SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended June 30, 2003

 

 

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from               to              

 

 

 

Commission file number 1-9924

 

Citigroup Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

52-1568099

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

399 Park Avenue, New York, New York 10043

(Address of principal executive offices) (Zip Code)

 

 

 

(212) 559-1000

(Registrant’s telephone number, including area code)

 

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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý  No o

 

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 June 30, 2003:  5,150,833,372

 

Available on the Web at www.citigroup.com

 

 



 

Citigroup Inc.

 

TABLE OF CONTENTS

 

 

 

Page No.

 

Part I – Financial Information

 

 

 

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

Consolidated Statement of Income (Unaudited) -
Three and Six Months Ended June 30, 2003 and 2002

56

 

 

 

 

Consolidated Statement of Financial Position -
June 30, 2003 (Unaudited) and December 31, 2002

57

 

 

 

 

Consolidated Statement of Changes in Stockholders’ Equity
(Unaudited) - Six Months Ended June 30, 2003 and 2002

58

 

 

 

 

Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended June 30, 2003 and 2002

59

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

60

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

5-55

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41-43

 

 

 

Item 4.

Controls and Procedures

68

 

 

 

 

Part II - Other Information

 

 

 

 

Item 1.

Legal Proceedings

74

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

75

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

75

 

 

 

Signatures

77

 

 

Exhibit Index

78

 



 

THE COMPANY

 

Citigroup Inc. (Citigroup and, together with its subsidiaries, the Company) is a diversified global financial services holding company whose businesses provide a broad range of financial services to consumer and corporate customers with some 200 million customer accounts in over 100 countries and territories.  Citigroup was incorporated in 1988 under the laws of the State of Delaware.

 

The Company’s activities are conducted through the Global Consumer, Global Corporate and Investment Bank (GCIB), Private Client Services (PCS), Global Investment Management (GIM) and Proprietary Investment Activities business segments.

 

The Company is a bank holding company within the meaning of the U.S. Bank Holding Company Act of 1956 (BHC Act) registered with, and subject to examination by, the Board of Governors of the Federal Reserve System (FRB).  Certain 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 2002 Annual Report on Form 10-K.

 

The periodic reports of Citicorp, Citigroup Global Markets Holdings Inc. (CGMHI) (formerly Salomon Smith Barney Holdings Inc.), The Student Loan Corporation (STU), The Travelers Insurance Company (TIC) and Travelers Life and Annuity Company (TLAC), subsidiaries of the Company that make filings pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act), provide additional business and financial information concerning those companies and their consolidated subsidiaries.

 

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 website at http://www.citigroup.com.

 

Citigroup’s annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K, and all amendments to these reports, are available free of charge through the Company’s website by clicking on the “Investor Relations” page and selecting “SEC Filings.”  The Securities and Exchange Commission (SEC) website contains reports, proxy and information statements, and other information regarding the Company at http://www.sec.gov.

 

GLOBAL CONSUMER

 

Global Consumer delivers a wide array of banking, lending, insurance and investment services through a network of local branches, offices and electronic delivery systems, including ATMs, Automated Lending Machines (ALMs) and the World Wide Web. The Global Consumer businesses serve individual consumers as well as small businesses.  Global Consumer includes Cards, Consumer Finance and Retail Banking.

 

Cards provides MasterCard, VISA and private label credit and charge cards.  North America Cards includes the operations of Citi Cards, the Company’s primary brand in North America, and Mexico Cards. International Cards provides credit and charge cards to customers in Europe, the Middle East and Africa (EMEA), Japan, Asia and Latin America.

 

Consumer Finance provides community-based lending services through branch networks, regional sales offices and cross-selling initiatives with other Citigroup businesses. The business of CitiFinancial is included in North America Consumer Finance.  As of June 30, 2003, North America Consumer Finance maintained 2,394 offices, including 2,158 CitiFinancial offices in the U.S. and Canada, while International Consumer Finance maintained 1,113 offices, including 813 in Japan.  Consumer Finance offers real estate-secured loans, unsecured and partially secured personal loans, auto loans and loans to finance consumer goods purchases.  In addition, CitiFinancial, through certain subsidiaries and third parties, makes available various credit-related and other insurance products to its U.S. customers.

 

Retail Banking provides banking, lending, leasing, equipment financing, investment and insurance services to customers through retail branches and electronic delivery systems. In North America, Retail Banking includes the operations of Citibanking North America, Consumer Assets and CitiCapital, Primerica Financial Services (Primerica), and Mexico Retail Banking.  Citibanking North America delivers banking, lending, investment and insurance services through 781 branches in the U.S. and Puerto Rico and through Citibank Online, an Internet banking site on the World Wide Web.  The Consumer Assets business originates and services mortgages and student loans for customers across the U.S.  The CitiCapital business provides leasing and equipment financing products to small and middle market businesses.  The operations of Primerica involve the sale, mainly in North America, of life insurance and other products manufactured by its affiliates, including Smith Barney mutual funds, CitiFinancial mortgages and personal loans and the products of our Life Insurance and Annuities business within the GIM segment.  The Primerica sales force is composed of over 100,000 independent representatives. Mexico Retail Banking consists of the branch banking operations of Banamex. International Retail Banking provides full-service banking and investment services in EMEA, Japan, Asia and Latin America.  The Commercial Markets Groups are included in Retail Banking and consist of the operations of CitiCapital, as well as middle market lending operations in North America and the international regions.

 

2



 

GLOBAL CORPORATE AND INVESTMENT BANK

 

Global Corporate and Investment Bank (GCIB) provides corporations, governments, institutions and investors in over 100 countries and territories with a broad range of financial products and services.  GCIB includes Capital Markets and Banking and Transaction Services.

 

Capital Markets and Banking offers a wide array of investment banking and commercial banking services and products, including investment banking, institutional brokerage, advisory services, foreign exchange, structured products, derivatives and lending.

 

Transaction Services is composed of Cash Management, Trade Services and Global Securities Services (GSS).  Cash Management and Trade Services provide comprehensive cash management, trade finance for corporations and financial institutions worldwide.  GSS provide custody services to investors such as insurance companies and pension funds, and clearing services to intermediaries such as broker/dealers as well as depository and agency and trust services to multinational corporations and governments globally.

 

PRIVATE CLIENT SERVICES

 

Private Client Services (PCS) provides investment advice, financial planning and brokerage services to affluent individuals, small and mid-size companies, non-profits and large corporations primarily through a network of more than 12,300 Smith Barney Financial Consultants in more than 500 offices worldwide.  In addition, Private Client Services provides independent client-focused research to individuals and institutions around the world.

 

A significant portion of Private Client Services revenue is generated from fees earned by managing client assets as well as commissions earned as a broker for its clients in the purchase and sale of securities. Additionally, Private Client Services generates net interest revenue by financing customers’ securities transactions and other borrowing needs through security-based lending. Private Client Services also receives commissions and other sales and service revenues through the sale of proprietary and third-party mutual funds. As part of Private Client Services, Global Equity Research produces equity research to serve both institutional and individual investor clients.   The majority of expenses for Global Equity Research are allocated to the Global Equities business within GCIB and Private Client Services’ businesses.

 

GLOBAL INVESTMENT MANAGEMENT

 

Global Investment Management (GIM) offers a broad range of life insurance, annuity, asset management and personalized wealth management products and services distributed to institutional, high-net-worth and retail clients.  Global Investment Management includes Life Insurance and Annuities, Private Bank and Asset Management.

 

Life Insurance and Annuities comprises Travelers Life and Annuity (TLA) and International Insurance Manufacturing (IIM).  TLA offers individual annuity, group annuity, individual life insurance and Corporate Owned Life insurance (COLI) products.  The individual products include fixed and variable deferred annuities, payout annuities and term, universal and variable life insurance.  These products are primarily distributed through Citigroup’s businesses, a nationwide network of independent agents and unaffiliated broker/dealers.  The COLI product is a variable universal life product distributed through independent specialty brokers.  The group products include institutional pension products, including guaranteed investment contracts, payout annuities, group annuities to employer-sponsored retirement and savings plans, and structured finance transactions.  The IIM business provides annuities, credit, life, health, disability and other insurance products internationally, leveraging the existing distribution channels of the Consumer Finance, Retail Banking and Asset Management (retirement services) businesses.  IIM primarily has operations in Mexico, EMEA, Latin America, Asia and Japan.  TLA and IIM include the realized investment gains/(losses) from sales on certain insurance related investments.

 

Private Bank provides personalized wealth management services for high-net-worth clients through 125 offices in 33 countries and territories, generating fee and interest income from investment funds management, client trading activity, trust and fiduciary services, custody services, and traditional banking and lending activities.  Through its Private Bankers and Product Specialists, Private Bank leverages its extensive experience with clients’ needs and its access to Citigroup to provide clients with comprehensive investment and banking services.

 

Asset Management includes Citigroup Asset Management, Citigroup Alternative Investments Institutional business, Banamex asset management and retirement services businesses and Citigroup’s other retirement services businesses in North America and Latin America.   These businesses offer institutional, high-net-worth and retail clients a broad range of investment alternatives from investment centers located around the world.  Products and services offered include mutual funds, closed-end funds, separately managed accounts, unit investment trusts, alternative investments (including hedge funds, private equity and credit structures), variable annuities through affiliated and third-party insurance companies, and pension administration services.

 

3



 

PROPRIETARY INVESTMENT ACTIVITIES

 

Proprietary Investment Activities is comprised of Citigroup’s proprietary Private Equity investments and Other Investment Activities which includes Citigroup’s proprietary investments in hedge funds and real estate investments, investments in countries that refinanced debt under the 1989 Brady Plan or plans of a similar nature, ownership of Travelers Property Casualty Corp. shares and Citigroup’s Alternative Investments (CAI) business, for which the net profits on products distributed through Citigroup’s Asset Management, Private Client Services and Private Bank businesses are reflected in the respective distributor’s income statement through net revenues.

 

CORPORATE/OTHER

 

Corporate/Other includes net corporate treasury results, corporate expenses, certain intersegment eliminations, the results of discontinued operations, the cumulative effect of accounting change and taxes not allocated to the individual businesses.

 

INTERNATIONAL

 

Citigroup International (whose operations are fully reflected in the product disclosures above), in partnership with our global product groups, offers a broad range of consumer financial services, corporate and investment banking services and investment management to some 50 million customer accounts in more than 100 countries and territories throughout Asia, Japan, EMEA and Latin America.

 

The product mix differs in each region, depending upon local conditions and opportunities.  Citigroup International also offers an array of wealth management services, with integrated offerings and dedicated service centers.

