10-Q 1 a2146111z10-q.htm 10-Q
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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 September 30, 2004

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
(State or other jurisdiction of
incorporation or organization)
  52-1568099
(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 September 30, 2004: 5,189,752,836

        Available on the Web at www.citigroup.com




Citigroup Inc.


TABLE OF CONTENTS

Part I—Financial Information

 
   
  Page

Item 1.

 

Financial Statements:

 

 

 

 

Consolidated Statement of Income (Unaudited)—Three and Nine Months Ended September 30, 2004 and 2003

 

66

 

 

Consolidated Balance Sheet—September 30, 2004 (Unaudited) and December 31, 2003

 

67

 

 

Consolidated Statement of Changes in Stockholders' Equity (Unaudited)—Nine Months Ended September 30, 2004 and 2003

 

68

 

 

Consolidated Statement of Cash Flows (Unaudited)—Nine Months Ended September 30, 2004 and 2003

 

69

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

70

Item 2.

 

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

 

5 – 63

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

48 – 50
80

Item 4.

 

Controls and Procedures

 

64

Part II—Other Information

Item 1.

 

Legal Proceedings

 

90

Item 2.

 

Changes in Securities and Use of Proceeds

 

91

Item 6.

 

Exhibits

 

91

Signatures

 

92

Exhibit Index

 

93

1


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 doing business in more than 100 countries. Citigroup was incorporated in 1988 under the laws of the State of Delaware.

        The Company's operations are distributed throughout the following regions: North America, Mexico, EMEA (Europe, Middle East & Africa), Japan, Asia and Latin America, and its activities are conducted through the Global Consumer, Global Corporate and Investment Bank (GCIB), Private Client Services, 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 2003 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 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 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, electronic delivery systems, including ATMs, Automated Lending Machines (ALMs), the World Wide Web, and the Primerica Financial Services (Primerica) sales force. The Global Consumer businesses serve individual consumers as well as small businesses. Global Consumer includes Cards, Consumer Finance, Retail Banking and Other Consumer.

        Cards provides MasterCard, VISA, Diner's Club 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 September 30, 2004, North America Consumer Finance maintained 2,624 offices, including 2,450 in the U.S., Canada, and Puerto Rico, and 174 offices in Mexico, while International Consumer Finance maintained 1,039 offices, including 529 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, investment and insurance services to customers through retail branches, electronic delivery systems, and the Primerica sales force. In North America, Retail Banking includes the operations of Citibanking North America, Consumer Assets, CitiCapital, Primerica, and Mexico Retail Banking. Citibanking North America delivers banking, lending, investment and insurance services through 776 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 equipment leasing and financing products to small- and middle-market businesses. The business 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. The Primerica sales force is composed of over 100,000 independent representatives. Mexico Retail Banking consists of the branch banking operations of Banamex, which maintained 1,347 branches. International Retail Banking consists of 1,118 branches and provides full-service banking and investment services in EMEA, Japan, Asia, and Latin America. The Commercial Markets Group is included in Retail Banking and consists 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 approximately 100 countries with a broad range of financial products and services. GCIB includes Capital Markets and Banking, Transaction Services and Other Corporate.

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

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

PRIVATE CLIENT SERVICES

        Private Client Services 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 12,000 Smith Barney Financial Consultants in more than 500 offices primarily in the U.S. 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 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 retail annuity, institutional annuity, individual life insurance and Corporate Owned Life Insurance (COLI) products. The retail annuity products include individual fixed and variable deferred annuities and payout annuities. Individual life insurance includes term, universal, and variable life insurance. These products are primarily distributed through CitiStreet Retirement Services (CitiStreet), Smith Barney, Primerica, Citibank and affiliates, and a nationwide network of independent agents and the outside broker/dealer channel. The COLI products are variable universal life products distributed through independent specialty brokers. The institutional annuity products include institutional pensions, including guaranteed investment contracts, payout annuities, group annuities sold to employer-sponsored retirement and savings plans, structured settlements and funding agreements. TLA's business is significantly affected by movements in the U.S. equity and fixed income credit markets. U.S. equity and credit market events can have both positive and negative effects on the deposit, revenue and policy retention performance of the business. A sustained weakness in the equity markets will decrease revenues and earnings in variable products. Declines in credit quality of issuers will have a negative effect on earnings. IIM 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 has operations in Mexico, Asia, EMEA, Latin America 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 123 offices in 34 countries and territories. With a global network of 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 management, investment finance and banking services. Investment management services include investment funds management and capital markets solutions, as well as trust, fiduciary and custody services. Investment finance provides standard and tailored credit services including real estate financing, commitments and letters of credit, while Banking includes services for deposit, checking and savings accounts, as well as cash management and other traditional banking services.

3


        Asset Management includes Citigroup Asset Management, the Citigroup Alternative Investments (CAI) institutional business, the 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.

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 St. Paul Travelers Companies Inc. shares and Citigroup's Alternative Investments 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 and taxes not allocated to the individual businesses.

4


CITIGROUP INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Financial Summary

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars, except per share amounts                          
Revenues, net of interest expense(1)   $ 20,514   $ 19,398   $ 64,304   $ 57,288  
Operating expenses     10,744     9,613     40,019     29,136  
Benefits, claims, and credit losses(1)     2,088     2,721     7,632     8,732  
   
 
 
 
 
Income before taxes and minority interest     7,682     7,064     16,653     19,420  
Income taxes     2,305     2,208     4,752     6,083  
Minority interest, after-tax     69     165     176     244  
   
 
 
 
 
Net Income   $ 5,308   $ 4,691   $ 11,725   $ 13,093  
   
 
 
 
 
Earnings per share:                          
  Basic   $ 1.03   $ 0.92   $ 2.29   $ 2.56  
  Diluted   $ 1.02   $ 0.90   $ 2.24   $ 2.51  
   
 
 
 
 
Return on Average Common Equity     21.3 %   20.2 %   15.9 %   19.7 %
Return on Risk Capital(2)     42 %         32 %      
Return on Invested Capital(2)     21 %         16 %      

Total Assets
(in billions of dollars) (3)

 

$

1,436.6

 

$

1,209.3

 

 

 

 

 

 

 
Total Equity (in billions of dollars)   $ 103.4   $ 95.3              

Tier 1 Capital Ratio

 

 

8.37

%

 

9.49

%

 

 

 

 

 

 
Total Capital Ratio     11.49 %   12.59 %            
   
 
 
 
 

(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 $1.250 billion and $1.210 billion in the 2004 and 2003 third quarters, respectively, and by $3.865 billion and $3.520 billion for the respective nine-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 17.

(2)
Risk Capital is defined as the amount of capital needed to cover unexpected economic losses during extreme events. Return on Risk Capital is defined as annualized net income divided by Average Risk Capital. Return on Invested Capital is a similar calculation but includes adjustments for goodwill and intangibles in both the numerator and denominator, similar to those necessary to translate return on tangible equity to return on total equity. Return on Risk Capital and Return on Invested Capital are non-GAAP performance measures. Management believes Return on Risk Capital is useful to make incremental investment decisions and serves as a key metric for organic growth initiatives. Return on Invested Capital is used for multi-year investment decisions and as a long-term performance measure. For a further discussion on Risk Capital, see page 39.

(3)
Reclassified to conform to the current period's presentation.

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
September 30,

  Nine Months Ended
September 30,

 
 
  2004
  2003(1)
  2004
  2003(1)
 
In millions of dollars                          
Global Consumer                          
Cards   $ 1,267   $ 980   $ 3,259   $ 2,455  
Consumer Finance     643     476     1,804     1,500  
Retail Banking     1,225     1,063     3,503     2,998  
Other(2)     (62 )   (30 )   148     (101 )
   
 
 
 
 
Total Global Consumer     3,073     2,489     8,714     6,852  
   
 
 
 
 
Global Corporate and Investment Bank                          
Capital Markets and Banking     1,159     1,162     4,138     3,539  
Transaction Services     285     196     780     567  
Other(3)     7     (5 )   (4,566 )   (8 )
   
 
 
 
 
Total Global Corporate and Investment Bank     1,451     1,353     352     4,098  
   
 
 
 
 
Private Client Services     195     206     655     553  
   
 
 
 
 
Global Investment Management                          
Life Insurance and Annuities     282     163     799     607  
Private Bank     136     143     447     407  
Asset Management     84     57     258     222  
   
 
 
 
 
Total Global Investment Management     502     363     1,504     1,236  
   
 
 
 
 
Proprietary Investment Activities     111     128     410     229  
Corporate/Other     (24 )   152     90     125  
   
 
 
 
 
Net Income   $ 5,308   $ 4,691   $ 11,725   $ 13,093  
   
 
 
 
 

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

(2)
The 2004 nine-month period includes a $378 million after-tax gain related to the sale of The Samba Financial Group (Samba).

(3)
The 2004 nine-month period includes a $378 million after-tax gain related to the sale of Samba and a $4.95 billion after-tax charge related to the WorldCom and Litigation Reserve Charge.

6


Citigroup Net Income—Regional View

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
  2004
  2003(1)
  2004
  2003(1)
 
In millions of dollars                          
                           
North America (excluding Mexico)(2)                          
  Consumer   $ 2,123   $ 1,691   $ 5,656   $ 4,679  
  Corporate(3)     501     604     (2,997 )   1,844  
  Private Client Services     195     206     655     553  
  Investment Management     317     368     1,042     1,031  
   
 
 
 
 
Total North America     3,136     2,869     4,356     8,107  
   
 
 
 
 
Mexico                          
  Consumer     208     168     601     458  
  Corporate     198     120     476     301  
  Investment Management     54     59     152     142  
   
 
 
 
 
Total Mexico     460     347     1,229     901  
   
 
 
 
 
Europe, Middle East and Africa (EMEA)                          
  Consumer(4)     154     189     959     493  
  Corporate(4)     123     233     1,048     801  
  Investment Management     7     6     23     5  
   
 
 
 
 
Total EMEA     284     428     2,030     1,299  
   
 
 
 
 
Japan                          
  Consumer     164     106     453     477  
  Corporate     91     54     271     108  
  Investment Management     9     25     63     62  
   
 
 
 
 
Total Japan     264     185     787     647  
   
 
 
 
 
Asia (excluding Japan)                          
  Consumer     332     212     859     596  
  Corporate     309     196     938     572  
  Investment Management     45     60     132     130  
   
 
 
 
 
Total Asia     686     468     1,929     1,298  
   
 
 
 
 
Latin America                          
  Consumer     92     123     186     149  
  Corporate     229     146     616     472  
  Investment Management     70     (155 )   92     (134 )
   
 
 
 
 
Total Latin America     391     114     894     487  
   
 
 
 
 
Proprietary Investment Activities     111     128     410     229  
Corporate/Other     (24 )   152     90     125  
   
 
 
 
 
Net Income   $ 5,308   $ 4,691   $ 11,725   $ 13,093  
   
 
 
 
 

(1)
Reclassified to conform to the current period's presentation.
(2)
Excludes Proprietary Investment Activities and Corporate/Other which are predominantly related to North America.
(3)
The 2004 nine-month period includes a $4.95 billion after-tax charge related to the WorldCom and Litigation Reserve Charge.
(4)
The 2004 nine-month period includes a $378 million after-tax gain related to the sale of Samba.

