net credit losses $ 172 $ 316 $ 472 (46 )% (33 )% Provision for unfunded lending commitments 3 (4 ) — NM — Credit reserve build (release) (118 ) (118 ) 310 — NM Provisions for loan losses $ 57 $ 194 $ 782 (71 )% (75 )% Income (loss) from continuing operations before taxes $ 135 $ 130 $ (352 ) 4 % NM Income taxes (benefits) 56 39 (132 ) 44 NM Income (loss) from continuing operations $ 79 $ 91 $ (220 ) (13 )% NM Net income (loss) attributable to noncontrolling interests — (1 ) — 100 — Net income (loss) $ 79 $ 92 $ (220 ) (14 )% NM Average assets(in billions of dollars) $ 10 $ 10 $ 11 — (9 )% Return on assets 0.79 % 0.92 % (2.01 )% Average deposits(in billions of dollars) $ 10 $ 9 $ 9 11 — Net credit losses as a percentage of average loans 2.38 % 4.45 % 5.64 % Revenue by business Retail banking $ 811 $ 822 $ 884 (1 )% (7 )% Citi-branded cards 668 681 666 (2 ) 2 Total $ 1,479 $ 1,503 $ 1,550 (2 )% (3 )% Income (loss) from continuing operations by business Retail banking $ (56 ) $ (54 ) $ (188 ) (4 )% 71 % Citi-branded cards 135 145 (32 ) (7 ) NM Total $ 79 $ 91 $ (220 ) (13 )% NM NM Not meaningful2011 vs. 2010Net incomedeclined 14% as compared to the prior year as an improvement in net credit losses was partially offset by lower revenues and higher expenses from increased investment spending. During 2011, the U.S. dollar generally depreciated versus local currencies. As a result, the impact of FX translation accounted for an approximately 1% growth in revenues and expenses, respectively.Revenues declined 2% driven by the continued liquidation of higher yielding non-strategic customer portfolios and a lower contribution from Akbank, Citi’s equity investment in Turkey. The revenue decline was partly offset by the impact of FX translation and improved underlying trends in the core lending portfolio, discussed below.Net interest revenuedeclined 3% due to the continued 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 increased 1%, reflecting higher investment sales and cards fees, partly offset by the lower contribution from Akbank. Underlying drivers continued to show growth as investment sales grew 28% from the prior year and cards purchase sales grew 14%.Expenses increased 9%, due to the impact of FX translation, investment spending and higher transactional expenses, partly offset by continued savings initiatives. Expenses could remain at elevated levels in 2012 given continued investment spending.Provisionswere 71% lower than the prior year 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. Loan loss reserve releases were flat. Assuming the underlying core portfolio continues to grow and season in 2012, Citi expects credit costs to rise.182010 vs. 2009Net income improved by $313 million, driven by the reduction in credit costs, partly offset by lower revenues and higher expenses. During 2010, the U.S. dollar generally appreciated versus local currencies. As a result, the impact of FX translation accounted for an approximately 1% decline in revenues and expenses, respectively.Revenuesdeclined 3% driven by FX translation and the continued liquidation of non-strategic customer portfolios.Net interest revenue was 5% lower due to the continued decline in the higher yielding non-strategic retail banking portfolio. In 2010, Citi focused its lending strategy around higher credit quality customers who tend to revolve less, meaning they have lower average balances than customers previously had. While this led to lower credit costs, it also negatively impacted Net interest revenue as customers paid off their loans more quickly.Non-interest revenueincreased 1%, reflecting higher investment sales and a higher contribution from Citi’s equity investment in Akbank.Expenses increased 5%, due to account acquisition-focused investment spending and volumes. As the average customer credit quality improved, Citi focused on volume growth to compensate for the lower revenue. The expansion of the sales force in 2010 drove some of the expense increase as compared to 2009.Provisionsdecreased 75% from the prior year driven by reduction in net credit losses and higher loan loss reserve releases. Net credit losses decreased 33%, reflecting continued credit quality improvement and the move to lower risk products.19LATIN AMERICA REGIONAL CONSUMER BANKINGLatin 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 throughoutLatin America as well as Banco Nacional de Mexico, or Banamex, Mexico’s second-largest bank, with over 1,700 branches. At December 31, 2011,LATAM RCB overall had 2,221 retail branches, with 29.2 million customer accounts, $24.0 billion in retail banking loans and $44.8 billion in deposits. In addition, the business had 12.9 million Citi-branded card accounts with $13.7 billion in outstanding loan balances.% Change % Change In millions of dollars 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 Net interest revenue $ 6,465 $ 5,968 $ 5,365 8 % 11 % Non-interest revenue 3,018 2,717 2,518 11 8 Total revenues, net of interest expense $ 9,483 $ 8,685 $ 7,883 9 % 10 % Total operating expenses $ 5,734 $ 5,159 $ 4,550 11 % 13 % Net credit losses $ 1,684 $ 1,868 $ 2,432 (10 )% (23 )% Credit reserve build (release) (67 ) (823 ) 463 92 NM Provision for benefits and claims 130 127 114 2 11 Provisions for loan losses and for benefits and claims $ 1,747 $ 1,172 $ 3,009 49 % (61 )% Income (loss) from continuing operations before taxes $ 2,002 $ 2,354 $ 324 (15 )% NM Income taxes (benefits) 401 565 (105 ) (29 ) NM Income (loss) from continuing operations $ 1,601 $ 1,789 $ 429 (11 )% NM Net (loss) attributable to noncontrolling interests — (8 ) — 100 — Net income (loss) $ 1,601 $ 1,797 $ 429 (11 )% NM Average assets(in billions of dollars) $ 80 $ 73 $ 66 10 % 11 % Return on assets 2.00 % 2.45 % 0.65 % Average deposits(in billions of dollars) $ 46 $ 41 $ 36 12 % 14 % Net credit losses as a percentage of average loans 4.64 % 6.05 % 8.52 % Revenue by business Retail banking $ 5,482 $ 5,034 $ 4,401 9 % 14 % Citi-branded cards 4,001 3,651 3,482 10 5 Total $ 9,483 $ 8,685 $ 7,883 9 % 10 % Income (loss) from continuing operations by business Retail banking $ 923 $ 938 $ 657 (2 )% 43 % Citi-branded cards 678 851 (228 ) (20 ) NM Total $ 1,601 $ 1,789 $ 429 (11 )% NM NM Not meaningful2011 vs. 2010Net income declined 11% as lower loan loss reserve releases more than offset increased operating margin. During 2011, the U.S. dollar generally depreciated versus local currencies. As a result, FX translation contributed approximately 2% to the growth in each of revenues and expenses.Revenues increased 9% primarily due to higher volumes as well as the impact of FX translation.Net interest revenueincreased 8% driven by the continued growth in lending and deposit volumes, partially offset by continued spread compression. The declining rate environment negatively impactedNet interest revenue as interest revenue declined at a faster pace than interest expense. Spread compression was also driven by the continued move towards customers with a lower risk profile and stricter underwriting criteria, especially in the branded cards portfolio.Non-interest revenue increased 11%, predominantly driven by an increase in banking fee income from credit card purchase sales, which grew 22%.Expenses increased 11% due to higher volumes and investment spending, including increased marketing and customer acquisition costs as well as new branches. These increased expenses were 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 49% reflecting lower loan loss reserve releases in 2011 as compared to 2010. Towards the end of 2011, there was a build in the loan loss reserves, primarily driven by increased volumes, particularly in the personal loan portfolio in Mexico. Net credit losses declined 10%, driven primarily by improvements in the Mexico cards portfolio. The cards net credit loss ratio declined from 11.7% in 2010 to 8.8% in 2011, driven in part by the continued move towards customers with a lower risk profile and stricter underwriting criteria. Citi currently expects the Citi-branded cards net credit loss ratio to stabilize in 2012 as new loans continue to season. Credit costs will likely increase in line with portfolio growth.202010 vs. 2009Net income increased $1.4 billion driven by lower credit costs as Citi released reserves in 2010 as compared to reserve builds in 2009. During 2010, the U.S. dollar generally appreciated versus local currencies. As a result, FX translation contributed approximately 5% to the decline in both revenues and expenses.Revenuesincreased 10%.Net interest revenueincreased 11% as higher loan volumes, particularly in the retail bank, offset the effect of spread compression. Spread compression was driven by the lower interest rates and move towards the above referenced lower risk customer base.Non-interest revenueincreased 8% due to higher banking fee income from increased purchase sale activity and FX translation.Expenses increased 13% due to FX translation as well as higher volumes and transaction-related expenses as economic conditions improved. The increase in expenses was also due to increased investment spending, including new cards acquisitions and new branches.Provisionsdecreased 61% primarily reflecting loan loss reserve releases of $823 million compared to a build of $463 million in the prior year as well as a $564 million improvement in net credit losses. The increase in loan loss reserve releases and decrease in net credit losses primarily resulted from improved credit conditions and portfolio quality in the Citi-branded cards portfolio, primarily in Mexico, as well as the move to customers with a lower risk profile and stricter underwriting criteria referenced above.21ASIA REGIONAL CONSUMER BANKINGAsia 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, Japan, Taiwan, Singapore, Australia, Hong Kong, India and Indonesia. Citi’s Japan Consumer Finance business, which Citi has been exiting since 2008, is included in Citi Holdings (see “Citi Holdings—Local Consumer Lending” below). At December 31, 2011,Asia RCBhad 671 retail branches, 16.3 million customer accounts, $66.2 billion in retail banking loans and $109.7 billion in deposits. In addition, the business had 15.9 million Citi-branded card accounts with $21.0 billion in outstanding loan balances.% Change % Change In millions of dollars 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 Net interest revenue $ 5,365 $ 5,077 $ 4,808 6 % 6 % Non-interest revenue 2,644 2,319 1,938 14 20 Total revenues, net of interest expense $ 8,009 $ 7,396 $ 6,746 8 % 10 % Total operating expenses $ 4,583 $ 4,046 $ 3,565 13 % 13 % Net credit losses $ 883 $ 1,013 $ 1,339 (13 )% (24 )% Credit reserve build (release) (63 ) (287 ) 523 78 NM Provisions for loan losses and for benefits and claims $ 820 $ 726 $ 1,862 13 % (61 )% Income from continuing operations before taxes $ 2,606 $ 2,624 $ 1,319 (1 )% 99 % Income taxes (benefits) 679 493 (72 ) 38 NM Income from continuing operations $ 1,927 $ 2,131 $ 1,391 (10 )% 53 % Net income attributable to noncontrolling interests — — — — — Net income $ 1,927 $ 2,131 $ 1,391 (10 )% 53 % Average assets(in billions of dollars) $ 122 $ 108 $ 93 13 % 16 % Return on assets 1.58 % 1.97 % 1.50 % Average deposits(in billions of dollars) $ 110 $ 100 $ 89 10 % 12 % Net credit losses as a percentage of average loans 1.03 % 1.37 % 2.07 % Revenue by business Retail banking $ 4,825 $ 4,586 $ 4,261 5 % 8 % Citi-branded cards 3,184 2,810 2,485 13 13 Total $ 8,009 $ 7,396 $ 6,746 8 % 10 % Income from continuing operations by business Retail banking $ 1,174 $ 1,436 $ 1,167 (18 )% 23 % Citi-branded cards 753 695 224 8 NM Total $ 1,927 $ 2,131 $ 1,391 (10 )% 53 % NM Not meaningful 2011 vs. 2010Net income decreased 10%, driven by higher operating expenses, lower loan loss reserve releases and a higher effective tax rate, partially offset by growth in revenue. The higher effective tax rate was due to lower tax benefits (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. During 2011, the U.S. dollar generally depreciated versus local currencies. As a result, the impact of FX translation accounted for an approximately 5% growth in revenues and expenses.Revenues increased 8%, primarily driven by higher business volumes and the impact of FX translation, partially offset by continued spread compression and $65 million of net charges relating to the repurchase of certain Lehmanstructured notes (see Note 29 to the Consolidated Financial Statements).Net interest revenue increased 6%, as investment initiatives and sustained economic growth in the region continued to drive 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. Spread compression will likely continue to have a negative impact on net interest revenue in the near-term.Non-interest revenue increased 14%, primarily due to a 17% increase in Citi-branded cards purchase sales and higher revenues from foreign exchange products, partially offset by a 12% decrease in investment sales, particularly in the second half of 2011, and the net charges for the repurchase of certain Lehman structured notes.22Expensesincreased 13% due to continued investment spending, growth in business volumes, repositioning charges and higher legal and related expenses, as well as the impact of FX translation, partially offset by ongoing productivity savings. The increase in the level of incremental investment spending in the business was largely completed at the end of 2011.Provisions increased 13% as lower loan loss reserve releases were partially offset by lower net credit losses. The increase in credit provisions reflected the increasing volumes in the region, partially offset by continued credit quality improvement. India remained a significant driver of the improvement in credit quality, as it continued to de-risk elements of its legacy portfolio. Citi believes that provisions could continue to increase as the portfolio continues to grow and season.2010 vs. 2009Net income increased 53%, driven by growth in revenue and a decrease in provisions, partially offset by higher operating expenses and a higher effective tax rate. During 2010, the U.S. dollar generally depreciated versus local currencies. As a result, the impact of FX translation accounted for approximately 6% growth in revenues, and 7% growth in expenses.Revenues increased 10%, driven by higher business volumes and the impact of FX translation, partially offset by spread compression.Net interest revenue increased 6%, as investment initiatives and sustained economic growth in the region drove higher lending and deposit volumes, which were partly offset by the spread compression. Non-interest revenueincreased 20%, primarily due to higher investment sales and a 19% increase in Citi-branded cards purchase sales.Expenses increased 13%, due to growth in business volumes, investment spending and the impact of FX translation.Provisionsdecreased 61%, mainly due to the net impact of a loan loss reserve release of $287 million in 2010, compared to a $523 million loan loss reserve build in 2009 and a 24% decline in net credit losses. The decrease in provisions reflected continued credit quality improvement across the region, particularly in India, partially offset by the increasing volumes in the region.23INSTITUTIONAL CLIENTS GROUPInstitutional Clients Group (ICG) includesSecurities and BankingandTransaction 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 withinTransaction Services in over 95 countries and jurisdictions. At December 31, 2011,ICG had $979 billion of assets and $484 billion of deposits.% Change % Change In millions of dollars 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 Commissions and fees $ 4,447 $ 4,266 $ 4,197 4 % 2 % Administration and other fiduciary fees 2,775 2,751 2,855 1 (4 ) Investment banking 3,029 3,520 4,687 (14 ) (25 ) Principal transactions 4,873 5,567 5,626 (12 ) (1 ) Other 1,817 1,681 1,749 8 (4 ) Total non-interest revenue $ 16,941 $ 17,785 $ 19,114 (5 )% (7 )% Net interest revenue (including dividends) 15,045 15,401 17,844 (2 ) (14 ) Total revenues, net of interest expense $ 31,986 $ 33,186 $ 36,958 (4 )% (10 )% Total operating expenses 20,687 19,597 17,573 6 12 Net credit losses 619 573 760 8 (25 ) Provision (release) for unfunded lending commitments 89 (29 ) 138 NM NM Credit reserve build (release) (556 ) (626 ) 892 11 NM Provisions for loan losses and benefits and claims $ 152 $ (82 ) $ 1,790 NM NM Income from continuing operations before taxes $ 11,147 $ 13,671 $ 17,595 (18 )% (22 )% Income taxes 2,845 3,499 4,622 (19 ) (24 ) Income from continuing operations $ 8,302 $ 10,172 $ 12,973 (18 )% (22 )% Net income attributable to noncontrolling interests 56 131 68 (57 ) 93 Net income $ 8,246 $ 10,041 $ 12,905 (18 )% (22 )% Average assets (in billions of dollars) $ 1,024 $ 948 $ 846 8 % 12 % Return on assets 0.81 % 1.06 % 1.53 % Revenues by region North America $ 10,000 $ 11,878 $ 11,361 (16 )% 5 % EMEA 10,707 10,205 13,445 5 (24 ) Latin America 4,069 4,063 4,826 — (16 ) Asia 7,210 7,040 7,326 2 (4 ) Total revenues $ 31,986 $ 33,186 $ 36,958 (4 )% (10 )% Income from continuing operations by region North America $ 1,458 $ 2,994 $ 2,978 (51 )% 1 % EMEA 3,150 3,030 4,713 4 (36 ) Latin America 1,623 1,755 2,174 (8 ) (19 ) Asia 2,071 2,393 3,108 (13 ) (23 ) Total income from continuing operations $ 8,302 $ 10,172 $ 12,973 (18 )% (22 )% Average loans by region (in billions of dollars) North America $ 69 $ 67 $ 52 3 % 29 % EMEA 47 38 45 24 (16 ) Latin America 29 23 22 26 5 Asia 52 36 28 44 29 Total average loans $ 197 $ 164 $ 147 20 % 12 % NM Not meaningful 24[THIS PAGE INTENTIONALLY LEFT BLANK]25SECURITIES AND BANKINGSecurities 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 inCommissions 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 inPrincipal transactions.S&B interest income earned on inventory and loans held is recorded as a component ofNet interest revenue.% Change % Change In millions of dollars 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 Net interest revenue $ 9,116 $ 9,723 $ 12,170 (6 )% (20 )% Non-interest revenue 12,301 13,392 14,970 (8 ) (11 ) Revenues, net of interest expense $ 21,417 $ 23,115 $ 27,140 (7 )% (15 )% Total operating expenses 15,028 14,693 13,090 2 12 Net credit losses 602 567 758 6 (25 ) Provision (release) for unfunded lending commitments 86 (29 ) 138 NM NM Credit reserve build (release) (572 ) (562 ) 887 (2 ) NM Provisions for loan losses and benefits and claims $ 116 $ (24 ) $ 1,783 NM NM Income before taxes and noncontrolling interests $ 6,273 $ 8,446 $ 12,267 (26 )% (31 )% Income taxes 1,378 1,947 3,072 (29 ) (37 ) Income from continuing operations 4,895 6,499 9,195 (25 ) (29 ) Net income attributable to noncontrolling interests 37 110 55 (66 ) 100 Net income $ 4,858 $ 6,389 $ 9,140 (24 )% (30 )% Average assets(in billions of dollars) $ 894 $ 841 $ 759 6 % 11 % Return on assets 0.54 % 0.76 % 1.21 % Revenues by region North America $ 7,558 $ 9,393 $ 8,836 (20 )% 6 % EMEA 7,221 6,849 10,056 5 (32 ) Latin America 2,364 2,547 3,435 (7 ) (26 ) Asia 4,274 4,326 4,813 (1 ) (10 ) Total revenues $ 21,417 $ 23,115 $ 27,140 (7 )% (15 )% Income from continuing operations by region North America $ 1,011 $ 2,465 $ 2,369 (59 )% 4 % EMEA 2,008 1,805 3,414 11 (47 ) Latin America 978 1,091 1,558 (10 ) (30 ) Asia 898 1,138 1,854 (21 ) (39 ) Total income from continuing operations $ 4,895 $ 6,499 $ 9,195 (25 )% (29 )% Securities and Bankingrevenue details Total investment banking $ 3,310 $ 3,828 $ 4,767 (14 )% (20 )% Lending 1,802 962 (2,447 ) 87 NM Equity markets 2,756 3,501 3,183 (21 ) 10 Fixed income markets 12,263 14,077 21,294 (13 ) (34 ) Private bank 2,146 2,004 2,068 7 (3 ) OtherSecurities and Banking (860 ) (1,257 ) (1,725 ) 32 27 TotalSecurities and Bankingrevenues $ 21,417 $ 23,115 $ 27,140 (7 )% (15 )% NM Not meaningful 262011 vs. 2010S&B’s results of operations for 2011 were significantly impacted by the macroeconomic concerns during the year, including the overall pace of U.S. economic recovery, the U.S. debt ceiling debate and subsequent downgrade of U.S. sovereign credit, the ongoing sovereign debt crisis in Europe and general continued concerns about the health of the global economy and financial markets. These concerns led to heightened volatility as well as overall declines in liquidity and market activity during the second half of the year as clients reduced their activity and risk.Net income of $4.9 billion decreased 24%. Excluding CVA/DVA (see table below), net income decreased 43% as declines in fixed income and equity markets revenues and investment banking revenues, along with higher expenses, more than offset increases in lending and private bank revenues.Revenues of $21.4 billion decreased 7% from the prior year. CVA/DVA increased by $2.1 billion from the prior year, driven by the widening of Citi’s credit spreads in 2011. Excluding CVA/DVA,S&B revenues decreased 16%, reflecting lower results in fixed income markets, equity markets and investment banking, partially offset by increased revenues in lending and the private bank. Fixed income markets revenues, which constituted over 50% ofS&B revenues in 2011, decreased 24% excluding CVA/DVA. This was driven by lower results in securitized and credit products, reflecting the challenging market environment and reduced customer risk appetite and, to a lesser extent, rates and currencies.Equity markets revenues decreased 35% excluding CVA/DVA, driven by declining revenues in equity proprietary trading (which Citi also refers to as equity principal strategies) as positions in the business were wound down, a decline in equity derivatives revenues and, to a lesser extent, a decline in cash equities. The wind down of Citi’s equity proprietary trading was completed at the end of 2011.Investment banking revenues declined 14%, as the macroeconomic concerns and market uncertainty drove lower volumes in debt and equity issuance.Lending revenues increased 87%, mainly due to the absence of losses on credit default swap hedges in the prior year (see the table below). Excluding the impact of these hedging gains and losses, lending revenues increased 3%, primarily due to growth in the Corporate loan portfolio. Private bank revenues increased 6% excluding CVA/DVA, primarily due to higher loan and deposit balances and improved customer pricing, partially offset by declines in investment and capital markets-related products given the negative market sentiment.Expenses increased 2%, primarily due to investment spending, which largely occurred in the first half of the year, 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 by $140 million, primarily due to builds in the allowance for unfunded lending commitments as a result of portfolio growth and higher net credit losses.2010 vs. 2009Net income of $6.4 billion decreased 30%. Excluding CVA/DVA, net income decreased 36%, as an increase in lending was more than offset by declines in fixed income and equity trading activities, investment banking fees and higher expenses.Revenues of $23.1 billion decreased 15% from the prior year, as performance in the first half of 2009 was particularly strong due to higher fixed income markets activity and client activity levels in investment banking. In addition, 2010 CVA/DVA increased $1.6 billion from the prior year, mainly due to a larger narrowing of Citi’s spreads in 2009 compared 2010. Excluding CVA/DVA, revenues decreased 19%, reflecting lower results in fixed income markets, equity markets and investment banking, partially offset by increased revenues in lending.Fixed income markets revenues decreased 32% excluding CVA/DVA, primarily reflecting lower results in rates and currencies, credit products and securitized products due to the overall weaker market environment during 2010.Equity markets revenues decreased 31% excluding CVA/DVA, driven by lower trading revenues linked to the derivatives business and equity proprietary trading.Investment banking revenues declined 20%, reflecting lower levels of market activity in debt and equity underwriting.Lending revenues increased by $3.4 billion, mainly driven by a reduction in losses on credit default swap hedges.Expenses increased 12%, or $1.6 billion, year over year. Excluding the 2010 U.K. bonus tax impact and litigation reserve releases in the first half of 2010 and 2009, expenses increased 8%, or $1.1 billion, mainly as a result of higher compensation, transaction costs and the negative impact of FX translation (which contributed approximately 1% to the expense growth).Provisions decreased by $1.8 billion, to negative $24 million, mainly due to credit reserve releases and lower net credit losses as the result of an improvement in the credit environment during 2010.In millions of dollars 2011 2010 2009 S&B CVA/DVA Fixed Income Markets $ 1,368 $ (187 ) $ 276 Equity Markets 355 (207 ) (2,190 ) Private Bank 9 (5 ) (43 ) TotalS&B CVA/DVA $ 1,732 $ (399 ) $ (1,957 ) TotalS&B Lending Hedge gain (loss) $ 73 $ (711 ) $ (3,421 ) 27TRANSACTION SERVICESTransaction 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 in these businesses, as well as from trade loans and fees for transaction processing and fees on assets under custody and administration in Securities and Fund Services.% Change % Change In millions of dollars 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 Net interest revenue $ 5,929 $ 5,678 $ 5,674 4 % — Non-interest revenue 4,640 4,393 4,144 6 6 % Total revenues, net of interest expense $ 10,569 $ 10,071 $ 9,818 5 % 3 % Total operating expenses 5,659 4,904 4,483 15 9 Provisions (releases) for credit losses and for benefits and claims 36 (58 ) 7 NM NM Income before taxes and noncontrolling interests $ 4,874 $ 5,225 $ 5,328 (7 )% (2 )% Income taxes 1,467 1,552 1,550 (5 ) — Income from continuing operations 3,407 3,673 3,778 (7 ) (3 ) Net income attributable to noncontrolling interests 19 21 13 (10 ) 62 Net income $ 3,388 $ 3,652 $ 3,765 (7 )% (3 )% Average assets(in billions of dollars) 130 $ 107 $ 87 21 % 23 % Return on assets 2.61 % 3.41 % 4.34 % Revenues by region North America $ 2,442 $ 2,485 $ 2,525 (2 )% (2 )% EMEA 3,486 3,356 3,389 4 (1 ) Latin America 1,705 1,516 1,391 12 9 Asia 2,936 2,714 2,513 8 8 Total revenues $ 10,569 $ 10,071 $ 9,818 5 % 3 % Income from continuing operations by region North America $ 447 $ 529 $ 609 (16 )% (13 )% EMEA 1,142 1,225 1,299 (7 ) (6 ) Latin America 645 664 616 (3 ) 8 Asia 1,173 1,255 1,254 (7 ) — Total income from continuing operations $ 3,407 $ 3,673 $ 3,778 (7 )% (3 )% Key indicators(in billions of dollars) Average deposits and other customer liability balances $ 363 $ 333 $ 304 9 % 10 % EOP assets under custody(1)(In trillions of dollars) 12.5 12.6 12.1 (1 ) 4 (1)Includes assets under custody, assets under trust and assets under administration.NMNot meaningful2011 vs. 2010Net income decreased 7%, as higher expenses, driven by investment spending, outpaced revenue growth. Year-over-year, the U.S. dollar generally depreciated versus local currencies. As a result, the impact of FX translation accounted for an approximately 1% growth in revenues and expenses, respectively.Revenues grew 5%, driven primarily by international growth, as improvement in fees and increased deposit balances more than offset the continued spread compression, which will likely continue to be a challenge in 2012. Treasury and Trade Solutions revenues increased 5%, drivenprimarily by growth in the trade and commercial cards businesses and increased deposits, partially offset by the impact of the continued low rate environment. Overall, Securities and Fund Services revenues increased 4% year-over-year, 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. During the fourth quarter of 2011, however, Securities and Fund Services experienced a 10% decline in revenues as compared to the prior year period, driven by a significant decrease in settlement volumes reflecting the overall decline in capital markets activity during the latter part of 2011, spread compression and the impact of FX translation.28Expenses increased 15% reflecting investment spending and higher business volumes, partially offset by productivity savings. The increase in the level of investment spending in the business was largely completed at the end of 2011.Provisions increased by $94 million, to $36 million, reflecting reserve builds in 2011 versus a net reserve release in the prior year.Average assets grew 21%, driven by a 59% increase in trade assets as a result of focused investment in the business.Average deposits and other customer liability balances grew 9% and included a favorable shift to operating balances as the business continued to emphasize stable, lower cost deposits as a way to mitigate spread compression.2010 vs. 2009Net income decreased 3%, as expenses driven by investment spending outpaced revenue growth. Year-over-year, the U.S. dollar generally depreciated versus local currencies. As a result, the impact of FX translation accounted for approximately 2% growth in revenues. Revenues grew 3%, despite the low interest rate environment. Treasury and Trade Solutions revenues grew 2% as a result of increased customer liability balances and growth in trade and fees, partially offset by the spread compression. Securities and Fund Services revenues grew by 3% as higher volumes and balances reflected the impact of sales and increased market activity.Expenses increased 9% reflecting investment spending and higher business volumes.Provisions decreased $65 million, to a negative $58 million, as compared to the prior year, reflecting credit reserve releases.Average deposits and other customer liability balances grew 10%, driven primarily by growth in emerging markets.29
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’sGlobal Consumer Banking businesses andInstitutional Clients Group; and Citi Holdings, consisting ofBrokerage and Asset Management, Local Consumer Lending andSpecial 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 atwww.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 atwww.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.
At December 31, 2012, Citi had approximately 259,000 full-time employees compared to approximately 266,000 full-time employees at December 31, 2011.
(1)North America includes the U.S., Canada and Puerto Rico,Latin America includes Mexico, andAsia includes Japan.
RESULTS OF OPERATIONS31 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 Management32 Local Consumer Lending 33 andSpecial 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 December 31, 2011, Citi Holdings’ GAAP assets were approximately $269 billion, a decrease of approximately $90 billion, or 25%, from year end 2010, and $558 billion, or 67%, from the peak in the first quarter of 2008. The decline in assets during 2011 reflected approximately $49 billion in asset sales and business dispositions, $35 billion in net run-off and amortization, and $6 billion in net cost of credit and net asset marks. Citi Holdings represented approximately 14% of Citi’s GAAP assets as of December 31, 2011, while Citi Holdings’ risk-weighted assets of approximately $245 billion at December 31, 2011 represented approximately 25% of Citi’s risk-weighted assets as of such date. As previously disclosed, Citi’s ability to continue to decrease the assets in Citi Holdings through the methods discussed above, including sales and dispositions, will not likely occur at the same pace or level as in the past. See also the “Executive Summary” above and “Risk Factors—Business Risks” below.% Change % Change In millions of dollars 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 Net interest revenue $ 10,287 $ 14,773 $ 16,139 (30 )% (8 )% Non-interest revenue 2,609 4,514 12,989 (42 ) (65 ) Total revenues, net of interest expense $ 12,896 $ 19,287 $ 29,128 (33 )% (34 )% Provisions for credit losses and for benefits and claims Net credit losses $ 11,731 $ 19,070 $ 24,585 (38 )% (22 )% Credit reserve build (release) (4,720 ) (3,500 ) 5,305 (35 ) NM Provision for loan losses $ 7,011 $ 15,570 $ 29,890 (55 )% (48 )% Provision for benefits and claims 820 813 1,094 1 (26 ) Provision (release) for unfunded lending commitments (41 ) (82 ) 106 50 NM Total provisions for credit losses and for benefits and claims $ 7,790 $ 16,301 $ 31,090 (52 )% (48 )% Total operating expenses $ 8,791 $ 9,615 $ 14,085 (9 )% (32 )% Loss from continuing operations before taxes $ (3,685 ) $ (6,629 ) $ (16,047 ) 44 % 59 % Benefits for income taxes (1,161 ) (2,573 ) (6,988 ) 55 63 (Loss) from continuing operations $ (2,524 ) $ (4,056 ) $ (9,059 ) 38 % 55 % Net income (loss) attributable to noncontrolling interests 119 207 29 (43 ) NM Citi Holdings net loss $ (2,643 ) $ (4,263 ) $ (9,088 ) 38 % 53 % Balance sheet data(in billions of dollars) Total EOP assets $ 269 $ 359 $ 487 (25 )% (26 )% Total EOP deposits $ 64 $ 79 $ 89 (19 )% (11 )% NM Not meaningful 30BROKERAGE AND ASSET MANAGEMENTBrokerage and Asset Management (BAM) consists of Citi’s global retail brokerage and asset management businesses. At December 31, 2011, BAM had approximately $27 billion of assets, or approximately 10% of Citi Holdings’ assets, primarily consisting of Citi’s investment in, and assets related to, the Morgan Stanley Smith Barney joint venture (MSSB JV). As more fully described in Forms 8-K filed with the SEC on January 14, 2009 and June 3, 2009, Morgan Stanley has options to purchase Citi’s remaining stake in the MSSB JV over three years beginning in 2012. % Change % Change In millions of dollars 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 Net interest revenue $ (180 ) $ (277 ) $ 390 35 % NM Non-interest revenue 462 886 14,233 (48 ) (94 )% Total revenues, net of interest expense $ 282 $ 609 $ 14,623 (54 )% (96 )% Total operating expenses $ 729 $ 987 $ 3,276 (26 )% (70 )% Net credit losses $ 4 $ 17 $ 1 (76 )% NM Credit reserve build (release) (3 ) (18 ) 36 83 NM Provision for unfunded lending commitments (1 ) (6 ) (5 ) 83 (20 )% Provision (release) for benefits and claims 48 38 40 26 (5 ) Provisions for credit losses and for benefits and claims $ 48 $ 31 $ 72 55 % (57 )% Income (loss) from continuing operations before taxes $ (495 ) $ (409 ) $ 11,275 (21 )% NM Income taxes (benefits) (209 ) (183 ) 4,425 (14 ) NM Income (loss) from continuing operations $ (286 ) $ (226 ) $ 6,850 (27 )% NM Net income attributable to noncontrolling interests 9 11 12 (18 ) (8 )% Net income (loss) $ (295 ) $ (237 ) $ 6,838 (24 )% NM EOP assets(in billions of dollars) $ 27 $ 27 $ 30 — (10 )% EOP deposits(in billions of dollars) 55 58 60 (5 )% (3 ) NM Not meaningful 2011 vs. 2010Net loss increased 24% as lower revenues were only partly offset by lower expenses.Revenues decreased by 54%, driven by the 2010 sale of the 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 the MSSB JV.Expenses decreased 26%, also driven by divestitures, as well as lower legal and related expenses.Provisions increased 55% due to the absence of the prior-year reserve releases.2010 vs. 2009Net loss was $0.2 billion in 2010, compared toNet income of $6.9 billion in 2009. The decrease was driven by the absence of the gain on sale related to the MSSB JV transaction in 2009.Revenues decreased 96% versus the prior year driven by the absence of the $11.1 billion pretax gain on sale ($6.7 billion after tax) related to the MSSB JV transaction in the second quarter of 2009 and a $320 million pretax gain on the sale of the managed futures business to the MSSB JV in the third quarter of 2009. Excluding these gains, revenues decreased primarily due to the absence of Smith Barney from May 2009 onwards as well as the absence of Nikko Asset Management, partially offset by higher revenues from the MSSB JV and an improvement in marks in the retail alternative investments business.Expensesdecreased 70% from the prior year, mainly driven by the absence of Smith Barney from May 2009 onwards, lower MSSB JV separation-related costs as compared to the prior year and the absence of Nikko and Colfondos, partially offset by higher legal settlements and reserves associated with Smith Barney.Provisions decreased 57%, mainly due to the absence of credit reserve builds in 2009.Assetsdecreased 10% versus the prior year, mostly driven by the sales of the private equity business and the run-off of tailored loan portfolios.31LOCAL CONSUMER LENDINGAs of December 31, 2011,Local Consumer Lending (LCL) included a portion of Citigroup’sNorth Americamortgage business, retail partner cards, CitiFinancial North America (consisting of the OneMain and CitiFinancial Servicing businesses), remaining student loans, and other local Consumer finance businesses globally (including Western European cards and retail banking and Japan Consumer Finance). At December 31, 2011,LCL had approximately $201 billion of assets (approximately $186 billion inNorth America) or approximately 75% of Citi Holdings assets. TheNorth Americaassets consisted of residential mortgages (residential first mortgages and home equity loans), retail partner card loans, personal loans, commercial real estate, and other consumer loans and assets. As referenced under “Citi Holdings” above, the substantial majority of the retail partner cards business will be transferred to Citicorp—NA RCB, effective in the first quarter of 2012.As of December 31, 2011, approximately $108 billion of assets inLCL consisted ofNorth Americamortgages in Citi’s CitiMortgage and CitiFinancial operations. % Change % Change In millions of dollars 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 Net interest revenue $ 10,872 $ 13,831 $ 12,995 (21 )% 6 % Non-interest revenue 1,195 1,995 4,770 (40 ) (58 ) Total revenues, net of interest expense $ 12,067 $ 15,826 $ 17,765 (24 )% (11 )% Total operating expenses $ 7,769 $ 8,057 $ 9,898 (4 )% (19 )% Net credit losses $ 10,659 $ 17,040 $ 19,185 (37 )% (11 )% Credit reserve build (release) (2,862 ) (1,771 ) 5,799 (62 ) NM Provision for benefits and claims 772 775 1,054 — (26 ) Provision for unfunded lending commitments — — — — — Provisions for credit losses and for benefits and claims $ 8,569 $ 16,044 $ 26,038 (47 )% (38 )% (Loss) from continuing operations before taxes $ (4,271 ) $ (8,275 ) $ (18,171 ) 48 % 54 % Benefits for income taxes (1,437 ) (3,287 ) (7,687 ) 56 57 (Loss) from continuing operations $ (2,834 ) $ (4,988 ) $ (10,484 ) 43 % 52 % Net income attributable to noncontrolling interests 2 8 33 (75 ) (76 ) Net (loss) $ (2,836 ) $ (4,996 ) $ (10,517 ) 43 % 52 % Average assets(in billions of dollars) $ 228 $ 324 $ 351 (30 )% (8 )% Net credit losses as a percentage of average loans 5.34 % 6.20 % 6.38 % Total GAAP revenues $ 12,067 $ 15,826 $ 17,765 (24 )% (11 )% Net impact of credit card securitizations activity(1) — — 4,135 Total managed revenues $ 12,067 $ 15,826 $ 21,900 (24 )% (28 )% Total GAAP net credit losses $ 10,659 $ 17,040 $ 19,185 (37 )% (11 )% Impact of credit card securitizations activity(1) — — 4,590 Total managed net credit losses $ 10,659 $ 17,040 $ 23,775 (37 )% (28 )% (1)See Note 1 to the Consolidated Financial Statements for a discussion of the impact of SFAS 166/167.36 NMNot meaningful2011 vs. 2010Net loss decreased 43%, driven primarily by the improving credit environment, including lower net credit losses and higher loan loss reserve releases, in both retail partner cards and mortgages. The improvement in credit was partly offset by lower revenues due to decreasing asset balances and sales.Revenues decreased 24%, driven primarily by the lower asset balances due to asset sales, divestitures and run-offs, which also drove the 21% decline inNet interest revenue.Non-interest revenue decreased 40% due to the impact of divestitures.Expensesdecreased 4%, driven by the lower volumes and divestitures, partly offset by higher legal and regulatory expenses, including without limitation those relating to the United States and state attorneys general mortgage servicing discussions and agreement in principle announced on February 9, 2012, reserves related to potential PPI refunds (see “Payment Protection Insurance” below) and, to a lesser extent, implementation costs associated with the OCC/Federal Reserve Board consent orders entered into in April 2011.Provisionsdecreased 47%, driven by lower credit losses and higher loan loss reserve releases. Net credit losses decreased 37%, primarily due to the credit improvements in retail partner cards ($3.0 billion) andNorth Americamortgages ($1.6 billion), although the pace of the decline in net credit losses in both portfolios slowed. Loan loss reserve releases increased 62%, driven by higher releases in retail partner cards and CitiFinancial North America due to better credit quality and lower loan balances.Assetsdeclined 20% from the prior year, 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 (see “North America Consumer Mortgage Lending” below).322010 vs. 2009Net lossdecreased 52%, driven primarily by the improving credit environment. Decreases in revenues driven by lower gains on asset sales were mostly offset by decreased expenses due to lower volumes and divestitures.Revenuesdecreased 11% from the prior year, driven primarily by portfolio run off, divestitures and asset sales.Net interest revenueincreased 6% due to the adoption of SFAS 166/167, partially offset by the impact of lower balances due to portfolio run-off and asset sales.Non-interest revenuedeclined 58%, primarily due to the absence of the $1.1 billion gain on the sale of Redecard in the first quarter of 2009 and a higher mortgage repurchase reserve charge.Expenses decreased 19%, primarily due to the impact of divestitures, lower volumes, re-engineering actions and the absence of costs associated with the U.S. government loss-sharing agreement, which was exited in the fourth quarter of 2009.Provisionsdecreased 38%, reflecting a net $1.8 billion loan loss reserve release in 2010 compared to a $5.8 billion build in 2009. Lower net credit losses across most businesses were partially offset by the impact of the adoption of SFAS 166/167. On a comparable basis, net credit losses were lower year-over-year by 28%, driven by improvement in U.S. mortgages, international portfolios and retail partner cards.Assetsdeclined 21% from the prior year, primarily driven by portfolio run-off, higher loan loss reserve balances, and the impact of asset sales and divestitures, partially offset by an increase of $41 billion resulting from the adoption of SFAS 166/167. Key divestitures in 2010 included The Student Loan Corporation, Primerica, auto loans, the Canadian Mastercard business and U.S. retail sales finance portfolios.Japan Consumer FinanceCiti continues to actively monitor a number of matters involving its Japan Consumer Finance business, including customer defaults, refund claims and litigation, as well as financial and 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 been liquidating its portfolio and otherwise winding down the business since such time. However, this business has incurred, and will continue to face, net credit losses and refunds, due in part to legislative, regulatory and judicial actions taken in recent years. These actions may also reduce credit availability and increase potential claims and losses relating to gray zone interest.In September 2010, one of Japan’s largest consumer finance companies (Takefuji) declared bankruptcy, reflecting the financial distress that Japan’s top consumer finance lenders are facing as they continue to deal with liabilities for gray zone interest refund claims. The publicity relating to Takefuji’s bankruptcy resulted in a significant increase in the number of refund claims during the latter part of 2010 and first half of 2011, although Citi observed a steady decline in such claims during the remainder of 2011. During 2011,LCLrecorded a net increase in its reserves related to customer refunds in the Japan Consumer Finance business of approximately $120 million (pretax), in addition to an increase of approximately $325 million (pretax) in 2010.As evidenced by the events described above, the trend in the type, number and amount of refund claims remains volatile, and the potential full amount of losses and their impact on Citi is subject to significant uncertainties and continues to be difficult to predict. In addition, regulators in Japan have stated that they are considering 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 and other types of collective actions. 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.33Payment Protection InsuranceThe alleged mis-selling of payment protection insurance products (PPI) by financial institutions in the UK, including Citi, has been, and continues to be, the subject of intense review and focus by the UK regulators, particularly the Financial Services Authority (FSA). PPI is designed to cover a customer’s loan repayments in the event of certain events, such as long-term illness or unemployment. 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. Prior to 2008, certain of Citi’s UK consumer finance businesses, primarily CitiFinancial Europe plc and 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 retains the potential liability relating to the sale of PPI by these businesses.As a result of this regulatory focus and resulting publicity, during 2010 and 2011, Citi observed an increase in customer complaints relating to the sale of PPI. In addition, in 2011, the FSA required all firms engaged in the sale of PPI in the UK, including Citi, to review their historical sales processes for PPI, generally from January 2005 forward. In addition, the FSA is requiring these firms to proactively contact any customers who may have been mis-sold PPI after January 2005 and invite them to have their individual sale reviewed. Redress, whether as a result of customer complaints or Citi’s proactive contact with customers, generally involves the repayment of premiums and the refund of all applicable contractual interest together with compensatory interest of 8%. As a result of these developments during 2011, Citi increased its reserves related to potential PPI refunds by approximately $330 million ($230 million inLCLand $100 million inCorporate/Otherfor discontinued operations). Citi continues discussions with the FSA regarding its proposed remediation process, and the trend in the number of claims, the potential amount of refunds and the impact on Citi remains volatile and is subject to significant uncertainty and lack of predictability. This is particularly true with respect to the potential customer response to any direct customer contact exercise. Citi continues to monitor and evaluate the PPI remediation process and developments and its related reserves.34SPECIAL ASSET POOLSpecial Asset Pool (SAP)had approximately $41 billion of assets as of December 31, 2011, which constituted approximately 15% 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.SAP assets have declined by approximately $287 billion, or 88%, from peak levels in 2007, reflecting cumulative write-downs, asset sales and portfolio run-off. % Change % Change In millions of dollars 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 Net interest revenue $ (405 ) $ 1,219 $ 2,754 NM (56 )% Non-interest revenue 952 1,633 (6,014 ) (42 )% NM Revenues, net of interest expense $ 547 $ 2,852 $ (3,260 ) (81 )% NM Total operating expenses $ 293 $ 571 $ 911 (49 )% (37 )% Net credit losses $ 1,068 $ 2,013 $ 5,399 (47 )% (63 )% Provision (releases) for unfunded lending commitments (40 ) (76 ) 111 47 NM Credit reserve builds (releases) (1,855 ) (1,711 ) (530 ) (8 ) NM Provisions for credit losses and for benefits and claims $ (827 ) $ 226 $ 4,980 NM (95 )% Income (loss) from continuing operations before taxes $ 1,081 $ 2,055 $ (9,151 ) (47 )% NM Income taxes (benefits) 485 897 (3,726 ) (46 ) NM Net income (loss) from continuing operations $ 596 $ 1,158 $ (5,425 ) (49 )% NM Net income (loss) attributable to noncontrolling interests 108 188 (16 ) (43 ) NM Net income (loss) $ 488 $ 970 $ (5,409 ) (50 )% NM EOP assets(in billions of dollars) $ 41 $ 80 $ 136 (49 )% (41 )% NM Not meaningful 2011 vs. 2010Net income decreased 50%, driven by the decrease in revenues due to lower asset balances, partially offset by lower expenses and improved credit.Revenuesdecreased 81%, driven by the overall decline inNet interest revenue during the year, as interest-earning assets declined and thus represent a smaller portion ofSAP.Net interest revenuewas a negative $405 million in 2011 and Citi expects to incur continued negative carrying costs inSAPgoing forward as the non-interest-earning assets ofSAP, which require funding, now represent the larger portion of the total asset pool.Non-interest revenuedecreased by 42% due to lower gains on asset sales and the absence of positive marks from the prior year, such as on subprime exposures.Expensesdecreased 49%, driven by lower volume and asset levels, as well as lower legal and related costs.Provisionsdecreased $1.1 billion as credit conditions continued to improve during the year. The decline of $1.1 billion was driven by a $945 million decrease in net credit losses and an increase in loan loss reserve releases to $1.9 billion in 2011 from a release of $1.7 billion in 2010.Assetsdeclined 49%, primarily driven by sales and amortization and prepayments. Asset sales of $29 billion for 2011 generated pretax gains of approximately $0.5 billion.2010 vs. 2009Net income increased $6.4 billion from a net loss of $5.4 billion in 2009. The increase was driven by higher gains on asset sales and improved revenue marks, as well as improved credit.Revenues increased $6.1 billion, primarily due to the improvement of revenue marks in 2010. Aggregate marks were negative $2.6 billion in 2009 as compared to positive marks of $3.4 billion in 2010. 2010 revenues included positive marks of $2.0 billion related to subprime-related direct exposure, a positive $0.5 billion CVA/DVA related to monoline insurers, and $0.4 billion on private equity positions. These positive marks were partially offset by negative revenues of $0.5 billion on Alt-A mortgages and $0.4 billion on commercial real estate.Expenses decreased 37%, mainly driven by the absence of the U.S. government loss-sharing agreement exited in the fourth quarter of 2009, lower compensation, and lower transaction expenses.Provisions decreased 95% as credit conditions improved. The decline in credit costs was driven by a decrease in net credit losses of $3.4 billion and a higher release of loan loss reserves and unfunded lending commitments of $1.4 billion.Assets declined 41%, primarily driven by sales and amortization and prepayments. Asset sales of $39 billion for 2010 generated pretax gains of approximately $1.3 billion.35CORPORATE/OTHERCorporate/Other includes global staff functions (including finance, risk, human resources, legal and compliance) and other corporate expense, global operations and technology, unallocated Corporate Treasury and Corporate items and discontinued operations. At December 31, 2011, this segment had approximately $286 billion of assets, or 15% of Citigroup’s total assets, consisting primarily of Citi’s liquidity portfolio.In millions of dollars 2011 2010 2009 Net interest revenue $ 25 $ 828 $ (1,840 ) Non-interest revenue 861 926 (8,715 ) Revenues, net of interest expense $ 886 $ 1,754 $ (10,555 ) Total operating expenses $ 2,522 $ 1,616 $ 1,039 Provisions (releases) for loan losses and for benefits and claims (1 ) — — Income (loss) from continuing operations before taxes $ (1,635 ) $ 138 $ (11,594 ) Provision (benefits) for income taxes (764 ) (36 ) (4,225 ) Income (loss) from continuing operations $ (871 ) $ 174 $ (7,369 ) Income (loss) from discontinued operations, net of taxes 112 (68 ) (445 ) Net income (loss) before attribution of noncontrolling interests $ (759 ) $ 106 $ (7,814 ) Net (loss) attributable to noncontrolling interests (27 ) (48 ) (2 ) Net income (loss) $ (732 ) $ 154 $ (7,812 ) 2011 vs. 2010Net lossof $732 million reflected a decline of $886 million compared toNet incomeof $154 million in 2010. The decline was primarily due to the decrease in revenues coupled with the increase in expenses, as well as the absence of the net gain on the sale of Nikko Cordial Securities and the related benefit for income taxes recorded in discontinued operations in 2010. This was partially offset by the absence of the net loss on the sale of The Student Loan Corporation in 2010 and a net gain on the sale of the Egg Banking plc credit card business in 2011, each recorded in discontinued operations in the respective year.Revenues decreased $868 million, primarily driven by lower investment yields in Treasury and lower gains on sales of AFS securities, partially offset by gains on hedging activities and the gain on the sale of a portion of Citi’s holdings in the Housing Development Finance Corp. (HDFC) in the second quarter of 2011 (approximately $200 million pretax).Expensesincreased $906 million, due to higher legal and related costs and continued investment spending, primarily in technology.2010 vs. 2009Net lossdecreased $8.0 billion, primarily due to the increase in revenues and the absence of prior-year losses related to Nikko Cordial, partially offset by the increase in expenses and the net loss on the sale of The Student Loan Corporation.Revenues increased $12.3 billion, primarily due to the absence of the loss on debt extinguishment related to the repayment of TARP and the exit from the loss-sharing agreement with the U.S. government, each in the fourth quarter of 2009. Revenues also increased due to gains on sales of AFS securities, benefits from lower short-term interest rates and other improved Treasury results in 2010. These increases were partially offset by the absence of the pretax gain related to Citi’s public and private exchange offers in 2009.Expenses increased $577 million, primarily due to various legal and related expenses as well as other non-compensation expenses.36The following sets forth37 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,
DIVIDENDS294 PERFORMANCE GRAPH 295 CORPORATE INFORMATION 296 Citigroup Executive Officers 296 CITIGROUP BOARD OF DIRECTORS 299
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’sGlobal Consumer Banking businesses andInstitutional Clients Group; and Citi Holdings, consisting ofBrokerage and Asset Management, Local Consumer Lending andSpecial 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 atwww.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 atwww.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.
At December 31, 2012, Citi had approximately 259,000 full-time employees compared to approximately 266,000 full-time employees at December 31, 2011.
(1)North America includes the U.S., Canada and Puerto Rico,Latin America includes Mexico, andAsia includes Japan.
RESULTS OF OPERATIONS
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:
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 compression1 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 general discussionpercentage 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).
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:
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 changescarrying value of Citi’s remaining 35% interest in certainMSSB recorded in Citi Holdings—Brokerage and Asset Managementduring 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 inCorporate/Otherduring 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 withinCorporate/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 inCorporate/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 more significant line itemsunderlying fundamentals of Citi’s Consolidated Balance Sheet duringbusinesses and enhances the comparison of results across periods.
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 inNorth America cards andLocal Consumer Lendingand theSpecial Asset Poolwithin Citi Holdings. Consumer net credit losses declined 22% to $14.4 billion reflecting improvements inNorth America Citi-branded cards and Citi retail services in Citicorp andLocal Consumer Lendingwithin Citi Holdings. Corporate net credit losses decreased 86% year-over-year to $223 million, driven primarily by continued credit improvement in both theSpecial 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 inNorth America Citi-branded cards and Citi retail services andSecurities 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 theSpecial 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.
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 inSecurities 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 RCBrevenues grew 5% to $21.1 billion. InternationalRCB revenues (consisting ofAsia RCB,Latin America RCB andEMEA RCB) increased 1% year-over-year to $19.1 billion. Excluding the impact of FX translation,6 internationalRCBrevenues 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 Servicesrevenues 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.
InNorth 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 Citigroup’s deposits, short-termCiti’s estimated Basel III Tier 1 Common Capital and long-term debt and secured financing transactions,Tier 1 Common ratio, including the calculation of these measures, see “Capital Resources and Liquidity—FundingCapital Resources” below.5 Citicorp includes Citi’s three operating businesses—Global Consumer Banking, Securities and Liquidity” below.December 31, Increase % In billions of dollars 2011 2010 (decrease) Change Assets Cash and deposits with banks $ 184 $ 190 $ (6 ) (3 )% Federal funds sold and securities borrowed or purchased under agreements to resell 276 247 29 12 Trading account assets 292 317 (25 ) (8 ) Investments 293 318 (25 ) (8 ) Loans, net of unearned income and allowance for loan losses 617 608 9 1 Other assets 212 234 (22 ) (9 ) Total assets $ 1,874 $ 1,914 $ (40 ) (2 )% Liabilities Deposits $ 866 $ 845 $ 21 2 % Federal funds purchased and securities loaned or sold under agreements to repurchase 198 190 8 4 Trading account liabilities 126 129 (3 ) (2 ) Short-term borrowings and long-term debt 378 460 (82 ) (18 ) Other liabilities 126 124 2 2 Total liabilities $ 1,694 $ 1,748 $ (54 ) (3 )% Total equity $ 180 $ 166 $ 14 8 % Total liabilities and equity $ 1,874 $ 1,914 $ (40 ) (2 )% ASSETSCash and Deposits with BanksCash and deposits with banksBankingis comprised of bothCash and due from banksandDeposits with banks. Cash and due from banksTransaction Services 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.well asDeposits 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 2011,Cash and deposits with banks decreased $6 billion, or 3%, driven by a $7 billion, or 4%, decrease inDeposits with banks offset by a $1 billion, or 3%, increase inCash and due from banksCorporate/Other. These changes resulted from Citi’s normalSee “Citicorp” below for additional information on the results of operations during the year.Federal Funds Sold and Securities Borrowed or Purchased Under Agreements to Resell (Reverse Repos)Federal funds sold consist of unsecured advances of excess balances in reserve accounts held at the Federal Reserve Banks to third parties. During 2010 and 2011, Citi’s federal funds sold were not significant. Reverse repos and securities borrowing transactions increased by $29 billion, or 12%, during 2011, compared to 2010. The majority of this increase was due to additional secured lending to clients.For further information regarding these Consolidated Balance Sheet categories, see Notes 1 and 12 to the Consolidated Financial Statements.Trading Account AssetsTrading 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 inTrading account assets.During 2011,Trading account assets decreased $25 billion, or 8%, primarily due to decreases in corporate bonds ($14 billion, or 28%), foreign government securities ($9 billion, or 10%), equity securities ($4 billion, or 11%) and U.S. Treasury and federal agency securities ($4 billion, or 18%), partially offset by a $12 billion, or 24%, increase in derivative assets. A significant portionfor each of the declinebusinesses in Citi’sCiticorp.6 For the impact of FX translation on 2012 results of operations for each of Trading account assetsEMEA RCB, Latin America RCB, Asia RCB occurred in the second half of 2011 as the economic uncertainty that largely began in the third quarter of 2011 continued into the fourth quarter. 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.AverageTrading account assetswere $270 billion in 2011, compared to $280 billion in 2010.For further information on Citi’sTrading account assetsTransaction Services, see Notes 1 and 14 to the Consolidated Financial Statements.37InvestmentsInvestments consiststable accompanying the discussion 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. Non-marketable 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.
each respective business’ results of operations below.During 2011,Investments decreased by $25 billion, or 8%, primarily due to a $9 billion, or 3%, decrease in available-for-sale securities (predominantly U.S. Treasury and federal agency securities), and a $18 billion decrease in held-to-maturity securities (predominately mortgage-backed and Corporate securities) that included the $12.7
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 inNorth America lending and deposits.
In Transaction Services,the increase inrevenues year-over-year, excluding the impact of FX translation, was driven by growth inTreasury and Trade Solutions,which was partially offset by a decline inSecurities 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 inLatin America, and 11% growth in Corporate loans.
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/DVA9 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 inLocal 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 theSpecial 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 inNorth 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 includesLocal Consumer Lending, Special Asset PoolandBrokerage 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 theSpecial Asset Pool that were reclassified, was $157 million in 2012, compared to $74 million in the prior year.FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA—PAGE 1 Citigroup Inc. and transferredConsolidated SubsidiariesIn 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 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 Trading account assetsclose in the first quarterhalf of 2011. The majority2013. Discontinued operations in 2012 and 2011 reflect the sale of the remaining decrease was largelyEgg 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 a combined reductionthe negative income allocated to unrestricted common stockholders. Using diluted shares and income allocated to unrestricted common stockholders (Diluted) would result in U.S. Treasuryanti-dilution. As of December 31, 2012, primarily all stock options were out of the money and federal agency securitiesdid 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 foreign government securities,Citigroup shares outstanding for all periods reflect Citigroup’s 1-for-10 reverse stock split, which was partially offseteffective 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 an increaseaverage 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. % 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 % % 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 )%
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 ofRegional Consumer Banking inNorth America, EMEA, Latin Americaand Asia) andInstitutional Clients Group (which includesSecurities and Banking andTransaction Services). Citicorp also includesCorporate/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 % 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. government agency mortgage-backed securities, as Citi begandollars at the current exchange rate for all periods presented.NM Not meaningful % 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
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.
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 modestly reallocate its portfolioassess whether changes in credit risk, market conditions or other factors merit a future decline in the APR.% 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 higher-yielding assets.U.S. dollars at the current exchange rate for all periods presented.NM Not meaningful
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 inEMEA RCB have largely stabilized and assuming the underlying core portfolio continues to grow in 2013, credit costs could begin to rise.
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.
Provisionsdecreased 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.% 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
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 inLatin Americawill likely continue to trend higher as various loan portfolios continue to mature.
Net incomedeclined 14% as higher revenues were more than offset by higher expenses and higher credit costs.
Revenuesincreased 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.
Expensesincreased 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.% 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
Net incomedecreased 4% primarily due to higher expenses.
Revenueswere 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.
Provisionsdecreased 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 inAsia RCB will largely remain stable, with increases largely in line with portfolio growth.
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.% 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 %
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 inCommissions 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 inPrincipal 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 Bankingrevenue 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 OtherSecurities and Banking (1,101 ) (859 ) (1,262 ) (28 ) 32 TotalSecurities and Bankingrevenues (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 )%
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:
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.
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:
Provisionsincreased $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&BCVA/DVA Fixed Income Markets $ (2,047 ) $ 1,368 $ (187 ) Equity Markets (424 ) 355 (207 ) Private Bank (16 ) 9 (5 ) TotalS&BCVA/DVA $ (2,487 ) $ 1,732 $ (399 ) S&BHedges on Accrual Loans gain (loss)(1) $ (698 ) $ 519 $ (65 ) (1) For further information regardingHedges onInvestmentsS&Baccrual 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.% 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
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 impactTransaction 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).
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).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
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 ofCorporate/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.
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.
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 ) % 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 )
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 inBAM was flat.
Revenues decreased by $5.0 billion to $(4.7) billion due to the MSSB impact described above. Excluding this impact, revenues inBAM 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.
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.% 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 %
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 inLCL 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
Provisions decreased 25%, driven primarily by the improved credit environment in North Americamortgages, 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
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 inNorth Americamortgages 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 inLCL 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 inNorth America mortgage loans and $11 billion in international average assets.
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.
Expensesdecreased 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 inNorth 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.
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.
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.
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 inLCL and $91 million of which was recorded inCorporate/Other for discontinued operations). This amount included a $148 million reserve increase in the fourth quarter of 2012 ($57 million of which was recorded inLCL and $91 million of which was recorded inCorporate/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.% 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 )%
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 inSAP 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.
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.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 ) — %
Cash and deposits with banks is composed of bothCash and due from banksandDeposits with banks. Cash and due from banksincludes (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 banksincludes 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 banksoffset 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
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.
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 certainSecurities 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 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 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 inAsia andLatin 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.LoansLoans represent the largest asset category of Citi’s balance sheet. Citi’s total loans (as discussed throughout this section, net of unearned income) were $647 billion at December 31, 2011, compared to $649 billion at December 31, 2010. Excluding the impact of FX translation, loans increased 1% year over year. At year end 2011, Consumer and Corporate loans represented 65% and 35%, respectively, of Citi’s total loans.In Citicorp, loans have increased for six consecutive quarters as of December 31, 2011, and were up 23% to $465 billion at year end 2011, as compared to $379 billion at the second quarter of 2010. Citicorp Corporate loans increased 24% year over year, and Citicorp Consumer loans were up 7% year over year. Corporate loan growth was driven byTransaction Services(37% growth), particularly from increased trade finance lending inAsia,Latin Americaand Europe, as well as growth in theSecurities and BankingCorporate loan book (20% growth), with increased borrowing generally across all client segments and geographies. Consumer loan growth was driven byRegional Consumer Banking, as loans increased 7% year over year, led byAsia andLatin America. The growth inRegional Consumer Bankingloans reflected the economic growth in these regions, as well as the result of Citi’s investment spending in these areas, which drove growth in both cards and retail loans.North America Consumer loans increased 6%, driven by retail loans as the cards market continued to adapt to the CARD Act and other regulatory changes. In contrast, Citi Holdings loans declined 25% year over year, due to the continued run-off and asset sales in the portfolio.During 2011, average loans of $644 billion yielded an average rate of 7.8%, compared to $686 billion and 8.0%, 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 AssetsOther assets consists ofBrokerage receivables, Goodwill, Intangibles andMortgage servicing rights in addition toOther 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 2011,Other assetsdecreased $22 billion, or 9%, primarily due to a $3 billion decrease inBrokerage receivables, a $2 billion decrease inMortgage servicing rights, a $1 billion decrease inIntangible assets, a $1 billion decrease inGoodwill and a $15 billion decrease inOther assets.For further information onBrokerage receivables, see Note 13 to the Consolidated Financial Statements. For further information regardingGoodwill andIntangible assets, see Note 18 to the Consolidated Financial Statements.
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 byTransaction Services (25% growth), particularly from increased trade finance lending in most regions, as well as growth in theSecurities 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 byGlobalConsumer Banking, as loans increased 3% year-over-year, led byLatin America andAsia. 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 inNorth 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 assetsconsists ofBrokerage receivables, Goodwill, Intangibles andMortgage servicing rights in addition toOther 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.LIABILITIESCAPITAL RESOURCES AND LIQUIDITY41 Capital Resources 41 Funding and Liquidity 50 Deposits
OFF-BALANCE-SHEET ARRANGEMENTS58 DepositsCONTRACTUAL OBLIGATIONS59 RISK FACTORS 60 MANAGING GLOBAL RISK 72 represent customer funds that are payable on demand or upon maturity.CREDIT RISK74 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,
DIVIDENDS294 PERFORMANCE GRAPH 295 CORPORATE INFORMATION 296 Citigroup Executive Officers 296 CITIGROUP BOARD OF DIRECTORS 299
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’sGlobal Consumer Banking businesses andInstitutional Clients Group; and Citi Holdings, consisting ofBrokerage and Asset Management, Local Consumer Lending andSpecial 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 atwww.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 atwww.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.
At December 31, 2012, Citi had approximately 259,000 full-time employees compared to approximately 266,000 full-time employees at December 31, 2011.
(1)North America includes the U.S., Canada and Puerto Rico,Latin America includes Mexico, andAsia includes Japan.
RESULTS OF OPERATIONS
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:
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 compression1 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).
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:
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 Managementduring 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 inCorporate/Otherduring 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 withinCorporate/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 inCorporate/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.
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 inNorth America cards andLocal Consumer Lendingand theSpecial Asset Poolwithin Citi Holdings. Consumer net credit losses declined 22% to $14.4 billion reflecting improvements inNorth America Citi-branded cards and Citi retail services in Citicorp andLocal Consumer Lendingwithin Citi Holdings. Corporate net credit losses decreased 86% year-over-year to $223 million, driven primarily by continued credit improvement in both theSpecial 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 inNorth America Citi-branded cards and Citi retail services andSecurities 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 theSpecial 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.
