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Citigroup 10-Q 2006 Documents found in this filing:QuickLinks -- Click here to rapidly navigate through this document
SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
Commission file number 1-9924 Citigroup Inc.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: Common stock outstanding as of March 31, 2006: 4,971,241,487 Available on the Web at www.citigroup.com
Citigroup Inc. (Citigroup, or the Company) is a diversified global financial services holding company whose businesses provide a broad range of financial services to consumer and corporate clients. Citigroup has some 200 million clients accounts and does business in more than 100 countries. Citigroup was incorporated in 1988 under the laws of the State of Delaware. The Company is a bank holding company within the meaning of the U.S. Bank Holding Company Act of 1956 registered with, and subject to examination by, the Board of Governors of the Federal Reserve System (FRB). Some of the Company's subsidiaries are subject to supervision and examination by their respective federal and state authorities. This quarterly report on Form 10-Q should be read in conjunction with Citigroup's 2005 Annual Report on Form 10-K. The principal executive offices of the Company are located at 399 Park Avenue, New York, New York 10043, telephone number 212-559-1000. Additional information about Citigroup is available on the Company's Web site at www.citigroup.com. Citigroup's annual report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K, and all amendments to these reports are available free of charge through the Company's Web site by clicking on the "Investor Relations" page and selecting "SEC Filings." The Securities and Exchange Commission (SEC) Web site contains reports, proxy and information statements, and other information regarding the Company at www.sec.gov. Citigroup is managed along the following segment and product lines:
The following are the six regions in which Citigroup operates. The regional results are fully reflected in the product results.
3 CITIGROUP INC. AND SUBSIDIARIES SUMMARY OF SELECTED FINANCIAL DATA
4 MANAGEMENT'S DISCUSSION MANAGEMENT SUMMARY Income from continuing operations of $5.555 billion in the 2006 first quarter was a record, up 9% from the 2005 first quarter. The strength of the Company's international operations (47% increase in earnings) more than offset weaker results in our U.S. Consumer businesses. Results in the 2006 first quarter included $846 million of compensation expense ($520 million after-tax) related to stock grants to retirement-eligible employees required under SFAS 123(R), and a $657 million tax benefit from the resolution of a U.S. Federal tax audit for the years 1999 through 2002. During the 2006 first quarter, we continued executing on our strategic initiatives, adding a record 238 new branches globally and significantly growing our international franchise. Average loans increased 9%, average deposits grew by 10% and average interest-earning assets were up 11% from year-ago levels. Income was well diversified by segment and region, as shown in the charts below.
5
Revenues increased 5% from the 2005 first quarter, reaching $22.2 billion. Our international operations recorded revenue growth of 19% in the 2006 quarter. In addition, CIB revenues increased 21%, reflecting strong performance in both Transaction Services and Capital Markets and Banking. Net interest revenue was down 4%, while other revenue increased 12%, continuing to benefit from volume increases across the businesses. Net interest margin in the 2006 first quarter was 2.86%, down 44 basis points from the 2005 first quarter and down 6 basis points from the 2005 fourth quarter. (See discussion of net interest margin on page 61.) Operating expenses increased 17% from the 2005 first quarter; this was comprised of 7% from SFAS 123(R) charges, 9% from organic business growth and acquisitions, and 1% due to investment spending.
The global credit environment remained favorable; this, as well as significantly lower bankruptcy filings and an asset mix shift, drove a $367 million decrease in credit costs compared to a year ago. Global Consumer loss rates improved to 1.46%, a 36 basis point decline from the 2005 fourth quarter, in part reflecting significantly lower bankruptcy filings. Corporate cash-basis loans declined 18% from December 31, 2005 to $821 million. The effective tax rate on continuing operations decreased to 21.5%, primarily reflecting the impact of the resolution of the U.S. Federal tax audit. The effective tax rate for the 2006 first quarter would have been 29.9% without the tax reserve release of $598 million. Our equity capital base and trust preferred securities grew to $120.6 billion at March 31, 2006. Stockholders' equity increased by $1.9 billion during the quarter to $114.4 billion, even with the distribution of $2.5 billion in dividends to shareholders and the repurchase of $2.0 billion of common stock during the quarter. Return on common equity was 20.3% for the quarter. 6
Citigroup maintained its "well-capitalized" position with a Tier 1 Capital Ratio of 8.60% at March 31, 2006. On April 13, 2006, the Board authorized the repurchase of up to an additional $10 billion of our common stock, bringing the total authorization to $12.4 billion.