 

4



 

CITIGROUP INC. AND SUBSIDIARIES

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

Financial Summary

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

In millions of dollars, except per share data

 

2003

 

2002

 

2003

 

2002

 

Revenues, net of interest expense (1)

 

$

19,354

 

$

17,993

 

$

37,890

 

$

35,791

 

Operating expenses

 

9,971

 

9,147

 

19,523

 

18,203

 

Benefits, claims, and credit losses (1)

 

3,087

 

2,982

 

6,011

 

6,344

 

Income from continuing operations before income taxes, minority interest and cumulative effect of accounting change

 

6,296

 

5,864

 

12,356

 

11,244

 

Income taxes

 

1,956

 

2,017

 

3,875

 

3,896

 

Minority interest, after-tax

 

41

 

18

 

79

 

35

 

Income from continuing operations

 

4,299

 

3,829

 

8,402

 

7,313

 

Income from discontinued operations (2)

 

 

255

 

 

1,661

 

Cumulative effect of accounting change (3)

 

 

 

 

(47

)

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

4,299

 

$

4,084

 

$

8,402

 

$

8,927

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.84

 

$

0.75

 

$

1.64

 

$

1.42

 

Net Income

 

$

0.84

 

$

0.80

 

$

1.64

 

$

1.74

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.83

 

$

0.73

 

$

1.62

 

$

1.40

 

Net Income

 

$

0.83

 

$

0.78

 

$

1.62

 

$

1.71

 

 

 

 

 

 

 

 

 

 

 

Return on Average Common Equity

 

19.2

%

19.5

%

19.2

%

21.7

%

 

 

 

 

 

 

 

 

 

 

Total Assets (in billions)

 

$

1,187.0

 

$

1,083.3

 

 

 

 

 

Total Equity (in billions)

 

$

93.3

 

$

85.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital

 

9.02

%

9.20

%

 

 

 

 

Total Capital Ratio

 

11.94

%

11.75

%

 

 

 

 

 


(1)          Revenues, Net of Interest Expense, and Benefits, Claims, and Credit Losses in the table above are disclosed on an owned basis (under Generally Accepted Accounting Principles (GAAP)).  If this table were prepared on a managed basis, which includes certain effects of credit card securitization activities including receivables held for securitization and receivables sold with servicing retained, there would be no impact to net income, but Revenues, Net of Interest Expense, and Benefits, Claims, and Credit Losses would each have been increased by $1.208 billion and $1.081 billion in the 2003 and 2002 second quarters, respectively, and by $2.310 billion and $2.094 billion in the respective six-month periods.  Although a managed basis presentation is not in conformity with GAAP, the Company believes it provides a representation of performance and key indicators of the credit card business that is consistent with the way management reviews operating performance and allocates resources.  Furthermore, investors utilize information about the credit quality of the entire managed portfolio as the results of both the held and securitized portfolios impact the overall performance of the Cards business.  See the discussion of the Cards business on page 16.

(2)          Travelers Property Casualty Corp. (TPC) (a wholly-owned subsidiary of Citigroup on December 31, 2001) sold 231,000,000 shares of its class A common stock in an initial public offering (IPO) on March 27, 2002.  Citigroup made a tax-free distribution to its stockholders of a portion of its ownership interest in TPC on August 20, 2002.  Discontinued Operations includes the operations of TPC, the $1.270 billion gain on the IPO ($1.061 billion after-tax recognized in the 2002 first quarter and $97 million after-tax recognized in the 2002 third quarter) and income taxes.  Following the distribution, Citigroup was a holder of approximately 9.9% of TPC’s common equity.  See Note 4 to the Consolidated Financial Statements.

(3)          Accounting Change refers to the 2002 first quarter adoption of the remaining provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” (SFAS 142).  See Note 2 to the Consolidated Financial Statements.

 

5



 

Business Focus

 

The following tables show the net income (loss) for Citigroup’s businesses both on a product view and on a regional view.

 

Citigroup Net Income – Product View

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

In millions of dollars

 

2003

 

2002(1)

 

2003

 

2002(1)

 

 

 

 

 

 

 

 

 

 

 

Global Consumer

 

 

 

 

 

 

 

 

 

Cards

 

$

768

 

$

722

 

$

1,503

 

$

1,301

 

Consumer Finance

 

508

 

568

 

993

 

1,098

 

Retail Banking

 

1,049

 

645

 

2,023

 

1,307

 

Other

 

(31

)

11

 

(47

)

(9

)

Total Global Consumer

 

2,294

 

1,946

 

4,472

 

3,697

 

 

 

 

 

 

 

 

 

 

 

Global Corporate and Investment Bank

 

 

 

 

 

 

 

 

 

Capital Markets and Banking

 

1,163

 

1,136

 

2,357

 

2,195

 

Transaction Services

 

187

 

216

 

384

 

305

 

Other

 

(10

)

(34

)

(2

)

(57

)

Total Global Corporate and Investment Bank

 

1,340

 

1,318

 

2,739

 

2,443

 

 

 

 

 

 

 

 

 

 

 

Private Client Services

 

181

 

223

 

338

 

440

 

 

 

 

 

 

 

 

 

 

 

Global Investment Management

 

 

 

 

 

 

 

 

 

Life Insurance and Annuities (2)

 

190

 

137

 

426

 

351

 

Private Bank

 

138

 

113

 

263

 

224

 

Asset Management

 

104

 

121

 

209

 

220

 

Total Global Investment Management

 

432

 

371

 

898

 

795

 

 

 

 

 

 

 

 

 

 

 

Proprietary Investment Activities

 

27

 

(70

)

27

 

(35

)

 

 

 

 

 

 

 

 

 

 

Corporate/Other

 

25

 

41

 

(72

)

(27

)

 

 

 

 

 

 

 

 

 

 

Income from Continuing Operations

 

4,299

 

3,829

 

8,402

 

7,313

 

 

 

 

 

 

 

 

 

 

 

Income from Discontinued Operations (3)

 

 

255

 

 

1,661

 

Cumulative Effect of Accounting Change (4)

 

 

 

 

(47

)

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

4,299

 

$

4,084

 

$

8,402

 

$

8,927

 

 


(1)          Reclassified to conform to the current period’s presentation.

(2)          Includes after-tax realized insurance investment portfolio gains/(losses) of ($1) million and ($118) million in the 2003 and 2002 second quarters, respectively, and ($3) million and ($108) million in the respective six-month periods.

(3)          See Note 4 to the Consolidated Financial Statements.

(4)          See Note 2 to the Consolidated Financial Statements.

 

6



 

Citigroup Net Income – Regional View

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

In millions of dollars

 

2003

 

2002 (1)

 

2003

 

2002 (1)

 

 

 

 

 

 

 

 

 

 

 

North America (excluding Mexico) (2)

 

 

 

 

 

 

 

 

 

Consumer

 

$

1,520

 

$

1,297

 

$

2,999

 

$

2,569

 

Corporate

 

552

 

602

 

1,191

 

1,276

 

Private Client Services

 

181

 

223

 

338

 

440

 

Investment Management

 

299

 

218

 

650

 

570

 

Total North America

 

2,552

 

2,340

 

5,178

 

4,855

 

 

 

 

 

 

 

 

 

 

 

Mexico

 

 

 

 

 

 

 

 

 

Consumer

 

214

 

114

 

378

 

160

 

Corporate

 

84

 

110

 

204

 

304

 

Investment Management

 

69

 

70

 

134

 

118

 

Total Mexico

 

367

 

294

 

716

 

582

 

 

 

 

 

 

 

 

 

 

 

Europe, Middle East and Africa (EMEA)

 

 

 

 

 

 

 

 

 

Consumer

 

169

 

146

 

331

 

294

 

Corporate

 

346

 

226

 

603

 

371

 

Investment Management

 

2

 

8

 

(1

)

4

 

Total EMEA

 

517

 

380

 

933

 

669

 

 

 

 

 

 

 

 

 

 

 

Japan

 

 

 

 

 

 

 

 

 

Consumer

 

179

 

256

 

337

 

483

 

Corporate

 

5

 

(3

)

37

 

20

 

Investment Management

 

20

 

16

 

37

 

31

 

Total Japan

 

204

 

269

 

411

 

534

 

 

 

 

 

 

 

 

 

 

 

Asia (excluding Japan)

 

 

 

 

 

 

 

 

 

Consumer

 

204

 

163

 

397

 

321

 

Corporate

 

188

 

200

 

367

 

393

 

Investment Management

 

37

 

28

 

67

 

55

 

Total Asia

 

429

 

391

 

831

 

769

 

 

 

 

 

 

 

 

 

 

 

Latin America

 

 

 

 

 

 

 

 

 

Consumer

 

8

 

(30

)

30

 

(130

)

Corporate

 

165

 

183

 

337

 

79

 

Investment Management

 

5

 

31

 

11

 

17

 

Total Latin America

 

178

 

184

 

378

 

(34

)

 

 

 

 

 

 

 

 

 

 

Proprietary Investment Activities

 

27

 

(70

)

27

 

(35

)

Corporate/Other

 

25

 

41

 

(72

)

(27

)

 

 

 

 

 

 

 

 

 

 

Income from Continuing Operations

 

4,299

 

3,829

 

8,402

 

7,313

 

 

 

 

 

 

 

 

 

 

 

Income from Discontinued Operations (3)

 

 

255

 

 

1,661

 

Cumulative Effect of Accounting Change (4)

 

 

 

 

(47

)

Net Income

 

$

4,299

 

$

4,084

 

$

8,402

 

$

8,927

 

 


(1)          Reclassified to conform to the current period’s presentation.

(2)          Excludes Proprietary Investment Activities and Corporate/Other.

(3)          See Note 4 to the Consolidated Financial Statements.

(4)          See Note 2 to the Consolidated Financial Statements.

 

7



 

Results of Operations

 

Income and Earnings Per Share

 

Citigroup reported income from continuing operations of $4.299 billion or $0.83 per diluted share in the 2003 second quarter, up 12% and 14% from $3.829 billion or $0.73 in the 2002 second quarter.

 

Net income in the 2003 second quarter of $4.299 billion or $0.83 per diluted share was up 5% and 6% from $4.084 billion or $0.78 per diluted share in the 2002 second quarter.  Net income in the 2002 second quarter included income from discontinued operations relating to Travelers Property Casualty (TPC) of $255 million (see Note 4 to the Consolidated Financial Statements).  Return on average common equity was 19.2% compared to 19.5% a year ago.

 

Income from continuing operations for the 2003 six months of $8.402 billion or $1.62 per diluted share was up 15% and 16% from $7.313 billion or $1.40 per diluted share in the 2002 six months.  Net income in the 2002 six months included an after-tax gain of $1.061 billion from the initial public offering of TPC’s stock, $600 million (after-tax) in income from discontinued operations from TPC and an after-tax charge of $47 million, reflecting the cumulative effect of adopting an accounting change (as described in Notes 2 and 4 to the Consolidated Financial Statements). Return on average common equity was 19.2% and 21.7% in the six months of 2003 and 2002, respectively.

 

Global Consumer net income increased $348 million or 18% and $775 million or 21% in the 2003 second quarter and six months compared to the 2002 periods.  Global Corporate and Investment Bank (GCIB) increased $22 million or 2% and $296 million or 12% in the 2003 second quarter and six months compared to the 2002 periods.  Private Client Services income declined $42 million or 19% in the 2003 second quarter and declined $102 million or 23% from the year-ago six-month period.  Global Investment Management grew $61 million or 16% and $103 million or 13% from the respective 2002 periods, while Proprietary Investment Activities increased $97 million and $62 million from the 2002 second quarter and six-month periods.

 

See individual segment and product discussions on pages 15 – 33 for additional discussion and analysis of the Company’s results of operations.

 

Revenues, Net of Interest Expense

 

Total revenues, net of interest expense, of $19.4 billion and $37.9 billion in the 2003 second quarter and six months were up $1.4 billion or 8% and $2.1 billion or 6%, respectively, from the 2002 periods. Global Consumer revenues were up $861 million or 9% in the 2003 second quarter to $10.1 billion, and were up $1.7 billion or 10% in the 2003 six months to $20.0 billion.  Increases in Retail Banking revenues of $834 million or 24% and $1.3 billion or 18% from the 2002 second quarter and six months, respectively, were driven by the results of Golden State Bancorp (GSB) as well as increases in most regions.  Compared to the 2002 periods, Cards was up $102 million or 3% in the 2003 second quarter and $314 million or 5% in the 2003 six months, while Consumer Finance revenue declined $18 million or 1% in the 2003 second quarter primarily due to declines in Japan, and was up $182 million or 4% in the 2003 six months.