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 inSecurities 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 RCBrevenues grew 5% to $21.1 billion. InternationalRCB revenues (consisting ofAsia RCB,Latin America RCB andEMEA RCB) increased 1% year-over-year to $19.1 billion. Excluding the impact of FX translation,6 internationalRCBrevenues 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 Servicesrevenues 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.
InNorth 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— FundingCapital Resources” below.5 Citicorp includes Citi’s three operating businesses—Global Consumer Banking, Securities and Liquidity”BankingandTransaction Services—as well asCorporate/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 ofEMEA RCB, Latin America RCB, Asia RCBandTransaction Services, see the table accompanying the discussion of each respective business’ results of operations below.
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 inNorth America lending and deposits.
In Transaction Services,the increase inrevenues year-over-year, excluding the impact of FX translation, was driven by growth inTreasury and Trade Solutions,which was partially offset by a decline inSecurities 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 inLatin America, and 11% growth in Corporate loans.
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/DVA9 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 inLocal 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 theSpecial 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 inNorth 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 includesLocal Consumer Lending, Special Asset PoolandBrokerage 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 theSpecial Asset Pool, was $157 million in 2012, compared to $74 million in the prior year. Federal Funds PurchasedFIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA—PAGE 1Citigroup Inc. and Securities Loaned or Sold Under Agreements To Repurchase (Repos)Consolidated SubsidiariesIn 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 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 Federal funds purchased consist(1) Discontinued operations in 2012 includes a carve-out of unsecured advancesCiti’s liquid strategies business within Citi Capital Advisors, the sale of excess balanceswhich is expected to close in reserve accounts held at the Federal Reserve Banks from third parties. During 2010first half of 2013. Discontinued operations in 2012 and 2011 Citi’s federal funds purchased were not significant.For further informationreflect 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 Citi’s secured financing transactions, including repossale of Citigroup’s Travelers Life & Annuity, substantially all of Citigroup’s international insurance business, and securities lending transactions, see “Capital Resources and Liquidity—Funding and Liquidity” below.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 also Notes 1 and 12Note 3 to the Consolidated Financial Statements for additional information on these balance sheet categories.Trading Account LiabilitiesTrading account liabilities includes securities sold, not yet purchased (short positions),Citi’s discontinued operations.(2) The diluted EPS calculation for 2009 and derivatives in a net payable position, as well as certain liabilities that Citigroup has elected2008 utilizes basic shares and income allocated to carry at fair value.During 2011,Trading account liabilities decreased by $3 billion, or 2%, primarilyunrestricted 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 $3percentage 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. % 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 % % 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 )%
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 ofRegional Consumer Banking inNorth America, EMEA, Latin Americaand Asia) andInstitutional Clients Group (which includesSecurities and Banking andTransaction Services). Citicorp also includesCorporate/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 % 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 % 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
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.
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 6%, decreaseother factors merit a future decline in derivative liabilities.the APR.% 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
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 inEMEA RCB have largely stabilized and assuming the underlying core portfolio continues to grow in 2013, credit costs could begin to rise.
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.
Provisionsdecreased 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.% 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
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 inLatin Americawill likely continue to trend higher as various loan portfolios continue to mature.
Net incomedeclined 14% as higher revenues were more than offset by higher expenses and higher credit costs.
Revenuesincreased 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.
Expensesincreased 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.% 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
Net incomedecreased 4% primarily due to higher expenses.
Revenueswere 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.
Provisionsdecreased 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 inAsia RCB will largely remain stable, with increases largely in line with portfolio growth.
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.% 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 %
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 inCommissions 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 inPrincipal 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 Bankingrevenue 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 OtherSecurities and Banking (1,101 ) (859 ) (1,262 ) (28 ) 32 TotalSecurities and Bankingrevenues (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 )%
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:
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.
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:
Provisionsincreased $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&BCVA/DVA Fixed Income Markets $ (2,047 ) $ 1,368 $ (187 ) Equity Markets (424 ) 355 (207 ) Private Bank (16 ) 9 (5 ) TotalS&BCVA/DVA $ (2,487 ) $ 1,732 $ (399 ) S&BHedges on Accrual Loans gain (loss)(1) $ (698 ) $ 519 $ (65 ) (1) Hedges on Trading account liabilitiesS&B were $86 billion, comparedaccrual loans reflect the mark-to-market on credit derivatives used to $80 billion in 2010.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.% 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 )% For further information on Citi’sTrading account liabilities(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
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 impactTransaction 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).
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).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
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 ofCorporate/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.
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.
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 ) % 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 )
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 inBAM was flat.
Revenues decreased by $5.0 billion to $(4.7) billion due to the MSSB impact described above. Excluding this impact, revenues inBAM 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.
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.% 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 %
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 inLCL 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
Provisions decreased 25%, driven primarily by the improved credit environment in North Americamortgages, 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
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 inNorth Americamortgages 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 inLCL 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 inNorth America mortgage loans and $11 billion in international average assets.
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.
Expensesdecreased 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 inNorth 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.
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.
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.
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 inLCL and $91 million of which was recorded inCorporate/Other for discontinued operations). This amount included a $148 million reserve increase in the fourth quarter of 2012 ($57 million of which was recorded inLCL and $91 million of which was recorded inCorporate/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.% 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 )%
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 inSAP 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.
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.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 ) — %
Cash and deposits with banks is composed of bothCash and due from banksandDeposits with banks. Cash and due from banksincludes (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 banksincludes 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 banksoffset 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
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.
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 certainSecurities 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 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 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 inAsia andLatin 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.
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 byTransaction Services (25% growth), particularly from increased trade finance lending in most regions, as well as growth in theSecurities 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 byGlobalConsumer Banking, as loans increased 3% year-over-year, led byLatin America andAsia. 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 inNorth 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 assetsconsists ofBrokerage receivables, Goodwill, Intangibles andMortgage servicing rights in addition toOther 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.DebtDebt is composed of both short-term and long-term borrowings. Long-term borrowings include senior notes, subordinated notes, trust preferred securities and securitizations. Short-term borrowings include commercial paper and borrowings from unaffiliated banks and other market participants. For further information on Citi’s long-term and short-term debt borrowings during 2011, see “Capital Resources and Liquidity—Funding and Liquidity” below and Notes 1 and 19 to the Consolidated Financial Statements.Other LiabilitiesOther liabilities consists ofBrokerage payables andOther 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 2011,Other liabilities increased $2 billion, or 2%, primarily due to a $5 billion increase inBrokerage payables, offset by a $4 billion decrease inOther liabilities.For further information regardingBrokerage payables, see Note 13 to the Consolidated Financial Statements.39SEGMENT BALANCE SHEET AT DECEMBER 31, 2011(1)Corporate/Other, Discontinued Operations Global Institutional and Consumer Clients Subtotal Citi Consolidating Total Citigroup In millions of dollars Banking Group Citicorp Holdings Eliminations Consolidated Assets Cash and due from banks $ 9,020 $ 17,439 $ 26,459 $ 1,105 $ 1,137 $ 28,701 Deposits with banks 7,659 52,249 59,908 1,342 94,534 155,784 Federal funds sold and securities borrowed or purchased under agreements to resell 3,269 269,295 272,564 3,285 — 275,849 Brokerage receivables — 16,162 16,162 11,181 434 27,777 Trading account assets 13,224 265,577 278,801 12,933 — 291,734 Investments 27,740 95,601 123,341 30,202 139,870 293,413 Loans, net of unearned income Consumer 246,545 — 246,545 177,186 — 423,731 Corporate — 218,779 218,779 4,732 — 223,511 Loans, net of unearned income $ 246,545 $ 218,779 $ 465,324 $ 181,918 $ — $ 647,242 Allowance for loan losses (10,040 ) (2,615 ) (12,655 ) (17,460 ) — (30,115 ) Total loans, net $ 236,505 $ 216,164 $ 452,669 $ 164,458 $ — $ 617,127 Goodwill 10,236 10,737 20,973 4,440 — 25,413 Intangible assets (other than MSRs) 1,915 897 2,812 3,788 — 6,600 Mortgage servicing rights (MSRs) 1,389 88 1,477 1,092 — 2,569 Other assets 29,393 34,282 63,675 35,392 49,844 148,911 Total assets $ 340,350 $ 978,491 $ 1,318,841 $ 269,218 $ 285,819 $ 1,873,878 Liabilities and equity Total deposits $ 312,847 $ 483,557 $ 796,404 $ 64,391 $ 5,141 $ 865,936 Federal funds purchased and securities loaned or sold under agreements to repurchase 6,238 192,134 198,372 1 — 198,373 Brokerage payables — 55,885 55,885 7 804 56,696 Trading account liabilities 50 124,684 124,734 1,348 — 126,082 Short-term borrowings 213 42,121 42,334 402 11,705 54,441 Long-term debt 3,077 63,779 66,856 9,884 246,765 323,505 Other liabilities 15,577 25,034 40,611 11,911 16,750 69,272 Net inter-segment funding (lending) 2,348 (8,703 ) (6,355 ) 181,274 (174,919 ) — Total Citigroup stockholders’ equity — — — — 177,806 177,806 Noncontrolling interest — — — — 1,767 1,767 Total equity $ — $ — $ — $ — $ 179,573 $ 179,573 Total liabilities and equity $ 340,350 $ 978,491 $ 1,318,841 $ 269,218 $ 285,819 $ 1,873,878 (1)The supplemental information presented in the table above reflects Citigroup’s consolidated GAAP balance sheet by reporting segment as of December 31, 2011. 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.4041 Capital Resources 41 Funding and Liquidity 50 CAPITAL RESOURCESOFF-BALANCE-SHEET ARRANGEMENTS58 Overview
CONTRACTUAL OBLIGATIONS59 Citi generates capital through earnings from its operating businesses. Citi may augment its capital through issuancesRISK FACTORS60 MANAGING GLOBAL RISK 72 CREDIT RISK 74 Loans Outstanding 75 Details of common stock, perpetual preferred stockCredit Loss Experience76 Non-Accrual Loans and equity issued through awards under employee benefit plans, among other issuances. Citi has also augmented its regulatory capital throughAssets andRenegotiated 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 issuance of subordinated debt underlying trust preferred securities, although the treatment of such instruments as regulatory capital will be phased out under Basel IIIIran Threat Reduction and The Dodd-Frank Wall Street Reform and Consumer ProtectionSyria Human Rights Act of 2010 (see “Regulatory Capital Standards” and “Risk Factors—Regulatory Risks” below). Further, the impact of future events on Citi’s business results, such as corporate and asset dispositions, as well as changes in regulatory and accounting standards, may also affect Citi’s capital levels.291 Customers 292 Competition 292 Properties 293 LEGAL PROCEEDINGS 293 UNREGISTERED SALES OF EQUITY, PURCHASES OF EQUITY SECURITIES,
DIVIDENDS294 CapitalPERFORMANCE GRAPH295 CORPORATE INFORMATION 296 Citigroup Executive Officers 296 CITIGROUP BOARD OF DIRECTORS 299
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’sGlobal Consumer Banking businesses andInstitutional Clients Group; and Citi Holdings, consisting ofBrokerage and Asset Management, Local Consumer Lending andSpecial 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 atwww.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 atwww.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.
At December 31, 2012, Citi had approximately 259,000 full-time employees compared to approximately 266,000 full-time employees at December 31, 2011.
(1)North America includes the U.S., Canada and Puerto Rico,Latin America includes Mexico, andAsia includes Japan.
RESULTS OF OPERATIONS
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:
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 compression1 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 primarily to support assets in Citi’s businesses and to absorb market, credit or operational losses. Capital may be used for other purposes, such as to pay dividends or repurchase common stock. However, Citi’s ability to pay regular quarterly cash dividends of more than $0.01 per share, or to redeem or repurchase equity securities or trust preferred securities, is currently restricted (which restriction may be waived) due to Citi’s agreements with certain U.S. government entities, generally for so long as the U.S. government continues to hold any Citi trust preferred securities acquired in connection with the exchange offers consummated in 2009. (See “Risk Factors—Business Risks” below.)Citigroup’s capital management framework is designed to ensure that Citigroup and its principal subsidiaries maintain sufficient capital consistent with Citi’s risk profile and all applicable regulatory standards and guidelines, as well as external rating agency considerations. Senior management is responsible for the capital and liquidity management process mainly through Citigroup’s Finance and Asset and Liability Committee (FinALCO), with oversight from the Risk Management and Finance Committee of Citigroup’s Board of Directors. Among other things, FinALCO’s responsibilities include: determining the financial structure of Citigroup and its principal subsidiaries; ensuring that Citigroup and its regulated entities are adequately capitalized in consultation with its regulators; determining appropriate asset levels and return hurdles for Citigroup and individual businesses; reviewing the funding and capital markets plan for Citigroup; and setting and monitoring corporate and bank liquidity levels and the impact of currency translation on non-U.S. capital. Asset and liability committees are also established globally and for each region, country and/or major line of business.Capital RatiosCitigroup is subjectthroughout this report, spread compression refers to the risk-based capital guidelines issued by the Federal Reserve Board. Historically, capital adequacy has been measured,reduction 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, asadjusted, 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 statednet interest revenue as a percentage of risk-weightedloans 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).
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:
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 Managementduring 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 inCorporate/Otherduring 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 withinCorporate/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 inCorporate/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.
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 inNorth America cards andLocal Consumer Lendingand theSpecial Asset Poolwithin Citi Holdings. Consumer net credit losses declined 22% to $14.4 billion reflecting improvements inNorth America Citi-branded cards and Citi retail services in Citicorp andLocal Consumer Lendingwithin Citi Holdings. Corporate net credit losses decreased 86% year-over-year to $223 million, driven primarily by continued credit improvement in both theSpecial 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 inNorth America Citi-branded cards and Citi retail services andSecurities 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 theSpecial 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.
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 inSecurities 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 RCBrevenues grew 5% to $21.1 billion. InternationalRCB revenues (consisting ofAsia RCB,Latin America RCB andEMEA RCB) increased 1% year-over-year to $19.1 billion. Excluding the impact of FX translation,6 internationalRCBrevenues 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 Servicesrevenues 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.
InNorth 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 BankingandTransaction Services—as well asCorporate/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 ofEMEA RCB, Latin America RCB, Asia RCBandTransaction Services, see the table accompanying the discussion of each respective business’ results of operations below.
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 inNorth America lending and deposits.
In Transaction Services,the increase inrevenues year-over-year, excluding the impact of FX translation, was driven by growth inTreasury and Trade Solutions,which was partially offset by a decline inSecurities 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 inLatin America, and 11% growth in Corporate loans.
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/DVA9 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 inLocal 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 theSpecial 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 inNorth 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 includesLocal Consumer Lending, Special Asset Pooland InBrokerage 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 theSpecial Asset Pool, was $157 million in 2012, compared to $74 million in the prior year. 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 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, developed a new measure of capital termed “Tierthe Tier 1 Common” which is defined as ratio represents Tier 1 Capital less non-common elements, including qualifying perpetual preferred stock, qualifying noncontrolling interests in subsidiaries and qualifying trust preferred securities. For more detail on all of these capital metrics, see “Components of Capital Under Regulatory Guidelines” below.Citigroup’ssecurities divided by risk-weighted assets 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. See “Components of Capital Under Regulatory Guidelines” below.Citigroup is also subject to a Leverageassets.(7) The leverage ratio requirement, a non-risk-based measure of capital adequacy, which is defined asrepresents Tier 1 Capital as a percentage ofdivided by quarterly adjusted average total assets.% 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 % % 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 )%
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 ofRegional Consumer Banking inNorth America, EMEA, Latin Americaand Asia) andInstitutional Clients Group (which includesSecurities and Banking andTransaction Services). Citicorp also includesCorporate/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 % 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 % 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
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.
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. % 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
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 inEMEA RCB have largely stabilized and assuming the underlying core portfolio continues to grow in 2013, credit costs could begin to rise.
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.
Provisionsdecreased 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.% 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
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 inLatin Americawill likely continue to trend higher as various loan portfolios continue to mature.
Net incomedeclined 14% as higher revenues were more than offset by higher expenses and higher credit costs.
Revenuesincreased 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.
Expensesincreased 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.% 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
Net incomedecreased 4% primarily due to higher expenses.
Revenueswere 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.
Provisionsdecreased 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 inAsia RCB will largely remain stable, with increases largely in line with portfolio growth.
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.% 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 %
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 inCommissions 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 inPrincipal 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 Bankingrevenue 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 OtherSecurities and Banking (1,101 ) (859 ) (1,262 ) (28 ) 32 TotalSecurities and Bankingrevenues (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 )%
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:
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.
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:
Provisionsincreased $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&BCVA/DVA Fixed Income Markets $ (2,047 ) $ 1,368 $ (187 ) Equity Markets (424 ) 355 (207 ) Private Bank (16 ) 9 (5 ) TotalS&BCVA/DVA $ (2,487 ) $ 1,732 $ (399 ) S&BHedges on Accrual Loans gain (loss)(1) $ (698 ) $ 519 $ (65 ) (1) Hedges on To be “well capitalized”S&Baccrual 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.% 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 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%,custody, assets under trust and not be subject to a Federal Reserve Board directive to maintain higher capital levels.assets under administration.NM Not meaningful
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 impactTransaction 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).
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).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
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 ofCorporate/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.
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.
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 ) % 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 )
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 inBAM was flat.
Revenues decreased by $5.0 billion to $(4.7) billion due to the MSSB impact described above. Excluding this impact, revenues inBAM 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.
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.% 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 %
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 inLCL 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
Provisions decreased 25%, driven primarily by the improved credit environment in North Americamortgages, 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
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 inNorth Americamortgages 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 inLCL 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 inNorth America mortgage loans and $11 billion in international average assets.
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.
Expensesdecreased 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 inNorth 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.
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.
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.
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 inLCL and $91 million of which was recorded inCorporate/Other for discontinued operations). This amount included a $148 million reserve increase in the fourth quarter of 2012 ($57 million of which was recorded inLCL and $91 million of which was recorded inCorporate/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.% 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 )%
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 inSAP 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.
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.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 ) — %
Cash and deposits with banks is composed of bothCash and due from banksandDeposits with banks. Cash and due from banksincludes (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 banksincludes 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 banksoffset 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
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.
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 certainSecurities 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 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 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 inAsia andLatin 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.
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 byTransaction Services (25% growth), particularly from increased trade finance lending in most regions, as well as growth in theSecurities 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 byGlobalConsumer Banking, as loans increased 3% year-over-year, led byLatin America andAsia. 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 inNorth 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 assetsconsists ofBrokerage receivables, Goodwill, Intangibles andMortgage servicing rights in addition toOther 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.
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.
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 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 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 consists ofBrokerage payables andOther 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 regardingBrokerage payables, see Note 13 to the Consolidated Financial Statements.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 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 forthabove reflects Citigroup’s regulatory capital ratiosconsolidated GAAP balance sheet by reporting segment as of December 31, 20112012. The respective segment information depicts the assets and December 31, 2010:(2) Consolidating eliminations for total Citigroup Regulatory Capital Ratiosand Citigroup parent company assets and liabilities are recorded within theAt year end 2011 2010 Tier 1 Common 11.80 % 10.75 % Tier 1 Capital 13.55 12.91 Total Capital (Tier 1 Capital + Tier 2 Capital) 16.99 16.59 Leverage 7.19 6.60 (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.
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.
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
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 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, 2011 and2012, compared with $67 billion as of December 31, 2010.41Components of Capital Under Regulatory GuidelinesIn millions of dollars at year end 2011 2010 Tier 1 Common Capital Citigroup common stockholders’ equity $ 177,494 $ 163,156 Less: Net unrealized losses on securities available-for-sale, net of tax(1) (35 ) (2,395 ) Less: Accumulated net losses on cash flow hedges, net of tax (2,820 ) (2,650 ) Less: Pension liability adjustment, net of tax(2) (4,282 ) (4,105 ) Less: Cumulative effect included in fair value of financial liabilities attributable to the change in own creditworthiness, net of tax(3) 1,265 164 Less: Disallowed deferred tax assets(4) 37,980 34,946 Less: Intangible assets: Goodwill 25,413 26,152 Other disallowed intangible assets 4,550 5,211 Other (569 ) (698 ) Total Tier 1 Common Capital $ 114,854 $ 105,135 Tier 1 Capital Qualifying perpetual preferred stock $ 312 $ 312 Qualifying mandatorily redeemable securities of subsidiary trusts 15,929 18,003 Qualifying noncontrolling interests 779 868 Other — 1,875 Total Tier 1 Capital $ 131,874 $ 126,193 Tier 2 Capital Allowance for credit losses(5) $ 12,423 $ 12,627 Qualifying subordinated debt(6) 20,429 22,423 Net unrealized pretax gains on available-for-sale equity securities(1) 658 976 Total Tier 2 Capital $ 33,510 $ 36,026 Total Capital (Tier 1 Capital + Tier 2 Capital) $ 165,384 $ 162,219 Risk-weighted assets (RWA)(7) $ 973,369 $ 977,629 (1)Tier 1 Capital excludes net unrealized gains (losses) on available-for-sale debt securities and net unrealized gains on available-for-sale 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 available-for-sale 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 available-for-sale equity securities with readily determinable fair values.(2)The Federal Reserve Board granted interim capital relief for the impact of ASC 715-20,Compensation—Retirement Benefits—Defined Benefits Plans(formerly SFAS 158).(3)The impact of changes in Citigroup’s own creditworthiness in valuing financial liabilities for which the fair value option has been elected is excluded from Tier 1 Capital, in accordance with risk-based capital guidelines.(4)Of Citi’s approximately $52 billion of net deferred tax assets at December 31, 2011, approximately $11 billion of such assets were includable without limitation in regulatory capital pursuant to risk-based capital guidelines, while approximately $38 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 approximately $3 billion of other net deferred tax assets primarily represented effects of the pension liability adjustment, which are permitted to be excluded prior to deriving the amount of net deferred tax assets subject to limitation under the guidelines.(5)Includable up to 1.25% of risk-weighted assets. Any excess allowance for credit losses is deducted in arriving at risk-weighted assets.(6)Includes qualifying subordinated debt in an amount not exceeding 50% of Tier 1 Capital.(7)Includes risk-weighted credit equivalent amounts, net of applicable bilateral netting agreements, of $67.0 billion for interest rate, commodity and equity derivative contracts, foreign exchange contracts, and credit derivatives as of December 31, 2011, compared with $62.1 billion as of December 31, 2010. Market risk equivalent assets included in risk-weighted assets amounted to $46.8 billion at December 31, 2011 and $51.4 billion at December 31, 2010.2011. 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.42Common Stockholders’ EquityCitigroup’s common stockholders’ equity increased during 2011 by $14.3 billion to $177.5 billion,(10) Risk-weighted assets as computed under Basel I credit risk capital rules and represented 9%final (revised) market risk capital rules (Basel II.5).
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 totalrisk-weighted assets under Basel II.5 is a non-GAAP financial measure as of December 31, 2011. The2012. 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 summarizesbelow) provide useful information to investors and others by measuring Citi’s progress against expected future regulatory capital standards.In millions of dollars December 31,
2012 September 30,
2012Tier 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 changeU.S. banking agencies proposed Basel III rules.(2) Includes goodwill “embedded” in Citigroup’sthe valuation of significant common stockholders’ equity during 2011:In billions of dollars Common stockholders’ equity, December 31, 2010 $ 163.2 Citigroup’s net income 11.1 Employee benefit plans and other activities(1) 0.9 Conversion of ADIA Upper DECs equity units purchase contracts to common stock 3.8 Net change in accumulated other comprehensive income (loss), net of tax (1.5 ) Common stockholders’ equity, December 31, 2011 $ 177.5 (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.
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, 2011, $6.7 billion of common stock repurchases remained under Citi’s authorized repurchase programs. No material repurchases were made in 2011.Tangible Common Equity and Tangible Book ValuePer ShareTangible common equity (TCE), as defined by Citigroup, represents common equity less goodwill, intangible assets (other than mortgage servicing rights (MSRs)), and related net deferred tax assets. Other companies may calculate TCE in a manner different from that of Citigroup. Citi’s TCE was $145.4 billion at December 31, 20112012, $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 $129.4 billion at December 31, 2010.The TCE ratio (TCE divided by risk-weighted assets) was 14.9% at December 31, 2011Operational Risks” and 13.2% at December 31, 2010.“Purchases of Equity Securities” below.
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
(otherthan MSRs) related to assets
for discontinued operations
held for sale32 — Net deferred tax assets related to goodwill
and other intangible assets32 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
discontinuedoperations held for sale32 — 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
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 as well asand related ratios are capital adequacy metricsnon-GAAP financial measures that are used and relied upon by investors and industry analysts; however, they are non-GAAP financial measures for SEC purposes. A reconciliation of Citigroup’s total stockholders’ equity to TCE, and book value per share to tangible book value per share,analysts as of December 31, 2011 and December 31, 2010, follows:In millions of dollars or shares at year end,
except ratios and per-share data2011 2010 Total Citigroup stockholders’ equity $ 177,806 $ 163,468 Less: Preferred stock 312 312 Common equity $ 177,494 $ 163,156 Less: Goodwill 25,413 26,152 Intangible assets (other than MSRs) 6,600 7,504 Related net deferred tax assets 44 56 Tangible common equity (TCE) $ 145,437 $ 129,444 Tangible assets GAAP assets $ 1,873,878 $ 1,913,902 Less: Goodwill 25,413 26,152 Intangible assets (other than MSRs) 6,600 7,504 Related deferred tax assets 322 359 Tangible assets (TA) $ 1,841,543 $ 1,879,887 Risk-weighted assets (RWA) $ 973,369 $ 977,629 TCE/TA ratio 7.90 % 6.89 % TCE/RWA ratio 14.94 % 13.24 % Common shares outstanding (CSO) 2,923.9 2,905.8 Book value per share (common equity/CSO) $ 60.70 $ 56.15 Tangible book value per share (TCE/CSO) $ 49.74 $ 44.55 43capital adequacy metrics.Capital Resources of Citigroup’s U.S. DepositoryInstitutionsCitigroup’s U.S. subsidiary 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 of Citibank, N.A., Citi’s primary U.S. subsidiary depository institution, as of December 31, 2011 and December 31, 2010:Citibank, N.A. Capital Tiers and Capital Ratios UnderRegulatory Guidelines(1)In billions of dollars at year end, except ratios 2011 2010 Tier 1 Common Capital $ 121.3 $ 123.6 Tier 1 Capital 121.9 124.2 Total Capital (Tier 1 Capital + Tier 2 Capital) 134.3 138.4 Tier 1 Common ratio 14.63 % 15.33 % Tier 1 Capital ratio 14.70 15.42 Total Capital ratio 16.20 17.18 Leverage ratio 9.66 9.32 (1)Effective July 1, 2011, Citibank (South Dakota) N.A. merged into Citibank, N.A. The amount of Tier 1 Common Capital, Tier 1 Capital and Total Capital, and the resultant capital ratios, at December 31, 2010 have been restated to reflect this merger. The 2011 Capital Ratios above also reflect the impact of dividends paid by Citibank, N.A. to Citigroup during 2011.
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 or Total Capital (numerator), or changes of $1 billion in risk-weighted assets or adjusted average total assets (denominator), based on financial information as of December 31, 2011. 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 ratioTier 1 Capital ratioTotal Capital ratioLeverage ratioImpact of $1Impact of $1Impact of $1Impact of $1billion changeImpact of $100 billion change inImpact of $100billion change inImpact of $100billion change inImpact of $100in adjustedmillion change inrisk-weightedmillion changerisk-weightedmillion changerisk-weightedmillion changeaverage totalTier 1 Common Capitalassetsin Tier 1 Capitalassetsin Total Capitalassets in Tier 1 CapitalassetsCitigroup1.0 bps1.2 bps1.0 bps1.4 bps1.0 bps1.8 bps0.6 bps0.4 bpsCitibank, N.A.1.2 bps1.8 bps1.2 bps1.8 bps1.2 bps2.0 bps0.8 bps0.8 bpsBroker-Dealer SubsidiariesAt December 31, 2011, Citigroup Global Markets Inc., a 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 $7.8 billion, which exceeded the minimum requirement by $7.0 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 broker-dealer subsidiaries were in compliance with their capital requirements at December 31, 2011.44Regulatory Capital StandardsThe prospective regulatory capital standards for financial institutions, both in the U.S. and internationally, continue to be subject to ongoing debate, extensive rulemaking activity and substantial uncertainty. See “Risk Factors—Regulatory Risks” below.Basel II and II.5.In November 2005, the Basel Committee on Banking Supervision (Basel Committee) published a new set of risk-based capital standards (Basel II) that permits banking organizations to leverage internal risk models used to measure credit and operational risks to derive risk-weighted assets. In November 2007, the U.S. banking agencies adopted these standards for large, internationally active U.S. banking organizations, including Citi. As adopted, the standards require Citi to comply with the most advanced Basel II approaches for calculating risk-weighted assets for credit and operational risks. The U.S. Basel II implementation timetable originally consisted of a parallel calculation period under the current regulatory capital regime (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. 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 Wall Street Reform and Consumer Protection Act of 2010 (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 use the lower of the resulting capital ratios for purposes of determining compliance with its minimum Tier 1 Capital and Total Capital requirements. As of December 31, 2011 neither Citi nor any other U.S. banking organization had received approval from the U.S. banking agencies to formally implement Basel II. Accordingly, the timing of Citi’s Basel II implementation remains subject to uncertainty.Apart from the Basel II rules regarding credit and operational risks, in June 2010, the Basel Committee agreed on certain revisions to the market risk capital framework (Basel II.5) that would also result in additional capital requirements. In January 2011, the U.S. banking agencies issued a proposal to amend the market risk capital rules to implement certain revisions approved by the Basel Committee. However, the U.S. banking agencies’ proposal excluded the methodologies adopted by the Basel Committee for calculating capital requirements on certain debt and securitization positions covered by the market risk capital rules, as such methodologies include reliance on external credit ratings, which is prohibited by the Dodd-Frank Act (see below).assetsCitigroup 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
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.Basel III and Global Systemically Important Banks (G-SIBs)Basel III.As an outgrowth of the financial crisis, in December 2010, the Basel Committee issued final rules to strengthen existing capital requirements (Basel III). The U.S. banking agencies are required to finalize, by December 2012, the rules to be applied by U.S. banking organizations commencing on January 1, 2013. While expected to be substantially the same as those of the Basel Committee as described below, as of December 31, 2011, the U.S. banking agencies had yet to issue the proposed U.S. version of the Basel III rules. Under Basel III, when fully phased in on January 1, 2019, Citi would be required to maintain minimum risk-based capital ratios (exclusive of a G-SIB capital surcharge) as follows:Tier 1 Common Tier 1 Capital Total Capital Stated minimum ratio 4.5 % 6.0 % 8.0 % Plus: Capital conservation buffer requirement 2.5 2.5 2.5 Effective minimum ratio (without G-SIB surcharge) 7.0 % 8.5 % 10.5 % While banking organizations would be permitted to draw on the 2.5% capital conservation buffer to absorb losses during periods of financial or economic stress, restrictions on earnings distributions (e.g., dividends, equity repurchases, and discretionary compensation) would result, with the degree of such restrictions greater based upon the extent to which the buffer is utilized. Moreover, subject to national discretion by the respective bank supervisory or regulatory authorities (i.e., for Citi, the U.S. banking agencies), a countercyclical capital buffer ranging from 0% to 2.5%, consisting of only Tier 1 Common Capital, could also be imposed on banking organizations when it is deemed that excess aggregate credit growth is resulting in a build-up of systemic risk in a given country. This countercyclical capital buffer, when in effect, would serve as an additional buffer supplementing the capital conservation buffer. Under Basel III, Tier 1 Common Capital will be required to be measured after applying generally all regulatory adjustments (including applicable deductions). The impact of these regulatory adjustments on Tier 1 Common Capital would be phased in incrementally at 20% annually beginning on January 1, 2014, with full implementation by January 1, 2018. During the transition period, the portion of the regulatory adjustments (including applicable deductions) not applied against Tier 1 Common Capital would continue to be subject to existing national treatments. Further, under Basel III, certain capital instruments will no longer qualify as non-common components of Tier 1 Capital (e.g., trust preferred securities and cumulative perpetual preferred stock) or Tier 2 Capital. These instruments will be subject to a 10% per year phase-out over 10 years beginning on January 1, 2013, except for certain limited grandfathering. This phase-out period will be substantially shorter in the U.S. as a result of the Collins Amendment of the Dodd-Frank Act, which will generally require a phase-out of these securities over a three-year period also beginning on January 1, 2013. In addition, the Basel Committee has subsequently issued supplementary minimum requirements to those contained in Basel III,45which must be met or exceeded in order to ensure that qualifying non-common Tier 1 or Tier 2 Capital instruments fully absorb losses at the point of a banking organization’s non-viability before taxpayers are exposed to loss. These requirements must be reflected within the terms of the capital instruments unless, subject to certain conditions, they are implemented through the governing jurisdiction’s legal framework.Although Citi, like other U.S. banking organizations, is currently subject to a supplementary, non-risk-based measure of leverage for capital adequacy purposes (see “Capital Ratios” above), Basel III establishes a more constrained Leverage ratio requirement. Initially, during a four-year parallel run test period beginning on January 1, 2013, Citi, like other U.S. banking organizations, will be required to maintain a minimum 3% Tier 1 Capital Leverage ratio. Disclosure of such ratio, and its components, will start on January 1, 2015. Depending upon the results of the parallel run test period, there could be subsequent adjustments to the definition and calibration of the Leverage ratio, which is to be finalized in 2017 and become a formal requirement by January 1, 2018.Global Systemically Important Banks (G-SIBs). In November 2011, the Basel Committee finalized rules which set forth measures for G-SIBs, including the methodology for assessing global systemic importance, the related additional loss absorbency capital requirements (surcharges), and the phase-in period regarding such requirements. Under the final rules, the methodology for assessing G-SIBs is to be based primarily on quantitative measurement indicators comprising five equally weighted broad categories: size, cross-jurisdictional activity, interconnectedness, substitutability/financial institution infrastructure, and complexity. G-SIBs will be subject to a progressive minimum additional Tier 1 Common Capital surcharge (over and above the Basel III minimum capital ratio requirements) ranging initially across four buckets from 1% to 2.5% of risk-weighted assets, depending upon the systemic importance of each individual banking organization. Further, a potential minimum additional 1% Tier 1 Common Capital requirement could also be imposed in the future on the largest G-SIBs that are deemed to have increased their global systemic importance (resulting in a total minimum additional Tier 1 Common Capital surcharge of 3.5%). Citi expects to be a G-SIB under the Basel Committee’s rules, although the extent of its initial additional capital surcharge remains uncertain.The minimum additional Tier 1 Common Capital surcharge for G-SIBs will be phased-in, as an extension of and in parallel with the Basel III capital conservation buffer and any countercyclical capital buffer, commencing on January 1, 2016 and becoming fully effective on January 1, 2019. Accordingly, based on Citi’s current understanding, under Basel III, on a fully phased-in basis, the effective minimum Tier 1 Common ratio requirement for those banking organizations initially deemed to be the most global systemically important, which will likely include Citi, will be at least 9.5% (consisting of the aggregate of the 4.5% stated minimum Tier 1 Common ratio requirement, the 2.5% capital conservation buffer, and the maximum 2.5% G-SIB capital surcharge). However, as referenced above, these capital surcharge measures have not yet been proposed by the U.S. banking agencies, although they have indicated they intend to adopt implementing rules in 2014.Dodd-Frank ActIn addition to the Collins Amendment, the Dodd-Frank Act contains other significant regulatory capital-related provisions that have not yet been fully implemented by the U.S. banking agencies. Alternative Creditworthiness Standards. In December 2011, the U.S banking agencies proposed to further amend and supplement the market risk capital rules beyond the January 2011 proposed modifications discussed above. The December 2011 proposals are intended to implement the provisions of the Dodd-Frank Act requiring that all federal agencies remove references to, and reliance on, credit ratings in their regulations, and replace these references with appropriate alternative standards for evaluating creditworthiness. Under the December 2011 proposal, the U.S. banking agencies set forth alternative methodologies to external credit ratings which are to be used to assess capital requirements on certain debt as well as securitization positions subject to the market risk capital rules. The U.S. banking agencies have also indicated they intend to propose similar revisions to the Basel I and Basel II rules to eliminate the use of external credit ratings to determine the risk weights applicable to securitization and certain corporate exposures under these regulations.Enhanced Prudential Regulatory Capital Requirements. As mandated by the Dodd-Frank Act, in January 2012, the Federal Reserve Board issued a proposal designed to strengthen regulation and supervision of those financial institutions deemed to be systemically important and posing risk to market-wide financial stability, which would include Citi. The proposal incorporates a wide range of enhanced prudential standards, including those related to risk-based capital requirements and leverage limits. The Federal Reserve Board has already implemented the first phase of the proposal’s enhanced capital requirements through the adoption of its capital plan rule in December 2011. As a result, Citi, like other covered bank holding companies, is required to develop annual capital plans, conduct stress tests, and maintain adequate capital, including a Tier 1 Common ratio in excess of 5% (under both expected and stressed conditions) in order to engage in capital distributions such as dividends or share repurchases (see “Risk Factors—Business Risks” below). The second phase of the enhanced capital requirements, as set forth in the January 2012 proposal, would involve a subsequent Federal Reserve Board proposal regarding the establishment of a quantitative risk-based capital surcharge for covered financial institutions or a subset thereof, to be consistent with the provisions of the Basel Committee’s final G-SIB surcharge rules.
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.
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.
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.
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.
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.
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.
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.”
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.
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.FUNDINGRISK FACTORS60 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 LIQUIDITYCROSS-BORDER RISK113 Country Risk 113 Cross-Border Risk 120 Overview
FAIR VALUE ADJUSTMENTS FORCiti’s funding DERIVATIVES AND STRUCTURED DEBT123 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 liquidity objectives generallySyria Human Rights Act291 Customers 292 Competition 292 Properties 293 LEGAL PROCEEDINGS 293 UNREGISTERED SALES OF EQUITY, PURCHASES OF EQUITY SECURITIES,
DIVIDENDS294 PERFORMANCE GRAPH 295 CORPORATE INFORMATION 296 Citigroup Executive Officers 296 CITIGROUP BOARD OF DIRECTORS 299
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’sGlobal Consumer Banking businesses andInstitutional Clients Group; and Citi Holdings, consisting ofBrokerage and Asset Management, Local Consumer Lending andSpecial 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 atwww.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 atwww.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.
At December 31, 2012, Citi had approximately 259,000 full-time employees compared to approximately 266,000 full-time employees at December 31, 2011.
(1)North America includes the U.S., Canada and Puerto Rico,Latin America includes Mexico, andAsia includes Japan.
RESULTS OF OPERATIONS
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:
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 compression1 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 maintain liquiditythe 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 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 undersuch assets (or 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:combination thereof).
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:(i)
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 the non-bank, which is largely composed of the parent holding company (Citigroup) and Citi’s broker-dealer subsidiaries (collectively referred to in this section as “non-bank”);(ii)Citi’s significant bank entities, such as Citibank, N.A.; and(iii)other entities. 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 beself-sufficient or net providers of liquidity, including in conditions established under their designated stress tests, and have excess cash capital. Citi’s primary sources of funding include (i) deposits via Citi’s bank subsidiaries, which continue to be Citi’s most stable and lowest cost source of long-term funding, (ii) long-term debt (including long-term collateralized financings) issued at the non-bank level and certain bank subsidiaries, and (iii) stockholders’ equity. These sources are supplemented by short-term borrowings, primarily in the form of secured financing transactions (securities loaned or sold under agreements to repurchase, or repos), and commercial paper at the non-bank level.
As referenced above, Citigroup works to ensure thatin 2012, the structural tenorsale of these funding sources is sufficiently long in relation tominority investments included a pretax loss of $4.7 billion ($2.9 billion after-tax) from the tenorsale of its asset base. The key goala 14% interest and other-than-temporary impairment of the carrying value of Citi’s asset-liability management is to ensure that there is excess tenorremaining 35% interest in MSSB recorded in Citi Holdings—Brokerage and Asset Managementduring the liability structure so as to provide excess liquidity to fund the assets. The excess liquidity resulting fromthird quarter of 2012. In addition, Citi recorded a longer-term tenor profile can effectively offset potential decreases in liquidity that may occur under stress. This excess funding is held in the formnet pretax loss of aggregate liquidity resources, as described below.Aggregate Liquidity ResourcesNon-bank (1) Significant bank entities Other entities (2) Total Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, In billions of dollars 2011 2010 2011 2010 2011 2010 2011 2010 Cash at major central banks $ 29.1 $ 22.7 $ 70.7 $ 77.4 $ 27.6 $ 32.5 $ 127.4 $ 132.6 Unencumbered liquid securities 69.3 71.8 129.5 145.3 79.3 77.1 278.1 294.2 Total $ 98.4 $ 94.5 $ 200.2 $ 222.7 $ 106.9 $ 109.6 $ 405.5 $ 426.8 (1)Non-bank includes the parent holding company (Citigroup), Citigroup Funding Inc. (CFI) and one of Citi’s broker-dealer entities, Citigroup Global Markets Holdings Inc. (CGMHI).(2)Other entities include Banamex and other bank entities.As set forth in the table above, Citigroup’s aggregate liquidity resources totaled $405.5 billion at December 31, 2011, compared with $426.8 billion at December 31, 2010. These amounts are as of period-end and may increase or decrease intra-period in the ordinary course of business. During the quarter ended December 31, 2011, the intra-quarter amounts did not fluctuate materially$424 million ($274 million after-tax) from the quarter-end amounts noted above. At December 31, 2011, Citigroup’s non-bank aggregate liquidity resources totaled $98.4 billion, compared with $94.5 billion at December 31, 2010. This amount included unencumbered liquid securities and cash heldpartial sale of Citi’s minority interest in Citi’s U.S. and non-U.S. broker-dealer entities.
Akbank T.A.S. (Akbank) recorded inCorporate/OtherCitigroup’s significant bank entities had approximately $200.2 billionduring the second quarter of aggregate liquidity resources as2012. In the first quarter of December 31, 2011. This amount included $70.7 billion2012, Citi recorded a net pretax gain on minority investments of cash on deposit with major central banks (including the U.S. Federal Reserve Bank, European Central Bank, Bank of England, Swiss National Bank, Bank of Japan, the Monetary Authority of Singapore and the Hong Kong Monetary Authority), compared with $77.4 billion atDecember 31, 2010. The significant bank entities’ liquidity resources also included unencumbered highly liquid government and government-backed securities. These securities are available-for-sale or secured funding through private markets or by pledging to the major central banks. The liquidity value of these liquid securities was $129.5 billion at December 31, 2011, compared with $145.3 billion at December 31, 2010. As shown in the table above, overall, liquidity at Citi’s significant bank entities was down at December 31, 2011, as compared to December 31, 2010, as Citi deployed some of its excess bank liquidity into loan growth within Citicorp (see “Balance Sheet Review” above) and paid down long-term bank debt. Citi estimates that its other entities and subsidiaries held approximately $106.9 billion in aggregate liquidity resources as of December 31, 2011. This included $27.6 billion of cash on deposit with major central banks and $79.3 billion of unencumbered liquid securities. Including these amounts, Citi’s aggregate liquidity resources as of December 31, 2011 were approximately $405.5 billion.47Further, Citi’s summary of aggregate liquidity resources above does not include additional potential liquidity in the form of Citigroup’s borrowing capacity at the U.S. Federal Reserve Bank discount window and from the various Federal Home Loan Banks (FHLB)$477 million ($308 million after-tax), which is maintained by pledged collateral to all such banks. Citi also maintains additional liquidity availableincluded pretax gains of $1.1 billion and $542 million on the sales of Citi’s remaining stake in the form of diversified high grade non-government securities. In general, Citigroup can freely fund legal entities withinHousing Development Finance Corporation Ltd. (HDFC) and its bank vehicles. In addition, Citigroup’s bank subsidiaries, including Citibank, N.A.stake in Shanghai Pudong Development Bank (SPDB), can lend to the Citigroup parent and broker-dealer entities in accordance with Section 23A of the Federal Reserve Act. As of December 31, 2011, the amount available for lending to these non-bank entities under Section 23A was approximately $20.4 billion, provided the funds are collateralized appropriately.DepositsCiti continued to focus on maintaining a geographically diverse retail and corporate deposits base that stood at $866 billion at December 31, 2011, as compared with $845 billion at December 31, 2010. The $21 billion increase in deposits year-over-year was largely due to higher deposit volumes inGlobal Consumer Banking andTransaction Services. These increases were partiallyrespectively, offset by a decreasepretax impairment charge relating to Akbank of $1.2 billion, all withinCorporate/Other. In 2011, Citi recorded a $199 million pretax gain ($128 million after-tax) from the partial sale of Citi’s minority interest in deposits in Citi Holdings year-over-year, while depositsHDFC, recorded inSecuritiesCorporate/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 Banking were relatively flat. Compared to2011 and the prior quarter, deposits increasedtax 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.
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 inNorth America cards andLocal Consumer Lendingand theSpecial Asset Poolwithin Citi Holdings. Consumer net credit losses declined 22% to $14.4 billion reflecting improvements inNorth America Citi-branded cards and Citi retail services in Citicorp andLocal Consumer Lendingwithin Citi Holdings. Corporate net credit losses decreased 86% year-over-year to $223 million, driven primarily by continued credit improvement in both theSpecial 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 inNorth America Citi-branded cards and Citi retail services andSecurities 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 theSpecial 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.
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 inSecurities 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 RCBrevenues grew 5% to $21.1 billion. InternationalRCB revenues (consisting ofAsia RCB,Latin America RCB andEMEA RCB) increased 1% year-over-year to $19.1 billion. Excluding the impact of FX translation,6 internationalRCBrevenues 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 Servicesrevenues 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.
InNorth 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 BankingandTransaction Services . Citi grew deposits year-over-year in all regions —as customers continued a “flight to quality” given the market environment, including increases in Europe andwell asNorth AmericaCorporate/Other in. See “Citicorp” below for additional information on the fourth quarterresults of 2011. As of December 31, 2011, approximately 60% of Citi’s deposits were located outsideoperations for each of the United States.
businesses in Citicorp.6 Deposits can be interest-bearing or non-interest-bearing. Citi had $866 billion of deposits at December 31, 2011; of those, $177 billion were non-interest-bearing, compared to $133 billion at December 31, 2010. The remainder, or $689 billion, was interest-bearing, compared to $712 billion at December 31, 2010. While Citi’s deposits have grown year over year, Citi’s overall cost of funds on deposits decreased, reflecting the low rate environment as well as Citi’s ability to lower price points that widens its margins given the high levels of customer liquidity while still remaining competitive. Citi’s average rate on total deposits was 0.96% at December 31, 2011, compared with 0.99% at December 31, 2010. ExcludingFor the impact of the higher FDIC assessment effective beginning in the second quarterFX translation on 2012 results of 2011 and deposit insurance, the average rate on Citi’s total deposits was 0.80% at December 31, 2011, compared with 0.86% at December 31, 2010. As interest rates rise, however, Citi expects to see pressure on these rates. In addition, the composition of Citi’s deposits shifted significantly year-over-year. Specifically, time deposits, where rates are fixedoperations for the termeach of the deposit and have generally lower margins, became a smaller proportion of the deposit base, whereas operating accounts became a larger proportion of deposits. As defined by Citigroup, operating accounts consist of accounts such as checking and savings accounts for individuals, as well as cash management accounts for corporations, and, in Citi’s experience, provide wider margins and exhibit retentive behavior. During 2011, operating account deposits grew across most of Citi’s deposit-taking businesses, including retail, the private bank EMEA RCB, Latin America RCB, Asia RCBandTransaction Services. Operating, see the table accompanying the discussion of each respective business’ results of operations below.
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 inNorth America lending and deposits.
In Transaction Services,the increase inrevenues year-over-year, excluding the impact of FX translation, was driven by growth inTreasury and Trade Solutions,which was partially offset by a decline inSecurities 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 inLatin America, and 11% growth in Corporate loans.
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/DVA9 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 inLocal 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 theSpecial 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 inNorth 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 includesLocal Consumer Lending, Special Asset PoolandBrokerage 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 theSpecial Asset Pool, was $157 million in 2012, compared to $74 million in the prior year. 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 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. % 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 % % 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 )%
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 ofRegional Consumer Banking inNorth America, EMEA, Latin Americaand Asia) andInstitutional Clients Group (which includesSecurities and Banking andTransaction Services). Citicorp also includesCorporate/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 % 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 % 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
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.
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 represented 75%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.% 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 Citicorp’s deposit baseforeign exchange (FX) translation into U.S. dollars at the current exchange rate for all periods presented.NM Not meaningful
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 inEMEA RCB have largely stabilized and assuming the underlying core portfolio continues to grow in 2013, credit costs could begin to rise.
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.
Provisionsdecreased 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.% 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
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 inLatin Americawill likely continue to trend higher as various loan portfolios continue to mature.
Net incomedeclined 14% as higher revenues were more than offset by higher expenses and higher credit costs.
Revenuesincreased 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.
Expensesincreased 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.% 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
Net incomedecreased 4% primarily due to higher expenses.
Revenueswere 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.
Provisionsdecreased 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 inAsia RCB will largely remain stable, with increases largely in line with portfolio growth.
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.% 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 %
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 inCommissions 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 inPrincipal 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 Bankingrevenue 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 OtherSecurities and Banking (1,101 ) (859 ) (1,262 ) (28 ) 32 TotalSecurities and Bankingrevenues (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 )%
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:
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.
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:
Provisionsincreased $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&BCVA/DVA Fixed Income Markets $ (2,047 ) $ 1,368 $ (187 ) Equity Markets (424 ) 355 (207 ) Private Bank (16 ) 9 (5 ) TotalS&BCVA/DVA $ (2,487 ) $ 1,732 $ (399 ) S&BHedges on Accrual Loans gain (loss)(1) $ (698 ) $ 519 $ (65 ) (1) Hedges onS&Baccrual 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. % 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
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 impactTransaction 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).
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).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
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 ofCorporate/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.
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.
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 ) % 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 )
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 inBAM was flat.
Revenues decreased by $5.0 billion to $(4.7) billion due to the MSSB impact described above. Excluding this impact, revenues inBAM 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.
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.% 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 %
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 inLCL 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
Provisions decreased 25%, driven primarily by the improved credit environment in North Americamortgages, 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
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 inNorth Americamortgages 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 inLCL 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 inNorth America mortgage loans and $11 billion in international average assets.
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.
Expensesdecreased 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 inNorth 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.
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.
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.
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 inLCL and $91 million of which was recorded inCorporate/Other for discontinued operations). This amount included a $148 million reserve increase in the fourth quarter of 2012 ($57 million of which was recorded inLCL and $91 million of which was recorded inCorporate/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.% 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 )%
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 inSAP 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.
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.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 ) — %
Cash and deposits with banks is composed of bothCash and due from banksandDeposits with banks. Cash and due from banksincludes (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 banksincludes 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 banksoffset 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
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.
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 certainSecurities 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 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 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 inAsia andLatin 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.
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 byTransaction Services (25% growth), particularly from increased trade finance lending in most regions, as well as growth in theSecurities 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 byGlobalConsumer Banking, as loans increased 3% year-over-year, led byLatin America andAsia. 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 inNorth 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 assetsconsists ofBrokerage receivables, Goodwill, Intangibles andMortgage servicing rights in addition toOther 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.
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.
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 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 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 consists ofBrokerage payables andOther 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 regardingBrokerage payables, see Note 13 to the Consolidated Financial Statements.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, 2011, compared2012. 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 theCorporate/Othersegment. (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 70%its businesses through inter-segment allocations as described above.
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.
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
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 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, 2010 and 63% at December 31, 2009.Long-Term DebtLong-term debt (generally defined as original maturities of one year or more) is an important funding source, primarily for the non-bank entities, because of its multi-year maturity structure. The weighted average maturities of structural long-term debt (as defined in note 1 to the long-term debt issuances and maturities table below), issued by Citigroup, CFI, CGMHI and Citibank, N.A., excluding trust preferred securities, was approximately 7.1 years at December 31, 2011,2012, compared to approximately 6.2 yearswith $67 billion as of December 31, 2010. At2011. Market risk equivalent assets included in risk-weighted assets amounted to $41.5 billion at December 31, 20112012 and $46.8 billion at December 31, 2010, overall long-term debt outstanding for Citigroup was2011. Risk-weighted assets also include the effect of certain other off-balance-sheet exposures, such as follows:In billions of dollars Dec. 31, 2011 Dec. 31, 2010 Non-bank $ 247.0 $ 268.0 Bank(1) 76.5 113.2 Total(2)(3) $ 323.5 $ 381.2 (1)Collateralized advances from the FHLB were approximately $11.0 billion and $18.2 billion, respectively, at December 31, 2011 and December 31, 2010. These advances are reflected in the table above.(2)Includes long-term debt related to consolidated variable interest entities (VIEs) of approximately $50.5 billion and $69.7 billion, respectively, at December 31, 2011 and December 31, 2010. The majority of these VIEs relate to the Citibank Credit Card Master Trust and the Citibank OMNI Master Trust.(3)Of this amount, approximately $38.0 billion maturing in 2012 is guaranteed by the FDIC under the Temporary Liquidity Guarantee Program (TLGP). As set forth in the table above, Citi’s overall long-term debt has decreased by approximately $58 billion year-over-year. In the non-bank, the year-over-year decrease was primarily due to TLGP run-off. In the bank entities, the decrease also included TLGP run-off, FHLB reductions,unused lending commitments and the maturingletters of credit, card securitization debt, particularlyand reflect deductions such as Citi has grown its overall deposit base. Citi currently expectscertain 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).
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 continued decline in its overall long-term debt over 2012, particularly within its bank entities. Given its liquidity resourcesnon-GAAP financial measure as of December 31, 2011,2012. Citi may consider opportunitiesbelieves this metric provides useful information to repurchaseinvestors and others by measuring Citi’s progress against future regulatory capital standards.12 Citi’s estimated Basel III Tier 1 Common ratio and its long-term debt, pursuantrelated 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 open market purchases, tender offers or other means.investors and others by measuring Citi’s progress against expected future regulatory capital standards.In millions of dollars December 31,
2012 September 30,
2012Tier 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 48The table below details(1) Calculated based on the long-term debt issuancesU.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 maturities of Citigroup duringsignificant common stock investments in unconsolidated financial institutions.(4) Calculated based on the past three years: 2011 2010 2009 In billions of dollars Maturities Issuances Maturities Issuances Maturities Issuances Long-term debt(1)(2) $ 50.6 $ 15.1 $ 43.0 $ 18.9 $ 64.0 $ 110.4 Local country level, FHLB and other 22.4 15.2 (3) 18.7 10.2 59.0 8.9 Secured debt and securitizations 16.1 0.7 14.2 4.7 0.9 17.0 Total $ 89.1 $ 31.0 $ 75.9 $ 33.8 $ 123.9 $ 136.3 (1)Long-term debt issuances for all periods in the table above reflect Citi’s structural long-term debt issuances. Structural long-term debt is a non-GAAP measure. Citi defines structural long-term debt as its long-term debt (original maturities of one year or more), excluding certain structured notes, such as equity-linked and credit-linked notes, with early redemption features effective within one year. 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. Long-term debt maturities for all periods reflect the total amount of senior and subordinated long-term debt and trust preferred securities.proposed U.S. Basel III “advanced approaches” for determining risk-weighted assets and including Basel II.5.(2)During 2011 and 2010, Citi issued a total of $7.5 billion of senior debt pursuant to the remarketing of the trust preferred securities held by ADIA.(3)Includes $0.5 billion of long-term FHLB issuance in the first quarter of 2011 and $5.5 billion in the second quarter of 2011.The table below shows Citi’s aggregate expected annual long-term debt maturities
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, 2011:Expected Long-Term Debt Maturities as of December 31, 2011 In billions of dollars 2012 2013 2014 2015 2016 Thereafter Total Senior/subordinated debt $ 60.6 $ 28.7 $ 25.9 $ 16.7 $ 12.2 $ 82.8 $ 226.9 Trust preferred securities 0.0 0.0 0.0 0.0 0.0 16.1 16.1 Securitized debt and securitizations 17.5 7.3 7.6 5.3 2.8 9.6 50.1 Local country and FHLB borrowings 5.8 10.3 4.5 1.6 4.9 3.3 30.4 Total long-term debt $ 83.9 $ 46.3 $ 38.0 $ 23.6 $ 19.9 $ 111.8 $ 323.5 As set forth in the table above, Citi currently estimates its long-term debt maturing during 2012, to be $60.6 billion (which excludes maturities relating to local country, securitizations and FHLB), of which $38.0 billion is TLGP that Citi does not expect to refinance. Given the current status of its liquidity resources and continued asset reductions in Citi Holdings, Citi currently expects to refinance approximately $15 billion to $20$6.7 billion of long-term debt duringcommon stock repurchases remained under Citi’s repurchase programs. Any Citi repurchase program is subject to regulatory approval. No material repurchases were made in 2012. However, Citi continually reviews its fundingSee “Risk Factors—Business and liquidity needsOperational Risks” and may adjust its expected issuances due to market conditions, including the continued uncertainty resulting from certain European market concerns, among other factors.“Purchases of Equity Securities” below.
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
(otherthan MSRs) related to assets
for discontinued operations
held for sale32 — Net deferred tax assets related to goodwill
and other intangible assets32 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
discontinuedoperations held for sale32 — 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
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.
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.Secured Financing Transactions and Short-Term Borrowings
Tier 1 Common ratioAs referenced above, Citi supplements its primary sourcesTier 1 Capital ratioTotal Capital ratio Leverage ratio Impact of funding with short-term borrowings (generally defined as original maturities$1Impact of less than one year). Short-term borrowings generally include (i) secured financing (securities loaned or sold under agreements to repurchase, or repos) and (ii) short-term borrowings consisting$1Impact of commercial paper and borrowings from the FHLB and other market participants. The following table contains the year-end, $1Impact 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 and maximum month-end amounts for the following respective short-term borrowings categories at the end of each of the three prior fiscal years.totalTier 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
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.
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.
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.
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.
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.
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.
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.
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.”
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.
