This summary is based on the third quarter fiscal 2008 earnings call conducted by Citigroup, Inc. (C) on October 16, 2008.
Management:
Director of Investor Relations: Scott Freidenrich
Chief Financial Officer: Gary L. Crittenden
Key Investors Issues
- The company lost 60 cents a share compared to a profit of 44 cents per share last year.
- Net income loss was $2.8 billion compared to a profit of $2.21 billion a year ago.
- Revenue fell to $16.7 billion from $21.6 billion.
Third Quarter Highlights
Revenues were $16.7 billion, down 23%.
This quarter’s decline in revenues was driven by $4.4 billion in net write-downs in Securities and Banking, lower securitization results in North America Cards, and a $612 million write-down related to the auction rates securities settlement announced on August 7, 2008, partially offset by a $347 million pre-tax gain on the sale of CitiStreet. The prior-year period included a $729 million pre-tax gain on the sale of Redecard shares. Revenues across all businesses reflect the impact of a difficult economic environment and weak capital markets. The net interest margin decreased 1 basis point versus the second quarter 2008, to 3.13%.
Operating expenses were $14.4 billion, up 2% from the prior-year period.
- Expense growth reflected $459 million in repositioning charges, a $100 million charge related to the ARS settlement, and the impact of acquisitions. Expense growth was partially offset by benefits from re-engineering efforts. Expenses declined for the third consecutive quarter, due to lower incentive compensation accruals and continued benefits from re-engineering efforts.
- Credit costs were $9.1 billion, up 86%. Credit costs primarily consisted of $4.9 billion in net credit losses and a $3.9 billion net charge to increase loan loss reserves. Net credit losses increased $2.5 billion, primarily driven by Consumer Banking and Cards in North America. The incremental net charge to increase loan loss reserves of $1.7 billion was mainly due to Consumer Banking and Cards in North America, and Securities and Banking.
- The effective tax rate on continuing operations was 48.4% versus 18.8% in the prior-year period. The increase in the tax rate was due largely to higher tax rates in the jurisdictions where the losses were incurred.
- The Tier 1 capital ratio was 8.2% at quarter-end.
Global Cards GAAP revenues declined 40%, mainly due to lower securitization results in North America and the absence of a $729 million pre-tax gain on the sale of Redecard shares recorded in the prior-year period.
- Global Cards managed revenues declined 1%, primarily due to the absence of a gain on the sale of Redecard shares recorded in the prior-year period, partially offset by growth in average managed loans, up 6%, and improved managed net interest margin.
- In North America, GAAP revenues declined 60%, as lower securitization revenues reflected the impact of higher current and expected credit losses and higher funding costs in the securitization trusts.
- North America managed revenues increased 7%, driven by growth in average managed loans, up 4%, and improved managed net interest margin. Growth in average managed loans was driven by a decline in payment rates across all portfolios. The managed net interest margin increased 53 basis points to 11.03%, primarily due to an increase in revolving balances, which drove higher interest and fee revenues. Purchase sales declined 3%, as higher spending on consumer necessities, such as gas and food, was offset by a decline in discretionary spending.
- In EMEA, revenues increased 5%, primarily driven by higher purchase sales and average loans, up 7% and 14%, respectively.
- In Latin America, revenues declined 34%, due to the absence of a $729 million pre-tax gain on the sale of Redecard shares recorded in the prior-year period. Excluding the Redecard gain, revenues increased 14%, driven by growth in purchase sales and average loans, up 14% and 19%, respectively.
- In Asia, revenues increased 24%, primarily driven by higher purchase sales and average loans, up 14% and 17%, respectively.
- Expenses declined 1%, primarily due to lower compensation and marketing costs, reflecting a slowdown in acquisition marketing, partially offset by higher credit management costs.