 

Compared to the 2002 periods, GCIB revenues were up $352 million or 7% to $5.4 billion in the 2003 second quarter and were up $299 million or 3% in the 2003 six months, driven by Capital Markets and Banking, up $312 million or 7% and $114 million or 1% in the 2003 second quarter and six-month periods.  Capital Markets and Banking growth in the 2003 second quarter reflected increases in Fixed Income.

 

Global Investment Management revenues of $2.1 billion in the 2003 second quarter and $4.1 billion in the 2003 six months were up $157 million or 8% and $240 million or 6% from the comparable 2002 periods, primarily due to growth in asset-based fee revenues and the impact of acquisitions.  Private Client Services revenues were down $102 million or 7% in the 2003 second quarter and were down $282 million or 9% in the six-month comparison primarily reflecting lower fee revenue and lower transaction volumes.  Revenues in Proprietary Investment Activities increased $217 million and $200 million from the 2002 second quarter and six months, respectively, primarily reflecting higher net recognized gains and lower impairment write-downs.

 

Selected Revenue Items

 

Net interest revenue rose $210 million or 2% from the 2002 second quarter to $9.6 billion and increased $645 million or 3% from the 2002 six months to $19.3 billion, reflecting increases in fixed income trading and investment positions, acquisitions, the impact of a changing rate environment and business volume growth.

 

Total commissions and asset management and administration fees of $5.4 billion were down $79 million or 1% from the 2002 second quarter, primarily as a result of decreases in volumes.  Insurance premiums of $839 million and $1.7 billion in the 2003 second quarter and six months were down $92 million or 10%, and $47 million or 3%, respectively, from the 2002 periods.

 

8



 

Principal transactions revenues of $1.3 billion and $2.9 billion for the 2003 second quarter and six months were up $41 million or 3% from the 2002 second quarter and $30 million or 1% from the 2002 six-month period attributable to strong fixed income underwriting.

 

Realized gains from sales of investments were up $378 million from the 2002 second quarter and $510 million from the 2002 six months, primarily resulting from the absence of losses from WorldCom in the prior-year periods and gains on the Company’s insurance investment portfolio.  Other revenue of $2.0 billion in the 2003 second quarter and $3.3 billion for the 2003 six months increased $903 million from the year-ago quarter and was up $1.3 billion from the 2002 six months, primarily reflecting higher venture capital activity and higher securitization gains and activity, partially offset by increased credit losses on securitized credit card receivables.

 

Operating Expenses

 

Operating expenses of $10.0 billion and $19.5 billion in the 2003 second quarter and six months, respectively, were up $824 million or 9% in the 2003 second quarter and were up $1.3 billion or 7% in the 2003 six months, compared to year-ago levels.  The increase primarily reflects the addition of GSB, severance costs, costs associated with the repositioning of our Latin America business, higher legal and pension costs, the additional cost of expensing stock options and an increase in the amortization of deferred acquisition costs in Life Insurance and Annuities.

 

Global Consumer expenses in the 2003 second quarter and six months were both up 11%.  GCIB expenses were up 13% in the quarter and were up 8% in the six months while Global Investment Management expenses were up 13% and 10% from the year-ago periods.  Private Client Services expenses were down 4% in the 2003 second quarter and were down 6% in the six month period.

 

Benefits, Claims, and Credit Losses

 

Benefits, claims, and credit losses were $3.1 billion and $6.0 billion in the 2003 second quarter and six months, up $105 million and down $333 million from the 2002 second quarter and six months, respectively.  Policyholder benefits and claims in the 2003 second quarter decreased 3% from the 2002 second quarter to $901 million, and were up 3% to $1.8 billion in the 2003 six months, primarily as a result of increases in Life Insurance and Annuities.  The provision for credit losses increased 6% from the 2002 second quarter to $2.2 billion in the 2003 second quarter and decreased 8% from the 2002 six months to $4.2 billion in the 2003 six months.

 

Global Consumer provisions for benefits, claims, and credit losses of $2.1 billion in the 2003 second quarter were up 4% from the 2002 second quarter, reflecting increases in Consumer Finance.  Total net credit losses were $1.745 billion and the related loss ratio (excluding Commercial Markets) was 2.42% in the 2003 second quarter, as compared to $1.707 billion and 2.38% in the preceding quarter and $1.655 billion and 2.72% in the year-ago quarter.  The consumer loan delinquency ratio (90 days or more past due) increased to 2.41% at June 30, 2003 from 2.40% at March 31, 2003 and decreased from 2.53% a year ago.  See page 38 for a reconciliation of total consumer credit information.

 

The GCIB provision for credit losses of $298 million in the 2003 second quarter increased $33 million or 12% while the six-month provision decreased $419 million or 50% from year-ago levels.  The decrease was primarily due to provisions for Argentina and exposures in the telecommunications industry recorded during the 2002 first quarter.

 

Corporate cash-basis loans at June 30, 2003 and 2002 were $4.204 billion and $3.840 billion, respectively, while the corporate Other Real Estate Owned (OREO) portfolio totaled $89 million and $136 million, respectively.  The increase in cash-basis loans from the 2002 second quarter was primarily attributable to borrowers in the power and energy industry, as well as corporate borrowers in Brazil, Hong Kong, Australia, Singapore and Mexico.  Corporate cash-basis loans at June 30, 2003 increased $122 million from March 31, 2003 primarily due to exposures in the power and energy industry, as well as corporate borrowers in Singapore, Australia and Brazil.  The decrease in OREO from the 2002 second quarter was primarily due to continued improvements in the North America real estate portfolio.

 

Income Taxes

 

The Company’s effective tax rate of 31.1% in the 2003 second quarter declined 330 basis points from 34.4% in the 2002 second quarter.  The decline primarily represented benefits for not providing U.S. income taxes for the earnings of certain foreign subsidiaries and a $94 million release of a tax reserve related to a settlement with tax authorities which increased income in Japan.

 

Capital

 

Total capital (Tier 1 and Tier 2) was $84.8 billion or 11.94% of net risk-adjusted assets, and Tier 1 capital was $64.1 billion or 9.02% at June 30, 2003, compared to $78.3 billion or 11.25% and $59.0 billion or 8.47%, respectively, at December 31, 2002.

 

9



 

EVENTS IN 2002 and 2003

 

Acquisition of Sears’ Credit Card Business

 

On July 15, 2003, Citigroup announced that it will acquire Sears’ $29 billion Credit Card business (the 8th largest portfolio in the U.S.) of private label and bankcard credit card receivables in a transaction in which Citigroup will pay a 10% premium or approximately $3 billion at closing.  The acquisition will also include Sears’ Financial Products business and credit card facilities with approximately 8,300 employees (5,800 full-time employees).  In addition, the companies signed a multi-year marketing and servicing agreement across a range of each company’s businesses, products and services.  The transaction is expected to close by year-end, subject to applicable regulatory approvals.

 

Common Dividend Increase and Dividend Reinvestment Plan

 

On July 14, 2003, the Company’s Board of Directors approved a 75% increase in the quarterly dividend on the Company’s common stock to 35 cents a share from 20 cents a share. The increase in the quarterly dividend is part of an effort to reallocate capital to dividends and reduce share repurchases.  Additionally, the Company’s Board of Directors approved a Dividend Reinvestment Plan (the “Plan”) for holders of Citigroup common stock.  Registered holders of Citigroup common stock may elect to participate in the Plan and have some or all of their dividends reinvested in Citigroup common stock.

 

Settlement of Certain Legal and Regulatory Matters

 

On July 28, 2003, Citigroup entered into a final settlement agreement with the Securities and Exchange Commission (SEC) to resolve the SEC's outstanding investigations into Citigroup transactions with Enron and Dynegy.  Pursuant to the settlement, Citigroup has, among other terms, (1) consented to the entry of an administrative cease and desist order, which bars Citigroup from committing or causing violations of provisions of the federal securities laws, and (2) agreed to pay $120 million ($101.25 million allocable to Enron and $18.75 million allocable to Dynegy). Citigroup entered into this settlement without admitting or denying any wrongdoing or liability, and the settlement does not establish wrongdoing or liability for purposes of any other proceeding.  On July 28, 2003, Citibank, N.A. entered into an agreement with the Office of the Comptroller of the Currency (OCC) and Citigroup entered into an agreement with the Federal Reserve Bank of New York (FED) to resolve their inquiries into certain of Citigroup’s transactions with Enron.  Pursuant to the agreements, Citibank and Citigroup have agreed to submit plans to the OCC and FED, respectively, regarding the handling of complex structured finance transactions.  Also on July 28, 2003, Citigroup entered into a settlement agreement with the Manhattan District Attorney’s Office to resolve its investigation into certain of Citigroup’s transactions with Enron; pursuant to the settlement, Citigroup has agreed to pay $25.5 million and to abide by its agreements with the SEC, OCC and FED.  The Company had previously established a reserve for the cost of these settlements.

 

On April 28, 2003, Salomon Smith Barney Inc., now named Citigroup Global Markets Inc. (CGMI), announced final agreements with the SEC, the National Association of Securities Dealers (NASD), the New York Stock Exchange (NYSE) and the New York Attorney General (as lead state among the 50 states, the District of Columbia and Puerto Rico) to resolve on a civil basis all of their outstanding investigations into its research and IPO allocation and distribution practices (the Research Settlement).  Consistent with the settlement-in-principle announced in December 2002, CGMI will pay $300 million for retrospective relief, plus $25 million for investor education, and has committed to spend $75 million to provide independent third-party research to its clients at no charge. CGMI will also adopt new policies and procedures to further ensure the independence of its research and address other issues identified in the course of the investigation. CGMI reached these final settlement agreements without admitting or denying any wrongdoing or liability. The Research Settlement does not establish wrongdoing or liability for purposes of any other proceeding. The Company established a reserve for the cost of this settlement during the 2002 fourth quarter.

 

In April 2003, to effectuate the Research Settlement, the SEC filed a Complaint and Final Judgment in the United States District Court for the Southern District of New York.  The Final Judgment has not yet been entered by the court, and the court has asked for certain additional information.  Also in April 2003, the NASD accepted the Letter of Acceptance, Waiver and Consent entered into with CGMI in connection with the Research Settlement; and in May 2003, the NYSE advised CGMI that the Hearing Panel’s Decision, in which it accepted the Research Settlement, had become final.  CGMI is currently in discussion with various of the states with respect to completion of the state components of the Research Settlement.  Payment will be made in conformance with the payment provisions of the Final Judgment.

 

10



 

Impact from Argentina’s Economic Changes

 

Throughout 2002, Argentina experienced significant political and economic changes including severe recessionary conditions, high inflation and political uncertainty.  The government of Argentina implemented substantial economic changes, including abandoning the country’s fixed U.S. dollar-to-peso exchange rate, and asymmetrically redenominating substantially all of the banking industry’s loans, deposits (which were also restricted) and other assets and liabilities previously denominated in U.S. dollars into pesos at different rates.  As a result of the impact of these government actions, the Company changed its functional currency in Argentina from the U.S. dollar to the Argentine peso during the 2002 first quarter.  Additionally, the government issued certain compensation instruments to financial institutions to compensate them in part for losses incurred as a result of the redenomination events.  The government also announced a 180-day moratorium against creditors filing foreclosures or bankruptcy proceedings against borrowers.  Later in the year, the government modified the terms of certain of their Patriotic Bonds, making them less valuable.  The government actions, combined with the severe recessionary economic situation and the devaluation of the peso, adversely impacted Citigroup’s business in Argentina.