7


Management Summary

        Net income of $5.308 billion ($1.02 per diluted share) in the 2004 third quarter was up 13% from the 2003 third quarter and represented the highest quarterly net income ever recorded by the Company. The strength of the Company's consumer franchise more than offset sluggishness in our capital markets businesses. The results included a $686 million (pretax) release of general credit reserves, reflecting the world-wide improvement in the credit environment. Revenues, net of interest expense, increased 6%, reflecting the impact of acquisitions and growth in volumes throughout most businesses.

        Earnings in the 2004 third quarter included the continued results of the 2003 acquisitions of the Sears Credit Card and Financial Products business and The Home Depot private label card portfolio, the 2004 acquisition of the consumer finance business of Washington Mutual, and the recent acquisition of KorAm Bank in Korea. The Company achieved double-digit income growth in five of its nine products, as well as in each of its international regions other than EMEA. Results from the Company's international operations included net income gains of 47% in Asia, 43% in Japan and 33% in Mexico. Trends in global growth, low inflation and low interest rates are consistent with financial conditions that remain stimulative and were favorable to the Company's business in the quarter.

        The Product results for the 2004 third quarter reflect the Company's focus on increasing customer volumes while increasing investment spending to grow the franchise, and the effects of the improved credit environment. The Global Consumer business continued its consistent growth model with net income increasing 23%, led by Consumer Finance growth of 35% which included 10% loan growth and improved credit, and Cards growth of 29%, reflecting the impact of acquisitions, improved credit and the addition of over 6 million accounts in our international business. Retail Banking had a record quarter as loan volumes were up 21% from a year ago, while deposits increased 9% with continued strong growth in the international operations.

        Capital Markets and Banking was the No. 1 Global Debt and Equity underwriter for the 12th consecutive quarter; however, total revenues were challenged by lower Fixed Income trading results. Transaction Services income growth of 45% was driven by higher assets under custody and higher liability balances. Private Client Services net income was down 5% from the prior year primarily due to sluggish markets. The Global Investment Management business net income was up 38% from the prior-year quarter as a result of record business volumes in Life Insurance and Annuities and a 47% increase in net income in Asset Management. Proprietary Investment Activities experienced lower dividends and fees during the quarter that led, in part, to lower income growth.

        During the 2004 third quarter, Citigroup announced the acquisitions of First American Bank (Texas) and Knight Trading (derivatives). The Company continued to strategically invest in growing our franchise by spending on advertising, marketing, technology and the building of new branches. Operating expenses increased 12% and reflected the impact of acquisitions and foreign exchange, which drove more than 50% of expense growth. Of the remaining expense growth, approximately two-thirds resulted from increased investment spending on core growth initiatives and approximately one-third reflected higher legal costs.

        The Company took numerous steps towards its goal of continually improving the way we do business. During 2004, we have strengthened the independence and capabilities of our internal control and compliance structure.

        Based on a recent inspection of Citibank Japan's operations, the Financial Services Agency of Japan (FSA) issued sanctions and a business improvement order on September 17, 2004 after determining that there were fundamental problems in Citibank Japan's internal controls and governance structure, principally in its private banking operations. The Company acknowledged the inadequate governance and management structures and the poor compliance and internal control environment in aspects of Citibank Japan's business. Regarding Citibank Japan, a formal business improvement plan was presented to the Financial Services Agency of Japan on October 26, 2004. On October 25, 2004, Citigroup announced the undertaking of a comprehensive strategic review of all its businesses in Japan. In connection with this ongoing review, the Company has decided to wind down Cititrust and Banking Corporation, a licensed trust bank in Japan, after concluding that there were internal control, compliance and governance issues in that subsidiary.

        The after-tax earnings for the first nine months of 2004 for the Japan Private Bank were $48 million, and for Cititrust and Banking Corporation, $13 million (excluding $2 million reported in the Japan Private Bank total).

        The Company's equity stood at more than $103 billion, with equity capital and trust preferred securities growing to over $110 billion at September 30, 2004. During the 2004 third quarter, the Company paid out $2.1 billion in dividends to its common shareholders, an increase of 14% from the year-ago quarter. The Company maintained its well-capitalized position with a Tier 1 Capital Ratio of 8.38% at the end of the quarter. We reported a return on common equity that was in excess of 21%.

8


        During the 2004 third quarter, the Company recorded an increase in unrealized gains of $1.3 billion (after-tax) in Equity from Non-owner Sources (a component of Stockholders' Equity) to reflect mark-to-market changes in the value of Available-for-Sale fixed income and equity securities in accordance with SFAS 115 (see Note 9 to the Consolidated Financial Statements).

        The U.S. equity markets declined during the quarter, weighed by concerns over economic growth, corporate profits, job creation, energy prices and geopolitical risks. Medium- and long-term U.S. interest rates negatively affected the Company's interest rate positions and trading results. The Company believes it is well-positioned to benefit from its pre-eminent global reach and diversification even in the face of these uncertainties. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 65.

9


EVENTS IN 2004 and 2003

Credit Reserve Releases

        During the past year, the world-wide credit environment has continuously improved, as evidenced by declining cash-basis loans balances and lower delinquency rates. Accordingly, the Company has recorded releases to its general credit reserves from its Allowance for Credit Losses. During the 2004 third quarter, the Company released $686 million of general reserves consisting of $250 million of GCIB general reserves and $436 million in Global Consumer general reserves.

        The GCIB releases consisted of a $202 million release in Capital Markets and Banking and a $48 million release in Transaction Services. The Consumer releases consisted of a $202 million release in the cards portfolio, a $165 million net release in Retail Banking, and a $69 million release in Consumer Finance. The Company's total allowance for loans, leases and commitments was $12.6 billion at September 30, 2004.

        Management evaluates the adequacy of loan loss reserves by analyzing probable loss scenarios and economic and geopolitical factors that impact the portfolios. See pages 43 - 47 herein and on pages 11 and 12 of Citigroup's 2003 Annual Report on Form 10-K for an additional discussion of the reserve levels and process.

        The 2004 nine-month period included $1.398 billion of general credit reserve releases, consisting of $750 million in GCIB and $648 million in Global Consumer.

        The 2003 third quarter and nine-month period included $230 million and $222 million, respectively, of general credit reserve releases, consisting of $100 million for both periods in GCIB and $130 million and $122 million, respectively, in Global Consumer.

Financial Services Agency of Japan Imposed Sanctions

        The sanctions imposed by the FSA required the Private Bank division of Citibank Japan to suspend all new transactions with its customers beginning on September 29, 2004 and exit all private banking operations by September 30, 2005.

        All banking services provided to existing retail customers, including CitiGold customers, will be unaffected by the sanctions. This includes access to all banking services through Citibank Japan's network of 25 retail branches and sub-branches, call centers and other channels.

        The Company's Private Bank operations in Japan had total revenues, net of interest expense, of $173 million and net income of $48 million for the first nine months of 2004 and $265 million and $84 million, respectively, for the 2003 full year.

        In connection with the exiting of private banking operations in Japan, the Company is performing a comprehensive review of the Private Bank division of Citibank Japan's customers and products to develop an appropriate exit plan. Implementation of the plan may result in significant charges in future periods. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 65.

Acquisition of First American Bank

        On August 24, 2004, Citigroup announced it will acquire First American Bank in Texas (FAB). The transaction is expected to be accretive to Citigroup's earnings and is expected to close in the first quarter of 2005, subject to applicable regulatory approvals. The transaction will establish Citigroup's retail banking presence in Texas, giving Citigroup over 100 branches, $3.5 billion in assets and approximately 120,000 new customers in the state. The above statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 65.

Settlement of WorldCom Class Action Litigation and Charge for Regulatory and Legal Matters

        During the 2004 second quarter, Citigroup recorded a charge of $7.915 billion ($4.95 billion after-tax) related to a settlement of class action litigation brought on behalf of purchasers of WorldCom securities and an increase in litigation reserves (WorldCom and Litigation Reserve Charge).

        Subject to the terms of the settlement and its eventual approval by the courts, Citigroup will make a payment of $2.65 billion, or $1.64 billion after-tax, to the settlement class, which consists of all persons who purchased or otherwise acquired publicly traded securities of WorldCom during the period from April 29, 1999 through and including June 25, 2002. The payment will be allocated between purchasers of WorldCom stock and purchasers of WorldCom bonds. Plaintiffs' attorneys' fees (the amount has not yet been determined) will come out of the settlement amount.

10


        In connection with the settlement of the WorldCom class action lawsuit, Citigroup reevaluated its reserves for the numerous lawsuits and other legal proceedings arising out of the transactions and activities that were the subjects of:

    (i)
    the April 2003 settlement of the research and IPO spinning-related inquiries conducted by the Securities and Exchange Commission, the National Association of Securities Dealers, the New York Stock Exchange and the New York Attorney General;

    (ii)
    the July 2003 settlement of the Enron-related inquiries conducted by the Securities and Exchange Commission, the Federal Reserve Bank of New York, the Office of the Comptroller of the Currency, and the Manhattan District Attorney;

    (iii)
    underwritings for, and research coverage of, WorldCom; and

    (iv)
    the allocation of, and aftermarket trading in, securities sold in initial public offerings.

        Accordingly, Citigroup increased its reserve for these matters. The Company believes that this reserve is adequate to meet all of its remaining exposure for these matters. However, in view of the large number of these matters, the uncertainties of the timing and outcome of this type of litigation, and the significant amounts involved, it is possible that the ultimate costs of these matters may exceed or be below the reserve. Citigroup will continue to defend itself vigorously in these cases, and seek to resolve them in the manner management believes is in the best interest of the Company.

        The Company's litigation reserve for these matters following payment of the WorldCom settlement will be $6.7 billion on a pretax basis.

Sale of Samba Financial Group

        On June 15, 2004, the Company sold, for cash, its 20 percent stake in The Samba Financial Group (Samba), formerly known as the Saudi American Bank, to the Public Investment Fund, a Saudi public sector entity. Citigroup recognized an after-tax gain of $756 million ($1.168 billion pretax) on the sale during the 2004 second quarter. The gain was recognized equally between Global Consumer and GCIB.

Acquisition of Principal Residential Mortgage, Inc.

        On July 1, 2004, Citigroup completed the acquisition of Principal Residential Mortgage, Inc. (PRMI) from Acquire Principal Residential Mortgage, Inc. PRMI, one of the largest independent mortgage servicers in the United States, originates, purchases, sells and services home loans, consisting primarily of conventional, conforming, fixed-rate prime mortgages.

        The transaction includes approximately $6.5 billion in assets and also includes $102 million of franchise premium. These amounts are subject to the finalization of the purchase price allocation.