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.Federal funds purchased and securities sold under agreements to Short-term borrowings (1) repurchase (2) Commercial paper (3) Other short-term borrowings (4) In billions of dollars 2011 2010 2009 2011 2010 2009 2011 2010 2009 Amounts outstanding at year end $ 198.4 $ 189.6 $ 154.3 $ 21.3 $ 24.7 $ 10.2 $ 33.1 $ 54.1 $ 58.7 Average outstanding during the year(5) 219.9 212.3 205.6 25.3 35.0 24.7 45.5 68.8 76.5 Maximum month-end outstanding 226.1 246.5 252.2 25.3 40.1 36.9 58.2 106.0 99.8 Weighted-average interest rate During the year(5)(6)(7) 1.45 % 1.32 % 1.67 % 0.28 % 0.38 % 0.99 % 1.28 % 1.14 % 1.54 % At year end(8) 1.10 0.99 0.85 0.38 0.35 0.34 1.09 0.40 0.66 (1)Original maturities of less than one year.(2)Rates reflect prevailing local interest rates including inflationary effects and monetary correction in certain countries.(3)Includes commercial paper related to VIEs consolidated effective January 1, 2010 with the adoption of SFAS 166/167.(4)Other short-term borrowings include broker borrowings and borrowings from banks and other market participants.(5)Excludes discontinued operations. While the annual average balance is primarily calculated from daily balances, in some cases, the average annual balance is calculated using a 13-point average composed of each of the month-end balances during the year plus the prior year-end ending balance.(6)Interest rates include the effects of risk management activities. See Notes 20 and 24 to the Consolidated Financial Statements.(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)Based on contractual rates at respective year-end; non-interest-bearing accounts are excluded from the weighted average interest rate calculated at year-end.Secured Financing TransactionsSecured 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, 2011, secured financing was $198 billion and averaged approximately $220 billion during the year. Secured financing at December 31, 2011 increased year over year by approximately $9 billion from $190 billion at December 31, 2010.Commercial PaperAt December 31, 2011 and December 31, 2010, commercial paper outstanding for Citigroup’s non-bank entities and significant bank entities, respectively, was as follows:In millions of dollars Dec. 31, 2011 Dec. 31, 2010 Non-bank $ 6,414 $ 9,670 Bank 14,872 14,987 Total $ 21,286 $ 24,657 Other Short-Term BorrowingsAt December 31, 2011, Citi’s other short-term borrowings were $33 billion, compared with $54 billion at December 31, 2010. The average balances for the quarters were generally consistent with the quarter-end balances for each period.See Note 19 to the Consolidated Financial Statements for further information on Citigroup’s outstanding long-term debt and short-term borrowings.Liquidity Risk ManagementLiquidity risk is the risk of a financial institution’s inability to meet its obligations in a timely manner. Management of liquidity risk at Citi is the responsibility of the Citigroup Treasurer with oversight from senior management through Citi’s Finance and Asset and Liability Committee (FinALCO). For additional information on FinALCO and Citi’s liquidity management, see “Capital Resources – Overview” above.Citigroup operates under a centralized treasury model where the overall balance sheet is managed by Citigroup Treasury through Global Franchise Treasurers and Regional Treasurers. Day-to-day liquidity and funding are managed by treasurers at the country and business level and are monitored by Citigroup Treasury and independent risk management.Liquidity Measures and Stress TestingCiti uses multiple measures in monitoring its liquidity, including liquidity ratios, stress testing and liquidity limits, each as described below.Liquidity MeasuresIn 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 Citi’s asset base is funded by sufficiently long-dated liabilities. Citi’s structural liquidity ratio was 73% at December 31, 2011 and 73% at December 31, 2010.Internally, Citi also utilizes cash capital to measure and monitor its ability to fund the structurally illiquid portion of the balance sheet, on a specific product-by-product basis. While cash capital is a methodology generally used by financial institutions to provide a maturity structure matching assets and liabilities, there is a lack of standardization in this area and specific product-by-product assumptions vary by firm. Cash capital measures the amount of long-term funding—core deposits, long-term debt and equity—available to fund illiquid assets. Illiquid assets generally include loans (net of securitization adjustments), securities haircuts and other assets (i.e., goodwill, intangibles and fixed assets). As of December 31, 2011, based on Citi’s internal measures, both the non-bank and the aggregate bank subsidiaries had excess cash capital. As part of Basel III, the Basel Committee proposed two new liquidity measurements (for an additional discussion of Basel III, see “Capital Resources—Regulatory Capital Standards” above). Specifically, as proposed, the Liquidity Coverage Ratio (LCR) is designed to ensure banking organizations maintain an adequate level of unencumbered cash and high quality unencumbered assets that can be converted into cash to meet liquidity needs. The LCR must be at least 100%, and is proposed to be effective beginning January 1, 2015. While the U.S. regulators have not yet provided final rules or guidance with respect to the LCR, based on its current understanding of the LCR requirements, Citi believes it is in compliance with the LCR as of December 31, 2011. In addition to the LCR, the Basel Committee proposed a Net Stable Funding Ratio (NSFR) designed to promote the medium- and long-term funding of assets and activities over a one-year time horizon. It is Citi’s understanding, however, that this proposed metric is under review by the Basel Committee and may be further revised. Moreover, in January 2012, the Federal Reserve Board proposed rules to implement the enhanced prudential standards for systemically important financial institutions, as required by the Dodd-Frank Act. The proposed rules include new requirements for liquidity management and corporate governance related thereto. Citi continues to review these proposed rules and any potential impact they may have on its liquidity management practices.50Stress TestingLiquidity 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(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 RatingsCitigroup’s 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. See also “Risk Factors—Market and Economic Risks” below. The table below indicates the ratings for Citigroup, Citibank, N.A. and Citigroup Global Markets Inc. (a broker-dealer subsidiary of Citi) as of December 31, 2011.Citigroup’s Debt Ratings as of December 31, 2011Citigroup Inc./CitigroupCitigroup GlobalFunding Inc. (1)Citibank, N.A.Markets Inc.SeniorCommercialLong-Short-SeniordebtpapertermtermdebtFitch Ratings (Fitch)AF1AF1NRMoody’s Investors Service (Moody’s)A3P-2A1P-1NRStandard & Poor’s (S&P)A-A-2AA-1A(1)As a result of the Citigroup guarantee, the ratings of, and changes in ratings for, CFI are the same as those of Citigroup.NRNot rated.Recent Rating ChangesOn September 21, 2011, Moody’s concluded its review of government support assumptions for Citi and certain peers and upgraded Citi’s unsupported “Baseline Credit Assessment” rating and affirmed Citi’s long-term debt ratings at both the Citibank and Citigroup levels. At the same time, however, Moody’s changed the short-term rating of Citigroup (the parent holding company) to ‘P-2’ from ‘P-1’. On November 29, 2011, following its global review of the banking industry under S&P’s revised bank criteria, S&P downgraded the issuer credit rating for Citigroup Inc. to ‘A-/A-2’ from ‘A/A-1’, and Citibank, N.A. to ‘A/A-1’ from ‘A+/A-1’. These ratings continue to receive two notches of uplift, reflecting S&P’s view that the U.S. government is supportive to Citi. On December 15, 2011, Fitch announced revised ratings resulting from its review of government support assumptions for 17 U.S. banks. The resolution of this review resulted in a revision to the issuer credit ratings of Citigroup and Citibank, N.A. from ‘A+’ to ‘A’ and the short-term issuer rating from ‘F1+’ to ‘F1’. The above mentioned rating changes did not have a material impact on Citi’s funding profile. Furthermore, forecasts of potential funding loss under various stress scenarios, including the above mentioned rating downgrades, did not occur.Potential Impact of Ratings DowngradesRatings downgrades by Fitch, Moody’s or S&P could have material impacts on funding and liquidity in the form of cash obligations, reduced funding capacity and collateral triggers.Most recently, on February 15, 2012, Moody’s announced a review of 17 banks and securities firms with global capital markets operations, including Citi, for possible downgrade during the first half of 2012. Moody’s stated this review was to assess adverse market trends, which it believes are weakening the credit profiles of many rated banks globally. It is not certain what the results of this review will be, or if Citigroup or Citibank, N.A. will be impacted.51Because of the current credit ratings of Citigroup, a one-notch downgrade of its senior debt/long-term rating may or may not impact Citigroup’s commercial paper/short-term rating by one notch. As of December 31, 2011, Citi estimates that a one-notch downgrade of the senior debt/long-term rating of Citigroup could result in loss of funding due to derivative triggers and additional margin requirements of $1.3 billion and a one-notch downgrade by Fitch of Citigroup’s commercial paper/short-term rating could result in the assumed loss of unsecured commercial paper of $6.4 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.Citi currently believes that a more severe ratings downgrade scenario, such as a two-notch downgrade of the senior debt/long-term rating of Citigroup, could result in an additional $0.9 billion in funding requirements in the form of cash obligations and collateral as of December 31, 2011. Other funding sources, such as secured financing transactions and other margin requirements, for which there are no explicit triggers, could also be adversely affected.As set forth under “Aggregate Liquidity Resources” above, the aggregate liquidity resources of Citigroup’s non-bank entities stood at approximately $98.4 billion as of December 31, 2011, in part as a contingency for such an event, and a broad range of mitigating actions are currently included in Citigroup’s detailed contingency funding plans. 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 significant bank subsidiaries.Further, as of December 31, 2011, a one-notch downgrade of the senior debt/long-term ratings of Citibank, N.A. could result in an approximate $2.4 billion funding requirement in the form of collateral and cash obligations. Because of the current credit ratings of Citibank, N.A., a one-notch downgrade of its senior debt/long-term rating is unlikely to have any impact on its commercial paper/short-term rating. However, a two-notch downgrade by Moody’s could have an adverse impact on Citibank, N.A.’s commercial paper/short-term rating. A two-notch downgrade by Moody’s could result in additional funding requirements in the form of cash obligations and collateral estimated at $0.8 billion as of December 31, 2011. As of December 31, 2011, Citibank, N.A. had liquidity commitments of $27.9 billion to asset-backed commercial paper conduits, which could also be impacted by a two-notch downgrade by Moody’s, including $14.9 billion of commitments to consolidated conduits, and $13.0 billion of commitments to unconsolidated conduits as referenced in Note 22 to the Consolidated Financial Statements. Additionally, Citibank, N.A. had $11.2 billion of funding programs related to the municipals markets that could be impacted by such a downgrade, of which $10.8 billion is principally reflected as commitments within Note 28 to the Consolidated Financial Statements.Citi’s significant bank entities and other entities, including Citibank, N.A., had aggregate liquidity resources of approximately $307.1 billion at December 31, 2011, in part as a contingency for such an event and also have detailed contingency funding plans that encompass a broad range of mitigating actions. These mitigating actions include, but are not limited to, selling or financing highly liquid government securities, tailoring levels of secured lending, repricing or reducing certain commitments to commercial paper conduits, exercising reimbursement agreements for the municipal programs mentioned above, adjusting the size of select trading books, reducing loan originations and renewals, raising additional deposits, or borrowing from the FHLB or other central banks. Citi believes these mitigating actions could substantially reduce the funding and liquidity risk of such a downgrade.52OFF-BALANCE-SHEET ARRANGEMENTSCitigroup 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 purposeentities, such as credit card receivables and mortgage-backed and otherasset-backed securitization entities;holding senior and subordinated debt, interests in limited and generalpartnerships and equity interests in other unconsolidated entities; andproviding 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 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” below, as well as Notes 1, 22 and 28 to the Consolidated Financial Statements.Types of Off-Balance-Sheet Arrangements Disclosures inthis Form 10-KVariable interests and other obligations,See Note 22 to the Consolidated including contingent obligations, Financial Statements. arising from variable interests in nonconsolidated VIEsLeases, letters of credit, and lendingSee Note 28 to the Consolidated and other commitments Financial Statements.GuaranteesSee Note 28 to the Consolidated Financial Statements.53CONTRACTUAL OBLIGATIONSThe 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.Excluded from the following table are obligations that are generally short-term in nature, including deposits and securities sold under agreements to repurchase, or repos (see “Capital Resources and Liquidity—Funding and Liquidity” above for a discussion of these obligations). The table also excludes certain insurance and investment contracts subject to mortality and morbidity risks or without defined maturities, such that the timing of payments and withdrawals is uncertain. The liabilities related to these insurance and investment contracts are included asOther liabilitieson the Consolidated Balance Sheet.Contractual obligations by year In millions of dollars at December 31, 2011 2012 2013 2014 2015 2016 Thereafter Total Long-term debt obligations(1) $ 83,907 $ 46,338 $ 37,950 $ 23,625 $ 19,897 $ 111,788 $ 323,505 Operating and capital lease obligations 1,199 1,096 1,008 906 793 2,292 7,294 Purchase obligations 694 437 389 353 274 409 2,556 Other liabilities(2) 40,707 366 310 291 294 5,666 47,634 Total $ 126,507 $ 48,237 $ 39,657 $ 25,175 $ 21,258 $ 120,155 $ 380,989 (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)Includes accounts payable and accrued expenses recorded inOther liabilitieson Citi’s Consolidated Balance Sheet. Also includes discretionary contributions for 2012 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).5460 REGULATORY RISKSMANAGING GLOBAL RISK72 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,
DIVIDENDS294 PERFORMANCE GRAPH 295 CORPORATE INFORMATION 296 Citigroup Executive Officers 296 CITIGROUP BOARD OF DIRECTORS 299
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’sGlobal Consumer Banking businesses andInstitutional Clients Group; and Citi Holdings, consisting ofBrokerage and Asset Management, Local Consumer Lending andSpecial 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 atwww.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 atwww.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.
At December 31, 2012, Citi had approximately 259,000 full-time employees compared to approximately 266,000 full-time employees at December 31, 2011.
(1)North America includes the U.S., Canada and Puerto Rico,Latin America includes Mexico, andAsia includes Japan.
RESULTS OF OPERATIONS
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:
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 compression1 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).
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:
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 Managementduring the third quarter of 2012. In addition, Citi faces significant regulatory changes aroundrecorded a net pretax loss of $424 million ($274 million after-tax) from the worldpartial sale of Citi’s minority interest in Akbank T.A.S. (Akbank) recorded inCorporate/Otherduring 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 could negativelyincluded 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 withinCorporate/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 inCorporate/Other.3 Presentation of Citi’s results excluding CVA/DVA, the impact its businesses, especially givenof minority investments, the unfavorable environment facing financial institutionsrepositioning charges in the fourth quarters of 2012 and 2011 and the lacktax benefit, as applicable, represent non- GAAP financial measures. Citigroup believes the presentation of international coordination.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.
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 inNorth America cards andLocal Consumer Lendingand theSpecial Asset Poolwithin Citi Holdings. Consumer net credit losses declined 22% to $14.4 billion reflecting improvements inNorth America Citi-branded cards and Citi retail services in Citicorp andLocal Consumer Lendingwithin Citi Holdings. Corporate net credit losses decreased 86% year-over-year to $223 million, driven primarily by continued credit improvement in both theSpecial 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 inNorth America Citi-branded cards and Citi retail services andSecurities 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 theSpecial 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.
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 inSecurities 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 RCBrevenues grew 5% to $21.1 billion. InternationalRCB revenues (consisting ofAsia RCB,Latin America RCB andEMEA RCB) increased 1% year-over-year to $19.1 billion. Excluding the impact of FX translation,6 internationalRCBrevenues 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 Servicesrevenues 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.
InNorth 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 As discussedandTransaction Services—as well asCorporate/Other. See “Citicorp” below for additional information on the results of operations for each of the businesses in more detail throughout this section, Citicorp.6 For the impact of FX translation on 2012 results of operations for each ofEMEA RCB, Latin America RCB, Asia RCBandTransaction Services, see the table accompanying the discussion of each respective business’ results of operations below.
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 inNorth America lending and deposits.
In Transaction Services,the increase inrevenues year-over-year, excluding the impact of FX translation, was driven by growth inTreasury and Trade Solutions,which was partially offset by a decline inSecurities 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 inLatin America, and 11% growth in Corporate loans.
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/DVA9 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 inLocal 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 theSpecial 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 inNorth 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 continuesHoldings includesLocal Consumer Lending, Special Asset PoolandBrokerage 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 theSpecial Asset Pool, was $157 million in 2012, compared to be subject to a significant number of new regulatory requirements and changes from numerous sources, both$74 million in the U.S.prior year.FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA—PAGE 1 Citigroup Inc. and internationally,Consolidated SubsidiariesIn 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 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 could negativelyis 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 its businesses, revenuesdiluted EPS. The year-end share price was $39.56. See Note 11 to the Consolidated Financial Statements.(3) All per share amounts and earnings. These reforms and proposals are occurring largely simultaneously and generally not on a coordinated basis. In addition,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. % 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 % % 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 )%
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 ofRegional Consumer Banking inNorth America, EMEA, Latin Americaand Asia) andInstitutional Clients Group (which includesSecurities and Banking andTransaction Services). Citicorp also includesCorporate/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 % 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 % 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
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.
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. % 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
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 inEMEA RCB have largely stabilized and assuming the underlying core portfolio continues to grow in 2013, credit costs could begin to rise.
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.
Provisionsdecreased 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.% 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
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 inLatin Americawill likely continue to trend higher as various loan portfolios continue to mature.
Net incomedeclined 14% as higher revenues were more than offset by higher expenses and higher credit costs.
Revenuesincreased 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.
Expensesincreased 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.% 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
Net incomedecreased 4% primarily due to higher expenses.
Revenueswere 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.
Provisionsdecreased 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 inAsia RCB will largely remain stable, with increases largely in line with portfolio growth.
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.% 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 %
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 inCommissions 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 inPrincipal 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 Bankingrevenue 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 OtherSecurities and Banking (1,101 ) (859 ) (1,262 ) (28 ) 32 TotalSecurities and Bankingrevenues (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 )%
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:
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.
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:
Provisionsincreased $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&BCVA/DVA Fixed Income Markets $ (2,047 ) $ 1,368 $ (187 ) Equity Markets (424 ) 355 (207 ) Private Bank (16 ) 9 (5 ) TotalS&BCVA/DVA $ (2,487 ) $ 1,732 $ (399 ) S&BHedges on Accrual Loans gain (loss)(1) $ (698 ) $ 519 $ (65 ) (1) Hedges onS&Baccrual 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 financial crisiscredit protection.% 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
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 impactTransaction 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).
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).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
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 ofCorporate/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.
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.
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 ) % 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 )
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 inBAM was flat.
Revenues decreased by $5.0 billion to $(4.7) billion due to the MSSB impact described above. Excluding this impact, revenues inBAM 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.
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.% 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 %
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 inLCL 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
Provisions decreased 25%, driven primarily by the improved credit environment in North Americamortgages, 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
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 inNorth Americamortgages 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 inLCL 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 inNorth America mortgage loans and $11 billion in international average assets.
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.
Expensesdecreased 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 inNorth 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.
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.
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.
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 inLCL and $91 million of which was recorded inCorporate/Other for discontinued operations). This amount included a $148 million reserve increase in the fourth quarter of 2012 ($57 million of which was recorded inLCL and $91 million of which was recorded inCorporate/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.% 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 )%
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 inSAP 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.
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.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 ) — %
Cash and deposits with banks is composed of bothCash and due from banksandDeposits with banks. Cash and due from banksincludes (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 banksincludes 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 banksoffset 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
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.
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 certainSecurities 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 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 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 inAsia andLatin 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.
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 byTransaction Services (25% growth), particularly from increased trade finance lending in most regions, as well as growth in theSecurities 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 byGlobalConsumer Banking, as loans increased 3% year-over-year, led byLatin America andAsia. 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 inNorth 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 assetsconsists ofBrokerage receivables, Goodwill, Intangibles andMortgage servicing rights in addition toOther 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.
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.
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 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 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 consists ofBrokerage payables andOther 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 regardingBrokerage payables, see Note 13 to the Consolidated Financial Statements.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 U.S.,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 continuing adverse economic climate globally, Citi, as well as other financial institutions, is subject to an increased level of distrust, scrutiny and skepticism from numerous constituencies, including the public, state, federal and foreign regulators, the media and within the political arena. This environment, in which the U.S. and international regulatory initiatives are being debated and implemented, engenders not only a bias towards more regulation, but towards the most prescriptive regulation for financial institutions. As a result of this ongoing negative environment, there could be additional regulatory requirements beyond those already proposed, adopted or even currently contemplated by U.S. or international regulators. It is not clear what the cumulative impact of all of this regulatory reform will be.The ongoing implementationbeneficial inter-relationship of the Dodd-Frank Act, as well as international regulatory reforms, continuesasset 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 theCorporate/Othersegment. (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 create much uncertainty for Citi, including with respect to the management of its businesses through inter-segment allocations as described above.
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.
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
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 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 timing of the resulting increased costs and its ability to compete.Despite enactment in July 2010, 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),non-credit-related factors such as the heightened prudential standards applicable to large financial companies, the so-called “Volcker Rule” and the regulation of derivatives markets, are stillchanges in developmental stages and significant rulemaking and interpretation remains. Moreover, agencies and offices created by the Dodd-Frank Act, such as the Bureau of Consumer Financial Protection, are in their early stages and the extent and timing of regulatory efforts by these bodies remains to be seen. This uncertainty is further compounded by the numerous regulatory efforts underway outside the U.S. Certain of these efforts overlap with the substantive provisions of the Dodd-Frank Act, while others, such as proposals for financial transaction and/or bank taxes in particular countries or regions, do not. In addition, even where these U.S. and international regulatory efforts overlap, these efforts generally have not been undertaken on a coordinated basis. Areas where divergence between U.S. regulators and their international counterparts exists or has begun to develop (whether with respect to scope, interpretation, timing, approach or otherwise) includes trading, clearing and reporting requirements for derivatives transactions, higher U.S. capital and margin requirements relating to uncleared derivatives transactions, and capitalinterest rates and liquidity requirements that may result in mandatory “ring-fencing” of capital or liquidity in certain jurisdictions, among others. Regulatory uncertainty makes future planningspreads for HTM securities with respect to the management of Citi’s businesses more difficult. For example, the cumulative effect of the new derivative rules and sequencing of implementation requirements will have a significant impact on how Citi chooses to structure its derivatives business and its selection of legal entities in which to conduct this business. Until these rules are final and interpretive questions are answered, management’s business planning and proposed pricing for this business necessarily include assumptions based on proposed rules. Incorrect assumptions could impede Citi’s ability to effectively implement and comply with the final requirements in a timely manner. Management’s planning is further complicated by the continual need to review and evaluate the impact to the business of an ongoing flow of rule proposals and interpretations from numerous regulatory bodies, all within compressed timeframes.
other-than-temporary impairment.(3) In addition, the operational and technological costs associated with implementation of, as well as the ongoing compliance costs associated with, all of these regulations will likely be substantial. Given the continued uncertainty, the ultimate amount and timing of such costs going forward are difficult to predict. In 2011, Citi invested approximately $1 billion in order to meet various regulatory requirements, and this amount did not include many of the costs likely to be incurred pursuant to the implementation of the Dodd-Frank Act or other regulatory initiatives. For example, the proposed Volcker Rule contemplates a comprehensive internal controls system as well as extensive data collection and reporting duties with respect to “proprietary trading,” and rules for registered swap dealers impose extensive recordkeeping requirements and business conduct rules for dealing with customers. All of these costs negatively impact Citi’s earnings. Given Citi’s global footprint, its implementation and compliance risks and costs are more complex and could be more substantial than its competitors. Ongoing compliance with inconsistent, conflicting or duplicative regulations across U.S. and international jurisdictions, or failure to implement or comply with these new regulations on a timely basis, could further increase costs or harm Citi’s reputation generally. Citi could also be subject to more stringent regulation because of its global footprint. In accordance with the Dodd-Frank Act, in December 2011 theThe Federal Reserve Board proposed a setgranted interim capital relief for the impact of heightened prudential standards that will be applicableASC 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 large financial companiesrisk-based capital guidelines, while approximately $40 billion of such assets exceeded the limitation imposed by these guidelines and, as Citi. The proposal dictates requirements for aggregate counterparty exposure limits and enhanced risk management processes and oversight, among“disallowed deferred tax assets,” were deducted in arriving at Tier 1 Capital. Citigroup’s approximate $4 billion of other things. Compliance with these standards could result in restrictions on Citi’s activities. Moreover, other financial institutions, including so-called “shadow banking” financial intermediaries, providing manynet deferred tax assets primarily represented effects of the same or similar services or products that Citi makes available to its customers, may not be regulated on the same basis or to the same extent as Citipension liability and consequently may also have certain competitive advantages.Finally, uncertainty persists as to the extent tocash flow hedges adjustments, which Citi will be subject to more stringent regulations than its foreign competitors with respect to several of the regulatory initiatives, particularly in its non-U.S. operations, including certain aspects of the proposed restrictions under the Volcker Rule and derivatives clearing and margin requirements. Differences in substance55or severity of regulations across jurisdictions could significantly reduce Citi’s ability to compete with foreign competitors, in a variety of businesses and geographic areas, and thus further negatively impact Citi’s earnings.Citi’s prospective regulatory capital requirements remain uncertain and will likely be higher than many of its competitors. There is a risk that Citi will be unable to meet these new standards in the timeframe expected by the market or regulators.As discussed in more detail under “Capital Resources and Liquidity – Capital Resources – Regulatory Capital Standards” above, Citi’s prospective regulatory capital requirements continueare permitted to be subjectexcluded prior to extensive rulemaking and interpretation. Ongoing areas of rulemaking include, among others, (i) the final Basel III rules applicable to U.S. financial institutions, including Citi, (ii) capital surcharges for global systemically important banks (G-SIBs), including the extent of the surcharge to be initially imposed on Citi, and (iii) implementation of the Dodd-Frank Act, including imposition of enhanced prudential capital requirements on financial institutions that are deemed to pose a systemic risk to market-wide financial stability as well as provisions requiring the elimination of credit ratings from capital regulations and the Collins Amendment.It is clear that final U.S. rules implementing Basel III, the G-SIB surcharge and the capital-related provisions of the Dodd-Frank Act will significantly increase Citi’s regulatory capital requirements, includingderiving the amount of capital requirednet deferred tax assets subject to belimitation under the guidelines.(6) Includable up to 1.25% of risk-weighted assets. Any excess allowance for credit losses is deducted in the form of common equity. However, the various regulatory capital levels Citi must maintain, the types of capital that will meet these requirements and the specific capital requirements associated with Citi’s assets remain uncertain. For example, Citi may be required to replace certain of its existing regulatory capitalarriving at risk-weighted assets.(7) Includes qualifying subordinated debt in a compressed timeframe or in unfavorable markets in order to comply with final rules implementing Basel III and the Collins Amendment, which eliminated trust preferred securities from the definitionan amount not exceeding 50% of Tier 1 Capital. In addition,(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 alternative approaches proposed to replace the useeffect of certain other off-balance-sheet exposures, such as unused lending commitments and letters of credit, ratings in accordance with the Dodd-Frank Actand 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 implementing(Basel II.5).
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 could requireis a non-GAAP financial measure as of December 31, 2012. Citi believes this metric provides useful information to hold more capitalinvestors and others by measuring Citi’s progress against certain of its assets than it must currently. The lack of finalfuture regulatory capital requirements impedes long-term capital planningstandards.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 management. Citi is not able to accurately forecast its capital requirements for particular exposures which complicates its ability to assess theprogress against expected future viability of, and appropriate pricing for, certain of its products. In addition, while management may desire to take certain actions to optimize Citi’s regulatory capital profile, such asstandards.In millions of dollars December 31,
2012 September 30,
2012Tier 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 reductionU.S. banking agencies proposed Basel III rules.(2) Includes goodwill “embedded” in the valuation of certainsignificant common stock investments in unconsolidated financial entities, without clarity as to the final standards, there is riskinstitutions.(3) Aside from MSRs, reflects DTAs arising from temporary differences and significant common stock investments in management either taking actionsunconsolidated financial institutions.(4) Calculated based on assumed orthe proposed rules or waiting to take action until final rules that are implemented in compressed timeframes.Citi’s projected ability to comply with the new capital requirements as they are implemented, or earlier, is also based on certain assumptions specific to Citi’s businesses, including its future earnings in Citicorp, the continued wind-down of Citi Holdings and the monetization of Citi’s deferred tax assets. If management’s assumptions with respect to certain aspects of Citi’sbusinesses prove to be incorrect, it could negatively impact Citi’s ability to comply with the future regulatory capital requirements in a timely manner or in a manner consistent with market or regulator expectations. Citi’s regulatory capital requirements will also likely be higher than many of its competitors. Citi’s strategic focus on emerging markets,U.S. Basel III “advanced approaches” for example, will likely result in higherdetermining risk-weighted assets and thus potentially higher capital requirements than its less global or less emerging-markets-focused competitors. In addition, within the U.S.,including Basel II.5.
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 will likely face higherrepurchase program is subject to regulatory capital requirements than mostapproval. No material repurchases were made in 2012. See “Risk Factors—Business and Operational Risks” and “Purchases of its U.S.-based competitorsEquity Securities” below.
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
(otherthan MSRs) related to assets
for discontinued operations
held for sale32 — Net deferred tax assets related to goodwill
and other intangible assets32 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
discontinuedoperations held for sale32 — 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
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.
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
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.
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.
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.
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.
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.
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.
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.
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.”
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.
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.
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:
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.Non-bank Significant Citibank Entities Other Citibank and
Banamex EntitiesTotal 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,
2011Available 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
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).
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
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).
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.
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
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 (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.
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 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.
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. 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 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 expenseexcludes 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.
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).
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
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.
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.
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.
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 horizons13 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.
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.
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.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
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.
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.
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.
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.
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.Variable interests and other obligations, See Note 22 to the G-SIB surcharge (orConsolidated including contingent obligations, Financial Statements. arising from variable interests in nonconsolidated VIEs Leases, letters of credit, and lending See Note 27 to the same levelConsolidated and other commitments Financial Statements. Guarantees See Note 27 to the Consolidated Financial Statements.
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
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 surcharge) orDecember 31, 2012 to the heightened prudential capital requirements to be imposedcontractual payment obligations on systemically important financial institutions. Internationally, there have already been instanceslong-term debt for each of Basel III not being consistently adopted or applied across countries or regions. Any lack of a level playing field with respect to capital requirements for Citi as compared to peers or less regulated financial intermediaries, boththe periods disclosed in the U.S.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 internationally, could put Citi at a competitive disadvantage.accrued expenses recorded inAs proposed, changes in regulation of derivatives required under the Dodd-Frank Act will require significant and costly restructuring ofOther liabilitieson Citi’s derivatives businesses in order to meet the new market structures and could affect the competitive position of these businesses.Once fully implemented, the provisions of the Dodd-Frank Act relating to the regulation of derivatives will result in comprehensive reform of the derivatives markets. Reforms will include requiring a wide range of over-the-counter derivatives to be cleared through recognized clearing facilities and traded on exchanges or exchange-like facilities, the collection and segregation of collateralConsolidated Balance Sheet. Also includes discretionary contributions for most uncleared derivatives, extensive public transaction reporting and business conduct requirements, and significantly broadened restrictions on the size of positions that may be maintained in specified commodity derivatives. While some of the regulations have been finalized, the rulemaking process is still not complete,2013 for Citi’s non-U.S. pension plans and the timing for the effectiveness of many of these requirements is not yet clear. The proposed rules implementing the derivatives provisions of the Dodd-Frank Act will necessitate costly and resource-intensive changes to certain areas of Citi’s derivatives business structures and practices. Those changes will include restructuring the legal entities through which those businesses are conducted and the successful and timely installation of extensive technological and operational systems and compliance infrastructure, among others. Effective legal entity restructuring will also be dependent on clients and regulators, and so may be subject to delays or disruptions not fully under Citi’s control. Moreover, new derivatives-related systems and infrastructure will likely become the basis on which institutions such as Citi compete for clients and, to the extent that Citi’s connectivity or services for clients in these businesses is deficient, Citi could be at a competitive disadvantage. More generally, the contemplated reforms will make trading in many derivatives products more costly and may significantly reduce the liquidity of certain derivatives markets and diminish customer demand for covered derivatives. These changes could negatively impact Citi’s earnings from these businesses.56Reforms similar to the derivatives provisions and proposed regulations under the Dodd-Frank Act are also contemplated in the European Union and certain other jurisdictions. These reforms appear likely to take effect after the 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 or additional requirements on Citi’s derivative 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 give rise to further disruptions and competitive dislocations.The proposed regulations implementing the derivatives provisions of the Dodd-Frank Act, if adopted without modification, would also adversely affect the competitiveness of Citi’s non-U.S. operations. For example, the proposed regulations would require some of Citi’s non-U.S. operations to collect more margin from its non-U.S. derivatives customers than Citi’s foreign bank competitors may be required to collect. The Dodd-Frank Act also contains a so-called “push-out” provision that will prevent FDIC-insured depository institutions from dealing in certain equity, commodity and credit-related derivatives. Citi conducts a substantial portion of its derivatives-dealing activities through its insured depository institution and, to the extent that certain of Citi’s competitors already conduct such 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 and other derivative provisions 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.The proposed restrictions imposed on proprietary trading and funds-related activities under the “Volcker Rule” provisions of the Dodd-Frank Act could adversely impact Citi’s market-making activities and may cause Citi to dispose of certain of its investments at less than fair value.The “Volcker Rule” provisions of the Dodd-Frank Act are intended to restrict the proprietary trading activities of institutions such as Citi,postretirement plans, as well as such institutions’ sponsorshipemployee benefit obligations accounted for under SFAS 87 (ASC 715), SFAS 106 (ASC 715) and investment in hedge funds and private equity funds. In October 2011, the Federal Reserve Board, OCC, FDIC and SEC proposed regulations that would implement these restrictions and the CFTC followed with its proposed regulations in January 2012.
SFAS 112 (ASC 712).The proposed regulations contain narrow 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, the degree to which Citi’s activities in these areas will be permitted to continue in their current form remains uncertain. Moreover, if adopted as proposed, the rules would require an extensive compliance regime around these “permitted” activities, and Citi could incur significant ongoing compliance and monitoring costs, including with respect to the frequent reporting of extensive metrics and riskanalytics, to the regulatory agencies. In addition, the proposed rules and any restrictions imposed by final regulations in this area 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 their activities outside of the U.S.In addition, under the funds-related provisions of the Volcker Rule, bank regulators have the flexibility to provide firms with extensions allowing them to hold their otherwise restricted investments in private equity and hedge funds for some time beyond the statutory divestment period. If the regulators elect not to grant such extensions, Citi could be forced to divest certain of its investments in illiquid funds in the secondary market on an untimely basis. Based on the illiquid nature of the investments and the prospect that other industry participants subject to similar requirements would likely be divesting similar assets at the same time, such sales could be at substantial discounts to their fair value.The establishment of the new Consumer Financial Protection Bureau, as well as other provisions of the Dodd-Frank Act and ensuing regulations, could affect Citi’s practices and operations with respect to a number of its U.S. Consumer businesses and increase its costs.The Dodd-Frank Act established the Consumer Financial Protection Bureau (CFPB). Among other things, the CFPB was given rulemaking authority over most providers of consumer financial services in the U.S., examination and enforcement authority over the consumer operations of large banks, as well as interpretive authority with respect to numerous existing consumer financial services regulations. The CFPB began exercising these oversight authorities over the largest banks, including Citibank, N.A., during 2011.Because this is an entirely new agency, the impact on Citi, including its retail banking, mortgages and cards businesses, is largely uncertain. However, any new regulatory requirements, or modified interpretations of existing regulations, will affect Citi’s U.S. Consumer business practices and operations, potentially resulting in increased compliance costs. Furthermore, the CFPB represents an additional source of potential enforcement or litigation against Citi and, as an entirely new agency with a focus on consumer protection, the CFPB may have new or different enforcement or litigation strategies than those typically utilized by other regulatory agencies. Such actions could further increase Citi’s costs.In addition, the provisions of the Dodd-Frank Act relating to the doctrine of “federal preemption” may allow a broader application of state consumer financial laws to federally chartered institutions such as Citibank, N.A. Moreover, the Dodd-Frank Act eliminated federal preemption protection for operating subsidiaries of federally chartered institutions. The Dodd-Frank Act also codified existing case law which allowed state authorities to bring certain types of enforcement actions against national banks under applicable state law and granted states the ability to bring enforcement actions and to secure remedies against national banks for violation of CFPB regulations as well. This potential exposure to state lawsuits and enforcement actions, which could be extensive, could also subject Citi to increased litigation and regulatory enforcement actions, further increasing costs.57 The Dodd-Frank Act also provides authority to the SEC to determine fiduciary duty standards applicable to brokers for retail customers. Any new such standards or related SEC rulemakings could also affect Citi’s business practices with retail investment customers and have indirect additional effects on standards applicable to its business practices with certain institutional customers. Such standards could also likely entail additional compliance costs and result in potential incremental liability.Regulatory requirements in the U.S. and other jurisdictions aimed at facilitating the future orderly resolution of large financial institutions could result in Citi having to change its business structures, activities and practices in ways that negatively impact its operations.The Dodd-Frank Act requires Citi to prepare a plan for the rapid and orderly resolution of Citigroup, the bank holding company, under the Bankruptcy Code in the event of future material financial distress or failure. Citi is also required to prepare a resolution plan for its insured depository institution subsidiary, Citibank, N.A., and to demonstrate how it 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 will require substantial effort, time and cost. These resolution plans will be subject to review by the Federal Reserve Board and the FDIC. Based on regulator review of these plans, Citi may have to restructure or reorganize businesses, legal entities, or operational systems and intracompany transactions in ways that negatively impact its operations, or be subject to restrictions on growth. For example, Citi could be required to create new subsidiaries instead of branches in foreign jurisdictions, or create subsidiaries to conduct particular businesses or operations (so-called “subsidiarization”), which would, among other things, increase Citi’s legal, regulatory and managerial costs, negatively impact Citi’s global capital and liquidity management and potentially impede its global strategy. Citi could also eventually be subjected to more stringent capital, leverage or liquidity requirements, or be required to divest certain assets or operations, if both regulators determine that Citi’s resolution plans do not meet statutory requirements and Citi does not remedy the deficiencies within required time periods.In addition, other jurisdictions, such as the United Kingdom, 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 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 requested by Citi’s regulators in the U.S.Citi could be harmed competitively if it is unable to hire or retain highly qualified employees as a result of regulatory requirements regarding compensation practices or otherwise.Citi’s performance and competitive standing is heavily dependent on the talents and efforts of the highly skilled individuals that it is able to attract and retain. Competition for highly qualified individuals within the financial services industry has been, and will likely continue to be, intense. Compensation is a key element of attracting and retaining highly qualified employees. Banking and other regulators in the U.S., European Union and elsewhere are in the process of developing principles, regulations and other guidance governing what are deemed to be sound compensation practices and policies. However, the steps that will be required to implement any new requirements, and the consequences of implementation, remain uncertain. In addition, compensation may continue to be a legislative focus both in Europe and in the U.S. as there has been significant legislation in Europe and the U.S. in recent years regarding compensation for certain employees of financial institutions, including provisions of the Dodd-Frank Act. Changes required to be made to Citi’s compensation policies and practices may hinder Citi’s ability to compete in or manage its businesses effectively, to expand into or maintain its presence in certain businesses and regions, or to remain competitive in offering new financial products and services. This is particularly the case in emerging markets, where Citi is often competing for qualified employees with financial institutions that are not subject to the same regulatory regimes as Citi and that are also seeking to expand in these markets. Moreover, new disclosure requirements or other legislation or regulation may result from the worldwide regulatory processes described above. If this were to occur, Citi could be required to make additional disclosures relating to the compensation of its employees or to restrict or modify its compensation policies, any of which could hurt its ability to hire, retain and motivate its key employees and thus harm it competitively, particularly in respect of companies not subject to these requirements.Provisions of the Dodd-Frank Act and other regulations relating to securitizations will impose additional costs on securitization transactions, increase Citi’s potential liability in respect of securitizations and may prohibit Citi from performing certain roles in securitizations, each of which could make it impractical to execute certain types of transactions and may have an overall negative effect on the recovery of the securitization markets.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. Among other provisions, these include a requirement that securitizers retain un-hedged exposure to at least 5% of the economic risk of certain assets they securitize, a prohibition on securitization participants engaging in transactions that would involve a conflict with investors in the securitization,58and extensive additional requirements for review and disclosure of the characteristics of the assets underlying the securitizations. The SEC has also proposed additional extensive regulation of both publicly and privately offered securitization transactions (so-called “Reg AB II”).
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.
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
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
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.
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
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.
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
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.
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
The cumulative effect of these extensive regulatory changes many of which have not been finalized, as well as other potential future regulatory changes such as GSE reform, on securitization markets, the nature and profitability of securitization transactions, and Citi’s participation therein, 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.The Financial Accounting Standards Board (FASB) is currently reviewing or proposing changes to several key financial accounting and reporting standards utilized by Citi which, if adopted as proposed, could have a material impact on how Citi records and reports its financial condition and results of operations.The FASB is currently reviewing or proposing changes to several of the financial accounting and reporting standards that govern key aspects of Citi’s financial statements. While the outcome of these reviews and proposed changes is uncertain and difficult to predict, certain of these changes could have a material impact on how Citi records and reports its financial condition and results of operations, and could hinder understanding or cause confusion across comparative financial statement periods. For example, the FASB’s financial instruments project could, among other things, significantly change how Citi determines the impairment on those assets and accounts for hedges. In addition, the FASB’s leasing project could eliminate most operating leases and instead capitalize them, which would result in a gross-up of Citi’s balance sheet and a change in the timing of income and expense recognition patterns for leases.Moreover, the FASB continues its convergence project with theInternational Accounting Standards Board (IASB) pursuant to which U.S. GAAP and International Financial Reporting Standards (IFRS) are to be converged. The FASB and IASB continue to have significant disagreements on the convergence of certain key standards affecting financial reporting, including accounting for financial instruments and hedging. In addition, the SEC has not yet determined whether, when or how U.S. companies will be required to adopt IFRS. There can be no assurance that the transition to IFRS, if and when required to be adopted by Citi, will not have a material impact on how Citi reports its financial results, or that Citi will be able to meet any required transition timeline.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 ECONOMIC RISKSCROSS-BORDER RISK113 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,
DIVIDENDS294 PERFORMANCE GRAPH 295 CORPORATE INFORMATION 296 Citigroup Executive Officers 296 CITIGROUP BOARD OF DIRECTORS 299
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’sGlobal Consumer Banking businesses andInstitutional Clients Group; and Citi Holdings, consisting ofBrokerage and Asset Management, Local Consumer Lending andSpecial 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 atwww.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 atwww.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.
At December 31, 2012, Citi had approximately 259,000 full-time employees compared to approximately 266,000 full-time employees at December 31, 2011.
(1)North America includes the U.S., Canada and Puerto Rico,Latin America includes Mexico, andAsia includes Japan.
RESULTS OF OPERATIONS
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:
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 compression1 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).
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:
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— The ongoing Eurozone debt crisis could have significant adverse effectsBrokerage and Asset Managementduring 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 inCorporate/Otherduring 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 business,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 withinCorporate/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 inCorporate/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.
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 inNorth America cards andLocal Consumer Lendingand theSpecial Asset Poolwithin Citi Holdings. Consumer net credit losses declined 22% to $14.4 billion reflecting improvements inNorth America Citi-branded cards and Citi retail services in Citicorp andLocal Consumer Lendingwithin Citi Holdings. Corporate net credit losses decreased 86% year-over-year to $223 million, driven primarily by continued credit improvement in both theSpecial 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 inNorth America Citi-branded cards and Citi retail services andSecurities 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 theSpecial 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.
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 inSecurities 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 RCBrevenues grew 5% to $21.1 billion. InternationalRCB revenues (consisting ofAsia RCB,Latin America RCB andEMEA RCB) increased 1% year-over-year to $19.1 billion. Excluding the impact of FX translation,6 internationalRCBrevenues 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 Servicesrevenues 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.
InNorth 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 conditionmeasure. For additional information on Citi’s estimated Basel III Tier 1 Common Capital and liquidity, particularly if it leads to any sovereign debt defaults, significant bank failures or defaults and/orTier 1 Common ratio, including the exitcalculation of one or more countries fromthese measures, see “Capital Resources and Liquidity—Capital Resources” below.5 Citicorp includes Citi’s three operating businesses—Global Consumer Banking, Securities and BankingandTransaction Services—as well asCorporate/Other. See “Citicorp” below for additional information on the European Monetary Union.The ongoing Eurozone debt crisis has caused, and is likely to continue to cause, disruption in global financial markets, particularly if it leads to any future sovereign debt defaults and/or significant bank failures or defaults in the Eurozone. In spite of a number of stabilization measures taken since spring 2010, yields on government bonds of certain Eurozone countries, including Greece, Ireland, Italy, Portugal and Spain, have remained volatile. In addition, some European banks and insurers have experienced a widening of credit spreads (and the resulting decreased availability and increased costs of funding) as a result of uncertainty regarding the exposure of such European financial institutions to these countries. This widening of credit spreads and increased cost of funding has also affected Citi due to concerns about its Eurozone exposure. The market disruptions in the Eurozone could intensify or spread further, particularly if ongoing stabilization efforts prove insufficient. Concerns have been raised as to the financial, political and legal ineffectiveness of measures taken to date. Continued economic turmoil in the Eurozone could have a significant negative impact on Citi, both directly through its own exposures and indirectly due to a decline in general global economic conditions, which could particularly impact Citi given its global footprint and strategy. See “Managing Global Risk—Country and Cross-Border Risk” below. There can be no assurance that the various steps Citi has taken to protect its businesses, results of operations for each of the businesses in Citicorp.6 For the impact of FX translation on 2012 results of operations for each ofEMEA RCB, Latin America RCB, Asia RCBandTransaction Services, see the table accompanying the discussion of each respective business’ results of operations below.
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 inNorth America lending and deposits.
In Transaction Services,the increase inrevenues year-over-year, excluding the impact of FX translation, was driven by growth inTreasury and Trade Solutions,which was partially offset by a decline inSecurities 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 inLatin America, and 11% growth in Corporate loans.
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/DVA9 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 inLocal 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 theSpecial 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 inNorth America real estate lending.7 For the summary of CVA/DVA by business within Securities and financial condition againstBanking for 2012 and comparable periods, see “Citicorp—Institutional Clients Group.”8 Citi Holdings includesLocal Consumer Lending, Special Asset PoolandBrokerage and Asset Management. See “Citi Holdings” below for additional information on the results of the Eurozone crisis will be sufficient.The effectsoperations for each of the Eurozone debt crisis could be even more significant if they leadbusinesses in Citi Holdings.9 CVA/DVA in Citi Holdings, recorded in theSpecial Asset Pool, was $157 million in 2012, compared to a partial or complete break-up of$74 million in the European Monetary Union (EMU). The partial or full break-up of the EMU would be unprecedented and its impact highly uncertain. The exit of one or more countries from the EMU or the dissolution of the EMU could lead to redenomination of obligations of obligors in exiting countries. Any such exit and redenomination would cause significant uncertainty with respect to outstanding obligations of counterparties and debtors in any exiting country, whether sovereign or otherwise, and lead to complex, lengthy litigation. The resulting uncertainty and market stress could also cause, among other things, severe disruption to 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. Any combination of such events would negatively impact Citi’s businesses, earnings and financial condition, particularly given Citi’s global strategy. In addition, exit and redenomination could be accompanied by imposition of capital, exchange and similar controls, which could further negatively impact Citi’s cross-border risk, other aspects of its businesses and its earnings.prior year.59FIVE-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 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 continued uncertainty relatingStudent Loan Corporation. See Note 3 to the sustainabilityConsolidated Financial Statements for additional information on Citi’s discontinued operations.(2) The diluted EPS calculation for 2009 and pace2008 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 economic recoveryDecember 31, 2012, primarily all stock options were out of the money and market volatility has adversely affected,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 may continue to adversely affect, certainCitigroup 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 Citi’s businesses, particularly S&B andnet 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. mortgage businesses withinbanking 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. % 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 % % 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 )%
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 ofRegional Consumer Banking inNorth America, EMEA, Latin Americaand Asia) andInstitutional Clients Group (which includesSecurities and Banking andTransaction Services). Citicorp also includesCorporate/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 % 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 Holdings – Local Consumer Lending.
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 % 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
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.
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 financial services industry andCARD Act requires a review once every six months for card accounts where the capital markets haveannual percentage rate (APR) has been and will likely continueincreased since January 1, 2009 to be adversely affected by the slow pace of economic recovery and continued disruptionsassess whether changes in credit risk, market conditions or other factors merit a future decline in the global financial markets. This continued uncertainty and disruption have adversely affected, and may continue to adversely affect, certainAPR.% 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 Citi’s businesses,foreign exchange (FX) translation into U.S. dollars at the current exchange rate for all periods presented.NM Not meaningful
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 inEMEA RCB have largely stabilized and assuming the underlying core portfolio continues to grow in 2013, credit costs could begin to rise.
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.
Provisionsdecreased 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.% 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
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 inLatin Americawill likely continue to trend higher as various loan portfolios continue to mature.
Net incomedeclined 14% as higher revenues were more than offset by higher expenses and higher credit costs.
Revenuesincreased 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.
Expensesincreased 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.% 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
Net incomedecreased 4% primarily due to higher expenses.
Revenueswere 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.
Provisionsdecreased 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 inAsia RCB will largely remain stable, with increases largely in line with portfolio growth.
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.% 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 %
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 inCommissions 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 inPrincipal 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 Bankingrevenue 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 OtherSecurities and Banking (1,101 ) (859 ) (1,262 ) (28 ) 32 TotalSecurities and Bankingrevenues (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 )%
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:
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.
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:
Provisionsincreased $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&BCVA/DVA Fixed Income Markets $ (2,047 ) $ 1,368 $ (187 ) Equity Markets (424 ) 355 (207 ) Private Bank (16 ) 9 (5 ) TotalS&BCVA/DVA $ (2,487 ) $ 1,732 $ (399 ) S&BHedges on Accrual Loans gain (loss)(1) $ (698 ) $ 519 $ (65 ) (1) Hedges onS&B business and itsLocal Consumer Lendingbusiness withinCiti Holdings.In particular,accrual loans reflect the mark-to-market on credit derivatives used to hedge the corporate and sovereign bond markets, equity and derivatives markets, debt and equity underwriting and other elementsloan accrual portfolio. The fixed premium cost of these hedges is included (netted against) the core lending revenues to reflect the cost of the financial markets have beencredit protection.% 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 could continueassets under administration.NM Not meaningful
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 be subject to wide swings and volatility relating to issues emanating from Eurozone and U.S. economic issues. As a result of this uncertainty and volatility, clients have remained and may continue to remain on the sidelines or cut back on trading and other business activities and, accordingly, the results of operations of Citi’sS&B businesses have been and could continue to be volatile and negatively impacted.Moreover, 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 impactTransaction 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).
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).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
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 ofCorporate/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.
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.
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 ) % 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 )
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 inBAM was flat.
Revenues decreased by $5.0 billion to $(4.7) billion due to the MSSB impact described above. Excluding this impact, revenues inBAM 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.
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.% 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 %
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 inLCL 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
Provisions decreased 25%, driven primarily by the improved credit environment in North Americamortgages, 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
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 inNorth Americamortgages 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 inLCL 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 inNorth America mortgage loans and $11 billion in international average assets.
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.
Expensesdecreased 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 inNorth 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.
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.
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.
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 inLCL and $91 million of which was recorded inCorporate/Other for discontinued operations). This amount included a $148 million reserve increase in the fourth quarter of 2012 ($57 million of which was recorded inLCL and $91 million of which was recorded inCorporate/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.% 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 )%
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 inSAP 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.
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.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 ) — %
Cash and deposits with banks is composed of bothCash and due from banksandDeposits with banks. Cash and due from banksincludes (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 banksincludes 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 banksoffset 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
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.
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 certainSecurities 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 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 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 inAsia andLatin 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.
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 byTransaction Services (25% growth), particularly from increased trade finance lending in most regions, as well as growth in theSecurities 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 byGlobalConsumer Banking, as loans increased 3% year-over-year, led byLatin America andAsia. 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 inNorth 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 assetsconsists ofBrokerage receivables, Goodwill, Intangibles andMortgage servicing rights in addition toOther 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.
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.
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 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 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 consists ofBrokerage payables andOther 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 regardingBrokerage payables, see Note 13 to the Consolidated Financial Statements.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 U.S., accompaniedtable above reflects Citigroup’s consolidated GAAP balance sheet by continued high levelsreporting segment as of unemploymentDecember 31, 2012. The respective segment information depicts the assets and depressed values of residential real estate, will continue to negatively impact Citi’s U.S. Consumer mortgage businesses, particularly its residential real estate and home equity loans inCiti Holdings – LCL. Given the continued decline in Citi’s ability to sell delinquent residential first mortgages, the decreased inventoryliabilities managed by each segment as of such loans for modification and re-defaultsdate. While this presentation is not defined by GAAP, Citi believes that these non-GAAP financial measures enhance investors’ understanding of previously modified mortgages, Citi began to experience increased delinquencies in this portfolio during the latter part of 2011. As a result, Citi could also experience increasing net credit losses in this portfolio going forward. Moreover, givenbalance sheet components managed by the lack of markets in which to sell delinquent home equity loans,underlying business segments, as well as the relatively fewer homebeneficial 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 theCorporate/Othersegment. (3) The total stockholders’ equity loan modifications and modification programs, Citi’s abilitysubstantially all long-term debt of Citigroup resides in the Citigroup parent company Consolidated Balance Sheet. Citigroup allocates stockholders’ equity and long-term debt to offset increased delinquenciesits businesses through inter-segment allocations as described above.
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.
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
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 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).
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 home equity loan portfoliorelated 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.In millions of dollars December 31,
2012 September 30,
2012Tier 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.
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 Holdings has been,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.
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
(otherthan MSRs) related to assets
for discontinued operations
held for sale32 — Net deferred tax assets related to goodwill
and other intangible assets32 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
discontinuedoperations held for sale32 — 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
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.
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
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.
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.
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.
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.
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.
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.
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.
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.”
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.
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.
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:
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.Non-bank Significant Citibank Entities Other Citibank and
Banamex EntitiesTotal 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,
2011Available 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
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).
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
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).
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 be, more limitedsupport local liquidity requirements and Citi’s local franchises and, as compared to residential first mortgages. See “Managing Global Risk—Credit Risk—North America Consumer Mortgage Lending”of December 31, 2012, principally included government bonds from Korea, Japan, Mexico, Brazil, Hong Kong, Singapore and “—Consumer Loan Modification Programs” below.Concerns aboutTaiwan.
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
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 (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.
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 levelamount of U.S. government$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 downgrade,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 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.
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 concerns aboutmore), 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. 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 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 expenseexcludes 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.
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).
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
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.
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.
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.
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 horizons13 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 downgrade, of the U.S. government credit rating could have a material adverse effect on Citi’s businesses, results of operations, capital, funding and liquidity.future expected regulatory liquidity standards.
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.
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.Citigroup Global In August 2011, 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 lowered its long-term sovereign credit rating on the U.S. government from AAA to AA+(S&P)A- A-2 A A-1 A
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.
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.
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.
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.
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.Variable interests and in the second half of 2011, Moody’s Investors Services and Fitch both placed the U.S. rating on negative outlook. Accordingother obligations,See Note 22 to the Consolidated including contingent obligations, Financial Statements. arising from variable interests in nonconsolidated VIEs Leases, letters of 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 ofU.S. government debt and reduce the U.S. debt level. If the credit rating of the U.S. government is further downgraded, the ratings and perceived creditworthiness of instruments issued, insured or guaranteed by institutions, agencies or instrumentalities directly linkedlendingSee Note 27 to the U.S. government could also be correspondingly affected. A future downgrade of U.S. debt obligations or U.S. government-related obligations by one or more credit rating agencies, or heightened concern that such a downgrade might occur, could negatively affect Citi’s ability to obtain funding collateralized by such obligations as well as the pricing of such funding. Such a downgrade could also negatively impact the pricing or availability of Citi’s funding as a U.S. financial institution. In addition, such a downgrade could affect financial markets and economic conditions generally and the market value of the U.S. debt obligations held by Citi. As a result, such a downgrade could lead to a downgrade of Citi debt obligations and could have a material adverse effect on Citi’s business, results of operations, capital, funding and liquidity.Citi’s extensive global network, particularly its operations in the world’s emerging markets, subject it to emerging market and sovereign volatility and further increases its compliance and regulatory risks and costs.Citi believes its extensive and diverse global network—which includes a physical presence in approximately 100 countries and services offered in over 160 countries and jurisdictions—provides it with a unique competitive advantage in servicing the broad financial services needs of large multinational clients and customers around the world, including in many emerging markets. International revenues have recently been the largest and fastest-growing component of Citicorp, driven by emerging markets. However, this global footprint also subjects Citi to a number of risks associated with international and emerging markets, including exchange controls, limitations on foreign investment, socio-political instability, nationalization, closure of branches or subsidiaries, confiscation of assets and sovereign volatility, among others. For example, there have been recent instances of political turmoil and violent revolutionary uprisings in some of the countries in which Citi operates, including in the Middle East, to which Citi has responded by transferring assets and relocating staff members to more stable jurisdictions. While these previous incidents have not been material to Citi, such disruptions could place Citi’s staff and operations in danger and may result in financial losses, some significant, including nationalization of Citi’s assets. Further, Citi’s extensive global operations 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 order to comply. Any failure by Citi to remain in compliance 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.60In addition, complying with inconsistent, conflicting or duplicative regulations requires extensive time and effort and further increases Citi’s compliance, regulatoryConsolidated and other costs.It is uncertain how the ongoing Eurozone debt crisis will affect emerging markets. A recession in the Eurozone could cause a ripple effect in emerging markets, particularly if banks in developed economies decrease or cease lending to emerging markets, as is currently occurring in some cases. This impact could be disproportionate in the case of Citi in light of the emphasis on emerging markets in its global strategy. Decreased, low or negative growth in emerging market economies could make execution of Citi’s global strategy more challenging and could adversely affect Citi’s revenues, profits and operations.The maintenance of adequate liquidity depends on numerous factors outside of Citi’s control, including without limitation market disruptions and increases in Citi’s credit spreads.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 credit worthiness in particular. Market perception of sovereign default risks, such as issues in the Eurozone as well as other complexities regarding the current European debt crisis, can also lead to ineffective money markets and capital markets, which could further impact Citi’s availability of funding.In addition, Citi’s cost and ability to obtain deposits, secured funding and long-term unsecured funding from the capital markets are directly related to its credit spreads. Changes in credit spreads constantly occur and are market-driven, including both external market factors as well as 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 require additional collateral based on these market perceptions or market conditions, which could further impair Citi’s access to funding.The credit rating agencies continuously review the ratings of Citi and its subsidiaries, and reductions in Citi’s and its subsidiaries’ credit ratings could have a significant and immediate impact on Citi’s funding and liquidity through cash obligations, reduced funding capacity and additional margin requirements.The rating agencies continuously evaluate Citi and 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 conditions affecting the financial services industry generally.Citi and its subsidiaries may not be able to maintain their current respective ratings. Ratings downgrades by Fitch, Moody’s or S&P could have a significant and immediate impact on Citi’s funding and liquidity through cash obligations, reduced funding capacity and additional margin requirements for derivatives or other transactions. Ratings downgrades 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. Some entities may also have ratings limitations as to their permissible counterparties, of which Citi may or may not be aware. A reduction in Citi’s or its subsidiaries’ credit ratings could also widen Citi’s credit spreads or otherwise increase its borrowing costs and limit its accesscommitments Financial Statements. Guarantees See Note 27 to the capital markets. Consolidated Financial Statements.
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
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 on the potential impact of a reduction in Citi’s or its subsidiaries’ credit ratings,about long-term debt obligations, see “Capital Resources and Liquidity—Funding and Liquidity—Credit Ratings” above.61BUSINESS RISKSCiti is subject to extensive litigation, investigationsLiquidity” above and inquiries pertaining to a myriad of U.S. mortgage-related activities that could take significant time to resolve and may subject Citi to extensive liability, including in the form of penalties and other equitable remedies, that could negatively impact Citi’s future results of operations.Virtually every aspect of mortgage-related activity in the U.S. is being challenged across the financial services industry in private and public litigation and by regulators, governmental agencies and state attorneys general, among others. Examples of the activities being challenged include the accuracy of offering documents for residential mortgage-backed securities, potential breaches of representations and warranties in the placement of mortgage loans into securitization trusts, mortgage servicing practices, the legitimacy of the securitization of mortgage loans and the Mortgage Electronic Registration System’s role in tracking mortgages, holding title and participating in the mortgage foreclosure process, fair lending, compliance with the Servicemembers Civil Relief Act, and False Claim Act violations alleged in “qui tam” cases, among others.Sorting out which of the many claims being asserted has legal merit as well as which financial institutions may be subject to liability with respect to their actual practices is a complex process that is highly uncertain and will take time to resolve. All of these inquiries, actions and investigations have resulted in, and will likely continue to result in, significant time, expense and diversion of management’s attention, and could result in significant liability as well as negative reputational and other costs to Citi. Citi is currently party to numerous actions relating to claims of misrepresentations or omissions in offering documents of residential mortgage-backed securities sponsored or serviced by Citi affiliates. This litigation has been brought by a number of institutional investors, including the Federal Housing Finance Agency. The cases are all in early stages, making it difficult to predict how they will develop, and Citi believes that such litigation will continue for several years. In addition, because the statute of limitations will soon expire for these types of disclosure-based claims, Citi could experience an increase in filed claims in the near term.Citi is exposed to representation and warranty (i.e., mortgage repurchase) liability through its U.S. Consumer mortgage businesses and, to a lesser extent, through legacy private-label residential mortgage securitizations sponsored by itsS&Bbusiness. With respect to its Consumer businesses, during 2011, Citi increased its repurchase reserve from approximately $969 million to $1.2 billion at December 31, 2011. To date, the majority of repurchase demands have come from the GSEs. The level of repurchase demands by GSEs has been trending upwards and Citi currently expects it to remain elevated for some time. To a lesser extent, Citi has received repurchase demands from private investors, although these claims have been volatile and could increase in the future.With regard to legacyS&Bprivate-label mortgage securitizations, whileS&Bhas to date received actual claims for breaches of representations and warranties relating to only a small percentage of the mortgages included in its securitization transactions, the pace of claims remains volatile and has recently increased, Citi has also experienced an increase in the level of inquiries, assertions and requests for loan files, among other matters, relating to such securitization transactions from trustees of securitization trusts and others. These inquiries could lead to actual claims for breaches of representations and warranties, or to litigation relating to such breaches or other matters. For additional information on these matters, see “Managing Global Risk—Credit Risk—Consumer Mortgage—Representations and Warranties” and“—Securities and Banking-Sponsored Private-Label Residential Mortgage Securitizations—Representations and Warranties” below.For further discussion of the matters above, see Note 2919 to the Consolidated Financial Statements.Citi will not be able(2) Contractual obligations related to wind down Citi Holdings atinterest payments on long-term debt are calculated by applying the same pace as it has in the past three years. As a result, the remaining assets in Citi Holdings will likely continue to have a negative impactweighted average interest rate on Citi’s results of operations and its ability to utilize the capital supporting the remaining assets in Citi Holdings for more productive purposes.Citi will not be able to dispose of or wind down the businesses or assets that are part of Citi Holdings at the same level or pace as in the past three years. As of December 31, 2011, assuming the transfer to Citicorp of the substantial majority of retail partner cards, effective in the first quarter of 2012,LCLconstituted approximately 70% of Citi Holdings. As of such date, over half of the remaining assets inLCL consisted of legacy U.S. mortgages which will likely be subject to run-off over an extended period of time. Besides mortgages, the remaining assets inLCLinclude the OneMain Financial business, as well as student, commercial real estate and credit card loans inNorth America, and consumer lending businesses in Europe andAsia.BAMprimarily consists of the MSSB JV. Morgan Stanley has call rights on Citi’s ownership interest in the venture over a three-year period beginning in 2012, which it is not required to exercise. Of the remaining assets inSAP, interest-earning assets have become a smaller portion of the assets, causing negative net interest revenues in the business as the remaining non-interest earning assets, which require funding, represent a larger portion of the total asset pool. In addition,outstanding long-term debt as of December 31, 2011, approximately 25%2012 to the contractual payment obligations on long-term debt for each of the remaining assetsperiods 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 SAPOther liabilitieswere held-to-maturity securities. As a result, the remaining assets within Citi Holdings will likely continue to have a negative impact on Citi’s overall results of operationsConsolidated Balance Sheet. Also includes discretionary contributions for 2013 for Citi’s non-U.S. pension plans and the foreseeable future, particularly after the transfer of retail partner cards to Citicorp. In addition, as of December 31, 2011 and as adjusted to reflect the transfer of retail partner cards, roughly 21% of Citi’s risk-weighted assets were in Citi Holdings, and were supported by approximately $24 billion of Citi’s regulatory capital. Accordingly, Citi’s ability to release the capital supporting these businesses and thus use such capital for more productive purposes will depend on the ultimate pace and level of Citi Holdings divestitures, portfolio run-offs and asset sales.62Citi’s ability to increase its common stock dividend or initiate a share repurchase program is subject to regulatory and government approval.Since the second quarter of 2011, Citi has paid a quarterly common stock dividend of $0.01 per share. In addition to Board of Directors’ approval, any decision by Citi to increase its common stock dividend, including the amount thereof, or initiate a share repurchase program is subject to regulatory approval, including the results of the Comprehensive Capital Analysis and Review (CCAR) process required by the Federal Reserve Board. Restrictions on Citi’s ability to increase the amounts of its common stock dividend or engage in share repurchase programs could negatively impact market perceptions of Citi, including the price of its common stock.In addition, pursuant to its agreements with certain U.S. government entities, dated June 9, 2009, executed in connection with Citi’s exchange offers consummated in July and September 2009, Citi remains subjectto dividend and share repurchase restrictions for as long as the U.S. government 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 December 31, 2011, approximately $3.025 billion of trust preferred securities issued to the FDIC remained outstanding (of which approximately $800 million is being held for the benefit of the U.S. Treasury).Citi may be unable to maintain or 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, such as call centers and collections, to achieve a targeted percentage expense savings annually. However, there is no guarantee that Citi will be able to maintain or reduce its level of expenses in the future, particularly as expenses incurred in Citi’s foreign entities are subject to foreign exchange volatility, and regulatory compliance and legal and related costs are difficult to predict or control, particularly given the current regulatory and litigation environment. Moreover, Citi has incurred, and will likely continue to incur, costs of investing in its businesses. These investments may not be as productive as Citi expects or at all. Furthermore, as the wind down of Citi Holdings slows, Citi’s ability to continue to reduce its expenses as a result of this wind down will also decline. The value of Citi’s deferred tax assets (DTAs) could be reduced if corporate tax rates in the U.S. or certain state or foreign jurisdictions are decreased or as a result of other potential significant changes in the U.S. corporate tax system.There have been discussions in Congress and by the Obama Administration regarding potentially 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 decreases in these corporate tax rates, any reduction in the U.S., state or foreign corporate tax rates would result in a decrease to the value of Citi’s DTAs, which could be significant. 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 ability to make effective use of its DTAs.The expiration of a provision of the U.S. tax law that allows Citi to defer U.S. taxes on certain active financing income could significantly increase Citi’s tax expense.Citi’s tax provision has historically been reduced because active financing income earned and indefinitely reinvested outside the U.S. is taxed at the lower local tax rate rather than at the higher U.S. tax rate. Such reduction has been dependent upon a provision of the U.S. tax law that defers the imposition of U.S. taxes on certain active financing income until that income is repatriated to the U.S. as a dividend. This “active financing exception” expired on December 31, 2011 with respect to taxable years beginning after such date. While the exception has been scheduled to expire on numerous prior occasions, Congress has extended it each time, including retroactively to the start of the tax year. Congress could still take action to retroactively extend the active financing exception to the beginning of 2012. However, there can be no assurance that it will do so. If the exception is not extended, the U.S. tax imposed on Citi’s active financing income earned outside the U.S. would increase, which could further result in Citi’s tax expense increasing significantly, particularly beginning in 2013.63Citi’s operational systems and networks have been, and will continue to be, vulnerable 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 informationnon-U.S. postretirement plans, 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 cardemployee benefit obligations accounted for under SFAS 87 (ASC 715), SFAS 106 (ASC 715) and SFAS 112 (ASC 712).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. These activities have been, and will continue to be, subject to an increasing risk of cyber attacks, the nature of which is continually evolving.Citi’s computer systems, software and networks have been and will continue to be vulnerable to 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. 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, additional costs to Citi (such as repairing systems or adding new personnel or protection technologies), regulatory penalties and 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 the high volume of transactions at 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 recently been subject to intentional cyber incidents from external sources, including (i) data breaches, which resulted in unauthorized access to customer account data and interruptions of services to customers; (ii) malicious software attacks on client systems, which in turn allowed unauthorized entrance to Citi’s systems under the guise of a client and the extraction of client data; and (iii) denial of service attacks, which attempted to interrupt service to clients and customers. While Citi was able to detect these prior incidents before they became significant, they still resulted in losses as well as increases in expenditures to monitor against the threat of similar future cyber incidents. There can be no assurance that such incidents, or other cyber incidents, will not occur again, and they could occur more frequently and on a more significant scale.In addition, third parties with which Citi does business may also be sources of cybersecurity or other technological risks. Citi outsources certain functions, such as processing of customer credit card transactions, which results in the storage and processing of customer information by third parties. While Citi engages in certain actions to reduce the exposure resulting from outsourcing, such as 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, unauthorized access, loss or destruction of data or other cyber incidents could occur, resulting in similar costs and consequences to Citi 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.Citi’s financial statements are based in part on assumptions and estimates, which, if wrong, could cause unexpected losses in the future, sometimes significant.Pursuant to U.S. GAAP, Citi is required to use certain assumptions and estimates in preparing its financial statements, including in determining credit loss reserves, reserves related to litigation and regulatory exposures, mortgage representation and warranty claims and the fair value of certain assets and liabilities, among other items. If the assumptions or estimates underlying Citi’s financial statements are incorrect, Citi may experience significant losses. 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 for further information relating to litigation and regulatory exposures, see Note 29 to the Consolidated Financial Statements.Citi is subject to a significant number of legal and regulatory proceedings that are often highly complex, slow to develop and are thus difficult to predict or estimate.At any given time, Citi is defending a significant number of legal and regulatory proceedings. The volume of claims and the amount of damages and penalties claimed in litigation, arbitration and regulatory proceedings against financial institutions remain high, and could further increase in the future. See, for example, “—Citi is subject to extensive litigation, investigations and inquiries pertaining to a myriad of mortgage-related activities that could take significant time to resolve and may subject Citi to extensive liability, including in the form of penalties and other equitable remedies, that could negatively impact Citi’s future results of operations.”Proceedings brought against Citi may result in judgments, settlements, fines, penalties, 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 64changes in Citi’s operations, or cause Citi reputational harm. Moreover, the 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 may thus be 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 litigation and regulatory matters according to accounting requirements, the amount of loss ultimately incurred in relation to those matters may be substantially higher or lower than the amounts accrued. In addition, while Citi takes numerous steps to prevent and detect employee misconduct, such as fraud, employee misconduct is not always possible to deter or prevent, and the extensive precautions Citi takes to prevent and detect this activity may not be effective in all cases, which could subject it to additional liability. Moreover, the “whistle-blower” provisions of the Dodd-Frank Act provide substantial financial incentives for persons to report alleged violations of law to the SEC and the CFTC. The final rules implementing these provisions for the SEC and CFTC became effective in August and October 2011, respectively. As such, there continues to be much uncertainty as to whether these new reporting provisions will incentivize and lead to an increase in the number of claims that Citi will have to investigate or against which Citi will have to defend itself, thus potentially further increasing Citi’s legal liabilities. For additional information relating to Citi’s potential exposure relating to legal and regulatory matters, see Note 29 to the Consolidated Financial Statements.Failure to maintain the value of the Citi brand could harm Citi’s global competitive advantage, results of operations and strategy.As Citi enters into its 200th year of operations in 2012, one of its most valuable assets is the Citi brand. Citi’s ability to continue to leverage its extensive global footprint, and thus maintain one of its key competitive advantages, depends on the continued strength and recognition of the Citi brand, including in emerging markets as other financial institutions grow their operations in these markets and competition intensifies. As referenced above, as a result of the economic crisis in the U.S. as well as the continuing adverse economic climate globally, Citi, like other financial institutions, is subject to an increased level of distrust, scrutiny and skepticism from numerous constituencies, including the general public. The Citi brand could be further harmed if its public image or reputation were to be tarnished by negative publicity, whether or not true, about Citi or the financial services industry in general, or by a negative perception of Citi’s short-term or long-term financial prospects. Maintaining, promoting and positioning the Citi brand will depend largely on Citi’s ability to provide consistent, high-quality financial services and products to its clients and customers around the world. Failure to maintain its brand could hurt Citi’s competitive advantage, results of operations and strategy.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 monitors and controls its risk exposure across businesses, regions and critical products through a risk and control framework encompassing a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems, internal controls, management review processes and other mechanisms. While Citi employs a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application may not be effective and may not anticipate every economic and financial outcome in all market environments or the specifics and timing of such outcomes. Market conditions over the last several years have involved unprecedented dislocations and highlight the limitations inherent in using historical data to manage risk.Concentration of risk increases the potential for significant losses. Because of concentration of risk, Citi may suffer losses even when economic and market conditions are generally favorable for Citi’s competitors. These concentrations 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. In addition, Citi extends large commitments as part of its credit origination activities. If Citi is unable to reduce its credit risk by selling, syndicating or securitizing these positions, including during periods of market dislocation, Citi’s results of operations could be negatively affected due to a decrease in the fair value of the positions, as well as the loss of revenues associated with selling such securities or loans. Although Citi’s activities expose it to the credit risk of many different entities and counterparties, Citi routinely executes a high volume of transactions with counterparties in the financial services sector, including banks, other financial institutions, insurance companies, investment banks and government and central banks. This has resulted in significant credit concentration with respect to this sector. 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.65
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.