On April 3, 2006, we received a letter from the Federal Reserve Bank of New York noting that "Citigroup has made significant progress in implementing its new compliance risk management program. Consequently, the understanding that you would refrain from significant expansion is no longer in operation." We remain focused on organic growth. Any expansion proposals will be reviewed with the Federal Reserve in accordance with all applicable statutory requirements. On March 21, 2006, the Citigroup Board of Directors unanimously elected Chief Executive Officer Charles Prince to the additional post of Chairman. 7 Adoption of the Accounting for Share-Based Payments On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) 123 (revised 2004), "Share-Based Payment" (SFAS 123(R)), which replaces the existing SFAS 123 and supersedes APB 25. SFAS 123(R) requires companies to measure and record compensation expense for stock options and other share-based payments based on the instruments' fair value, reduced by expected forfeitures. In adopting this standard, the Company conformed to recent accounting guidance that restricted stock awards issued to retirement-eligible employees who meet certain age and service requirements must be either expensed on the grant date or accrued over a service period prior to the grant date. The impact to the 2006 first quarter results was a charge of $846 million ($520 million after-tax). This charge consisted of $648 million ($398 million after-tax) for the immediate expensing of awards granted to retirement-eligible employees in January 2006, and $198 million ($122 million after-tax) for the quarterly accrual of the estimated awards that will be granted through January 2007. Additional information can be found in Notes 1 and 14 to the Consolidated Financial Statements on pages 81 and 96, respectively. The Company will continue to accrue for the estimated awards that will be granted through January 2007 in each quarter of 2006. Settlement of IRS Tax Audit In March 2006, the Company received a notice from the Internal Revenue Service (IRS) that they had concluded the tax audit for the years 1999 through 2002. For the first quarter of 2006, the Company released a total of $657 million from its tax contingency reserves related to the 1999 through 2002 Federal tax audit (referred to hereinafter as the "resolution of the Federal Tax Audit.") Summary by Business of SFAS 123(R) and Resolution of the Federal Tax Audit The following table summarizes the SFAS 123(R) impact on 2006 first quarter pretax compensation expense and the tax benefit from the resolution of the Federal Tax Audit:
Sale of Asset Management Business On December 1, 2005, the Company completed the sale of substantially all of its Asset Management Business to Legg Mason, Inc. (Legg Mason) in exchange for Legg Mason's broker-dealer business, $2.298 billion of Legg Mason's common and preferred shares (valued as of the closing date), and $500 million in cash. This cash was obtained via a lending facility provided by Citigroup CIB. The transaction did not include Citigroup's asset management business in Mexico, its retirement services business in Latin America (both of which are now included in International Retail Banking) or 8 its interest in the CitiStreet joint venture (which is now included in Smith Barney). The total value of the transaction at the time of closing was approximately $4.369 billion, resulting in an after-tax gain to Citigroup of approximately $2.082 billion ($3.404 billion pretax). This gain remains subject to final closing adjustments. Concurrently, Citigroup sold Legg Mason's Capital Markets business to Stifel Financial Corp. (The transactions described in these two paragraphs are referred to as the "Sale of the Asset Management Business.") Upon completion of the Sale of the Asset Management Business, Citigroup added 1,226 financial advisors in 124 branch offices from Legg Mason to its Global Wealth Management business. During March 2006, Citigroup sold 10.3 million shares of Legg Mason stock through an underwritten public offering. The net sale proceeds of $1.258 billion resulted in a pretax gain of $24 million. Additional information can be found in Note 3 to the Consolidated Financial Statements on page 83. Sale of Travelers Life & Annuity On July 1, 2005, the Company completed the sale of Citigroup's Travelers Life & Annuity and substantially all of Citigroup's international insurance businesses to MetLife, Inc. (MetLife). The businesses sold were the primary vehicles through which Citigroup engaged in the Life Insurance and Annuities business. Citigroup received $1.0 billion in MetLife equity securities and $10.830 billion in cash, which resulted in an after-tax gain of approximately $2.120 billion ($3.386 billion pretax). This gain remains subject to final closing adjustments. The transaction encompassed Travelers Life & Annuity's U.S. businesses and its international operations, other than Citigroup's life insurance business in Mexico (which is now included within International Retail Banking). (The transaction described in the preceding three paragraphs is referred to as the "Sale of the Life Insurance and Annuities Business.") Additional information can be found in Note 3 to the Consolidated Financial Statements on page 83. Credit Reserves During the first quarter of 2006, the Company recorded a net