Acquisition of KorAm Bank

        On April 30, 2004, Citigroup completed its tender offer to purchase all the outstanding shares of KorAm Bank (KorAm) at a price of KRW 15,500 per share in cash. In total, Citigroup has acquired 99.65% of KorAm's outstanding shares for a total of KRW 3.14 trillion ($2.7 billion). The results of KorAm are included in the Consolidated Financial Statements from May 2004 forward.

        KorAm is a leading commercial bank in Korea, with 223 domestic branches and total assets at June 30, 2004 of $37 billion. In the 2004 fourth quarter, Citigroup plans to merge its Citibank Korea Branch into KorAm.

Divestiture of Citicorp Electronic Financial Services Inc.

        During January 2004, the Company completed the sale for cash of Citicorp's Electronic Financial Services Inc. (EFS), a subsidiary of Citigroup, for $390 million (pretax). EFS is a provider of government-issued benefits payments and prepaid stored value cards used by state and federal government agencies, as well as of stored value services for private institutions. The sale of EFS resulted in an after-tax gain of $180 million in the 2004 first quarter.

Acquisition of Washington Mutual Finance Corporation

        On January 9, 2004, Citigroup completed the acquisition of Washington Mutual Finance Corporation (WMF) for $1.25 billion in cash. WMF was the consumer finance subsidiary of Washington Mutual, Inc. WMF provides direct consumer installment loans and real-estate-secured loans, as well as sales finance and the sale of insurance. The acquisition included 427 WMF offices located in 26 states, primarily in the Southeastern and Southwestern United States, and total assets of $3.8 billion. Citicorp has guaranteed all outstanding unsecured indebtedness of WMF in connection with this acquisition. The results of WMF are included in the Consolidated Financial Statements from January 2004 forward.

11


Acquisition of Sears' Credit Card and Financial Products Business

        On November 3, 2003, Citigroup acquired the Sears' Credit Card and Financial Products business (Sears). Approximately $28.6 billion of gross receivables were acquired for a 10% premium of $2.9 billion and annual performance payments over the next 10 years based on new accounts, retail sales volume, and financial product sales. Approximately $5.8 billion of intangible assets and goodwill have been recorded as a result of this transaction. In addition, the companies signed a multi-year marketing and servicing agreement across a range of each company's businesses, products, and services. The results of Sears are included in the Consolidated Financial Statements from November 2003 forward.

Acquisition of The Home Depot's Private-Label Portfolio

        In July 2003, Citigroup completed the acquisition of The Home Depot's private-label portfolio (Home Depot), which added $6 billion in receivables and 12 million accounts. The results of Home Depot are included in the Consolidated Financial Statements from July 2003 forward.

12


Results of Operations

Income and Earnings Per Share

        Citigroup reported income of $5.308 billion or $1.02 per diluted share in the 2004 third quarter, both up 13% from $4.691 billion or $0.90 in the 2003 third quarter. Return on average common equity was 21.3% compared to 20.2% in the 2003 third quarter. Net income of $11.725 billion or $2.24 per diluted share for the 2004 nine-month period were down 10% and 11%, respectively, from $13.093 billion or $2.51 per diluted share in the 2003 nine months.

        In the 2004 third quarter, Global Consumer net income increased $584 million or 23% compared to the 2003 third quarter, while the Global Corporate and Investment Bank (GCIB) increased $98 million or 7%. Private Client net income decreased $11 million or 5% from the third quarter of 2003, Global Investment Management grew $139 million or 38%, and Proprietary Investment Activities decreased $17 million or 13% from the 2003 third quarter. For the nine-month period, Global Consumer recorded a $1.9 billion or 27% increase, while GCIB declined $3.7 billion or 91%. Private Client recorded a $102 million or 18% increase from the 2003 nine-month period, while Global Investment Management increased $268 million or 22% from the 2003 nine-month period. Proprietary Investment Activities increased $181 million from the prior year's nine-month period.

        See individual segment and product discussions on pages 16 - 38 for additional discussion and analysis of the Company's results of operations.

Revenues, Net of Interest Expense

        Total revenues, net of interest expense, of $20.5 billion and $64.3 billion in the 2004 third quarter and nine-month period, respectively, were up $1.1 billion or 6% and $7.0 billion or 12% from the respective 2003 periods. Global Consumer revenues were up $1.6 billion or 15% in the 2004 third quarter to $11.7 billion, and were up $5.4 billion or 18% from the 2003 nine months to $35.3 billion. The increase was led by a $1.1 billion or 30% increase in Cards from the 2003 third quarter and a $3.5 billion or 35% increase from the 2003 nine months, reflecting the results of the acquisitions of the Sears and Home Depot portfolios. Consumer Finance revenues increased $118 million or 5% and $471 million or 6% from the 2003 third quarter and nine months, respectively, primarily reflecting the integration of the Washington Mutual consumer finance business and growth in average loans. Retail Banking revenues increased $401 million or 10% and $924 million or 8% from the 2003 three- and nine-month periods, respectively, due primarily to growth in average loans, average deposits and the acquisition of KorAm in the second quarter of 2004.

        GCIB revenues of $4.8 billion and $16.3 billion in the 2004 third quarter and nine-month period, respectively, increased $47 million or 1% and $1.1 billion or 7% from the 2003 third quarter and nine months, respectively. There was an increase of $160 million or 18% and $283 million or 11% in Transaction Services from the respective 2003 three- and nine-month periods, primarily due to increases in securities services and the impact of recent acquisitions. The increases were partially offset by a decrease in Capital Markets and Banking of $113 million from the 2003 third quarter, reflecting reduced revenues in fixed income and equity underwriting due to rising interest rates, lower customer volumes and market volatility, while there was a $170 million or 1% increase from the 2003 nine-month period.

        Private Client Services revenues of $1.5 billion and $4.8 billion in the 2004 third quarter and nine-month period, respectively, increased $30 million or 2% and $550 million or 13% from the 2003 three- and nine-month periods, respectively, due primarily to higher fee-based revenue.

        Global Investment Management revenues were $2.5 billion in the 2004 third quarter and $7.0 billion in the 2004 nine-month period, up $158 million or 7% from the 2003 third quarter and $611 million or 10% from the prior-year nine-month period. Life Insurance and Annuities revenues increased $144 million or 10% and $362 million or 10% from the 2003 three- and nine-month periods, respectively, primarily related to record high volumes. Asset Management noted increases of $42 million or 10% and $180 million or 15% from the 2003 three- and nine-month periods, respectively. Private Bank noted a decrease of $28 million or 5% from the third quarter of 2003 but an increase of $69 million or 5% from the 2003 nine-month period.

        Revenues from Proprietary Investment Activities in the 2004 third quarter and nine-month period decreased $223 million from the third quarter of 2003 but increased $116 million from the year-to-date 2003 period due to market fluctuations.

Selected Revenue Items

        Net interest revenue of $11.1 billion and $33.6 billion in the 2004 three- and nine-month periods, respectively, increased $1.2 billion or 12% and $4.4 billion or 15% from the respective 2003 periods, primarily reflecting the impact of acquisitions, a changing rate environment and business volume growth in certain markets.

        Total commissions, asset management and administration fees, and other fee revenues of $5.2 billion and $17.4 billion decreased by $353 million or 6% from the three-month period of 2003 and increased $1.5 billion or 9% compared to the 2003 nine-month period,

13


primarily as a result of higher asset management fees driven by positive market action. Insurance premiums of $1.1 billion and $2.9 billion in the 2004 three- and nine-month periods, respectively, were up $19 million or 2% and $130 million or 5%, compared to a year ago, primarily reflecting organic growth and record business volumes.

        Principal transactions revenues were $398 million and $2.8 billion in the 2004 three- and nine-month periods, respectively, down $909 million or 70% and $1.4 billion or 34% from the respective year-ago periods due primarily to decreased volatility, lower FX trading, and decreasing interest rates. Realized gains from sales of investments were up $166 million from the third quarter of 2003 to $281 million and up $158 million to $623 million in the 2004 nine-month period, primarily due to higher gains on the investment portfolio in 2004. Other revenue of $2.5 billion and $7.0 billion in the three- and nine-month periods of 2004, respectively, increased $1.0 billion and $2.3 billion from the 2003 third quarter and nine-month period, respectively, primarily reflecting the absence of the $1.2 billion gain on the sale of Samba, partially offset in the quarterly comparison from decreases in revenue earned from securitization activity and SFAS 133 hedging activities in the mortgage business.

Operating Expenses

        Total operating expenses were $10.7 billion and $40.0 billion for the 2004 third quarter and nine-month periods, up $1.1 billion and $10.9 billion from the comparable 2003 periods. The increases primarily reflected the $7.9 billion pretax reserve for the WorldCom and Litigation Reserve Charge taken in the second quarter of 2004 and the impact of acquisitions.

        Global Consumer expenses were up 18% and 17% from the 2003 third quarter and nine-month period, respectively, driven by acquisitions as well as increased marketing and advertising costs. Operating expenses in the GCIB increased 14% and 95%, primarily from the WorldCom and Litigation charges taken in the second quarter of 2004. Private Client Services operating expenses increased 4% and 11% from the 2003 periods primarily due to higher production-related compensation reflecting increased revenue and higher legal costs. Global Investment Management noted an 11% and 13% increase in expenses from the 2003 third quarter and nine-month period, respectively, and Proprietary Investment Activities noted a 33% and 27% increase from the three- and nine-month periods of 2003.

Benefits, Claims, and Credit Losses

        Benefits, claims, and credit losses were $2.1 billion and $7.6 billion in the 2004 third quarter and nine-month period, down $633 million and $1.1 billion from the respective 2003 periods. Global Consumer provisions for benefits, claims, and credit losses of $1.6 billion and $6.2 billion were down 7% and up 5% from the 2003 third quarter and nine months, reflecting the impact of acquisitions, partially offset by an improved credit environment which resulted in credit reserve releases.

        GCIB provision for credit losses of ($405) million in the 2004 third quarter decreased $481 million from the year-ago level, due to loan loss reserve releases resulting from the overall improvement in the credit environment.

        Corporate cash-basis loans at September 30, 2004 and 2003 were $2.2 billion and $3.8 billion, respectively, while the corporate Other Real Estate Owned (OREO) portfolio totaled $95 million in the current and prior-year quarter. Corporate cash-basis loans decreased $419 million from June 30, 2004, $1.2 billion from December 31, 2003, and $1.6 billion from September 30, 2003.

Income Taxes

        The Company's effective tax rate of 30.0% in the 2004 third quarter reflected a tax reserve release of $147 million due to the closing of a tax audit. In addition, results included a $47 million tax benefit associated with the life and annuity business in Argentina resulting from the company receiving an IRS ruling allowing it to deduct losses incurred in the prior-year period. The effective tax rate also reflected the tax benefits for not providing U.S. income taxes on the earnings of certain foreign subsidiaries that are indefinitely invested.

        The 2004 nine-month period effective tax rate was 28.5%, which reflected the items above and the separately reported WorldCom and Litigation Reserve Charge and gain on sale of Samba.