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
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
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.
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
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.
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
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.
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
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.72 Risk Management—Overview CREDIT RISK74 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,
DIVIDENDS294 PERFORMANCE GRAPH 295 CORPORATE INFORMATION 296 Citigroup Executive Officers 296 CITIGROUP BOARD OF DIRECTORS 299
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’sGlobal Consumer Banking businesses andInstitutional Clients Group; and Citi Holdings, consisting ofBrokerage and Asset Management, Local Consumer Lending andSpecial 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 atwww.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 atwww.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.
At December 31, 2012, Citi had approximately 259,000 full-time employees compared to approximately 266,000 full-time employees at December 31, 2011.
(1)North America includes the U.S., Canada and Puerto Rico,Latin America includes Mexico, andAsia includes Japan.
RESULTS OF OPERATIONS
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:
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 compression1 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).
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:
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 Managementduring 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 inCorporate/Otherduring 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 withinCorporate/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 inCorporate/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 that effective risk managementthe 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.
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 inNorth America cards andLocal Consumer Lendingand theSpecial Asset Poolwithin Citi Holdings. Consumer net credit losses declined 22% to $14.4 billion reflecting improvements inNorth America Citi-branded cards and Citi retail services in Citicorp andLocal Consumer Lendingwithin Citi Holdings. Corporate net credit losses decreased 86% year-over-year to $223 million, driven primarily by continued credit improvement in both theSpecial 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 inNorth America Citi-branded cards and Citi retail services andSecurities 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 theSpecial 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.
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 inSecurities 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 RCBrevenues grew 5% to $21.1 billion. InternationalRCB revenues (consisting ofAsia RCB,Latin America RCB andEMEA RCB) increased 1% year-over-year to $19.1 billion. Excluding the impact of FX translation,6 internationalRCBrevenues 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 Servicesrevenues 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.
InNorth 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 primary importancethese measures, see “Capital Resources and Liquidity—Capital Resources” below.5 Citicorp includes Citi’s three operating businesses—Global Consumer Banking, Securities and BankingandTransaction Services—as well asCorporate/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 ofEMEA RCB, Latin America RCB, Asia RCBandTransaction Services, see the table accompanying the discussion of each respective business’ results of operations below.
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 inNorth America lending and deposits.
In Transaction Services,the increase inrevenues year-over-year, excluding the impact of FX translation, was driven by growth inTreasury and Trade Solutions,which was partially offset by a decline inSecurities 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 inLatin America, and 11% growth in Corporate loans.
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/DVA9 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 inLocal 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 theSpecial 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 inNorth 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 includesLocal Consumer Lending, Special Asset PoolandBrokerage 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 theSpecial Asset Pool, was $157 million in 2012, compared to its overall operations. Accordingly, $74 million in the prior year.FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA—PAGE 1 Citigroup hasInc. and Consolidated SubsidiariesIn 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 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 comprehensive risk management processcarve-out of Citi’s liquid strategies business within Citi Capital Advisors, the sale of which is expected to monitor, evaluateclose in the first half of 2013. Discontinued operations in 2012 and manage2011 reflect the principal risks it assumes in conducting its activities. Thesesale 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 credit, marketthe operations and operational risks, which are each discussed in more detail throughout this section.
associated gain on sale of Citigroup’s risk management framework is designedTravelers Life & Annuity, substantially all of Citigroup’s international insurance business, and Citigroup’s Argentine pension business sold to balance corporate oversight with well-defined independent risk management functions. Enhancements continued to be madeMetLife Inc. Discontinued operations for the second half of 2010 also reflect the sale of The Student Loan Corporation. See Note 3 to the risk management framework throughout 2011 basedConsolidated Financial Statements for additional information on guiding principles establishedCiti’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 Citi’s Chief Risk Officer: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. % 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 % % 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 )%
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 ofRegional Consumer Banking inNorth America, EMEA, Latin Americaand Asia) andInstitutional Clients Group (which includesSecurities and Banking andTransaction Services). Citicorp also includesCorporate/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 % 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 % 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
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.
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 common risk capital model to evaluate risks;a defined risk appetite, aligned with business strategy;accountability through a common framework to manage risks;risk decisions based on transparent, accurate and rigorous analytics;expertise, stature, authority and independence of risk managers; andempowering risk managers to make decisions and escalate issues. Significant focusreview once every six months for card accounts where the annual percentage rate (APR) has been placedincreased since January 1, 2009 to assess whether changes in credit risk, market conditions or other factors merit a future decline in the APR.% 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
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 inEMEA RCB have largely stabilized and assuming the underlying core portfolio continues to grow in 2013, credit costs could begin to rise.
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.
Provisionsdecreased 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.% 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
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 inLatin Americawill likely continue to trend higher as various loan portfolios continue to mature.
Net incomedeclined 14% as higher revenues were more than offset by higher expenses and higher credit costs.
Revenuesincreased 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.
Expensesincreased 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.% 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
Net incomedecreased 4% primarily due to higher expenses.
Revenueswere 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.
Provisionsdecreased 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 inAsia RCB will largely remain stable, with increases largely in line with portfolio growth.
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.% 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 %
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 inCommissions 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 inPrincipal 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 Bankingrevenue 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 OtherSecurities and Banking (1,101 ) (859 ) (1,262 ) (28 ) 32 TotalSecurities and Bankingrevenues (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 )%
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:
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.
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:
Provisionsincreased $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&BCVA/DVA Fixed Income Markets $ (2,047 ) $ 1,368 $ (187 ) Equity Markets (424 ) 355 (207 ) Private Bank (16 ) 9 (5 ) TotalS&BCVA/DVA $ (2,487 ) $ 1,732 $ (399 ) S&BHedges on Accrual Loans gain (loss)(1) $ (698 ) $ 519 $ (65 ) (1) Hedges on fostering a risk culture basedS&Baccrual loans reflect the mark-to-market on a policycredit derivatives used to hedge the corporate loan accrual portfolio. The fixed premium cost of “Taking Intelligent Risk with Shared Responsibility, Without Forsaking Individual Accountability”:“Taking intelligent risk” means that Citi must carefully measure andaggregate risks, must appreciate potential downside risks, and mustunderstand risk/return relationships.“Shared responsibility” means that risk and business management mustactively partnerthese hedges is included (netted against) the core lending revenues to own risk controls and influence business outcomes.“Individual accountability” means that all individuals are ultimatelyresponsible for identifying, understanding and managing risks. The Chief Risk Officer, working closely withreflect the Citi Chief Executive Officer and established management committees, and with oversight from the Risk Management and Finance Committeecost of the Boardcredit protection.% 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 Directorsforeign 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
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 impactTransaction 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).
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).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
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 ofCorporate/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.
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.
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 ) % 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 )
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 inBAM was flat.
Revenues decreased by $5.0 billion to $(4.7) billion due to the MSSB impact described above. Excluding this impact, revenues inBAM 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.
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.% 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 %
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 inLCL 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
Provisions decreased 25%, driven primarily by the improved credit environment in North Americamortgages, 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
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 inNorth Americamortgages 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 inLCL 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 inNorth America mortgage loans and $11 billion in international average assets.
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.
Expensesdecreased 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 inNorth 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.
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.
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.
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 inLCL and $91 million of which was recorded inCorporate/Other for discontinued operations). This amount included a $148 million reserve increase in the fourth quarter of 2012 ($57 million of which was recorded inLCL and $91 million of which was recorded inCorporate/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.% 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 )%
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 inSAP 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.
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.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 ) — %
Cash and deposits with banks is composed of bothCash and due from banksandDeposits with banks. Cash and due from banksincludes (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 banksincludes 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 banksoffset 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
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.
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 certainSecurities 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 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 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 inAsia andLatin 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.
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 byTransaction Services (25% growth), particularly from increased trade finance lending in most regions, as well as growth in theSecurities 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 byGlobalConsumer Banking, as loans increased 3% year-over-year, led byLatin America andAsia. 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 inNorth 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 assetsconsists ofBrokerage receivables, Goodwill, Intangibles andMortgage servicing rights in addition toOther 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.
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.
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 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 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 consists ofBrokerage payables andOther 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 regardingBrokerage payables, see Note 13 to the Consolidated Financial Statements.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 fullbeneficial 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 theCorporate/Othersegment. (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.
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.
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
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 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 of Directors, is responsible for:establishing core standardsgranted interim capital relief for the management, measurement andreportingimpact of risk;ASC 715-20,identifying, assessing, communicatingCompensation—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, monitoring risks on acompany-wide basis;engaging with senior management on a frequent basis on materialmatters with respect to risk-taking activitiesas “disallowed deferred tax assets,” were deducted in the businesses and relatedrisk management processes; andensuring that the risk function has adequate independence, authority,expertise, staffing, technology and resources. The risk management organization is structured so as to facilitate the managementarriving at Tier 1 Capital. Citigroup’s approximate $4 billion 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 majorityother net deferred tax assets primarily represented effects of the staff in Citi’s independent risk management organization report to these Business Chief Risk Officers. Therepension liability and cash flow hedges adjustments, which are also Chief Risk Officers for Citibank, N.A. and Citi Holdings. Regional Chief Risk Officers, appointed in each ofAsia,EMEA andLatin 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. In addition, the positions of Product Chief Risk Officers are created 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. In addition to facilitating the management of risk across these three dimensions, the independent risk management organization also includes the business management team to ensure that the risk organization has the appropriate infrastructure, processes and management reporting. This team includes:the risk capital group, which continues to enhance the risk capital modeland ensure that it is consistent across all business activities;the risk architecture group, which ensures Citi has integrated systemsand common metrics, thereby allowing Citi to aggregate and stress testexposures across the institution;the enterprise risk management group, which focuses on improving Citi’soperational processes across businesses and regions (see “OperationalRisk” below); andthe office of the Chief Administrative Officer, which focuses onre-engineering and risk communications, including maintainingcritical regulatory relationships. Each of the Business, Regional and Product Chief Risk Officers, as well as the heads of the groups in the business management team, report to Citi’s Chief Risk Officer, who reports directly to the Chief Executive Officer.66Risk Aggregation and Stress TestingWhile Citi’s major risk areas are described individually on the following pages, these risks are also reviewed and managed in conjunction with one another and across the various businesses.The Chief Risk Officer, as noted above, monitors and controls major risk exposures and concentrations across the organization. This means aggregating risks, within and across businesses, as well as subjecting those risks to alternative stress scenarios in order to assess the potential economic impact they may have on Citigroup.Comprehensive stress tests are in place across Citi for trading, available-for-sale and accrual portfolios. These firm-wide stress reports measure the potential impact to Citi and its component businesses of very large changes in various types of key risk factors (e.g., interest rates, credit spreads, etc.), as well as the potential impact of a number of historical and hypothetical forward-looking systemic stress scenarios.Supplementing the stress testing described above, Citi independent risk management, working with input from the businesses and finance, provides periodic updates to senior management 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 intendedpermitted to be forward-looking assessments of the potential economic impactsexcluded prior to Citi that may arise from these exposures. Risk management also provides reports to the Risk Management and Finance Committee of the Board of Directors, as well as the full Board of Directors, on these matters.The stress-testing and focus-position exercises 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.Risk CapitalRisk capital is defined asderiving 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 requiredrules.(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 absorb potential unexpected economic losses resulting from extremely severe events over$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).
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 one-year time period.“Economic losses” include losses thatnon-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 reflected onnon-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 ConsolidatedIncome Statement and fair value adjustments to the ConsolidatedFinancial Statements, as well as any further declines in value not capturedon the Consolidated Income Statement.“Unexpected losses” are the difference between potential extremely severelosses and Citigroup’sprogress against expected (average) loss over a one-year time period.“Extremely severe” is defined as potential loss at a 99.9% and a 99.97%confidence level,future regulatory capital standards.In millions of dollars December 31,
2012 September 30,
2012Tier 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 distributionU.S. banking agencies proposed Basel III rules.(2) Includes goodwill “embedded” in the valuation of observed events andscenario analysis. The driverssignificant 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.
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 economic lossesDecember 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.
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
(otherthan MSRs) related to assets
for discontinued operations
held for sale32 — Net deferred tax assets related to goodwill
and other intangible assets32 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
discontinuedoperations held for sale32 — 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
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.
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
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.
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.
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.
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.
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.
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.
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.
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.”
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.
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.
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:
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.Non-bank Significant Citibank Entities Other Citibank and
Banamex EntitiesTotal 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,
2011Available 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
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).
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
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).
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.
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
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 (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.
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 for 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 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.
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. 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 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 broadly categorized as credit risk, market riskreported net pursuant to FIN 41 (ASC 210-20-45). However,Interest expenseexcludes the impact of FIN 41 (ASC 210-20-45).(5) Average rates reflect prevailing local interest rates, including inflationary effects and operational risk.Credit risk losses primarily result from a borrower’s or counterparty’sinability to meet its financial ormonetary correction in certain countries.(6) Based on contractual obligations.Market risk losses arise from fluctuations in the market value of tradingand non-trading positions, including the changes in value resulting fromfluctuations in rates.Operational risk losses result from inadequate or failed internal processes,systems or human factors or from external events. These risks, discussed in more detail below,rates at respective year ends; non-interest-bearing accounts are measured and aggregated within businesses and across Citigroup to facilitate the understanding of Citi’s exposure to extreme downside events as described under “Risk Aggregation and Stress Testing” above. The risk capital framework is reviewed and enhanced on a regular basis in light of market developments and evolving practices.CREDIT RISKCredit risk is the potential for financial loss resultingexcluded from the failureweighted average interest rate calculated at year end.
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).
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
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.
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.
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.
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 horizons13 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.
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.
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.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
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.
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.
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.
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.
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.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 a borrower or counterpartycredit, and lendingSee Note 27 to honor its financial or contractual obligations. Credit risk arises in many of Citigroup’s business activities, including:lending;salesthe Consolidated and trading;derivatives;securities transactions;settlement;other commitments Financial Statements. Guarantees See Note 27 to the Consolidated Financial Statements.
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
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 when Citigroup acts as an intermediary. For Citi’s loan accounting policies, see Liquidity—Funding and Liquidity” above and Note 119 to the Consolidated Financial Statements. See Notes 16(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 17accrued expenses recorded inOther liabilitieson Citi’s Consolidated Balance Sheet. Also includes discretionary contributions for additional information on Citigroup’s Consumer2013 for Citi’s non-U.S. pension plans and Corporate loan, creditthe non-U.S. postretirement plans, as well as employee benefit obligations accounted for under SFAS 87 (ASC 715), SFAS 106 (ASC 715) and allowance data.SFAS 112 (ASC 712).67
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.
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
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
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.
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
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.
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
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.
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
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.
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.
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.
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 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.
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 inAsia(other than Japan, Australia and New Zealand), the Middle East, Africa and central and eastern European countries inEMEAand the markets inLatin 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
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.
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
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, 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.
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.
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.
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.
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).
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.
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.
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.
Through its U.S. Citi-branded cards and Citi retail services credit card businesses withinNorth 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, orNA 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, withinNA 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 orNA 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 orNA RCB over time.
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.
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.
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.
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 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.
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.
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:
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 ofAsia, EMEAand 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.
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.
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.
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 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.In millions of dollars at year end 2011 2010 2009 2008 2007 In millions of dollars 2012 2011 2010 2009 2008 Consumer loans In U.S. offices Mortgage and real estate(1) $ 139,177 $ 151,469 $ 183,842 $ 219,482 $ 240,644 $ 125,946 $ 139,177 $ 151,469 $ 183,842 $ 219,482 Installment, revolving credit, and other 15,616 28,291 58,099 64,319 69,379 14,070 15,616 28,291 58,099 64,319 Cards (3)(2)117,908 122,384 28,951 44,418 46,559 111,403 117,908 122,384 28,951 44,418 Commercial and industrial 4,766 5,021 5,640 7,041 7,716 5,344 4,766 5,021 5,640 7,041 Lease financing 1 2 11 31 3,151 — 1 2 11 31 $ 277,468 $ 307,167 $ 276,543 $ 335,291 $ 367,449 $ 256,763 $ 277,468 $ 307,167 $ 276,543 $ 335,291 In offices outside the U.S. Mortgage and real estate(1) $ 52,052 $ 52,175 $ 47,297 $ 44,382 $ 49,326 $ 54,709 $ 52,052 $ 52,175 $ 47,297 $ 44,382 Installment, revolving credit, and other 34,613 38,024 42,805 41,272 70,205 36,182 34,613 38,024 42,805 41,272 Cards 38,926 40,948 41,493 42,586 46,176 40,653 38,926 40,948 41,493 42,586 Commercial and industrial 20,366 16,684 14,780 16,814 18,422 20,001 19,975 16,136 14,183 16,814 Lease financing 711 665 331 304 1,124 781 711 665 331 304 $ 146,668 $ 148,496 $ 146,706 $ 145,358 $ 185,253 $ 152,326 $ 146,277 $ 147,948 $ 146,109 $ 145,358 Total Consumer loans $ 424,136 $ 455,663 $ 423,249 $ 480,649 $ 552,702 $ 409,089 $ 423,745 $ 455,115 $ 422,652 $ 480,649 Unearned income (405 ) 69 808 738 787 (418 ) (405 ) 69 808 738 Consumer loans, net of unearned income $ 423,731 $ 455,732 $ 424,057 $ 481,387 $ 553,489 $ 408,671 $ 423,340 $ 455,184 $ 423,460 $ 481,387 Corporate loans In U.S. offices Commercial and industrial $ 21,667 $ 14,334 $ 15,614 $ 26,447 $ 20,696 $ 26,985 $ 20,830 $ 13,669 $ 15,614 $ 26,447 Loans to financial institutions(2) 33,265 29,813 6,947 10,200 8,778 18,159 15,113 8,995 6,947 10,200 Mortgage and real estate(1) 20,698 19,693 22,560 28,043 18,403 24,705 21,516 19,770 22,560 28,043 Installment, revolving credit, and other 15,011 12,640 17,737 22,050 26,539 32,446 33,182 34,046 17,737 22,050 Lease financing 1,270 1,413 1,297 1,476 1,630 1,410 1,270 1,413 1,297 1,476 $ 91,911 $ 77,893 $ 64,155 $ 88,216 $ 76,046 $ 103,705 $ 91,911 $ 77,893 $ 64,155 $ 88,216 In offices outside the U.S. Commercial and industrial $ 79,373 $ 71,618 $ 66,747 $ 79,421 $ 94,188 $ 82,939 $ 79,764 $ 72,166 $ 67,344 $ 79,421 Installment, revolving credit, and other 14,114 11,829 9,683 17,441 21,037 14,958 14,114 11,829 9,683 17,441 Mortgage and real estate(1) 6,885 5,899 9,779 11,375 9,981 6,485 6,885 5,899 9,779 11,375 Loans to financial institutions 29,794 22,620 15,113 18,413 20,467 37,739 29,794 22,620 15,113 18,413 Lease financing 568 531 1,295 1,850 2,292 605 568 531 1,295 1,850 Governments and official institutions 1,576 3,644 2,949 773 1,029 1,159 1,576 3,644 2,949 773 $ 132,310 $ 116,141 $ 105,566 $ 129,273 $ 148,994 $ 143,885 $ 132,701 $ 116,689 $ 106,163 $ 129,273 Total Corporate loans $ 224,221 $ 194,034 $ 169,721 $ 217,489 $ 225,040 $ 247,590 $ 224,612 $ 194,582 $ 170,318 $ 217,489 Unearned income (710 ) (972 ) (2,274 ) (4,660 ) (536 ) (797 ) (710 ) (972 ) (2,274 ) (4,660 ) Corporate loans, net of unearned income $ 223,511 $ 193,062 $ 167,447 $ 212,829 $ 224,504 $ 246,793 $ 223,902 $ 193,610 $ 168,044 $ 212,829 Total loans—net of unearned income $ 647,242 $ 648,794 $ 591,504 $ 694,216 $ 777,993 $ 655,464 $ 647,242 $ 648,794 $ 591,504 $ 694,216 Allowance for loan losses—on drawn exposures (30,115 ) (40,655 ) (36,033 ) (29,616 ) (16,117 ) (25,455 ) (30,115 ) (40,655 ) (36,033 ) (29,616 ) Total loans—net of unearned income and allowance for credit losses $ 617,127 $ 608,139 $ 555,471 $ 664,600 $ 761,876 $ 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) 4.69 % 6.31 % 6.09 % 4.27 % 2.07 % 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) 6.45 % 7.80 % 6.70 % 4.61 % 2.26 % 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) 1.31 % 2.76 % 4.56 % 3.48 % 1.61 % 1.14 % 1.31 % 2.75 % 4.57 % 3.48 % (1) Loans secured primarily by real estate. (2) 2011 andBeginning in 2010, includeincludes the impact of consolidating entities in connection with Citi’s adoption of SFAS 167. See Note 1 to the Consolidated Financial Statements.(3) Excludes loans in 2012, 2011 and 2010 that are carried at fair value. 68In millions of dollars at year end 2011 2010 2009 2008 2007 2012 2011 2010 2009 2008 Allowance for loan losses at beginning of year $ 40,655 $ 36,033 $ 29,616 $ 16,117 $ 8,940 $ 30,115 $ 40,655 $ 36,033 $ 29,616 $ 16,117 Provision for loan losses Consumer (2)$ 12,512 $ 25,119 $ 32,407 $ 27,942 $ 15,660 $ 10,761 $ 12,512 $ 25,119 $ 32,407 $ 27,942 Corporate (739 ) 75 6,353 5,732 1,172 87 (739 ) 75 6,353 5,732 $ 11,773 $ 25,194 $ 38,760 $ 33,674 $ 16,832 $ 10,848 $ 11,773 $ 25,194 $ 38,760 $ 33,674 Gross credit losses Consumer In U.S. offices $ 15,767 $ 24,183 $ 17,637 $ 11,624 $ 5,765 In U.S. offices(1)(2) $ 12,226 $ 15,767 $ 24,183 $ 17,637 $ 11,624 In offices outside the U.S. 5,397 6,890 8,819 7,172 5,165 4,612 5,397 6,890 8,819 7,172 Corporate Mortgage and real estate In U.S. offices 182 953 592 56 1 59 182 953 592 56 In offices outside the U.S. 171 286 151 37 3 21 171 286 151 37 Governments and official institutions outside the U.S. — — — 3 — — — — — 3 Loans to financial institutions In U.S. offices 215 275 274 — — 33 215 275 274 — In offices outside the U.S. 391 111 448 463 69 68 391 111 448 463 Commercial and industrial In U.S. offices 392 1,222 3,299 627 635 154 392 1,222 3,299 627 In offices outside the U.S. 649 571 1,564 778 226 305 649 571 1,564 778 $ 23,164 $ 34,491 $ 32,784 $ 20,760 $ 11,864 $ 17,478 $ 23,164 $ 34,491 $ 32,784 $ 20,760 Credit recoveries Consumer In U.S. offices $ 1,467 $ 1,323 $ 576 $ 585 $ 695 $ 1,302 $ 1,467 $ 1,323 $ 576 $ 585 In offices outside the U.S. 1,273 1,315 1,089 1,050 966 1,183 1,273 1,315 1,089 1,050 Corporate Mortgage and real estate In U.S. offices 27 130 3 — 3 17 27 130 3 — In offices outside the U.S. 2 26 1 1 — 19 2 26 1 1 Governments and official institutions outside the U.S. — — — — 4 — — — — — Loans to financial institutions In U.S. offices — — — — — — — — — — In offices outside the U.S. 89 132 11 2 1 43 89 132 11 2 Commercial and industrial In U.S. offices 175 591 276 6 49 243 175 591 276 6 In offices outside the U.S. 93 115 87 105 220 95 93 115 87 105 $ 3,126 $ 3,632 $ 2,043 $ 1,749 $ 1,938 $ 2,902 $ 3,126 $ 3,632 $ 2,043 $ 1,749 Net credit losses In U.S. offices $ 14,887 $ 24,589 $ 20,947 $ 11,716 $ 5,654 In U.S. offices(1)(2) $ 10,910 $ 14,887 $ 24,589 $ 20,947 $ 11,716 In offices outside the U.S. 5,151 6,270 9,794 7,295 4,272 3,666 5,151 6,270 9,794 7,295 Total $ 20,038 $ 30,859 $ 30,741 $ 19,011 $ 9,926 $ 14,576 $ 20,038 $ 30,859 $ 30,741 $ 19,011 Other—net (1)(3)$ (2,275 ) $ 10,287 $ (1,602 ) $ (1,164 ) $ 271 $ (932 ) $ (2,275 ) $ 10,287 $ (1,602 ) $ (1,164 ) Allowance for loan losses at end of year (2)$ 30,115 $ 40,655 $ 36,033 $ 29,616 $ 16,117 $ 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 (3)(5)$ 1,136 $ 1,066 $ 1,157 $ 887 $ 1,250 $ 1,119 $ 1,136 $ 1,066 $ 1,157 $ 887 Total allowance for loans, leases and unfunded lending commitments $ 31,251 $ 41,721 $ 37,190 $ 30,503 $ 17,367 $ 26,574 $ 31,251 $ 41,721 $ 37,190 $ 30,503 Net Consumer credit losses $ 18,424 $ 28,435 $ 24,791 $ 17,161 $ 9,269 $ 14,353 $ 18,424 $ 28,435 $ 24,791 $ 17,161 As a percentage of average Consumer loans 4.20 % 5.74 % 5.43 % 3.34 % 1.87 % 3.49 % 4.20 % 5.74 % 5.43 % 3.34 % Net Corporate credit losses (recoveries) $ 1,614 $ 2,424 $ 5,950 $ 1,850 $ 657 $ 223 $ 1,614 $ 2,424 $ 5,950 $ 1,850 As a percentage of average Corporate loans 0.79 % 1.27 % 3.13 % 0.84 % 0.30 % 0.09 % 0.79 % 1.27 % 3.13 % 0.84 % Allowance for loan losses at end of period (4)(6)Citicorp $ 12,656 $ 17,075 $ 10,731 $ 8,202 $ 5,262 $ 14,623 $ 12,656 $ 17,075 $ 10,731 $ 8,202 Citi Holdings 17,459 23,580 25,302 21,414 10,855 10,832 17,459 23,580 25,302 21,414 Total Citigroup $ 30,115 $ 40,655 $ 36,033 $ 29,616 $ 16,117 $ 25,455 $ 30,115 $ 40,655 $ 36,033 $ 29,616 Allowance by type Consumer $ 27,236 $ 35,406 $ 28,347 $ 22,204 $ 12,493 $ 22,679 $ 27,236 $ 35,406 $ 28,347 $ 22,204 Corporate 2,879 5,249 7,686 7,412 3,624 2,776 2,879 5,249 7,686 7,412 Total Citigroup $ 30,115 $ 40,655 $ 36,033 $ 29,616 $ 16,117 $ 25,455 $ 30,115 $ 40,655 $ 36,033 $ 29,616 69(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, (see Note 1 to the Consolidated Financial Statements) andpartially 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. 2007 primarily includes reductions to the loan loss reserve of $475 million related to securitizations and transfer of loans to held-for-sale and of $83 million related to the transfer of the U.K. CitiFinancial portfolio to held-for-sale, offset by additions of $610 million related to the acquisitions of Egg, Nikko Cordial, Grupo Cuscatlán and Grupo Financiero Uno.(2)(4)Included in the allowance for loan losses are reserves for loans that have been modified subject to troubled debt restructurings (TDRs) of $8,772 million, $7,609 million, $4,819 million, and $2,180 million, as ofDecember 31, 2012, December 31, 2011 and December 31, 2010 December 31, 2009,exclude $5.3 billion, $5.3 billion and December 31, 2008, respectively.$4.4 billion, respectively, of loans that are carried at fair value.(3)(5)Represents additional credit loss reserves for unfunded lending commitments and letters of credit recorded inOther liabilitieson the Consolidated Balance Sheet. (4)(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.”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.
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, 2011 In billions of dollars Allowance for loan losses Loans, net of unearned income Allowance as a percentage of loans (1) North AmericaCards(2) $ 10.1 $ 118.7 8.5 % North AmericaResidential Mortgages 10.0 138.9 7.3 North AmericaOther 1.6 23.5 6.8 International Cards 2.8 40.1 7.0 International Other(3) 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 % December 31, 2012 In billions of dollars Allowance for loan losses Loans, net of unearned income Allowance as a percentage of loans (1) North Americacards(2) $ 7.3 $ 112.0 6.5 % North Americamortgages(3) 8.6 125.4 6.9 North Americaother 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 Americacards(2) $ 10.1 $ 118.7 8.5 % North Americamortgages 10.0 138.9 7.3 North Americaother 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 partner cards.services. The $7.3 billion of loan loss reserves forNorth Americacards 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 toNorth Americamortgages 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 forNorth Americamortgages as of December 31, 2012 represented approximately 33 months of coincident net credit loss coverage. (4) Includes mortgages and other retail loans. 70
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:partner cardsservices are not includedbecause,notincluded as, under industry standards, theycredit card loans accrue interest until charge-off.interestuntil such loans are charged off, which typically occurs at 180 dayscontractual delinquency.ina TDR.in atroubled debt restructuring (TDR).
The table below summarizes Citigroup’s non-accrual loans as of the periods indicated. Non-accrualAs 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 which are therefore considered impaired. In situations where Citi reasonably expects that only a portion of the principal and/or interest owed will ultimately be collected, all payments received are reflected as a reduction of principal and not as interest income. There is no industry-wide definition of non-accrual assets, however,
Corporate and as such, analysis across the industry is not always comparable.CorporateConsumer (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. Consistent with industry conventions, Citi generally accrues interest on credit card loans until such loans are charged-off, which typically occurs at 180 days contractual delinquency. As such, the non-accrual loan disclosures in this section do not includeNorth Americacredit card loans.In millions of dollars 2011 2010 2009 2008 2007 2012 2011 2010 2009 2008 Citicorp $ 4,018 $ 4,909 $ 5,353 $ 3,282 $ 2,027 $ 4,096 $ 4,018 $ 4,909 $ 5,353 $ 3,282 Citi Holdings 7,208 14,498 26,387 19,015 6,941 7,433 7,050 14,498 26,387 19,015 Total non-accrual loans (NAL) $ 11,226 $ 19,407 $ 31,740 $ 22,297 $ 8,968 $ 11,529 $ 11,068 $ 19,407 $ 31,740 $ 22,297 Corporate non-accrual loans(1) North America $ 1,246 $ 2,112 $ 5,621 $ 2,660 $ 291 $ 735 $ 1,246 $ 2,112 $ 5,621 $ 2,660 EMEA 1,293 5,337 6,308 6,330 1,152 1,131 1,293 5,337 6,308 6,330 Latin America 362 701 569 229 119 128 362 701 569 229 Asia 335 470 981 513 103 339 335 470 981 513 Total corporate non-accrual loans $ 3,236 $ 8,620 $ 13,479 $ 9,732 $ 1,665 Total Corporate non-accrual loans $ 2,333 $ 3,236 $ 8,620 $ 13,479 $ 9,732 Citicorp $ 2,217 $ 3,091 $ 3,238 $ 1,453 $ 247 $ 1,909 $ 2,217 $ 3,091 $ 3,238 $ 1,453 Citi Holdings 1,019 5,529 10,241 8,279 1,418 424 1,019 5,529 10,241 8,279 Total corporate non-accrual loans $ 3,236 $ 8,620 $ 13,479 $ 9,732 $ 1,665 Total Corporate non-accrual loans $ 2,333 $ 3,236 $ 8,620 $ 13,479 $ 9,732 Consumer non-accrual loans(1) North America (3)$ 6,046 $ 8,540 $ 15,111 $ 9,617 $ 4,841 $ 7,148 $ 5,888 $ 8,540 $ 15,111 $ 9,617 EMEA 387 652 1,159 948 696 380 387 652 1,159 948 Latin America 1,107 1,019 1,340 1,290 1,133 1,285 1,107 1,019 1,340 1,290 Asia 450 576 651 710 633 383 450 576 651 710 Total consumer non-accrual loans $ 7,990 $ 10,787 $ 18,261 $ 12,565 $ 7,303 Total Consumer non-accrual loans(2) $ 9,196 $ 7,832 $ 10,787 $ 18,261 $ 12,565 Citicorp $ 1,801 $ 1,818 $ 2,115 $ 1,829 $ 1,780 $ 2,187 $ 1,801 $ 1,818 $ 2,115 $ 1,829 Citi Holdings (2) 6,189 8,969 16,146 10,736 5,523 7,009 6,031 8,969 16,146 10,736 Total consumer non-accrual loans $ 7,990 $ 10,787 $ 18,261 $ 12,565 $ 7,303 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, and $2.3732008.(2) During 2012, there was an increase in Consumer non-accrual loans inNorth Americaof 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 inNorth Americaduring 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 Decemberthe time of reclassification. The reclassification reflected regulatory guidance issued on January 31, 2007.2012. The reclassification had no impact on Citi’s delinquency statistics or its loan loss reserves.Statement continues on the next page71
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 2011 2010 2009 2008 2007 2012 2011 2010 2009 2008 OREO Citicorp $ 71 $ 826 $ 874 $ 371 $ 541 $ 47 $ 71 $ 826 $ 874 $ 371 Citi Holdings 480 863 615 1,022 679 391 480 863 615 1,022 Corporate/Other 15 14 11 40 8 2 15 14 11 40 Total OREO $ 566 $ 1,703 $ 1,500 $ 1,433 $ 1,228 $ 440 $ 566 $ 1,703 $ 1,500 $ 1,433 North America $ 441 $ 1,440 $ 1,294 $ 1,349 $ 1,168 $ 299 $ 441 $ 1,440 $ 1,294 $ 1,349 EMEA 73 161 121 66 40 99 73 161 121 66 Latin America 51 47 45 16 17 40 51 47 45 16 Asia 1 55 40 2 3 2 1 55 40 2 Total OREO $ 566 $ 1,703 $ 1,500 $ 1,433 $ 1,228 $ 440 $ 566 $ 1,703 $ 1,500 $ 1,433 Other repossessed assets $ 1 $ 28 $ 73 $ 78 $ 99 $ 1 $ 1 $ 28 $ 73 $ 78 Non-accrual assets—Total Citigroup 2011 2010 2009 2008 2007 2012 2011 2010 2009 2008 Corporate non-accrual loans $ 3,236 $ 8,620 $ 13,479 $ 9,732 $ 1,665 $ 2,333 $ 3,236 $ 8,620 $ 13,479 $ 9,732 Consumer non-accrual loans (1)7,990 10,787 18,261 12,565 7,303 9,196 7,832 10,787 18,261 12,565 Non-accrual loans (NAL) $ 11,226 $ 19,407 $ 31,740 $ 22,297 $ 8,968 $ 11,529 $ 11,068 $ 19,407 $ 31,740 $ 22,297 OREO 566 1,703 $ 1,500 $ 1,433 $ 1,228 440 566 1,703 1,500 1,433 Other repossessed assets 1 28 73 78 99 1 1 28 73 78 Non-accrual assets (NAA) $ 11,793 $ 21,138 $ 33,313 $ 23,808 $ 10,295 $ 11,970 $ 11,635 $ 21,138 $ 33,313 $ 23,808 NAL as a percentage of total loans 1.73 % 2.99 % 5.37 % 3.21 % 1.15 % 1.76 % 1.71 % 2.99 % 5.37 % 3.21 % NAA as a percentage of total assets 0.63 1.10 1.79 1.23 0.47 0.64 0.62 1.10 1.79 1.23 Allowance for loan losses as a percentage of NAL(1)(2) 268 209 114 133 180 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) The $6.403 billion ofDuring 2012, there was an increase in Consumer non-accrual loans transferredinNorth 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 inNorth Americaof $0.8 billion related to a reclassification from accrual to non-accrual status of home equity loans where the held-for-sale portfoliorelated residential first mortgage was 90 days or more past due. For additional information on each of these items, see footnote 2 to the held-for-investment portfolio during the fourth quarter of 2008 were marked to market at the transfer date and, therefore, no allowance was necessary at the time of the transfer. $2.426 billion of the par value of the loans reclassified was written off prior to transfer.“Non-Accrual Loans” table above.(2) The allowance for loan losses includes the allowance for credit card 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 write-off.Non-accrual assets—Total Citicorp 2011 2010 2009 2008 2007 Non-accrual loans (NAL) $ 4,018 $ 4,909 $ 5,353 $ 3,282 $ 2,027 OREO 71 826 874 371 541 Other repossessed assets N/A N/A N/A N/A N/A Non-accrual assets (NAA) $ 4,089 $ 5,735 $ 6,227 $ 3,653 $ 2,568 NAA as a percentage of total assets 0.31 % 0.45 % 0.55 % 0.34 % 0.21 % Allowance for loan losses as a percentage of NAL(1) 315 348 200 250 242 Non-accrual assets—Total Citi Holdings 2011 2010 2009 2008 2007 Non-accrual loans (NAL) $ 7,208 $ 14,498 $ 26,387 $ 19,015 $ 6,941 OREO 480 863 615 1,022 679 Other repossessed assets N/A N/A N/A N/A N/A Non-accrual assets (NAA) $ 7,688 $ 15,361 $ 27,002 $ 20,037 $ 7,620 NAA as a percentage of total assets 2.86 % 4.28 % 5.54 % 3.08 % 0.86 % Allowance for loan losses as a percentage of NAL(1) 242 163 96 113 161 (1)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 write-off.charge-off.N/A Not available at the Citicorp or Citi Holdings level. 72
The following table presents Citi’s loans modified in TDRs.Dec. 31, Dec. 31, Dec. 31, Dec. 31, In millions of dollars 2011 2010 2012 2011 Corporate renegotiated loans(1) In U.S. offices Commercial and industrial(2) $ 206 $ 240 $ 180 $ 206 Mortgage and real estate(3) 241 61 72 241 Loans to financial institutions 552 671 17 85 Other 79 28 447 546 $ 1,078 $ 1,000 $ 716 $ 1,078 In offices outside the U.S. Commercial and industrial(2) $ 223 $ 207 $ 95 $ 223 Mortgage and real estate(3) 17 90 59 17 Loans to financial institutions 12 11 — 12 Other 6 7 3 6 $ 258 $ 315 $ 157 $ 258 Total Corporate renegotiated loans $ 1,336 $ 1,315 $ 873 $ 1,336 Consumer renegotiated loans(4)(5)(6)(7) In U.S. offices Mortgage and real estate (8)$ 21,429 $ 17,717 $ 22,903 $ 21,429 Cards 5,766 4,747 3,718 5,766 Installment and other 1,357 1,986 1,088 1,357 $ 28,552 $ 24,450 $ 27,709 $ 28,552 In offices outside the U.S. Mortgage and real estate $ 936 $ 927 $ 932 $ 936 Cards 929 1,159 866 929 Installment and other 1,342 1,875 904 1,342 $ 3,207 $ 3,961 $ 2,702 $ 3,207 Total Consumer renegotiated loans $ 31,759 $ 28,411 $ 30,411 $ 31,759 (1) Includes $455$267 million and $553$455 million of non-accrual loans included in the non-accrual assets table above at December 31, 20112012 and December 31, 2010,2011, respectively. The remaining loans are accruing interest.(2) In addition to modifications reflected as TDRs at December 31, 2011,2012, Citi also modified $39$1 million and $421$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, 2011,2012, Citi also modified $185 million and $33$7 million of commercial real estate loans risk rated “Substandard Non-Performing” or worse (asset category defined by banking regulators) in U.S. offices and in offices outside the U.S., respectively.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 $2,371$4,198 million and $2,751$2,269 million of non-accrual loans included in the non-accrual assets table above at December 31, 20112012 and December 31, 2010,2011, respectively. The remaining loans are accruing interest.(5) Includes $19$38 million and $22$19 million of commercial real estate loans at December 31, 20112012 and December 31, 2010,2011, respectively.(6) Includes $257$261 million and $177$257 million of commercial loans at December 31, 20112012 and December 31, 2010,2011, 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. reduction in the face amount of the debtprincipal reductions or reduction or waiver of accrued interest or fees. See “Consumer Loan Modification Programs” below.Note 16 to the Consolidated Financial Statements for a discussion of such modifications.In non- In non- In U.S. U.S. 2011 In U.S. U.S. 2012 In millions of dollars offices total offices offices total Interest revenue that would have been accrued at original contractual rates(2) $ 3,597 $ 1,276 $ 4,873 $ 3,123 $ 965 $ 4,088 Amount recognized as interest revenue(2) 1,539 415 1,954 1,412 388 1,800 Forgone interest revenue $ 2,058 $ 861 $ 2,919 $ 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. 7381Due Over 1 year Due Over 1 year within but within Over 5 within but within Over 5 In millions of dollars at year end 2011 1 year 5 years years Total 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 $ 10,053 $ 7,600 $ 4,014 $ 21,667 $ 12,181 $ 9,684 $ 5,120 $ 26,985 Financial institutions 15,434 11,668 6,163 33,265 8,197 6,517 3,445 18,159 Mortgage and real estate 9,603 7,260 3,835 20,698 11,152 8,866 4,687 24,705 Lease financing 589 446 235 1,270 637 506 267 1,410 Installment, revolving credit, other 6,965 5,265 2,781 15,011 14,647 11,644 6,155 32,446 In offices outside the U.S. 91,060 31,725 9,525 132,310 97,709 33,686 12,490 143,885 Total corporate loans $ 133,704 $ 63,964 $ 26,553 $ 224,221 $ 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 $ 7,005 $ 5,741 $ 9,255 $ 8,483 Loans at floating or adjustable interest rates 56,959 20,812 61,648 23,681 Total $ 63,964 $ 26,553 $ 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. MortgageMortgages and Real Estate LoansDue Over 1 year Greater within but within Over 5 Due than 1 year Greater In millions of dollars at year end 2011 1 year 5 years years Total 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 type loan portfolio First mortgages $ 219 $ 1,143 $ 95,757 $ 97,119 $ 121 $ 1,352 $ 88,448 $ 89,921 Second mortgages 858 14,457 26,743 42,058 1,384 18,102 16,539 36,025 Total $ 1,077 $ 15,600 $ 122,500 $ 139,177 $ 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 $ 888 $ 83,159 $ 1,048 $ 76,410 Loans at floating or adjustable interest rates 14,712 39,341 18,406 28,577 Total $ 15,600 $ 122,500 $ 19,454 $ 104,987 7482
Citi’sNorth America Consumer mortgage portfolio consists of both residential first mortgages and home equity loans. As of December 31, 2011,2012, Citi’sNorth America Consumer residential first mortgage portfolio totaled $95.4$88.2 billion, while the home equity loan portfolio was $37.2 billion. This compared to $95.4 billion and $43.5 billion.billion of residential first mortgages and home equity loans as of December 31, 2011, respectively. Of the first mortgages $67.5at December 31, 2012, $57.7 billion areis recorded inLCL within Citi Holdings, with the remaining $27.9$30.5 billion recorded in Citicorp. With respect to the home equity loan portfolio, $40.0$34.1 billion areis recorded inLCL, and $3.5$3.1 billion are reportedis in Citicorp.
Citi’s residential first mortgage portfolio included $9.2$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 originated to low-to-moderate-income borrowers with lower FICO (Fair Isaac Corporation) scores and therefore generally has higher loan-to-value ratios (LTVs). LossesCredit 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 to date.loans.Also In addition, as of December 31, 2011, the2012, Citi’s residential first mortgage portfolio included $1.6$1.5 billion of loans with LTVs above 80%, compared to $1.6 billion as of December 31, 2011, most of which have insuranceare insured through mortgage insurance companies, and $1.2companies. 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.thethese guarantees and commitments referenced above.commitments.
Citi does not offer option adjustableoption-adjustable rate mortgages/negative amortizing mortgage products to its customers. As a result, option adjustableoption-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, 2011,2012, Citi’sNorth America residential first mortgage portfolio contained approximately $15$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.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 thatwho 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 thatwho 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.
The following charts detail the quarterly trends in delinquencies and net credit losses for Citi’sCitigroup’s residential first mortgage portfolio inNorth America. As referenced in the “Overview” section above, the majorityApproximately 65% of Citi’s residential first mortgage exposure arises from its portfolio within Citi Holdings –Holdings—LCL.Mortgages — Mortgages—CitigroupIn billions of dollars 
75
Mortgages — Mortgages—Citi HoldingsIn billions of dollars 
(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. Delinquencies — Delinquencies—Citi HoldingsIn billions of dollars 
Notes:– Totals may not sum due to rounding.–Note: For each of the tables above, days past due exclude (i) U.S. mortgage loans that are guaranteed by U.S. governmentgovernment-sponsored agencies because the potential loss predominantly resides with the U.S. agencies, and (ii) loans recorded at fair value.76 Totals may not sum due to rounding.As previously disclosed, managementManagement actions, includingprimarily asset sales and to a lesser extent modification programs, have beencontinued 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. With respectabove (excluding the impacts to asset sales,net credit losses described in total,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 $7.6$9.6 billion of delinquent first mortgages since the beginning of 2010, including $2.7 billion in 2011. As evidenced by the numbers above, the pace of Citi’s sales of residential first mortgages has slowed, primarily due to the lack of remaining eligible inventory and demand.mortgages. Regarding modifications of residential first mortgages, since the third quarter of 2009, In addition, Citi has permanently modified approximately $6.1$0.9 billion and $0.3 billion of residential first mortgage loans under its HAMPduring 2012 and CSM programs, twoin the fourth quarter of Citi’s more significant residential first2012, respectively, including loan modifications pursuant to the national mortgage modification programs.settlement. (For additional information on Citi’s significant residential first mortgage loan modification programs,modifications, see “ConsumerNote 16 to the Consolidated Financial Statements.) Loan Modification Programs” below.) However,modifications under the pace of modification activity has also slowednational mortgage settlement have improved Citi’s 30+ days past due to thedelinquencies by approximatelydecrease in the inventory of residential first mortgage loans available for modification, primarily$249 million as a result of the significant levelsend of modifications in prior periods.As a result of these two converging trends and as set forth in the tables above, Citi’s residential first mortgage delinquency trends are beginning to show the impact of2012. While re-defaults of previously modified mortgages including an increase in the 90+ days past due delinquencies during the fourth quarter of 2011, although the re-default rates forunder the HAMP and CSMCiti Supplemental Modification (CSM) programs continued to track favorably versus expectations as of December 31, 2011. While2012, 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 thisits residential first mortgage portfolio, decreased duringdue to any deterioration of the periods set forth above, if delinquencies continueunderlying credit performance of these loans, re-defaults, the lengthening of the foreclosure process (see “Foreclosures” below) or otherwise, pursuant to increase, Citiasset sales or modifications could begin experiencing increasing net credit losses in this portfoliobe limited going forward.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 – Mortgages—Loan Loss Reserve Coverage”below.Mortgages – 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, 20112012 and December 31, 2010.2011.In billions of dollars December 31, 2011 December 31, 2010 December 31, 2012 December 31, 2011 % % % % ENR 90+DPD LTV > Refreshed ENR 90+DPD LTV > Refreshed ENR 90+DPD LTV > Refreshed ENR 90+DPD LTV > Refreshed State(1) ENR (2) Distribution % 100% FICO ENR (2) Distribution % 100% FICO ENR (2) Distribution % 100% FICO ENR (2) Distribution % 100% FICO CA $ 22.6 28 % 2.7 % 38 % 727 $ 23.0 27 % 4.1 % 40 % 718 $ 21.1 28 % 2.1 % 23 % 730 $ 22.6 28 % 2.7 % 38 % 727 NY/NJ/CT 11.2 14 4.9 10 712 9.7 12 6.6 13 693 11.8 16 4.0 8 723 11.2 14 4.9 10 712 IN/OH/MI 4.6 6 6.3 44 650 5.0 6 8.3 46 636 4.0 5 5.5 31 655 4.6 6 6.3 44 650 FL 4.3 5 10.2 57 668 4.7 6 12.2 59 656 3.8 5 8.1 43 676 4.3 5 10.2 57 668 IL 3.5 4 7.2 45 686 3.5 4 8.3 44 669 3.1 4 5.8 34 694 3.5 4 7.2 45 686 AZ/NV 2.3 3 5.7 73 698 2.6 3 8.2 73 688 1.9 3 4.8 50 702 2.3 3 5.7 73 698 Other 33.2 41 5.8 21 663 35.2 42 7.0 21 650 29.7 39 5.4 15 667 33.2 41 5.8 21 663 Total $ 81.7 100 % 5.1 % 30 % 689 $ 83.7 100 % 6.6 % 32 % 675 $ 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. tablestable 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). Year over year,The improvement in refreshed LTV percentages at December 31, 2012 was primarily the 90+ days past due delinquency rate improvedresult of improvements in HPI across each of the states and regions shownsubstantially all metropolitan statistical areas, thereby increasing values used in the tables. As referenced under “Citi Holdings—Residential First Mortgages” above, however, the vast majoritydetermination of the improvement in these delinquency rates was driven by Citi’s continuedLTV. Additionally, asset sales of delinquent mortgages. As asset sales have slowed, Citi has observed deteriorationhigher 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 90+ days past due delinquencies for eachthis category during the year. With the continued lengthening of the states and/or regions above, including during the fourth quarter of 2011. Combined with the increase in the average number of days to foreclosure process (see discussion under “Foreclosures” below) in all of these states and regions during 2012, Citi expects it could experience continued deteriorationless improvement in the 90+ days past due delinquency rate in certain of these areas.states and/or regions in the future.
The substantial majority of Citi’s foreclosure inventory consists of residential first mortgages. As of December 31, 2011,2012, approximately 2.5%2.0% of Citi’s residential first mortgage portfolio was actively in Citi’s foreclosure inventory (based on the dollar amount of loans in foreclosure process, which Citi refersinventory as of such date, excluding loans that are guaranteed by U.S. government agencies and loans subject to LTSCs), compared to 2.1% as its “foreclosure inventory.” This was down from 3.1% atof September 30, 2012 and 2.4% as of December 31, 2010.2011.foreclosure inventory year over year was largely due to two separate trends. First, during 2011, there were fewer residential first mortgages moving into Citi’s foreclosure inventory primarilyyear-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 a result ofwell as additional abilities for states to place holds on foreclosures), Citi’s continued asset sales of delinquent first mortgages (as discussed above), as well as increased state requirements for foreclosure filings. For example, certain states have increased the number of pre-foreclosure filings and notices required, including various requirements for affidavit filings and demand letters (including the contents of such letters), as well as required additional time to review a borrower’s loss mitigation activities prior to permitting a foreclosure filing. In addition, while Citi may generally begin77the foreclosure process when loans are 90+ days past due, not all such loans become part of Citi’s foreclosure inventory as Citi may not refer such loans to foreclosure as it continues to work with the borrower pursuant to its loss mitigation programs, or for other reasons. This also decreased the number of residential first mortgages moving into Citi’s foreclosure inventory.Second, while loans exited foreclosure inventory during 2011, this was not necessarily due to completion of foreclosure and sale. Loans may exit foreclosure inventory if Citi renewscontinued efforts to work with the borrowerborrowers pursuant to its loss mitigationloan modification programs, ifincluding under the borrower enters bankruptcy proceedings, if Citi decides not to pursue the foreclosure, or for other reasons. In each of the circumstances described in the discussion above, however, the loans continue to age through Citi’s delinquency buckets and remain part of its non-accrual assets.national mortgage settlement. In addition to the decline in the actual number of completed foreclosures, the overall The foreclosure process has lengthened. This is particularly pronounced in judicialremains stagnant across most states, (i.e., those states that requiredriven primarily by the additional state requirements necessary to complete foreclosures to be processed via court approval)—including New York, New Jersey, Florida and Illinois—but has also occurred in non-judicial states where Citi has a higher concentration of residential first mortgages (see “Residential First Mortgages—State Delinquency Trends” above). Thereferenced above as well as the continued lengthening of the foreclosure process is dueprocess. Citi continues to numerous factors, including without limitationexperience 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 increased state requirements referenced above, Citi’s continued work with borrowers through its various modification programsfourth quarter of 2012. Extended foreclosure timelines and the overall depressed statelow number of home sales in certain of Citi’s high concentration markets. As one example of the lengthening ofloans moving into the foreclosure process,inventory resulted in Citi’s aged foreclosure inventory (active foreclosures in process for two years or more), as a proportion increasing to approximately 29% of Citi’s total foreclosure inventory more than doubled year over year. While the proportion of aged foreclosure inventory continued to represent a small portion of the total (approximately 10%, as of December 31, 2012 (compared to 20% at September 30, 2012 and 10% at December 31, 2011), Citi believes this trend reflects the increased time involved. Extended foreclosure timelines continue to be more pronounced in the foreclosure process, and believes this trend could continue due, in part,judicial states (i.e., states that require foreclosures to the issues discussed above.When combined with the continued pressure on home prices, particularly in certain regionsbe processed via court approval), where Citi has a higher concentration of residential first mortgages this lengtheningin foreclosure (see “North America Residential First Mortgages—State Delinquency Trends” above).foreclosure process also subjects Cititimelines, which includes imposing compensatory fees. While the GSEs have not historically exercised their rights to increased “severity” risk, orimpose compensatory fees, they have begun to do so on a regular basis. To date, the magnitudeimposition of compensatory fees, as a result of the lossextended foreclosure timelines or otherwise, has not had a material impact on the amount ultimately realized for the property subject to foreclosure, as well as increased ongoing costs related to the foreclosure process, such as property maintenance.Citi.
Citi’s home equity loan portfolio consists of both fixed ratefixed-rate home equity loans and loans extended under home equity lines of credit. Fixed rateFixed-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. After conversion,loan (the interest-only payment feature during the loan typically has a 20-year amortization repayment period. Historically,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 new originations of home equity lines of credit typically have a five-year draw period as Citi changed these terms to mitigate risk due torisk. After conversion, the economic environment and declining home prices.equity loans typically have a 20-year amortization period.
As of December 31, 2011,2012, Citi’s home equity loan portfolio of $37.2 billion included approximately $25$22.0 billion of home equity lines of credit that are still within their revolving period and have not commenced amortization, (the interest-only payment feature duringor “reset.” During the revolving period is standard for this product across the industry). The vast majority2009–2012, 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, 20112012 will contractually begin to amortize after 2014.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
As of December 31, 2011,2012, the percentage of U.S. home equity loans in a junior lien position where Citi also owned or serviced the first lien was approximately 31%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, whichlien. 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.7887Similar to Citi’s residential first mortgage portfolio, theThe vast majority of Citi’s home equity loan exposure arises from its portfolio within Citi Holdings –Holdings—LCL.Loans — Loans—CitigroupIn billions of dollars 
Loans — Loans—Citi HoldingsIn billions of dollars 
S&P/CaseShiller 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. 
Delinquencies — Delinquencies—Citi HoldingsIn billions of dollars 
Notes:–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.79the pace of improvement in home equity loan delinquencies improved during 2012, although the rate of improvement has slowed or remained flat.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, has beenwhether pursuantMortgages – Mortgages—Loan Loss Reserve Coverage”below.Loans– 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, 20112012 and December 31, 2010.2011.In billions of dollars December 31, 2011 December 31, 2010 December 31, 2012 December 31, 2011 % % % % ENR 90+DPD LTV > Refreshed ENR 90+DPD LTV > Refreshed ENR 90+DPD CLTV > Refreshed ENR 90+DPD CLTV > Refreshed State(1) ENR (2) Distribution % 100% FICO ENR (2) Distribution % 100% FICO ENR (2) Distribution % 100% (3) FICO ENR (2) Distribution % 100% (3) FICO CA $ 11.2 27 % 2.3 % 50 % 721 $ 12.7 27 % 2.8 % 48 % 724 $ 9.7 28 % 2.0 % 40 % 723 $ 11.2 27 % 2.3 % 50 % 721 NY/NJ/CT 9.2 22 2.1 19 715 10.1 21 2.1 20 719 8.2 23 2.3 20 715 9.2 22 2.1 19 715 FL 2.8 7 3.3 69 698 3.2 7 3.9 68 698 2.4 7 3.4 58 698 2.8 7 3.3 69 698 IL 1.6 4 2.3 62 705 1.9 4 2.4 57 706 1.4 4 2.1 55 708 1.6 4 2.3 62 705 IN/OH/MI 1.5 4 2.6 66 678 1.8 4 3.3 64 671 1.2 3 2.2 55 679 1.5 4 2.6 66 678 AZ/NV 1.0 3 4.1 83 706 1.3 3 5.5 82 703 0.8 2 3.1 70 709 1.0 3 4.1 83 706 Other 13.7 33 2.3 46 695 16.3 34 2.4 44 693 11.5 33 2.2 37 695 13.7 33 2.3 46 695 Total $ 41.0 100 % 2.4 % 45 % 707 $ 47.3 100 % 2.6 % 44 % 707 $ 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. (see “Residential First Mortgages—State Delinquency Trends” above),discussed above, the general improvement in refreshed CLTV percentages at December 31, 2011, Citi’s home equity loan portfolio2012 was primarily concentratedthe result of improvements in California and the New York/New Jersey/Connecticut region. Year over year, 90+ days past due delinquencies improved or remained stableHPI across each of the states and regions shownsubstantially all metropolitan statistical areas, thereby increasing values used in the tables. See also “Consumer Mortgage FICO and LTV” below.North America Consumer Mortgages – Loan Loss Reserve CoverageAt December 31, 2011, approximately $9.8 billiondetermination of Citi’s total loan loss reserves of $30.1 billion was allocated toNorth America real estate lending in Citi Holdings, representing approximately 31 months of coincident net credit loss coverage as of such date. With respect to Citi’s aggregateCLTV. 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.
Under the national mortgage portfolio,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 Holdingscommenced 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.
All of the loan modifications for delinquent borrowers receiving relief toward the $1.4 billion in settlement value are either currently accounted for as well asTDRs 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.Citicorp, Citi’san 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 $10.0 billion at December 31, 2011 represented 302012 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.
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 coincident net credit loss coverage.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.