release/utilization of its credit reserves of $154 million, consisting of a net release/utilization of $187 million in Global Consumer and Global Wealth Management, and a net build of $33 million in CIB. The net release/utilization in Global Consumer was primarily due to the overall improvement in the consumer portfolio. Partially offsetting the releases was a build of $100 million in Asia related to recent credit trends in Taiwan credit cards. The net build of $33 million in CIB was primarily composed of $29 million in Capital Markets and Banking, which included a $46 million reserve increase for unfunded lending commitments and letters of credit. During the 2005 first quarter, the Company recorded a net release/utilization of $89 million to its credit reserves, consisting of a net release/utilization of $56 million in Global Consumer and a net release/utilization of $33 million in CIB. Credit Reserve Builds (Releases)
Allowance for Credit Losses
Repositioning Charges The Company recorded a $272 million after-tax ($435 million pretax) charge during the 2005 first quarter for repositioning costs. The repositioning charges were predominantly severance-related costs recorded in CIB ($151 million after-tax) and in Global Consumer ($95 million after-tax). These repositioning actions were consistent with the Company's objectives of controlling expenses while continuing to invest in growth opportunities. 9 Acquisition of Federated Credit Card Portfolio and Credit Card Agreement With Federated Department Stores On June 2, 2005, Citigroup announced a long-term agreement with Federated Department Stores, Inc. (Federated) under which the companies will partner to manage Federated's $6.3 billion in credit card receivables, including existing and new accounts, executed in three phases. For the first phase, which closed on October 24, 2005, Citigroup acquired Federated's receivables under management, totaling $3.3 billion. For the second phase, which closed on May 1, 2006, additional Federated receivables totaling $1.2 billion were transferred to Citigroup from the previous provider. For the final phase, in the 2006 third quarter, Citigroup expects to acquire the approximately $1.8 billion credit card receivable portfolio of The May Department Stores Company (May), which recently merged with Federated. Citigroup is paying a premium of approximately 11.5% to acquire each of the portfolios. The multi-year agreement also provides Federated the ability to participate in the portfolio performance, based on credit sales and certain other performance metrics. The Federated and May credit card portfolios comprise a total of approximately 17 million active accounts. Certain of the above statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 75. Resolution of Glendale Litigation During the 2005 first quarter, the Company recorded a $72 million after-tax gain ($114 million pretax) following the resolution of Glendale Federal Bank v. United States, an action brought by Glendale Federal Bank, a predecessor to Citibank (West), FSB, against the United States government. Acquisition of First American Bank On March 31, 2005, Citigroup completed its acquisition of First American Bank in Texas (FAB). The transaction established Citigroup's retail branch presence in Texas, giving Citigroup 106 branches, $4.2 billion in assets and approximately 120,000 new customers in the state at the time of the transaction's closing. The results of FAB are included in the Consolidated Financial Statements from March 2005 forward. Divestiture of the Manufactured Housing Loan Portfolio On May 1, 2005, Citigroup completed the sale of its manufactured housing loan portfolio, consisting of $1.4 billion in loans, to 21st Mortgage Corp. The Company recognized a $109 million after-tax loss ($157 million pretax) in the 2005 first quarter related to the divestiture. Divestiture of CitiCapital's Transportation Finance Business On January 31, 2005, the Company completed the sale of CitiCapital's Transportation Finance Business based in Dallas and Toronto to GE Commercial Finance for total cash consideration of approximately $4.6 billion. The sale resulted in an after-tax gain of $111 million ($157 million pretax). 10 SEGMENT, PRODUCT AND REGIONAL NET INCOME The following tables show the net income (loss) for Citigroup's businesses on a segment and product view and on a regional view: Citigroup Net Income—Segment and Product View
NM Not meaningful 11 Citigroup Net Income—Regional View
NM Not meaningful. 12 SELECTED REVENUE AND EXPENSE ITEMS Selected Revenue Items Net interest revenue of $9.8 billion decreased $354 million, or 4%, from the 2005 first quarter, primarily reflecting an increase in interest paid on deposits due to higher rates and balances. Total commissions, asset management and administration fees, and other fee revenues of $6.6 billion increased by $710 million, or 12%, compared to the 2005 first quarter. This was primarily attributable to increased investment banking fees, volumes and assets under custody in CIB. Principal transactions revenue of $2.1 billion was down $98 million, or 4%, from the first quarter of 2005. Realized gains from sales of investments were up $136 million, or 56%, to $379 million in the 2006 first quarter; this was primarily due to the sale of the remaining 12.3 million shares of St. Paul Travelers during the quarter. Other