        The 2003 third quarter tax rate was 31.3% and included a $200 million release of a tax reserve that had been held at the legacy Associates' businesses and was deemed to be in excess of expected tax liabilities, and the benefit of indefinitely-invested international earnings.

Regulatory Capital

        Total capital (Tier 1 and Tier 2) was $95.6 billion or 11.49% of net risk-adjusted assets, and Tier 1 Capital was $69.6 billion or 8.37% of net risk-adjusted assets at September 30, 2004, compared to $90.3 billion or 12.04% and $66.9 billion or 8.91%, respectively, at December 31, 2003.

14


Accounting Changes and Future Application of Accounting Standards

        See Note 2 to the Consolidated Financial Statements for a discussion of Accounting Changes and the Future Application of Accounting Standards.

SIGNIFICANT ACCOUNTING POLICIES

        The Company's accounting policies are fundamental to understanding management's discussion and analysis of results of operations and financial condition. The Company has identified five policies as being significant because they require management to make subjective and/or complex judgments about matters that are inherently uncertain. These policies relate to Valuations of Financial Instruments, Allowance for Credit Losses, Securitizations, Argentina and Legal Reserves. The Company, in consultation with the Audit Committee, has reviewed and approved these significant accounting policies, which are further described in the Company's 2003 Annual Report on Form 10-K.


        Certain amounts in prior periods have been reclassified to conform to the current period's presentation.

15


GLOBAL CONSUMER

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
In millions of dollars                                
                                 
Revenues, net of interest expense   $ 11,713   $ 10,160   15   $ 35,284   $ 29,884   18
Operating expenses     5,483     4,657   18     16,095     13,756   17
Provisions for benefits, claims, and credit losses     1,604     1,719   (7 )   6,189     5,906   5
   
 
     
 
   
Income before taxes and minority interest     4,626     3,784   22     13,000     10,222   27
Income taxes     1,538     1,286   20     4,241     3,330   27
Minority interest, after-tax     15     9   67     45     40   13
   
 
     
 
   
Net income   $ 3,073   $ 2,489   23   $ 8,714   $ 6,852   27
   
 
     
 
   

Average Risk Capital(1)

 

$

22,195

 

 

 

 

 

 

$

21,967

 

 

 

 

 
Return on Risk Capital(1)     55 %             53 %        
Return on Invested Capital(1)     23 %             22 %        
   
           
         

(1)
See Footnote (2) to the table on page 5.

        Global Consumer reported net income of $3.073 billion and $8.714 billion in the 2004 third quarter and nine months, respectively, up $584 million or 23% and $1.862 billion or 27% from the comparable 2003 periods, driven by double-digit growth across all products. Growth in the nine-month comparison includes the 2004 second quarter gain on the sale of Samba of $378 million, reported in Other Consumer. Cards net income increased $287 million or 29% in the 2004 third quarter and $804 million or 33% in the 2004 nine months from the comparable periods of 2003, mainly reflecting an improved credit environment including the impact of credit reserve releases, the addition of the Sears and KorAm portfolios and a lower effective tax rate. Consumer Finance net income increased $167 million or 35% in the 2004 third quarter and $304 million or 20% in the 2004 nine months, primarily reflecting growth in North America, including the acquisition of WMF, growth in Latin America and Asia, and the benefit of an improved credit environment including the impact of credit reserve releases. The nine-month comparison was also impacted by the absence of a 2003 second quarter $94 million tax release in Japan. Retail Banking net income increased $162 million or 15% in the 2004 third quarter and $505 million or 17% in the 2004 nine months from the comparable periods of 2003, primarily reflecting improved credit performance in North America and the international regions, including the impact of credit reserve releases, the KorAm acquisition in Asia, an increase in wealth management product sales, primarily in Asia, and a lower effective tax rate. Significant general credit reserve releases occurred in Global Consumer in the 2004 second and third quarters, in which $191 million and $436 million were released, respectively.

        On July 1, 2004, Citigroup acquired PRMI, a servicing portfolio of $115 billion. In the 2004 second quarter, Citigroup completed the acquisition of KorAm, which added $10.0 billion in deposits and $12.6 billion in loans, with $11.5 billion in Retail Banking and $1.1 billion in Cards at June 30, 2004. In January 2004, Citigroup completed the acquisition of WMF, which added $3.8 billion in average loans and 427 loan offices. In November 2003, Citigroup completed the acquisition of Sears, which added $15.4 billion of private-label card receivables, $13.2 billion of bankcard receivables and 32 million accounts. In July 2003, Citigroup completed the acquisition of the Home Depot portfolio, which added $6 billion in receivables and 12 million accounts. In July 2003, Citigroup also acquired the remaining stake in Diners Club Europe, adding 1 million accounts and $0.6 billion of receivables. These acquisitions were accounted for as purchases; therefore, their results are included in the Global Consumer results from the dates of acquisition forward.

Global Consumer Net Income—Regional View

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars                                  
                                   
North America (excluding Mexico)   $ 2,123   $ 1,691   26   $ 5,656   $ 4,679   21  
Mexico     208     168   24     601     458   31  
EMEA     154     189   (19 )   959     493   95  
Japan     164     106   55     453     477   (5 )
Asia (excluding Japan)     332     212   57     859     596   44  
Latin America     92     123   (25 )   186     149   25  
   
 
     
 
     
Total Net Income   $ 3,073   $ 2,489   23   $ 8,714   $ 6,852   27  
   
 
     
 
     

        The increase in Global Consumer net income in the 2004 third quarter reflected growth in all regions except Latin America and EMEA. Latin America experienced net reserve releases in 2003, while EMEA experienced net credit reserve increases in the 2004 second and third quarters, primarily in Germany. The 2004 nine months showed growth in all regions except Japan, which declined due to the absence of a $94 million 2003 second quarter tax release in Consumer Finance. North America (excluding Mexico) net

16


income grew by $432 million or 26% in the 2004 third quarter and $977 million or 21% in the nine-month period, reflecting the impacts of acquisitions and an improved credit environment, including credit reserve releases, partially offset by lower securitization revenues and the impact of losses on mortgage servicing hedge ineffectiveness in Consumer Assets. Mexico contributed net income growth of $40 million or 24% and $143 million or 31% in the 2004 third quarter and nine months, respectively, driven by the impact of volume growth in Cards and Retail Banking. Higher credit reserve builds in the 2004 third quarter drove EMEA's net income decline of $35 million or 19% from the 2003 third quarter. In the nine-month comparison, net income in EMEA was up $466 million or 95%, primarily reflecting the $378 million gain on the sale of Samba in the 2004 second quarter. Income in Japan was up $58 million or 55% in the 2004 third quarter mainly due to lower credit costs and expenses, and down $24 million or 5% in the 2004 nine months, mainly due to the absence of the 2003 second quarter tax release, partially offset by a lower provision for credit losses. Growth in Asia of $120 million or 57% and $263 million or 44% in the 2004 third quarter and nine-month periods, respectively, was mainly due to higher wealth management sales in Retail Banking, improved credit and growth in Cards, and the impact of KorAm. Latin America's 2004 third quarter net income decreased $31 million or 25% from the prior-year period mainly due to larger reserve releases in the prior year, primarily related to Argentina. Improvement of $37 million or 25% in the nine-month comparison was additionally impacted by the absence of prior-year repositioning costs in both Retail Banking and Consumer Finance.

Cards

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
In millions of dollars                                
                                 
Revenues, net of interest expense   $ 4,602   $ 3,535   30   $ 13,667   $ 10,137   35
Operating expenses     2,053     1,508   36     5,955     4,417   35
Provision for credit losses     646     540   20     2,889     1,992   45
   
 
     
 
   
Income before taxes and minority interest     1,903     1,487   28     4,823     3,728   29
Income taxes     635     506   25     1,561     1,270   23
Minority interest, after-tax     1     1       3     3  
   
 
     
 
   
Net income   $ 1,267   $ 980   29   $ 3,259   $ 2,455   33
   
 
     
 
   
Average assets (in billions of dollars)   $ 96   $ 64   50   $ 95   $ 65   46
Return on assets     5.25 %   6.08 %       4.58 %   5.05 %  
   
 
     
 
   
Average Risk Capital(1)   $ 5,205             $ 5,386          
Return on Risk Capital(1)     97 %             81 %        
Return on Invested Capital(1)     31 %             27 %        
   
           
         

(1)
See Footnote (2) to the table on page 5.



        Cards reported net income of $1.267 billion and $3.259 billion in the 2004 third quarter and nine months, respectively, up $287 million or 29% and $804 million or 33% from the 2003 periods. North America Cards reported net income of $1.067 billion and $2.749 billion in the 2004 third quarter and nine months, respectively, up $252 million or 31% and $667 million or 32% from the 2003 periods, mainly reflecting the Sears acquisition, an improved credit environment including the impact of a $160 million pretax credit reserve release, higher sales and the impact of higher securitization levels, primarily related to the Home Depot portfolio. International Cards net income of $200 million and $510 million in the 2004 third quarter and nine months, respectively, increased $35 million or 21% and $137 million or 37% from the 2003 periods, reflecting receivables growth, improved credit, a lower effective tax rate and the addition of KorAm.

        As shown in the following table, average managed loans grew 22% in both the 2004 third quarter and nine months, reflecting growth of 22% and 21%, respectively, in North America and 24% and 27%, respectively, in International Cards. In North America, the addition of the Sears portfolio and growth in the U.S. and Mexico were partially offset by a decline in introductory promotional rate balances that was driven by a change in account acquisition marketing strategies in 2003. International Cards reflected growth driven by strong account acquisitions in all regions, led by Asia, which included the addition of KorAm, and the benefit of strengthening currencies.

        Total card sales were $90.8 billion and $256.9 billion in the 2004 third quarter and nine months, respectively, up 25% and 24% from the 2003 periods. North America sales were up 24% and 23% over the prior-year quarter and nine months to $77.3 billion and $219.4 billion, respectively, reflecting the impact of acquisitions and higher purchase sales. International Cards sales grew 31% and 34% over the prior-year quarter and nine months to $13.5 billion and $37.5 billion, reflecting broad-based growth led by Asia, and also reflected the addition of KorAm and the benefit of strengthening currencies.