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.As a consequenceThe following charts detail the quarterly trends of the financial crisis, economic environment and the decrease in housing prices, LTV and FICO scoresunpaid principal balances for Citi’s residential first mortgage and home equity loan portfolios have generally deteriorated since origination, particularlyby risk segment (FICO and LTV) and the 90+ day delinquency rates for those risk segments. For example, in the casefourth quarter of originations between 2006 and 2007, although, as set forth in the tables below, the negative migration has generally stabilized. Generally, on a refreshed basis, approximately 30% of2012, residential first mortgages had a$7.1 billion of balances with refreshed FICO < 660 and refreshed LTV ratio above> 100%, compared to approximately 0% at origination. Similarly, approximately 36%. Approximately 17.5% of residential first mortgages had FICO scores less than 660 on a refreshed basis, compared to 27% at origination. With respect to home equitythese loans approximately 45% of home equity loans had refreshed LTVs above 100%, compared to approximately 0% at origination. Approximately 24% of home equity loans had FICO scores less than 660 on a refreshed basis, compared to 9% at origination.in this segment were over 90+ days past due.80FICO and LTV Trend Information—North AmericaConsumer Mortgages
In billions of dollars
Residential Mortgage—90+ DPD % 4Q10 1Q11 2Q11 3Q11 4Q11 In millions of dollars 4Q11 1Q12 2Q12 3Q12 4Q12 Res Mortgage—90+ DPD $ % $ % $ % $ % $ % FICO ≥ 660, LTV ≤ 100% 0.3% 0.4% 0.3% 0.4% 143 0.4% 128 0.3% 160 0.4% 158 0.4% 167 0.4% FICO ≥ 660, LTV > 100% 1.3% 1.1% 1.2% 157 1.2% 164 1.2% 185 1.6% 120 1.4% 113 1.4% FICO < 660, LTV ≤ 100% 12.8% 11.0% 9.8% 10.0% 10.7% 1,916 10.7% 1,759 10.4% 1,777 10.5% 1,892 10.6% 1,776 10.1% FICO < 660, LTV > 100% 20.4% 16.6% 15.3% 14.9% 16.5% 1,842 16.5% 1,943 17.2% 1,812 18.4% 1,420 18.3% 1,245 17.5%
In billions of dollars
Home Equity—90+ DPD % 4Q10 1Q11 2Q11 3Q11 4Q11 FICO ≥ 660, LTV ≤ 100% 0.1% 0.1% 0.1% 0.1% 0.3% FICO ≥ 660, LTV > 100% 0.3% 0.3% 0.1% 0.1% 0.2% FICO < 660, LTV ≤ 100% 7.7% 7.7% 7.0% 7.4% 7.6% FICO < 660, LTV > 100% 12.1% 11.7% 10.1% 10.3% 10.3% 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 includes $0.4 billion for 4Q10, $0.6 billion for 1Q11, andinclude $0.4 billion in each of 2Q11, 3Q11 and 4Q11.the periods presented. For home equity loans, balances for which such data is unavailable includes $0.3 billion in 4Q10, $0.1 billion in 1Q11, $0.3 billion in 2Q11,include $0.2 billion in 3Q11, and $0.2 billion in 4Q11.each of the periods presented.As evidencedCiti’s residential first mortgages with an LTV above 100% has declined by the table above, the overall proportion39% 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 first mortgages with refreshed FICO scores of less than 660 decreased year over year. Citi believes that the deterioration in these 90+ days past due delinquency ratios from thirdas well as higher LTVs primarily can be attributed to fourth quarter 2011 reflects the decline in Citi’s asset sales of delinquent first mortgages,and modification programs, offset by the lengthening of the foreclosure process, and the continued economic uncertainty, 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.
AlthoughResidential 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, residential first mortgages historically have experienced higher delinquency rates as compared to home equity loans.position. Citi believes this difference is primarily due to the fact thatbecause 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, whereasforeclosure; 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 mortgagesloans remain higher.Despite this historically higher level of delinquencies for residential first mortgages, however, home equity loan delinquencies have generally decreased at a slower rate than residential first mortgage delinquencies. Citi believes this difference is due primarily to the lack of a market to sell delinquent home equity loans and the relatively smaller number of home equity loan modifications which, to date, have been the primary drivers of Citi’s first mortgage delinquency improvement (see “North America Consumer Mortgage Quarterly Credit Trends—Delinquencies and Net Credit Losses—Residential First Mortgages” above).81
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 lowerdeclines in or continued low interest rates are generally one factor that tendstend 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 asTrading trading account assetsassets..
Citi’s MSRs totaled $2.569$1.9 billion $2.852as of December 31, 2012, compared to $1.9 billion and $4.554$2.6 billion at December 31, 2011, September 30, 20112012 and December 31, 2010,2011, respectively. The decrease in the value of Citi’s MSRs from year end 2010 to year endyear-end 2011 primarily representedreflected the impact from lower interest rates in addition to amortization.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.
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).
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:
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.
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 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.
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.
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.
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.
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
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.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. 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
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. As of December 31, 2011, Citi’sNorth America cards portfolio primarily consists of its Citi-branded portfoliocards and Citi retail services portfolios in Citicorp—Global Consumer Banking and its retail partner cards portfolio in Citi Holdings—Local Consumer Lending. The substantial majority of the retail partner cards portfolio will be transferred to Citicorp—NA RCB, effective in the first quarter of 2012 (see “Executive Summary” and “Citi Holdings” above).Citicorp. As of December 31, 2011,2012, the Citicorp Citi-branded cards portfolio totaled $76approximately $73 billion, while the Citi retail partner cardsservices portfolio was $43approximately $39 billion.
See “Consumer Loan Modification Programs” belowNote 16 to the Consolidated Financial Statements for a discussion ofadditional information on Citi’s significantNorth America cards modification programs.modifications.
The following charts detail the quarterly trends in delinquencies and net credit losses for Citigroup’sNorth America Citi-branded cards and Citi retail partner cards portfolios. As evidenced byservices portfolios in Citicorp. Assuming no significant downturn in the charts,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 continued to improve during 2011. Citi currently expects some continued improvement in these metrics, although at a slower pace as the portfolios stabilize.could begin to increase in line with portfolio growth.Citi-Branded Cards – Cards—Citigroup
82In billions of dollars
EOP Loans: 4Q11-$77.2 3Q12-$72.2 4Q12-$72.9Citi Retail Partner Cards – Services—Citigroup
North America Cards–Loan Loss Reserve CoverageIn billions of dollarsAt December 31, 2011, approximately $10.1 billion of Citi’s total loan loss reserves of $30.1 billion was allocated to Citi’sNorth America cards portfolios, representing over 17 months of coincident net credit loss coverage as of such date.EOP Loans: 4Q11-$39.9 3Q12-$36.6 4Q12-$38.68397Total Total loans (7) 90+ days past due (1) 30–89 days past due (1) loans (1) 90+ days past due (2) 30–89 days past due (2) December 31, December 31, December 31, December 31, December 31, December 31, In millions of dollars, except EOP loan amounts in billions 2011 2011 2010 2009 2011 2010 2009 Citicorp(2)(3)(4) In millions of dollars, except EOP loan amounts in billions and ratios 2012 2012 2011 2010 2012 2011 2010 Citicorp(3)(4) Total $ 246.6 $ 2,410 $ 3,101 $ 4,103 $ 2,880 $ 3,553 $ 4,338 $ 295.4 $ 3,082 $ 3,406 $ 4,453 $ 3,509 $ 4,072 $ 5,014 Ratio 0.98 % 1.35 % 1.83 % 1.17 % 1.55 % 1.93 % 1.05 % 1.19 % 1.63 % 1.19 % 1.42 % 1.84 % Retail banking Total $ 133.3 $ 736 $ 760 $ 805 $ 1,039 $ 1,146 $ 1,107 $ 145.8 $ 880 $ 769 $ 761 $ 1,112 $ 1,040 $ 1,148 Ratio 0.56 % 0.66 % 0.75 % 0.79 % 0.99 % 1.03 % 0.61 % 0.58 % 0.66 % 0.77 % 0.78 % 1.00 % North America 38.9 235 228 106 213 212 81 42.7 280 235 228 223 213 212 Ratio 0.63 % 0.76 % 0.33 % 0.57 % 0.71 % 0.25 % 0.68 % 0.63 % 0.76 % 0.54 % 0.57 % 0.71 % EMEA 4.2 58 84 129 93 136 223 5.1 48 59 84 77 94 136 Ratio 1.38 % 2.00 % 2.48 % 2.21 % 3.24 % 4.29 % 0.94 % 1.40 % 2.00 % 1.51 % 2.24 % 3.24 % Latin America 24.0 221 223 311 289 265 344 28.3 324 253 224 353 289 267 Ratio 0.92 % 1.09 % 1.71 % 1.20 % 1.30 % 1.89 % 1.14 % 1.07 % 1.13 % 1.25 % 1.22 % 1.35 % Asia 66.2 222 225 259 444 533 459 69.7 228 222 225 459 444 533 Ratio 0.34 % 0.37 % 0.50 % 0.67 % 0.88 % 0.89 % 0.33 % 0.33 % 0.37 % 0.66 % 0.66 % 0.87 % Citi-branded cards Total $ 113.3 $ 1,674 $ 2,341 $ 3,298 $ 1,841 $ 2,407 $ 3,231 $ 149.6 $ 2,202 $ 2,637 $ 3,692 $ 2,397 $ 3,032 $ 3,866 Ratio 1.48 % 2.05 % 2.81 % 1.62 % 2.11 % 2.75 % 1.47 % 1.72 % 2.35 % 1.60 % 1.98 % 2.46 % North America 75.9 1,004 1,597 2,371 1,062 1,539 2,182 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 1.32 % 2.06 % 2.82 % 1.40 % 1.99 % 2.59 % 1.87 % 2.38 % 3.20 % 2.04 % 2.94 % 3.45 % EMEA 2.7 44 58 85 59 72 140 2.9 48 44 58 63 59 72 Ratio 1.63 % 2.07 % 2.83 % 2.19 % 2.57 % 4.67 % 1.66 % 1.63 % 2.07 % 2.17 % 2.19 % 2.57 % Latin America 13.7 412 446 565 399 456 556 14.8 413 412 446 432 399 456 Ratio 3.01 % 3.33 % 4.56 % 2.91 % 3.40 % 4.48 % 2.79 % 3.01 % 3.33 % 2.92 % 2.91 % 3.40 % Asia 21.0 214 240 277 321 340 353 20.4 234 214 240 342 321 340 Ratio 1.02 % 1.18 % 1.55 % 1.53 % 1.67 % 1.97 % 1.15 % 1.08 % 1.22 % 1.68 % 1.61 % 1.73 % Citi Holdings—Local Consumer Lending(2)(3)(5)(6) Citi Holdings—Local Consumer Lending(5)(6) Total $ 176.0 $ 6,971 $ 10,216 $ 18,457 $ 6,340 $ 9,396 $ 14,105 $ 112.7 $ 4,611 $ 5,849 $ 8,864 $ 4,228 $ 5,148 $ 7,935 Ratio 4.18 % 4.76 % 6.11 % 3.80 % 4.38 % 4.67 % 4.42 % 4.66 % 5.17 % 4.05 % 4.10 % 4.63 % International 10.8 422 657 1,362 498 848 1,482 7.6 345 422 657 393 499 848 Ratio 3.91 % 3.00 % 4.22 % 4.61 % 3.87 % 4.59 % 4.54 % 3.91 % 3.00 % 5.17 % 4.62 % 3.87 % North America retail partner cards 42.8 1,054 1,601 2,681 1,282 1,685 2,674 Ratio 2.46 % 3.45 % 4.42 % 3.00 % 3.63 % 4.41 % North America(excluding cards) 122.4 5,495 7,958 14,414 4,560 6,863 9,949 North America 105.1 4,266 5,427 8,207 3,835 4,649 7,087 Ratio 4.85 % 5.43 % 6.89 % 4.03 % 4.68 % 4.76 % 4.41 % 4.73 % 5.49 % 3.96 % 4.05 % 4.74 % Total Citigroup (excludingSpecial Asset Pool) $ 422.6 $ 9,381 $ 13,317 $ 22,560 $ 9,220 $ 12,949 $ 18,443 $ 408.1 $ 7,693 $ 9,255 $ 13,317 $ 7,737 $ 9,220 $ 12,949 Ratio 2.28 % 3.00 % 4.29 % 2.24 % 2.92 % 3.50 % 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. (2)(3) The 90+ days past due balances forNorth America—Citi-branded cards andNorth America—Citi retail partnerservices 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.(3)Periods prior to January 1, 2010 are presented on a managed basis. Citigroup adopted SFAS 166/167 effective January 1, 2010. As a result, beginning in the first quarter of 2010, there is no longer a difference between reported and managed delinquencies. Prior years’ managed delinquencies are included herein for comparative purposes to the 2010 delinquencies. Managed basis reporting historically impacted theNorth America Regional Consumer Banking—Citi-branded cards and theLCL—retail partner cards businesses. The historical disclosures reflect the impact from credit card securitizations only. See discussion of adoption of SFAS 166/167 in Note 1 to the Consolidated Financial Statements.(4) The 90+ days and 30–89 days past due and related ratios forNorth America Regional Consumer Bankingexclude U.S. mortgage loans that are guaranteed by U.S. government agencies since the potential loss predominantly resides withinwith the U.S. agencies. The amounts excluded for loans 90+ days past due and (EOP(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 forNorth America LCL (excluding cards) exclude U.S. mortgage loans that are guaranteed by U.S. government agencies since the potential loss predominantly resides withinwith the U.S. agencies. The amounts excluded for loans 90+ days past due and (EOP(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), and $5.4 billion ($9.0 billion) at December 31, 2011,2012, December 31, 2010,2011 and December 31, 2009,2010, 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 $1.6 billion, and $1.0$1.6 billion, as of December 31, 2011,2012, December 31, 2010,2011 and December 31, 2009,2010, 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 forNorth America (excluding cards) exclude $1.2 billion, $1.3 billion and $1.7 billion, respectively, of loans that are carried at fair value.(7)Total loans include interest and fees on credit cards.8498Average Average loans (1) Net credit losses (2) loans (1) Net credit losses (2) In millions of dollars, except average loan amounts in billions 2011 2011 2010 2009 In millions of dollars, except average loan amounts in billions and ratios 2012 2012 2011 2010 Citicorp Total $ 236.5 $ 7,688 $ 11,216 $ 5,395 $ 286.4 $ 8,452 $ 10,840 $ 16,328 Add: impact of credit card securitizations(3) — — 6,931 Managed NCL 7,688 11,216 12,326 Ratio 3.25 % 5.11 % 5.63 % 2.95 % 3.93 % 6.22 % Retail banking Total $ 126.3 $ 1,174 $ 1,267 $ 1,555 $ 140.9 $ 1,258 $ 1,190 $ 1,281 Ratio 0.93 % 1.16 % 1.48 % 0.89 % 0.94 % 1.17 % North America 34.5 300 339 311 41.3 247 302 341 Ratio 0.87 % 1.11 % 0.90 % 0.60 % 0.88 % 1.12 % EMEA 4.4 87 167 287 4.7 46 87 166 Ratio 1.99 % 3.88 % 5.17 % 0.98 % 1.98 % 3.84 % Latin America 22.6 475 439 512 26.3 648 475 439 Ratio 2.10 % 2.35 % 3.08 % 2.46 % 2.14 % 2.42 % Asia 64.8 312 322 445 68.6 317 326 335 Ratio 0.48 % 0.58 % 0.92 % 0.46 % 0.50 % 0.59 % Citi-branded cards Cards Total $ 110.2 $ 6,514 $ 9,949 $ 3,840 $ 145.5 $ 7,194 $ 9,650 $ 15,047 Add: impact of credit card securitizations(3) — — 6,931 Managed NCL 6,514 9,949 10,771 Ratio 5.92 % 9.04 % 9.46 % 4.94 % 6.48 % 9.84 % North America 73.1 4,649 7,680 841 Add: impact of credit card securitizations(3) — — 6,931 Managed NCL 4,649 7,680 7,772 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 6.36 % 10.02 % 9.41 % 6.29 % 8.13 % 12.10 % EMEA 2.9 85 149 185 2.8 59 85 149 Ratio 2.98 % 5.32 % 6.55 % 2.09 % 2.98 % 5.32 % Latin America 13.7 1,209 1,429 1,920 14.1 1,102 1,209 1,429 Ratio 8.82 % 11.67 % 16.10 % 7.84 % 8.82 % 11.67 % Asia 20.5 571 691 894 19.8 524 557 678 Ratio 2.78 % 3.77 % 5.42 % 2.65 % 2.85 % 3.83 % Citi Holdings—Local Consumer Lending Total $ 199.7 $ 10,659 $ 17,040 $ 19,185 Add: impact of credit card securitizations(3) — — 4,590 Managed NCL 10,659 17,040 23,775 Total(3)(4) $ 124.3 $ 5,870 $ 7,504 $ 11,928 Ratio 5.34 % 6.20 % 7.03 % 4.72 % 4.69 % 5.16 % International 16.8 1,057 1,927 3,521 9.4 536 1,057 1,927 Ratio 6.30 % 7.36 % 9.18 % 5.72 % 6.30 % 7.36 % North America retailpartner cards 42.1 3,609 6,564 3,485 Add: impact of credit card securitizations(3) — — 4,590 Managed NCL 3,609 6,564 8,075 North America(3)(4) 114.9 5,334 6,447 10,001 Ratio 8.58 % 12.82 % 12.77 % 4.64 % 4.50 % 4.88 % North America(excluding cards) 140.8 5,993 8,549 12,179 Total Citigroup (excludingSpecial Asset Pool)(3)(4) $ 410.7 $ 14,322 $ 18,344 $ 28,256 Ratio 4.25 % 4.33 % 5.15 % 3.49 % 4.21 % 5.72 % Total Citigroup (excludingSpecial Asset Pool) $ 436.2 $ 18,347 $ 28,256 $ 24,580 Add: impact of credit card securitizations(3) — — 11,521 Managed NCL 18,347 28,256 36,101 Ratio 4.21 % 5.72 % 6.48 % (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) See Note 12012 includes approximately $635 million of incremental charge-offs related to OCC guidance issued in the Consolidated Financial Statementsthird 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 discussionbenefit to charge-offs of approximately $40 million related to finalizing the impact of SFAS 166/167.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. 85Consumer Loan Modification ProgramsCiti has instituted a variety of loan modification programs to assist its borrowers with financial difficulties. Under these programs, the largest of which are predominately long-term modification programs targeted at residential first mortgage borrowers, the original loan terms are modified. Substantially all of these programs incorporate some form of interest rate reduction; other concessions may include reductions or waivers of accrued interest or fees, loan tenor extensions and/or the deferral or forgiveness of principal.Loans modified under long-term modification programs (as well as short-term modifications originated since January 1, 2011) that provide concessions to borrowers in financial difficulty are reported as troubled debt restructurings (TDRs). Accordingly, loans modified under the programs described below, including modifications under short-term programs since January 1, 2011, are TDRs. These TDRs are concentrated in the U.S. See Note 16 to the Consolidated Financial Statements for a discussion of TDRs and Note 1 to the Consolidated Financial Statements for a discussion of the allowance for loan losses for these loans.A summary of Citi’s more significant U.S. modification programs follows:Residential First MortgagesHAMP. The HAMP is a long-term modification program designed to reduce monthly residential first mortgage payments to a 31% housing debt ratio (monthly mortgage payment, including property taxes, insurance and homeowner dues, divided by monthly gross income) by lowering the interest rate, extending the term of the loan and deferring or forgiving (either on an absolute or contingent basis) principal of certain eligible borrowers who have defaulted on their mortgages or who are at risk of imminent default due to economic hardship. The interest rate reduction for residential first mortgages under HAMP is in effect for five years and the rate then increases up to 1% per year until the interest rate cap (the lower of the original rate or the Freddie Mac Weekly Primary Mortgage Market Survey rate for a 30-year fixed rate conforming loan as of the date of the modification) is reached. In order to be entitled to a HAMP loan modification, borrowers must provide the required documentation and complete a trial period (generally three months) by making the agreed payments.Historically, Citi accounted for modifications under HAMP as TDRs when the borrower successfully completed the trial period and the loan was permanently modified. Effective in the fourth quarter of 2011, trial modifications are reported as TDRs at the beginning of the trial period. Accordingly, all loans in HAMP trials as of the end of 2011 are reported as TDRs.Citi Supplemental. The Citi Supplemental (CSM) program is a long-term modification program designed to assist residential first mortgage borrowers ineligible for HAMP or who become ineligible through the HAMP trial period process. If the borrower already has less than a 31% housing debtratio, the modification offered is an interest rate reduction (up to 2.5% with a floor rate of 4%), which is in effect for two years, and the rate then increases up to 1% per year until the interest rate is at the pre-modified contractual rate. If the borrower’s housing debt ratio is greater than 31%, steps similar to those under HAMP, including potential interest rate reductions, will be taken to achieve a 31% housing debt ratio. The modified interest rate is in effect for two years, and then increases up to 1% per year until the interest rate is at the pre-modified contractual rate. Three trial payments are required prior to modification, which can be made during the trial period. As in the case of HAMP as discussed above, all loans in CSM trials as of the end of 2011 are reported as TDRs.FHA/VA. Loans guaranteed by the FHA or VA are modified through the modification process required by those respective agencies and are long-term modification programs. Borrowers must be delinquent, and concessions include interest rate reductions, principal forgiveness, extending maturity dates, and forgiving accrued interest and late fees. The interest rate reduction is in effect for the remaining loan term. Losses on FHA loans are borne by the sponsoring agency, provided that the insurance terms have not been rescinded as a result of an origination defect. The VA establishes a loan-level loss cap, beyond which Citi is liable for loss. Historically, Citi’s losses on FHA and VA loans have been negligible.Responsible Lending.Citi’s Responsible Lending program is a long-term modification program designed to assist current residential first mortgage borrowers unable to refinance their loan due to negative equity in their home and/or other borrower characteristics. These loans are not eligible for modification under HAMP or CSM. This program is designed to provide payment relief based on a floor interest rate by product type. All adjustable rate and interest only loans are converted to fixed rate, amortizing loans for the remaining mortgage term.CFNA Permanent Mortgage Adjustment of Terms. This long-term modification program is targeted to CitiFinancial’s (part of Citi Holdings –LCL) consumer finance residential mortgage borrowers with a permanent hardship. Payment reduction is provided through the re-amortization of the remaining loan balance, typically at a lower interest rate. Modified loan tenors may not exceed a period of 480 months. Generally, the rescheduled payment cannot be less than 50% of the original payment amount unless the adjustment of terms is a result of participation in the CitiFinancial Home Affordability Modification Program (CHAMP) (terminated August 2010), or as a result of settlement, court order, judgment or bankruptcy. Borrowers must make a qualifying payment at the reduced payment amount in order to qualify for the modification. In addition, borrowers must provide income and employment verification, and monthly obligations are validated through an updated credit report.86CFNA Temporary Mortgage Adjustment of Terms. This short-term modification program is similar to the long-term program discussed above, but is targeted to CitiFinancial’s consumer finance borrowers with a temporary hardship. Under this program, which can include both an interest rate reduction and a term extension, the interest rate is reduced for either a five- or an eleven-month period. At the end of the temporary modification period, the interest rate reverts to the pre-modification rate. Similar to the long-term program, borrowers must make a payment at the reduced payment amount prior to the adjustment of terms being processed to qualify, and they must meet the verification and validation requirements discussed above. If the customer is still undergoing hardship at the conclusion of the temporary payment reduction, an extension of the temporary terms can be considered in either of the time period increments above, to a maximum of 24 months. In cases where the account is over 60 days past due at the expiration of the temporary modification period, the terms of the modification are made permanent and the payment is kept at the reduced amount for the remaining life of the loan.Credit CardsCredit card long-term modification programs.Citi’s long-term modification programs for its Citi-branded and retail partner cards borrowers are designed to liquidate a borrower’s balance within 60 months. These programs are available to borrowers who indicate a long-term hardship. Payment requirements are decreased by reducing interest rates charged to either 9.9% or 0%, depending on the borrower’s situation, and are designed to fully amortize the balance. Under these programs, fees are discontinued and charging privileges are permanently rescinded.Universal Payment Program (UPP).The UPP is a short-term cards modification program offered to Citi-branded and retail partner cards borrowers and provides short-term interest rate reductions to assist borrowers experiencing temporary hardships. Under this program, a participant’s APR is reduced by at least 500 basis points for a period of up to 12 months. The minimum payment is established based upon the borrower’s specific circumstances and is designed to amortize at least 1% of the principal balance each month. The participant’s APR returns to its original rate at the end of the program or earlier upon failure to make the required payments.Modification Programs—SummaryThe following table sets forth, as of December 31, 2011, information relating to Citi’s significant U.S. loan modification programs.Average Average Program interest rate Average % tenor of Deferred Principal In millions of dollars balance reduction payment relief modified loans principal forgiveness U.S. Consumer mortgage lending HAMP $ 4,282 4 % 41 % 30 years $ 558 $ 7 CSM 2,061 3 21 26 years 94 1 FHA/VA 4,117 2 18 28 years — — CFNA Adjustment of Terms (AOT) 3,796 3 23 29 years — — Responsible Lending 1,694 2 18 28 years — — CFNA Temporary Mortgage AOT 1,570 2 N/A N/A — — North America cards Long-term modification programs 5,035 15 — 5 years — — UPP 515 20 N/A N/A — — 87Consumer Mortgage—Representations and WarrantiesThe majority of Citi’s exposure to representation and warranty claims relates to its U.S. Consumer mortgage business within CitiMortgage.CitiMortgage Servicing PortfolioAs of December 31, 2011, Citi services loans previously sold to the U.S. government sponsored entities (GSEs) and private investors as follows:In millions December 31, 2011 (1) Unpaid Vintage sold(2): Number of loans principal balance 2005 and prior 1.4 $ 141,122 2006 0.3 43,040 2007 0.2 40,080 2008 0.3 39,279 2009 0.2 45,811 2010 0.2 40,474 2011 0.2 46,501 Total 2.8 $ 396,307 (1)Excludes the fourth quarter 2010 sale of servicing rights on 0.1 million loans with remaining unpaid principal balances of approximately $24,843 million as of December 31, 2011. Citi continues to be exposed to representation and warranty claims on these loans.(2)Includes 0.7 million loans with remaining unpaid principal balance of approximately $80,690 million as of December 31, 2011 that are serviced by CitiMortgage pursuant to prior acquisitions of mortgage servicing rights. These loans are covered by indemnification agreements from third parties in favor of CitiMortgage; however, substantially all of these agreements will expire prior to March 1, 2012. The expiration of these indemnification agreements is considered in determining the repurchase reserve.As previously disclosed, during the period 2005 through 2008, Citi sold approximately $25 billion of loans through private-label residential mortgage securitizations. As of December 31, 2011, approximately $11 billion of the $25 billion remained outstanding as a result of repayments of approximately $13 billion and cumulative losses (incurred by the issuing trusts) of approximately $1 billion. The remaining $11 billion outstanding is included in the $396 billion of serviced loans above. As of December 31, 2011, the amount that remained outstanding had a 90 days or more delinquency rate in the aggregate of approximately 12.9%. For information on litigation related to these and other Citi securitization activities, see “Securities and Banking-Sponsored Private-Label Residential Mortgage Securitizations—Representations and Warranties” below and Note 29 to the Consolidated Financial Statements.Representations and WarrantiesWhen selling a loan, Citi makes various representations and warranties relating to, among other things, the following:Citi’s ownership of the loan;the validity of the lien securing the loan;the absence of delinquent taxes or liens against the property securing the loan;the effectiveness of title insurance on the property securing the loan;the process used in selecting the loans for inclusion in a transaction;the loan’s compliance with any applicable loan criteria established by thebuyer; andthe loan’s compliance with applicable local, state and federal laws. The specific representations and warranties made by Citi depend on the nature of the transaction and the requirements of the buyer. Market conditions and credit-rating agency requirements may also affect representations and warranties and the other provisions to which Citi may agree in loan sales.Repurchases or “Make-Whole” PaymentsIn the event of a breach of these representations and warranties, Citi may be required to either repurchase the mortgage loans with the identified defects (generally at unpaid principal balance plus accrued interest) or indemnify (“make-whole”) the investors for their losses. Citi’s representations and warranties are generally not subject to stated limits in amount or time of coverage.Similar to 2010, during 2011, issues related to (i) misrepresentation of facts by either the borrower or a third party (e.g., income, employment, debts, FICO, 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. However, the type of defect that results in a repurchase or make-whole payment has continued and will continue to vary over time. More importantly, there has not been a meaningful difference in Citi’s incurred or estimated loss for any particular type of defect.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). 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.88 The unpaid principal balance of loans repurchased due to representation and warranty claims for the years ended December 31, 2011 and 2010, respectively, was as follows:December 31, 2011 December 31, 2010 Unpaid principal Unpaid principal In millions of dollars balance balance GSEs $ 505 $ 280 Private investors 8 26 Total $ 513 $ 306 As evidenced in the tables above, Citi’s repurchases have primarily been from the GSEs. In addition to the amounts set forth in the tables above, Citi recorded make-whole payments of $530 million and $310 million for the years ended December 31, 2011 and 2010, respectively.Repurchase ReserveCiti has recorded a reserve for its exposure to losses from the obligation to repurchase or make-whole payments in respect of previously sold loans (referred to as the repurchase reserve) that is included inOther liabilities in the Consolidated Balance Sheet. In estimating the repurchase reserve, Citi considers reimbursements estimated to be received from third-party correspondent lenders and indemnification agreements relating to previous acquisitions of mortgage servicing rights. The estimated reimbursements are based on Citi’s analysis of its most recent collection trends and the financial solvency of the correspondents.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 inOther revenue in the Consolidated Statement of Income) and is updated quarterly. Any change in estimate is recorded inOther revenue.The repurchase reserve is calculated by individual sales vintage (i.e., the year the loans were sold). During 2011, the majority of Citi’s repurchases continued to be from the 2006 through 2008 sales vintages, which also represented the vintages with the largest loss severity. An insignificant percentage of repurchases have been from vintages prior to 2006, and Citi continues to believe that this percentage will continue to decrease, as those vintages are later in the credit cycle. Although still early in the credit cycle, Citi continued to experience lower repurchases and loss per repurchase or make-whole from post-2008 sales vintages. The repurchase reserve is based on various assumptions. These assumptions contain a level of uncertainty and risk that, if different from actual results, could have a material impact on the reserve amounts (see “Sensitivity of Repurchase Reserve” below). The most significant assumptions used to calculate the reserve levels are as follows:Loan documentation requests:Assumptions regarding future expectedloan documentation requests exist as a means to predict future repurchaseclaim trends. These assumptions are based on recent historical trends inloan documentation requests, recent trends in historical delinquencies,forecasted delinquencies and general industry knowledge about thecurrent repurchase environment. During 2011, the actual number of loandocumentation requests declined as compared to 2010. However, becausesuch requests remain elevated from historical levels, and because of thecontinued increased focus on mortgage-related matters, the assumptionfor estimated future loan documentation requests increased during 2011.Citi currently believes the level of actual loan documentation requests willremain elevated from historical levels and will continue to be volatile.Repurchase claims as a percentage of loan documentation requests:Given that loan documentation requests are a potential indicatorof future repurchase claims, an assumption is made regarding theconversion rate from loan documentation requests to repurchase claims,which assumption is based on historical performance. During 2011, theconversion rate, or the number of repurchase claims as a percentage ofloan documentation requests, increased as compared to 2010, and thusthe assumption regarding future repurchase claims also increased. Citicurrently believes the claims as a percentage of loan documentationrequests will remain at elevated levels.Claims appeal success rate:This assumption represents Citi’sexpected success at rescinding a claim by satisfying the demand formore information, disputing the claim validity, or similar matters. Thisassumption is based on recent historical successful appeals rates, whichcan fluctuate based on changes in the validity or composition of claims.During 2011, Citi’s appeal success rate remained stable as comparedto 2010, meaning approximately half of the repurchase claims weresuccessfully appealed and resulted in no loss to Citi.Estimated loss per repurchase or make-whole:The assumption ofthe estimated loss per repurchase or make-whole payment is based onactual and estimated losses of recent historical repurchases/make-wholepayments calculated for each sales vintage year in order to capturevolatile housing price highs and lows. The estimated loss per repurchaseor make-whole payment assumption is also impacted by estimates of loansize at the time of repurchase or make-whole payment. During 2011, theseverity of losses increased slightly as compared to 2010, but was morethan offset by the reduction in loan size, resulting in a decline in theactual loss per repurchase or make-whole payment. Citi would expect tocontinue to see reductions in loan size, including for the 2006 to 2008sales vintages, as the loans continue to amortize through the loan cycle.89 In sum, the increase in estimated future loan documentation requests and repurchase claims as a percentage of loan documentation requests were the primary drivers of the $948 million increase in estimate for the repurchase reserve during 2011. These factors were also the primary drivers of the $305 million increase in estimate during the fourth quarter of 2011.The table below sets forth the activity in the repurchase reserve for the years ended December 31, 2011 and 2010:In millions of dollars Dec. 31, 2011 Dec. 31, 2010 Balance, beginning of period $ 969 $ 482 Additions for new sales 20 16 Change in estimate 948 917 Utilizations (749 ) (446 ) Balance, end of period $ 1,188 $ 969 The activity in the repurchase reserve for the three months ended December 31, 2011 was as follows:In millions of dollars Dec. 31, 2011 Balance, beginning of period $ 1,076 Additions for new sales 7 Change in estimate 305 Utilizations (200 ) Balance, end of period $ 1,188 Sensitivity of Repurchase ReserveAs discussed above, the repurchase reserve estimation process is subject to numerous estimates and judgments. The assumptions used to calculate the repurchase reserve contain a level of uncertainty and risk that, if different from actual results, could have a material impact on the reserve amounts. For example, Citi estimates that if there were a simultaneous 10% adverse change in each of the significant assumptions noted above, the repurchase reserve would increase by approximately $620 million as of December 31, 2011. This potential change is hypothetical and intended to indicate the sensitivity of the repurchase reserve to changes in the key assumptions. Actual changes in the key assumptions may not occur at the same time or to the same degree (i.e., an adverse change in one assumption may be offset by an improvement in another). Citi does not believe it has sufficient information to estimate a range of reasonably possible loss (as defined under ASC 450) relating to its Consumer representations and warranties.Representation and Warranty Claims—By ClaimantFor the GSEs, Citi’s response (i.e., agree or disagree to repurchase or make-whole) to any repurchase claim is required within 90 days of receipt of the claim. If Citi does not respond within 90 days, the claim is subject to discussions between Citi and the particular GSE. For private investors, the time period for responding to any repurchase claim is governed by the individual sale agreement; however, if the specified timeframe is exceeded, the investor may choose to initiate legal action. As of December 31, 2011, no such legal action has been initiated by private investors.The representation and warranty claims by claimant, as well as the number of unresolved claims by claimant, for the years ended December 31, 2011 and 2010, respectively, were as follows:Claims during Unresolved claims as of: 2011 2010 December 31, 2011 December 31, 2010 Original Original Original Original Number principal Number principal Number principal Number principal In millions of dollars of claims balance of claims balance of claims balance of claims balance GSEs 13,584 $ 2,930 11,520 $ 2,433 5,344 $ 1,148 5,257 $ 1,123 Private investors 1,649 331 1,221 313 651 122 581 128 Mortgage insurers(1) 729 164 274 60 62 15 78 17 Total(2) 15,962 $ 3,425 13,015 $ 2,806 6,057 $ 1,285 5,916 $ 1,268 (1)Represents the insurer’s rejection of a claim for loss reimbursement that has yet to be resolved. To the extent that mortgage insurance will not cover the claim on a loan, Citi may have to make the GSE or private investor whole. As of December 31, 2011, approximately $31 billion of the total servicing portfolio of $396 billion has insurance through mortgage insurance companies. Failure to collect from mortgage insurers is considered in determining the repurchase reserve. Citi does not believe inability to collect reimbursement from mortgage insurers would have a material impact on its repurchase reserve.(2)Includes 1,738 and 2,914 claims, and $291 million and $612 million of original principal balance for claims during the years ended December 31, 2011 and 2010, respectively, and 633 and 1,333, and $123 million and $267 million of original principal balance for unresolved claims as of December 31, 2011 and 2010, respectively, that are serviced by CitiMortgage pursuant to prior acquisitions of mortgage servicing rights. These loans are covered by indemnification agreements from third parties in favor of CitiMortgage; however, substantially all of these agreements will expire prior to March 1, 2012. The expiration of these indemnification agreements is considered in determining the repurchase reserve.90Securities and Banking-Sponsored Legacy Private-Label Residential Mortgage Securitizations—Representations and WarrantiesOverviewCiti is also exposed to representation and warranty claims through residential mortgage securitizations that had been sponsored by Citi’sS&B business. However,S&B-sponsored legacy securitizations have represented a much smaller portion of Citi’s business than Citi’s Consumer residential mortgage business discussed above.As previously disclosed, during the period 2005 through 2008,S&B had sponsored approximately $66.5 billion in legacy private-label mortgage-backed securitization transactions that were backed by loan collateral composed of approximately $15.5 billion prime, $12.4 billion Alt-A and $38.6 billion subprime residential mortgage loans. As of December 31, 2011, approximately $23.4 billion of this amount remains outstanding as a result of repayments of approximately $34.5 billion and cumulative losses (incurred by the issuing trusts) of approximately $8.7 billion (of which approximately $6.6 billion related to subprime loans). Of the amount remaining outstanding, approximately $6.1 billion is backed by prime residential mortgage collateral at origination, approximately $4.9 billion by Alt-A and approximately $12.3 billion by subprime. As of December 31, 2011, the $23.4 billion remaining outstanding had a 90 days or more delinquency rate of approximately 27.2%.The mortgages included in these securitizations were purchased from parties outside of Citi; fewer than 2% of the mortgages underlying the transactions outstanding as of December 31, 2011 were originated by Citi. In addition, fewer than 10% of the mortgages are serviced by Citi. (The mortgages serviced by Citi are included in the $396 billion of residential mortgage loans referenced under “Consumer Mortgage—Representations and Warranties” above.)Representation and WarrantiesIn connection with these securitization transactions, representations and warranties (representations) relating to the mortgages included in each trust issuing the securities were made either by Citi, by third-party sellers (Selling Entities, which were also often the originators of the loans), or both. These representations were generally made or assigned to the issuing trust and related to, among other things, the following:the absence of fraud on the part of the borrower, the seller or anyappraiser, broker or other party involved in the origination of themortgage (which was sometimes wholly or partially limited to theknowledge of the representation provider);whether the mortgage property was occupied by the borrower as his or herprincipal residence;the mortgage’s compliance with applicable federal, state and local laws;whether the mortgage was originated in conformity with the originator’sunderwriting guidelines; anddetailed data concerning the mortgages that were included on themortgage loan schedule. The specific representations relating to the mortgages in each securitization varied, however, depending on various factors such as the Selling Entity, rating agency requirements and whether the mortgages were considered prime, Alt-A or subprime in credit quality.In the event of a breach of its representations, Citi may be required either to repurchase the mortgage with the identified defects (generally at unpaid principal balance plus accrued interest) or indemnify the investors for their losses through make-whole payments. For securitizations in which Citi made representations, Citi generally also received from the Selling Entities similar representations, with the exception of certain limited representations required by, among others, the rating agencies. In cases where Citi made representations and also received the same representations from the Selling Entity for a particular loan, if Citi receives a claim based on breach of those representations in respect of the loan, it may have a contractual right to pursue a similar (back-to-back) claim against the Selling Entity (see discussion below). If only the Selling Entity made representations with respect to a particular loan, then only the Selling Entity should be responsible for a claim based on breach of the representations.For the majority of the securitizations where Citi made representations and received similar representations from Selling Entities, Citi currently believes that with respect to the securitizations backed by prime and Alt-A collateral, if it received a repurchase claim for those loans, it would have back-to-back claims against the Selling Entities that the Selling Entities would likely be in a position to honor. However, for the significant majority of the subprime collateral where Citi has back-to-back claims against Selling Entities, Citi believes that those Selling Entities would be unlikely to honor back-to-back claims because they are in bankruptcy, liquidation, or financial distress. In those situations, in the event that claims for breaches of representations were made against Citi, the Selling Entities’ financial condition might preclude Citi from obtaining back-to-back recoveries from them.To date, Citi has received actual claims for breaches of representations relating to only a small percentage of the mortgages included in these securitization transactions, although the pace of claims remains volatile and has recently increased. Citi has also experienced an increase in the level of inquiries, assertions and requests for loan files, among other matters, relating to the above securitization transactions from trustees of securitization trusts and others. Trustee activities have been prompted in part by lawsuits and other actions by investors. Given the continued increased focus on mortgage-related matters, as well as the increasing level of litigation and regulatory activity relating to mortgage loans and mortgage-backed securities, the level of inquiries and assertions regarding these securitizations may further increase. These inquiries and assertions could lead to actual claims for breaches of representations, or to litigation relating to such breaches or other matters. For information on litigation, claims and regulatory proceedings regarding these and other S&B mortgage-related activities, see Note 29 to the Consolidated Financial Statements.9199
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,”Overview” above. These include:thatwhich coordinatescredit activities with thateach client;
The following table represents the Corporate credit portfolio (excluding private banking),Private Bank inSecurities 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, 2011 At December 31, 2010 At December 31, 2012 At December 31, 2011 Greater Greater Greater Greater Due than 1 year Greater Due than 1 year Greater Due than 1 year Greater Due than 1 year Greater within but within than Total within but within than Total 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 1 year 5 years 5 years Exposure 1 year 5 years 5 years exposure Direct outstandings $ 177 $ 62 $ 13 $ 252 $ 191 $ 43 $ 8 $ 242 $ 198 $ 70 $ 18 $ 286 $ 177 $ 62 $ 13 $ 252 Unfunded lending commitments 144 151 21 316 174 94 19 287 123 180 12 315 144 151 21 316 Total $ 321 $ 213 $ 34 $ 568 $ 365 $ 137 $ 27 $ 529 $ 321 $ 250 $ 30 $ 601 $ 321 $ 213 $ 34 $ 568 MixMix—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, December 31, December 31, 2011 2010 2012 2011 North America 47 % 47 % 45 % 47 % EMEA 27 28 29 27 Asia 18 18 Latin America 8 7 8 8 Asia 18 18 Total 100 % 100 % 100 % 100 % Obligor Counterparty risk ratings reflect an estimated probability of default for an obligora 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 reflectloss-given defaultloss-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.assets.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, 20112012 and December 31, 2010,2011, as a percentage of the total portfolio:Direct outstandings and Direct outstandings and unfunded commitments unfunded lending commitments December 31, December 31, December 31, December 31, 2011 2010 2012 2011 AAA/AA/A 55 % 56 % 56 % 55 % BBB 29 26 29 29 BB/B 13 13 13 13 CCC or below 2 5 2 2 Unrated 1 — — 1 Total 100 % 100 % 100 % 100 % 92Direct outstandings and Direct outstandings and unfunded commitments unfunded lending commitments December 31, December 31, December 31, December 31, 2011 2010 2012 2011 Public sector 19 % 19 % 19 % 19 % Transportation and industrial 18 16 Petroleum, energy, chemical and metal 17 15 17 17 Transportation and industrial 16 16 Banks/broker-dealers 13 14 12 13 Consumer retail and health 13 12 12 13 Technology, media and telecom 8 8 8 8 Insurance and special purpose vehicles 5 5 Insurance and special purpose entities 5 5 Real estate 4 3 Hedge funds 4 3 3 4 Real estate 3 4 Other industries (1)2 4 2 2 Total 100 % 100 % 100 % 100 % (1)Includes all other industries, none of which exceeds 2% of total outstandings.
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 thePrincipal transactions line on the Consolidated Statement of Income.20112012 and December 31, 2010, $41.52011, $41.6 billion and $49.0$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, 20112012 and December 31, 2010,2011, the credit protection was economically hedging underlying credit exposure with the following risk rating distribution, respectively:distribution:December 31, December 31, December 31, December 31, 2011 2010 2012 2011 AAA/AA/A 41 % 53 % 29 % 41 % BBB 45 32 49 45 BB/B 13 11 19 13 CCC or below 1 4 3 1 Total 100 % 100 % 100 % 100 % 20112012 and December 31, 2010,2011, the credit protection was economically hedging underlying credit exposures with the following industry distribution:December 31, December 31, 2011 2010 Petroleum, energy, chemical and metal 22 % 24 % Transportation and industrial 22 19 Consumer retail and health 15 19 Public sector 12 13 Technology, media and telecom 12 10 Banks/broker-dealers 10 7 Insurance and special purpose vehicles 5 4 Other industries(1) 2 4 Total 100 % 100 % (1)Includes all other industries, none of which is greater than 2% of the total hedged amount. 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 % 93EXPOSURE TO COMMERCIAL REAL ESTATEICG and theSAP, through their business activities and as capital markets participants, incur exposures that are directly or indirectly tied to the commercial real estate (CRE) market, and each ofLCL andGCB hold loans that are collateralized by CRE. These exposures are represented primarily by the following three categories:(1)Assets held at fair value included approximately $5.5 billion at December 31, 2011, of which approximately $4.0 billion are securities, loans and other items linked to CRE that are carried at fair value asTrading account assets, approximately $1.1 billion are securities backed by CRE carried at fair value as available-for-sale (AFS) investments, and approximately $0.4 billion are other exposures classified as Other assets. Changes in fair value for these trading account assets are reported in current earnings, while for AFS investments change in fair value are reported inAccumulated other comprehensive income with credit-related other-than-temporary impairments reported in current earnings.The majority of these exposures are classified as Level 3 in the fair value hierarchy. Over the last several years, weakened activity in the trading markets for some of these instruments resulted in reduced liquidity, thereby decreasing the observable inputs for such valuations, and could continue to have an adverse impact on how these instruments are valued in the future. See Note 25 to the Consolidated Financial Statements.(2)Assets held at amortized cost include approximately $1.2 billion of securities classified as held-to-maturity (HTM) and approximately $26.2 billion of loans and commitments each as of December 31, 2011. HTM securities are accounted for at amortized cost, subject to an other-than-temporary impairment evaluation. Loans and commitments are recorded at amortized cost. The impact of changes in credit is reflected in the calculation of the allowance for loan losses and in net credit losses.(3)Equity and other investments include approximately $3.6 billion of equity and other investments (such as limited partner fund investments) at December 31, 2011 that are accounted for under the equity method, which recognizes gains or losses based on the investor’s share of the net income (loss) of the investee. The following table provides a summary of Citigroup’s global CRE funded and unfunded exposures at December 31, 2011 and 2010:December 31, December 31, In billions of dollars 2011 2010 Institutional Clients Group CRE exposures carried at fair value (including AFS securities) $ 4.6 $ 4.4 Loans and unfunded commitments 19.9 17.5 HTM securities 1.2 1.5 Equity method investments 3.4 3.5 TotalICG $ 29.1 $ 26.9 Special Asset Pool CRE exposures carried at fair value (including AFS securities) $ 0.4 $ 0.8 Loans and unfunded commitments 2.4 5.1 HTM securities — 0.1 Equity method investments 0.2 0.2 TotalSAP $ 3.0 $ 6.2 Global Consumer Banking Loans and unfunded commitments $ 2.9 $ 2.7 Local Consumer Lending Loans and unfunded commitments $ 1.0 $ 4.0 Brokerage and Asset Management CRE exposures carried at fair value $ 0.5 $ 0.5 Total Citigroup $ 36.5 $ 40.3 The above table represents the vast majority of Citi’s direct exposure to CRE. There may be other transactions that have indirect exposures to CRE that are not reflected in this table.94101Market 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. intermediary.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 islosses arise from fluctuations in the earnings riskmarket 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. Price risk arises in non-trading portfolios, as well as in trading portfolios.risks are measured in accordance with established standards to ensure consistency across businesses and the ability to aggregate risk. 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 (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.
Net interest revenueInterest Revenue and interest rate riskInterest 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 the customers’customer requirements with regard to tenor, index (if applicable) and rate type. Net interest revenue (NIR), for interest rate exposure (IRE) 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:repricing. Wheneverrepricing.Whenever the amount of liabilities subject to repricing exceeds theamount of assets subject to repricing, a company is considered “liabilitysensitive.” In this case, a company’s NIR will deteriorate in a risingrate environment.rising-rateenvironment.Federal Funds ratefederal funds rates, as well as the shape of the yield curve.
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.
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.
Citigroup employs additional measurements, including: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.95102IREInterest Rate Exposure
The exposures in the following table represent the approximate annualized risk to NIR assuming an unanticipated parallel instantaneous 100 bps change as well as a more gradual 100 bps (25 bps per quarter) parallel change in interest rates compared with the market forward interest rates in selected currencies.December 31, 2011 December 31, 2010 In millions of dollars Increase Decrease Increase Decrease U.S. dollar(1) Instantaneous change $ 97 NM $ (105 ) NM Gradual change 110 NM 25 NM Mexican peso Instantaneous change $ 87 $ (87 ) $ 181 $ (181 ) Gradual change 54 (54 ) 107 (107 ) Euro Instantaneous change $ 69 NM $ (10 ) NM Gradual change 35 NM (8 ) NM Japanese yen Instantaneous change $ 105 NM $ 93 NM Gradual change 61 NM 52 NM Pound sterling Instantaneous change $ 35 NM $ 33 NM Gradual change 24 NM 21 NM 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 $61$(107) million for a 100 basis pointbps instantaneous increase in interest rates as of December 31, 2012 and $61 million as of December 31, 2011.NM Not meaningful. A 100 basis pointbps decrease in interest rates would imply negative rates for the yield curve.year over yearyear-over-year reflected revised modelingchanges in Citi’s balance sheet composition, including deposit growth. They also reflected regular updates of mortgagesbehavioral assumptions for customer-related assets and liabilities, the impact of lower rates, asset sales, swappingswap activities and repositioning of the liquidity portfolio.portfolio, including increased AFS investments and decreasing long-term debt (see “Capital Resources and Liquidity—Funding and Liquidity” above).
The following table shows the approximate annualized risk to NIR from six different changes in the implied-forward rates.rates for the U.S. dollar. Each scenario assumes that the rate change will occur on a gradual basis every three months over the course of one year.simultaneously. Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Scenario 6 Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Scenario 6 Overnight rate change (bps) — 100 200 (200 ) (100 ) — — 100 200 (200 ) (100 ) — 10-year rate change (bps) (100 ) — 100 (100 ) — 100 (100 ) — 100 (100 ) — 100 Impact to net interest revenue(in millions of dollars) $ (380 ) $ 163 $ 247 NM NM $ (37 ) Impact to net interest revenue increase (decrease)(in millions of dollars) (166 ) 823 1,592 NM NM 163 96103
Price risk in Citi’s trading portfolios is monitored using a series of measures, including but not limited to:sensitivitiessensitivityOther)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.resultresults reflected in earnings. In 2011, negative trading-related revenue (net losses) was recorded for 54 of 260 trading days. Of the 54 days on which negative revenue (net losses) was recorded, 1 day was greater than $180 million.tradingtrading-related revenue (loss) captures trading volatility and shows the number of days in which revenues for Citi’s VAR trading-related revenuestrading businesses fell within particular ranges. A substantial portionAs shown in the histogram, positive trading-related revenue was achieved for 96% of the volatility relating to Citi’s total daily trading revenue VAR is driven by changesdays in CVA on Citi’s derivative assets, net of CVA hedges.2012.
Histogram of Daily Trading-Related Revenue(1)—Twelve Months Ended December 31, 2012 In millions of dollars 
(1) TotalDaily trading-related revenue includes trading, revenue consists of: (i) customer revenue, which includes spreads from customer flow and positions taken to facilitate customer orders; (ii) hedging activity, including hedging of the Corporate loan portfolio, MSRs, etc.; (iii) proprietary trading activities in cash and derivative transactions; (iv) net interest revenue; and (v) CVA adjustments incurred due to changes in the credit quality of counterparties as well as anyother revenue associated hedges to that CVA.(2)Principally related towith Citi’s trading revenue inICGon the day of the U.S. government rating downgrade by S&P (August 2011).(3)Principally related to trading revenue in ICGbusinesses. It excludes DVA and CVA, hedges on the daynet of the tsunami in Japan (March 2011).associated hedges. In addition, it excludes fees and other revenue associated with capital markets origination activities.97
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 whichVAR 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
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 market factorssensitivities updated daily and model parameters updated weekly.
The conservative features of the VAR calibration contribute approximately 20%15% add-on to what would be a VAR estimated under the assumption of stable and perfectly normally distributed markets. Under normal and stable market conditions, Citi would thus expect the number of days where trading losses exceed its VAR to be less than two or three exceptions per year. Periods of unstable market conditions could increase the number of these exceptions. During the last four quarters, there was one back-testing exception where trading losses exceeded the VAR estimate at the Citigroup level (back-testing is the process in which the daily VAR of a portfolio is compared to the actual daily change in the market value of transactions). This occurred on August 8, 2011, after the U.S. government rating was downgraded by S&P.and 2010, including quarterlyyearly averages. Historically, Citi included only the hedges associated with the CVA of its derivative transactions in its VAR calculations and disclosures (these hedges were, and continue to be, included within the relevant risk type (e.g., interest rate, foreign exchange, equity, etc.)). However, Citi now includes both the hedges associated with the CVA of its derivatives and the CVA on the derivative counterparty exposure (included in the line “Incremental Impact of Derivative CVA”). The inclusion of the CVA on derivative counterparty exposure reduces Citi’s total trading VAR; Citi believes this calculation and presentation reflect a more complete and accurate view of its mark-to-market risk profile as it incorporates both the CVA underlying derivative transactions and related hedges.For comparison purposes, Citi has included in the table below (i) total VAR, the specific risk-only component of VAR and the isolated general market factor VAR, each as reported previously (i.e., including only hedges associated with the CVA of its derivatives counterparty exposures), (ii) the incremental impact of adding in the derivative counterparty CVA, and (iii) the total trading and CVA VAR. As set forth in the table below, Citi’s total trading and CVAcredit portfolios VAR was $118 million at December 31, 2012 and $183 million at December 31, 2011 and $186 million at December 31, 2010.2011. Daily total trading and CVAcredit portfolios VAR averaged $189$148 million in 20112012 and ranged from $135$111 million to $255 million (prior period information is not available for comparability purposes).$199 million. The change in total trading and CVAcredit portfolios VAR year over yearyear-over-year was driven by a reduction in Citi’s trading exposures acrossS&B, particularlythe fact that the relatively higher volatilities from 2008 and 2009 are no longer included in the latter part ofthree-year volatility time horizon used for VAR, as well as reduced risk in the year, offset by an increase in market volatilitycredit portfolios related to CVA and an increase in CVA exposures and associated hedges.Corporate Treasury.Dec. 31, 2011 Dec. 31, 2010 Dec. 31, 2012 Dec. 31, 2011 In millions of dollars 2011 Average 2010 Average 2012 Average 2011 Average Interest rate $ 250 $ 246 $ 235 $ 234 $ 116 $ 122 $ 147 $ 187 Foreign exchange 51 61 52 61 33 38 37 45 Equity 36 46 56 59 32 29 36 46 Commodity 16 22 19 23 11 15 16 22 Covariance adjustment(1) (118 ) (162 ) (171 ) (172 ) (76 ) (82 ) (89 ) (124 ) Total Trading VAR— Total trading VAR— all market risk factors, including general and specific risk (excluding derivative CVA) $ 235 $ 213 $ 191 $ 205 (excluding credit portfolios)(2) $ 116 $ 122 $ 147 $ 176 Specific risk-only Component(2) $ 14 $ 22 $ 8 $ 18 Total—general component(3) $ 31 $ 24 $ 21 $ 25 Total trading VAR—general market factors only $ 221 $ 191 $ 183 $ 187 Incremental Impact of Derivative CVA $ (52 ) $ (24 ) $ (5 ) N/A Total Trading and CVA VAR $ 183 $ 189 $ 186 N/A (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 fromS&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. N/A(4) Not availableThe 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.9820112012 and 2010.2011.2011 2010 2012 2011 In millions of dollars Low High Low High Low High Low High Interest rate $ 187 $ 322 $ 171 $ 315 $ 101 $ 149 $ 138 $ 238 Foreign exchange 34 105 31 98 25 53 28 72 Equity 26 86 31 111 17 59 19 85 Commodity 14 36 15 39 9 21 14 36 20112012, excluding hedges to the loan portfolio, fair value option loans and DVA/CVA, relatingnet 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
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,ICGbusiness 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 derivative counterpartiesimplementation. 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 riskhedgesapproved by Citi’s U.S. banking regulators.CVA.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 lossIn millions of dollars Dec. 31, 2011 Total—all market risk factors, including general and specific risk $ 144 Average—during year $ 153 High—during year 205 Low—during year 104
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 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. Independentbusinesses.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 as toon the ongoing appropriateness of exposure levels and limits.