revenue of $2.5 billion increased $558 million, or 28%, from the 2005 first quarter. Operating Expenses Total operating expenses were $13.4 billion for the 2006 first quarter, up $2.0 billion, or 17%, from the comparable 2005 period. The increase was primarily due to the adoption of SFAS 123(R) and an increase in incentive compensation in CIB, primarily Capital Markets and Banking. Global Consumer reported a 9% increase in total expenses from the 2005 first quarter, led by U.S. Consumer, due to increased business volumes and investments in new branches. International Consumer expenses increased $199 million versus the first quarter of 2005, primarily due to branch expansion and increased sales staff, and an increase in profit sharing in Mexico in International Retail Banking. CIB expenses increased 30% from the 2005 first quarter, primarily due to the implementation of SFAS 123(R). Global Wealth Management expenses increased 22% as compared to the prior year's three-month period, also primarily related to SFAS 123(R) implementation. Alternative Investments expenses increased 72% from the 2005 period, primarily resulting from higher employee-related expenses. Provisions for Credit Losses and for Benefits and Claims The provision for credit losses decreased $367 million, or 20%, from the 2005 first quarter to $1.4 billion. Policyholder benefits and claims in the 2006 first quarter increased $10 million, or 5%, from the 2005 first quarter. Global Consumer provisions for loan losses and for benefits and claims of $1.7 billion in the 2006 first quarter were down $434 million, or 21%, from the 2005 first quarter. This was due to lower bankruptcy filings and a continued favorable credit environment that drove the net credit loss ratio down. Total net credit losses were $1.633 billion, and the related loss ratio was 1.46% in the first quarter of 2006, as compared to $1.925 billion and 1.83% in the 2005 first quarter. The consumer loan delinquency ratio (90 days or more past due) decreased to 1.31% at March 31, 2006 from 1.83% at March 31, 2005. See page 50 for a reconciliation of total consumer credit information. Corporate and Investment Banking provision for credit losses in the 2006 first quarter was up $56 million from the 2005 first quarter. The Company increased CIB's reserve for credit losses by $50 million for unfunded lending commitments in the 2006 first quarter due to an increase in exposures and credit risk in the portfolio. Corporate cash-basis loans at March 31, 2006 and 2005 were $821 million and $1.7 billion, respectively, while the corporate Other Real Estate Owned (OREO) portfolio totaled $144 million and $127 million, respectively. The decrease in corporate cash-basis loans from March 31, 2005, was related to improvements in the overall credit environment and write-offs, as well as sales of loans and paydowns in the portfolio. Income Taxes The Company's effective tax rate on continuing operations was 21.5% in the 2006 first quarter, compared to 32.0% in the 2005 first quarter. The 2006 first quarter includes a tax benefit in continuing operations of $598 million related to the resolution of the Federal Tax Audit for the years 1999 through 2002. Regulatory Capital Total capital (Tier 1 and Tier 2) was $109.7 billion and $106.4 billion, or 11.80% and 12.02% of net risk-adjusted assets at March 31, 2006 and December 31, 2005, respectively. Tier 1 capital was $79.9 billion, or 8.60% of net risk-adjusted assets at March 31, 2006, compared to $77.8 billion, or 8.79%, at December 31, 2005. ACCOUNTING CHANGES AND FUTURE APPLICATION OF ACCOUNTING STANDARDS See Note 1 to the Consolidated Financial Statements on page 81 for a discussion of Accounting Changes and the Future Application of Accounting Standards. SIGNIFICANT ACCOUNTING POLICIES The Company's accounting policies are fundamental to understanding management's discussion and analysis of results of operations and financial condition. The Company has identified five policies as being significant because they require management to make subjective and/or complex judgments about matters that are inherently uncertain. These policies relate to Valuations of Financial Instruments, Allowance for Credit Losses, Securitizations, Income Taxes and Legal Reserves. The Company, in consultation with the Audit and Risk Management Committee of the Board of Directors, has reviewed and approved these significant accounting policies, which are further described in the Company's 2005 Annual Report on Form 10-K. The net income line in the following business segment and operating unit discussions excludes discontinued operations. Income from discontinued operations is included within the Corporate/Other business segment. See Notes 3 and 4 to the Consolidated Financial Statements on pages 83 and 85, respectively. Certain prior period amounts have been reclassified to conform to the current period's presentation. 13 GLOBAL CONSUMER
Citigroup's Global Consumer Group provides a wide array of banking, lending, insurance and investment services through a network of 7,440 branches, 12,167 ATMs, 731 Automated Lending Machines (ALMs), the Internet, telephone and mail, and the Primerica Financial Services salesforce. Global Consumer serves more than 200 million customer accounts, providing products and services to meet the financial needs of both individuals and small businesses.
