This summary is based on the first quarter fiscal 2007 earnings call conducted by Citigroup, Inc. (C) on April 16, 2007.
Key Investors Issues
- The earnings per share fell 9% over the prior year quarter.
- Quarterly revenue grew 15% compared to the previous year.
- The expenses for the quarter were up 17%, including the $1.4 billion charge.
First Quarter Fiscal 2007 Financial Highlights
The first quarter had the following unusual items:
- The firm had gain of $171 million after tax on the sale of Mark pro.
- The company adopted FAS 157 which resulted in $135 million after-tax benefit.
- Citigroup had certain APB 23 tax benefits of $131 million.
- Offsetting these benefits, the firm took an after tax charge of $871 million for its expense restructuring.
The net revenues grew 15% in the first quarter.
In the U.S., revenues were up 1% and internationally revenues were up 18% as the firm continues to grow its international businesses faster. Excluding the unusual items, revenue growth was still strong at 12% reflecting continued momentum in the key drivers of each of the firm’s businesses.
- Consumer loans were up 10% in the U.S. and 16% internationally.
- Corporate loans were up 10%.
- Consumer deposits were up 20% in the U.S. and 7% internationally.
- Credit card purchase sales were up 6% in the U.S. and 25% internationally.
- Drivers of fee based and transactional revenue also grew nicely.
- Assets under management were up 12% in global consumer and 52% in client AUMs in alternative investment business.
- In global wealth management business, assets under fee based management grew 13%.
The net interest revenue moves around quite a bit from quarter to quarter driven by the volatility resulting from the trading activities.
The firm’s trading businesses are not managed to target a specific net interest margin but instead to drive overall revenue growth. The firm had strong volume growth in all of its businesses which resulted in a fairly steady increase in net interest revenue over the last 8 quarters. The net interest margin grew 1 basis point sequentially. Excluding the impact of gray zone, however, net interest margin declined 14 basis points sequentially with slightly less than half of the decline in the trading portfolio. The firm continues to see pressure of net interest margin as short rates are higher and the pricing environment remains very competitive. Volume growth however continues to drive net interest revenues higher in spite of this margin compression.
The expenses for the quarter were up 17%, including the $1.4 billion charge announced last week.
The impact of the expense growth of three items is given below:
- The impact of the $648 million pre-tax FAS 123(R) charge that was taken in the first quarter of 2006. That resulted in a 5% comparable benefit for the quarter.
- The firm also booked a $1.4 billion charge in the quarter related to the structural expense review which added 11% to the growth in the quarter. The actions that the firm is taking now will create a more streamlined organization. They will reduce the future expense growth, improve how the company operates, and generate savings that can be used to fund ongoing re-engineering to drive revenue growth.
- Compensation accruals related to the revenue impact of adopting FAS 157 was a 1% contributor to the expense growth or $181 million.
Adjusting for these three items, expense growth for the quarters was 10%. This represents the underlying growth rate of the firm’s expense base and comprises the business unusual expenses. Acquisition and foreign exchange contributed 2% of the 10% revenue growth. The business unusual expenses were up 8%. The bulk of which is compensation cost increases related to the revenue growth in the quarter. This also includes the impact of incremental investment spending which the firm now considers to be part of the ongoing expense base.
Citigroup anticipated that credit cost would be a difficult comparison for this quarter and it was.
While conditions are generally stable there are a number of factors that affect this comparison year-over-year. The combined result of these factors was an increase in the total cost of credit of $1.3 billion year-over-year. The firm had a net release of 154 million in loan loss reserves last year due to the particularly strong credit environment at the time and lower than expected bankruptcy filings in the US. The net credit losses were higher by about $509 million. Almost all of this was driven by the global consumer business. The key drivers are the gray zone in Japan, organic portfolio growth, acquisitions, and some deterioration in the firm’s second mortgage portfolio. The third component is nearly a $600 million increase in its loan loss reserve. There were four major drivers of this increase.
- The firm had portfolio growth in all of its businesses.
- The firm had a $286 million increase in its markets and banking business that was driven by higher commitments to leverage transactions and an increase in its average loan tenure reflecting the success that it has had in supporting those businesses.
- In its consumer businesses, a change in the estimate of loan losses that are inherent in its portfolio but are not yet visible in its credit met ridges was taken.
- The firm saw an increase in delinquencies in its second mortgages.
Going forward, broadly the credit environment remains good, but the firm continues to expect some deterioration in credit as the year progresses as the industry is coming from extremely low loss levels in the last two years. Next quarter, the firm will again see a challenging year-over-year comparison as it adds $210 million in net reserve releases in the second quarter of 2006. In the third and fourth quarters of this year, the year-over-year comparisons should improve. Net credit losses and reserves should continue to grow in line with portfolio growth. Year-over-year comparisons could reflect as they have in the past some volatility to specific events. Additionally the firm’s reserves will continue to reflect the best estimation of inherent losses in its portfolio that are not yet visible in the firm’s credit metrics.
The quality of the consumer first mortgage portfolio of Citigroup is very good.
Less than 10% of the portfolio has a FICO score less than 620 and greater than 80%. In second mortgages, none of the portfolio has a FICO score of less than 620. In fact, 96% of the portfolio has a FICO score of greater than or equal to 660. However, 34% of the portfolio has a combined LTV of 90% or higher. This is the area where the firm is seeing signs of stress and it has built the reserves accordingly.