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.99106INTEREST REVENUE/EXPENSE AND YIELDS Average Rates–InterestRates-Interest Revenue, Interest Expense and Net Interest Margin
Change Change Change Change In millions of dollars 2011 2010 2009 2011 vs. 2010 2010 vs. 2009 In millions of dollars, except as otherwise noted 2012 2011 2010 2012 vs. 2011 2011 vs. 2010 Interest revenue (1) $ 73,201 $ 79,801 $ 77,069 (8 )% 4 % $ 68,680 $ 73,201 $ 79,801 (6 )% (8 )% Interest expense (2)24,229 25,096 27,881 (3 ) (10 ) 20,484 24,229 25,096 (15 ) (3 ) Net interest revenue(1)(2)(3) $ 48,972 $ 54,705 $ 49,188 (10 )% 11 % Net interest revenue(3) $ 48,196 $ 48,972 $ 54,705 (2 )% (10 )% Interest revenue—average rate 4.27 % 4.55 % 4.78 % (28 ) bps (23 ) bps 4.10 % 4.27 % 4.55 % (17 ) bps (28 ) bps Interest expense—average rate 1.63 1.61 1.93 2 bps (32 ) bps 1.46 1.63 1.61 (17 ) bps 2 bps Net interest margin 2.86 3.12 3.05 (26 ) bps 7 bps 2.88 2.86 3.12 2 bps (26 ) bps Interest-rate benchmarks Federal Funds rate—end of period 0.00–0.25 % 0.00–0.25 % 0.00–0.25 % — — Federal Funds rate—average rate 0.00–0.25 0.00–0.25 0.00–0.25 — — Two-year U.S. Treasury note—average rate 0.45 % 0.70 % 0.96 % (25 ) bps (26 ) bps 0.28 % 0.45 % 0.70 % (17 ) bps (25 ) bps 10-year U.S. Treasury note—average rate 2.78 3.21 3.26 (43 ) bps (5 ) bps 1.80 2.78 3.21 (98 ) bps (43 ) bps 10-year vs. two-year spread 233 bps 251 bps 230 bps 152 bps 233 bps 251 bps (1) Net interestInterest revenueincludes the taxable equivalent adjustments (based on the U.S. federal statutory tax rate of 35%) of $525$542 million, $520 million, and $519 million for 2012, 2011 and $692 million for 2011, 2010, and 2009, respectively.(2) Interest expenseincludes 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 asLong-term debtand accounted for at fair value with changes recorded inPrincipal transactions. (3)The increase in the net interest revenue from the fourth quarter of 2009 to the first quarter of 2010 was primarily driven by the adoption of SFAS 166/167 on January 1, 2010. See Note 1 to the Consolidated Financial Statements for further information.As described under “Market Risk” above, aA 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 2011,2012, Citi’s NIM declinedremained relatively stable as compared to the prior year decreasingat 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 2617 basis points primarily driven byin 2012 versus the continued run-off and sales of higher-yielding assets in Citi Holdings and lower investment yields driven byprior year. Ongoing pressure from the continued low interest rate environment partiallywas offset by the growthpay-downs of lower-yielding loanshigher-cost long-term debt and redemptions of trust preferred securities during the year, which positively impacted NIM by approximately 10 basis points in Citicorp2012. In addition, asborrowing costs (e.g., substituting maturingoutstanding long-term debt, with deposits as a funding source).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, (e.g., a significant portfolio sale in Citi Holdings), Citi expects its NIM will likely continue to reflect the pressure of a low interest rate environment butand 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 generally stabilize around end-of-year-2011 levels.be relatively stable to its full-year 2012 level, with some quarterly fluctuations.100107[THIS PAGE INTENTIONALLY LEFT BLANK]101Average volume Interest revenue % Average rate Average volume Interest revenue % Average rate In millions of dollars 2011 2010 2009 2011 2010 2009 2011 2010 2009 In millions of dollars, except rates 2012 2011 2010 2012 2011 2010 2012 2011 2010 Assets Deposits with banks(5) $ 169,688 $ 166,120 $ 186,841 $ 1,750 $ 1,252 $ 1,478 1.03 % 0.75 % 0.79 % $ 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 $ 158,154 $ 162,799 $ 138,579 $ 1,487 $ 1,774 $ 1,975 0.94 % 1.09 % 1.43 % $ 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) 116,681 86,926 63,909 2,144 1,382 1,109 1.84 1.59 1.74 120,400 116,681 86,926 1,947 2,144 1,382 1.62 1.84 1.59 Total $ 274,835 $ 249,725 $ 202,488 $ 3,631 $ 3,156 $ 3,084 1.32 % 1.26 % 1.52 % $ 277,237 $ 274,835 $ 249,725 $ 3,418 $ 3,631 $ 3,156 1.23 % 1.32 % 1.26 % Trading account assets(7) (8) Trading account assets(7)(8) In U.S. offices $ 122,234 $ 128,443 $ 140,233 $ 4,270 $ 4,352 $ 6,975 3.49 % 3.39 % 4.97 % $ 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) 147,417 151,717 126,309 4,033 3,819 3,879 2.74 2.52 3.07 126,203 147,417 151,717 3,077 4,033 3,819 2.44 2.74 2.52 Total $ 269,651 $ 280,160 $ 266,542 $ 8,303 $ 8,171 $ 10,854 3.08 % 2.92 % 4.07 % $ 250,836 $ 269,651 $ 280,160 $ 6,976 $ 8,303 $ 8,171 2.78 % 3.08 % 2.92 % Investments In U.S. offices Taxable $ 170,196 $ 169,218 $ 124,404 $ 3,313 $ 4,806 $ 6,208 1.95 % 2.84 % 4.99 % $ 169,307 $ 170,196 $ 169,218 $ 2,880 $ 3,313 $ 4,806 1.70 % 1.95 % 2.84 % Exempt from U.S. income tax 13,592 14,876 16,489 922 918 1,110 6.78 6.17 6.73 16,405 13,592 14,876 816 922 918 4.97 6.78 6.17 In offices outside the U.S.(5) 122,298 136,713 118,988 4,478 5,678 6,047 3.66 4.15 5.08 114,549 122,298 136,713 4,156 4,478 5,678 3.63 3.66 4.15 Total $ 306,086 $ 320,807 $ 259,881 $ 8,713 $ 11,402 $ 13,365 2.85 % 3.55 % 5.14 % $ 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 $ 369,656 $ 430,685 $ 378,937 $ 29,111 $ 34,773 $ 24,748 7.88 % 8.07 % 6.53 % $ 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) 274,035 255,168 267,683 21,180 20,312 22,766 7.73 7.96 8.50 289,371 274,035 255,168 21,508 21,180 20,312 7.43 7.73 7.96 Total $ 643,691 $ 685,853 $ 646,620 $ 50,291 $ 55,085 $ 47,514 7.81 % 8.03 % 7.35 % $ 649,165 $ 643,691 $ 685,853 $ 48,585 $ 50,291 $ 55,085 7.48 % 7.81 % 8.03 % Other interest-earning assets $ 49,467 $ 50,936 $ 49,707 $ 513 $ 735 $ 774 1.04 % 1.44 % 1.56 % $ 40,766 $ 49,467 $ 50,936 $ 580 $ 513 $ 735 1.42 % 1.04 % 1.44 % Total interest-earning assets $ 1,713,418 $ 1,753,601 $ 1,612,079 $ 73,201 $ 79,801 $ 77,069 4.27 % 4.55 % 4.78 % $ 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) 238,550 225,271 264,165 $ 234,437 $ 238,550 $ 225,271 Total assets from discontinued operations 668 18,989 15,137 — 668 18,989 Total assets $ 1,952,636 $ 1,997,861 $ 1,891,381 $ 1,910,699 $ 1,952,636 $ 1,997,861 (1) Net interestInterest revenueincludes the taxable equivalent adjustments (based on the U.S. federal statutory tax rate of 35%) of $525$542 million, $520 million, and $519 million for 2012, 2011 and $692 million for 2011, 2010, and 2009, 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 revenueandInterest expenseexcludeDiscontinued 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 revenueexcludes the impact of FIN 41 (ASC 210-20-45). (7) The fair value carrying amounts of derivative contracts are reported inNon-interest-earning assetsandOther non-interest-bearing liabilities. (8) Interest expense onTrading account liabilitiesofICGis reported as a reduction ofInterest revenue. Interest revenue and interestInterest expense on cash collateral positions are reported in interest onTrading account assetsandTrading account liabilities, respectively.(9) Includes cash-basis loans. 102108
AND NET INTEREST REVENUE (1)(2)(3)(4)Average volume Interest expense % Average rate Average volume Interest expense % Average rate In millions of dollars 2011 2010 2009 2011 2010 2009 2011 2010 2009 In millions of dollars, except rates 2012 2011 2010 2012 2011 2010 2012 2011 2010 Liabilities Deposits In U.S. offices Savings deposits(5) $ 193,762 $ 189,311 $ 174,260 $ 1,922 $ 1,872 $ 2,765 0.99 % 0.99 % 1.59 % Other time deposits 29,034 46,238 59,673 249 412 1,104 0.86 0.89 1.85 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) 485,101 483,796 443,601 6,385 6,087 6,277 1.32 1.26 1.42 488,166 485,101 483,796 5,659 6,385 6,087 1.16 1.32 1.26 Total $ 707,897 $ 719,345 $ 677,534 $ 8,556 $ 8,371 $ 10,146 1.21 % 1.16 % 1.50 % $ 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 $ 120,039 $ 123,425 $ 133,375 $ 776 $ 797 $ 988 0.65 % 0.65 % 0.74 % $ 121,843 $ 120,039 $ 123,425 $ 852 $ 776 $ 797 0.70 % 0.65 % 0.65 % In offices outside the U.S.(6) 99,848 88,892 72,258 2,421 2,011 2,445 2.42 2.26 3.38 101,928 99,848 88,892 1,965 2,421 2,011 1.93 2.42 2.26 Total $ 219,887 $ 212,317 $ 205,633 $ 3,197 $ 2,808 $ 3,433 1.45 % 1.32 % 1.67 % $ 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 $ 37,279 $ 36,115 $ 22,854 $ 266 $ 283 $ 222 0.71 % 0.78 % 0.97 % $ 29,486 $ 37,279 $ 36,115 $ 116 $ 266 $ 283 0.39 % 0.71 % 0.78 % In offices outside the U.S.(6) 49,162 43,501 37,244 142 96 67 0.29 0.22 0.18 44,639 49,162 43,501 74 142 96 0.17 0.29 0.22 Total $ 86,441 $ 79,616 $ 60,098 $ 408 $ 379 $ 289 0.47 % 0.48 % 0.48 % $ 74,125 $ 86,441 $ 79,616 $ 190 $ 408 $ 379 0.26 % 0.47 % 0.48 % Short-term borrowings In U.S. offices $ 87,472 $ 119,262 $ 123,168 $ 139 $ 674 $ 1,050 0.16 % 0.57 % 0.85 % $ 78,747 $ 87,472 $ 119,262 $ 203 $ 139 $ 674 0.26 % 0.16 % 0.57 % In offices outside the U.S.(6) 39,052 35,533 33,379 511 243 375 1.31 0.68 1.12 31,897 39,052 35,533 524 511 243 1.64 1.31 0.68 Total $ 126,524 $ 154,795 $ 156,547 $ 650 $ 917 $ 1,425 0.51 % 0.59 % 0.91 % $ 110,644 $ 126,524 $ 154,795 $ 727 $ 650 $ 917 0.66 % 0.51 % 0.59 % Long-term debt(10) In U.S. offices $ 325,709 $ 370,819 $ 316,223 $ 10,697 $ 11,757 $ 11,507 3.28 % 3.17 % 3.64 % $ 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) 17,970 22,176 29,132 721 864 1,081 4.01 3.90 3.71 14,603 17,970 22,176 292 721 864 2.00 4.01 3.90 Total $ 343,679 $ 392,995 $ 345,355 $ 11,418 $ 12,621 $ 12,588 3.32 % 3.21 % 3.64 % $ 269,696 $ 343,679 $ 392,995 $ 9,137 $ 11,418 $ 12,621 3.39 % 3.32 % 3.21 % Total interest-bearing liabilities $ 1,484,428 $ 1,559,068 $ 1,445,167 $ 24,229 $ 25,096 $ 27,881 1.63 % 1.61 % 1.93 % $ 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 $ 16,410 $ 16,117 $ 27,032 $ 13,170 $ 16,410 $ 16,117 Other non-interest-bearing liabilities(8) 275,408 245,481 263,296 311,529 275,408 245,481 Total liabilities from discontinued operations 10 18,410 9,502 — 10 18,410 Total liabilities $ 1,776,256 $ 1,839,076 $ 1,744,997 $ 1,724,201 $ 1,776,256 $ 1,839,076 Citigroup stockholders’ equity(11) $ 174,351 $ 156,478 $ 144,510 $ 184,592 $ 174,351 $ 156,478 Noncontrolling interest 2,029 2,307 1,874 1,906 2,029 2,307 Total equity(11) $ 176,380 $ 158,785 $ 146,384 $ 186,498 $ 176,380 $ 158,785 Total liabilities and stockholders’ equity $ 1,952,636 $ 1,997,861 $ 1,891,381 $ 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 $ 971,792 $ 1,044,486 $ 962,084 $ 25,723 $ 30,928 $ 24,230 2.65 % 2.96 % 2.52 % $ 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) 741,626 709,115 649,995 23,249 23,777 24,958 3.13 3.35 3.84 734,895 741,626 709,115 23,396 23,249 23,777 3.18 3.13 3.35 Total $ 1,713,418 $ 1,753,601 $ 1,612,079 $ 48,972 $ 54,705 $ 49,188 2.86 % 3.12 % 3.05 % $ 1,676,262 $ 1,713,418 $ 1,753,601 $ 48,196 $ 48,972 $ 54,705 2.88 % 2.86 % 3.12 % (1) Net interest revenueInterest expenseincludes the taxable equivalent adjustments (based on the U.S. federal statutory tax rate of 35%) of $525$51 million, $519$5 million and $692$0 million for 2012, 2011 2010, and 2009,2010, 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, interestInterest revenueand interestInterest expenseexclude discontinued operations.Discontinued operations. See Note 3 to the Consolidated Financial Statements.(5) Consists of other time deposits and savings deposits. Savings deposits consistare made up of Insured Money Marketinsured 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 expenseexcludes the impact of FIN 41 (ASC 210-20-45). (8) The fair value carrying amounts of derivative contracts are reported inNon-interest-earning assetsandOther non-interest-bearing liabilities.liabilities.(9) Interest expense onTrading account liabilitiesofICGis reported as a reduction ofInterest revenue. Interest revenue and interestInterest expense on cash collateral positions are reported in interest onTrading account assetsandTrading account liabilities, respectively.(10) Excludes hybrid financial instruments and beneficial interests in consolidated VIEs that are classified asLong-term debt, as these obligations are accounted for atin changes in fair value with changes recorded inPrincipal transactions.(11) Includes stockholders’ equity from discontinued operations. (12) Includes allocations for capital and funding costs based on the location of the asset. 1031092011 vs. 2010 2010 vs. 2009 2012 vs. 2011 2011 vs. 2010 Increase (decrease) Increase (decrease) Increase (decrease) Increase (decrease) due to change in: due to change in: due to change in: due to change in: Average Average Net Average Average Net Average Average Net Average Average Net In millions of dollars volume rate change volume rate change volume rate change volume rate change Deposits with banks(4) $ 27 $ 471 $ 498 $ (158 ) $ (68 ) $ (226 ) $ (114 ) $ (367 ) $ (481 ) $ 27 $ 471 $ 498 Federal funds sold and securities borrowed or purchased under agreements to resell In U.S. offices $ (49 ) $ (238 ) $ (287 ) $ 311 $ (512 ) $ (201 ) $ (12 ) $ (4 ) $ (16 ) $ (49 ) $ (238 ) $ (287 ) In offices outside the U.S.(4) 524 238 762 372 (99 ) 273 67 (264 ) (197 ) 524 238 762 Total $ 475 $ — $ 475 $ 683 $ (611 ) $ 72 $ 55 $ (268 ) $ (213 ) $ 475 $ — $ 475 Trading account assets(5) In U.S. offices $ (214 ) $ 132 $ (82 ) $ (547 ) $ (2,076 ) $ (2,623 ) $ 82 $ (453 ) $ (371 ) $ (214 ) $ 132 $ (82 ) In offices outside the U.S.(4) (111 ) 325 214 706 (766 ) (60 ) (544 ) (412 ) (956 ) (111 ) 325 214 Total $ (325 ) $ 457 $ 132 $ 159 $ (2,842 ) $ (2,683 ) $ (462 ) $ (865 ) $ (1,327 ) $ (325 ) $ 457 $ 132 Investments(1) In U.S. offices $ (9 ) $ (1,480 ) $ (1,489 ) $ 1,854 $ (3,448 ) $ (1,594 ) $ 44 $ (583 ) $ (539 ) $ (9 ) $ (1,480 ) $ (1,489 ) In offices outside the U.S.(4) (565 ) (635 ) (1,200 ) 827 (1,196 ) (369 ) (281 ) (41 ) (322 ) (565 ) (635 ) (1,200 ) Total $ (574 ) $ (2,115 ) $ (2,689 ) $ 2,681 $ (4,644 ) $ (1,963 ) $ (237 ) $ (624 ) $ (861 ) $ (574 ) $ (2,115 ) $ (2,689 ) Loans (net of unearned income)(6) In U.S. offices $ (4,824 ) $ (838 ) $ (5,662 ) $ 3,672 $ 6,353 $ 10,025 $ (764 ) $ (1,270 ) $ (2,034 ) $ (4,824 ) $ (838 ) $ (5,662 ) In offices outside the U.S.(4) 1,471 (603 ) 868 (1,036 ) (1,418 ) (2,454 ) 1,158 (830 ) 328 1,471 (603 ) 868 Total $ (3,353 ) $ (1,441 ) $ (4,794 ) $ 2,636 $ 4,935 $ 7,571 $ 394 $ (2,100 ) $ (1,706 ) $ (3,353 ) $ (1,441 ) $ (4,794 ) Other interest-earning assets $ (21 ) $ (201 ) $ (222 ) $ 19 $ (58 ) $ (39 ) $ (101 ) $ 168 $ 67 $ (21 ) $ (201 ) $ (222 ) Total interest revenue $ (3,771 ) $ (2,829 ) $ (6,600 ) $ 6,020 $ (3,288 ) $ 2,732 $ (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, interestInterest revenue and interestInterest expense exclude discontinued operations.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 onTrading account liabilitiesofICGis reported as a reduction of interest revenue. Interest revenue. Interest revenue and interestInterest expense on cash collateral positions are reported in interest onTrading account assetsandTrading account liabilities,, respectively.(6) Includes cash-basis loans. 1041102011 vs. 2010 2010 vs. 2009 2012 vs. 2011 2011 vs. 2010 Increase (decrease) Increase (decrease) Increase (decrease) Increase (decrease) due to change in: due to change in: due to change in: due to change in: Average Average Net Average Average Net Average Average Net Average Average Net In millions of dollars volume rate change volume rate change volume rate change volume rate change Deposits In U.S. offices $ (124 ) $ 11 $ (113 ) $ 27 $ (1,612 ) $ (1,585 ) $ 97 $ (314 ) $ (217 ) $ (124 ) $ 11 $ (113 ) In offices outside the U.S.(4) 16 282 298 540 (730 ) (190 ) 40 (766 ) (726 ) 16 282 298 Total $ (108 ) $ 293 $ 185 $ 567 $ (2,342 ) $ (1,775 ) $ 137 $ (1,080 ) $ (943 ) $ (108 ) $ 293 $ 185 Federal funds purchased and securities loaned or sold under agreements to repurchase In U.S. offices $ (22 ) $ 1 $ (21 ) $ (70 ) $ (121 ) $ (191 ) $ 12 $ 64 $ 76 $ (22 ) $ 1 $ (21 ) In offices outside the U.S.(4) 259 151 410 486 (920 ) (434 ) 49 (505 ) (456 ) 259 151 410 Total $ 237 $ 152 $ 389 $ 416 $ (1,041 ) $ (625 ) $ 61 $ (441 ) $ (380 ) $ 237 $ 152 $ 389 Trading account liabilities(5) In U.S. offices $ 9 $ (26 ) $ (17 ) $ 110 $ (49 ) $ 61 $ (48 ) $ (102 ) $ (150 ) $ 9 $ (26 ) $ (17 ) In offices outside the U.S.(4) 14 32 46 12 17 29 (12 ) (56 ) (68 ) 14 32 46 Total $ 23 $ 6 $ 29 $ 122 $ (32 ) $ 90 $ (60 ) $ (158 ) $ (218 ) $ 23 $ 6 $ 29 Short-term borrowings In U.S. offices $ (145 ) $ (390 ) $ (535 ) $ (32 ) $ (344 ) $ (376 ) $ (15 ) $ 79 $ 64 $ (145 ) $ (390 ) $ (535 ) In offices outside the U.S.(4) 26 242 268 23 (155 ) (132 ) (104 ) 117 13 26 242 268 Total $ (119 ) $ (148 ) $ (267 ) $ (9 ) $ (499 ) $ (508 ) $ (119 ) $ 196 $ 77 $ (119 ) $ (148 ) $ (267 ) Long-term debt In U.S. offices $ (1,470 ) $ 410 $ (1,060 ) $ 1,840 $ (1,590 ) $ 250 $ (2,422 ) $ 570 $ (1,852 ) $ (1,470 ) $ 410 $ (1,060 ) In offices outside the U.S.(4) (168 ) 25 (143 ) (269 ) 52 (217 ) (117 ) (312 ) (429 ) (168 ) 25 (143 ) Total $ (1,638 ) $ 435 $ (1,203 ) $ 1,571 $ (1,538 ) $ 33 $ (2,539 ) $ 258 $ (2,281 ) $ (1,638 ) $ 435 $ (1,203 ) Total interest expense $ (1,605 ) $ 738 $ (867 ) $ 2,667 $ (5,452 ) $ (2,785 ) $ (2,520 ) $ (1,225 ) $ (3,745 ) $ (1,605 ) $ 738 $ (867 ) Net interest revenue $ (2,166 ) $ (3,567 ) $ (5,733 ) $ 3,353 $ 2,164 $ 5,517 $ 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, interestInterest revenue and interestInterest expense exclude discontinued operations.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 onTrading account liabilitiesofICGis reported as a reduction ofInterest revenue. Interest revenue and interestInterest expense on cash collateral positions are reported in interest onTrading account assetsandTrading account liabilities, respectively.105111as with othercan result in losses arising from events related to the following, among others:
Citi’s operational risk types, is managed through an overall framework designed to balance strong corporate oversight with well-defined independent risk management. This framework includes:management;management and control functions; andreviewassessment by Citi’s Internal Audit and Risk Review (ARR).function. Notwithstanding these controls, Citigroup incurs operational losses.Framework
To monitor, mitigate and control operational risk, Citigroup maintains a system of comprehensive policies and has established a consistent framework for assessing and communicating operational riskrisks and the overall effectiveness of the internal control environment across Citigroup. An Operational Risk Council provides oversight forAs part of this framework, Citi has established a “Manager’s Control Assessment” program to help managers self-assess key operational risk across Citigroup. The Council’s membership includes senior membersrisks and controls and identify and address weaknesses in the design and/or effectiveness of the Chief Risk Officer’s organization covering multiple dimensions of risk management, with representatives of the Business and Regional Chief Risk Officers’ organizations and the business management group (see “Managing Global Risk—Risk Management—Overview” above). The Council’s focus is on identification and mitigation ofinternal controls that mitigate significant operational risk and related incidents. The Council works with the business segments and the control functions with the objective of ensuring a transparent, consistent and comprehensive framework for managing operational risk globally.risks.
EachAs 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:prioritize and assure adequateensure that sufficient resources are available to actively improve theoperational risk environment and mitigate emerging risks. The operational risk standards facilitate the effective communication and mitigation of operational risk both within and across businesses. As new products and business activities are developed, processes are designed, modified or sourced through alternative means and operational risks are considered. Enterprise
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 newly formed organizationtransparent, 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. InformationOperational 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 Risk Management and FinanceAudit Committee of Citi’s Board of DirectorsDirectors.
Operational risk is measured and the full Board of Directors.Measurement and Basel IITo support advancedassessed through risk capital(see “Managing Global Risk—Risk Capital” above). The approach to capital modeling and management, the businesses are required to capture relevant operational risk capital information. A risk capital model for operational risk has been developed and implemented across the major business segments as a step toward readiness for Basel II capital calculations. The risk capital calculation is designed to qualify as an “Advanced Measurement Approach” underbe generally consistent with Basel II. It uses a combination of internalII advanced measurement approaches standards (see “Capital Resources and external loss data to support statistical modeling of capital requirement estimates, which are then adjusted to reflect qualitative data regarding theLiquidity—Capital Resources—Regulatory Capital Standards” above). Projected operational risk and control environment.Information Security and Continuitylosses under stress scenarios are also required as part of BusinessInformation security and the protection of confidential and sensitive customer data are a priority for Citigroup. Citi has implemented an Information Security Program in accordance with the Gramm-Leach-Bliley Act and regulatory guidance. The Information Security Program is reviewed and enhanced periodically to address emerging threats to customers’ information.The Corporate Office of Business Continuity, with the support of senior management, continues to coordinate global preparedness and mitigate business continuity risks by reviewing and testing recovery procedures.Federal Reserve Board’s CCAR process.106112Country RiskOverview
Country risk is the risk that an event in a country (precipitated by developments within or external to a country) willcould directly or indirectly impair the value of Citi’s franchise or will adversely affect the ability of obligors within that country to honor their obligations to Citi.Citi, any of which could negatively impact Citi’s results of operations or financial condition. Country risk events maycould include sovereign volatility or defaults, banking failures or defaults, redenomination events (which could be accompanied by a revaluation (either devaluation or crises,appreciation) of the affected currency), currency crises, foreign exchange and/or capital controls and/or political events.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.belowregarding Citi’s country risk exposures on these topics as of December 31, 2012.
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.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. This includes exposureAs 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. Citi assesses thecountry (e.g., Citi’s Greece credit risk exposures may include loans, derivatives and other exposures to a U.K. subsidiary of loss associated with certain of the country exposures on a regular basis. These analyses take into consideration alternative scenarios that may unfold, as well as specific characteristics of Citi’s portfolio, such as transaction structure and collateral. Greece-based corporation).
Citi currently 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. For additional information relating to Citi’s risk management practices, see “Managing Global Risk” above.TheIn addition, the sovereign entities of all 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 uponon its franchise, client needs and transaction structures.GIIPS113France
Corporate ExposuresSeveral European countries, including Greece, Ireland, Italy, Portugal, Spain and France, have been the subject of credit deterioration due to weaknesses in their economic and fiscal situations. Given investor interest in this area, the table below sets forth Citi’s exposures to these countries as of December 31, 2011.In billions of U.S. dollars GIIPS (1) Greece Ireland Italy Portugal Spain France In billions of U.S. dollars as of December 31, 2012 GIIPS (1) Greece Ireland Italy Portugal Spain France Funded loans, before reserves (2)$ 9.4 $ 1.1 $ 0.3 $ 1.9 $ 0.4 $ 5.7 $ 4.7 $ 8.0 $ 1.1 $ 0.3 $ 1.8 $ 0.3 $ 4.5 $ 5.4 Derivative counterparty mark-to-market, inclusive of CVA (2)(3)10.8 0.6 0.6 7.3 0.3 2.0 7.0 13.6 0.6 0.5 9.6 0.2 2.6 6.0 Gross funded credit exposure $ 20.2 $ 1.7 $ 0.9 $ 9.2 $ 0.7 $ 7.7 $ 11.7 $ 21.6 $ 1.7 $ 0.8 $ 11.4 $ 0.5 $ 7.1 $ 11.5 Less: margin and collateral (3)(4)(4.2 ) (0.2 ) (0.4 ) (1.2 ) (0.1 ) (2.3 ) (5.3 ) $ (5.5 ) $ (0.3 ) $ (0.3 ) $ (1.2 ) $ (0.1 ) $ (3.5 ) $ (5.0 ) Less: purchased credit protection (4)(5)(9.6 ) (0.1 ) (0.1 ) (6.7 ) (0.2 ) (2.5 ) (5.1 ) (10.1 ) (0.3 ) (0.0 ) (7.6 ) (0.2 ) (2.0 ) (2.6 ) Net current funded credit exposure $ 6.4 $ 1.4 $ 0.4 $ 1.3 $ 0.4 $ 2.9 $ 1.3 $ 6.0 $ 1.2 $ 0.5 $ 2.6 $ 0.2 $ 1.5 $ 3.9 Net trading exposure $ 1.1 $ 0.1 $ 0.2 $ 0.2 $ — $ 0.6 $ 0.3 $ 2.6 $ 0.0 $ (0.0 ) $ 1.4 $ 0.1 $ 1.1 $ (0.2 ) AFS exposure 0.2 — — 0.2 — — 0.3 0.3 0.0 0.0 0.2 0.0 0.0 0.3 Net trading and AFS exposure $ 1.3 $ 0.1 $ 0.2 $ 0.4 $ — $ 0.6 $ 0.6 $ 2.9 $ 0.0 $ (0.0 ) $ 1.6 $ 0.1 $ 1.2 $ 0.1 Net current funded exposure $ 7.7 $ 1.5 $ 0.6 $ 1.7 $ 0.4 $ 3.5 $ 1.9 $ 8.9 $ 1.2 $ 0.5 $ 4.2 $ 0.3 $ 2.7 $ 4.0 Additional collateral received, not reducing amounts above $ (4.3 ) $ (1.2 ) $ (0.2 ) $ (0.4 ) $ — $ (2.5 ) $ (4.6 ) $ (2.1 ) $ (0.9 ) $ (0.2 ) $ (0.6 ) $ (0.0 ) $ (0.4 ) $ (4.0 ) Net current funded credit exposure detail: Net current funded credit exposure detail Sovereigns $ 0.7 $ 0.1 $ — $ 0.4 $ 0.2 $ — $ — $ 1.1 $ 0.2 $ 0.0 $ 1.1 $ 0.0 $ (0.3 ) $ 0.0 Financial institutions 1.6 — — 0.1 — 1.5 1.9 ��Financial institutions 0.8 0.0 0.0 0.2 0.0 0.6 1.9 Corporations 4.1 1.3 0.4 0.8 0.2 1.4 (0.6 ) 4.1 1.0 0.5 1.3 0.1 1.2 2.0 Net current funded credit exposure $ 6.4 $ 1.4 $ 0.4 $ 1.3 $ 0.4 $ 2.9 $ 1.3 $ 6.0 $ 1.2 $ 0.5 $ 2.6 $ 0.2 $ 1.5 $ 3.9 Unfunded commitments: Net unfunded commitments(6) Sovereigns $ 0.3 $ — $ — $ — $ — $ 0.3 $ 0.8 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.1 Financial institutions 0.3 — — 0.1 — 0.2 3.4 0.4 0.0 0.0 0.1 0.0 0.3 3.2 Corporations 6.7 0.4 $ 0.5 3.1 0.3 2.4 11.9 Total unfunded commitments $ 7.3 $ 0.4 $ 0.5 $ 3.2 $ 0.3 $ 2.9 $ 16.1 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: Information based onTotals 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 measures.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. (3)(4)MarginFor derivatives and loans, includes margin and collateral posted under legally enforceable margin agreements and collateral pledged under bankruptcy-remote structures.agreements. Does not include collateral received on secured financing transactions.(4)(5)Credit protection purchased primarily from investment grade, global financial institutions predominatelypredominantly 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. 107114GrossAs noted in the table above, Citi’s gross funded credit exposure to the sovereign entities, of Greece, Ireland, Italy, Portugal and Spain (GIIPS), as well as financial institutions and multinational and local corporations designated in these countriesthe GIIPS under Citi’s risk management systems was $20.2$21.6 billion at December 31, 2011. The $20.22012, 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 $9.4$8.0 billion in gross funded loans, before reserves (compared to $8.4 billion at September 30, 2012), and $10.8$13.6 billion in derivative counterparty mark-to-market exposure, inclusive of credit valuation adjustments.CVA (compared to $13.0 billion at September 30, 2012). The increase in derivative counterparty mark-to-market exposure includes the net creditquarter-over-quarter was primarily due to an increase in exposure arising from secured financing transactions, such as repurchase and reverse repurchase agreements. See “Secured Financing Transactions” below.in Italy due to market movements.
AsFurther, as of December 31, 2011,2012, Citi’s net current funded exposure to the GIIPS sovereigns, financial institutions and corporations was $7.7 billion. Includeddesignated in the $7.7GIIPS under Citi’s risk management systems was $8.9 billion, net current funded exposure was $1.3compared to $9.5 billion of net trading and available-for-sale securities exposure, and $6.4 billion ofat September 30, 2012, reflecting a decrease in net current funded credit exposure. Each component is described belowexposure partially offset by an increase in more detail.net trading and AFS exposure, each as discussed below.Exposure - $1.3Exposure—$2.9 billion
Included in the net current funded exposure at December 31, 20112012 was a net position of $1.3$2.9 billion in securities and derivatives with the GIIPS sovereigns, financial institutions and corporations as the issuer or reference entity, which are held in Citi’sentity. This compared to $2.0 billion of net trading and AFS portfolios.exposures as of September 30, 2012. These portfoliossecurities and derivatives are marked to market daily and, as previously disclosed,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).Exposure - $6.4Exposure—$6.0 billion
As of December 31, 2011, the2012, Citi’s net current funded credit exposure to the GIIPS sovereigns, financial institutions and corporations was $6.4 billion. Exposures were $0.7$6.0 billion, the majority of which was to sovereigns, $1.6corporations 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 financial institutionsan increase in margin and $4.1 billion to corporations.collateral netted against Citi’s gross funded credit exposure in the GIIPS, as discussed below.
Consistent with Citi’sits internal risk management measures and as set forth in the table above, net currentCiti’s gross funded credit exposure as of December 31, 2012 has been reduced by $4.3$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 pledged under bankruptcy-remote structures. Atnetted 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, 2011,2012. The reallocation resulted fromthisCiti’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 non-French securities, which are included at fair value.
Net currentGross funded credit exposure as of December 31, 2012 has also reflects a reduction for $9.6been 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 France. Suchtranched 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, (see “Credit Default Swaps” below), 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.
As of December 31, 2011,2012, Citi also had $7.3 billion of unfunded commitments to the GIIPS sovereigns, financial institutions and corporations, with $6.7$6.9 billion of this amount to corporations. TheseThis compared to $6.6 billion of unfunded linescommitments 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.drawn, and $2.0 billion of letters of credit (compared to $4.4 billion and $2.2 billion, respectively, at September 30, 2012).LikeIn 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. In addition, at
As of December 31, 2011,2012, Citi had approximately $7.4$6.2 billion of mostly locally funded exposureaccrual loans to retail, small business and Citi Private Bank customers in the GIIPS, generally to retail customers and small businesses as part of its local lending activities. Thethe vast majority of this exposure iswhich was in Citi Holdings (SpainHoldings. 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 Greece).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.GrossCiti’s gross funded credit exposure to the French sovereign entity of France, as well as financial institutions and multinational and local corporations designated in France under Citi’s risk management systems, was $11.7$11.5 billion at December 31, 2011. The $11.72012, 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 $4.7$5.4 billion in gross funded loans, before reserves (compared to $6.4 billion at September 30, 2012), and $7.0$6.0 billion in derivative counterparty mark-to-market exposure, inclusive of credit valuation adjustments. The derivative counterparty mark-to-market exposure includes the net credit exposure arising from secured financing transactions, suchCVA (compared to $6.9 billion at September 30, 2012).
Further, as repurchase and reverse repurchase agreements. See “Secured Financing Transactions” below.As of December 31, 2011,2012, 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 $1.9 billion. Included in the $1.9$4.0 billion, net current funded exposure was $0.6compared to $3.6 billion of net trading and available-for-sale securities exposure, and $1.3 billion of net current funded credit exposure. Each component is described below in more detail.at September 30, 2012.Exposure - $0.6Exposure—$0.1 billion
Included in the net current funded exposure at December 31, 20112012 was a net position of $0.6$0.1 billion in securities and derivatives with the French sovereign, financial institutions and corporations as the issuer or reference entity, which are held in Citi’sentity. This compared to a net position of $(0.5) billion of net trading and AFS portfolios.exposures as of September 30, 2012. These portfoliossecurities and derivatives are marked to market daily and, as previously disclosed,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).Exposure - $1.3Exposure—$3.9 billion
As of December 31, 2011,2012, the net current funded credit exposure to the French sovereign, financial institutions and corporations was $1.3$3.9 billion. Exposures wereOf 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 $(0.6)$2.0 billion to corporations.corporations (compared to $1.1 billion at September 30, 2012).
Consistent with Citi’sits internal risk management measures and as set forth in the table above, net currentCiti’s gross funded credit exposure has been reduced by $5.3$5.0 billion of margin and collateral posted under legally enforceable margin agreements and collateral pledged under bankruptcy-remote structures.(compared to $5.5 billion at September 30, 2012). As of December 31, 2011,2012, the majority of thisCiti’s margin and collateral netted against its gross funded credit exposure to France was in the form of cash, with the remainder in non-GIIPS,predominantly non-French securities, which are included at fair value.108 Net currentGross funded credit exposure as of December 31, 2012 has also reflects a reduction for $5.1been reduced by $2.6 billion in purchased credit protection (compared to $3.7 billion at September 30, 2012), predominantly from financial institutions outside GIIPSFrance (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 France. Suchtranched 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, (see “Credit Default Swaps” below), 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.16.114.4 billion
As of December 31, 2011,2012, Citi also had $16.1$14.4 billion of unfunded commitments to the French sovereign, financial institutions and corporations, with $11.9$11.2 billion of this amount to corporations. TheseThis compared to $13.7 billion of unfunded linescommitments 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.drawn, and $2.7 billion of letters of credit (compared to $10.6 billion and $3.1 billion, respectively, as of September 30, 2012).SimilarIn 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. Citi also has locally funded exposure in France; however, as of December 31, 2011, the amount of this exposure was not material.SwapsSwaps—GIIPS and France
Citi buys and sells credit protection, through credit default swaps (CDS), on underlying GIIPS orand French entities as part of its market-making activities for clients in its trading portfolios. Citi also purchases credit protection, through credit default swaps,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 credit default swapsCDS as part of its market-making activity, and purchases credit default swapsCDS for credit protection, primarily with investment grade, global financial institutions that Citi believes are of high quality.predominantly outside the GIIPS and France. Thecredit default swapsCDS, including any GIIPS or French counterparties, is usually covered bymanaged and mitigated through legally enforceable netting and margining agreements with a given counterparty, so thatcounterparty. 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 orand French underlying single reference entities as of December 31, 20112012 is set forth in the table below. The net notional contract amounts, less mark-to-market adjustments, are included in “net“Net current funded exposure” in the table under “GIIPS“Sovereign, Financial Institution and France”Corporate Exposures” above, and appear in either “net“Net trading exposure” when part of a trading strategy or in “purchased“Purchased credit protection” when purchased as a hedge against a credit exposure (see note 1 to the table below).exposure. Credit default swaps purchased or sold on underlying single reference entities in these countries (1) In billions of U.S. dollars GIIPS Greece Ireland Italy Portugal Spain France Notional CDS contracts on underlying
reference entities(1) Net purchased(2) $ (16.9 ) $ (1.0 ) $ (1.0 ) $ (9.2 ) $ (1.9 ) $ (7.6 ) $ (10.4 ) Net sold(2) 7.8 1.0 0.7 2.7 2.0 5.3 6.4 Sovereign underlying reference entity Net purchased(2) (11.7 ) (0.8 ) (0.6 ) (7.4 ) (1.2 ) (4.5 ) (4.6 ) Net sold(2) 5.7 0.8 0.6 1.9 1.2 4.0 4.5 Financial institution underlying reference entity Net purchased(2) (2.9 ) — (0.4 ) (1.3 ) (0.4 ) (1.3 ) (1.8 ) Net sold(2) 2.4 — 0.1 1.4 0.4 1.0 1.6 Corporate underlying reference entity Net purchased(2) (5.2 ) (0.4 ) (0.2 ) (2.4 ) (0.7 ) (2.8 ) (6.7 ) Net sold(2) 2.6 0.3 0.2 1.4 0.8 1.2 3.0 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 net notional contract amounts, less mark-to-market adjustments, are included in Citi’s “net current funded exposure” in the table under “GIIPS and France” on page 107. These amounts are reflected in two places in such table: $9.6 billion and $5.1 billion for GIIPS and France, respectively, are included in “purchased credit protection” hedging “gross funded credit exposure.” The remaining activity is reflected in “net trading exposure” since these positions are part of a trading strategy.(2)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. 109credit default swapsCDS 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 credit default swapCDS tenors readily available in the market, Citi generally will purchase credit protection with a maximum tenor that is readily available in the market.credit default swaps (CDSs)CDS purchased or sold on GIIPS orand French underlying single reference entities, whether part of a trading strategy or as purchased credit protection. With respect to the $16.9$15.9 billion net purchased CDS contracts on underlying GIIPS reference entities, approximately 89% has been91% was purchased from non-GIIPS counterparties.counterparties and 83% was purchased from investment grade counterparties as of December 31, 2012. With respect to the $10.4$9.0 billion net purchased CDS contracts on underlying French reference entities, approximately 72% has been97% was purchased from non-French counterparties. The net credit exposure to any counterparties arisingand 93% was purchased from these transactions, including any GIIPS or Frenchinvestment grade counterparties is managed and mitigated through legally enforceable netting and margining agreements. When Citi purchases credit default swaps 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.of December 31, 2012.TransactionsTransactions—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.ofshown in the table below, at December 31, 2011,2012, Citi had loaned $19.2$13.0 billion in cash through secured financing transactions with GIIPS orand French counterparties, usually through reverse repurchase agreements,agreements. This compared to $12.6 billion as shown in the table below.of September 30, 2012. Against those loans, it held approximately $21.2$16.6 billion fair value of securities collateral as well as $1.1collateral. In addition, Citi held $1.2 billion in variation margin, most of which was in cash.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 Cash financing out Securities collateral in (1) 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 $19.2 $21.2 $ 13.0 $ 16.6 (1) Citi has also received approximately $1.1$1.2 billion in variation margin, predominatelypredominantly cash, associated with secured financing transactions with these counterparties.2011.2012.Government Municipal or corporate Asset-backed In billions of dollars Total bonds bonds bonds Securities pledged by GIIPS or French counterparties in secured
financing transaction lending(1) $ 21.2 $ 10.3 $0.7 $ 10.2 Investment grade $ 20.3 $ 10.2 $0.4 $ 9.8 Non-investment grade 0.2 0.2 0.1 — Not rated 0.7 — 0.2 0.4 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 $2.8$3.1 billion in correlated risk collateral, predominatelypredominantly French and Spanish sovereign debt pledged by French counterparties.2011.2012.Remaining transaction tenor In billions of dollars Total <1 year 1-3 years 3-4 years (1) Cash extended to GIIPS or French counterparties in secured financing transactions lending(1) $ 19.2 $ 11.6 $ 6.1 $ 1.5 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 January 2015.November 2018.110118Cross-BorderRedenomination 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 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.
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 Global Country Risk Management.independent risk management. See also “Risk Factors—Market and Economic Risks” above.
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
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.20112012 and December 31, 2010:2011:December 31, 2011 December 31, 2010 December 31, 2012 December 31, 2011 Cross-border claims on third parties Cross-Border Claims on Third Parties Investments Investments in and Total in, and Total Trading and funding of Total cross- Trading and funding of Total cross- short-term local cross-border border 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) Banks Public Private Total claims (1) franchises outstandings (2) Commitments (3) outstandings (2) Commitments (3) United Kingdom $20.2 $ 1.0 $21.9 $ 43.1 $38.8 $ — $43.1 $101.8 $34.7 $105.5 $ 25.2 $ 0.3 $ 25.6 $ 51.1 $ 45.2 $ — $ 51.1 $ 85.0 $ 42.1 $ 90.3 Germany 15.8 18.6 4.2 38.6 37.6 0.6 39.2 64.7 33.6 59.5 14.6 18.0 7.6 40.2 37.4 7.4 47.6 66.8 36.2 64.7 France 15.6 3.2 19.6 38.4 35.9 — 38.4 69.3 37.5 57.3 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 4.1 0.9 6.7 11.7 11.0 18.8 30.5 5.3 28.6 4.6 4.8 1.6 7.9 14.3 12.2 18.4 32.7 5.5 30.9 5.3 Cayman Islands 0.2 — 22.7 22.9 22.5 — 22.9 1.4 20.6 0.3 Netherlands(4) 6.9 3.0 13.7 23.6 18.1 2.2 25.8 24.9 18.3 24.8 Brazil 2.3 2.3 7.5 12.1 8.9 8.4 20.5 22.8 16.0 22.1 1.4 4.1 9.3 14.8 9.5 6.9 21.7 19.2 20.4 22.9 Netherlands 6.2 1.3 10.2 17.7 14.1 0.5 18.2 24.4 14.2 25.6 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 — 3.0 4.7 7.7 4.7 10.2 17.9 12.3 16.2 12.0 2.4 1.1 4.6 8.1 5.2 8.1 16.2 12.4 17.9 12.2 Korea 1.9 0.9 3.2 6.0 4.7 9.9 15.9 24.5 15.8 22.6 1.4 0.9 4.1 6.4 3.8 9.1 15.5 26.4 16.3 24.5 Spain 4.4 1.0 4.4 9.8 7.4 4.2 14.0 27.7 11.5 20.3 Italy 1.5 7.7 1.7 10.9 10.4 0.5 11.4 37.0 13.0 25.9 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 such as experienced in the third quarter of 2011, 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. 111120
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:risks.Generally,risks.Generally, country risk includes the benefit of margin received as well asoffsetting exposures and hedge positions. As such, country risk which isreported based on Citi’s internal risk management standards, measuresnetgenerallymeasures net exposure to a credit or market risk event.thatwhich prevent the conversion of local currency to non-localcurrency or restrict the remittance of funds outside the country. Unlikecountry risk, FFIEC cross-border risk measures exposure to the immediateobligors or counterparties domiciled in the given country or, if applicable,by the location of collateral or guarantors of the legally bindingguarantees, generally without the benefit of margin received or hedgepositions, and recognizes offsetting exposures only for certain products.hedge positionshedgepositions in place. For cross-border risk, theseitemsthese items are also reported basedreportedbased on fair value and allow for netting ofreceivablesof receivables and payables if aifa legally binding netting agreement is in place,but only with the same specificsamespecific counterparty, and do not recognize thebenefitthe benefit of margin received orreceivedor hedges in place.bankruptcy-remote structures.legally enforceable margin agreements. For cross-border risk, loans arereportedloansare reported without taking hedges into account.(CDSs)(CDS) are reported based onthe neton thenet notional amount of CDSsCDS purchased and sold, assuming zerorecovery fromzero recoveryfrom the underlying entity, and adjusted for any mark-to-marketreceivable or payable position. For cross-border risk, CDSsCDS are includedbased on the gross notional amount sold, and do not include anyoffsetting purchased CDSsCDS on the same underlying entity.Venezuelan OperationsArgentina 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.
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:
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
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 that have restricted Citigroup’slimited Citi’s ability to obtain U.S. dollars in Venezuela at the official foreign currency rate. In May 2010, the government enacted new laws that have closed the parallel foreign exchange market and established a new foreign exchange market. Citigroup doesCiti has not have accessbeen able to acquire U.S. dollars in this new market. Citigroupfrom CADIVI since 2008.
Citi uses the official exchange rate to re-measure the foreign currency transactions in the financial statements of its Venezuelan operations which have(which use the U.S. dollar as the functional currencies,currency) into U.S. dollars. 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 2010, Citigroup had$300 million at September 30, 2012), which included net monetary assets in its Venezuelan operations denominated in Venezuelan bolivars of approximately $241$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 $200 million, respectively.Citi’s net bolivar-denominated assets declined to approximately $190 million.112122discussions relatediscussion 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.
The fair value adjustments applied by Citigroup to its derivative carrying values consist of the following items:thefair-valuethe fair-value hierarchy (see Note 25 to the Consolidated Financial Statementsfor more details) to ensure that the fair value reflects the price at whichthe entirenet open risk position could be liquidated. The liquidity reserve is basedisbased on thebid/the bid/offer spread for an instrument, adjusted toinstrument. When Citi has elected tomeasure certain portfolios of financial investments, such as derivatives,on the basis of the net open risk position, the liquidity reserve is adjustedto take into account the size oftheof the position.isare applied to over-the-counterderivative instruments, in which the base valuation generally discountsexpected cash flows using LIBORthe relevant base interest rate curves. Because not allcounterpartiesBecausenot all counterparties have the same credit risk as that implied by the relevantLIBORtherelevant base curve, a CVA is necessary to incorporate the market view of bothcounterpartyofboth counterparty credit risk and Citi’s own credit risk in the valuation.CitigroupCiti’s CVA methodology comprisesis 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 CDScredit 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 facilitiesnetting sets where individual analysis is practicable (for example,(e.g., exposures to monoline counterparties)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
The table below summarizes the CVA applied to the fair value of derivative instruments as of December 31, 2011 and 2010.for the periods indicated:Credit valuation adjustment Credit valuation adjustment contra-liability (contra-asset) contra-liability (contra-asset) December 31, December 31, December 31, December 31, In millions of dollars 2011 2010 2012 2011 Non-monoline counterparties $ (5,392 ) $ (3,015 ) $ (2,971 ) $ (5,392 ) Citigroup (own) 2,176 1,285 918 2,176 Net non-monoline CVA $ (3,216 ) $ (1,730 ) Monoline counterparties(1) — (1,548 ) Total CVA—derivative instruments $ (3,216 ) $ (3,278 ) $ (2,053 ) $ (3,216 ) (1)The reduction in CVA on derivative instruments with monoline counterparties includes $1.4 billion of utilizations in 2011.DVADebt Valuation Adjustments for Structured Debt
Own debt valuation adjustments (DVA) are recognized on Citi’s debt liabilities for which the fair value option (FVO) has been elected using Citi’s credit spreads observed in the bond market. Accordingly, the fair value of debt liabilities for which the fair value option has been elected (other than non-recourse and similar liabilities) is impacted by the narrowing or widening of Citi’s credit spreads. Changes in fair value resulting from changes in Citi’s instrument-specific credit risk are estimated by incorporating Citi’s current credit spreads observable in the bond market into the relevant valuation technique used to value each liability.
The table below summarizes pretax gains (losses) related to changes in CVA on derivative instruments, net of hedges, and DVA on own FVO debt:debt for the periods indicated: Credit/debt valuation Credit/debt valuation adjustment gain adjustment gain (loss) (loss) In millions of dollars 2011 2010 2012 2011 CVA on derivatives, excluding monolines,
net of hedges$ 33 $ 120 CVA related to monoline counterparties,
net of hedges 179 523 Derivative counterparty CVA, excluding monolines $ 805 $ (830 ) Derivative own-credit CVA (1,126 ) 863 Total CVA—derivative instruments (1) $ 212 $ 643 $ (321 ) $ 33 DVA related to own FVO debt $ 1,774 $ (589 ) $ (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 $ 1,986 $ 54 $ (2,328 ) $ 1,985 113123both on behalf of clients as well as forand in connection with its own account.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.
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. ApproximatelyAs of December 31, 2012 and December 31, 2011, approximately 96% and 89% of the gross receivables are from counterparties with which Citi maintains collateral agreements as of December 31, 2011 and December 31, 2010, respectively.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.11412420112012 and December 31, 2010:2011: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 Fair values Notionals In millions of dollars Receivable Payable Beneficiary Guarantor Receivable Payable Beneficiary Guarantor By industry/counterparty Bank $ 57,175 $ 53,638 $ 981,085 $ 929,608 $ 57,175 $ 53,638 $ 981,085 $ 929,608 Broker-dealer 21,963 21,952 343,909 321,293 21,963 21,952 343,909 321,293 Monoline 10 — 238 — 10 — 238 — Non-financial 95 130 1,797 1,048 95 130 1,797 1,048 Insurance and other financial institutions 11,611 9,132 185,861 142,579 11,611 9,132 185,861 142,579 Total by industry/counterparty $ 90,854 $ 84,852 $ 1,512,890 $ 1,394,528 $ 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 $ 89,998 $ 83,419 $ 1,491,053 $ 1,393,082 Total return swaps and other 856 1,433 21,837 1,446 856 1,433 21,837 1,446 Total by instrument $ 90,854 $ 84,852 $ 1,512,890 $ 1,394,528 $ 90,854 $ 84,852 $ 1,512,890 $ 1,394,528 By rating Investment grade $ 26,457 $ 23,846 $ 681,406 $ 611,447 $ 26,457 $ 23,846 $ 681,406 $ 611,447 Non-investment grade(1) 64,397 61,006 831,484 783,081 64,397 61,006 831,484 783,081 Total by rating $ 90,854 $ 84,852 $ 1,512,890 $ 1,394,528 $ 90,854 $ 84,852 $ 1,512,890 $ 1,394,528 By maturity Within 1 year $ 5,707 $ 5,244 $ 281,373 $ 266,723 $ 5,707 $ 5,244 $ 281,373 $ 266,723 From 1 to 5 years 56,740 54,553 1,031,575 947,211 56,740 54,553 1,031,575 947,211 After 5 years 28,407 25,055 199,942 180,594 28,407 25,055 199,942 180,594 Total by maturity $ 90,854 $ 84,852 $ 1,512,890 $ 1,394,528 $ 90,854 $ 84,852 $ 1,512,890 $ 1,394,528 December 31, 2010 Fair values Notionals In millions of dollars Receivable Payable Beneficiary Guarantor By industry/counterparty Bank $ 37,586 $ 35,727 $ 820,211 $ 784,080 Broker-dealer 15,428 16,239 319,625 312,131 Monoline 1,914 2 4,409 — Non-financial 93 70 1,277 1,463 Insurance and other financial institutions 10,108 7,760 177,171 125,442 Total by industry/counterparty $ 65,129 $ 59,798 $ 1,322,693 $ 1,223,116 By instrument Credit default swaps and options $ 64,840 $ 58,225 $ 1,301,514 $ 1,221,211 Total return swaps and other 289 1,573 21,179 1,905 Total by instrument $ 65,129 $ 59,798 $ 1,322,693 $ 1,223,116 By rating Investment grade $ 18,427 $ 15,368 $ 547,171 $ 487,270 Non-investment grade(1) 46,702 44,430 775,522 735,846 Total by rating $ 65,129 $ 59,798 $ 1,322,693 $ 1,223,116 By maturity Within 1 year $ 1,716 $ 1,817 $ 164,735 $ 162,075 From 1 to 5 years 33,853 34,298 935,632 853,808 After 5 years 29,560 23,683 222,326 207,233 Total by maturity $ 65,129 $ 59,798 $ 1,322,693 $ 1,223,116 (1) Also includes not-rated credit derivative instruments. 115125change.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.
Citigroup holds fixed incomedebt 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, and interest rate risks and for proprietary trading 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 38.8%42.6% and 37.3%38.9% of total assets, and 15.7%16.0% and 16.6%15.0% of total liabilities, were accounted for at fair value as of December 31, 20112012 and 2010,2011, 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 independent personnel.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.2011.2012. 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 “Managing Global Risk.”Notes 25 and 26 to the Consolidated Financial Statements.
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 available-for-sale securities,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 ofStockholders’ 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 26 and 2726 to the Consolidated Financial Statements.
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 notmore-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 ornor 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 available-for-saleAFS 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 other-than-temporary impairment)OTTI). For securities transferred to held-to-maturityHTM fromTrading 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 held-to-maturityHTM from available-for-sale,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.116126available-for-saleAFS or held-to-maturity,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. At December 31, 2011, Citi had several The following paragraphs discuss Citi’s significant OTTI equity method investments that had temporaryduring 2012.
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 includingcharge 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, and the Morgan Stanley Smith Barney joint venture.resulting in a loss on sale of $424 million ($274 million after-tax), recorded within other revenue. As of December 31, 2011, management does not plan2012, the remaining 9.9% stake in Akbank is recorded within marketable equity securities available-for-sale.
On September 17, 2012, Citi sold to sell those investments priorMorgan Stanley a 14% interest (14% Interest) in MSSB to recoverywhich 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 valuethe 14% Interest. The purchase price was based on an implied 100% valuation of MSSB of $13.5 billion, as agreed between Morgan Stanley and it is not more likely than not that Citi will be requiredpursuant to sell those investments. Foran agreement dated September 11, 2012 (for additional information, see Citi’s Form 8-K filed with the U.S. Securities and Exchange Commission on theseSeptember 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.
As of December 31, 2012, Citi continues to account for its remaining 35% interest in MSSB under the equity method, investments, see Note 15 towith the Consolidated Financial Statements (Evaluating Investments for Other-Than-Temporary Impairments) below.carrying value capped at the agreed selling price of $4.725 billion.
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 balance sheetConsolidated 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.
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 (primarilyInstitutional Clients GroupandGlobal Consumer Banking), or modified Consumer loans, where concessions were granted due to the borrowers’ financial difficulties.probable lossesProbable Losses for non-performing, non-homogeneousexposures withinNon-Performing, Non-Homogeneous Exposures Within a business line’s classifiably managed portfolioBusiness Line’s Classifiably Managed Portfolio and impaired smaller-balance homogeneous loans whose termshave been modified dueImpaired Smaller-Balance Homogeneous Loans Whose Terms Have Been Modified Due to the borrowers’ financial difficulties, whereit was determined thatBorrowers’ Financial Difficulties, Where It Was Determined That a concession was grantedConcession Was Granted to the borrower.Borrower.
Consideration may be given to the following, as appropriate, whendeterminingwhen determining this estimate: (i) the present value of expected future cashflowscash flows discounted at the loan’s original effective rate; (ii) the borrower’soverallborrower’s overall financial condition, resources and payment record; and (iii) theprospectsthe prospects for support from financially responsible guarantors or therealizablethe realizable value of any collateral. When impairment is measured basedonbased on the present value of expected future cash flows, the entire change inpresent value is recorded in theProvision for loan losses.calculated losses inherentCalculated Losses Inherent in the classifiably managedportfolioClassifiably Managed Portfolio for performingPerforming and de minimis non-performing exposuresDe Minimus Non-Performing Exposures..TheThe calculation is based upon: (i) Citigroup’s internal system of credit-riskratings,credit-risk ratings, which are analogous to the risk ratings of the major credit ratingagencies;rating agencies; and (ii) historical default and loss data, including rating agencyinformationagency information regarding default rates from 1983 to 2011, and internal datadatingdata dating to the early 1970s on severity of losses in the event of default.Additional adjustments.These Adjustments may be made to this data. Such adjustments include: (i) statistically calculatedestimatescalculated estimates to cover the historical fluctuation of the default rates over thecreditthe credit cycle, the historical variability of loss severity among defaultedloans,defaulted loans, and the degree to which there are large obligor concentrations inthein the global portfolio; and (ii) adjustments made for specifically knownitems,known items, such as current environmental factors and credit trends.117losses.losses.
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 inOther liabilities. Changes to the allowance for unfunded lending commitments are recorded in theProvision for unfunded lending commitments.commitments.
For a further description of the loan loss reserve and related accounts, see Notes 1 and 17 to the Consolidated Financial Statements.
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.Elimination of Qualifying Special Purpose Entities (QSPEs) and Changes in the Consolidation Model for VIEsIn June 2009, the FASB issued SFAS No. 166,Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140(SFAS 166, now incorporated into ASC Topic 860) and SFAS No. 167,Amendments to FASB Interpretation No. 46(R)(SFAS 167, now incorporated into ASC Topic 810). Citigroup adopted both standards on January 1, 2010 and elected to apply SFAS 166 and SFAS 167 prospectively. Accordingly, prior periods have not been restated. SFAS 166 eliminated the concept of QSPEs from U.S. GAAP and amends the guidance on accounting for transfers of financial assets. SFAS 167 details three key changes to the consolidation model. First, former QSPEs are now included in the scope of SFAS 167. Second, the FASB has changed the method of analyzing which party to a variable interest entity (VIE) should consolidate the VIE (known as the primary beneficiary) to a qualitative determination of which party to the VIE has “power,” combined with potentially significant benefits or losses, instead of the previous quantitative risks and rewards model. The party that has “power” has the ability to direct the activities of the VIE that most significantly impact the VIE’s economic performance. Third, the new standard requires that the primary beneficiary analysis be re-evaluated whenever circumstances change. The previous rules required reconsideration of the primary beneficiary only when specified reconsideration events occurred.As a result of implementing these new accounting standards, Citigroup consolidated certain of the VIEs and former QSPEs with which it had involvement on January 1, 2010. Further, certain asset transfers, including transfers of portions of assets, that would have been considered sales under SFAS 140 are considered secured borrowings under the new standards. Citigroup consolidated all required VIEs and former QSPEs, as of January 1, 2010, at carrying values or unpaid principal amounts, except for certain private-label residential mortgage and mutual fund deferred sales commissions VIEs, for which the fair value option was elected.The incremental impact of these changes on GAAP assets and resulting risk-weighted assets for those VIEs and former QSPEs that were consolidated or deconsolidated for accounting purposes as of January 1, 2010 was an increase in GAAP assets of $137.3 billion and $24.0 billion in risk-weighted assets. In addition, the cumulative effect of adopting these new accounting standards as of January 1, 2010 resulted in an aggregate after-tax charge toRetained earningsof $8.4 billion, reflecting the net effect of an overall pretax charge toRetained earnings (primarily relating to the establishment of loan loss reserves and the reversal of residual interests held) of $13.4 billion and the recognition of related deferred tax assets amounting to $5.0 billion.Non-Consolidation of Certain Investment FundsThe FASB issued Accounting Standards Update No. 2010-10,Consolidation (Topic 810), Amendments for Certain Investment Funds (ASU 2010-10) in the first quarter of 2010. ASU 2010-10 provides a deferral of the requirements of SFAS 167 for certain investment funds. Citigroup has determined that a majority of the investment vehicles managed by it are provided a deferral from the requirements of SFAS 167 as they meet these criteria. These vehicles continue to be evaluated under the requirements of FIN 46(R) (ASC 810-10), prior to the implementation of SFAS 167.118Where Citi 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.For additional information, see Notes 1 and 22 to the Consolidated Financial Statements.
Citigroup has recordedGoodwill on its Consolidated Balance Sheet goodwill of $25.7 billion (1.4% of assets) and $25.4 billion (1.4% of assets) and $26.2 billion (1.4% of assets) on its Consolidated Balance Sheet at December 31, 20112012 and December 31, 2010,2011, 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 2009, 2010, 2011 and 2011.2012. full fair value of each reporting unit is available to support the value of goodwill allocated to the unit. As ofgoodwill. Citi’s nine reporting units at December 31, 2011, Citigroup operated in three core business segments, as discussed above. Goodwill impairment testing is performed at the reporting unit level, one level below the business segment.The reporting unit structure in 2011 was consistent with the reporting units identified in the second quarter of 2009 as a result of the change in Citi’s organizational structure. During 2011, goodwill was allocated to disposals and tested for impairment under these reporting units. The nine reporting units2012 wereNorth 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—CardsandLocal Consumer Lending—Other.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 theLocal Consumer Lending—Cards reporting unit was transferred to North America—Regional Consumer Banking. In addition, certain small businesses included within theLocal Consumer Lending—Cards reporting unit were transferred toLocal Consumer Lending—Other. Additionally, an insurance business in El Salvador withinBrokerage and Asset Management was transferred toLatin America Regional Consumer Banking. Goodwill affected by these transfers was reassigned fromLocal Consumer Lending—Cards andBrokerage 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 analysistest. If, after assessing the totality of events or circumstances, the Company determines that it is done in two steps.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.
WhenIf required, the second step of testing 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, whichcombination. 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 as if the reporting unit were being acquired.intangibles. If the amount of the goodwill allocated to the reporting unit
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, theSpecial Asset Pool andCorporate/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.
Citigroup engaged the services of an independent valuation specialist in 20102011 and 20112012 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 20102011 and 2011,2012, 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 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 strategic plan is developed. For the purpose of performing any impairment test, the three-year forecast is updated by Citi to reflect current economic conditions as of the testing date. Citi used updated long-range financial forecasts as a basis forperformed its annual goodwill impairment test performed as of July 1, 2011.
2012. The results of the July 1, 20112012 annual impairment test validated that the fair values exceeded the carrying values for the reporting units that had goodwill at the testing date. 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 interim goodwill impairment tests were required to be performed during 2011.2012, outside of the test performed as of January 1, 2012, as discussed above.119the Company’sCiti’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, 20112012 exceeded the overall market capitalization of Citi as of July 1, 2011.2012. However, Citi believes that it was not meaningful to reconcile the sum of the fair values of its reporting units to its market capitalization during the 2011 annual impairment test due to the fact that Citi’sseveral factors. The market capitalization of Citigroup reflects the execution risk in a transaction involving Citigroup due to its size. TheHowever, 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 ofLocal 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.
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 itsLocal 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 also Note 18 to the Consolidated Financial Statements.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.
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.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.
At December 31, 2011,2012, Citi had recorded net DTAs of approximately $51.5$55.3 billion, a decreasean increase of $0.6$3.8 billion from $52.1$51.5 billion at December 31, 2010.2011. 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: 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. DTADTAs of $51.5$55.3 billion at December 31, 20112012 is more likely than notmore-likely-than-not based upon (i) expectations as to future taxable income in the jurisdictions in which the DTAs arise, and based on(ii) available tax planning strategies (as defined in ASC 740,Income Taxes)Taxes) that would be implemented, if necessary, to prevent a carryforwardcarry-forward from expiring.
expiring, each as discussed further below. In general, Citi would need to generate approximately $111$112 billion of U.S. taxable income during the respective carryforwardcarry-forward periods, (discussedsubstantially 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. Citi’s net DTAs will decline primarily as additional domestic GAAP taxable income is generated.of December 31, 2011, Citi was no longer in a three-year cumulative loss position for purposes of evaluating its DTAs. While this removes a significant piece of negative evidence in evaluating the need for a valuation allowance, Citi will continue to weigh the evidence supporting its DTAs.referenced above, Citi has concluded that there are two piecescomponents of positive evidence that support the full realizability of its DTAs. First, Citi forecasts sufficient U.S. taxable income in the carryforward period,carry-forward periods, exclusive of tax planning strategies. Second, Citi has sufficientASC 740 tax planning strategies, including potential sales of assets, in which it could realize the excess of appreciated value over the tax basis of its assets. The amount of the DTAs considered realizable, however, is necessarily subject toalthough Citi’s estimates ofestimated future taxable income inhas decreased due to the jurisdictions inongoing challenging economic environment, which it operates during the respective carry-forward periods, which is in turnwill 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.
The following table summarizes Citi’s net DTAs balance at December 31, 2011 and 2010:Jurisdiction/ComponentDTA balance DTA balance In billions of dollars December 31, 2011 December 31, 2010 U.S. federal(1) Consolidated tax return net operating loss (NOL) $ — $ 3.8 Consolidated tax return foreign tax credit (FTC) 15.8 13.9 Consolidated tax return general business credit (GBC) 2.1 1.7 Future tax deductions and credits 23.0 21.8 Other(2) 1.4 0.4 Total U.S. federal $ 42.3 $ 41.6 State and local New York NOLs $ 1.3 $ 1.7 Other state NOLs 0.7 0.8 Future tax deductions 2.2 2.1 Total state and local $ 4.2 $ 4.6 Foreign APB 23 subsidiary NOLs $ 0.5 $ 0.5 Non-APB 23 subsidiary NOLs 1.8 1.5 Future tax deductions 2.7 3.9 Total foreign $ 5.0 $ 5.9 Total $ 51.5 $ 52.1 (1)Included in the net U.S. federal DTAs of $42.3 billion at December 31, 2011 are deferred tax liabilities of $3 billion that will reverse in the relevant carryforward period and may be used to support the DTAs, and $0.2 billion in compensation deductions that reduced additional paid-in capital in January 2012 and for which no adjustment to such DTAs is permitted at December 31, 2011 because the related stock compensation was not yet deductible to Citi.(2)Includes $1.2 billion and $0.1 billion for 2011 and 2010, respectively, of tax carryforwards related to companies that file U.S. federal tax returns separate from Citigroup’s consolidated U.S. federal tax return.120The U.S. federal consolidated tax return NOL carry-forward component of the DTAs of $3.8 billion at December 31, 2010 was utilized in 2011. For the reasons discussed herein, Citi believes the U.S. federal and New York state and city NOL carryforward period of 20 years provides enough time to fully utilize the DTAs pertaining to the existing NOL carryforwards 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.Because the U.S. federal consolidated tax return NOL carryforward has been utilized, Citi can begin to utilize its foreign tax credit (FTC) and general business credit (GBC) carryforwards. The U.S. FTC carryforward period is 10 years. Utilization of foreign tax credits in any year is restricted to 35% of foreign source taxable income in that year. However, overall domestic losses thatSecond, Citi has incurred of approximately $56 billion as of December 31, 2011 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 in fact be sufficient to cover the foreign tax credits being carried forward. As such, Citi believes the foreign source taxable income limitation will not be an impediment to the foreign tax credit carryforward usage as long as Citi can generate sufficient domestic taxable income within the 10-year carryforward period.Regarding the estimate of future taxable income, Citi has projected its pretax earnings, predominantly based upon the “core” businesses that Citi intends to conduct going forward. These “core” businesses have produced steady and strong earnings in the past. Citi believes that it will generate sufficient pretax earnings within the 10-year carryforward period referenced above to be able to fully utilize the foreign tax credit carryforward, in addition to any foreign tax credits produced in such period.As mentioned above, Citi has examined tax planning strategies available to it in accordance withunder ASC 740 that would be employed,implemented, if necessary, to prevent a carryforwardcarry-forward from expiring and to accelerate the usage of its carryforwards.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 carryforwardcarry-forward period (e.g., selling appreciated intangible assets, and electing straight-line depreciation), accelerating deductible temporary differences outside the U.S., holding onto available-for-sale debt securities with losses until they mature and selling certain assets that produce tax-exempt income, while purchasing assets that produce fully taxable income. In addition,Also, the sale or restructuring of certain businesses can produce significant U.S. taxable income within the relevant carryforwardcarry-forward periods. As previously disclosed, Citi’s ability to utilize its DTAs to offset future taxable income may be significantly limited if Citi experiences an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (Code). Generally, an ownership change will occur if there is a cumulative change in Citi’s ownership by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. Any limitation on Citi’s ability to utilize its DTAs arising from an ownership change under Section 382 will depend on the value of Citi’s stock at the time of the ownership change.
SeeIn 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 a further descriptioninformation on the amount of Citi’s tax provision and related income tax assets and liabilities.Approximately $11 billion of the net DTAs was included in Tier 1 Common and Tier 1 Capitalsuch 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.
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.
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.
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.
See the discussion in Note 2928 to the Consolidated Financial Statements for information regarding Citi’s policies on establishing accruals for legal and regulatory claims.contingencies.
See Note 1 to the Consolidated Financial Statements for a discussion of “Accounting Changes” and the “Future Application of Accounting Standards.”121132
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, 20112012 and, based on that evaluation, the CEO and CFO have concluded that at that date Citigroup’s disclosure controls and procedures were effective.122133
REPORTING
Citi management assessed the effectiveness of Citigroup’s internal control over financial reporting as of December 31, 20112012 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, 2011,2012, 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, 20112012 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, 20112012 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, 2011.2012.123134
Generally, forward-looking statements are not based on historical facts but instead represent only Citigroup’s and its management’s beliefs regarding future events. Such statements may be identified by words such asbelieve, expect, anticipate, intend, estimate, may increase, may fluctuate, and similar expressions, or future or conditional verbs such aswill, should, wouldandcould.
