Citigroup (C)

Capital Markets and Banking

        Capital Markets and Banking offers a wide array of investment and commercial banking services and products, including investment banking and advisory services, debt and equity trading, institutional brokerage, foreign exchange, structured products, derivatives, and lending. Capital Markets and Banking revenue is generated primarily from fees for investment banking and advisory services, fees and spread on structured products, foreign exchange and derivatives, fees and interest on loans, and income earned on principal transactions.

(1)

See footnote 3 to the table on page 4.

NM

Not meaningful.

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1Q06 vs. 1Q05

        Revenues, net of interest expense, increased, driven by broad-based performance across products and regions. Equity Markets revenues increased, driven by strong growth globally, including cash trading, derivatives products and convertibles. Fixed Income Markets revenue increases reflected growth in emerging markets trading, municipals, and credit products. Investment Banking revenue growth was driven by higher debt underwriting and advisory fees. Lending revenue declined, as improved credit conditions led to lower hedging results.

        Operating expenses growth was primarily driven by higher compensation expenses, which included higher production-driven incentive compensation and $439 million of compensation expense related to the adoption of SFAS 123(R).

        The provision for credit losses increased, reflecting the absence of loan loss reserve releases recorded in the prior year.

Capital Markets and Banking

(1)

See Footnote (5) to the table on page 6 and discussion of Risk Capital on page 42.

Capital Markets and Banking net income of $1.424 billion in the 2005 third quarter increased $265 million, or 23%, from the 2004 third quarter, while net income of $3.906 billion in the 2005 nine months decreased $232 million, or 6%, from the 2004 nine months. Fixed Income Markets revenues in the 2005 periods increased, driven by strong performance in interest rate products, foreign exchange and commodities. Equity Markets revenues increased in the 2005 periods, driven by improved performance and growth in cash trading, alternative execution and derivatives products. Investment Banking revenues increased in the 2005 periods, driven by an increase in advisory fees, which reflected strong growth in completed M&A transactions, and growth in equity underwriting. Capital Markets and Banking net income in the 2005 periods was reduced by an increased provision for credit losses in the 2005 third quarter and nine months, versus loan loss reserve releases in the 2004 periods. Results also include a third quarter $70 million tax benefit from provisions of the Homeland Investment Act.

        Revenues, net of interest expense, of $5.187 billion and $14.051 billion in the 2005 third quarter and nine months increased $1.454 billion, or 39%, and $1.292 billion, or 10%, from the 2004 third quarter and nine months, respectively. Fixed Income Markets revenues increased in the 2005 periods, reflecting favorable performances in interest rate products increased commodity derivatives driven by strong energy markets and increased foreign exchange revenues driven by higher volatility in currency markets, and increased securitized markets resulting from strong deal activity in North America and EMEA. Equity Markets revenues increased in the 2005 periods, driven by improved performance and growth in cash trading, alternative execution and derivatives products. Investment Banking revenues increased in the 2005 periods, driven by an increase in advisory fees, which reflected strong growth in completed M&A transactions, and growth in equity underwriting.

        Operating expenses of $3.134 billion in the 2005 third quarter increased $790 million from the 2004 third quarter, primarily due to higher incentive compensation, partially offset by decreased legal expenses. Operating expenses of $8.578 billion in the 2005 nine months increased $1.343 billion from the 2004 nine months, primarily due to higher incentive compensation, higher compensation and

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benefits expense (primarily reflecting repositioning costs of $212 million pretax in the first quarter of 2005), increased investment spending on strategic growth initiatives, and the impact of acquisitions of Knight and Lava Trading.

        The provision for credit losses was $40 million in the 2005 third quarter and $(26) million in the 2005 nine months, up $375 million and $611 million, respectively, from the 2004 periods. Credit costs were up, reflecting an increase to loan loss reserves in the 2005 periods, and the absence of loan loss reserve releases recorded in the prior periods. The provision for credit losses in the 2005 third quarter and nine-month period includes pretax charges of $143 million and $239 million, respectively, to increase loan loss reserves. These charges are due to increases in off-balance sheet exposure, a slight decline in credit quality, and downgrades in certain names and sectors.