17


 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In billions of dollars                                  
                                   
Sales                                  
  North America   $ 77.3   $ 62.3   24   $ 219.4   $ 179.1   23  
  International     13.5     10.3   31     37.5     27.9   34  
   
 
     
 
     
Total Sales   $ 90.8   $ 72.6   25   $ 256.9   $ 207.0   24  

Average managed loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  North America   $ 139.1   $ 113.7   22   $ 138.3   $ 113.9   21  
  International     15.7     12.7   24     15.2     12.0   27  
   
 
     
 
     
Total average managed loans   $ 154.8   $ 126.4   22   $ 153.5   $ 125.9   22  

Average securitized receivables

 

 

(76.2

)

 

(72.1

)

6

 

 

(75.9

)

 

(70.3

)

8

 
Average loans held-for-sale     (7.4 )   (4.1 ) 80     (3.2 )   (4.1 ) (22 )
   
 
     
 
     
Total on-balance sheet average loans   $ 71.2   $ 50.2   42   $ 74.4   $ 51.5   44  
   
 
     
 
     

        Revenues, net of interest expense, of $4.602 billion and $13.667 billion in the 2004 third quarter and nine months, respectively, increased $1.067 billion or 30% and $3.530 billion or 35% from the 2003 periods. Revenue growth in North America was $954 million or 33% and $3.103 billion or 38% in the 2004 third quarter and nine months, respectively. The growth in the 2004 third quarter was mainly due to the impact of acquisitions, the benefit of increased purchase sales, a gain on the securitization of Home Depot receivables of $146 million in the 2004 third quarter and increased loans in Mexico, partially offset by a higher cost of funds and the absence of net gains of $64 million in the 2003 third quarter resulting from changes in estimates related to the timing of revenue recognition on securitized portfolios. The growth in the 2004 nine-month period primarily resulted from the impact of acquisitions, net interest margin expansion, the benefit of increased purchase sales, the gain on the Home Depot securitizations and increased loans in Mexico. Adversely impacting the nine-month comparison were increased credit losses on securitized receivables (which are recorded as a contra-revenue item after receivables are securitized) and the absence of 2003 net gains of $279 million related to the timing of revenue recognition on securitized portfolios. Revenue growth in International Cards of $113 million or 17% and $427 million or 23% in the 2004 third quarter and nine months was mainly driven by loan and sales growth in all regions, the additions of KorAm and Diners Club Europe, and the benefit of foreign currency translation.

        Operating expenses in the 2004 third quarter and nine months of $2.053 billion and $5.955 billion, respectively, were $545 million or 36% and $1.538 billion or 35% higher than the prior-year periods, primarily reflecting the impact of acquisitions and foreign currency translation, combined with increased marketing and advertising costs in both North America and International Cards.

        The provision for credit losses in the 2004 third quarter and nine months was $646 million and $2.889 billion, respectively, compared to $540 million and $1.992 billion in the prior-year periods. The increase in the provision for credit losses primarily reflected the impact of the Sears and Home Depot acquisitions. In North America, these acquisitions more than offset a decline in net credit losses and the release of general credit reserves of $160 million pretax in the 2004 third quarter and $220 million pretax in the 2004 nine-month period resulting from the improved credit environment, as well as the impact of increased levels of securitized receivables. The International Cards provision declined by 22% and 10% in the 2004 three-and nine-month periods, respectively, reflecting an improved credit environment and general credit reserve releases of $42 million pretax in the 2004 third quarter and $51 million pretax in the 2004 nine-month period.

        The securitization of credit card receivables is limited to the CitiCards business within North America. At September 30, 2004, securitized credit card receivables were $79.9 billion, compared to $73.6 billion at September 30, 2003. Credit card receivables held-for-sale were $7.5 billion at September 30, 2004 compared to $3.0 billion a year ago.

        Securitization changes Citigroup's role from that of a lender to that of a loan servicer, as receivables are removed from the balance sheet but continue to be serviced by Citigroup. As a result, securitization affects the amount of revenue and the manner in which revenue and the provision for credit losses are recorded with respect to securitized receivables.

        A gain is recorded at the time receivables are securitized, representing the difference between the carrying value of the receivables removed from the balance sheet and the fair value of the proceeds received and interests retained. Interests retained from securitization transactions include interest-only strips, which represent the present value of estimated excess cash flows associated with securitized receivables (including estimated credit losses). Collections of these excess cash flows amounts are recorded as commission and fees revenue (for servicing fees) or other revenue. For loans not securitized these excess cash flows would otherwise be reported as gross amounts of net interest revenue, commission and fees revenue and credit losses.

        In addition to interest-only strip assets, Citigroup may retain one or more tranches of certificates issued in securitization transactions, provide escrow cash accounts or subordinate certain principal receivables to collateralize the securitization interests sold to third parties. However, Citigroup's exposure to credit losses on securitized receivables is limited to the amount of the interests retained and collateral provided.

        Including securitized receivables and receivables held-for-sale, managed net credit losses in the 2004 third quarter were $2.142 billion, with a related loss ratio of 5.50%, compared to $2.373 billion and 6.27% in the 2004 second quarter, and $1.789 billion and 5.62% in the 2003 third quarter. In North America, the 2004 third quarter net credit loss ratio of 5.66% declined from 6.61% in the 2004 second quarter and 5.77% from the 2003 third quarter, reflecting an improved credit environment, offset by the addition of the Sears portfolio, which impacted both the bankcard and private label portfolios in North America. In International Cards, the 2004 third quarter net credit loss ratio of 4.09% increased from 3.25% in the 2004 second quarter, but declined from 4.27% in the 2003 third quarter. The increase from the 2004 second quarter reflected the acquisition of KorAm. Citigroup reserved against a certain non-strategic portfolio

18


of KorAm at the time of acquisition, and releases reserves against credit losses as such losses are incurred. This treatment of the non-strategic portfolio increases the net credit loss ratio, but has minimal impact on the total provision for credit losses. The decrease in the ratio versus the 2003 third quarter primarily reflects the improved credit environment offset by the impact of KorAm.

        Loans delinquent 90 days or more on a managed basis were $2.842 billion or 1.81% of loans at September 30, 2004, compared to $2.808 billion or 1.82% at June 30, 2004 and $2.353 billion or 1.83% at September 30, 2003. The net impact of acquisitions was more than offset by the improved credit environment in driving the declines in the ratio versus both the prior year and the prior quarter.

Consumer Finance

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars                                  
                                   
Revenues, net of interest expense   $ 2,631   $ 2,513   5   $ 7,996   $ 7,525   6  
Operating expenses     853     867   (2 )   2,649     2,567   3  
Provisions for benefits, claims, and credit losses     786     925   (15 )   2,596     2,812   (8 )
   
 
     
 
     
Income before taxes     992     721   38     2,751     2,146   28  
Income taxes     349     245   42     947     646   47  
   
 
     
 
     
Net income   $ 643   $ 476   35   $ 1,804   $ 1,500   20  
   
 
     
 
     
Average assets (in billions of dollars)   $ 113   $ 104   9   $ 111   $ 104   7  
Return on assets     2.26 %   1.82 %     $ 2.17 % $ 1.93 %    
   
 
     
 
     

Average Risk Capital(1)

 

$

3,675

 

 

 

 

 

 

$

3,728

 

 

 

 

 

 
Return on Risk Capital(1)     70 %             65 %          
Return on Invested Capital(1)     23 %             22 %          
   
           
           

(1)
See Footnote (2) to the table on page 5.

        Consumer Finance reported net income of $643 million and $1.804 billion in the 2004 third quarter and nine months, respectively, up $167 million or 35% and $304 million or 20% from the comparable 2003 periods, principally reflecting continued growth in North America, including the acquisition of WMF, and continued strong international growth in Latin America and Asia. A decline in EMEA in the 2004 third quarter from the 2003 period was mainly due to the expansion of 58 new offices in 6 countries—Italy, Poland, Spain, UK, Romania and Slovakia. Japan, which increased income in the 2004 third quarter due to lower credit losses, declined in the 2004 nine-month period from 2003 due to lower personal loan and real-estate revenues, and the absence of a $94 million prior-year tax reserve release related to a settlement with tax authorities, offset by improved net credit losses and lower expenses.

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
In billions of dollars                                
                                 
Average loans                                
Real estate-secured loans   $ 58.6   $ 52.2   12   $ 57.2   $ 51.6   11
Personal     24.6     22.1   11     24.5     22.3   10
Auto     11.6     11.2   4     11.5     11.0   5
Sales finance and other     5.1     5.3   (4 )   5.4     4.9   10
   
 
     
 
   
Total average loans   $ 99.9   $ 90.8   10   $ 98.6   $ 89.8   10
   
 
     
 
   

        As shown in the preceding table, average loans grew $9.1 billion or 10% compared to the 2003 third quarter, primarily reflecting growth in North America of $8.5 billion or 12%. North American growth reflected the addition of WMF, which contributed $3.5 billion in average loans, and growth in all products, but primarily real estate-secured and auto loans. Growth of $0.6 billion or 3% in the International markets was mainly driven by growth in real estate-secured and personal loans in both EMEA and Asia, and included the impact of strengthening currencies, partially offset by a decline in EMEA auto loans. In Japan, average loans in the 2004 third quarter and nine-month periods declined 8% and 6%, respectively, from the comparable 2003 periods, as the benefit of foreign currency translation was more than offset by the impact of higher pay-downs, reduced loan demand, and tighter underwriting standards.

        As shown in the following table, the average net interest margin of 9.68% in the 2004 third quarter decreased 34 basis points from the 2003 third quarter, primarily reflecting spread compression in North America, where the average net interest margin declined 36 basis points. The decline in North America primarily represented a one-time increase in cost of funds related to the repositioning of debt, which decreased the average net interest margin in the 2004 third quarter by 30 basis points. Additionally, lower yields in North America reflected the continued shift to higher-quality credits, particularly in the real estate-secured and auto loan business. The average net interest margin for International Consumer Finance was 16.02% in the 2004 third quarter, increasing 25 basis points from

19


the prior-year quarter, primarily driven by the impact of recording adjustments and refunds of interest in Japan, all in net credit losses, beginning in the 2004 third quarter, which positively impacted the International net interest margin by 49 basis points. Excluding this impact, the International net interest margin declined 24 basis points from the 2003 third quarter, primarily due to lower yields and a higher cost of funds in EMEA.

 
  Three Months Ended
September 30,

   
 
  2004
  2003
  Change
Average Net Interest Margin            
North America   7.99 % 8.35 % (36) bps
International   16.02 % 15.77 % 25 bps
Total   9.68 % 10.02 % (34) bps
   
 
 

        Revenues, net of interest expense, of $2.631 billion and $7.996 billion in the 2004 third quarter and nine months, respectively, increased $118 million or 5% and $471 million or 6% from the prior-year periods. Revenue in North America increased $86 million or 5% and $467 million or 9% from the 2003 third quarter and nine-month period, respectively, primarily driven by the acquisition of WMF and growth in receivables, partially offset by declines in insurance-related revenue and the impact of a one-time increase in cost of funds by $66 million related to the repositioning of intercompany debt (offset in treasury earnings in Corporate Other). Revenue in International Consumer Finance increased $32 million or 4% from the 2003 third quarter, mainly due to growth in Asia and the impact of foreign currency translation, partially offset by a decline in Japan due to lower volumes. International Consumer Finance revenue for the 2004 nine-month period was essentially flat to the prior year as declines in Japan due to lower volumes and spreads were offset by growth in Asia and EMEA, including the impact of foreign currency translation.