 

During the full year of 2002, Citigroup recorded a total of $1.704 billion in net pretax charges, as follows: $1.018 billion in net provisions for credit losses; $284 million in investment write-downs; $232 million in losses relating to Amparos (representing judicial orders requiring previously dollar-denominated deposits and insurance contracts that had been redenominated at government rates to be immediately repaid at market exchange rates); $98 million of write-downs of Patriotic Bonds; a $42 million restructuring charge; and a $30 million net charge for currency redenomination and other foreign currency items that includes a benefit from compensation instruments issued in 2002.

 

Of these charges, Citigroup recorded a total of $84 million in pretax charges in the 2002 second quarter and $942 million (pretax) in the 2002 six-month period.

 

In addition, the impact of the devaluation of the peso during 2002 produced foreign currency translation losses that reduced Citigroup’s equity by $595 million, net of tax, during 2002, including $512 million, net of tax, during the 2002 first quarter and an additional $77 million, net of tax, in the 2002 second quarter.

 

The Argentina Supreme Court has determined that the 2002 redenomination of certain bank deposits of the Province of San Luis with Banco de la Nacion Argentina from dollars to pesos was unconstitutional.  The parties to that litigation did not reach an agreement on the timing and manner of the repayment of the referred deposits within the timeframe set forth by the Supreme Court in its ruling, therefore, the Supreme Court is to decide the terms and conditions of such repayment.  In the opinion of the Company’s management, the ultimate resolution of the redenomination would not be likely to have a material adverse effect on the consolidated financial condition of the Company, but may be material to the Company’s operating results for any particular period.  Following this decision, on April 1, 2003, the government issued a regulation providing for a voluntary election on the part of depositors with reprogrammed/ restricted balances to receive their peso deposits, including indexation, from their respective banks, as well as a ten-year bond issued directly by the government (the April 2003 Plan).  During the election period, which expired on May 23, 2003, 41% of Citigroup’s eligible deposit liabilities in Argentina elected to redeem their deposits under the terms of the April 2003 Plan.  The redemption of deposits was effected with no significant impact on the Company’s net income or liquidity.  Additional costs to the Company will depend on future actions or decisions by the Argentine government or judiciary.  Further, any voluntary actions the Company might undertake, such as the settlement of reprogrammed deposits completed in January 2003, could mitigate such cost.

 

The Company believes it has a sound basis to bring a claim, as a result of various actions of the Argentine government.  A recovery on such a claim could serve to reduce the economic loss of the Company in Argentina.

 

As the economic situation as well as legal and regulatory issues in Argentina remain fluid, we continue to work with the government and our customers and continue to monitor conditions closely.  Additional losses may be incurred.  In particular, we continue to monitor the potential additional impact that the continued economic crisis may have on our corporate borrowers, as well as the impact on consumer deposits and insurance liabilities of potential government actions, including re-dollarization.  Another item we continue to monitor is the realizability of government obligations such as the compensation instruments.  The initial principal payment of approximately $70 million under certain compensation instruments issued to the Company is due in August 2003.

 

On July 3, 2003, an insurance subsidiary of the Company that issues annuities obtained approval from the Argentine Ministry of Insurance to offer a restructuring plan for its voluntary annuity holders.  The plan offers three alternatives, from which its customers will be able to elect during the third quarter of 2003.  The alternatives are settlement with local currency, a Company-issued U.S. dollar obligation with a maturity of up to 10 years or a government bond.  Once the annuitants have made an election, the Company will be able to evaluate the impact this restructuring plan will have on its financial results.

 

The above paragraphs contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act.  See “Forward-Looking Statements” on page 34.

 

11



 

Initial Public Offering and Tax-Free Distribution of Travelers Property Casualty Corp.

 

Travelers Property Casualty Corp. (TPC) (an indirect wholly owned subsidiary of Citigroup on December 31, 2001) sold 231 million shares of its class A common stock representing approximately 23.1% of its outstanding equity securities in an initial public offering (the IPO) on March 27, 2002.  In 2002, Citigroup recognized an after-tax gain of $1.158 billion ($1.061 billion after-tax recognized in the 2002 first quarter and $97 million after-tax recognized in the 2002 third quarter) as a result of the IPO.

 

On August 20, 2002, Citigroup completed the distribution to its stockholders of a majority portion of its remaining ownership interest in TPC (the distribution). This non-cash distribution was tax-free to Citigroup, its stockholders and TPC.  The distribution was treated as a dividend to stockholders for accounting purposes that reduced Citigroup’s Additional Paid-In Capital by approximately $7.0 billion.  Following the distribution, Citigroup was a holder of approximately 9.9% of TPC’s outstanding equity securities which are carried at fair value in the Proprietary Investment Activities segment and classified as available-for-sale within Investments on the Consolidated Statement of Financial Position.

 

Following the August 20, 2002 distribution, the results of TPC were reported in the Company’s Statements of Income and Cash Flows separately as discontinued operations.  TPC represented the primary vehicle by which Citigroup engaged in the property and casualty insurance business.

 

Acquisition of Golden State Bancorp

 

On November 6, 2002, Citigroup completed its acquisition of 100% of Golden State Bancorp (GSB) in a transaction in which Citigroup paid approximately $2.3 billion in cash and issued 79.5 million Citigroup common shares.  The total transaction value of approximately $5.8 billion was based on the average prices of Citigroup shares, as adjusted for the effect of the TPC distribution, for the two trading days before and after May 21, 2002, the date the terms of the acquisition were agreed to and announced.

 

GSB was the parent company of California Federal Bank, the second-largest thrift in the U.S. and, through its First Nationwide Mortgage business, the eighth-largest mortgage servicer.

 

ACCOUNTING CHANGES IN 2003

 

Stock-Based Compensation

 

On January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), prospectively to all awards granted, modified, or settled after January 1, 2003.  The prospective method is one of the adoption methods provided for under SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” issued in December 2002.  SFAS 123 requires that compensation cost for all stock awards be calculated and recognized over the service period (generally equal to the vesting period). This compensation cost is determined using option pricing models, intended to estimate the fair value of the awards at the grant date.  Similar to Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” the alternative method of accounting, an offsetting increase to stockholders’ equity under SFAS 123 is recorded equal to the amount of compensation expense charged.  Earnings per share dilution is recognized as well.

 

Assuming a three-year vesting provision for options, the estimated impact of this change will be approximately $0.03 per diluted share in 2003 and, when fully phased in over three years, approximately $0.06 per diluted share annually. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act.  See “Forward-Looking Statements” on page 34.

 

Had the Company applied SFAS 123 in accounting for the Company’s stock option plans for all options granted, net income and net income per share would have been the pro forma amounts indicated below:

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

In millions of dollars, except per share amounts

 

 

 

2003

 

2002

 

2003

 

2002

 

Compensation expense related to stock option plans, net of tax

 

As reported

 

$

20

 

$

 

$

33

 

$

 

 

 

Pro forma

 

88

 

132

 

182

 

234

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

As reported

 

$

4,299

 

$

4,084

 

$

8,402

 

$

8,927

 

 

 

Pro forma

 

4,231

 

3,952

 

8,253

 

8,693

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

As reported

 

$

0.84

 

$

0.80

 

$

1.64

 

$

1.74

 

 

 

Pro forma

 

0.83

 

0.77

 

1.61

 

1.69

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

As reported

 

$

0.83

 

$

0.78

 

$

1.62

 

$

1.71

 

 

 

Pro forma

 

0.82

 

0.75

 

1.59

 

1.66

 

 

12



 

The Company has made changes to various stock-based compensation plan provisions for awards granted after 2002.  For example, the vesting period and the term of stock options granted after 2002 have been shortened to three and six years, respectively.  In addition, the sale of underlying shares acquired through the exercise of options granted in 2003 is restricted for a two-year period.  The Company continues its existing stock ownership commitment for senior executives which requires executives to retain at least 75% of the shares they own and acquire from the Company, subject to certain minimum ownership guidelines, over the term of their employment.  Original option grants in 2003 and thereafter will not have a reload feature; however, previously granted options retain that feature.  Other changes also may be made that may impact the SFAS 123 adoption estimates disclosed above.  This statement is a forward-looking statement within the meaning of the Private Securities Litigation Act.  See “Forward-Looking Statements” on page 34.

 

Costs Associated with Exit or Disposal Activities

 

On January 1, 2003, Citigroup adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146).  SFAS 146 requires that a liability for costs associated with exit or disposal activities, other than in a business combination, be recognized when the liability is incurred.  Previous generally accepted accounting principles provided for the recognition of such costs at the date of management’s commitment to an exit plan.  In addition, SFAS 146 requires that the liability be measured at fair value and be adjusted for changes in estimated cash flows.  The provisions of the new standard are effective for exit or disposal activities initiated after December 31, 2002.  The impact of adopting SFAS 146 was not material.

 

Consolidation of Variable Interest Entities

 

In January 2003, the Financial Accounting Standards Board (FASB) released FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46).  This interpretation changes the method of determining whether certain entities, including securitization entities, should be included in the Company’s Consolidated Financial Statements.  An entity is subject to FIN 46 and is called a variable interest entity (VIE) if it has (1) equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) equity investors that cannot make significant decisions about the entity’s operations, or that do not absorb the expected losses or receive the expected returns of the entity.  All other entities are evaluated for consolidation in accordance with SFAS No. 94, “Consolidation of All Majority-Owned Subsidiaries” (SFAS 94).  A VIE is consolidated by its primary beneficiary, which is the party involved with the VIE that has a majority of the expected losses or a majority of the expected residual returns or both.

 

The provisions of the interpretation are to be applied immediately to VIEs created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. For VIEs in which an enterprise holds a variable interest that it acquired before February 1, 2003, FIN 46 is applicable beginning July 1, 2003.  For any VIEs that must be consolidated under FIN 46, the assets, liabilities and noncontrolling interest of the VIE would be initially measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change.  If determining the carrying amounts is not practicable, fair value at the date FIN 46 first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE.

 

The Company is evaluating the impact of applying FIN 46 to existing VIEs in which it has variable interests and has not yet completed this analysis.  The Company previously reported that the implementation of FIN 46 could increase both assets and liabilities by $55 billion.  However, the Company has since restructured certain VIEs that enables them to meet the criteria for non-consolidation.  At this time, it is anticipated that the effect on the Company’s Consolidated Statement of Financial Position could be an increase of approximately $5 billion to both assets and liabilities.  As we continue to evaluate the impact of applying FIN 46, additional entities may be identified that would need to be consolidated by the Company.  This paragraph contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act.  See “Forward-Looking Statements” on page 34.

 

Guarantees and Indemnifications

 

On January 1, 2003, the Company adopted the recognition and measurement provisions of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45), which requires that, for guarantees within the scope of FIN 45 issued or amended after December 31, 2002, a liability for the fair value of the obligation undertaken in issuing the guarantee be recognized.  The impact of adopting FIN 45 was not material.

 

Derivative Instruments and Hedging Activities

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS 149).  SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133.  In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows.  This Statement is generally effective for contracts entered into or modified after June 30, 2003 and is not expected to have a material impact on the Company’s financial statements.

 

13



 

This statement is a forward-looking statement within the meaning of the Private Securities Litigation Act.  See “Forward-Looking Statements” on page 34.

 

Liabilities and Equity

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (SFAS 150).  SFAS 150 establishes standards for how an issuer measures certain financial instruments with characteristics of both liabilities and equity and classifies them in its statement of financial position.  It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) when that financial instrument embodies an obligation of the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, and is not expected to have a material impact on the Company’s financial statements.  This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act.  See “Forward-Looking Statements” on page 34.