        Cash-basis loans were $1.145 billion at September 30, 2005, compared to $1.493 billion at June 30, 2005, $1.794 billion at December 31, 2005 and $2.149 billion at September 30, 2004. Cash-basis loans net of write-offs decreased $1.004 billion from September 30, 2004, primarily due to charge-offs against reserves as well as paydowns from corporate borrowers in North America, Argentina, Brazil, and Asia. Cash-basis loans decreased $348 million from June 30, 2005, primarily due to asset sales and paydowns in North America and Latin America.

Capital Markets and Banking net income of $5.395 billion in 2004 increased $753 million or 16% compared to 2003, primarily due to a lower provision for credit losses as well as an increase in Lending, Fixed Income and Equity Markets revenues.  The increase in expenses was driven by higher incentive compensation, the impact of recent acquisitions, higher legal reserves, and increased investment spending on strategic growth initiatives.  Net income of $4.642 billion in 2003 increased $647 million or 16% compared to 2002, primarily reflecting a lower provision for credit losses, increases in Fixed Income Markets and the absence of prior-year redenomination losses in Argentina, partially offset by mark-to-market losses on credit derivatives (which serve as an economic hedge for the loan portfolio) as credit spreads tightened.

Transaction Services net income of $1.045 billion in 2004 increased $297 million or 40% from 2003, primarily due to higher revenue reflecting growth in assets under custody and liability balances, improved spreads, a benefit from foreign currency translation and the impact of KorAm, and a lower provision for credit losses, partially offset by higher expenses.  Transaction Services net income of $748 million in 2003 increased $177 million or 31% from 2002, primarily due to a lower provision for credit losses, the benefit of lower taxes due to the application of APB 23 indefinite investment criteria and business consolidation, as well as lower expenses resulting from expense control initiatives.

Capital Markets and Banking

(1)

See Footnote (5) to the table on page 6 and discussion of Risk Capital on page 38.

        Capital Markets and Banking net income of $1.043 billion and $2.482 billion in the 2005 second quarter and six months, respectively, decreased $459 million, or 31%, and $497 million, or 17%, from the 2004 periods. The decrease in the 2005 second quarter was primarily due to lower Fixed Income Markets revenues, partially offset by increases in Equity Markets revenues. The decrease in the 2005 six months was driven by higher expenses, including repositioning costs of $212 million pretax in the first quarter of 2005.

        Revenues, net of interest expense, of $3.965 billion and $8.864 billion in the 2005 second quarter and six months decreased $530 million, or 12%, and $162 million, or 2%, from the 2004 second quarter and six months, respectively. Fixed Income Markets revenues decreased in the 2005 periods as difficult capital markets conditions and flattening yield curves led to lower trading results in interest rate and credit products, which were partially offset by increased revenues from foreign exchange and commodities. Investment Banking revenues declined in the 2005 second quarter, reflecting lower debt underwriting revenues, partially offset by strong growth in completed M&A transactions. Equity Markets revenues increased in the 2005 periods, driven by improved performance and growth in cash trading, derivatives products, and equity finance.

        Operating expenses of $2.585 billion in the 2005 second quarter increased $48 million from the 2004 second quarter, primarily due to higher salaries, staff benefits, floor brokerage costs and communications expense, partially offset by decreases in incentive compensation. Operating expenses of $5.444 billion in the 2005 six months increased $553 million from the 2004 six months, primarily due to higher compensation and benefits expense (primarily reflecting repositioning costs of $212 million pretax in the first quarter of 2005), increased investment spending on strategic growth initiatives, and the impact of acquisitions of Knight, Lava Trading, and KorAm.

        The provision for credit losses was $(20) million in the 2005 second quarter and $(66) million in the 2005 six months, up $256 million and $236 million, respectively, from the 2004 periods primarily due to loan loss reserve releases in the prior periods as a result of improving credit quality. The provision for credit losses in the 2005 second quarter included a $96 million pretax charge to increase the allowance for unfunded lending commitments, due to a shift in the credit profiles for certain of its corporate clients, as well as an increase in outstanding commitments.

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        Cash-basis loans were $1.493 billion at June 30, 2005, compared to $1.655 billion at March 31, 2005, and $2.501 billion at June 30, 2004. Cash-basis loans net of write-offs decreased $1.008 billion from June 30, 2004, primarily due to charge-offs against reserves as well as paydowns from corporate borrowers in North America, Argentina, Brazil, and Asia. Cash-basis loans decreased $162 million from March 31, 2005, primarily due to asset sales and paydowns in North America, Europe, Brazil and Argentina.

