This summary is based on the fourth quarter fiscal 2007 earnings call conducted by Citigroup Inc. (C) on January 15, 2007.
Chief Executive Officer: Vikram Pandit
Chief Financial Officer: Gary Crittenden
Director of Investor Relations: Art Tildesley
Key Investors Issues
- The net loss was $1.99 per share as against a net income of $1.03 per share in last year.
- Quarterly revenue was $7.22 billion.
- The company eliminated 4,200 jobs in the quarter, as part of its cost reduction initiative.
Fourth Quarter Fiscal 2007 Financial Highlights
The company reported a net loss of $9.83 billion, or $1.99 per share.
The results include $18.1 billion in pre-tax write-downs and credit costs on sub-prime related direct exposures in fixed income markets, and a $4.1 billion increase in credit costs in U.S. consumer, primarily related to higher current and estimated losses on consumer loans.
A number of items impacted the results significantly in the quarter.
- $18.1 billion from the writedown and credit costs on sub-prime related direct exposures in the fixed income markets business. The firm’s net super senior ABS CDO direct exposure was $29.3 billion and gross direct sub-prime exposure related to the structuring and lending business was $8 billion at the end of the quarter.
- The firm had $5.1 billion in credit costs in its U.S. consumer business driven primarily by higher charges to loan loss reserves, reflecting accelerating delinquencies and losses during the quarter in U.S. mortgage portfolio and higher current and expected losses in its U.S. cards and personal loan portfolio.
- A $539 million charge related to the headcount reductions and moves to lower cost locations. In this first phase of productivity plan, this year, the company expects to reduce headcount by approximately 4,200 people.
- A $306 million pretax charge for Visa-related litigation exposure.
- The company had a $534 million pretax gain on Visa shares in international Consumer and Transaction Services business.
- A $313 million pretax gain on the sale of an ownership interest in Nikko Cordial Simplex investment Advisors.
Revenues were $7.2 billion, down 70%, driven by significant write-downs on sub-prime related direct exposures in fixed income markets.
Revenues across many businesses increased, driven by growth in business volumes. In particular, the company had record results in Wealth Management, International Consumer, Asia Pacific, Latin America and Global Transaction Services.
The markets and banking revenues reflect the writedowns and losses. The alternative investments revenue declines reflect sharply lower proprietary investment revenues driven primarily by lower private equity gains and mark to market losses from changes in the market value of Legg Mason shares this quarter. Offsetting these results was revenue growth in International Consumer and Global Wealth Management, driven by both organic growth and acquisitions. In addition, U.S. consumer revenues were up 6%. The international revenue decline reflected about $4.4 billion of sub-prime related writedowns recorded in Europe and the Middle East. Acquisitions accounted for approximately 7% of year-over-year revenue growth, offset completely by revenue reductions embedded in business as usual activities, which declined by 77%.
During the quarter, some of the key drivers for business have grown at a fairly consistent pace with the second quarter of this year, which was the best quarter in the firm’s history.
Strong momentum continued to cross these drivers, especially in the international franchises. Drivers of net interest revenue showed strong growth, so average consumer loans were up 10% in the U.S. and 30% internationally. Internationally, organic consumer loan growth was 18%. Average corporate loans were up 24%. Average consumer deposits were up 10% in the U.S. and 21% internationally. Internationally, organic deposit growth was 9%.
Drivers of non-interest revenues also grew nicely. Credit card purchase sales were up 8% in the U.S. and 37% internationally. Internationally, organic card purchase sales growth was 25%. International assets under management were up 24% in international consumer. Client capital under management in CAI was up 26%.
The net interest margin increased by 15 basis points sequentially and 7 basis points over last year.
The single largest driver of the increase was the firm’s actions to reduce lower-yielding assets from the balance sheet. In particular, lower yielding purchased fed funds and resale asset balances were down almost 15% sequentially with a similar decline in related liabilities. Trading assets dropped almost 6% sequentially and trading account liabilities dropped 22%. With a continued focus on enhancing asset productivity, the management expects its efforts to drive bottom line results.
Expenses in the quarter grew by 18% versus last year, and foreign exchange accounted for 3% of the 18% increase.
Acquisitions accounted for about half of the growth; Nikko was the main driver. With the remaining 9% of organic growth, there are two main components. This quarter, the firm took a $539 million pre-tax charge related to new headcount reductions primarily in markets and banking. This charge reflects the execution of the first phase of the firm’s 2008 reengineering effort. In addition, the company took a $306 million pretax charge for Visa-related litigation exposure. Together, these two items accounted for 6% of the expense growth. The remaining 3% organic growth is composed of expenses related to branch build-outs and more collectors in the consumer businesses, and higher volume-related growth in businesses such as Transaction Services and Global Wealth Management.
Sequentially, the company had 13% expense growth, of which 1% was from foreign exchange. Acquisitions accounted for 1 percentage point of the growth, with the remaining 12% driven by organic growth. Key components of the 12% of organic growth included 6 percentage points from two charges related to the headcount reductions and the Visa-related litigation exposure. The six percentage points primarily related to a change in the accrual adjustment to the firm’s full year compensation levels in its Markets and Banking business, consistent with last year’s fourth quarter. This quarter’s adjustment reflected strong full year performance in certain businesses including equity markets, equity underwriting, advisory and global transaction services.