 

Accounting Changes in 2002

 

Business Combinations, Goodwill and Other Intangible Assets

 

Effective July 1, 2001, the Company adopted the provisions of SFAS No. 141, “Business Combinations” (SFAS 141) and certain provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), as required for goodwill and indefinite-lived intangible assets resulting from business combinations consummated after June 30, 2001.  The new rules require that all business combinations consummated after June 30, 2001 be accounted for under the purchase method.  The nonamortization provisions of the new rules affecting goodwill and intangible assets deemed to have indefinite lives are effective for all purchase business combinations completed after June 30, 2001.

 

On January 1, 2002, Citigroup adopted the remaining provisions of SFAS No. 142, when the rules became effective for calendar year companies.  Under the new rules, effective January 1, 2002, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests.  Other intangible assets will continue to be amortized over their useful lives.  The adoption resulted in a cumulative adjustment of $47 million (after-tax) reported as a charge to earnings related to the impairment of certain intangible assets.

 

Impairment or Disposal of Long-Lived Assets

 

On January 1, 2002, Citigroup adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), when the rule became effective for calendar year companies.  SFAS 144 establishes additional criteria as compared to existing generally accepted accounting principles to determine when a long-lived asset is held-for-sale.  It also broadens the definition of “discontinued operations,” but does not allow for the accrual of future operating losses, as was previously permitted.  The impact of adopting SFAS 144 was not material.

 

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 four 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 and Argentina.  The Company, in consultation with the Audit Committee, has reviewed and approved these significant accounting policies, which are further described in the Company’s 2002 Annual Report on Form 10-K.


The net income line in the following business segments and operating unit discussions excludes the cumulative effect of accounting change and income from discontinued operations.  The cumulative effect of accounting change and income from discontinued operations is disclosed within the Corporate/Other business segment.  See Notes 2 and 4 to the Consolidated Financial Statements.  Certain amounts in prior periods have been reclassified to conform to the current period’s presentation.


14



 

GLOBAL CONSUMER

 

 

 

Three Months Ended June 30,

 

%
Change

 

Six Months Ended June 30,

 

%
Change

 

In millions of dollars

 

2003

 

2002

 

 

2003

 

2002

 

 

Revenues, net of interest expense

 

$

10,060

 

$

9,199

 

9

 

$

19,967

 

$

18,225

 

10

 

Operating expenses

 

4,664

 

4,197

 

11

 

9,180

 

8,304

 

11

 

Provisions for benefits, claims, and credit losses

 

2,064

 

1,989

 

4

 

4,187

 

4,171

 

 

Income before taxes and minority interest

 

3,332

 

3,013

 

11

 

6,600

 

5,750

 

15

 

Income taxes

 

1,026

 

1,058

 

(3

)

2,097

 

2,034

 

3

 

Minority interest, after-tax

 

12

 

9

 

33

 

31

 

19

 

63

 

Net income

 

$

2,294

 

$

1,946

 

18

 

$

4,472

 

$

3,697

 

21

 

 

Global Consumer – which provides banking, lending, including credit and charge cards, and investment and personal insurance products and services to customers around the world — reported net income of $2.294 billion and $4.472 billion in the 2003 second quarter and six months, up $348 million or 18% and $775 million or 21% from the comparable 2002 periods, driven by growth in Retail Banking and Cards that was partially offset by a decline in Consumer FinanceRetail Banking net income increased $404 million or 63% in the 2003 second quarter and $716 million or 55% in the 2003 six months from the prior-year periods, reflecting the impact of the Golden State Bancorp (GSB) acquisition, organic revenue growth and improved credit costs.  Cards net income increased $46 million or 6% in the 2003 second quarter and $202 million or 16% in the 2003 six months from the 2002 periods primarily reflecting increases in North America.  Consumer Finance net income of $508 million and $993 million in the 2003 second quarter and six months declined $60 million or 11% and $105 million or 10% from the 2002 periods, as the addition of the GSB auto finance business was more than offset by continued weakness in Japan.

 

Global Consumer Net Income – Regional View

 

 

 

Three Months Ended June 30,

 

%
Change

 

Six Months Ended June 30,

 

%
Change

 

In millions of dollars

 

2003

 

2002

 

 

2003

 

2002

 

 

North America (excluding Mexico)

 

$

1,520

 

$

1,297

 

17

 

$

2,999

 

$

2,569

 

17

 

Mexico

 

214

 

114

 

88

 

378

 

160

 

NM

 

EMEA

 

169

 

146

 

16

 

331

 

294

 

13

 

Japan

 

179

 

256

 

(30

)

337

 

483

 

(30

)

Asia (excluding Japan)

 

204

 

163

 

25

 

397

 

321

 

24

 

Latin America

 

8

 

(30

)

NM

 

30

 

(130

)

NM

 

Total Net Income

 

$

2,294

 

$

1,946

 

18

 

$

4,472

 

$

3,697

 

21

 

 


NM   Not meaningful

 

Growth in Global Consumer in the 2003 second quarter and six months reflected increases in all regions except Japan.  Net income in North America (excluding Mexico) grew 17% in both the 2003 second quarter and six months, respectively, driven by the acquisition of GSB and growth in Retail Banking and Cards.  Mexico contributed growth of $100 million and $218 million in the 2003 second quarter and six months, respectively, mainly reflecting volume and spread improvements combined with a lower provision for credit losses.  EMEA experienced growth of 16% in the 2003 second quarter and 13% in the six-month period, mainly reflecting the strengthening of the Euro combined with higher business volumes in all products.  A decline in Japan of 30% in both the 2003 second quarter and six-month periods primarily reflected the impact of lower volumes and spreads and increased credit losses in Consumer Finance that were partially offset, in the six month comparison, by the acquisitions of Taihei and Marufuku. In addition, the 2003 second quarter results in Japan included a $94 million release of a tax reserve resulting from a settlement with tax authorities.  The increase in Latin America in the 2003 second quarter and six months was mainly due to Argentina and reflected the absence of charges taken in the 2002 periods, partially offset by costs in the 2003 second quarter attributable to business repositioning across the region.

 

15



 

Cards

 

 

 

Three Months Ended June 30,

 

%
Change

 

Six Months Ended June 30,

 

%
Change

 

In millions of dollars

 

2003

 

2002

 

 

2003

 

2002

 

 

Revenues, net of interest expense

 

$

3,309

 

$

3,207

 

3

 

$

6,642

 

$

6,328

 

5

 

Operating expenses

 

1,463

 

1,381

 

6

 

2,909

 

2,708

 

7

 

Provision for credit losses

 

678

 

729

 

(7

)

1,452

 

1,626

 

(11

)

Income before taxes and minority interest

 

1,168

 

1,097

 

6

 

2,281

 

1,994

 

14

 

Income taxes

 

399

 

375

 

6

 

776

 

693

 

12

 

Minority interest, after-tax

 

1

 

 

 

2

 

 

 

Net income

 

$

768

 

$

722

 

6

 

$

1,503

 

$

1,301

 

16

 

Average assets (in billions of dollars)

 

$

62

 

$

60

 

 

 

$

65

 

$

59

 

 

 

Return on assets

 

4.97

%

4.83

%

 

 

4.66

%

4.45

%

 

 

 

Cards – which includes bankcards, private-label cards and charge cards in 47 countries around the world - reported net income of $768 million and $1.503 billion in the 2003 second quarter and six months, respectively, up $46 million or 6% and $202 million or 16% from the 2002 periods, led by North America, which benefited from revenue growth that was driven by increases in average managed receivables.  International Cards income declined $8 million or 7% compared to the prior-year quarter and increased $70 million or 50% compared to the 2002 six months, both reflecting changes in the allowance for credit losses related to Argentina in the 2002 periods.

 

As shown in the following table, average managed loans grew 5% and 6% in the 2003 second quarter and six months, respectively, reflecting growth of 4% and 6% in North America and 12% and 13% in International Cards.  Growth in North America was led by Citi Cards, reflecting a higher level of promotional rate balances and new product launches.  Average loan growth in the 2003 second quarter was negatively impacted by a change in acquisition marketing strategies which resulted in a decline in promotional rate balances compared to the prior quarter.  Growth in International Cards reflected increases in EMEA, driven by the U.K., and in Asia, led by Korea and Malaysia.  The growth in International Cards also included the benefit of strengthening currencies and was partially offset by a decline in Latin America, which reflected lower loan volumes across the region.  Sales in North America declined 4% in the 2003 second quarter, reflecting the change in acquisition marketing strategies partially offset by an increase in sales per active account.  International Cards sales grew 10% from the prior-year quarter, reflecting strong growth in EMEA, which benefited from marketing and expansion efforts. In Asia, sales were up 2% as growth across the region was partially offset by the effect of Severe Acute Respiratory Syndrome (SARS), impacting mostly Hong Kong and Taiwan.

 

 

 

Three Months Ended June 30,

 

%
Change

 

Six Months Ended June 30,

 

%
Change

 

In billions of dollars

 

2003

 

2002

 

 

2003

 

2002

 

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

59.7

 

$

61.9

 

(4

)

$

116.8

 

$

116.8

 

 

International

 

9.0

 

8.2

 

10

 

17.6

 

15.6

 

13

 

Total Sales

 

$

68.7

 

$

70.1

 

(2

)

$

134.4

 

$

132.4

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average managed loans

 

 

 

 

 

 

 

 

 

 

 

 

 

North America (1)

 

$

112.7

 

$

108.0

 

4

 

$

114.0

 

$

107.8

 

6

 

International

 

11.8

 

10.5

 

12

 

11.7

 

10.4

 

13

 

Total average managed loans (1)

 

$

124.5

 

$

118.5

 

5

 

$

125.7

 

$

118.2

 

6

 

Securitized receivables

 

(71.1

)

(65.2

)

9

 

(69.4

)

(66.0

)

5

 

Loans held-for-sale

 

(3.0

)

(6.5

)

(54

)

(4.1

)

(6.5

)

(37

)

On-balance sheet loans

 

$

50.4

 

$

46.8

 

8

 

$

52.2

 

$

45.7

 

14

 

 


(1)          Although a managed basis presentation is not in conformity with GAAP, the Company believes it provides a representation of performance and key indicators of the credit card business that is consistent with the way management reviews operating performance and allocates resources.  Furthermore, investors utilize information about the credit quality of the entire managed portfolio as the results of both the held and securitized portfolios impact the overall performance of the Cards business.

 

Revenues, net of interest expense, of $3.309 billion and $6.642 billion in the 2003 second quarter and six months rose $102 million or 3% and $314 million or 5% from the 2002 periods, primarily reflecting growth in North America, EMEA and Asia.  Revenue growth in North America was primarily due to the benefit of receivable growth and increased cardholder services fees and was partially offset by lower spreads.  Managed net interest revenue as a percent of average managed loans in North America of 10.27% declined 19 bps from the prior-year quarter, as lower cost of funds was more than offset by the impact of increased promotional rate balances.  Citi Cards revenues in the 2003 second quarter included gains from the sale of $1.7 billion in non-strategic portfolios.  In addition, Citi Cards revenues included net gains of $69 million and $215 million, in the 2003 second quarter and six months, respectively, as a result of changes in estimates in the timing of revenue recognition on securitizations while prior-year revenues included $94 million and $115 million, in the quarter and six months, respectively, resulting from an increase in the amortization period for certain direct loan origination costs.  Increases in EMEA and Asia were driven by growth in receivables and sales combined with the benefit of foreign currency translation.