14 U.S. CONSUMER
U.S. Consumer is composed of four businesses: Cards, Retail Distribution, Consumer Lending and Commercial Business.
15 U.S. Cards
U.S. Cards is one of the largest providers of credit cards in North America, with more than 130 million customer accounts in the United States, Canada and Puerto Rico. In addition to MasterCard (including Diners), Visa, and American Express, U.S. Cards is the largest provider of credit card services to the oil and gas industry and the leading provider of consumer private-label credit cards and commercial accounts on behalf of merchants such as Sears, The Home Depot, Sears, Federated, Dell Computer, Radio Shack, Staples and Zales Corporation. Revenues are primarily generated from net interest revenue on receivables, interchange fees on purchase sales and other delinquency or services fees.
16 1Q06 vs. 1Q05 Revenues, net of interest expense, declined as the positive impact of 11% growth in purchase sales and the addition of the Federated portfolio in the 2005 fourth quarter was more than offset by continued net interest margin compression and higher rewards program costs related to the 2005 fourth quarter change to conform accounting practices for customer rewards. The net interest margin compression was driven by a combination of increased payment rates, higher cost of funds, and the mix of average managed receivable balances. Operating expenses increased, primarily reflecting the addition of the Federated portfolio and the adoption of SFAS 123(R) in the 2006 first quarter, partially offset by the absence of 2005 first quarter repositioning expenses and a decline in advertising and marketing expenses, largely reflecting the timing of advertising campaigns. Provision for loan losses and for benefits and claims declined, primarily reflecting a decline in net credit losses due to lower bankruptcies, the positive credit environment and higher loan loss reserve releases of $72 million. Net Income also reflected an $89 million tax benefit resulting from the resolution of the Federal Tax Audit. 17
U.S. Retail Distribution provides banking, lending, investment and insurance products and services to customers through 906 Citibank branches, 2,299 CitiFinancial branches, the Primerica Financial Services (PFS) salesforce, the Internet, direct mail and telesales. Revenues are primarily derived from net interest revenue on loans and deposits and from fees on banking, insurance and investment products.
18 1Q06 vs. 1Q05 Revenues, net of interest expense, decreased primarily due to the absence of a $110 million gain in the 2005 first quarter related to the resolution of the Glendale litigation. Growth in deposits and loans, up 6% and 8% respectively, and increased investment product sales were more than offset by net interest margin compression. This resulted in part from a shift in customer liabilities from savings and other demand deposits to certificates of deposit. Operating expense growth was primarily due to higher volume-related expenses, increased investment spending driven by 36 new branch openings, and the impact of SFAS 123(R). The impact of the FAB acquisition also contributed to higher expenses in the quarter. Provisions for loan losses and for benefits and claims decreased primarily due to lower bankruptcy filings. CitiFinancial Branches also had higher loan loss reserve releases of $38 million. The net credit loss ratio declined 70 basis points to 2.66%, reflecting the favorable credit environment. Deposit growth reflected balance increases in certificates of deposit, premium checking, and partly rate-sensitive money market products, as well as the impact of the FAB acquisition. Loan growth reflected improvements in all channels and products. Investment product sales increased 26%, driven by increased volumes. Net income also reflected a $51 million tax reserve release resulting from the resolution of the Federal Tax Audit. 19 U.S. Consumer Lending
U.S. Consumer Lending provides home mortgages and home equity loans to prime and non-prime customers, auto financing to non-prime consumers and educational loans to students. Loans are originated throughout the United States and Canada through the Citibank, CitiFinancial and Smith Barney branch networks, Primerica Financial Services agents, third-party brokers, direct mail, the Internet and telesales. Loans are also purchased in the wholesale markets. U.S. Consumer Lending also provides mortgage servicing to a portfolio of mortgage loans owned by third parties. Revenues are composed of loan fees, net interest revenue and mortgage servicing fees.