        Operating expenses of $853 million and $2.649 billion in the 2004 third quarter and nine months, respectively, decreased $14 million or 2% from the 2003 third quarter, but increased $82 million or 3% from the 2003 nine-month periods, respectively. Operating expenses in North America decreased $11 million or 2% from the 2003 third quarter, but increased $63 million or 4% from the 2003 nine-month period. The increase in the nine-month period primarily reflects the WMF acquisition. Included in the 2004 third quarter expenses was a change in estimate related to the WMF portfolio of $22 million. Internationally, expenses decreased $3 million or 1% from the 2003 third quarter, but increased $19 million or 2% from the 2003 nine-month period. The low level of expense growth produced through prior-year repositioning in Japan was slightly offset by the impact of foreign currency translation, volume growth, and branch expansion in Asia (primarily India) and EMEA.

        The provisions for benefits, claims, and credit losses were $786 million in the 2004 third quarter, down from $894 million in the 2004 second quarter and $925 million in the 2003 third quarter, as lower credit losses in Japan due to lower bankruptcies, improved credit conditions in the U.S., and credit reserve releases of $69 million pretax in the 2004 third quarter and $74 million pretax in the 2004 nine-month period were partially offset by the impact of the WMF acquisition and the impact of recording adjustments and refunds of interest in Japan, all in net credit losses, beginning in the 2004 third quarter. Net credit losses and the related loss ratio were $832 million and 3.31% in the 2004 third quarter, compared to $857 million and 3.52% in the 2004 second quarter and $898 million and 3.92% in the 2003 third quarter. In North America, the net credit loss ratio of 2.46% in the 2004 third quarter was down from 2.69% in the 2004 second quarter and 2.93% in the 2003 third quarter, reflecting improvements in the real estate, auto and personal loan businesses, partially offset by the impact of WMF. The net credit loss ratio for International Consumer Finance was 6.52% in the 2004 third quarter, down from 6.57% in the 2004 second quarter and 7.34% in the 2003 third quarter. The decrease from the prior quarter primarily represents improvements in personal loans and real estate, partially offset by the impact in Japan related to adjustments and refunds of interest. The decrease from the 2003 third quarter primarily reflects improved conditions in Japan, where lower bankruptcy losses were partially offset by the impact related to adjustments and refunds of interest.

        Loans delinquent 90 days or more were $1.938 billion or 1.91% of loans at September 30, 2004, compared to $1.948 billion or 1.96% at June 30, 2004 and $2.127 billion or 2.30% a year ago. The decrease in the delinquency ratio versus the prior quarter was mainly due to improvements in Japan, while the decrease versus the prior-year quarter primarily relates to North America and Japan.

20


Retail Banking

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars                                  
Revenues, net of interest expense   $ 4,504   $ 4,103   10   $ 13,104   $ 12,180   8  
Operating expenses     2,500     2,226   12     7,223     6,569   10  
Provisions for benefits, claims, and credit losses     172     254   (32 )   704     1,102   (36 )
   
 
     
 
     
Income before taxes and minority interest     1,832     1,623   13     5,177     4,509   15  
Income taxes     593     552   7     1,632     1,474   11  
Minority interest, after-tax     14     8   75     42     37   14  
   
 
     
 
     
Net income   $ 1,225   $ 1,063   15   $ 3,503   $ 2,998   17  
   
 
     
 
     
Average assets (in billions of dollars)   $ 274   $ 234   17   $ 257   $ 230   12  
Return on assets     1.78 %   1.80 %       1.82 %   1.74 %    
   
 
     
 
     
Average Risk Capital(1)   $ 13,315             $ 12,854            
Return on Risk Capital(1)     37 %             37 %          
Return on Invested Capital(1)     19 %             18 %          
   
           
           

(1)
See Footnote (2) to the table on page 5.

        Retail Banking reported net income of $1.225 billion and $3.503 billion in the 2004 third quarter and nine months, respectively, up $162 million or 15% and $505 million or 17% from the 2003 periods. The increase in Retail Banking was driven by growth in North America Retail Banking of $130 million or 19% and $241 million or 11% in the 2004 third quarter and nine months, respectively, primarily due to credit improvements in CitiCapital. Net income in International Retail Banking increased $32 million or 9% and $264 million or 29% in the 2004 third quarter and nine months, respectively, primarily reflecting growth in Asia including the impact of KorAm, and growth in Japan. The nine-month period comparison additionally reflected growth in EMEA.

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
In billions of dollars                                
Average customer deposits                                
  North America   $ 116.9   $ 113.3   3   $ 115.0   $ 112.7   2
  Bank Deposit Program Balances(1)     41.4     41.3       41.6     41.2   1
   
 
     
 
   
    Total North America     158.3     154.6   2     156.6     153.9   2
    International     104.9     87.0   21     101.1     84.2   20
   
 
     
 
   
Total average customer deposits   $ 263.2   $ 241.6   9   $ 257.7   $ 238.1   8

Average loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  North America   $ 139.5   $ 121.3   15   $ 133.8   $ 122.7   9
  International     50.5     35.8   41     44.8     35.4   27
   
 
     
 
   
Total average loans   $ 190.0   $ 157.1   21   $ 178.6   $ 158.1   13
   
 
     
 
   

(1)
The Bank Deposit Program balances are generated from the Smith Barney channel (Private Client Services segment) and the funds are managed by Citibanking North America.

        As shown in the preceding table, Retail Banking grew average customer deposits and average loans compared to 2003. Average customer deposit growth in North America primarily reflected increases in both higher-margin demand and money market accounts, partially offset by declines in time and mortgage escrow deposits. Average loan growth in North America reflected increased mortgages and student loans in Consumer Assets, partially offset by a decline in CitiCapital resulting from the run-off of non-core portfolios and the sale of the $1.2 billion CitiCapital Fleet Services portfolio at the end of the 2003 third quarter. In the international markets, average customer deposits grew 21% from the prior-year quarter driven by growth in Asia, EMEA and Japan and the impact of foreign currency translation. The growth in Asia included the impact of the KorAm acquisition, which added $9.7 billion in average customer deposits, while the growth in EMEA was primarily in Germany. International Retail Banking average loans increased 41% from the prior-year quarter due to growth in Asia and EMEA, and included the impact of the KorAm acquisition, which added $11.7 billion, and foreign currency translation. Growth in average loans was impacted by a decline in Latin America, largely reflecting the impact of strategic repositioning in the area.

        As shown in the following table, revenues, net of interest expense, of $4.504 billion and $13.104 billion in the 2004 third quarter and nine months, respectively, increased $401 million or 10% and $924 million or 8% from the 2003 periods. Revenues in North America increased $205 million or 7% compared to the prior-year quarter and $199 million or 2% in the nine-month comparison, primarily reflecting increased results in Mexico, CitiCapital, Citibanking North America and Primerica, partially offset by a decline in

21


Consumer Assets. In Mexico, revenues increased due to the absence of a prior-year $85 million write-down of the Fobaproa investment security and higher deposit and loan revenues, partially offset by the negative impact of foreign currency translation. The increase in CitiCapital primarily resulted from the reclassification of operating leases from loans to other assets and the related operating lease depreciation expense from revenue to expense. This reclassification increased both revenues and expenses by $137 million pretax in the 2004 third quarter and $272 million pretax in the 2004 nine-month period, and was partially offset by the impact of lower loan volumes. The increase in Citibanking North America was driven by higher deposit and loan volumes, partially offset by lower net funding spreads, while in Primerica the increase resulted from higher life insurance premiums, and securities commissions and fees. The decline in Consumer Assets resulted primarily from lower securitization revenues due to spread compression and lower origination volumes, and the impact of losses on mortgage servicing hedge ineffectiveness resulting from the volatile rate environment, partially offset by the impact of the PRMI acquisition and a higher net interest margin.

        International Retail Banking revenues increased $196 million or 15% and $725 million or 20% in the 2004 third quarter and nine-month period, respectively, reflecting growth in Asia and EMEA and the impact of strengthening currencies. Revenue increases in Asia were primarily due to the KorAm acquisition, increased investment product sales, growth in branch lending and deposits, and favorable foreign currency translation. Growth in EMEA was driven by the impact of favorable foreign currency translation, improved investment product sales and growth in deposits, mainly in Germany.

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
In millions of dollars                                
Revenues, net of interest expense                                
  Citibanking North America, Consumer Assets and CitiCapital   $ 1,971   $ 1,895   4   $ 5,645   $ 5,627  
  Primerica Financial Services     532     527   1     1,592     1,557   2
  Mexico     495     371   33     1,451     1,305   11
   
 
     
 
   
North America     2,998     2,793   7     8,688     8,489   2
   
 
     
 
   
  EMEA     687     615   12     2,093     1,748   20
  Japan     113     117   (3 )   357     338   6
  Asia     574     422   36     1,581     1,231   28
  Latin America     132     156   (15 )   385     374   3
   
 
     
 
   
International     1,506     1,310   15     4,416     3,691   20
   
 
     
 
   
Total revenues, net of interest expense   $ 4,504   $ 4,103   10   $ 13,104   $ 12,180   8
   
 
     
 
   

        Operating expenses in the 2004 third quarter and nine months increased $274 million or 12% and $654 million or 10%, respectively, from the comparable 2003 periods. In North America, expenses grew $171 million or 11% and $389 million or 9% from the 2003 third quarter and nine months, respectively. The increase primarily reflected the impact of the operating lease reclassification in CitiCapital of $137 million and $272 million in the 2004 third quarter and nine months, respectively, higher volume-related expenses and increased investment spending in technology projects in Citibanking North America, higher legal and staff-related costs in Mexico, and the impact of the PRMI acquisition. International Retail Banking operating expenses increased $103 million or 15% and $265 million or 13% from the 2003 third quarter and nine months, respectively, mainly reflecting the addition of KorAm, the impact of foreign currency translation, and increased investment spending in branch expansion, technology, and advertising and marketing, partially offset in the nine-month comparison by the absence of prior-year repositioning costs in Latin America and EMEA.

        The provisions for benefits, claims, and credit losses were $172 million and $704 million in the 2004 third quarter and nine months, respectively, down $82 million or 32% and $398 million or 36% from the comparable periods in 2003. The decline in the 2004 third quarter primarily reflected general credit reserve releases of $165 million, which were net of a $66 million credit reserve build in Germany, and lower credit losses in CitiCapital and Citibanking North America, partially offset by the absence of a prior-year $64 million credit recovery in Mexico and higher credit losses in EMEA due to Germany. The decline in the provisions for benefits, claims and credit losses in the nine-month comparison was additionally impacted by the 2004 second quarter general credit reserve release of $117 million. Net credit losses (excluding Commercial Markets) were $176 million and the related loss ratio was 0.47% in the 2004 third quarter, compared to $176 million and 0.51% in the 2004 second quarter and $210 million and 0.72% in the 2003 third quarter. The decrease in the net credit loss ratio from the 2003 third quarter was primarily due to the absence of an $87 million write-down of an Argentina compensation note in the prior year (which was written down against previously established reserves) and improved credit losses in Citibanking North America, partially offset by higher credit losses in Germany and Mexico. Commercial Markets net credit losses were $43 million and the related loss ratio was 0.43% in the 2004 third quarter, compared to $31 million and 0.31% in the 2004 second quarter and $50 million and 0.47% in the 2003 third quarter. The increase in the loss ratio from the 2004 second quarter was primarily due to increases in CitiCapital, Citibanking North America and Mexico, while the improvement in the loss ratio from the 2003 third quarter resulted from improvements in CitiCapital and Citibanking North America, offset by the absence of a prior-year recovery in Mexico.