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 inthroughout this Form 10-K and the factors and uncertainties listed and described under “Risk Factors” above and the factors describedsummarized below:ongoing potential impact of the significant regulatory changes around theworld on Citi’s businesses, revenues and earnings,uncertainties faced by Citi in the U.S. and non-U.S. jurisdictions in which it operates, and the possibilityofpossibility of additional regulatory requirements or changes beyond those alreadyproposed,already proposed, adopted or currently contemplated by U.S. or internationalnon-U.S. regulators;aroundregarding the ongoingtiming and implementation of TheDodd-Frank Wall Street Reform and Consumer Protection Act of 2010(Dodd-Frank Act), as well as international efforts,future regulatory capital requirements, including the potential impact these requirements could have on Citi’s ability tomanage its businesses, the amountresults of operations and timing of increased costs,financial condition, and Citi’s ability to compete with U.S. and foreign competitors;Citi’s ability to meet prospective new regulatory capital requirementsin the timeframe expected by the marketrequirements as it projects or its regulators, the impactthe continued lack of certainty surrounding Citi’s capital requirements has on Citi’s long-term capital planning, and the extent to which Citi will be disadvantaged by capital requirements compared to U.S. and non-U.S. competitors;as required;proposed rules relating to the regulation of derivativesunder“push-out” provision, under the Dodd-Frank Act, as well as similar proposedother international derivativesregulations,derivatives regulations, on Citi’s competitiveness, in,compliance costs and earnings from,these businesses;risks and results of operations;underof the “Volcker Rule”provisions ofunder the Dodd-Frank Act on Citi’s market-making activities, the significant compliance costs and risks associated with those proposals, andtheand the potential thatinconsistent regulatory regimes and increased compliance and other costs resulting from non-U.S. proposals;could be forcedand its businesses of additional regulations with respect to dispose of certain investments atless than fair value;securitizations;newly formed Consumer Financial Protection Bureauon Citi’s practices and operations with respect to a number of its U.S.Consumer businesses and the potential significant costs associated with implementing and complying with any new regulatory requirements;the potential negative impact to Citi of regulatory requirements in the U.S.and other jurisdictions aimed at facilitating the orderly resolution of largefinancial institutions;Citi’s ability to hire and retain highly qualified employees as a result ofregulatory requirements regarding compensation practices or otherwise;the impact of existing and potential future regulations on Citi’s abilityand costs to participate in securitization transactions, as well as the natureand profitability of securitization transactions generally;potential future changes to key accounting standards utilized by Citi andtheir impact on how Citi records and reports its financial condition andresults of operations, including whether Citi would be able to meet anyrequired transition timelines;the potential negative impact the ongoing Eurozone debt and economic crisis, couldhavedirectly or indirectly, on Citi’s businesses, results of operations or financial condition, andliquidity, particularly if sovereign debt defaults, significantbank failures or defaults and/orincluding the exit of one or more countries from theEuropeanthe European Monetary Union occur;Union; continued uncertainty relating to the sustainability and pace ofeconomicof economic recovery in the U.S. and their continued effect on certain of Citi’s businesses,particularlyS&Bglobally and the U.S. mortgageimpact any continued uncertainty could have on Citi’s businesses withinresults of operations and financial condition;Citi Holdings –Local Consumer Lending;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;potential impactuncertainty regarding the level of any furtherU.S. government debt and potential downgrade of the U.S. government creditrating, or concerns regarding a potential downgrade,credit rating on Citi’s businesses,results of operations, capital, and funding and liquidity;particularlyinparticularly in emerging markets, including without limitation,among others foreign exchange controls, limitations on foreign investments, sociopolitical instability, nationalization, closure of branches or subsidiaries and confiscation of assets, and sovereign volatility, as well as increasedcomplianceincreased compliance and regulatory risks and costs;or negativemarket perceptions of Citi or the financial services industry generally, onCiti’s liquidity and/or costs of funding;and changes in Citi’s credit spreads; negative 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’sorCiti’s or its more significant subsidiaries’ credit ratings;outcome of the extensive litigation, investigations andinquiries pertaining to Citi’s U.S. mortgage-related activities and theimpact of any such outcomesimpact on Citi’s businesses, businesspractices,business practices, reputation, financial condition or results of operations;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;negative impact of Citi Holdings on Citi’s results of operations, and its ability to utilize the capital supporting the remaining assets inof Citi Holdings on Citi’sresults of operations and for more productive purposes;more productively utilize the capitalsupporting these assets;negativemarket impact if it is not able to Citi’s common stock price and marketperception if Citi is unable to increase its common stock dividend orinitiatedo so, whether as a share repurchase program;result of the CCAR process, required supervisory stress tests or otherwise;124135targetedannounced or anticipated expense reduction levelsreductions, including as well as ensuringa result of external factors outside of its control;highest level ofproductivity of Citi’s previous or future investment spending;relevant carry-forward periods, particularly the FTC carry-forward periods; negative impact on the value of Citi’s deferred tax assets (DTAs)DTAs if U.S., state or foreign tax rates are reduced, or if other changes are made to the U.S.taxU.S. tax system, such as changes to the tax treatment of foreign business income;expirationCiti-AAdvantage card program, and the potential impact any such failure could have on the results of the active financing income exception on Citi’stax expense;operations or financial condition of those businesses;othertechnologicalother technological risks and attacks, which could result inincluding additional costs, reputational damage, regulatory penalties and financial losses;accuracypotential impact on Citi’s performance, including its competitive position and ability to execute its strategy, if Citi is unable to hire or retain qualified employees;assumptions and estimates used to prepare itsfinancialfinancial statements, and the potential for Citi to experience significant losses if these assumptions or estimates are incorrect;the inability to predict the potential outcome of the extensive legal and regulatory proceedingsthat Citi is subject to at any given time, and the impact of any suchoutcomesregulatory changes to financial accounting and reporting standards on Citi’s businesses, business practices, reputation,how Citi records and reports its financial condition or resultsofand results of operations;Citi’s inability to maintainthe potential impact of changes in the method for determining LIBOR on the value of theany LIBOR-linked debt securities and other financial obligations held or issued by Citi brand;and on Citi’s results of operations or financial condition; andCiti’s concentration of risk andthe potential ineffectivenesseffectiveness of Citi’s risk management and mitigation processes and strategies, including the effectiveness of its risk monitoring and risk mitigation techniques.models.125136
INTERNAL CONTROL OVER FINANCIAL REPORTING
Citigroup Inc.:2011,2012, based on criteria established inInternal Control—Integrated Frameworkissued 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
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, 2011,2012, based on criteria established inInternal 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, 20112012 and 2010,2011, 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, 2011,2012, and our report dated February 24, 2012March 1, 2013 expressed an unqualified opinion on those consolidated financial statements.
February 24, 2012March 1, 2013126137
CONSOLIDATED FINANCIAL STATEMENTS
Citigroup Inc.:20112012 and 2010,2011, 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, 2011.2012. 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 made20112012 and 2010,2011, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2011,2012, in conformity with U.S. generally accepted accounting principles.As discussed in Note 1 to the Consolidated Financial Statements, in 2010 the Company changed its method of accounting for qualifying special purpose entities, variable interest entities and embedded credit derivatives.
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, 2011,2012, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 24, 2012March 1, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.February 24, 2012March 1, 2013127[THIS PAGE INTENTIONALLY LEFT BLANK]128138CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Income—
For the Years Ended December 31, 2012, 2011 2010 and 20092010131140Consolidated Statement of Comprehensive Income—
For the Years Ended December 31, 2012, 2011 and 2010141 Consolidated Balance Sheet—December 31, 2012 and 2011 142 December 31, 2011, and 2010132Consolidated Statement of Changes in Stockholders’ Equity—
For theYears Ended December 31, 2012, 2011 and 2010144 Consolidated Statement of Cash Flows—
For the Years Ended December 31, 2012, 2011 2010 and 20092010134145Consolidated Statement of Cash Flows— For the Years Ended December 31, 2011, 2010 and 2009136NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSSTATEMENTSNote 1 – Summary of Significant Accounting Policies 137146Note 2 – Business Divestitures 153161Note 3 – Discontinued Operations 154161Note 4 – Business Segments 156163Note 5 – Interest Revenue and Expense 157164Note 6 – Commissions and Fees 157164Note 7 – Principal Transactions 158165Note 8 – Incentive Plans 158165Note 9 – Retirement Benefits 165171Note 10 – Income Taxes 177183Note 11 – Earnings per Share 181187Note 12 – Federal Funds/Securities Borrowed, Loaned and Subject to RepurchasetoRepurchase Agreements182188Note 13 – Brokerage Receivables and Brokerage Payables 183189Note 14 – Trading Account Assets and Liabilities 183189Note 15 – Investments 184190Note 16 – Loans 194201Note 17 – Allowance for Credit Losses 205212Note 18 – Goodwill and Intangible Assets 207214Note 19 – Debt 210217Note 20 – Regulatory Capital and Citigroup Inc. Parent Company Information 213219Note 21 – Changes in Accumulated Other Comprehensive
Income (Loss)214222Note 22 – Securitizations and Variable Interest Entities 215223Note 23 – Derivatives Activities 232241Note 24 – Concentrations of Credit Risk 241250Note 25 – Fair Value Measurement 241250Note 26 – Fair Value Elections 255269Note 27 – Fair Value of Financial InstrumentsPledged Assets, Collateral, Commitments and Guarantees260274Note 28 – Pledged Securities, Collateral, Commitments and GuaranteesContingencies261280Note 29 – Contingencies267Note 30 – Subsequent Events276Note 31 – Condensed Consolidating Financial Statement Schedules276Note 32 – Selected Quarterly Financial Data (Unaudited)285288129[THIS PAGE INTENTIONALLY LEFT BLANK]130139CONSOLIDATED STATEMENT OF INCOME Citigroup Inc. and Subsidiaries Citigroup Inc. and Subsidiaries Year ended December 31, Years Ended December 31, In millions of dollars, except per-share amounts 2011 2010 2009 In millions of dollars, except per share amounts 2012 2011 2010 Revenues Interest revenue $ 72,681 $ 79,282 $ 76,398 $ 68,138 $ 72,681 $ 79,282 Interest expense 24,234 25,096 27,902 20,535 24,234 25,096 Net interest revenue $ 48,447 $ 54,186 $ 48,496 $ 47,603 $ 48,447 $ 54,186 Commissions and fees $ 12,850 $ 13,658 $ 15,485 $ 12,926 $ 12,850 $ 13,658 Principal transactions 7,234 7,517 6,068 4,781 7,234 7,517 Administration and other fiduciary fees 3,995 4,005 5,195 4,012 3,995 4,005 Realized gains (losses) on sales of investments, net 1,997 2,411 1,996 3,251 1,997 2,411 Other-than-temporary impairment losses on investments Gross impairment losses (1)(2,413 ) (1,495 ) (7,262 ) (5,037 ) (2,413 ) (1,495 ) Less: Impairments recognized in AOCI 159 84 4,356 66 159 84 Net impairment losses recognized in earnings (2,254 ) (1,411 ) $ (2,906 ) $ (4,971 ) $ (2,254 ) $ (1,411 ) Insurance premiums 2,647 $ 2,684 $ 3,020 $ 2,476 $ 2,647 $ 2,684 Other revenue (2)3,437 3,551 2,931 95 3,437 3,551 Total non-interest revenues $ 29,906 $ 32,415 $ 31,789 $ 22,570 $ 29,906 $ 32,415 Total revenues, net of interest expense $ 78,353 $ 86,601 $ 80,285 $ 70,173 $ 78,353 $ 86,601 Provisions for credit losses and for benefits and claims Provision for loan losses $ 11,773 $ 25,194 $ 38,760 $ 10,848 $ 11,773 $ 25,194 Policyholder benefits and claims 972 965 1,258 887 972 965 Provision (release) for unfunded lending commitments 51 (117 ) 244 (16 ) 51 (117 ) Total provisions for credit losses and for benefits and claims $ 12,796 $ 26,042 $ 40,262 $ 11,719 $ 12,796 $ 26,042 Operating expenses Compensation and benefits $ 25,688 $ 24,430 $ 24,987 $ 25,204 $ 25,688 $ 24,430 Premises and equipment 3,326 3,331 3,697 3,282 3,326 3,331 Technology/communication 5,133 4,924 5,215 5,914 5,133 4,924 Advertising and marketing 2,346 1,645 1,415 2,224 2,346 1,645 Restructuring — — (113 ) Other operating 14,440 13,045 12,621 13,894 14,440 13,045 Total operating expenses $ 50,933 $ 47,375 $ 47,822 Total operating expenses(3) $ 50,518 $ 50,933 $ 47,375 Income (loss) from continuing operations before income taxes $ 14,624 $ 13,184 $ (7,799 ) $ 7,936 $ 14,624 $ 13,184 Provision (benefit) for income taxes 3,521 2,233 (6,733 ) Income (loss) from continuing operations $ 11,103 $ 10,951 $ (1,066 ) 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 $ 23 $ 72 $ (653 ) $ (219 ) $ 23 $ 72 Gain (loss) on sale 155 (702 ) 102 (1 ) 155 (702 ) Provision (benefit) for income taxes 66 (562 ) (106 ) (71 ) 66 (562 ) Income (loss) from discontinued operations, net of taxes $ 112 $ (68 ) $ (445 ) $ (149 ) $ 112 $ (68 ) Net income (loss) before attribution of noncontrolling interests $ 11,215 $ 10,883 $ (1,511 ) Net income attributable to noncontrolling interests 148 281 95 Citigroup’s net income (loss) $ 11,067 $ 10,602 $ (1,606 ) Basic earnings per share(1)(2) Income (loss) from continuing operations $ 3.69 $ 3.66 $ (7.61 ) 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 0.04 (0.01 ) (0.38 ) (0.05 ) 0.04 (0.01 ) Net income (loss) $ 3.73 $ 3.65 $ (7.99 ) Net income $ 2.51 $ 3.73 $ 3.65 Weighted average common shares outstanding 2,909.8 2,877.6 1,156.8 2,930.6 2,909.8 2,877.6 Diluted earnings per share(1)(2) Income (loss) from continuing operations $ 3.59 $ 3.55 $ (7.61 ) Diluted earnings per share(4) Income from continuing operations $ 2.49 $ 3.59 $ 3.55 Income (loss) from discontinued operations, net of taxes 0.04 (0.01 ) (0.38 ) (0.05 ) 0.04 (0.01 ) Net income (loss) $ 3.63 $ 3.54 $ (7.99 ) Adjusted weighted average common shares outstanding 2,998.8 2,967.8 1,209.9 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) Earnings(2) (3) (4) adjusted weighted average commonCitigroup shares outstanding for all periods reflect Citigroup’s 1-for-10 reverse stock split, which was effective May 6, 2011.(2)Due
The Notes to the net loss available to common shareholders in 2009, loss available to common stockholders for basic EPS was used to calculate diluted EPS. Including the effectConsolidated Financial Statements are an integral part of dilutive securities would result in anti-dilution.these Consolidated Financial Statements.See Notes to the Consolidated Financial Statements.131140CONSOLIDATED BALANCE SHEET Citigroup Inc. and Subsidiaries December 31, In millions of dollars, except shares 2011 2010 Assets Cash and due from banks (including segregated cash and other deposits) $ 28,701 $ 27,972 Deposits with banks 155,784 162,437 Federal funds sold and securities borrowed or purchased under agreements to resell (including $142,862 and $87,512 as of December 31, 2011 and 2010, respectively, at fair value) 275,849 246,717 Brokerage receivables 27,777 31,213 Trading account assets (including $109,719 and $117,554 pledged to creditors at December 31, 2011 and 2010, respectively) 291,734 317,272 Investments (including $14,940 and $12,546 pledged to creditors at December 31, 2011 and 2010, respectively, and $274,040 and $281,174 at December 31, 2011 and 2010, respectively, at fair value) 293,413 318,164 Loans, net of unearned income Consumer (including $1,326 and $1,745 as of December 31, 2011 and 2010, respectively, at fair value) 423,731 455,732 Corporate (including $3,939 and $2,627 at December 31, 2011 and 2010, respectively, at fair value) 223,511 193,062 Loans, net of unearned income $ 647,242 $ 648,794 Allowance for loan losses (30,115 ) (40,655 ) Total loans, net $ 617,127 $ 608,139 Goodwill 25,413 26,152 Intangible assets (other than MSRs) 6,600 7,504 Mortgage servicing rights (MSRs) 2,569 4,554 Other assets (including $11,241 and $19,530 as of December 31, 2011 and 2010, respectively, at fair value) 148,911 163,778 Total assets $ 1,873,878 $ 1,913,902 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 inOther comprehensive income. 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 December 31, December 31, In millions of dollars 2011 2010 2012 2011 Assets of consolidated VIEs that can only be used to settle obligations of consolidated VIEs Cash and due from banks $ 536 $ 799 $ 498 $ 591 Trading account assets 567 6,509 481 567 Investments 10,582 7,946 10,751 12,509 Loans, net of unearned income Consumer (including $1,292 and $1,718 as of December 31, 2011 and December 31, 2010, respectively, fair value) 103,275 117,768 Corporate (including $198 and $425 as of December 31, 2011 and December 31, 2010, respectively, fair value) 23,780 23,537 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 $ 127,055 $ 141,305 $ 117,620 $ 127,055 Allowance for loan losses (8,000 ) (11,346 ) (5,854 ) (8,000 ) Total loans, net $ 119,055 $ 129,959 $ 111,766 $ 119,055 Other assets 859 680 674 874 Total assets of consolidated VIEs that can only be used to settle obligations of consolidated VIEs $ 131,599 $ 145,893 $ 124,170 $ 133,596 132142CONSOLIDATED BALANCE SHEET Citigroup Inc. and Subsidiaries Citigroup Inc. and Subsidiaries (Continued) December 31, (Continued) December 31, In millions of dollars, except shares 2011 2010 In millions of dollars, except shares and per share amounts In millions of dollars, except shares and per share amounts 2012 2011 Liabilities Liabilities Non-interest-bearing deposits in U.S. offices $ 119,437 $ 78,268 Non-interest-bearing deposits in U.S. offices $ 129,657 $ 119,437 Interest-bearing deposits in U.S. offices (including $848 and $662 at December 31, 2011 and 2010, respectively, at fair value) 223,851 225,731 Interest-bearing deposits in U.S. offices (including $889 and $848 as of December 31, 2012 and Interest-bearing deposits in U.S. offices (including $889 and $848 as of December 31, 2012 and December 31, 2011, respectively, at fair value) December 31, 2011, respectively, at fair value) 247,716 223,851 Non-interest-bearing deposits in offices outside the U.S. 57,357 55,066 Non-interest-bearing deposits in offices outside the U.S. 65,024 57,357 Interest-bearing deposits in offices outside the U.S. (including $478 and $603 at December 31, 2011 and 2010, respectively, at fair value) 465,291 485,903 Interest-bearing deposits in offices outside the U.S. (including $558 and $478 as of December 31, 2012 and 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) December 31, 2011, respectively, at fair value) 488,163 465,291 Total deposits $ 865,936 $ 844,968 Total deposits $ 930,560 $ 865,936 Federal funds purchased and securities loaned or sold under agreements to repurchase (including $112,770 and $121,193 as of December 31, 2011 and 2010, respectively, at fair value) 198,373 189,558 Federal funds purchased and securities loaned or sold under agreements to repurchase 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) (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 56,696 51,749 Brokerage payables 57,013 56,696 Trading account liabilities 126,082 129,054 Trading account liabilities 115,549 126,082 Short-term borrowings (including $1,354 and $2,429 at December 31, 2011 and 2010, respectively, at fair value) 54,441 78,790 Long-term debt (including $24,172 and $25,997 at December 31, 2011 and 2010, respectively, at fair value) 323,505 381,183 Other liabilities (including $3,742 and $9,710 as of December 31, 2011 and 2010, respectively, at fair value) 69,272 72,811 Short-term borrowings (including $818 and $1,354 as of December 31, 2012 and December 31, 2011, respectively, at fair value) 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) 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) 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 Liabilities of discontinued operations held for sale — — Total liabilities $ 1,694,305 $ 1,748,113 Total liabilities $ 1,673,663 $ 1,694,305 Stockholders’ equity Stockholders’ equity Preferred stock ($1.00 par value; authorized shares: 30 million), issued shares:12,038 at December 31, 2011and December 31, 2010, at aggregate liquidation value $ 312 $ 312 Common stock ($0.01 par value; authorized shares: 6 billion), issued shares:2,937,755,921 at December 31, 2011 and 2,922,401,623 at December 31, 2010 29 29 Preferred stock ($1.00 par value; authorized shares: 30 million), issued shares:102,038 as of Preferred stock ($1.00 par value; authorized shares: 30 million), issued shares:102,038 as of December 31, 2012and 12,038 as of December 31, 2011, at aggregate liquidation value December 31, 2012and 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 Common stock ($0.01 par value; authorized shares: 6 billion), issued shares:3,043,153,204 as of December 31, 2012and 2,937,755,921 as of December 31, 2011 December 31, 2012and 2,937,755,921 as of December 31, 2011 30 29 Additional paid-in capital 105,804 101,287 Additional paid-in capital 106,391 105,804 Retained earnings 90,520 79,559 Retained earnings 97,809 90,520 Treasury stock, at cost:2011—13,877,688 sharesand 2010—16,565,572 shares (1,071 ) (1,442 ) Treasury stock, at cost:December 31, 2012—14,269,301 sharesand December 31, 2011—13,877,688 shares Treasury stock, at cost:December 31, 2012—14,269,301 sharesand December 31, 2011—13,877,688 shares (847 ) (1,071 ) Accumulated other comprehensive income (loss) (17,788 ) (16,277 ) Accumulated other comprehensive income (loss) (16,896 ) (17,788 ) Total Citigroup stockholders’ equity $ 177,806 $ 163,468 Total Citigroup stockholders’ equity $ 189,049 $ 177,806 Noncontrolling interest 1,767 2,321 Noncontrolling interest 1,948 1,767 Total equity $ 179,573 $ 165,789 Total equity $ 190,997 $ 179,573 Total liabilities and equity $ 1,873,878 $ 1,913,902 Total liabilities and equity $ 1,864,660 $ 1,873,878 December 31, In millions of dollars 2011 2010 Liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have recourse to the general credit of Citigroup Short-term borrowings $ 21,009 $ 22,046 Long-term debt (including $1,558 and $3,942 as of December 31, 2011 and December 31, 2010, respectively, fair value) 50,451 69,710 Other liabilities 587 813 Total liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have recourse to the general credit of Citigroup $ 72,047 $ 92,569 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 SeeThe Notes to the Consolidated Financial Statements are an integral part of these Consolidated Financial Statements.133143CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY Citigroup Inc. and Subsidiaries Year ended December 31, Amounts Shares In millions of dollars, except shares in thousands 2011 2010 2009 2011 2010 2009 Preferred stock at aggregate liquidation value Balance, beginning of year $ 312 $ 312 $ 70,664 12 12 829 Redemption or retirement of preferred stock — — (74,005 ) — — (824 ) Issuance of new preferred stock — — 3,530 — — 7 Preferred stock Series H discount accretion — — 123 — — — Balance, end of year $ 312 $ 312 $ 312 12 12 12 Common stock and additional paid-in capital Balance, beginning of year $ 101,316 $ 98,428 $ 19,222 2,922,402 2,862,610 567,174 Employee benefit plans 766 (736 ) (4,395 ) 3,540 46,703 — Conversion of preferred stock to common stock — — 61,963 — — 1,737,259 Reset of convertible preferred stock conversion price — — 1,285 — — — Issuance of shares and T-DECs for TARP repayment — — 20,298 — 1,270 558,177 Issuance of TARP-related warrants — — 88 — — — ADIA Upper Decs Equity Units Purchase Contract 3,750 3,750 — 11,781 11,781 — Other 1 (126 ) (33 ) 33 38 — Balance, end of year $ 105,833 $ 101,316 $ 98,428 2,937,756 2,922,402 2,862,610 Retained earnings Balance, beginning of year $ 79,559 $ 77,440 $ 86,521 Adjustment to opening balance, net of taxes(1) (2) — (8,483 ) 413 Adjusted balance, beginning of period $ 79,559 $ 68,957 $ 86,934 Citigroup’s net income (loss) 11,067 10,602 (1,606 ) Common dividends(3) (81 ) 10 (36 ) Preferred dividends (26 ) (9 ) (3,202 ) Preferred stock Series H discount accretion — — (123 ) Reset of convertible preferred stock conversion price — — (1,285 ) Conversion of preferred stock to common stock — — (3,242 ) Other 1 (1 ) — Balance, end of year $ 90,520 $ 79,559 $ 77,440 Treasury stock, at cost Balance, beginning of year $ (1,442 ) $ (4,543 ) $ (9,582 ) (16,566 ) (14,283 ) (22,168 ) Issuance of shares pursuant to employee benefit plans 372 3,106 5,020 2,714 (2,128 ) 7,925 Treasury stock acquired(4) (1 ) (6 ) (3 ) (26 ) (162 ) (97 ) Other — 1 22 — 7 57 Balance, end of year $ (1,071 ) $ (1,442 ) $ (4,543 ) (13,878 ) (16,566 ) (14,283 ) Statement continues on the next page.134CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY Citigroup Inc. and Subsidiaries (Continued) Year ended December 31, Amounts Shares In millions of dollars, except shares in thousands 2011 2010 2009 2011 2010 2009 Accumulated other comprehensive income (loss) Balance, beginning of year $ (16,277 ) $ (18,937 ) $ (25,195 ) Adjustment to opening balance, net of taxes(2) — — (413 ) Adjusted balance, beginning of year $ (16,277 ) $ (18,937 ) $ (25,608 ) Net change in unrealized gains and losses on investment securities, net of taxes 2,360 1,952 5,713 Net change in cash flow hedges, net of taxes (170 ) 532 2,007 Net change in foreign currency translation adjustment, net of taxes and hedges (3,524 ) 820 (203 ) Pension liability adjustment, net of taxes(5) (177 ) (644 ) (846 ) Net change inAccumulated other comprehensive income (loss) before attribution of noncontrolling interest $ (1,511 ) $ 2,660 $ 6,671 Balance, end of year $ (17,788 ) $ (16,277 ) $ (18,937 ) Total Citigroup common stockholders’ equity and common shares outstanding $ 177,494 $ 163,156 $ 152,388 2,923,878 2,905,836 2,848,327 Total Citigroup stockholders’ equity $ 177,806 $ 163,468 $ 152,700 Noncontrolling interest Balance, beginning of year $ 2,321 $ 2,273 $ 2,392 Initial origination of a noncontrolling interest 28 412 285 Transactions between noncontrolling-interest shareholders and the related consolidated subsidiary — — (134 ) Transactions between Citigroup and the noncontrolling-interest shareholders (274 ) (231 ) (354 ) Net income attributable to noncontrolling-interest shareholders 148 281 95 Dividends paid to noncontrolling-interest shareholders (67 ) (99 ) (17 ) Accumulated other comprehensive income—net change in unrealized gains and losses on investment securities, net of tax (5 ) 1 5 Accumulated other comprehensive income (loss)—net change in FX translation adjustment, net of tax (87 ) (27 ) 39 All other (297 ) (289 ) (38 ) Net change in noncontrolling interests $ (554 ) $ 48 $ (119 ) Balance, end of year $ 1,767 $ 2,321 $ 2,273 Total equity $ 179,573 $ 165,789 $ 154,973 Comprehensive income (loss) Net income (loss) before attribution of noncontrolling interests $ 11,215 $ 10,883 $ (1,511 ) Net change inAccumulated other comprehensive income (loss) (1,603 ) 2,634 6,715 Total comprehensive income (loss) $ 9,612 $ 13,517 $ 5,204 Comprehensive income (loss) attributable to the noncontrolling interests $ 56 $ 255 $ 139 Comprehensive income (loss) attributable to Citigroup $ 9,556 $ 13,262 $ 5,065 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’sAccumulated 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 inAccumulated 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 forRetained earningsin 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. (2)The adjustment to the opening balances forRetained earningsandAccumulated other comprehensive income (loss)in 2009 represents the cumulative effect of initially adopting ASC 320-10-35-34 (FSP FAS 115-2 and FAS 124-2). 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. Common dividends declared were as follows: $0.01 per share in the second, third and fourth quarters of 2011; $0.01 per share in the first quarter of 2009.(4) All open market repurchases were transacted under an existing authorized share repurchase plan and relate to customer fails/errors. (5)Reflects adjustments to the funded status of pension and postretirement plans, which is the difference between the fair value of the plan assets and the projected benefit obligation. See Note 9 to the Consolidated Financial Statements.SeeThe Notes to the Consolidated Financial Statements are an integral part of these Consolidated Financial Statements.135144CONSOLIDATED STATEMENT OF CASH FLOWS Citigroup Inc. and Subsidiaries Year ended December 31, In millions of dollars 2011 2010 2009 Cash flows from operating activities of continuing operations Net income (loss) before attribution of noncontrolling interests $ 11,215 $ 10,883 $ (1,511 ) Net income attributable to noncontrolling interests 148 281 95 Citigroup’s net income (loss) $ 11,067 $ 10,602 $ (1,606 ) Income (loss) from discontinued operations, net of taxes 17 215 (402 ) Gain (loss) on sale, net of taxes 95 (283 ) (43 ) Income (loss) from continuing operations—excluding noncontrolling interests $ 10,955 $ 10,670 $ (1,161 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities of continuing operations Amortization of deferred policy acquisition costs and present value of future profits $ 250 $ 302 $ 434 (Additions)/reductions to deferred policy acquisition costs (54 ) (98 ) (461 ) Depreciation and amortization 2,872 2,664 2,853 Deferred tax benefit (74 ) (964 ) (7,709 ) Provision for credit losses 11,824 25,077 39,004 Change in trading account assets 25,538 15,601 25,864 Change in trading account liabilities (2,972 ) (8,458 ) (25,382 ) Change in federal funds sold and securities borrowed or purchased under agreements to resell (29,132 ) (24,695 ) (43,726 ) Change in federal funds purchased and securities loaned or sold under agreements to repurchase 8,815 35,277 (47,669 ) Change in brokerage receivables net of brokerage payables 8,383 (6,676 ) 1,847 Realized gains from sales of investments (1,997 ) (2,411 ) (1,996 ) Change in loans held-for-sale 1,021 2,483 (1,711 ) Other, net 9,312 (13,086 ) 5,203 Total adjustments $ 33,786 $ 25,016 $ (53,449 ) Net cash provided by (used in) operating activities of continuing operations $ 44,741 $ 35,686 $ (54,610 ) Cash flows from investing activities of continuing operations Change in deposits with banks $ 6,653 $ 4,977 $ 2,519 Change in loans (11,559 ) 60,730 (148,651 ) Proceeds from sales and securitizations of loans 10,022 9,918 241,367 Purchases of investments (314,250 ) (406,046 ) (281,115 ) Proceeds from sales of investments 182,566 183,688 85,395 Proceeds from maturities of investments 139,959 189,814 133,614 Capital expenditures on premises and equipment and capitalized software (3,448 ) (2,363 ) (2,264 ) Proceeds from sales of premises and equipment, subsidiaries and affiliates, and repossessed assets 1,323 2,619 6,303 Net cash provided by (used in) investing activities of continuing operations $ 11,266 $ 43,337 $ 37,168 Cash flows from financing activities of continuing operations Dividends paid $ (107 ) $ (9 ) $ (3,237 ) Issuance of common stock — — 17,514 Issuances of T-DECs—APIC — — 2,784 Issuance of ADIA Upper Decs equity units purchase contract 3,750 3,750 — Treasury stock acquired (1 ) (6 ) (3 ) Stock tendered for payment of withholding taxes (230 ) (806 ) (120 ) Issuance of long-term debt 30,242 33,677 110,088 Payments and redemptions of long-term debt (89,091 ) (75,910 ) (123,743 ) Change in deposits 23,858 9,065 61,718 Change in short-term borrowings (25,067 ) (47,189 ) (51,995 ) Net cash (used in) provided by financing activities of continuing operations $ (56,646 ) $ (77,428 ) $ 13,006 Effect of exchange rate changes on cash and cash equivalents $ (1,301 ) $ 691 $ 632 Discontinued operations Net cash provided by (used in) discontinued operations $ 2,669 $ 214 $ 23 Change in cash and due from banks $ 729 $ 2,500 $ (3,781 ) Cash and due from banks at beginning of period 27,972 25,472 29,253 Cash and due from banks at end of period $ 28,701 $ 27,972 $ 25,472 Supplemental disclosure of cash flow information for continuing operations Cash paid/(received) during the year for income taxes $ 2,705 $ 4,307 $ (289 ) Cash paid during the year for interest $ 21,230 $ 23,209 $ 28,389 Non-cash investing activities Transfers to OREO and other repossessed assets $ 1,284 $ 2,595 $ 2,880 Transfers to trading account assets from investments (available-for-sale) — 12,001 — Transfers to trading account assets from investments (held-to-maturity) $ 12,700 $ — $ — 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 — SeeThe Notes to the Consolidated Financial Statements are an integral part of these Consolidated Financial Statements.136145
The Consolidated Financial Statements include the accounts of Citigroup and its subsidiaries.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 inOther revenue. Income from investments in less than 20%-owned companies is recognized when dividends are received. As discussed below,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 inOther revenue.revenue.
Throughout these Notes, “Citigroup”,“Citigroup,” “Citi” and “the Company”the “Company” refer to Citigroup Inc. and its consolidated subsidiaries.
Certain reclassifications have been made to the prior-periods’prior periods’ financial statements and notes to conform to the current period’s presentation.
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.
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: (1)(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 (2)(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.Prior to January 1, 2010, the Company consolidated a VIE if it had a majority of the expected losses or a majority of the expected residual returns or both. As of January 1, 2010, when the Company adopted SFAS 167’s amendments to the VIE consolidation guidance, the 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).
However, these VIEs as well asand all other unconsolidated VIEs are continually monitored by the Company to determine if any events have occurred that could cause its primary beneficiary status to change. These events include:interest ownershipinterestownership to change;that mostsignificantlythatmost significantly impact the entity’s economic performance; and “DeterminingDetermining 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”Rights).
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 separate 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 inPrincipal 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 inOther revenue.137146
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:fair valuefairvalue reported inAccumulated other comprehensive income (loss),a separate component ofStockholders’ equity, net ofapplicableof applicable income taxes.taxesand hedges. As described in more detail in Note 15 to theConsolidated Financialthe ConsolidatedFinancial Statements, credit-related declines in fair valuethatvalue that are determined to be other–than-temporarybeother-than-temporary are recorded in earningsimmediately. Realized gainsearnings immediately. Realizedgains and losses on sales are included in incomeprimarilyincome primarily on a specific identificationspecificidentification cost basis. Interest and dividend income on such securities issecuritiesis included inInterest revenue.and engageandengage exclusively in venture capital activities.certain investmentscertaininvestments that would otherwise have been accounted for using theequity method are carried at fair value, since the Company has elected toapply fair value accounting. Changes in fair value of such investments arerecorded in earnings.set out inNotedescribedin Note 15 to the Consolidated Financial Statements.
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 income.earnings.
Trading account assets include debt and marketable equity securities, derivatives in a receivable position, residual interests in securitizations and physical commodities inventory. In addition, (asas described in Note 26 to the Consolidated Financial Statements),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 inTrading account assets.
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 inPrincipal 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 inInterest revenue reduced by interest expense on trading liabilities.
Physical commodities inventory is carried at the lower of cost or market with related losses reported inPrincipal transactions. Realized gains and losses on sales of commodities inventory are included inPrincipal 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.
Securities borrowing and lending transactions generally do not constitute a sale of the underlying securities for accounting purposes, and so are treated as collateralized financing transactions when the transaction involves the exchange of cash.transactions. Such transactions are recorded at the amount of cashproceeds 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. Irrespective of whether the Company has elected fair value accounting, feesFees paid or received for all securities lending and borrowing transactions are recorded inInterest expenseorInterest revenue at the contractually specified rate.With respect to securities borrowed or loaned, theThe Company monitors the marketfair 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.
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 so138set outdescribed 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 inInterest expense orInterest 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 marketfair 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. See related discussion of the assessment of the effective control for repurchase agreements in “Future Application of Accounting Standards” below.
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 accountsaccounted for certain repurchase agreements and securities lending agreements as sales. The key distinction resulting in these agreements being accounted for as sales iswas a reduction in initial margin or restriction in daily maintenance margin. At December 31, 2011, and December 31, 2010, a nominal amount of these transactions were accounted for as sales that reducedTrading account assets. See related discussion of the assessment of the effective control for repurchase agreements in “Accounting Changes” below.
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 inInterest 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.
Consumer loans represent loans and leases managed primarily by the Global Consumer Banking andLocal Consumer Lending businesses.
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 twelve12 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.
Citi’s charge-off policies follow the general guidelines below:180days180 days contractually past due.theestimatedthe estimated value of the collateral, less costs to sell, at 120 days past due.theproperty,the property, less costs to sell, at 180 days contractually past due.139estimatedvalueestimated value of the property, less costs to sell, at the earlier of the receipt of title or12or 12 months in foreclosure (a process that must commence when paymentsarepayments are 120 days contractually past due).Non-bank auto loans are written down to the estimated value of the collateral, less costs to sell, at repossession or, if repossession is not pursued, no later than 180 days contractually past due.RealAs a result of OCC guidance issued in the third quarter of 2012, real estate-secured loans that were discharged through Chapter 7 bankruptcy, other than FHA-insured loans, are written down to the collateral value of the property, less costs to sell. Other real estate-secured loans in bankruptcy are written down to the estimated value of the property, less costs to sell, at the later of 60 days after notification or 60 days contractually past due.
Corporate loans represent loans and leases managed byICG or theSpecial 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.judgeddeemed 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.
Corporate and Consumer loans that have been identified for sale are classified as loans held-for-sale and included inOther assets. The practice of theCiti’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 the time of origination.origination, with changes in fair value recorded inOther 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 toOther revenue. The related cash flows are classified in the Consolidated Statement of Cash Flows in the cash flows from operating activities category on the lineChange in loans held-for-sale.
Allowance for loan losses represents management’s best estimate of probable losses inherent in the portfolio, as well asincluding 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 theProvision 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.
In the corporateCorporate portfolios, theAllowance 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)
The allowance for the remainder of the loan portfolio is calculateddetermined 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 assessment140
For both the asset-specific and the statistically based components of theAllowance 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 to achieve Citi’s strategy 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. Enforcing a guarantee via legal action against the guarantor is not the primary means of resolving a troubled loan situation and rarely occurs. 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.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 ourCiti’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 theAllowance for loan losses. To date, it is only in rare circumstances that an impaired commercial loan or commercial real estate (CRE) loan is carried at a value in excess of the appraised value due to a guarantee.
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
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 frombeginning January 1, 2011)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.
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.
Management provides reserves for an estimate of probable losses inherent in the funded loan portfolio on the balance sheetConsolidated 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 managed141
Institutional Clients GroupandGlobal Consumer Banking) or modified Consumer loans, where concessions were granted due to the borrowers’ financial difficulties.
The above-mentioned representatives coveringfor 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:borrowerborrower..Consideration Consideration may be given to the following, as appropriate, whendeterminingwhen determining this estimate: (i) the present value of expected future cashflowscash flows discounted at the loan’s original effective rate; (ii) the borrower’soverallborrower’s overall financial condition, resources and payment record; and (iii) theprospectsthe prospects for support from financially responsible guarantors or therealizablethe realizable value of any collateral. In the determination of the allowanceforallowance for loan losses for TDRs, management considers a combination ofhistoricalof historical re-default rates, the current economic environment and thenaturethe nature of the modification program when forecasting expected cash flows.Whenflows. When impairment is measured based on the present value of expectedfutureexpected future cash flows, the entire change in present value is recorded in theProvision for loan losses.exposuresexposures..The The calculation is based upon: (i) Citigroup’s internal system of credit-riskratings,credit-risk ratings, which are analogous to the risk ratings of the major ratingagencies;rating agencies; and (ii) historical default and loss data, including rating agencyinformationagency information regarding default rates from 1983 to 2010 and internal datadatingdata dating to the early 1970s on severity of losses in the event of default.Additional Adjustments may be made to this data. Such adjustments include:include: (i) statistically calculated estimates tocoverto cover the historical fluctuation of the default rates over the credit cycle,the historical variability of loss severity among defaulted loans, andtheand the degree to which there are large obligor concentrations in the globalportfolio;global portfolio; and (ii) adjustments made for specific known items, such ascurrentas current environmental factors and credit trends.
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. Changes to theAllowance for loan losses are recorded in theProvision for loan losses.
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 inOther liabilities. Changes to the allowance for unfunded lending commitments are recorded in theProvision for unfunded lending commitments.
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 inOther Revenuerevenuein 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.Consumer Mortgage—Citigroup Residential Mortgages—Representations and Warranties
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 majorityspecific representations and warranties made by Citi in any particular transaction depend on, among other things, the nature of Citi’s exposurethe 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).
Citi is exposed to representation and warranty repurchase claims relatesprimarily as a result of its whole loan sales to the GSEs and, to a lesser extent, private investors, through its U.S. Consumer mortgage business withinin CitiMortgage.
When selling a loan to these investors, Citi makes various representations and warranties relating to, among other things, the following:The specific representations and warranties made by Citi depend on the nature of the transaction and the requirements of the buyer. Market conditions and credit rating agency requirements may also affect representations and warranties and the other provisions to which Citi may agree in loan sales.142In the event of a breach of these representations and warranties, Citi may be required to either repurchase the mortgage loans with the identified defects (generally at unpaid principal balance plus accrued interest) or indemnify (“make-whole”) the investors for their losses. Citi’s representations and warranties are generally not subject to stated limits in amount or time of coverage.
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 fromdue to GSE repurchase claims.
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 U.S. government sponsored entities (GSEs).issuing trust and related to, among other things, the following:
Citi has recorded a reserve for its exposure to losses from the obligation tomortgage repurchase previously sold loansreserve (referred to as the repurchase reserve) for its potential repurchase or make-whole liability regarding representation and warranty claims that is included inOther liabilities in the Consolidated Balance Sheet. In estimating theCiti’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 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 correspondent lenders and indemnification agreements relating to previous acquisitions of mortgage servicing rights. The estimated reimbursementssellers, which are generally based on Citi’s analysis of its most recent collection trends and the financial solvency or viability of the correspondents.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 inOther revenue in the Consolidated Statement of Income) and is updated quarterly. Any change in estimate is recorded inOther revenue.The repurchase reserve is calculated by individual sales vintage (i.e., the year the loans were sold) and is based on various assumptions. These assumptions contain a level of uncertainty and risk that, if different from actual results, could have a material impact on the reserve amount. The most significant assumptions used to calculate the reserve levels are as follows:loan documentation requests;Repurchase Reserve—Private-Label Securitizationsrepurchase claims as a percentage of loan documentation requests;claims appeal success rate; andestimated loss per repurchase or make-whole.Securities and Banking-Sponsored Legacy Private LabelResidential Mortgage Securitizations—Representationsand WarrantiesLegacy mortgageInvestors in private-label securitizations sponsored by Citi’sS&B business have represented a much smaller portion of Citi’s mortgage business.The mortgages included inS&B-sponsored legacy securitizations were purchased from parties outside ofS&B. Representations and warranties relating to the mortgage loans included in each trust issuing the securities were made either by Citi, by third-party sellers (which were also often the originators of the loans), or both. These representations and warranties were generally made or assigned to the issuing trust and related to, among other things, the following:the absence of fraud on the part of the borrower, the seller or anyappraiser, broker or other party involved in the origination of themortgage (which was sometimes wholly or partially limited to theknowledge of the representation and warranty provider);whether the mortgage property was occupied by the borrower as his or herprincipal residence;the mortgage’s compliance with applicable federal, state andlocal laws;whether the mortgage was originated in conformity with theoriginator’s underwriting guidelines; anddetailed data concerning the mortgages that were included on themortgage loan schedule.In the event of a breach of its representations and warranties, Citi may be required either to repurchase the mortgage with the identified defects (generally at unpaid principal balance plus accrued interest) or indemnify the investorsseek recovery for their losses through make-whole payments.To date, Citi has received actual claims foralleged 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 onlyprivate-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 small percentagereview of the mortgages includedunderlying loan files. These reserves are recorded in these securitizationPrincipal transactions although in the paceConsolidated Statement of claims remains volatile and has recently increased.Income.
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 whereby Goodwill is allocated toif an event occurs or circumstances change that would more-likely-than-not reduce the Company’s reporting units and an impairment is deemed to exist if the carryingfair value of a reporting unit exceedsbelow its estimatedcarrying 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.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, Goodwillgoodwill 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.
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 contracts143Intangibleintangible assets subject to amortization, an impairment is recognized if the carrying amount is not recoverable and exceeds the fair value of the Intangibleintangible asset.
Other assets include, among other items, loans held-for-sale, deferred tax assets, equity-methodequity 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.
Real estate or other assets received through foreclosure or repossession are generally reported inOther assets, net of a valuation allowance for selling costs and net of subsequent declines in fair value.
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.The Company consolidates VIEs when it has both: (1) power to direct activities of the VIE that most significantly impact the entity’s economic performance and (2) an obligation to absorb losses or right to receive benefits from the entity that could potentially be significant to the VIE.
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 asTrading Account Assetsaccount assets, except for MSRs, which are included in Mortgage Servicing Rightsservicing rights on Citigroup’s Consolidated Balance Sheet.
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.
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.Activities–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 inOther assets, Other liabilities, Trading account assets andTrading account liabilities.a managementan 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 the144
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 inOther revenue orPrincipal 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 inOther revenue orPrincipal 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 inAccumulated 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 inOther 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.End-user derivatives that are economic hedges, rather than qualifying for hedge accounting, are also carried at fair value, with changes in value included inPrincipal transactions orOther 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 designateeither 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.
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 inAccumulated 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 inAccumulated other comprehensive income (loss) are immediately reflected inOther 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 inPrincipal transactions orOther 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 includes current service costs of pension and other postretirement benefit plans which(which are accrued on a current basis,basis), contributions and unrestricted awards under other employee plans, the amortization of restricted stock awards and costs of other employee benefits.
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 charges fluctuatecompensation expense fluctuates with changes in Citigroup’s stock price.
The Company is subject to the income tax laws of the U.S., and its states and municipalities, and those of the foreign jurisdictions in which the Companyit 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/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 ofIncome tax expense.145more likely than not.more-likely-than-not. FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) (now incorporated into ASC 740,Income Taxes)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 notmore-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 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 (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.T-DECs, 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.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.
Management must make estimates and assumptions that affect theConsolidatedthe 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 22.22 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 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.
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.146
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).
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.
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 endingended 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
In April 2011, the FASB issued ASU No. 2011-02,Receivables (Topic 310): A Creditor’s Determination of whether a Restructuring isIs 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:restructuringsbecauserestructurings,because the new contractual rate could still be below the market rate.the creditorthecreditor has granted a concession.adoptingthe Company’s adoption of ASU 2011-02, certain loans modified under short-term programs sincebeginning 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.
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.
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 $60 million.$125 million, increasing pretax income in the first quarter of 2012.
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
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).
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.TheAs set forth in the table below, the Company has elected to account for certain beneficial interests issued by securitization vehicles under the fair value option that are included in the table below.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. 147158Beginning July 1, 2010, theThe Company elected to account for these beneficial interests under the fair value option beginning July 1, 2010 for various reasons, including:(1)To reduce the operational burden of assessing beneficial interests for bifurcation under the guidance in the ASU;(2)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(3)To permit more economic hedging strategies without generating volatility in reported earnings.
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 arewere 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 arewere 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.Elimination of Qualifying Special Purpose Entities(QSPEs) and Changes in the Consolidation Model for VIEsIn June 2009, the FASB issued SFAS No. 166,Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140 (SFAS 166, now incorporated into ASC Topic 860) and SFAS No. 167,Amendments to FASB Interpretation No. 46(R) (SFAS 167, now incorporated into ASC Topic 810). Citigroup adopted both standards on January 1, 2010. Citigroup has elected to apply SFAS 166 and SFAS 167 prospectively. Accordingly, prior periods have not been restated.SFAS 166 eliminates the concept of QSPEs from U.S. GAAP and amends the guidance on accounting for transfers of financial assets. SFAS 167 details three key changes to the consolidation model. First, former QSPEs are now included in the scope of SFAS 167. Second, the FASB has changed the method of analyzing which party to a VIE should consolidate the VIE (known as the primary beneficiary) to a qualitative determination of which party to the VIE has “power,” combined with potentially significant benefits or losses, instead of the previous quantitative risks and rewards model. The party that has “power” has the ability to direct the activities of the VIE that most significantly impact the VIE’s economic performance. Third, the new standard requires that the primary beneficiary analysis be re-evaluated whenever circumstances change. The previous rules required reconsideration of the primary beneficiary only when specified reconsideration events occurred.As a result of implementing these new accounting standards, Citigroup consolidated certain of the VIEs and former QSPEs with which it had involvement on January 1, 2010. Further, certain asset transfers, including transfers of portions of assets, that would have been considered sales under SFAS 140 are considered secured borrowings under the new standards.In accordance with SFAS 167, Citigroup employed three approaches for newly consolidating certain VIEs and former QSPEs as of January 1, 2010. The first approach requires initially measuring the assets, liabilities, and noncontrolling interests of the VIEs and former QSPEs at their carrying values (the amounts at which the assets, liabilities, and noncontrolling interests would have been carried in the Consolidated Financial Statements, if Citigroup had always consolidated these VIEs and former QSPEs). The second approach measures assets at their unpaid principal amount, and is applied when determining carrying values is not practicable. The third approach is to elect the fair value option, in which all of the financial assets and liabilities of certain designated VIEs and former QSPEs are recorded at fair value upon adoption of SFAS 167 and continue to be marked to market thereafter, with changes in fair value reported in earnings.Citigroup consolidated all required VIEs and former QSPEs, as of January 1, 2010, at carrying values or unpaid principal amounts, except for certain private label residential mortgage and mutual fund deferred sales commissions VIEs, for which the fair value option was elected. The following tables present the impact of adopting these new accounting standards applying these approaches.148 The incremental impact of these changes on GAAP assets and resulting risk-weighted assets for those VIEs and former QSPEs that were consolidated or deconsolidated for accounting purposes as of January 1, 2010 was as follows:Incremental Risk- GAAP weighted In billions of dollars assets assets (1) Impact of consolidation Credit cards $ 86.3 $ 0.8 Commercial paper conduits 28.3 13.0 Student loans 13.6 3.7 Private label Consumer mortgages 4.4 1.3 Municipal tender option bonds 0.6 0.1 Collateralized loan obligations 0.5 0.5 Mutual fund deferred sales commissions 0.5 0.5 Subtotal $ 134.2 $ 19.9 Impact of deconsolidation Collateralized debt obligations(2) $ 1.9 $ 3.6 Equity-linked notes(3) 1.2 0.5 Total $ 137.3 $ 24.0 (1)The net increase in risk-weighted assets (RWA) was $10 billion, principally reflecting the deduction from gross RWA of $13 billion of loan loss reserves (LLR) recognized from the adoption of SFAS 166/167, which exceeded the 1.25% limitation on LLRs includable in Tier 2 Capital.(2)The implementation of SFAS 167 resulted in the deconsolidation of certain synthetic and cash collateralized debt obligation (CDO) VIEs that were previously consolidated under the requirements of ASC 810 (FIN 46(R)). Due to the deconsolidation of these synthetic CDOs, Citigroup’s Consolidated Balance Sheet now reflects the recognition of current receivables and payables related to purchased and written credit default swaps entered into with these VIEs, which had previously been eliminated in consolidation. The deconsolidation of certain cash CDOs has a minimal impact on GAAP assets, but causes a sizable increase in risk-weighted assets. The impact on risk-weighted assets results from replacing, in Citigroup’s trading account, largely investment grade securities owned by these VIEs when consolidated, with Citigroup’s holdings of non-investment grade or unrated securities issued by these VIEs when deconsolidated.(3)Certain equity-linked note client intermediation transactions that had previously been consolidated under the requirements of ASC 810 (FIN 46 (R)) because Citigroup had repurchased and held a majority of the notes issued by the VIE were deconsolidated with the implementation of SFAS 167, because Citigroup does not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. Upon deconsolidation, Citigroup’s Consolidated Balance Sheet reflects both the equity-linked notes issued by the VIEs and held by Citigroup as trading assets, as well as related trading liabilities in the form of prepaid equity derivatives. These trading assets and trading liabilities were formerly eliminated in consolidation. The following table reflects the incremental impact of adopting SFAS166/167 on Citigroup’s GAAP assets, liabilities, and stockholders’ equity.In billions of dollars January 1, 2010 Assets Trading account assets $ (9.9 ) Investments (0.6 ) Loans 159.4 Allowance for loan losses (13.4 ) Other assets 1.8 Total assets $ 137.3 Liabilities Short-term borrowings $ 58.3 Long-term debt 86.1 Other liabilities 1.3 Total liabilities $ 145.7 Stockholders’ equity Retained earnings $ (8.4 ) Total stockholders’ equity $ (8.4 ) Total liabilities and stockholders’ equity $ 137.3 The preceding tables reflect: (i) the portion of the assets of former QSPEs to which Citigroup, acting as principal, had transferred assets and received sales treatment prior to January 1, 2010 (totaling approximately $712.0 billion), and (ii) the assets of significant VIEs as of January 1, 2010 with which Citigroup was involved (totaling approximately $219.2 billion) that were previously unconsolidated and are required to be consolidated under the new accounting standards. Due to the variety of transaction structures and the level of Citigroup’s involvement in individual former QSPEs and VIEs, only a portion of the former QSPEs and VIEs with which the Company was involved were required to be consolidated.In addition, the cumulative effect of adopting these new accounting standards as of January 1, 2010 resulted in an aggregate after-tax charge toRetained earnings of $8.4 billion, reflecting the net effect of an overall pretax charge toRetained earnings (primarily relating to the establishment of loan loss reserves and the reversal of residual interests held) of $13.4 billion and the recognition of related deferred tax assets amounting to $5.0 billion.149
The FASB issued Accounting Standards UpdateASU No. 2010-10,Consolidation (Topic 810),: Amendments for Certain Investment Funds (ASU 2010-10) in the first quarter of 2010. ASU 2010-10 provides a deferral of the requirements of SFAS 167 where the following criteria are met:applymeasurementapply measurement principles that are consistent with an investment company;tofundto fund losses of the entity that could potentially be significant to the entity;and – a securitization entity; – an asset-backed financing entity; or – an entity that was formerly considered a qualifying special-purpose entity. vehiclesentities managed by Citigroup are provided a deferral from the requirements of SFAS 167 because they meet these criteria. These vehiclesentities 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.Investments in Certain Entities that Calculate NetAsset Value per ShareAs of December 31, 2009, the Company adopted Accounting Standards Update (ASU) No. 2009-12,Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent), which provides guidance on measuring the fair value of certain alternative investments. The ASU permits entities to use net asset value as a practical expedient to measure the fair value of their investments in certain investment funds. The ASU also requires additional disclosures regarding the nature and risks of such investments and provides guidance on the classification of such investments as Level 2 or Level 3 of the fair value hierarchy. This ASU did not have a material impact on the Company’s accounting for its investments in alternative investment funds.Multiple Foreign Exchange RatesIn May 2010, the FASB issued ASU 2010-19,Foreign Currency Issues: Multiple Foreign Currency Exchange Rates. The ASU requires certain disclosure in situations when an entity’s reported balances in U.S. dollar monetary assets held by its foreign entities differ from the actual U.S. dollar-denominated balances due to different foreign exchange rates used in remeasurement and translation. The ASU also clarifies the reporting for the difference between the reported balances and the U.S. dollar-denominated balances upon the initial adoption of highly inflationary accounting. The ASU does not have a material impact on the Company’s accounting.Effect of a Loan Modification When the Loan Is Part of aPool Accounted for as a Single Asset (ASU No. 2010-18)In April 2010, the FASB issued ASU No. 2010-18,Effect of a LoanModification When the Loan is Part of a Pool Accounted for as a Single Asset. As a result of the amendments in this ASU, modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool, even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The ASU was effective for reporting periods ending on or after July 15, 2010. The ASU had no material effect on the Company’s financial statements.Measuring Liabilities at Fair ValueAs of September 30, 2009, the Company adopted ASU No. 2009-05,Measuring Liabilities at Fair Value. This ASU provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques:a valuation technique that uses quoted prices for similar liabilities (or anidentical liability) when traded as assets; oranother valuation technique that is consistent with the principles ofASC 820. This ASU also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This ASU did not have a material impact on the Company’s fair value measurements.150159Other-Than-Temporary Impairments onInvestment SecuritiesIn April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2) (now ASC 320-10-35-34,Investments—Debt and Equity Securities: Recognition of an Other-Than-Temporary Impairment), which amends the recognition guidance for other-than-temporary impairments (OTTI) of debt securities and expands the financial statement disclosures for OTTI on debt and equity securities. Citigroup adopted the FSP in the first quarter of 2009.As a result of the FSP, the Company’s Consolidated Statement of Income reflects the full impairment (that is, the difference between the security’s amortized cost basis and fair value) on debt securities that the Company intends to sell or would more-likely-than-not be required to sell before the expected recovery of the amortized cost basis. For available-for-sale (AFS) and held-to-maturity (HTM) debt securities that management has no intent to sell and believes that it more-likely-than-not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the rest of the fair value loss is recognized inAccumulated other comprehensive income (AOCI). The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected using the Company’s cash flow projections and its base assumptions. As a result of the adoption of the FSP, Citigroup’s income in the first quarter of 2009 was higher by $631 million on a pretax basis ($391 million on an after-tax basis) and AOCI was decreased by a corresponding amount.The cumulative effect of the change included an increase in the opening balance ofRetained earnings at January 1, 2009 of $665 million on a pretax basis ($413 million after-tax). See Note 15 to the Consolidated Financial Statements for disclosures related to the Company’s investment securities and OTTI.Noncontrolling Interests in SubsidiariesIn December 2007, the FASB issued Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements (now ASC 810-10-45-15,Consolidation—Noncontrolling Interests in a Subsidiary), which establishes standards for the accounting and reporting of noncontrolling interests in subsidiaries (previously called minority interests) in consolidated financial statements and for the loss of control of subsidiaries. The Standard requires that the equity interest of noncontrolling shareholders, partners, or other equity holders in subsidiaries be presented as a separate item inTotal equity, rather than as a liability. After the initial adoption, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary must be measured at fair value at the date of deconsolidation. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of the remaining investment, rather than the previous carrying amount of that retained investment.Citigroup adopted the Standard on January 1, 2009. As a result, $2.392 billion of noncontrolling interests were reclassified from Other liabilities to Total equity.DVA Accounting MisstatementIn January 2010, the Company determined that an error existed in the process used to value certain liabilities for which the Company elected the fair value option (FVO). The error related to a calculation intended to measure the impact on the liability’s fair value attributable to Citigroup’s credit spreads. Because of the error in the process, both an initial Citi contractual credit spread and an initial own-credit valuation adjustment were being included at the time of issuance of new Citi FVO debt. The own-credit valuation adjustment was properly included; therefore, the initial Citi contractual credit spread should have been excluded. (See Note 26 to the Consolidated Financial Statements for a description of own-credit valuation adjustments.) The cumulative effect of this error from January 1, 2007 (the date that SFAS 157 (ASC 820), requiring the valuation of own-credit for FVO liabilities, was adopted) through December 31, 2008 was to overstate income and retained earnings by $204 million ($330 million on a pretax basis). The impact of this adjustment was determined not to be material to the Company’s results of operations and financial position for any previously reported period. Consequently, in the accompanying financial statements, the cumulative effect through December 31, 2008 was recorded in 2009.151Repurchase Agreements - AssessmentReclassification out of EffectiveControlAccumulated Other Comprehensive Income
In April 2011,February 2013, the FASB issued ASU No. 2011-03,2013-02,Transfers and ServicingComprehensive Income (Topic 860) – Reconsideration220): Reporting of Effective Control for Repurchase AgreementsAmounts Reclassified out of Accumulated Other Comprehensive Income. The amendmentsAccounting 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.
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 ASU remove from the assessmentrealizable value (impairment) of effective control: (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financialindefinite-lived intangible assets on substantially the agreed terms, even in the eventother than goodwill. Some examples of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. Other criteria applicableintangible 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 effective control are not changed byimpairment of an indefinite-lived intangible asset to determine whether further impairment testing is necessary, similar in approach to the amendments in the ASU.goodwill impairment test.
The ASU became effective for Citigroup on January 1,annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The guidance is to be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The ASU did not have a material effect on the Company’s financial statements. A nominal amount of the Company’s repurchase transactions are currently accounted for as sales, because of a reduction in initial margin or restriction in daily maintenance margin. Such transactions will be accounted for as financing transactions if executed on or after January 1, 2012.Fair Value MeasurementIn 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 amendment creates a common definition of fair value for U.S. GAAP and IFRS and aligns the measurement and disclosure requirements. It requires significant additional disclosures both of a qualitative and quantitative nature, particularly on those instruments measured at fair value that are classified in Level 3 of the fair value hierarchy. Additionally, the amendment provides guidance on when it is appropriate to measure fair value on a portfolio basis and expands the prohibition on valuation adjustments from Level 1 to all levels of the fair value hierarchy where the size of the Company’s position is a characteristic of the adjustment. The amendment 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 will release reserves of approximately $125 million, increasing pretax income in the first quarter of 2012.Deferred Asset Acquisition CostsIn 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 amends the guidance for insurance entities that requires 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 limits DAC to those costs directly related to the successful acquisition of insurance contracts; all other acquisition-related costs must be expensed as incurred. Under current guidance, DAC consists of those costs that vary with, and primarily relate to, the acquisition of insurance contracts. The amendment became effective for Citigroup on January 1, 2012. The Company continues to evaluate the impact of adopting this statement.
In December 2011, the FASB issued Accounting Standards Update No. 2011-11—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. The
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.