 

16



 

Operating expenses of $1.463 billion and $2.909 billion in the 2003 second quarter and six months, respectively, increased $82 million or 6% and $201 million or 7% from the prior-year periods. In North America, expenses increased 8% in both the 2003 second quarter and six months, respectively, driven by increased advertising expenditures and on-going business initiatives, including costs associated with the anticipated third quarter addition of the Home Depot private label card portfolio as well as the absence of a $19 million restructuring reserve release in the prior year.  In International Cards, expenses were unchanged in the quarter and up 5% in the six months as disciplined expense management was offset by the impact of foreign currency translation and, in the six-month comparison, investments to support business growth, including costs associated with the consolidation of certain back office operations in Europe.

 

The provision for credit losses in the 2003 second quarter and six months was $678 million and $1.452 billion, respectively, compared to $729 million and $1.626 billion in the 2002 periods. In the prior year, the provision for credit losses included a $117 million addition to the allowance for credit losses in the 2002 first quarter resulting from deteriorating credit in Argentina that was partially offset by a $31 million release in the 2002 second quarter resulting from a decline in the Argentine loan portfolio.  Excluding the prior year amounts related to Argentina, the decline in the provision for credit losses reflected credit improvement in North America and in the international markets overall and an increase in the level of securitized receivables, partially offset by the impact of higher loss rates in the U.K. and Korea.  Net credit losses in the 2003 second quarter were $679 million with a related loss ratio of 5.41%, compared to $730 million and 5.49% for the 2003 first quarter and $760 million and 6.51% in the prior-year quarter.  Loans delinquent 90 days or more were $870 million or 1.80% of loans at June 30, 2003, compared to $932 million or 1.81% at March 31, 2003 and $925 million or 1.87% at June 30, 2002.

 

The securitization of credit card receivables is limited to the Citi Cards business within North America.  At June 30, 2003, securitized credit card receivables were $72.0 billion, compared to $65.8 billion at June 30, 2002.  Credit card receivables held-for-sale were $3.0 billion at June 30, 2003, compared to $6.5 billion a year ago.  Because securitization changes Citigroup’s role from that of a lender to that of a loan servicer, it removes the receivables from Citigroup’s balance sheet and affects the amount of revenue and the manner in which revenue and the provision for credit losses are classified in the income statement.  For securitized receivables and receivables held-for-sale, gains are recognized upon sale and amounts that would otherwise be reported as net interest revenue, fee and commission revenue, and credit losses on loans are instead reported as fee and commission revenue (for servicing fees) and other revenue (for the remaining revenue, net of credit losses and the amortization of previously recognized securitization gains).  Because credit losses are a component of these cash flows, revenues over the terms of these transactions may vary depending upon the credit performance of the securitized receivables.  For a further discussion of the securitization of credit card receivables, see page 48.

 

Including the effect of securitizations, managed net credit losses in the 2003 second quarter were $1.887 billion with a related loss ratio of 6.08%, compared to $1.832 billion and 5.86% in the 2003 first quarter and $1.841 billion and 6.23% in the 2002 second quarter.  The increase in the rate from the first quarter of 2003 was primarily due to higher bankruptcy losses, including the impact of seasonality in North America, while the decline from the prior-year quarter reflected improvement in both North America and the international markets, despite higher loss rates in the United Kingdom and Korea.  Loans delinquent 90 days or more on a managed basis were $2.313 billion or 1.88% at June 30, 2003, compared to $2.406 billion or 1.92% at March 31, 2003 and $2.260 billion or 1.86% at June 30, 2002.

 

Consumer Finance

 

 

 

Three Months Ended June 30,

 

%
Change

 

Six Months Ended June 30,

 

%
Change

 

In millions of dollars

 

2003

 

2002

 

 

2003

 

2002

 

 

Revenues, net of interest expense

 

$

2,431

 

$

2,449

 

(1

)

$

4,963

 

$

4,781

 

4

 

Operating expenses

 

835

 

789

 

6

 

1,700

 

1,544

 

10

 

Provisions for benefits, claims, and credit losses

 

957

 

775

 

23

 

1,887

 

1,525

 

24

 

Income before taxes

 

639

 

885

 

(28

)

1,376

 

1,712

 

(20

)

Income taxes

 

131

 

317

 

(59

)

383

 

614

 

(38

)

Net income

 

508

 

568

 

(11

)

993

 

1,098

 

(10

)

Average assets (in billions of dollars)

 

$

105

 

$

94

 

12

 

$

105

 

$

93

 

13

 

Return on assets

 

1.94

%

2.42

%

 

 

1.91

%

2.38

%

 

 

 

Consumer Finance – which provides community-based lending services through branch networks, regional sales offices and cross-selling initiatives with other Citigroup businesses – reported net income of $508 million and $993 million in the 2003 second quarter and six months, respectively, down $60 million or 11% and $105 million or 10% from the 2002 periods, principally reflecting a decline in International Consumer Finance resulting from continued weakness in Japan that was partially offset by the acquisition of GSB in North America. International results in the 2003 second quarter also included a $94 million release of a tax reserve related to a settlement with tax authorities which increased income in Japan.

 

17



 

 

 

Three Months Ended June 30,

 

%
Change

 

Six Months Ended June 30,

 

%
Change

 

In billions of dollars

 

2003

 

2002

 

 

2003

 

2002

 

 

Average loans

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate-secured loans

 

$

51.7

 

$

47.3

 

9

 

$

51.4

 

$

46.9

 

10

 

Personal

 

22.2

 

21.4

 

4

 

22.4

 

20.8

 

8

 

Auto

 

11.1

 

7.9

 

41

 

11.0

 

7.7

 

43

 

Sales finance and other

 

4.8

 

4.1

 

17

 

4.5

 

3.6

 

25

 

Total average loans

 

$

89.8

 

$

80.7

 

11

 

$

89.3

 

$

79.0

 

13

 

 

As shown in the preceding table, average loans grew 11% compared to the 2002 second quarter resulting from acquisitions, growth in real-estate secured loans, the impact of funding auto loan volumes internally and strengthening currencies in the international markets. Growth in real estate-secured loans mainly reflected the continued cross-selling of products through Primerica as well as portfolio acquisitions in North America and growth in the U.K. Average auto loans for the 2003 second quarter increased $3.2 billion or 41% from 2002, primarily resulting from the addition of $2.0 billion from the acquisition of GSB, as well as a shift in funding policy to fund business volumes internally. In Japan, average loans in the 2003 second quarter declined 3% from the prior-year quarter, as the benefit of foreign currency translation was offset by the impact of charge-offs, reduced loan demand and higher pay-downs.

 

As shown in the following table, the average net interest margin of 9.99% in the 2003 second quarter declined 83 basis points from the 2002 second quarter, reflecting compression in both North America and the international markets, particularly in Japan. In North America, the average net interest margin was 8.36% in the 2003 second quarter, decreasing 9 basis points from the prior-year quarter as the benefit of lower cost of funds was more than offset by lower yields, reflecting the lower interest rate environment and the continued shift to higher-quality credits. The average net interest margin for International Consumer Finance was 15.40% in the 2003 second quarter, declining 277 basis points from the prior-year quarter, primarily driven by Japan.  The compression of net interest margin in Japan reflected a decline in higher-yielding personal loans combined with a change in the treatment of adjustments and refunds of interest and continued high levels of non-performing loans.  Beginning in the second quarter of 2003, adjustments and refunds of interest charged to customer accounts are accounted for as reduction of net interest margin whereas, in prior periods, such amounts were treated as credit costs.  The net interest margin decline in Japan was offset, in part, by margin expansion in Europe which experienced increased yields as well as favorable funding.

 

 

 

Three Months Ended June 30,

 

%
Change

 

 

 

2003

 

2002

 

 

Average Net Interest Margin

 

 

 

 

 

 

 

North America

 

8.36

%

8.45

%

(9

)bps

International

 

15.40

%

18.17

%

(277

)bps

Total

 

9.99

%

10.82

%

(83

)bps

 

Revenues, net of interest expense, of $2.431 billion and $4.963 billion in the 2003 second quarter and six months, respectively, declined $18 million or 1% from the prior-year quarter and increased $182 million or 4% from the prior-year six months.  Revenue in North America increased 7% from both the second quarter and six months of 2002 and was primarily driven by growth in receivables that included the addition of the GSB auto portfolio, partially offset by declines in insurance revenue and net interest margin. Revenue in International Consumer finance declined $125 million or 13% and $34 million or 2% from the 2002 periods mainly due to lower volumes and spreads in Japan partially offset by growth in EMEA and Asia, the benefit of foreign currency translation and, in the six-month comparison, the impact of acquisitions in Japan.

 

Operating expenses of $835 million and $1.700 billion in the 2003 second quarter and six months, respectively, increased $46 million or 6% and $156 million or 10% from the prior-year periods. Operating expenses in North America increased $52 million or 11% and $98 million or 10%, respectively, from the prior-year periods, primarily due to increased volumes, including the acquisition of GSB, and increased credit and collection costs. Operating expenses for International Consumer Finance declined 2% from the prior-year quarter and increased 10% from the prior-year six months. The decline from the prior-year quarter reflected expense savings from branch closings and headcount reductions in Japan, partially offset by the impact of foreign currency translation, additional costs in Japan attributable to actions taken to restructure the business in response to the continued challenging business environment and, in the six-month comparison, the addition of Taihei and Marufuku.

 

The provisions for benefits, claims, and credit losses were $957 million in the 2003 second quarter, up from $930 million in the 2003 first quarter and $775 million in the prior-year second quarter primarily reflecting increases in the provision for credit losses in Japan, due to deteriorating credit conditions, and in North America, resulting from growth in the portfolio, including the impact of acquisitions. Net credit losses and the related loss ratio were $897 million and 4.01% in the 2003 second quarter, compared to $855 million and 3.91% in the 2003 first quarter and $724 million and 3.60% in the 2002 second quarter. In North America, the net credit loss ratio of 2.98% in the 2003 second quarter was down from 3.06% in the 2003 first quarter and 3.10% in the 2002 second quarter.  The net credit loss ratio for International Consumer Finance was 7.43% in the 2003 second quarter, up from 6.69% in the 2003 first quarter and 5.16% in the 2002 second quarter, primarily due to conditions in Japan, including increased bankruptcy losses and deteriorating credit quality.  The net credit loss ratio for International Consumer Finance in the 2003 second quarter was reduced by 62 basis points as a result of the change in treatment of adjustments and refunds as discussed above.  Loans delinquent 90 days or more

 

18



 

were $2.182 billion or 2.41% of loans at June 30, 2003, compared to $2.183 billion or 2.45% at March 31, 2003 and $2.166 billion or 2.62% a year ago. The decrease in the delinquency ratio versus the prior year and prior quarter was mainly due to improvements in North America.

 

In Japan, net credit losses and the related loss ratio are expected to increase from the 2003 second quarter as a result of economic conditions and credit performance of the unsecured loan portfolio, including increased bankruptcy filings. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See “Forward-Looking Statements” on page 34.