22


        Loans delinquent 90 days or more (excluding Commercial Markets) were $3.907 billion or 2.53% of loans at September 30, 2004, compared to $3.576 billion or 2.46% at June 30, 2004, and $3.707 billion or 3.19% a year ago. The increase in delinquent loans compared to a year ago resulted from increases in Consumer Assets, reflecting the impact of a GNMA portfolio that was purchased in the PRMI acquisition, and increases in Germany including the impact of foreign currency translation. These increases were partially offset by improvements in Asia, Latin America and Mexico. The increase in delinquent loans from the 2004 second quarter related to the GNMA portfolio in PRMI, offset by improvements in all other regions.

        Cash-basis loans in Commercial Markets were $1.000 billion or 2.55% of loans at September 30, 2004, $1.173 billion or 2.96% at June 30, 2004, and $1.283 billion or 3.17% at September 30, 2003. Cash-basis loans improved from the prior quarter primarily due to broad-based declines in all products and regions, led by CitiCapital, where the business continues to work through the liquidation of non-core portfolios. Compared to a year ago, the decline in cash-basis loans was driven by improvement in all products and regions except Mexico, led by CitiCapital.

        Average assets of $274 billion and $257 billion in the 2004 third quarter and nine months, respectively, increased $40 billion and $27 billion from the comparable periods of 2003. The increase in average assets primarily reflected the impact of the KorAm acquisition and growth in mortgages, partially offset by a reduction in CitiCapital due to the liquidation of non-core portfolios.

Other Consumer

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars                          
Revenues, net of interest expense   ($ 24 ) $ 9   $ 517   $ 42  
Operating expenses     77     56     268     203  
   
 
 
 
 
Income before taxes (benefits)     (101 )   (47 )   249     (161 )
Income taxes (benefits)     (39 )   (17 )   101     (60 )
   
 
 
 
 
Net income (loss)   ($ 62 ) ($ 30 ) $ 148   ($ 101 )
   
 
 
 
 

        Other Consumer—which includes certain treasury and other unallocated staff functions, global marketing and other programs—reported a loss of $62 million in the 2004 third quarter and income of $148 million in the 2004 nine months, compared to losses of $30 million and $101 million in the comparable 2003 periods. The increase in income of $249 million in the 2004 nine months was primarily due to a $378 million after-tax gain related to the sale of Samba in the 2004 second quarter. Excluding the Samba gain, the decrease in income in both the 2004 third quarter and nine-month period was due to lower treasury results, including the impact of higher capital funding costs, and an increase in staff-related expenses and advertising and marketing costs.

23


GLOBAL CORPORATE AND INVESTMENT BANK

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars                                  
Revenues, net of interest expense   $ 4,777   $ 4,730   1   $ 16,312   $ 15,253   7  
Operating expenses     3,054     2,678   14     17,221     8,814   95  
Provision for credit losses     (405 )   76   NM     (812 )   490   NM  
   
 
     
 
     
Income (loss) before taxes and minority interest     2,128     1,976   8     (97 )   5,949   NM  
Income taxes (benefit)     633     615   3     (529 )   1,826   NM  
Minority interest, after-tax     44     8   NM     80     25   NM  
   
 
     
 
     
Net income (loss)   $ 1,451   $ 1,353   7   $ 352   $ 4,098   (91 )
   
 
     
 
     
Average Risk Capital(1)   $ 20,543             $ 18,545            
Return on Risk Capital(1)     28 %             3 %          
Return on Invested Capital(1)     21 %             1 %          
   
           
           

(1)
See Footnote (2) to the table on page 5.

NM
Not meaningful

        GCIB reported net income of $1.451 billion and $352 million in the 2004 third quarter and nine months, up $98 million or 7% and down $3.746 billion or 91% from the 2003 third quarter and nine months, respectively. The 2004 third quarter reflects increases of $89 million or 45% in Transaction Services and $12 million in Other Corporate, offset by a decrease of $3 million in Capital Markets and Banking. The 2004 nine months reflects a decrease of $4.558 billion in Other Corporate, offset by an increase of $599 million or 17% in Capital Markets and Banking and $213 million or 38% in Transaction Services. The increase in the average risk capital is due largely to the impact on operational risk capital of the WorldCom and Litigation Reserve Charge and the acquisition of KorAm.

        Capital Markets and Banking net income of $1.159 billion and $4.138 billion in the 2004 third quarter and nine months, respectively, was basically unchanged from the 2003 third quarter and increased $599 million or 17% from the 2003 nine months. Income in the 2004 third quarter remained unchanged, reflecting a decrease in revenues and an increase in expenses offset by a lower provision for credit losses. The increase in the 2004 nine months primarily reflects a lower provision for credit losses as well as an increase in Lending and Equity Markets revenues, partially offset by decreases in Investment Banking revenues. Expenses in the 2004 periods increased and reflect the impact of recent acquisitions, a $100 million increase in legal reserves, and increased investment spending on strategic growth initiatives.

        Transaction Services net income of $285 million and $780 million in the 2004 third quarter and nine months increased $89 million or 45% from the 2003 third quarter and $213 million or 38% from the 2003 nine months, respectively. The increases in net income in 2004 were primarily due to lower provision for credit losses, higher revenue reflecting growth in assets under custody and liability balances, and improved spreads, partially offset by higher expenses.

        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 approximately 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.

GCIB Net Income—Regional View

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars                                  
North America (excluding Mexico)   $ 501   $ 604   (17 ) ($ 2,997 ) $ 1,844   NM  
Mexico     198     120   65     476     301   58  
EMEA     123     233   (47 )   1,048     801   31  
Japan     91     54   69     271     108   NM  
Asia (excluding Japan)     309     196   58     938     572   64  
Latin America     229     146   57     616     472   31  
   
 
     
 
     
Total Net Income   $ 1,451   $ 1,353   7   $ 352   $ 4,098   (91 )
   
 
     
 
     

NM
Not meaningful

        GCIB net income increased in the 2004 third quarter compared to the 2003 third quarter primarily due to increases in Asia (excluding Japan), Latin America, Mexico and Japan, partially offset by declines in EMEA and North America (excluding Mexico), but decreased in the 2004 nine months primarily as a result of the WorldCom and Litigation Reserve Charge in North America (excluding

24


Mexico), partially offset by increases in Asia (excluding Japan), EMEA, Mexico, Latin America and Japan. Asia (excluding Japan) net income increased $113 million and $366 million in the 2004 third quarter and nine months, respectively, primarily due to loan loss reserve releases, as a result of improving credit quality, the acquisition of KorAm, and increases in Fixed Income (mainly in global distressed debt trading) and strong foreign exchange trading results, which were positively impacted by the weakening of the U.S. dollar. EMEA net income decreased $110 million in the 2004 third quarter primarily due to a $100 million pretax increase in legal reserves, partially offset by a lower provision for credit losses reflecting credit recoveries. EMEA net income increased $247 million in the 2004 nine months primarily due to the $378 million after-tax gain on the sale of Samba and a lower provision for credit losses reflecting credit recoveries, partially offset by the increase in legal reserves. Japan net income increased $37 million and $163 million in the 2004 third quarter and nine months, respectively, primarily driven by increases in Fixed Income and Investment Banking revenue, a gain on the partial sale of Nikko Cordial shares, and a lower provision for credit losses due to general loan loss reserve releases. Mexico net income increased $78 million and $175 million in the 2004 third quarter and nine months, respectively, primarily due to general loan loss reserve releases resulting from improving credit quality. Latin America net income increased $83 million and $144 million in the 2004 third quarter and nine months, respectively, primarily due to general loan loss reserve releases resulting from improving credit quality, partially offset by strong prior year trading gains in Brazil.

Capital Markets and Banking

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
In millions of dollars                                
Revenues, net of interest expense   $ 3,733   $ 3,846   (3 ) $ 12,759   $ 12,589   1
Operating expenses     2,344     2,053   14     7,235     6,953   4
Provision for credit losses     (335 )   73   NM     (637 )   466   NM
   
 
     
 
   
Income before taxes and minority interest     1,724     1,720       6,161     5,170   19
Income taxes     522     550   (5 )   1,946     1,606   21
Minority interest, after-tax     43     8   NM     77     25   NM
   
 
     
 
   
Net income   $ 1,159   $ 1,162     $ 4,138   $ 3,539   17
   
 
     
 
   
Average Risk Capital(1)   $ 19,081             $ 17,190          
Return on Risk Capital(1)     24 %             32 %        
Return on Invested Capital(1)     19 %             25 %        
   
           
         

(1)
See Footnote (2) to the table on page 5.

NM
Not meaningful

        Capital Markets and Banking reported net income of $1.159 billion and $4.138 billion in the 2004 third quarter and nine months, respectively, a decrease of $3 million from the 2003 third quarter and an increase of $599 million or 17% from the 2003 nine months. The decrease in the 2004 third quarter is primarily due to decreases in Fixed Income Markets and Equity Markets revenues as well as higher expenses due to a $100 million increase in legal reserves and increased investment spending, partially offset by a lower provision for credit losses reflecting improved credit trends and higher Investment Banking revenue and Lending due to the impact of the KorAm acquisition. The increase in the 2004 nine months primarily reflects a lower provision for credit losses and higher Lending and Equity Markets revenues, partially offset by declines in Investment Banking revenues.

        Revenues, net of interest expense, of $3.733 billion and $12.759 billion in the 2004 third quarter and nine months decreased $113 million or 3% from the 2003 third quarter and increased $170 million or 1% from the 2003 nine months, respectively. The revenue decrease in the 2004 third quarter was driven by declines in Fixed Income and Equity Markets, partially offset by increases in Investment Banking and Lending. Fixed Income Markets decreased primarily due to weaker trading results in Interest Rate and Currency products as a result of declining interest rates and lower client activity, partially offset by higher commodity revenues. The Equity Markets decline primarily reflects decreases in convertible and derivative volumes as rising interest rates and widening spreads reduced market activity. Lending revenues increased primarily reflecting the acquisition of KorAm.

        The increase in revenues in the 2004 nine months was primarily driven by increases in Lending, Equity Markets and Fixed Income Markets, partially offset by a decrease in Investment Banking. Lending increased primarily reflecting the absence of prior-year losses in credit derivatives (which serve as an economic hedge for the loan portfolio) and the acquisition of KorAm. The Equity Markets increase is primarily due to higher cash trading and derivatives, partially offset by declines in convertibles. Fixed Income Markets increased primarily due to higher commodities, mortgage trading, and distressed debt trading, partially offset by losses on interest rate positions and foreign exchange trading. The decrease in Investment Banking is primarily due to lower debt underwriting, partially offset by increases in equity underwriting and advisory and other fees, primarily higher M&A.