20 1Q06 vs. 1Q05 Revenues, net of interest expense, declined as an 18% increase in average loan volumes was offset by net interest margin compression, lower gains on securitizations of real estate loans, and lower net mortgage servicing revenues. Average loan growth reflected a strong increase in originations across all businesses, driven by a 17% increase in prime mortgage originations and home equity loans. Operating expenses increased primarily due to higher loan origination volumes, the continued integration of the real estate businesses, and the impact of SFAS 123(R) charges of $8 million. Provisions for loan losses and for benefits and claims decreased due to a continued favorable credit environment. The 90 days-past-due ratio declined across all product categories. Net income also reflected a $31 million tax reserve release resulting from the resolution of the Federal Tax Audit. 21 U.S. Commercial Business
U.S. Commercial Business provides equipment leasing, financing, and banking services to small- and middle-market businesses ($5 million to $500 million in annual revenues) and financing for investor-owned multifamily and commercial properties. Revenues are composed of net interest revenue and fees on loans and leases.
1Q06 vs. 1Q05 Revenues, net of interest expense, declined primarily due to the absence of a $161 million gain on the sale of the CitiCapital Transportation Finance business in the 2005 first quarter. Strong growth in core loan and deposit balances, up 23% and 25%, respectively, and the impact of the FAB acquisition were more than offset by the continuing impact of net interest margin compression. Operating expenses increased primarily due to the impact of the FAB acquisition and the SFAS 123(R) charges of $12 million, partially offset by lower expenses from the absence of the transportation finance businesses sold in the prior year. Provision for loan losses decreased primarily due to higher loan loss reserve releases of $26 million, a stable credit environment, and the continued liquidation of non-core portfolios. Net Income also reflected a $4 million tax reserve release resulting from the resolution of the Federal Tax Audit. Deposit and core loan growth reflected strong transaction volumes and balances across all business units and the impact of the FAB acquisition, partially offset by declines in the liquidating portfolio. 22
International Consumer is composed of three businesses: Cards, Consumer Finance and Retail Banking.
23 International Cards
International Cards provides MasterCard-, Visa- and Diners-branded credit and charge cards, as well as private label cards and co-branded cards, to more than 26 million customer accounts in 43 countries outside of the U.S. and Canada. Revenues are primarily generated from net interest revenue on receivables, interchange fees on purchase sales and other delinquency or service fees.
NM Not meaningful 24 1Q06 vs. 1Q05 Revenues, net of interest expense, increased, driven by an 8% increase in purchase sales and 14% growth in average receivables across the regions. Operating expenses increased, reflecting continued investment in organic growth, costs associated with a labor settlement in Korea, the adoption of SFAS 123(R) of $9 million, and volume growth across the region. This was partially offset by the absence of 2005 first quarter repositioning expenses of $13 million. Provision for loan losses reflected higher loan loss reserves of $99 million, driven by the industry-wide credit deterioration in Taiwan and an increase in net credit losses in Mexico, reflecting portfolio growth and target market expansion. Net Income also reflected a $20 million tax benefit resulting from the resolution of the Federal Tax Audit. Regional Net Income Mexico income increased due to higher sales volumes and average loans, as well as tax benefits of $6 million. Latin America income increased primarily due to volume growth and the benefit of foreign currency translation. Japan income increased primarily due to tax credits of $2 million and the benefit of foreign currency translation. Asia income declined due to an increase in loan loss reserves related to Taiwan and costs associated with a Korea labor settlement, partially offset by higher purchase sales and loan growth. EMEA income remained unchanged as higher purchase sales and volume growth were offset by higher net credit losses and higher expenses. 25 International Consumer Finance
International Consumer Finance provides community-based lending services through its branch network, regional sales offices and cross-selling initiatives with International Cards and International Retail Banking. As of March 31, 2006, International Consumer Finance maintained 2,319 sales points composed of 1,588 branches in more than 25 countries and 731 ALMs in Japan. International Consumer Finance offers real-estate-secured loans, unsecured or partially secured personal loans, auto loans, and loans to finance consumer-goods purchases. Revenues are primarily derived from net interest revenue and fees on loan products.