The FASB and IASB, either jointly or separately, are currently working on several major projects, including amendments to existing accounting standards governing financial instruments, lease accounting,leases, consolidation and investment companies. As part of the joint financial instruments project, the FASB is proposing sweepinghas issued a proposed ASU that would result in significant changes to the classificationguidance for recognition and measurement of financial instruments, hedging and impairment guidance. 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 Accounting Standards UpdateASU 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. In addition to the major projects, the FASB has also proposed changes regarding the Company’s release of any cumulative translation adjustment into earnings when it ceases to have a controlling financial interest in certain groups of assets that constitute a business within a consolidated foreign subsidiary. 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.1521602009,2011 and 2010 and 2011 and dodid not qualify asDiscontinued operations. Divestitures that qualified asDiscontinued operations are discussed in Note 3 to the Consolidated Financial Statements.Sale of Primerica
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.Sale of Phibro LLCOn December 31, 2009, the Company sold 100% of its interest in Phibro LLC, which was part of Citicorp—Securities and Banking, to Occidental Petroleum Corporation for a purchase price equal to approximately the net asset value of the business. The decision to sell Phibro was the outcome of an evaluation of a variety of alternatives and was consistent with Citi’s core strategy of a client-centered business model. The sale of Phibro did not affect Citi’s client-facing commodities business lines, which continue to operate and serve the needs of Citi’s clients throughout the world.Sale of Citi’s Nikko Asset Management Business and Trust and Banking CorporationOn October 1, 2009, the Company completed the sale of its entire stake in Nikko Asset Management (Nikko AM) to the Sumitomo Trust and Banking Co., Ltd. (Sumitomo Trust) and completed the sale of Nikko Citi Trust and Banking Corporation (Nikko Citi Trust) to Nomura Trust & Banking Co. Ltd. Nikko AM and Nikko Citi Trust were part of Citi Holdings.The Nikko AM transaction was valued at 120 billion yen (U.S. $1.3 billion at an exchange rate of 89.60 yen to U.S. $1.00 as of September 30, 2009). The Company received all-cash consideration of 75.6 billion yen (U.S. $844 million), after certain deal-related expenses and adjustments, for its 64% beneficial ownership interest in Nikko AM. Sumitomo Trust also acquired the beneficial ownership interests in Nikko AM held by various minority investors in Nikko AM, bringing Sumitomo Trust’s total ownership stake in Nikko AM to 98.55% at closing.For the sale of Nikko Citi Trust, the Company received all-cash consideration of 19 billion yen (U.S. $212 million at an exchange rate of 89.60 yen to U.S. $1.00 as of September 30, 2009) as part of the transaction.Retail Partner Cards SalesDuring 2009, Citigroup sold its Financial Institutions (FI) and Diners Club North America credit card businesses. Total credit card receivables disposed of in these transactions was approximately $2.2 billion. During 2010, Citigroup sold its Canadian MasterCard business and U.S. retail sales finance portfolios. Total credit card receivables disposed of in these transactions was approximately $3.6 billion. Each of these businesses was in Citi Holdings.Joint Venture with Morgan StanleyOn June 1, 2009, Citi and Morgan Stanley established a joint venture (JV) that combined the Global Wealth Management platform of Morgan Stanley with Citigroup’s Smith Barney, Quilter and Australia private client networks. Citi sold 100% of these businesses to Morgan Stanley in exchange for a 49% stake in the JV and an upfront cash payment of $2.75 billion. Citigroup recorded a pretax gain of approximately $11.1 billion ($6.7 billion after-tax) on this sale. Both Morgan Stanley and Citi will access the JV for retail distribution, and each firm’s institutional businesses will continue to execute order flow from the JV.Citigroup’s 49% ownership in the JV is recorded as an equity method investment. In determining the value of its 49% interest in the JV, Citigroup utilized the assistance of an independent third-party valuation firm upon acquisition and utilized both the income and the market approaches.153
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’sInstitutional 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 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 ) PLCplc Credit Card Business
On March 1, 2011, the Company announced that Egg Banking plc (Egg), an indirect subsidiary whichthat was part of the Citi Holdings, segment, 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 the full year of 2011 and 2012 only. Prior periods were2010 was not reclassified, due to the immateriality of the impact in those periods.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.In millions of dollars 2011 Total revenues, net of interest expense(1) $ 340 Income from discontinued operations $ 24 Gain on sale 143 Provision for income taxes 58 Income from discontinued operations, net of taxes $ 109 In millions of dollars 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 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 (1)Total revenues include gain or loss on sale, if applicable.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
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 the Citi Holdings, segment, 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 2011 2010 (1) Total revenues, net of interest expense(2) $ — $ (577 ) Income (loss) from discontinued operations $ — $ 97 Loss on sale — (825 ) Benefit for income taxes — (339 ) Loss from discontinued operations, net of taxes $ — $ (389 ) In millions of dollars 2011 2010 (1) 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 (1)Amounts reflect activity from July 1, 2010 through December 31, 2010 only.(2)Total revenues include gain or loss on sale, if applicable.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 ) 154Cash Flows from Discontinued OperationsSale of Nikko CordialOn October 1, 2009 the Company announced the successful completion of the sale of Nikko Cordial Securities to Sumitomo Mitsui Banking Corporation. The transaction had a total cash value to Citi of 776 billion yen (U.S. $8.7 billion at an exchange rate of 89.60 yen to U.S. $1.00 as of September 30, 2009). The cash value was composed of the purchase price for the transferred business of 545 billion yen, the purchase price for certain Japanese-listed equity securities held by Nikko Cordial Securities of 30 billion yen, and 201 billion yen of excess cash derived through the repayment of outstanding indebtedness to Citi. After considering the impact of foreign exchange hedges of the proceeds of the transaction, the sale resulted in an immaterial gain in 2009. A total of about 7,800 employees were included in the transaction.The Nikko Cordial operations had total assets and total liabilities of approximately $24 billion and $16 billion, respectively, at the time of sale, which were reflected in Citi Holdings prior to the sale.Results for all of the Nikko Cordial businesses sold are reported asDiscontinued operations for all periods presented.Summarized financial information forDiscontinued operations, including cash flows, related to the sale of Nikko Cordial is as follows:In millions of dollars 2011 2010 2009 Total revenues, net of interest expense(1) $ — $ 92 $ 646 Loss from discontinued operations $ — $ (7 ) $ (623 ) Gain on sale — 94 97 Benefit for income taxes — (122 ) (78 ) Income (loss) from discontinued operations, net of taxes $ — $ 209 $ (448 ) In millions of dollars 2011 2010 2009 Cash flows from operating activities $ — $ (134 ) $ (1,830 ) Cash flows from investing activities — 185 1,824 Cash flows from financing activities — — — Net cash provided by (used in) discontinued operations $ — $ 51 $ (6 ) (1)Total revenues include gain or loss on sale, if applicable.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
The following is summarized financial information for the Egg credit card, SLC, Nikko Cordial Securities, German retail banking and CitiCapital businesses. The SLCCCA business, which was sold on December 31, 2010, is reported as discontinued operations for the third and fourth quarters of 2010 only and the sale of the Egg credit card business, is reported asThe Student Loan Corporation business and previous discontinued operations, for the full year 2011 only due to the immateriality of the impact of that presentation in other periods. The Nikko Cordial Securities business, which was sold on October 1, 2009, the German retail banking business, which was sold on December 5, 2008, and the CitiCapital business, which was sold on July 31, 2008, continueCiti continues to have minimal residual costs associated with the sales. Additionally, during 2009, contingent consideration payments of $29 million pretax ($19 million after tax) were received related to the sale of Citigroup’s asset management business, which was sold in December 2005.In millions of dollars 2011 2010 2009 Total revenues, net of interest expense(1) $ 352 $ (410 ) $ 779 Income (loss) from discontinued operations $ 23 $ 72 $ (653 ) Gain (loss) on sale 155 (702 ) 102 Provision (benefit) for income taxes 66 (562 ) (106 ) Income (loss) from discontinued operations, net of taxes $ 112 $ (68 ) $ (445 ) In millions of dollars 2011 2010 2009 Cash flows from operating activities $ (146 ) $ 4,974 $ (1,825 ) Cash flows from investing activities 2,827 1,726 1,854 Cash flows from financing activities (12 ) (6,486 ) (6 ) Net cash provided by discontinued operations $ 2,669 $ 214 $ 23 (1)Total revenues include gain or loss on sale, if applicable.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 ) 155Cash Flows from Discontinued OperationsIn 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 Citi Holdings andCorporate/Other and Citi Holdings business segments.
TheGlobal Consumer Bankingsegment 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 fourRegional Consumer Banking (RCB) businesses:North America, EMEA, Latin America andAsia.
The Company’sICG segment is composed ofSecurities and Banking andTransaction Services and provides corporations, governments, institutionscorporate, institutional, public sector and investorshigh net-worth clients in approximately 100 countries with a broad range of banking and financial products and services. The Citi Holdings segment is composed ofBrokerage and Asset Management, Local Consumer Lending andSpecial Asset Pool.
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 ofBrokerage and Asset Management, Local Consumer Lending andSpecial 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. These reclassificationsReclassifications during the first quarter of 2012 related to Citi’s re-allocation of certain expenses between businesses and segments and the transfer of certain commercial market loansthe substantial majority of the Company’s retail partner cards business (which Citi now refers to as “Citi retail services”) from Citi Holdings—GCBLocal Consumer Lending to Citicorp—ICGNorth 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:Identifiable Revenues, Provision (benefit) Income (loss) from assets Revenues, Provision (benefit) Income (loss) from net of interest expense (1) for income taxes continuing operations (1)(2) at year end net of interest expense (1) for income taxes continuing operations (2) Identifiable assets In millions of dollars, except identifiable assets in billions 2011 2010 2009 2011 2010 2009 2011 2010 2009 2011 2010 2012 2011 2010 2012 2011 2010 2012 2011 2010 2012 2011 Global Consumer Banking $ 32,585 $ 32,374 $ 24,754 $ 2,601 $ 1,343 $ (142 ) $ 6,196 $ 4,661 $ 2,389 $ 340 $ 328 $ 40,214 $ 39,195 $ 39,369 $ 3,733 $ 3,509 $ 1,551 $ 8,104 $ 7,672 $ 4,969 $ 402 $ 385 Institutional Clients Group 31,986 33,186 36,958 2,845 3,499 4,622 8,302 10,172 12,973 979 956 30,600 32,002 33,207 2,102 2,820 3,490 7,990 8,262 10,173 1,059 980 Subtotal Citicorp $ 64,571 $ 65,560 $ 61,712 $ 5,446 $ 4,842 $ 4,480 $ 14,498 $ 14,833 $ 15,362 $ 1,319 $ 1,284 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 12,896 19,287 29,128 (1,161 ) (2,573 ) (6,988 ) (2,524 ) (4,056 ) (9,059 ) 269 359 (833 ) 6,271 12,271 (4,412 ) (2,127 ) (2,815 ) (6,560 ) (4,103 ) (4,433 ) 156 225 Corporate/Other 886 1,754 (10,555 ) (764 ) (36 ) (4,225 ) (871 ) 174 (7,369 ) 286 271 Total $ 78,353 $ 86,601 $ 80,285 $ 3,521 $ 2,233 $ (6,733 ) $ 11,103 $ 10,951 $ (1,066 ) $ 1,874 $ 1,914 $ 70,173 $ 78,353 $ 86,601 $ 27 $ 3,521 $ 2,233 $ 7,909 $ 11,103 $ 10,951 $ 1,865 $ 1,874 (1) Includes Citicorp (excludingCorporate/Other) total revenues, net of interest expense, inNorth Americaof $23.6$29.8 billion, $26.7$30.1 billion and $19.9$33.6 billion; inEMEAof $12.2$11.5 billion, $11.7$12.3 billion and $15.0$11.8 billion; inLatin Americaof $14.5 billion, $13.6 billion $12.8 billion and $12.7$12.8 billion; and inAsiaof $15.0 billion, $15.2 billion and $14.4 billion in 2012, 2011 and $14.1 billion in 2011, 2010, and 2009, respectively. Regional numbers exclude Citi Holdings andCorporate/Other, which largely operate within the U.S.(2) Includes pretax provisions (credits) for credit losses and for benefits and claims in theGCBresults of $4.9$6.6 billion, $9.8$6.6 billion and $7.4$14.0 billion; in theICGresults of $276 million, $152 million and $(82) million and $1.8 billion;million; and in the Citi Holdings results of $7.8$4.9 billion, $16.3$6.0 billion and $31.1$12.1 billion for 2012, 2011 2010 and 2009,2010, respectively.156163 2009, respectively, interest revenue andInterest expenseconsisted of the following:In millions of dollars 2011 2010 2009 2012 2011 2010 Interest revenue Loan interest, including fees $ 50,281 $ 55,056 $ 47,457 $ 48,544 $ 50,281 $ 55,056 Deposits with banks 1,750 1,252 1,478 1,269 1,750 1,252 Federal funds sold and securities borrowed or purchased under agreements to resell 3,631 3,156 3,084 Federal funds sold and securities borrowed or purchased under agreements to resell 3,418 3,631 3,156 Investments, including dividends 8,320 11,004 12,882 7,525 8,320 11,004 Trading account assets(1) 8,186 8,079 10,723 6,802 8,186 8,079 Other interest 513 735 774 580 513 735 Total interest revenue $ 72,681 $ 79,282 $ 76,398 $ 68,138 $ 72,681 $ 79,282 Interest expense Deposits(2) $ 8,556 $ 8,371 $ 10,146 $ 7,613 $ 8,556 $ 8,371 Federal funds purchased and securities loaned or sold under agreements to repurchase 3,197 2,808 3,433 Federal funds purchased and securities loaned or sold under agreements to repurchase 2,817 3,197 2,808 Trading account liabilities(1) 408 379 289 190 408 379 Short-term borrowings 650 917 1,425 727 650 917 Long-term debt 11,423 12,621 12,609 9,188 11,423 12,621 Total interest expense $ 24,234 $ 25,096 $ 27,902 $ 20,535 $ 24,234 $ 25,096 Net interest revenue $ 48,447 $ 54,186 $ 48,496 $ 47,603 $ 48,447 $ 54,186 Provision for loan losses 11,773 25,194 38,760 10,848 11,773 25,194 Net interest revenue after provision for loan losses $ 36,674 $ 28,992 $ 9,736 $ 36,755 $ 36,674 $ 28,992 (1) Interest expense onTrading account liabilitiesofICGis reported as a reduction of interest revenue fromTrading account assets. (2) Includes deposit insurance fees and charges of $1.3 billion,$1,262 million, $1,332 million and $981 million and $1.5 billion for the 12 monthsyears ended December 31, 2011, 2010 and 2009, respectively. The 12-month period ended2012, December 31, 2009 includes the one-time FDIC special assessment.2011 and December 31, 2010, respectively.twelve monthsyears ended December 31, 2012, 2011 2010 and 2009,2010, respectively. The primary components ofCommissions and fees revenue for the twelve monthsyear ended December 31, 20112012 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 inCommissions 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 inOther 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 inOther 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 inCommissions and fees. Gains or losses, if any, on these transactions are included inPrincipal transactions (see Note 7 to the Consolidated Financial Statements).
The following table presents commissionsCommissions and fees revenue for the years ended December 31:In millions of dollars 2011 2010 2009 2012 2011 2010 Credit cards and bank cards $ 3,603 $ 3,774 $ 4,110 $ 3,526 $ 3,603 $ 3,774 Investment banking 2,451 2,977 3,462 2,991 2,451 2,977 Smith Barney — — 837 Trading-related 2,587 2,368 2,316 2,296 2,587 2,368 Transaction services 1,520 1,454 1,306 1,441 1,520 1,454 Other Consumer(1) 931 1,156 1,272 878 931 1,156 Checking-related 926 1,023 1,043 907 926 1,023 Primerica — 91 314 — — 91 Loan servicing 251 353 226 313 251 353 Corporate finance(2) 519 439 678 516 519 439 Other 62 23 (79 ) 58 62 23 Total commissions and fees $ 12,850 $ 13,658 $ 15,485 $ 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. 157164as well asand 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 2011 2010 2009 2012 2011 2010 Global Consumer Banking $ 716 $ 533 $ 1,569 $ 812 $ 716 $ 533 Institutional Clients Group 4,873 5,567 5,626 4,130 4,873 5,566 Corporate/Other (192 ) 45 (406 ) Subtotal Citicorp $ 5,589 $ 6,100 $ 7,195 $ 4,750 $ 5,634 $ 5,693 Local Consumer Lending (102 ) (217 ) 896 $ (69 ) $ (102 ) $ (217 ) Brokerage and Asset Management (11 ) (37 ) 30 5 (11 ) (37 ) Special Asset Pool 1,713 2,078 (2,606 ) 95 1,713 2,078 Subtotal Citi Holdings $ 1,600 $ 1,824 $ (1,680 ) $ 31 $ 1,600 $ 1,824 Corporate/Other 45 (407 ) 553 Total Citigroup $ 7,234 $ 7,517 $ 6,068 $ 4,781 $ 7,234 $ 7,517 In millions of dollars 2011 2010 2009 Interest rate contracts(1) $ 5,136 $ 3,231 $ 6,211 $ 2,301 $ 5,136 $ 3,231 Foreign exchange contracts(2) 2,309 1,852 2,762 2,403 2,309 1,852 Equity contracts(3) 3 995 (334 ) 158 3 995 Commodity and other contracts(4) 76 126 924 92 76 126 Credit derivatives(5) (290 ) 1,313 (3,495 ) (173 ) (290 ) 1,313 Total Citigroup $ 7,234 $ 7,517 $ 6,068 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.
The Company administersmakes 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 payments. The award programsvests, the shares are usedfreely transferable, unless they are subject to attract, retain and motivate officers, employees and non-employee directors,a restriction on sale or transfer for a specified period. Pursuant to provide incentives fora stock ownership commitment, certain executives have committed to holding most of their contributionsvested shares indefinitely.
All equity awards granted since April 19, 2005, have been made pursuant to the long-term performance and growth of the Company, and to align their interests with those of stockholders. These programsstockholder-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. All grants of equity awards since April 19, 2005 have been made pursuant to stockholder-approved stock incentive plans.
At December 31, 2011,2012, approximately 77.586.9 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 washas been to deliver shares from treasury stock upon the exercise or vesting of equity awards. However, newly issued shares were issued as stock paymentsto settle certain awards in April 2010, (to settle “commonand the vesting of annual deferred stock equivalent” awards granted in January 2010), in January 2011, (as current stock payments in lieu of cash bonuses)2012 and in January 2012 (to settle the vesting of deferred stock awards granted in prior years).2013. The new issuancesnewly issued shares in April 2010 and January 2011 were specifically intended to increase the Company’s equity capital. RestrictedThe practice of issuing new sharesthat vestedis expected to continue in January 2012 were settled withthe absence of a share repurchase program by which treasury shares that were previously issued outcan be replenished. The use of treasury. There is no income statement impact from treasury stock issuances and issuances of new shares.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 2010 and 2009:2010:In millions of dollars 2011 2010 2009 2012 2011 2010 Charges for estimated awards to retirement-eligible employees $ 338 $ 366 $ 207 $ 444 $ 338 $ 366 Option expense 161 197 55 99 161 197 Amortization of deferred cash awards and deferred cash stock units 208 280 113 198 208 280 Amortization of MC LTIP awards(1) — — 19 Salary stock award expense — 173 162 — — 173 Immediately vested stock award expense(2) 52 174 1,723 Immediately vested stock award expense(1) 60 52 174 Amortization of restricted and deferred stock awards(3) 871 747 1,543 stock awards(2) 864 871 747 Total $ 1,630 $ 1,937 $ 3,822 $ 1,665 $ 1,630 $ 1,937 (1) Management Committee Long-Term Incentive Plan (MC LTIP) awards were granted in 2007. The awards expired in December 2009 without the issuance of shares.(2) This represents expense for immediately vested stock awards that generally were stock payments in lieu of cash compensation. The expense is generally accrued for as cash incentive compensation in the year prior to grant. The 2009 amount is for the “common stock equivalent” awards, which are described in more detail below.(3)(2)All periods include amortization expense for all unvested awards to non-retirement-eligible employees. Amortization is recognized net of estimated forfeitures of awards. 158Stock Award ProgramsAnnual Incentive AwardsCitigroup issues (and/or has issued)Most of the shares of its 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 stock awards,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 stocka 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.
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, (and predecessor plans)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 its officers, employeesa four-year vesting schedule and non-employee directors.For allearning a LIBOR-based return, and the other subject to a two-year vesting schedule and denominated in stock award programs, duringunits, the applicable vesting period,value of which fluctuated based on the shares awarded are not issued to participants (inprice of Citigroup common stock. Other terms and conditions of these awards were the casesame 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.award)options in lieu of some or cannot be sold or transferred byall of the participants (in the case of a restricted stock award), until after the vesting conditionsvalue that would otherwise have been satisfied. Recipients ofawarded as restricted or deferred stockstock. CAP awards dogranted prior to 2011 were not have any stockholder rights until shares are delivered to them, but they generally are entitled to receive dividend-equivalent payments during the vesting period. Recipients of restricted stock awards are entitled to a limited voting right and to receive dividend or dividend-equivalent payments during the vesting period. (Dividend equivalents are paid through payroll and recorded as an offset to retained earnings on those shares expected to vest.) Once a stock award vests, the shares may become freely transferable, but in the case of certain executives, may be subject to transfer restrictions by their termsclawback provisions or a stock ownership commitment.performance criteria.
The total expense to be recognized for the stock awards described below represents the fair value of Citigroup common stock at the date of grant. Theaward date. Generally, the expense is recognized as a charge to income ratably over the vesting period, except for those awards granted to retirement-eligible employees, and stock payments (e.g., salary stock and other immediately vested awards. Forawards). Whenever awards of deferred stockare 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 ruleseligibility are or will be met. If the employee is retirement rules will have been meteligible on or prior to the expected awardgrant date, the entire estimated expense is recognized in the year prior to grant in the same manner as cash incentive compensation is accrued, rather than amortized overgrant. For employees who become retirement eligible during the applicable vesting period, ofexpense is recognized from the award. Salary stock and othergrant date until the date eligibility conditions are met.
Expense for immediately vested stock awards that generally were grantedmade in lieu of cash compensation (salary stock and areother 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 same mannerEmergency Economic Stabilization Act of 2008, as cashamended (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 is accrued. Certainin the form of fully vested stock payments, long-term restricted stock (LTRS), and/or restricted and deferred stock awards, with performance conditions 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, may beare subject to variable accounting, pursuant to which the associated charges fluctuate with changes in Citigroup’s common stock price over the applicable vesting periods. TheFor these awards, the total amount that will be recognized as expense cannot be determined in full until the awards vest.Annual Award Programs.Citigroup’s primary stock award program is the Capital Accumulation Program (CAP). Generally, CAP awards of restricted or deferred stock constitute a percentage of annual incentive compensation and vest ratably over three- or four-year periods, beginning on or about the first anniversary of the award date. Continuous employment within Citigroup is generally required to vest in CAP and other stock award programs. Typical exceptions include vesting for participants whose employment is terminated involuntarily during the vesting period for a reason other than “gross misconduct,” who meet specified age and service requirements before leaving employment (retirement-eligible participants), or who die or become disabled during the vesting period. Post-employment vesting by retirement-eligible participants is generally conditioned upon their refraining from competition with Citigroup during the remaining vesting period.In a change from prior years, incentive awards in January 2012 to individual employees who have influence over the Company’s material risks (covered employees) were delivered as a mix of immediate cash bonuses, deferred For stock awards under CAP and deferred cash awards. (Previously, annual incentives were traditionally awarded as a combination of cash bonus and CAP.) For covered employees, the minimum percentage of incentive pay required to be deferred was raised from 25% to 40%, with a maximum deferral of 60% for the most highly paid employees. For incentive awards made to covered employees in January 2012 (in respect of 2011 performance), only 50% of the deferred portion was delivered as a CAP award; the other 50% was delivered in the form of a deferred cash award. The 2012 deferred cash award is subject to a performance-based vesting condition that results in cancellation of unvested amounts on a formulaic basis if a participant’s business has losses in any year of the vesting period. The 2012 deferred cash award also earns notional interest at an annual rate of 3.55%, compounded annually.CAP awards made in January 2012 and January 2011 to “identified staff” in the European Union (EU) have several features that differ from the generally applicable CAP provisions described above. “Identified staff” are those Citigroup employees whosediscretionary performance conditions, compensation is subject to various banking regulations on sound incentive compensation policies in the EU. CAP awards to these employees are scheduled to vest over three years of service, but vested shares are subject to a six-month sale restriction, and awards are subject to cancellation, in the sole discretion of the Committee, if (a) there is reasonable evidence a participant engaged in misconduct or committed material error in connection with his or her employment, or (b) the Company or the employee’s business unit suffers a material downturn in its financial performance or a material failure of risk management (the EU clawback). For these CAP awards, the EU clawback is in addition to the clawback provision described below. CAP awards containing the EU clawback provision are subject to variable accounting.159A portion of the immediately vested cash incentive compensation awarded in January 2011 to selected highly compensated employees (and in January 2012 to such employees in the EU) was delivered in immediately-vested stock payments. In the EU, the shares awarded were subject to a six-month sale restriction.Annual incentive awards made in January 2011, January 2010, and December 2009 to certain executive officers and highly compensated employees were made in the form of long-term restricted stock (LTRS), with terms prescribed by the Emergency Economic Stabilization Act of 2008, as amended. (SeeEESA-related Stock Compensation below for additional information.) The annual incentive awards made in January 2011 to executive officers have a performance-based vesting condition. If Citigroup has pretax net losses during any of the years of the deferral period, the Committee may exercise its discretion to eliminate or reduce the number of shares that vest for that year. This performance-based vesting condition applies to CAP and LTRS awards made in January 2011 to executive officers. These awards are subject to variable accounting. Compensation expense was accrued based on Citigroup’s common stock price at yearthe end of the reporting period, and the estimated outcome of meeting the performance conditions.
All CAP awards made in January 2011 and 2012 and all LTRS awards made in January 2011 provide for a clawback that applies to specified cases, including in the case of employee misconduct or where the awards were based on earnings that were misstated. Some of these awards are subject to variable accounting.Generally, in order to reduce the use of shares under Citigroup’s stockholder-approved stock incentive plan, the percentages of total annual incentives awarded pursuant to CAP in January 2010 and January 2009 were reduced and were instead awarded as deferred cash awards primarily in the U.S. and the U.K. The deferred cash awards are subject to two-year and four-year vesting schedules, but the other terms and conditions are the same as CAP awards made in those years. The deferred cash awards earn a return during the vesting period based on LIBOR; in 2010 only, a portion of the deferred cash award was denominated as a stock unit, the value of which will fluctuate based on the price of Citi common stock. In both cases, only cash will be delivered at vesting.
In January 2009, members of the Management Executive Committee (except the CEO and CFO)certain senior executives received 30% of their annual incentive awards for 2008 as performance vesting-equity awards. Theseperformance-vesting equity awards vest 50% ifconditioned 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 CitigroupCitigroup’s common stock meets aon January 14, 2013, to the award’s price targettargets of $106.10 and 50% for a price target of $178.50, in each case on or prior to January 14, 2013. The price target will be met only if the NYSE closing price equals or exceeds the applicable price target for at least 20 NYSE trading days within any period of 30 consecutive NYSE trading days ending on or before January 14, 2013. Any shares that have not vested by such date will vest according to a fraction, the numerator of which is the share price on the delivery date and the denominator of which is the price target$178.50. None of the unvested shares. Noshares awarded or vested were entitled to any payment or accrual of dividendequivalents are paid on unvested awards. equivalents. The fair value of the awards iswas recognized as compensation expense ratably over the vesting period.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 % and 2009 includesincluded expense associated with these awards.EESA-related Stock Compensation.Incentive compensation in respect of 2009 performance for the senior executive officers and the next 95 most highly compensated employees (2009 Top 100) was 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). Pursuant to such structures, the affected employees did not participate in CAP and instead received equity compensation in the form of fully vested stock payments, LTRS and other restricted and deferred stock awards subject to vesting requirements and sale restrictions. The other restricted and deferred stock awards to the 2009 Top 100 vest ratably over three years pursuant to terms similar to CAP awards, but vested shares are subject to sale restrictions until the later of the first anniversary of the regularly scheduled vesting date or January 20, 2013. Pursuant to EESA-prescribed structures, incentive compensation in respect of 2010 performance was delivered to the senior executive officers and next 20 most highly compensated employees for 2010 (2010 Top 25), in the form of LTRS awards. The LTRS awards to the 2009 Top 100 and 2010 Top 25 vest in full after three years of service and there are no provisions for early vesting in the event of retirement, involuntary termination of employment or change in control, but early vesting will occur upon death or disability.In 2009 and January 2010, the 2009 Top 100 received salary stock payments that become transferrable in monthly installments over periods of either one year or three years beginning in January 2010. In September 2010, salary stock payments were made to the 2010 Top 25 (other than the CEO) in a manner consistent with the salary stock payments made in 2009 pursuant to rulings issued by the Special Master. The salary stock paid for 2010, net of tax withholdings, is transferable over a 12-month period beginning in January 2011. 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.160 In connection with its agreement to repay $20 billion of its TARP obligations to the U.S. Treasury Department in December 2009, Citigroup announced that $1.7 billion of incentive compensation that would have otherwise been awarded in cash to employees in respect of 2009 performance would instead be awarded as “common stock equivalent” awards denominated in U.S. dollars or in local currency that were settled by stock payments in April 2010. The awards were generally accrued as compensation expense in the year 2009 and were recorded as a liability from the January 2010 grant date until the settlement date in April 2010. The recorded liability was reclassified to equity when newly issued shares were delivered to participating employees on the settlement date.Awards.AwardsFromAs referenced above, from time to time, restricted or deferred stock awards, and/or stock option grants are made outside of theCitigroup’s annual incentive programprograms to induce talented 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.
OnDeferred 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, the Committee approved a deferred stock retention awardand was scheduled to CEO Vikram Pandit. The award vestsvest in three equal installments on December 31, 2013, December 31, 2014, and December 31, 2015 if the Committee determines that he has satisfied2015. The award was cancelled in its entirety when Mr. Pandit resigned in October 2012. Because of discretionary performance criteria dealing with regulatory compliance, Citi culture and talent management and Mr. Pandit remains employed throughvesting conditions, the vesting date. Any vested shares from the December 31, 2013, and December 31, 2014 vestings will be sale-restricted until December 31, 2015. This award iswas subject to variable accounting.On July 17, 2007,accounting until its cancellation in the Committeefourth quarter of 2012.
Pursuant to structures approved by the Management Committee Long-Term Incentive Plan (MC LTIP) (pursuantSpecial 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 the termsthree years. There are no provisions for early release of the shareholder-approved 1999 Stock Incentive Plan) under which participants received an equity award that could be earned basedtransfer restrictions on Citigroup’s performance against various metrics relative to peer companies and publicly stated return on equity (ROE) targets measured atsalary stock in the endevent of each calendar year beginning with 2007. The final expense for eachretirement, involuntary termination of the three consecutive calendar years was adjusted based on the results of the ROE tests. No awards were earned for 2009, 2008employment, change in control, or 2007 and no shares were issued because performance targets were not met. No new awards were made under the MC LTIP since the initial award in July 2007.any other reason.Directors.167
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.20112012 and changes during the 12 months ended December 31, 20112012 are presented below:Weighted-average Weighted-average grant date grant date Unvested stock awards Shares fair value Shares fair value Unvested at January 1, 2011 32,508,167 $72.84 Unvested at January 1, 2012 50,213,124 $ 50.90 New awards 33,189,925 49.59 33,452,028 30.51 Cancelled awards (1,894,723 ) 54.39 (2,342,822 ) 39.15 Vested awards(1) (13,590,245 ) 99.73 (17,345,405 ) 62.12 Unvested at December 31, 2011 50,213,124 $50.90 Unvested at December 31, 2012 63,976,925 $ 37.62 (1) 20112012 was approximately $46.10$32.78 per share.20112012, and changes during the 12 months ended December 31, 20112012, are presented below:Weighted-average Weighted-average award issuance award issuance Unvested stock awards Shares fair value Shares fair value Unvested at January 1, 2011 — $ — Unvested at January 1, 2012 5,290,798 $ 49.30 New awards 5,337,863 49.31 2,219,213 30.55 Cancelled awards (47,065 ) 50.20 (377,358 ) 43.92 Vested awards (1)— — (1,168,429 ) 50.16 Unvested at December 31, 2011 5,290,798 $49.30 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. 2011,2012, there was $985$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 2.32.1 years. However, the cost of awards subject to variable accounting will fluctuate with changes in Citigroup’s common stock price.
While the Company no longer grants options as part of its annual incentive award programs, CitiCitigroup may grant stock options to employees or directors on a one-time basis, as sign-on awards or as retention awards.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).161On May 17, 2011, 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 Committee approvedstock option election for all directors and employees (except certain CAP participants who were permitted to make a retentionstock 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 to the CEO that included an option grant with exercise prices at or above the market price of Citi common stock on the grant date. The price of Citi common stock on the grant date was $41.54 and the committee awarded options with exercise prices of $41.54, $52.50 and $60.00. These options vest in three equal installments on the first three anniversaries of the grant date, and vested options remain exercisable for their entire 10-year term. Unvested options will be forfeited if the CEO terminates employment with the Company for any reason before the applicable vesting date, except in the event of his death or disability. The options have risk-adjustment features suchdelivered instead as a one-year holding period for incremental shares if the options are exercised before the fifth anniversary of the grant date, and unvested and vested but unexercised option shares may be cancelled or forfeited pursuant to a clawback provision.
stock option.CitiCitigroup 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 CitiCitigroup 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 one-time 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 theCitigroup’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 Citi’sthe 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.
Prior to 2009, stock options were granted to CAP participants who elected to receive stock options in lieu of restricted or deferred stock awards, and to non-employee directors who elected to receive their compensation in the form of a stock option grant. Beginning in 2009, Citi eliminated the stock option election forGenerally, all directors and employees (except certain CAP participants who were permitted to make a stock option election for awards made in 2009). Generally,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. Vesting schedules for sign-on or retention grants may vary. The sale of shares acquired through the exercise of employee stockAll outstanding options granted from 2003 through Januaryprior to 2009 is restricted for a two-year period (and may be subject to the stock ownership commitment of senior executives thereafter).On January 22, 2008, the CEO was awarded stock options to purchase three hundred thousand shares of common stock. The options vest 25% per year beginning on the first anniversaryare significantly out of the grant date and expire on the tenth anniversary of the grant date. One-third of the options have an exercise price equal to the NYSE closing price of Citigroup stock on the grant date ($244.00), one-third have an exercise price equal to a 25% premium over the grant-date closing price ($305.00), and one-third have an exercise price equal to a 50% premium over the grant date closing price ($366.00). These options do not have a reload feature.money.
Prior to 2003, Citigroup options including options granted since the date of the merger of Citicorphad 10-year terms and Travelers Group, Inc., 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) and had 10-year terms. Certain. All outstanding options mostlythat were granted prior to January 1, 2003 and with 10-year terms, permit an employee exercising an option under certain conditions to be granted new options (reload options)expired in an amount equal to the number of common shares used to satisfy the exercise price and the withholding taxes due upon exercise. The reload options are granted for the remaining term of the related original option and vest after six months. Reload options may in turn be exercised using the reload method, given certain conditions. An option may not be exercised using the reload method unless the market price on the date of exercise is at least 20% greater than the option to purchase.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 remainremained outstanding will expireexpired 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 2012.1621682010 and 20092010 is as follows:2011 2010 2009 2012 2011 2010 Weighted- Weighted- Weighted- Weighted- Weighted- Weighted- average Intrinsic average Intrinsic average Intrinsic average Intrinsic average Intrinsic average Intrinsic exercise value exercise value exercise value exercise value exercise value exercise value Options price per share Options price per share Options price per share Options price per share Options price per share Options price per share Outstanding, beginning of period 37,486,011 $ 93.70 $ — 40,404,481 $ 127.50 $ — 14,386,066 $ 418.40 $ — 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 — 32,124,473 42.70 — — — — 3,425,000 48.86 — 4,450,017 47.80 — Forfeited or exchanged (1,539,227 ) 176.41 — (4,368,086 ) 115.10 — (3,928,531 ) 369.80 — (858,906 ) 83.84 — (1,539,227 ) 176.41 — (4,368,086 ) 115.10 — Expired (1,610,450 ) 487.24 — (2,935,863 ) 458.70 — (2,177,527 ) 362.10 — (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 — — — — — — (165,305 ) 40.80 6.72 (64,538 ) 40.80 3.80 Outstanding, end of period 37,596,029 $ 69.60 $ — 37,486,011 $ 93.70 $ — 40,404,481 $ 127.50 $ — 35,020,397 $ 51.20 $ — 37,596,029 $ 69.60 $ — 37,486,011 $ 93.70 $ — Exercisable, end of period 23,237,069 15,189,710 7,893,909 32,973,444 23,237,069 15,189,710 2011:2012:Options outstanding Options exercisable Options outstanding Options exercisable Weighted-average Weighted-average Number contractual life Weighted-average Number Weighted-average Number contractual life Weighted-average Number Weighted-average Range of exercise prices outstanding remaining exercise price exercisable exercise price outstanding remaining exercise price exercisable exercise price $29.70–$49.99 (1)33,982,017 4.1 years $ 42.38 20,302,484 $ 41.79 33,392,541 3.1 years $ 42.40 31,431,666 $ 42.02 $50.00–$99.99 203,614 9.3 years 56.44 1,807 67.10 69,956 8.1 years 56.76 69,132 56.64 $100.00–$199.99 532,152 6.9 years 147.20 298,788 150.89 516,577 5.9 years 147.33 431,323 148.33 $200.00–$299.99 852,842 2.6 years 244.51 658,586 244.50 754,375 1.7 years 243.85 754,375 243.85 $300.00–$399.99 366,912 3.6 years 346.94 316,912 348.74 206,627 4.9 years 335.97 206,627 335.97 $400.00–$499.99 1,216,690 0.1 years 428.22 1,216,690 428.22 $500.00–$564.10 441,802 0.3 years 520.90 441,802 520.90 37,596,029 4.0 years $ 69.60 23,237,069 $ 82.47 $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. 2011,2012, there was $122.5$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 0.80.3 years.163Fair Value Assumptions
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 % For options granted during 2011 2010 2009 Weighted-average per-share fair value, at December 31 $ 13.90 $ 16.60 $ 13.80 Weighted-average expected life Original grants 4.95 yrs. 6.06 yrs. 5.87 yrs. Valuation assumptions Expected volatility 35.64 % 36.42 % 35.89 % Risk-free interest rate 2.33 % 2.88 % 2.79 % Expected dividend yield 0.00 % 0.00 % 0.02 % Expected annual forfeitures Original and reload grants 9.62 % 9.62 % 7.60 %
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 (a)(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 (b)(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 CitiCitigroup 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 CitiCitigroup 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.CEO.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 takenrecognized in 20112012 in respect of the KEPSP was $285$246 million.
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.OtherVariable Incentive Compensation
Citigroup may at times issue Cashhas various incentive plans globally that are used to motivate and reward performance primarily in Lieuthe areas of Equity awards, whichsales, operational excellence and customer satisfaction. These programs are deferred cash awards givenreviewed on a periodic basis to new hires in replacement of prior employer’s awards or other forfeited compensation. The vesting schedulesensure that they are structured appropriately, aligned to shareholder interests and termsadequately risk balanced. For the years ended December 31, 2012 and conditions of these deferred cash awards are generally structured to match the terms of awards or other compensation from a prior employer that was forfeited to accept employment with the Company. Expense taken in 2011, Citigroup expensed $670 million and $1.0 billion, respectively, for these awards was $172 million.Additionally, certain subsidiaries or business units of the Company operate and may from time to time introduce other incentive plans for certain employees that have an incentive-based award component. These awards are not considered material to Citigroup’s operations.globally.164170
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
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.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 Citigroup’sThe Company’s funding policypractice 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 at December 31, 2011 and 2010, there were no minimum required cash contributions. During 2010, a discretionary cash contribution of $995 million was made to the plan. For the U.S. non-qualified pension plans, the Company contributed $51 million in benefits paid directly during 2011, $51 million during 2010 and $55 million during 2009. No contributions are expected for the U.S. qualified pension plan for 2012 and $53 million of direct payments are expected for the U.S. non-qualified plans for 2012.For the non-U.S. pension plans, the Company reported $389 million in employer contributions during 2011, which includes $47 million in benefits paid directly by the Company. For the non-U.S. pension plans, discretionary cash contributions for 2012 are anticipated to be approximately $211 million. In addition,or 2011. The following table summarizes the actual Company expects to contribute $43 million of benefits to be paid directly by the Company for its non-U.S. pension plans. For the U.S. postretirement benefit plans, there are no expected or required contributions for the years ended December 31, 2012 other than $55 million of benefit paymentsand 2011, as well as estimated expected to be paid directly by the Company.For the non-U.S. postretirement benefit plans, the Company reported $75 million in employer contributions during 2011, which includes $5 million in benefits paid directly by the Company during the year. For the non-U.S. postretirement benefit plans, expected cash contributions for 2012 are $83 million including $4 million of benefits to be paid directly by the Company.These estimates2013. Expected contributions are subject to change since contribution decisions are affected by various factors, such as market performance and regulatory requirements. In addition, management has the ability to change funding policy.Net (Benefit) ExpensePension plans Postretirement benefit plans U.S. plans Non-U.S. plans U.S. plans Non-U.S. plans In millions of dollars 2011 2010 2009 2011 2010 2009 2011 2010 2009 2011 2010 2009 Qualified Plans Benefits earned during the year $ 13 $ 14 $ 18 $ 203 $ 167 $ 148 $ — $ 1 $ 1 $ 28 $ 23 $ 26 Interest cost on benefit obligation 612 644 649 382 342 301 53 59 61 118 105 89 Expected return on plan assets (890 ) (874 ) (912 ) (422 ) (378 ) (336 ) (6 ) (8 ) (10 ) (117 ) (100 ) (77 ) Amortization of unrecognized Net transition obligation — — — (1 ) (1 ) (1 ) — — — — — — Prior service cost (benefit) (1 ) (1 ) (1 ) 4 4 4 (3 ) (3 ) (1 ) — — — Net actuarial loss 64 47 10 72 57 60 3 11 2 24 20 18 Curtailment (gain) loss(1) — — 47 4 1 (8 ) — — — — — — Settlement (gain) loss — — — 10 7 15 — — — — — — Special termination benefits — — — 27 5 15 — — — — — — Net qualified (benefit) expense $ (202 ) $ (170 ) $ (189 ) $ 279 $ 204 $ 198 $ 47 $ 60 $ 53 $ 53 $ 48 $ 56 Nonqualified plans expense $ 42 $ 41 $ 41 $ — $ — $ — $ — $ — $ — $ — $ — $ — Total net (benefit) expense $ (160 ) $ (129 ) $ (148 ) $ 279 $ 204 $ 198 $ 47 $ 60 $ 53 $ 53 $ 48 $ 56 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 2009 curtailment gain in the non-U.S.U.S. pension plans includes an $18 million gain reflectinginclude benefits paid directly by the sale of Citigroup’s Nikko operations. See Note 2 toCompany for the Consolidated Financial Statements for further discussion of the sale of Nikko operations.nonqualified pension plan.165171 and net transition obligation that will be amortized fromAccumulated other comprehensive income (loss) into net expense in 20122013 are approximately $181 million, $2$226 million and $(1)$3 million, respectively, for defined benefit pension plans. For postretirement plans, the estimated 20122013 net actuarial loss and prior service cost amortizations are approximately $32$45 million and $(1) million, respectively.Pension plans Postretirement benefit plans Pension plans Postretirement plans U.S. plans (1) Non-U.S. plans U.S. plans Non-U.S. plans U.S. plans (1) Non-U.S. plans U.S. plans Non-U.S. plans In millions of dollars 2011 2010 2011 2010 2011 2010 2011 2010 2012 2011 2012 2011 2012 2011 2012 2011 Change in projected benefit obligation Projected benefit obligation at beginning of year $ 11,730 $ 11,178 $ 6,189 $ 5,400 $ 1,179 $ 1,086 $ 1,395 $ 1,141 $ 12,377 $ 11,730 $ 6,262 $ 6,189 $ 1,127 $ 1,179 $ 1,368 $ 1,395 Benefits earned during the year 13 14 203 167 — 1 28 23 12 13 199 203 — — 29 28 Interest cost on benefit obligation 612 644 382 342 53 59 118 105 565 612 367 382 44 53 116 118 Plan amendments — — 2 8 — — — — (13 ) — 17 2 — — — — Actuarial (gain) loss 655 537 59 459 (44 ) 108 29 120 965 655 923 59 (24 ) (44 ) 457 29 Benefits paid (633 ) (643 ) (288 ) (264 ) (79 ) (87 ) (54 ) (47 ) Benefits paid, net of participating contributions (638 ) (633 ) (306 ) (282 ) (85 ) (79 ) (54 ) (54 ) Expected Medicare Part D subsidy — — — — 10 12 — — — — — — 10 10 — — Settlements — — (44 ) (49 ) — — — — — — (254 ) (44 ) — — — — Curtailments — — 3 (5 ) — — — — Curtailment (gain) loss — — (8 ) 3 — — — — Special/contractual termination benefits — — 27 5 — — — — — — 1 27 — — — — Foreign exchange impact and other — — (271 ) 126 8 — (148 ) 53 — — 198 (277 ) — 8 86 (148 ) Projected benefit obligation at year end $ 12,377 $ 11,730 $ 6,262 $ 6,189 $ 1,127 $ 1,179 $ 1,368 $ 1,395 $ 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 $ 11,561 $ 9,934 $ 6,145 $ 5,592 $ 95 $ 114 $ 1,176 $ 967 $ 11,991 $ 11,561 $ 6,421 $ 6,145 $ 74 $ 95 $ 1,096 $ 1,176 Actual return on plan assets 1,063 1,271 526 432 5 10 40 126 1,303 1,063 786 526 7 5 277 40 Company contributions (2)— 999 389 305 53 58 75 75 — — 352 389 54 53 92 75 Plan participants contributions — — 6 6 — — — — — — 6 6 58 65 — — Settlements — — (44 ) (49 ) — — — — — — (254 ) (44 ) — — — — Benefits paid (633 ) (643 ) (288 ) (264 ) (79 ) (87 ) (54 ) (47 ) (638 ) (633 ) (312 ) (288 ) (143 ) (144 ) (54 ) (54 ) Foreign exchange impact and other — — (313 ) 123 — — (141 ) 55 — — 155 (313 ) — — 86 (141 ) Plan assets at fair value at year end $ 11,991 $ 11,561 $ 6,421 $ 6,145 $ 74 $ 95 $ 1,096 $ 1,176 $ 12,656 $ 11,991 $ 7,154 $ 6,421 $ 50 $ 74 $ 1,497 $ 1,096 Funded status of the plan at year end (3)(2)$ (386 ) $ (169 ) $ 159 $ (44 ) $ (1,053 ) $ (1,084 ) $ (272 ) $ (219 ) $ (612 ) $ (386 ) $ (245 ) $ 159 $ (1,022 ) $ (1,053 ) $ (505 ) (272 ) Net amount recognized Benefit asset $ — $ — $ 874 $ 528 $ — $ — $ — $ 52 $ — $ — $ 763 $ 874 $ — $ — $ — $ — Benefit liability (386 ) (169 ) (715 ) (572 ) (1,053 ) (1,084 ) (272 ) (271 ) (612 ) (386 ) (1,008 ) (715 ) (1,022 ) (1,053 ) (505 ) (272 ) Net amount recognized on the balance sheet $ (386 ) $ (169 ) $ 159 $ (44 ) $ (1,053 ) $ (1,084 ) $ (272 ) $ (219 ) $ (612 ) $ (386 ) $ (245 ) $ 159 $ (1,022 ) $ (1,053 ) $ (505 ) $ (272 ) Amounts recognized inAccumulated other comprehensive income (loss) Net transition obligation $ — $ — $ (1 ) $ (2 ) $ — $ — $ 1 $ 1 $ — $ — $ (2 ) $ 1 $ — $ — $ (1 ) $ (1 ) Prior service cost (benefit) (1 ) (1 ) 23 26 (3 ) (6 ) (5 ) (6 ) 13 1 (33 ) (23 ) 1 3 5 5 Net actuarial loss 4,440 4,021 1,454 1,652 152 194 509 486 (4,904 ) (4,440 ) (1,936 ) (1,454 ) (123 ) (152 ) (802 ) (509 ) Net amount recognized in equity—pretax $ 4,439 $ 4,020 $ 1,476 $ 1,676 $ 149 $ 188 $ 505 $ 481 $ (4,891 ) $ (4,439 ) $ (1,971 ) $ (1,476 ) $ (122 ) $ (149 ) $ (798 ) (505 ) Accumulated benefit obligation at year end $ 12,337 $ 11,689 $ 5,463 $ 5,576 $ 1,127 $ 1,179 $ 1,368 $ 1,395 $ 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 $713$769 million and $658$713 million and the aggregate accumulated benefit obligation was $694$738 million and $648$694 million at December 31, 20112012 and 2010,2011, respectively. These plans are unfunded. As such, the funded status of these plans is $(713)$(769) million and $(658)$(713) million at December 31, 20112012 and 2010,2011, respectively.Accumulated other comprehensive income (loss)reflects pretax charges of $231$298 million and $167$231 million at December 31, 20112012 and 2010,2011, respectively, that primarily relate to net actuarial loss.(2) There were no Company contributions to the U.S. pension plan during 2011 and $999 million during 2010, which includes a discretionary cash contribution of $995 million in 2010 and advisory fees paid to Citi Alternative Investments. Company contributions to the non-U.S. pension plans include $47 million and $40 million of benefits paid directly by the Company during 2011 and 2010, respectively.(3)The U.S. qualified pension plan is fully funded under specified ERISA funding rules as of January 1, 20112013 and no minimum required funding is expected for 2011 and 2012.2012 or 2013.16617220112012 and 2010:2011:In millions of dollars 2011 2010 2012 2011 Balance, January 1, net of tax(1) $ (4,105 ) $ (3,461 ) $ (4,282 ) $ (4,105 ) Actuarial assumptions changes and plan experience(2) (820 ) (1,257 ) (2,400 ) (820 ) Net asset gain due to actual returns exceeding expected returns 197 479 963 197 Net amortizations 183 137 214 183 Foreign exchange impact and other 28 (437 ) (155 ) 28 Change in deferred taxes, net 235 434 390 235 Change, net of tax $ (177 ) $ (644 ) $ (988 ) $ (177 ) Balance, December 31, net of tax(1) $ (4,282 ) $ (4,105 ) $ (5,270 ) $ (4,282 ) (1) See Note 21 to the Consolidated Financial Statements for further discussion of netAccumulated other comprehensive income (loss)balance. (2) Includes $70$62 million and $33$70 million in net actuarial losses related to U.S. nonqualified pension plans for 20112012 and 2010,2011, respectively.the end ofDecember 31, 2012 and 2011, and 2010, 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 ABO exceeds fair value of plan assets assets 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 U.S. plans (1) Non-U.S. plans U.S. plans (1) Non-U.S. plans In millions of dollars 2011 2010 2011 2010 2011 2010 2011 2010 2012 2011 2012 2011 2012 2011 2012 2011 Projected benefit obligation $ 13,089 $ 12,388 $ 2,386 $ 2,305 $ 13,089 $ 12,388 $ 1,970 $ 1,549 $ 14,037 $ 13,089 $ 4,792 $ 2,386 $ 14,037 $ 13,089 $ 2,608 $ 1,970 Accumulated benefit obligation 13,031 12,337 1,992 1,949 13,031 12,337 1,691 1,340 13,984 13,031 3,876 1,992 13,984 13,031 2,263 1,691 Fair value of plan assets 11,991 11,561 1,671 1,732 11,991 11,561 1,139 1,046 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. In 2010, the PBO and ABO of the U.S. plans include $11,730 million and $11,689 million, respectively, relating to the qualified plan and $658 million and $648 million, respectively, relating to the nonqualified plans. At December 31, 2010, combined accumulated benefit obligations for the U.S. and non-U.S. pension plans, excluding U.S. nonqualified plans, exceeded plan assets by $0.4 billion.167173CitigroupThe 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 onAccumulated other comprehensive income (loss).A.
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%.
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 qualityhigh-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. At December 31, 2010, the discount rate was set at 5.45% for the pension plans and 5.10% for the postretirement plans, referencing a Citigroup-specific cash flow analysis.
The discount rates for the non-U.S. pension and postretirement plans are selected by reference to high qualityhigh-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.bonds in certain countries. The discount rate and future rate of compensation assumptions used in determining pension and postretirement benefit obligations and net benefit expense for the Company’s plans are shown in the following table:At year end 2011 2010 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) 3.00 3.00 Non-U.S. pension plans Range 1.60 to 13.30 1.0 to 11.0 Weighted average 4.04 4.66 During the year 2011 2010 Discount rate U.S. plans(1) Pension 5.45 % 5.90 % Postretirement 5.10 5.55 Non-U.S. pension plans Range 1.75 to 14.00 2.00 to 13.25 Weighted average 6.23 6.50 Future compensation increase rate U.S. plans(2) 3.00 3.00 Non-U.S. pension plans Range 1.00 to 11.00 1.00 to 12.00 Weighted average 4.66 4.60 (1)Weighted-average rates for the U.S. plans equal the stated rates.(2)Effective January 1, 2008, the U.S. qualified pension plan was frozen except for certain 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. Future compensation increase rates for small groups of employees were 4%.168A one-percentage-point change in the discount rates would have the following effects on pension expense:One-percentage-point increase One-percentage-point decrease In millions of dollars 2011 2010 2009 2011 2010 2009 Effect on pension expense for U.S. plans(1) $ 19 $ 19 $ 14 $ (34 ) $ (34 ) $ (27 ) Effect on pension expense for non-U.S. plans (57 ) (49 ) (40 ) 70 56 62 (1)Due to the freeze of the U.S. qualified pension plan commencing January 1, 2008, 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.Assumed health-care cost-trend rates were as follows:2011 2010 Health-care cost increase rate for U.S. plans Following year 9.00 % 9.50 % 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 2011 2010 2011 2010 Effect on benefits earned and interest cost for U.S. plans $ 2 $ 3 $ (2 ) $ (2 ) Effect on accumulated postretirement benefit obligation for U.S. plans 43 49 (38 ) (44 ) CitigroupThe 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.CitigroupThe 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 future compensation increase 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, and 7.75% at December 31, 2009, reflecting a change in investment allocations during 2010. Actual returns in 2012, 2011 and 2010 were greater than the expected returns, while actual returns in 2009 were less than thereturns. The expected returns. This expected amountreturn on assets reflects the expected annual appreciation of the plan assets and reduces the annual pension expense of Citigroup.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, 2010, and 20092010 reflects deductions of $897 million, $890 million, $874 million, and $912$874 million of expected returns, respectively.2010 and 20092010 for the U.S. pension and postretirement plans: 2011 2010 2009 2012 2011 2010 Expected rate of return (1) 7.50 % 7.50 % 7.75 % 7.50 % 7.50 % 7.75 % Actual rate of return (1)(2)11.13 % 14.11 % (2.77 )% 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. 20112012 was reduced by the expected return of $422$399 million, compared with the actual return of $526$786 million. Pension expense for 20102011 and 20092010 was reduced by expected returns of $378$422 million and $336$378 million, respectively. Actual returns were higher in 2012, 2011, 2010, and 20092010 than the expected returns in those years.
The expected long-term rates of returnfollowing tables summarize the effect on assets used in determining the Company’s pension expense are shown below:of a one-percentage-point change in the discount rate: 2011 2010 Rate of return on assets U.S. plans (1) 7.50 % 7.75 % Non-U.S. pension plans Range 1.00 to 12.50 1.75 to 13.00 Weighted average 6.89 6.96 (1)Weighted-average rates for the U.S. plans equal the stated rates.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 56 169 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.A The following tables summarize the effect on pension expense of a one-percentage-point change in the expected rates of returnreturn: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
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 effects on pension expense:effects:One-percentage-point increase One-percentage-point decrease In millions of dollars 2011 2010 2009 2011 2010 2009 Effect on pension expense for U.S. plans $ (118 ) $ (119 ) $ (109 ) $118 $119 $109 Effect on pension expense for non-U.S. plans (62 ) (54 ) (44 ) 62 54 44 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 )
Citigroup’s pension and postretirement plans’ asset allocations for the U.S. plans at the end ofDecember 31, 2012 and 2011, and 2010, and the target allocations for 20122013 by asset category based on asset fair values, are as follows:Target asset U.S. pension assets U.S. postretirement assets Target asset U.S. pension assets U.S. postretirement assets allocation at December 31, at December 31, allocation at December 31, at December 31, Asset category(1) 2012 2011 2010 2011 2010 2013 2012 2011 2012 2011 Equity securities(2) 0-34 % 16 % 15 % 16 % 15 % 0 - 30 % 17 % 16 % 17 % 16 % Debt securities 30-67 44 40 44 39 25 - 73 45 44 45 44 Real estate 0-7 5 5 5 5 0 - 7 5 5 5 5 Private equity 0-15 13 16 13 16 0 - 15 11 13 11 13 Other investments 8-29 22 24 22 25 12 - 29 22 22 22 22 Total 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % (1) Target assetAsset 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 20112012 and 2010.2011.20112012 and 2010,2011, and the weighted-average target allocations for 20122013 by asset category based on asset fair values are as follows:Non-U.S. pension plans Non-U.S. pension plans Weighted-average Actual range Weighted-average Weighted-average Actual range Weighted-average target asset allocation at December 31, at December 31, target asset allocation at December 31, at December 31, Asset category 2012 2011 2010 2011 2010 2013 2012 2011 2012 2011 Equity securities 20 % 0 to 65 % 0 to 67 % 19 % 22 % 16 % 0 to 63 % 0 to 65 % 16 % 19 % Debt securities 73 0 to 99 0 to 100 71 68 75 0 to 100 0 to 99 72 71 Real estate 1 0 to 42 0 to 43 1 1 1 0 to 41 0 to 42 1 1 Other investments 6 0 to 100 0 to 100 9 9 8 0 to 100 0 to 100 11 9 Total 100 % 100 % 100 % 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 2012 2011 2010 2011 2010 Equity securities 44 % 0 to 44 % 0 to 43 % 44 % 43 % Debt securities 45 45 to 100 47 to 100 45 47 Other investments 11 0 to 11 0 to 10 11 10 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 % 170176
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 levelLevel 1 and levelLevel 2 during the years ended December 31, 20112012 and 2010.2011.
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. 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. 171178In millions of dollars U.S. pension and postretirement benefit plans (1) Non-U.S. pension and postretirement benefit plans Fair value measurement at December 31, 2010 Fair value measurement at December 31, 2012 Asset categories(2) Level 1 Level 2 Level 3 Total Asset categories Level 1 Level 2 Level 3 Total Equity securities U.S. equity $ 530 $ 9 $ — $ 539 $ 12 $ 12 $ — $ 24 Non-U.S. equity 432 4 — 436 88 77 48 213 Mutual funds 920 — — 920 31 4,583 — 4,614 Commingled funds 773 — — 773 26 — — 26 Debt securities U.S. Treasuries 1,039 — — 1,039 — 1 — 1 U.S. agency — 90 — 90 U.S. corporate bonds — 1,050 5 1,055 10 478 — 488 Non-U.S. government debt — 243 — 243 1,806 144 4 1,954 Non-U.S. corporate bonds — 219 1 220 162 804 4 970 State and municipal debt — 62 — 62 — — — — Hedge funds — 1,521 1,014 2,535 — — 16 16 Asset-backed securities — 28 — 28 Mortgage-backed securities — 25 — 25 — 1 — 1 Annuity contracts — — 187 187 — 5 6 11 Private equity — — 2,920 2,920 Derivatives 9 634 — 643 — 40 — 40 Other investments 9 — 4 13 3 9 219 231 Total investments at fair value $ 3,712 $ 3,885 $ 4,131 $ 11,728 $ 2,138 $ 6,154 $ 297 $ 8,589 Cash and short-term investments $ 152 $ 361 $ — $ 513 $ 56 $ 4 $ 3 $ 63 Other investment receivables — 21 — 21 Total assets $ 3,864 $ 4,267 $ 4,131 $ 12,262 $ 2,194 $ 6,158 $ 300 $ 8,652 Other investment liabilities $ (16 ) $ (590 ) $ — $ (606 ) Total net assets $ 3,848 $ 3,677 $ 4,131 $ 11,656 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 (1)The investments of the U.S. pension and postretirement benefit plans are commingled in one trust. At December 31, 2010, the allocable interests of the U.S. pension and postretirement benefit plans were 99.2% and 0.8%, respectively.(2)Balances at December 31, 2010 have been reclassified to conform to the current year’s presentation.172In 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 In millions of dollars Non-U.S. pension and postretirement benefit plans Fair value measurement at December 31, 2010 Asset categories(1) Level 1 Level 2 Level 3 Total Equity securities U.S. equity $ 12 $ 20 $ — $ 32 Non-U.S. equity 117 423 3 543 Mutual funds 183 4,773 — 4,956 Commingled funds — — — — Debt securities U.S. Treasuries 2 26 — 28 U.S. corporate bonds — 354 — 354 Non-U.S. government debt 167 404 — 571 Non-U.S. corporate bonds 4 354 107 465 State and municipal debt — 15 — 15 Hedge funds 4 — 14 18 Mortgage-backed securities — 2 — 2 Annuity contracts — — — — Derivatives — — — — Other investments 9 29 189 227 Total investments at fair value $ 498 $ 6,400 $ 313 $ 7,211 Cash and short-term investments $ 92 $ 18 $ — $ 110 Total assets $ 590 $ 6,418 $ 313 $ 7,321 (1)Balances at December 31, 2010 have been reclassified to conform to the current year’s presentation.173179
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 U.S. pension and postretirement benefit plans Beginning Level 3 Realized Unrealized Purchases, Transfers in Ending Level 3 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 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 Dec. 31, 2010 (losses) (losses) issuances Level 3 Dec. 31, 2011 Equity securities U.S. equity $ — $ — $ — $ — $ 51 $ 51 $ — $ — $ — $ — $ 51 $ 51 Non-U.S. equity — — (1 ) — 20 19 — — (1 ) — 20 19 Debt securities U.S. corporate bonds 5 (2 ) (1 ) (1 ) 4 5 5 (2 ) (1 ) (1 ) 4 5 Non-U.S. corporate bonds 1 — — (1 ) — — 1 — — (1 ) — — Hedge funds 1,014 42 (45 ) (131 ) (10 ) 870 1,014 42 (45 ) (131 ) (10 ) 870 Annuity contracts 187 — 3 (35 ) — 155 187 — 3 (35 ) — 155 Private equity 2,920 89 94 (497 ) (132 ) 2,474 2,920 89 94 (497 ) (132 ) 2,474 Other investments 4 — (6 ) — 123 121 4 — (6 ) — 123 121 Total investments $ 4,131 $ 129 $ 44 $ (665 ) $ 56 $ 3,695 $ 4,131 $ 129 $ 44 $ (665 ) $ 56 $ 3,695 Other investment receivables — — — 221 — 221 — — — 221 — 221 Total assets $ 4,131 $ 129 $ 44 $ (444 ) $ 56 $ 3,916 $ 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 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, 2009 (losses) (losses) issuances Level 3 Dec. 31, 2010 Equity securities U.S. equity $ 1 $ (1 ) $ — $ — $ — $ — Non-U.S. equity 1 (1 ) — — — — Debt securities U.S. corporate bonds 1 — — 3 1 5 Non-U.S. corporate bonds — — — 1 — 1 Hedge funds 1,235 (15 ) 85 (220 ) (71 ) 1,014 Annuity contracts 215 (44 ) 55 (39 ) — 187 Private equity 2,539 148 292 (59 ) — 2,920 Other investments 148 (66 ) (66 ) (16 ) 4 4 Total assets $ 4,140 $ 21 $ 366 $ (330 ) $ (66 ) $ 4,131 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(1) 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 (1)Balances at December 31, 2010 have been reclassified to conform to the current year’s presentation.174180In 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(1) Dec. 31, 2009 (losses) (losses) issuances Level 3 Dec. 31, 2010 Equity securities Non-U.S. equity $ 2 $ — $ 1 $ — $ — $ 3 Debt securities Non-U.S. corporate bonds 91 — — 16 — 107 Hedge funds 14 — — — — 14 Other investments 205 (5 ) 3 — (14 ) 189 Total assets $ 312 $ (5 ) $ 4 $ 16 $ (14 ) $ 313 (1)Balances have been reclassified to conform to the current year’s presentation.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 Citigroup’sThe 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 Citigroup’sthe 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.
The assets of Citigroup’sthe 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 threefour 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 Citigroup’sthe Company’s largest non-U.S. plans are primarily invested in publicly traded fixed income and publicly traded equity securities.
The framework for Citigroup’sthe 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 Citigroup’sthe Company’s U.S. qualified pension plansplan 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 Citigroup’sthe Company’s monitoring and risk management process:175
The Company expects to pay the following estimated benefit payments in future years:U.S. plans Non-U.S. plans Pension Postretirement Pension Postretirement Pension plans Postretirement benefit plans In millions of dollars benefits benefits benefits benefits U.S. plans Non-U.S. plans U.S. plans Non-U.S. plans 2012 $ 748 $ 102 $ 331 $ 50 2013 762 93 324 50 $ 774 $ 366 $ 88 $ 58 2014 773 90 344 53 796 356 86 63 2015 785 91 358 56 798 373 86 66 2016 800 89 380 60 811 391 83 71 2017–2021 4,271 407 2,235 377 2017 825 408 81 75 2018–2022 4,370 2,399 370 483
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
The expected subsidy reduced the accumulated postretirement benefit obligation (APBO) by approximately $96$93 million and $139$96 million as of December 31, 20112012 and 2010,2011, respectively, and the postretirement expense by approximately $9 million and $10 million for 2012 and $9 million for 2011, and 2010, respectively. Expected U.S. Expected U.S. postretirement benefit payments postretirement benefit payments Before Medicare Medicare After Medicare Before Medicare Medicare After Medicare In millions of dollars Part D subsidy Part D subsidy Part D subsidy Part D subsidy Part D subsidy Part D subsidy 2012 $ 112 $ 10 $ 102 2013 103 10 93 $ 98 $ 10 $ 88 2014 101 11 90 96 10 86 2015 99 8 91 94 8 86 2016 97 8 89 91 8 83 2017–2021 440 33 407 2017 89 8 81 2018–2022 399 29 370
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.
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.