 

Retail Banking

 

 

 

Three Months Ended June 30,

 

%
Change

 

Six Months Ended June 30,

 

%
Change

 

In millions of dollars

 

2003

 

2002

 

 

2003

 

2002

 

 

Revenues, net of interest expense

 

$

4,243

 

$

3,409

 

24

 

$

8,204

 

$

6,932

 

18

 

Operating expenses

 

2,241

 

1,910

 

17

 

4,343

 

3,852

 

13

 

Provisions for benefits, claims, and credit losses

 

429

 

485

 

(12

)

848

 

1,020

 

(17

)

Income before taxes and minority interest

 

1,573

 

1,014

 

55

 

3,013

 

2,060

 

46

 

Income taxes

 

513

 

360

 

43

 

961

 

734

 

31

 

Minority interest, after-tax

 

11

 

9

 

22

 

29

 

19

 

53

 

Net income

 

$

1,049

 

$

645

 

63

 

$

2,023

 

$

1,307

 

55

 

Average assets (in billions of dollars)

 

$

230

 

$

179

 

28

 

$

229

 

$

178

 

29

 

Return on assets

 

1.83

%

1.45

%

 

 

1.78

%

1.48

%

 

 

 

Retail Banking — which delivers banking, lending, including leasing and equipment financing, investment and insurance services to customers through retail branches, electronic delivery systems and the network of Primerica independent agents — reported net income of $1.049 billion and $2.023 billion in the 2003 second quarter and six months, respectively, up $404 million or 63% and $716 million or 55% from the 2002 periods. The increase in Retail Banking was driven by growth in North America of $307 million or 67% and $543 million or 60% in the 2003 second quarter and six months, respectively, primarily due to the acquisition of GSB, organic revenue growth and improved credit costs. Net income in International Retail Banking increased $97 million or 52% and $173 million or 43% in the 2003 second quarter and six months, respectively, reflecting growth in Asia, as well as an increase in Latin America due to charges taken in the prior-year periods related to Argentina.

 

As shown in the following table, Retail Banking grew average loans and customer deposits compared to 2002. The growth in North America primarily reflected the acquisition of GSB, partially offset by the negative impact of foreign currency translation in Mexico and the run-off of non-core portfolios in CitiCapital. North America also experienced organic growth in customer deposits in Citibanking North America and in average loans in Consumer Assets, primarily due to increased mortgages and student loans. In the international markets, average customer deposits grew 7% from the prior-year quarter driven by the impact of foreign currency translation and growth in Japan. International Retail Banking average loans increased 2% from the prior-year quarter as the impact of foreign currency translation and growth in installment loans in Germany were partially offset by the 2002 third quarter sale of the mortgage portfolio in Japan. Growth in both loans and customer deposits was negatively impacted by volume declines in Latin America.

 

 

 

Three Months Ended June 30,

 

%
Change

 

Six Months Ended June 30,

 

%
Change

 

In billions of dollars

 

2003

 

2002

 

 

2003

 

2002

 

 

Average customer deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

112.9

 

$

87.4

 

29

 

$

112.4

 

$

88.4

 

27

 

International

 

84.3

 

79.1

 

7

 

82.9

 

78.1

 

6

 

Total average customer deposits

 

$

197.2

 

$

166.5

 

18

 

$

195.3

 

$

166.5

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average loans

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

122.1

 

$

91.4

 

34

 

$

123.4

 

$

91.6

 

35

 

International

 

35.6

 

34.8

 

2

 

35.2

 

34.3

 

3

 

Total average loans

 

$

157.7

 

$

126.2

 

25

 

$

158.6

 

$

125.9

 

26

 

 

Revenues, net of interest expense, of $4.243 billion and $8.204 billion in the 2003 second quarter and six months, respectively, increased $834 million or 24% and $1.272 billion or 18% from the 2002 periods. The growth in revenues reflected increases across all regions. Revenues in North America increased $534 million or 22% and $917 million or 19% in the 2003 second quarter and six months, respectively, driven by the acquisition of GSB and growth in Consumer Assets and Mexico. Excluding the acquisition of GSB, growth in North America, excluding Mexico, was driven by higher mortgage securitization income and the benefit of increased loan and deposit volumes, partially offset by lower net funding and positioning spreads in Citibanking North America and lower revenue in CitiCapital resulting from the run-off of non-core portfolios.  In Mexico, revenues benefited from revised estimates of reserves related to certain investments and increased deposit volumes and spreads and were negatively impacted by foreign currency

 

19



 

translation.  North America Retail Banking revenue also benefited from growth in Primerica, which experienced volume-related growth in insurance premiums.  International Retail Banking revenues increased $300 million or 32% and $355 million or 17% in the 2003 second quarter and six months, respectively, reflecting strengthening currencies, growth in Asia and EMEA, and improvement in Latin America. Excluding the impact of foreign currency translation, increased loan volumes, mainly in Germany, drove growth in EMEA, while Asia benefited from strong investment and insurance products sales.  The improvement in Latin America was due to events in Argentina including lower losses and reserves related to Amparos and government-mandated inflation indexed interest accruals. These improvements were partially offset in the six-month comparison by a benefit in the prior year resulting from a change in the allocation of re-denomination losses among products based on the pesification decree issued by the Argentine government in February 2002.

 

Operating expenses in the 2003 second quarter and six months increased $331 million or 17% and $491 million or 13%, respectively, from the comparable 2002 periods. In North America, growth of $243 million or 19% and $331 million or 12% from the 2002 second quarter and six months, respectively, was primarily due to the addition of GSB and volume-related increases in Consumer Assets, partially offset by the impact of foreign currency translation in Mexico.  International Retail Banking operating expenses increased $88 million or 15% and $160 million or 13% from the 2003 second quarter and six months, respectively, mainly reflecting the impact of foreign currency translation, volume-related increases, costs (including severance) attributable to business repositioning in Latin America and, in the six-month comparison, costs associated with the consolidation of certain back office operations in Europe.

 

The provisions for benefits, claims, and credit losses were $429 million and $848 million in the 2003 second quarter and six months, down from $485 million and $1.020 billion in the prior-year periods, reflecting a lower provision for credit losses. The decline in the provision for credit loss from the prior-year second quarter was primarily due to lower credit costs in CitiCapital and Mexico, partially offset by the impact of foreign currency translation and an addition to the allowance for credit losses in Germany. The six-month comparison also reflected a $101 million addition to the allowance for credit losses in the first quarter of 2002 related to Argentina. Net credit losses (excluding Commercial Markets) were $165 million and the related loss ratio was 0.58% in the 2003 second quarter, compared to $120 million and 0.42% in the 2003 first quarter and $172 million and 0.79% in the prior-year second quarter.  The increase in credit losses from the 2003 first quarter was mainly driven by higher bankruptcies in Germany. The decrease in the net credit loss ratio from the prior-year second quarter was primarily due to a reduction of losses in Argentina, higher recoveries in Mexico, and the addition of the GSB portfolio which is predominantly real estate secured loans. Commercial Markets net credit losses were $139 million and the related loss ratio was 1.30% in the 2003 second quarter, compared to $179 million and 1.65% in the 2003 first quarter and $250 million and 2.55% in the prior-year second quarter.  The decline from the 2003 first quarter and 2002 second quarter reflected improvement in CitiCapital, Mexico and Citibanking North America.

 

Loans delinquent 90 days or more (excluding Commercial Markets) were $3.706 billion or 3.29% of loans at June 30, 2003, compared to $3.644 billion or 3.18% at March 31, 2003, and $3.037 billion or 3.46% a year ago. Compared to a year ago, the increase in delinquent loans was primarily due to increases in Consumer Assets and Germany, including the impact of foreign currency translation, and was partially offset by declines in Mexico and Asia, mainly in Taiwan. The increase in Consumer Assets reflected the addition of GSB and a higher level of buy backs from GNMA pools where credit risk is maintained by government agencies. The decline in Mexico reflected improvement in the mortgage portfolio as well as the impact of foreign currency translation.

 

Cash-basis loans in Commercial Markets were $1.165 billion or 2.76% of loans at June 30, 2003, $1.250 billion or 2.88% at March 31, 2003, and $1.161 billion or 2.95% at June 30, 2002.  Cash-basis loans were essentially unchanged from the prior year and improved slightly from the prior quarter as improved credit and the impact of foreign currency translation in Mexico were essentially offset by increases in CitiCapital where the business continues to work through the liquidation of non-core portfolios.

 

Average assets of $230 billion and $229 billion in the 2003 second quarter and six months, respectively, increased $51 billion from both comparable 2002 periods. The increase in average assets primarily reflected the acquisition of GSB, growth in mortgages and student loans in Consumer Assets, and the impact of foreign currency translation in EMEA.

 

Other Consumer

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

In millions of dollars

 

2003

 

2002

 

2003

 

2002

 

Revenues, net of interest expense

 

$

77

 

$

134

 

$

158

 

$

184

 

Operating expenses

 

125

 

117

 

228

 

200

 

Income (loss) before tax benefits

 

(48

)

17

 

(70

)

(16

)

Income taxes (benefits)

 

(17

)

6

 

(23

)

(7

)

Net income (loss)

 

$

(31

)

$

11

 

$

(47

)

$

(9

)

 

Other Consumer — which includes certain treasury and other unallocated staff functions, global marketing and other programs — reported losses of $31 million and $47 million for the 2003 second quarter and six months, respectively, compared to income of $11 million in the 2002 second quarter and a loss of $9 million in the 2002 six months.  Income in the 2002 second quarter reflected a $40 million pre-tax release of a reserve related to unused travelers checks in a non-core business.

 

20



 

GLOBAL CORPORATE AND INVESTMENT BANK

 

 

 

Three Months Ended June 30,

 

%

 

Six Months Ended June 30,

 

%

 

In millions of dollars

 

2003

 

2002

 

Change

 

2003

 

2002

 

Change

 

Revenues, net of interest expense

 

$

5,429

 

$

5,077

 

7

 

$

10,512

 

$

10,213

 

3

 

Operating expenses

 

3,186

 

2,816

 

13

 

6,136

 

5,695

 

8

 

Provision for credit losses

 

298

 

265

 

12

 

414

 

833

 

(50

)

Income before taxes and minority interest

 

1,945

 

1,996

 

(3

)

3,962

 

3,685

 

8

 

Income taxes

 

593

 

673

 

(12

)

1,206

 

1,234

 

(2

)

Minority interest, after-tax

 

12

 

5

 

NM

 

17

 

8

 

NM

 

Net income

 

$

1,340

 

$

1,318

 

2

 

$

2,739

 

$

2,443

 

12

 

 


NM   Not meaningful

 

Global Corporate and Investment Bank (GCIB) serves corporations, financial institutions, governments, investors and other participants in capital markets throughout the world and consists of Capital Markets and Banking and Transaction Services. The primary businesses in Capital Markets and Banking include Fixed Income, Equities, Investment Banking, Sales & Trading (which mainly operates in Asia, Latin America, EMEA and Mexico) and Lending.

 

GCIB net income of $1.340 billion and $2.739 billion in the 2003 second quarter and six months was up $22 million or 2% from the 2002 second quarter, and up $296 million or 12% from the 2002 six months, respectively.  The 2003 second quarter reflects net income growth from the comparable 2002 quarter of $27 million or 2% in Capital Markets and Banking, offset by a decrease of $29 million or 13% in Transaction Services.  The 2003 six months reflects net income growth of $162 million or 7% in Capital Markets and Banking and $79 million or 26% in Transaction Services.  Other Corporate reported net losses of $10 million and $2 million in the 2003 second quarter and six months, respectively, compared with net losses of $34 million and $57 million in the comparable prior-year periods.

 

The increase in Capital Markets and Banking net income in the 2003 second quarter primarily reflects increases in Fixed Income, partially offset by losses in credit derivatives (which serve as an economic hedge for the loan portfolio) as credit spreads tightened, as well as lower Equities and Investment Banking.  The increase in the 2003 six months also reflects a lower provision for credit losses.  The decrease in Transaction Services net income in the 2003 second quarter reflects lower gains from the sale of equity investments, as well as the continued decline in market capitalizations and interest rates, and a lower level of IPO and debt issuance activity as compared to the prior year, partially offset by gains on early termination of intracompany deposits (which were offset in Capital Markets and Banking).  The increase in the 2003 six months is primarily due to gains on early termination of intracompany deposits (which were offset in Capital Markets and Banking), a lower provision for credit losses and the impact of expense control initiatives.  The decrease in Other Corporate net losses in 2003 is primarily attributable to lower GCIB segment eliminations.