NM Not meaningful 26 1Q06 vs. 1Q05 Revenues, net of interest expense, excluding Japan revenues increased 16%, driven mainly by higher personal loan volumes and higher net interest margins. Japan revenues declined primarily due to the impact of foreign currency translation. Operating expense decreased, primarily due to the absence of a 2005 first quarter repositioning charge in EMEA of $38 million and declines in Japan due to the closing of branches and the increased network of ALMs. Expenses in all other regions increased, reflecting the impact of investment spending associated with 130 new branch openings. Provision for loan losses declined primarily due to a loan loss reserve release in EMEA and lower net credit losses in Japan related to the sale of previously charged-off assets. This was partially offset by higher personal loan losses in the U.K. The net credit loss ratio increased 16 basis points to 5.78%. The decline in average loans was mainly driven by decreases in the personal-loan and real-estate-secured portfolios in Japan and decreases in the real-estate-secured and auto loan portfolios in EMEA. This was partially offset by higher personal loan volumes in Asia, EMEA, and Latin America. In Japan, average loans declined by 12% due to the impact of higher pay-downs, reduced loan demand, and the impact of foreign currency translation. 27
International Retail Banking delivers a wide array of banking, lending, insurance and investment services through a network of local branches and electronic delivery systems, including ATMs, call centers and the Internet. International Retail Banking serves 47 million customer accounts for individuals and small businesses. Revenues are primarily derived from net interest revenue on deposits and loans, and fees on mortgage, banking, and investment products.
28 1Q06 vs. 1Q05 Revenues, net of interest expense, increased, reflecting higher investment product sales in all regions, higher branch lending revenues in all regions except Asia, and higher deposit revenues in Asia, Latin America and EMEA. Average deposits grew 6%, led by increases of 20% in EMEA and 13% in Mexico. Loan balances declined slightly from the 2005 first quarter as growth in Mexico, Japan and Latin America was offset by a decline in EMEA, due to loan write-offs in the 2005 third quarter, and in Asia, due to the impact of labor actions in Korea. Assets under management increased by 23%. Operating expenses increased due to an increase in profit-sharing in Mexico, SFAS 123(R) charges, costs associated with a labor settlement in Korea, and continued expansion of the distribution network that included 72 new branch openings during the quarter. Additionally, there was a net increase of 157 branches since the 2005 first quarter, as well as, on a larger scale, the addition of more than 1,500 Banamex Aqui agents in Mexico. Provisions for loan losses and for benefits and claims decreased due to a loan loss reserve release in Korea as a result of an improving credit environment, and a gain from the sale of charged-off assets in Germany, partially offset by higher reserves in Mexico, higher credit losses in EMEA due to the standardization of the global write-off policy in the 2005 third quarter. The standardization of the loan write-off policies resulted in a significant drop in the 90 days past-due ratio, which fell to 1.21% from 3.26% in the 2005 first quarter. Net income also reflected a $72 million tax benefit in Mexico related to increased APB 23 benefits and a $55 million benefit from tax reserve releases related to the resolution of the Federal Tax Audit. Regional Net Income Asia income increased, benefiting from higher deposit and investment product sales, a $59 million loan loss reserve release in Korea, and tax benefits of $27 million related to the resolution of the Federal Tax Audit, partially offset by costs associated with the labor settlement. Mexico income increased primarily due to increased APB 23 benefits, partially offset by higher expenses, including an increase in profit sharing. EMEA income increased on stronger investment product sales and lending revenues and a decline in expenses, reflecting the absence of repositioning expenses in the 2005 first quarter of $36 million after-tax. Latin America income declined, primarily due to the impact of foreign currency translation. Japan income declined due to lower deposit revenues; higher expenses, mainly due to the consolidation and compliance activities related to the shutdown of the Japan Private Bank; and the impact of foreign currency translation. 29 Other Consumer Other Consumer includes certain treasury and other unallocated staff functions and global marketing.
Revenues and expenses reflect certain unallocated items that are not reported in the Global Consumer operating segments. The net income increase was primarily due to the absence of the 2005 first quarter loss on the sale of a Manufactured Housing loan portfolio of $109 million after-tax and tax credits of $40 million, reflecting the resolution of the Federal Tax Audit, partially offset by SFAS 123(R) charges of $17 million after-tax and higher unallocated expenses. 30 CORPORATE AND INVESTMENT BANKING
Corporate and Investment Banking (CIB) provides corporations, governments, institutions and investors in approximately 100 countries with a broad range of financial products and services. CIB includes Capital Markets and Banking, Transaction Services and Other CIB.
31 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.
