This summary is based on the first quarter fiscal 2008 earnings call conducted by Citigroup Inc. (C) on April 18, 2008.
Management:
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CEO: Vikram Pandit
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CFO: Gary Crittenden
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Director IR: Scott Freidenrich
Key Investors Issues
- Revenues dropped 48% to $13.2 billion.
- The firm realised a loss of $5.1 billion or $1.02 a share, down from a profit of $5 billion or $1.01 a share in 2007.
- Tier one ratios firmed at 7.7%.
First Quarter Highlights
Net revenues declined 48% to $13.2 billion from $25.5 billion in the prior year driven by the continued disruption in fixed income markets, partially offset by underlying growth in several of the other businesses.
- Revenues included a $1.3 billion gain related to the inclusion of Citi credit spreads in the termination of the market value of those liabilities for which the fair value option was elected.
- Credit costs doubled due to higher net credit losses and a subsequent change to the increase in loan loss reserves, both principally in the US consumer business, driving a loss of $5.1 billion or $1.02 a share from a profit of $5 billion or $1.01 a share in 2007.
- Results were impacted by $6 million from write down and credit costs on subprime related direct exposure in the fixed income markets business.
- At the end of the quarter, net super senior ABS CDO direct exposure was $23 billion and the gross direct subprime exposure related to the structuring and lending business was $6.4 billion.
The firm had $3.7 billion in net credit losses and $1.8 billion in charges to increase the loan loss reserve in the global consumer businesses with the majority of that being driven by the US consumer business.
- It also had $3.1 billion in write downs on the highly leveraged finance commitments, $1.5 billion in credit market value adjustments related to the monoline exposure and a $1 billion write down net of hedges on alt A mortgages in the CMB business.
- Additionally it recorded $622 million in repositioning charges related to this quarter’s installment of the reengineering plan.
- This was offset by a $663 million gain from the sale of the Ready Card shares, a $633 million benefit related to the gain on VISA shares and a partial release of previously established VISA related litigation reserves.
Net interest margin was 2.83%, 36 basis points over the prior year period on lower cost funding and driven by deposits and Fed funds which are reflecting the benefit of the Fed rate cuts.
- Partially offsetting the benefits from lower funding costs was a decrease in asset yields primarily related to Fed funds due to an increase in trading assets driven by higher revaluation gains from interest rates.
- Expenses grew 4% versus last year and foreign exchange accounted for 3% of that growth, with the major components being a $622 million repositioning charge related to a number of activities such as headcount reductions and branch closing.
Operational Perspectives:
- Capital ratios were up versus fourth quarter with the tier one ratio slightly higher than the internal target and the TCE ratio slightly lower than target.
- The firm is executing on the capital plan and are enhancing capital by reducing legacy assets in non-core businesses.
- It is also on top of the risks and have focused on prudently managing legacy risk assets and reducing risk assets in a way that does not dilute shareholders, by reducing risk in the net super senior gross exposures.
The alternative investments revenue decline reflects sharply lower revenues from proprietary activities and the write down of some of the SIV assets.
- Offsetting these results was revenue growth in international consumer and global wealth management driven by both organic growth and acquisitions.
- In addition US consumer revenues were up on a GAAP basis by 3% and international revenues were up in every region except EMEA where the decline reflected a $1.4 billion subprime related write down and $460 million in write downs on highly leveraged finance commitments in the region.
- Acquisitions produced year over year revenue gain in the quarter of 2%.
The firm had a $250 million reserve to facilitate for global wealth management clients and exit from a specific Citi managed fund and a $200 million write down on the hedge fund intangible assets related to Old Lane.
- The total cost of credit increased by $3 billion with $1.7 billion driven by higher net credit losses and $1.4 billion driven by incremental loan loss reserves.
- Higher net credit losses were driven primarily by the US consumer businesses where NCLs increased by $1.1 billion and consumer lending net credit losses were higher by $762 million over last year driven by higher losses in the consumer mortgage portfolio.
- In US cards, net credit losses were up by $102 million reflecting higher write offs and lower recoveries.
- Delinquency levels were higher and the increase in write offs reflected higher bankruptcy filings and the impact of customers that are delinquent advancing to write off at a higher rate.
In the US retail distribution, net credit losses were higher by $228 million reflecting higher losses in personal finance, sales finance and home equity portfolios.
- The firm strengthened the loan loss reserve by adding $1.9 billion primarily driven by the US consumer reserve build of $1.4 billion.
- Approximately half of $659 million of the US consumer build was in the consumer lending group reflecting continued weakness in the mortgage portfolio and a higher expectation of losses in the auto portfolio.
- The auto portfolio was primarily subprime with the loans sourced indirectly through dealers.
- Markets and banking credit cost declined 2% over last year to $249 million driven in large part by the cards business in Mexico and in India and consumer finance business in India.
Reserve actions for the mortgage portfolio primarily reflected significant deterioration.
- The firm made a commitment to reduce real estate assets by $45 billion during the course of the year and a key contributor to this decline is that it plans to originate loans that it can sell as opposed to loans that it holds in its portfolio.
- Of the total consumer lending group mortgage originations of $34.3 billion in the quarter, it decreased a proportion of those held on balance sheet to 29% versus 42% in the prior year’s $39.6 billion of originations.
- Capital ratios declined driven by acquisitions, organic growth in assets and negative earnings in the fourth quarter to tier one capital ratio of 7.1% and a TCE ratio of 5.6%, rising to tier one ratio of 7.7% following a capital raising of $35 billion.