 

The businesses of GCIB are significantly affected by the levels of activity in the global capital markets which, in turn, are influenced by macro-economic and political policies and developments, among other factors, in over 100 countries in which the businesses operate. Global economic and market events can have both positive and negative effects on the revenue performance of the businesses and can affect credit performance. Losses on corporate lending activities and the level of cash-basis loans can vary widely with respect to timing and amount, particularly within any narrowly defined business or loan type.  Credit costs are expected to improve compared to 2002 levels despite continued weak global economic conditions.  This paragraph contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act.  See “Forward-Looking Statements” on page 34.

 

GCIB Net Income – Regional View

 

 

 

Three Months Ended June 30,

 

%
Change

 

Six Months Ended June 30,

 

%
Change

 

In millions of dollars

 

2003

 

2002

 

 

2003

 

2002

 

 

North America (excluding Mexico)

 

$

552

 

$

602

 

(8

)

$

1,191

 

$

1,276

 

(7

)

Mexico

 

84

 

110

 

(24

)

204

 

304

 

(33

)

EMEA

 

346

 

226

 

53

 

603

 

371

 

63

 

Japan

 

5

 

(3

)

NM

 

37

 

20

 

85

 

Asia (excluding Japan)

 

188

 

200

 

(6

)

367

 

393

 

(7

)

Latin America

 

165

 

183

 

(10

)

337

 

79

 

NM

 

Total Net Income

 

$

1,340

 

$

1,318

 

2

 

$

2,739

 

$

2,443

 

12

 

 


NM   Not meaningful

 

GCIB net income increased in the 2003 second quarter and six months primarily due to an increase in EMEA and Latin America (in the six months), partially offset by decreases in Mexico and North America.  EMEA net income increased $120 million in the 2003 second quarter and $232 million in the 2003 six months primarily due to improved business volumes and increases in Fixed Income.

 

21



 

The increase in Latin America of $258 million in the 2003 six months was mainly due to prior-year charges in Argentina.  North America (excluding Mexico) decreased $50 million in the 2003 second quarter and $85 million in the 2003 six months primarily reflecting lower deal volume, tighter trading spreads in equity products and losses in the credit derivative economic hedge program in the 2003 second quarter, partially offset by increases in Fixed Income.  Mexico net income decreased $26 million in the 2003 second quarter due to a higher provision for credit losses, and decreased $100 million in the 2003 six months primarily due to strong 2002 trading revenues.

 

Capital Markets and Banking

 

 

 

Three Months Ended June 30,

 

%

 

Six Months Ended June 30,

 

%

 

In millions of dollars

 

2003

 

2002

 

Change

 

2003

 

2002

 

Change

 

Revenues, net of interest expense

 

$

4,531

 

$

4,219

 

7

 

$

8,711

 

$

8,597

 

1

 

Operating expenses

 

2,546

 

2,222

 

15

 

4,900

 

4,497

 

9

 

Provision for credit losses

 

286

 

262

 

9

 

393

 

761

 

(48

)

Income before taxes and minority interest

 

1,699

 

1,735

 

(2

)

3,418

 

3,339

 

2

 

Income taxes

 

524

 

596

 

(12

)

1,044

 

1,139

 

(8

)

Minority interest, after-tax

 

12

 

3

 

NM

 

17

 

5

 

NM

 

Net income

 

$

1,163

 

$

1,136

 

2

 

$

2,357

 

$

2,195

 

7

 

 


NM   Not meaningful

 

Capital Markets and Banking delivers a full range of global financial services and products including investment banking, institutional brokerage, advisory services, foreign exchange, structured products, derivatives and loans.

 

Capital Markets and Banking net income of $1.163 billion in the 2003 second quarter increased $27 million or 2% from 2002, primarily due to increases in Fixed Income.  Net income was $2.357 billion in the 2003 six months, up $162 million or 7% from 2002, primarily due to a lower provision for credit losses and increases in Fixed Income. The 2002 six months were negatively impacted by Latin America, primarily Argentina.

 

Revenues, net of interest expense, of $4.531 billion and $8.711 billion in the 2003 second quarter and six months increased $312 million or 7% from the 2002 second quarter and  $114 million or 1% from the 2002 six months, respectively.  Revenue growth in the 2003 periods was driven by Fixed Income trading and originations, as companies have continued to take advantage of the low interest rate environment, partially offset by declines in Advisory and Equities.  The increase in Fixed Income was partially offset by losses in credit derivatives (which serve as an economic hedge for the loan portfolio) as credit spreads tightened.  The declines in Equities primarily reflects lower derivatives and lower listed and NASDAQ trading revenues, partially offset by higher underwriting volumes.  The increase in the 2003 six months also reflects redenomination losses in Argentina in the prior-year period.

 

Operating expenses of $2.546 billion and $4.900 billion in the 2003 second quarter and six months increased $324 million or 15% from the 2002 second quarter and $403 million or 9% from the 2002 six months, respectively.  The increase in operating expenses in 2003 reflects increased incentive compensation expense primarily related to Fixed Income performance, costs associated with the repositioning of the Company’s business in Latin America, primarily severance-related and higher legal fees.

 

The provision for credit losses was $286 million in the 2003 second quarter, an increase of $24 million from the prior-year quarter, primarily reflecting deterioration in power and energy industry exposures.  The provision for credit losses of $393 million in the 2003 six months decreased $368 million from the 2002 six months, primarily reflecting prior-year provisions for Argentina and the telecommunications industry.

 

Cash-basis loans were $3.691 billion at June 30, 2003, $3.543 billion at March 31, 2003, $3.423 billion at December 31, 2002, and $3.201 billion at June 30, 2002.  Cash-basis loans increased $490 million from June 30, 2002, primarily due to increases in the power and energy industry, as well as corporate borrowers in Brazil, Hong Kong, Australia, Mexico and Singapore.  Cash-basis loans increased $148 million from March 31, 2003, primarily reflecting increases in the power and energy industry, as well as corporate borrowers in Singapore, Australia and Brazil.

 

22



 

Transaction Services

 

 

 

Three Months Ended June 30,

 

%
Change

 

Six Months Ended June 30,

 

%
Change

 

In millions of dollars

 

2003

 

2002

 

 

2003

 

2002

 

 

Revenues, net of interest expense

 

$

908

 

$

962

 

(6

)

$

1,821

 

$

1,819

 

 

Operating expenses

 

634

 

630

 

1

 

1,259

 

1,283

 

(2

)

Provision for credit losses

 

12

 

3

 

NM

 

21

 

72

 

(71

)

Income before taxes and minority interest

 

262

 

329

 

(20

)

541

 

464

 

17

 

Income taxes

 

75

 

111

 

(32

)

157

 

156

 

1

 

Minority interest, after-tax

 

 

2

 

(100

)

 

3

 

(100

)

Net income

 

$

187

 

$

216

 

(13

)

$

384

 

$

305

 

26

 

 


NM   Not meaningful

 

Transaction Services – which provides cash management, trade finance, custody, clearing and depository services globally – reported net income of $187 million in the 2003 second quarter, down $29 million or 13% from the 2002 second quarter.  The decrease in the 2003 second quarter reflects lower gains from the sale of equity investments, as well as lower fees on assets under custody, a decline in interest rates and a lower level of issuance activity as compared to the prior year, partially offset by gains on early termination of intracompany deposits (which were offset in Capital Markets and Banking).  Net income in the 2003 six months increased $79 million or 26% from 2002, primarily due to gains on early termination of intracompany deposits (which were offset in Capital Markets and Banking), lower provision for credit losses and the impact of expense control initiatives.

 

As shown in the following table, average liability balances of $96 billion grew 14% compared to the 2002 second quarter primarily due to increases in Europe and Asia.  Assets under custody reached $5.6 trillion, a 4% increase compared to the prior year.

 

 

 

Three Months Ended
June 30,
2003

 

Three Months Ended
June 30,
2002

 

%
Change

 

Liability balances (average in billions)

 

$

96

 

$

84

 

14

 

Assets under custody (EOP in trillions)

 

5.6

 

5.4

 

4

 

 

Revenues, net of interest expense, of $908 million in the 2003 second quarter decreased $54 million or 6% from the 2002 second quarter, due to lower gains from the sale of equity investments, lower interest rates versus 2002, a decline in market capitalizations, and lower issuance activity.  Revenues, net of interest expense, of $1.821 billion in the 2003 six months were essentially unchanged from the 2002 six months, as declines in the 2003 second quarter were offset by gains on the early termination of intracompany deposits (which were offset in Capital Markets and Banking) and a benefit from foreign exchange currency translation in the 2003 six-month period.

 

Operating expenses of $634 million in the 2003 second quarter were held to a $4 million or 1% increase, primarily reflecting costs associated with the repositioning of the Company’s business in Latin America, primarily severance-related, partially offset by staff reductions and continued efficiency gains.  Operating expenses of $1.259 billion in the 2003 six months decreased $24 million or 2% from the 2002 six months, primarily reflecting expense control initiatives, including prior-period staff reductions, reduced technology spending and absence of asset write-offs, as well as operational efficiency improvements resulting from prior-year investments in Internet initiatives.

 

The provision for credit losses of $12 million in the 2003 second quarter increased by $9 million from the 2002 second quarter reflecting higher trade write-offs in Latin America. The provision for credit losses of $21 million in the 2003 six months decreased by $51 million from the 2002 six months, primarily reflecting prior-year write-offs in Argentina, partially offset by 2003 provisions in Brazil.

 

Cash-basis loans, which in the Transaction Services business are primarily trade finance receivables, were $513 million at June 30, 2003, $539 million at March 31, 2003, $572 million at December 31, 2002 and $639 million at June 30, 2002.  Cash-basis loans were down $26 million from March 31, 2003 and $126 million from June 30, 2002, primarily due to trade finance receivables in Argentina.

 

23



 

Other Corporate

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

In millions of dollars

 

2003

 

2002

 

2003

 

2002

 

Revenues, net of interest expense

 

$

(10

)

$

(104

)

$

(20

)

$

(203

)

Operating expenses

 

6

 

(36

)

(23

)

(85

)

Income (loss) before taxes

 

(16

)

(68

)

3

 

(118

)

Income taxes (benefits)

 

(6

)

(34

)

5

 

(61

)

Net (loss)

 

$

(10

)

$

(34

)

$

(2

)

$

(57

)

 

Other Corporate – which includes intra-GCIB segment eliminations, certain one-time non-recurring items and tax amounts not allocated to GCIB products – reported a net loss of $10 million and $2 million for the 2003 second quarter and six months, respectively, compared to a net loss of $34 million and $57 million in the 2002 second quarter and six months.  The decrease in Other Corporate net losses in 2003 is primarily attributable to lower GCIB segment eliminations, which impacted revenues and operating expenses.

 

24



 

PRIVATE CLIENT SERVICES

 

 

 

Three Months Ended June 30,

 

%
Change

 

Six Months Ended June 30,

 

%
Change

 

In millions of dollars

 

2003

 

2002

 

 

2003

 

2002

 

 

Revenues, net of interest expense

 

$

1,449

 

$

1,551

 

(7

)

$

2,776

 

$

3,058

 

(9

)

Operating expenses

 

1,156

 

1,198

 

(4

)

2,228

 

2,363

 

(6

)

Provision for credit losses

 

 

2

 

NM

 

1

 

2

 

(50

)

Income before taxes

 

293

 

351

 

(17

)

547

 

693

 

(21

)

Income taxes

 

112

 

128

 

(13

)

209

 

253

 

(17

)

Net income

 

$

181

 

$

223

 

(19

)

$

338