This summary is based on the third quarter fiscal 2007 earnings call conducted by Citigroup Inc. (C) on October 15, 2007.
Chairman, CEO: Charles Prince
Chief Financial Officer: Gary Crittenden
Investor Relations: Art Tildesley
Key Investors Issues
- The earnings per share dropped to 47 cents from $1.10 in the prior year quarter.
- Quarterly revenue rose to $22.66 billion from $21.42 billion in last year.
- The company opened 96 new retail banks during the quarter, including 47 internationally and 49 in the US.
Third Quarter Fiscal 2007 Financial Highlights
The net income for the quarter was $2.38 billion or 47 cents per share, a decline of 57% from the prior-year quarter.
The results include a $729 million pre-tax gain on the sale of Redecard shares.
Revenues were up 6%, led by 30% growth in international revenues.
Excluding acquisitions and the gain on sale of Redecard shares, total organic revenues declined 3%.
Global consumer revenues increased 14%, driven by international consumer up 35%, which included a $729 million pre-tax gain on the sale of Redecard shares. Excluding the gain, international consumer revenues increased 21%, reflecting deposit and loan growth of 18% and 29%, respectively, and higher investment sales, up 26%. U.S. consumer revenues were flat with the prior-year period as deposit and managed loan growth of 16% and 8%, respectively, was offset by lower securitization results in cards and the absence of gains on sale of securities in the prior-year period in consumer lending.
Markets & banking revenues declined 24%, reflecting record transaction services revenues, up 38%, offset by a 44% decline in securities and banking. Securities and banking revenues declined due to write-downs and losses related to dislocations in the mortgage-backed securities and credit markets, including:
- Write-downs of $1.35 billion pre-tax, net of underwriting fees, on funded and unfunded highly leveraged finance commitments.
- Losses of $1.56 billion pre-tax, net of hedges, on the value of sub-prime mortgage-backed securities warehoused for future collateralized debt obligation (CDO) securitizations, CDO positions, and leveraged loans warehoused for future collateralized loan obligation (CLO) securitizations.
- Losses of $636 million pre-tax in fixed income credit trading due to significant market volatility and the disruption of historical pricing relationships.
- U.S. markets & banking revenues declined 87% and international revenues grew 7%. International revenues included strong double-digit revenue growth in Asia, Latin America, and Mexico.
Global wealth management revenues increased 41%, as U.S. revenues grew 14% and international revenues more than doubled, due to double-digit organic growth and increased ownership in Nikko Cordial.
Alternative investments revenues declined 63%, as strong growth in client revenues was offset by lower revenues from proprietary investment activities.
The net interest margin declined 3 basis points versus the second quarter 2007.
Operating expenses increased 22%, driven by increased business volumes and acquisitions.
This was partially offset by savings from structural expense initiatives announced in April 2007. The company anticipated that this quarter''s expense growth comparison would be challenging. The expenses in the third quarter of 2006 were the lowest in the last seven quarters, primarily reflecting reductions in advertising and marketing spend in U.S. consumer, and lower expenses in Markets & Banking. The best way to track the progress on expense management would be to track headcount growth and expense growth relative to revenues. On both structural expense saves and total headcount reductions, the company is ahead of its commitments.
The firm’s reported expense growth is 22% and 14% without acquisitions; Nikko was the main driver. The business as usual expense growth of 14% is driven by higher business volumes throughout the franchise and the opening of more than 600 De Novo branches in the last 12 months. Sequentially, expenses were down, primarily on lower compensation cost in securities and banking.
There was significant year-on-year growth in headcount, driven predominantly by acquisitions, which contributed 11 percentage points of the 16% year-over-year growth.
Excluding acquisitions, from the first quarter of 2006 to the first quarter of 2007 headcount grew by 9%. From the second quarter of 2006 to the second quarter of 2007, headcount grew by 5%. This quarter, the firm had 5% headcount growth, which includes 2 percentage points caused by De Novo branch openings. The sequential headcount growth rate is 3%, with approximately half from acquisitions and half from business as usual activities. The firm continues to be heavily engaged in ongoing re-engineering efforts and is focused on expense management driving results for the next year.
- The company opened 96 new retail bank or consumer finance branches during the quarter, including 47 internationally and 49 in the U.S. Over the last twelve months, 820 retail bank and consumer finance branches have been opened or acquired. Excluding the impact of acquisitions, organic expense growth was 14%.
Credit costs increased $2.98 billion, primarily driven by an increase in net credit losses of $780 million and a net charge of $2.24 billion to increase loan loss reserves.
In
U.S. consumer, higher credit costs reflected an increase in net credit losses of $278 million and a net charge of $1.30 billion to increase loan loss reserves. The $1.30 billion net charge compares to a net reserve release of $197 million in the prior-year period. The increase in credit costs primarily reflected a weakening of leading credit indicators, including increased delinquencies on mortgages and unsecured personal loans, as well as trends in the U.S. macro-economic environment, portfolio growth, and a change in estimate of loan losses inherent in the portfolio but not yet visible in delinquencies.