- In North America, credit costs nearly doubled, reflecting higher net credit losses, up 68% or $311 million, and a $309 million incremental net charge to increase loan loss reserves. The net charge to increase loan loss reserves included $243 million related to assets that were brought back on the balance sheet due to rate and liquidity disruptions in the securitization market. Higher credit costs reflected a weakening of leading credit indicators and trends in the macro-economic environment, including rising unemployment, higher bankruptcy filings, and the housing market downturn. Higher credit costs also reflected a significant increase in the rate at which customers became delinquent, as well as the continued acceleration in the rate at which delinquent customers advanced to write-off. The managed net credit loss ratio increased 262 basis points to 7.13%.
- In EMEA, credit costs increased 33%, primarily driven by a $74 million incremental net charge to increase loan loss reserves. Higher credit costs reflected weakening in the macro-economic environment in certain developed countries, such as the UK, Spain and Greece.
- In Latin America, credit costs increased 65%, reflecting higher net credit losses, up 62% or $185 million, and a $118 million incremental net charge to increase loan loss reserves. Higher credit costs were driven by continued deterioration in the credit environment in Mexico and Brazil. The net credit loss ratio increased 351 basis points to 13.16%.
- In Asia, credit costs increased 51%, reflecting higher net credit losses, up 36% or $42 million, and a $65 million incremental net charge to increase loan loss reserves. Higher credit costs reflect continued deterioration, primarily in India. The net credit loss ratio increased 52 basis points to 3.63%.
- The decline in net income, which resulted in a net loss of $902 million, reflected lower securitization revenues in North America, significantly higher credit costs, and the absence of a gain on the sale of Redecard shares recorded in the prior-year period.
Consumer Banking revenues grew 2%, driven by growth in North America, partially offset by declines in Latin America and Asia.
- Average loans and deposits were both up 1%, while investment sales declined 26%.
- Expenses declined 2%, as benefits from re-engineering efforts more than offset the impact of acquisitions and higher credit management costs. Expenses also included a $152 million write-down of customer intangibles and fixed assets in Consumer Finance Japan recorded in the prior-year period, offset by a $150 million repositioning charge in the current quarter.
- Credit costs increased 82% or $2.3 billion, reflecting higher net credit losses, up $1.6 billion, as well as a $679 million incremental net charge to increase loan loss reserves in North America.
- North America revenues increased 6%, reflecting higher net interest revenues, primarily driven by personal loans and residential real estate loans, as well as increased deposit spreads, partially offset by a $192 million loss from the mark-to-market on the mortgage servicing right asset and related hedge. Average loans and deposits were essentially flat with the prior-year period. Expenses increased 2%, mainly due to an $87 million repositioning charge and higher credit management expenses, partially offset by lower compensation costs.
- Credit costs increased $2.2 billion, due to higher net credit losses, up $1.4 billion, mainly in residential real estate. Credit costs also included a $1.9 billion net charge to increase loan loss reserves, up $739 million from the prior-year period. The net charge to increase loan loss reserves was mainly driven by residential real estate, as delinquencies in first mortgages continued to increase. Higher credit costs reflected a weakening of leading credit indicators, as well as trends in the macro-economic environment, including housing market declines. The net credit loss ratio increased 194 basis points to 2.95%. The increase in credit costs led to a net loss of $1.1 billion.
- Europe, Middle East and Africa revenues were even with the prior-year period. Average loans grew 5% and average deposits declined 6%. Average deposit growth was strong in Central and Eastern Europe, but was more than offset by a decline in Western Europe. Investment sales and assets under management declined mainly due to adverse market action and asset sales. Expenses were essentially even with the prior-year period.
- Credit costs increased 45%, reflecting higher net credit losses, up 55% or $67 million, and an $18 million incremental net charge to increase loan loss reserves. Higher credit costs reflected weakening in the macro-economic environment in certain developed countries, such as Spain and the UK. The net credit loss ratio increased 96 basis points to 2.95%. Higher credit costs led to a net loss of $94 million.
- Current and historical German retail banking operations income statement items have been reclassified as discontinued operations. Related assets and liabilities have been condensed and moved to assets and liabilities of discontinued operations held for sale, respectively, on the balance sheet in the current period.