Capital Markets and Banking net income of $5.395 billion in 2004 increased $753 million or 16% compared to 2003, primarily due to a lower provision for credit losses as well as an increase in Lending, Fixed Income and Equity Markets revenues.  The increase in expenses was driven by higher incentive compensation, the impact of recent acquisitions, higher legal reserves, and increased investment spending on strategic growth initiatives.  Net income of $4.642 billion in 2003 increased $647 million or 16% compared to 2002, primarily reflecting a lower provision for credit losses, increases in Fixed Income Markets and the absence of prior-year redenomination losses in Argentina, partially offset by mark-to-market losses on credit derivatives (which serve as an economic hedge for the loan portfolio) as credit spreads tightened.

Transaction Services net income of $1.041 billion in 2004 increased $296 million or 40% from 2003, primarily due to higher revenue reflecting growth in assets under custody and liability balances, improved spreads, a benefit from foreign currency translation and the impact of KorAm, and a lower provision for credit losses, partially offset by higher expenses.  Transaction Services net income of $745 million in 2003 increased $176 million or 31% from 2002, primarily due to a lower provision for credit losses, the benefit of lower taxes due to the application of APB 23 indefinite investment criteria and business consolidation, as well as lower expenses resulting from expense control initiatives.

Capital Markets and Banking

(1)

See Footnote (4) to the table on page 6 and discussion of Risk Capital on page 36.

        Capital Markets and Banking net income of $1.439 billion in the 2005 first quarter was down $38 million or 3% from the 2004 first quarter primarily due to higher expenses, including repositioning costs of $212 million pretax.

        Revenues, net of interest expense, of $4.899 billion in the 2005 first quarter increased $368 million or 8% from the 2004 first quarter. Revenue growth in the 2005 first quarter was driven by increases in Fixed Income Markets and Investment Banking, partially offset by declines in Equity Markets and Other Capital Markets and Banking. Fixed Income Markets increased primarily due to strong results in commodities and municipals, favorable interest rate positioning, and increased customer activity. Investment Banking increased as strong growth in completed M&A transactions led to an increase in advisory and other fees, which was partially offset by lower equity underwriting volumes and revenues. Equity Markets declined primarily due to weakness in derivative and convertible activity, partially offset by an increase in cash market volumes. Other Capital Markets and Banking decreased primarily due to the transfer of an interest-generating loan portfolio to Fixed Income Markets in the 2004 third quarter, a negative mark-to-market adjustment on a firm investment, and the impact of the sell-down of Nikko Cordial in the 2004 third quarter.

        Operating expenses of $2.859 billion in the 2005 first quarter increased $505 million or 21% from the 2004 first quarter primarily due to higher compensation and benefits expense (primarily reflecting repositioning costs of $212 million pretax), increased investment spending on strategic growth initiatives and the impact of acquisitions of Knight, Lava Trading and KorAm.

        Net credit recoveries in the provision for credit losses of $46 million in the 2005 first quarter, was down $20 million from the 2004 first quarter, primarily reflecting the continuing positive credit environment, partially offset by the absence of loan loss reserve releases recorded in the 2004 first quarter.

        Cash-basis loans were $1.655 billion at March 31, 2005, compared to $1.794 billion at December 31, 2004, and $2.811 billion at March 31, 2004. Cash-basis loans net of write-offs decreased $1.156 billion from March 31, 2004, primarily due to charge-offs against reserves as well as paydowns from corporate borrowers in Argentina, North America, Mexico, and Australia, partially offset by increases in Korea reflecting the acquisition of KorAm. Cash-basis loans decreased $139 million from December 31, 2004, primarily due to asset sales and paydowns in Argentina and Brazil.

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—           Record fixed income markets revenues, which increased 16%, reflected increased customer activity, favorable interest rate positioning and strong results in commodities.

—           Equity markets revenues declined 5% as an increase in cash market volumes was offset by weakness in derivative and convertible activity.

—           Investment banking revenues increased 6%, as strong growth in completed M&A transactions led to a 26% increase in advisory and other fees, which was partially offset by lower equity underwriting market volumes and revenues.

—           Operating expenses increased 21%, reflecting repositioning costs of $212 million pre-tax, and an increase in other non-compensation expenses.

—           Net credit recoveries of $46 million reflected the continuing positive credit environment.  Cash basis loans decreased to $1.7 billion, a 41% decrease from the prior year period.

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CAPITAL MARKETS AND BANKING