32 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. Regional Net Income Net income in the U.S. decreased primarily due to higher compensation expenses (higher production-driven incentive compensation and the impact of SFAS 123(R) charges), as well as lower Lending and Fixed Income Markets revenues; these were partially offset by higher Equities Markets revenues and tax benefits from the resolution of the Federal Tax Audit. Mexico net income was unchanged as the absence of a loan loss recovery recorded in the prior-year period was offset by strong revenue growth in Fixed Income and Equity Markets. Credit conditions remained stable. Latin America net income increased primarily due to strong revenue growth in Equity and Fixed Income Markets activities in Brazil, as well as tax benefits from the resolution of the Federal Tax Audit; these were partially offset by the absence of prior year loan loss reserve releases and the impact from SFAS 123(R) charges. Credit conditions remained favorable. EMEA net income increased, driven by double-digit revenue growth across all major product lines and geographies on higher volumes and growth in customer activity, the absence of prior year repositioning expenses, and tax benefits from the resolution of the Federal Tax Audit. Results also include the impact from SFAS 123(R) charges. Net income in Japan increased strongly due to growth in Fixed Income Markets, partially offset by higher expenses. Net income in Asia increased, driven by double-digit revenue growth in Equity and Fixed Income Markets, as well as tax benefits from the resolution of the Federal Tax Audit, partially offset by the impact from SFAS 123(R) charges. Credit conditions remained favorable. 33
Transaction Services is composed of Cash Management, Trade Services & Finance (Trade) and Securities & Funds Services (SFS). Cash Management and Trade Services provide comprehensive cash management and trade finance for corporations and financial institutions worldwide. SFS provides custody and fund services to investors such as insurance companies and pension funds, clearing services to intermediaries such as broker/dealers, and depository and agency/trust services to multinational corporations and governments globally. Revenue is generated from fees for transaction processing, net interest revenue on Trade, loans and deposits in Cash Management and SFS, and fees on assets under custody in SFS.
NM Not meaningful. 34 1Q06 vs. 1Q05 Revenues, net of interest expense, increased, reflecting growth in liability balances, assets under custody, and rising interest rates in Cash Management and SFS. Average liability balances grew 14% to $158 billion primarily due to increases in EMEA and the U.S., reflecting positive flow from new and existing customers. Cash Management revenue increased, reflecting growth across all regions except Mexico from higher liability balances, higher interest rates, and increased revenues from new sales. Securities & Funds Services revenue increased, reflecting growth across all regions, higher assets under custody, and the impact of acquisitions. Assets under custody reached $8.8 trillion, an increase of $0.8 trillion, or 10%, driven by strong sales momentum, higher equity market values, and the inclusion of ABN Amro and UNISEN assets under custody. Trade Services & Finance revenue increased primarily due to double-digit revenue growth in EMEA and the U.S., partially offset by Mexico and Latin America. The change in the provision for credit losses of $18 million was primarily attributable to a reserve build of $5 million in 2006, compared to reserve releases of $13 million in 2005. Operating expenses increased due to organic business growth, acquisitions, and investment spending. Cash-basis loans, which are primarily trade finance receivables, were $76 million and $77 million at March 31, 2006 and 2005, respectively. Regional Net Income Net income in the U.S. decreased primarily due to higher expenses from acquisitions and continued investment spending, which was partially offset by growth in liability balances, higher interest rates, and the resolution of the Federal Tax Audit. Mexico net income decreased primarily due to higher expenses, and declining interest rates. Latin America net income increased on liability balance growth and the resolution of the Federal Tax Audit. EMEA net income increased primarily due to increases in liability balances, assets under custody and higher interest rates. Results also included the benefit of the resolution of the Federal Tax Audit. Asia net income increased primarily due to higher customer volumes, growth in liability balances and assets under custody, higher interest rates, and the resolution of the Federal Tax Audit. Japan net income increased due to higher liability balances and assets under custody. 35 Other CIB Other CIB includes offsets to certain line items reported in other CIB segments, certain non-recurring items and tax amounts not allocated to CIB products.
1Q06 vs. 1Q05 The net loss of $12 million in the 2006 first quarter, compared to a net loss of $5 million in the prior-year quarter, is primarily due to higher taxes, partially offset by lower credit provisions. 36 GLOBAL WEALTH MANAGEMENT
Global Wealth Management is composed of the Smith Barney Private Client businesses (branded Citigroup Wealth Advisors outside the U.S.), Citigroup Private Bank, and Citigroup Investment Research.
NM Not meaningful. 37 Smith Barney
Smith Barney provides investment advice, financial planning and brokerage services to affluent individuals, companies, and non-profits through a network of more than 13,000 Financial Advisors in more than 600 offices primarily in the U.S. Smith Barney generates revenue from managing client assets, acting as a broker for clients in the purchase and sale of securities, financing customers' securities transactions and other borrowing needs through lending, and through the sale of mutual funds.
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