        Operating expenses of $2.344 billion and $7.235 billion in the 2004 third quarter and nine months, respectively, increased $291 million or 14% from the 2003 third quarter and $282 million or 4% from the 2003 nine months primarily due to the acquisition of

25


KorAm, increased legal reserves, and increased investment spending on strategic growth initiatives, partially offset by lower compensation and benefits expense (primarily reflecting a lower incentive compensation accrual).

        The provision for credit losses was ($335) million in the 2004 third quarter and ($637) million in the 2004 nine months, down $408 million and $1.103 billion, respectively, from the 2003 periods primarily due to general loan loss reserve releases as a result of improving credit quality, and lower credit losses in the power and energy industry, Argentina and Brazil. The 2004 third quarter included the release of $202 million in general loan loss reserves, which consisted of releases of $118 million in Mexico, $71 million in Latin America, $11 million in Japan and $2 million in EMEA.

        Cash-basis loans were $2.149 billion at September 30, 2004, compared to $2.501 billion at June 30, 2004, $3.263 billion at December 31, 2003, and $3.588 billion at September 30, 2003. Cash-basis loans net of write-offs decreased $1.439 billion from September 30, 2003, primarily due to decreases related to borrowers in the telecommunications and power and energy industries and charge-offs against reserves as well as paydowns from corporate borrowers in Argentina, Mexico, Australia, Hong Kong, and New Zealand, partially offset by increases in Korea reflecting the acquisition of KorAm. Cash-basis loans decreased $352 million from June 30, 2004, primarily due to charge-offs taken against reserves and paydowns from borrowers in the power and energy industry, Argentina, Thailand and Mexico, partially offset by an increase in Russia.

Transaction Services

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
In millions of dollars                                
Revenues, net of interest expense   $ 1,042   $ 882   18   $ 2,965   $ 2,682   11
Operating expenses     711     618   15     2,061     1,877   10
Provision for credit losses     (70 )   3   NM     (175 )   24   NM
   
 
     
 
   
Income before taxes and minority interest     401     261   54     1,079     781   38
Income taxes and minority interest, after-tax     116     65   78     299     214   40
   
 
     
 
   
Net income   $ 285   $ 196   45   $ 780   $ 567   38
   
 
     
 
   
Average Risk Capital(1)   $ 1,462             $ 1,355          
Return on Risk Capital(1)     78 %             77 %        
Return on Invested Capital(1)     47 %             47 %        
   
           
         

(1)
See Footnote (2) to the table on page 5.

NM
Not meaningful

        Transaction Services net income of $285 million and $780 million in the 2004 third quarter and nine months increased $89 million or 45% from the 2003 third quarter and $213 million or 38% from the 2003 nine months, respectively. The increases in net income in 2004 were primarily due to a lower provision for credit losses, higher revenue reflecting growth in assets under custody and liability balances, improved spreads, and the impact of KorAm, partially offset by higher expenses.

        As shown in the following table, average liability balances of $121 billion grew 20% compared to the 2003 third quarter, primarily due to increases in Asia and Europe reflecting positive flow and the impact of recent acquisitions in Asia. Assets under custody reached $7.3 trillion, an increase of $1.6 trillion or 28% compared to the 2003 third quarter, primarily reflecting market appreciation and increases in customer volumes.

 
  Three Months Ended
September 30,

  Three Months Ended
September 30,

   
 
 
  %
Change

 
 
  2004
  2003
 
Liability balances (average in billions)   $ 121   101   20 %
Assets under custody (EOP in trillions)     7.3   5.7   28 %
   
 
     

        Revenues, net of interest expense, of $1.042 billion and $2.965 billion in the 2004 third quarter and nine months increased $160 million or 18% from the 2003 third quarter and $283 million or 11% from the 2003 nine months, respectively, primarily driven by growth in Cash and Securities Services revenue. Revenue in Cash Management Services increased $128 million or 26% from the 2003 third quarter and $172 million or 11% from the 2003 nine months, mainly due to increased transaction volumes, growth in liability balances and the impact of the KorAm acquisition. Revenue in Securities Services increased $31 million or 13% from the 2003 third quarter and $131 million or 19% from the 2003 nine months, primarily reflecting higher assets under custody and the impact of the Forum Financial acquisition, partially offset by a prior-year gain on the sale of interest in a European market exchange. Trade revenue remained essentially flat to the 2003 third quarter and decreased $20 million or 4% from the 2003 nine months, primarily due to lower spreads. The 2003 and 2004 nine-month periods included gains on the early termination of intracompany deposits (which were offset in Capital Markets and Banking).

26


        Operating expenses of $711 million and $2.061 billion in the 2004 third quarter and nine months increased $93 million or 15% from the 2003 third quarter and $184 million or 10% from the 2003 nine months, respectively. Expenses increased in the 2004 periods primarily due to higher business volumes, including the effect of the acquisitions of Forum Financial and KorAm, as well as increased compensation and benefits costs.

        The provision for credit losses of ($70) and ($175) million in the 2004 third quarter and nine months decreased $73 million from the 2003 third quarter and $199 million from the 2004 nine months, respectively, primarily due to general loan loss reserve releases of $48 million in the 2004 third quarter and $147 million in the 2004 nine months as a result of improving credit quality and lower write-offs in Latin America.

        Cash-basis loans, which in the Transaction Services business are primarily trade finance receivables, were $51 million, $118 million, $156 million, and $201 million at September 30, 2004, June 30, 2004, December 31, 2003 and September 30, 2003, respectively. The decreases in cash-basis loans of $67 million from June 30, 2004 and of $150 million from September 30, 2003 were primarily due to charge-offs in Argentina and Poland.

Other Corporate

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars                          
Revenues, net of interest expense   $ 2   $ 2   $ 588   ($ 18 )
Operating expenses     (1 )   7     7,925     (16 )
   
 
 
 
 
Income (loss) before taxes     3     (5 )   (7,337 )   (2 )
Income tax (benefits)     (4 )       (2,771 )   6  
   
 
 
 
 
Net (loss)   $ 7   ($ 5 ) ($ 4,566 ) ($ 8 )
   
 
 
 
 

        Other Corporate—which includes intra-GCIB segment eliminations, certain one-time non-recurring items and tax amounts not allocated to GCIB products—reported net income of $7 million and a net loss of $4.566 billion for the 2004 third quarter and nine months, respectively, compared to a net loss of $5 million and $8 million in the 2003 third quarter and nine months. The increase in Other Corporate net losses in the 2004 nine months reflects the $4.95 billion (after-tax) WorldCom and Litigation Reserve Charge, partially offset by a $378 million after-tax gain on the sale of Samba.

27


PRIVATE CLIENT SERVICES

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars                                  

Revenues, net of interest expense

 

$

1,523

 

$

1,493

 

2

 

$

4,830

 

$

4,280

 

13

 
Operating expenses     1,204     1,162   4     3,758     3,390   11  
Provision for credit losses                   1   (100 )
   
 
     
 
     
Income before taxes     319     331   (4 )   1,072     889   21  
Income taxes     124     125   (1 )   417     336   24  
   
 
     
 
     
Net income   $ 195   $ 206   (5 ) $ 655   $ 553   18  
   
 
     
 
     

Average Risk Capital(1)

 

$

1,080

 

 

 

 

 

 

$

1,200

 

 

 

 

 

 
Return on Risk Capital(1)     72 %             73 %          
Return on Invested Capital(1)     52 %             55 %          
   
           
           

(1)
See Footnote (2) to the table on page 5.

        Private Client Services net income of $195 million in the 2004 third quarter decreased $11 million or 5% from 2003, primarily due to higher legal and communications expense and lower transactional revenue, which were partially offset by higher revenue, reflecting higher asset-based fee revenue. Net income of $655 million in the 2004 nine months increased $102 million or 18% from 2003, primarily due to increases in both asset-based revenue and transactional revenue, partially offset by higher production-related compensation and legal costs.

        Revenues, net of interest expense, of $1.523 billion in the 2004 third quarter increased $30 million or 2% from the prior-year period, primarily due to increases in asset-based fee revenue reflecting higher assets under fee-based management, partially offset by decreases in transactional revenue reflecting lower customer trading volumes. Revenues, net of interest expense, of $4.830 billion in the 2004 nine-month period, increased $550 million or 13% from 2003, reflecting increases in asset-based fee revenue. Fee-based revenue increased $473 million or 23%, resulting from growth in assets under fee-based management. Transactional revenue increased $77 million or 3%, primarily due to increased customer trading volumes.

        Total assets under fee-based management were $221 billion as of September 30, 2004, up $29 billion or 15% from the prior-year period. Total client assets, including assets under fee-based management, of $1,087 billion in the 2004 third quarter increased $89 billion or 9% compared to the prior-year quarter, principally due to market appreciation and positive net inflows. Net inflows were $3 billion in the 2004 third quarter compared to $5 billion in the prior-year quarter. Private Client Services had 12,096 financial consultants as of September 30, 2004, compared with 12,254 as of September 30, 2003. Annualized revenue per financial consultant of $500,000 increased 4% from the prior-year quarter.

        Operating expenses of $1.204 billion in the 2004 third quarter and $3.758 billion in the 2004 nine months, increased $42 million or 4% and $368 million or 11%, respectively, from the comparable 2003 periods. The increases were mainly due to higher production-related compensation reflecting increased revenue and higher legal costs.

 
  September 30,
2004

  September 30,
2003

  %
Change

In billions of dollars                

Consulting Group and Internally Managed Accounts

 

$

145

 

$

128

 

13
Financial Consultant Managed Accounts     76     64   19
   
 
   
Total Assets under Fee-Based Management(1)   $ 221   $ 192   15
   
 
   
Private Client Assets   $ 920   $ 851   8
Other Investor Assets within Citigroup Global Markets     167     147   14
   
 
   
Total Private Client Assets(1)   $ 1,087   $ 998   9
   
 
   
Annualized Revenue per Financial Consultant
(
in thousands of dollars)
  $ 500   $ 482   4
   
 
   

(1)
Includes assets managed jointly with Citigroup Asset Management.

28


GLOBAL INVESTMENT MANAGEMENT

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars                                  

Revenues, net of interest expense

 

$

2,478

 

$

2,320

 

7

 

$

6,982

 

$

6,371

 

10

 
Operating expenses     922     828   11     2,603     2,295   13  
Provisions for benefits, claims, and credit losses     887     927   (4 )   2,255     2,335   (3 )
   
 
     
 
     
Income before taxes and minority interest     669     565   18     2,124     1,741   22  
Income taxes     167     202   (17 )   615     504   22  
Minority interest, after-tax               5     1   NM  
   
 
     
 
     
Net income   $ 502   $ 363   38   $ 1,504   $ 1,236   22  
   
 
     
 
     

Average Risk Capital(1)

 

$

5,378

 

 

 

 

 

 

$

5,438

 

 

 

 

 

 
Return on Risk Capital(1)     37 %             37 %          
Return on Invested Capital(1)     22 %             22 %          
   
           
           

(1)
See Footnote (2) to the table on page 5.

NM
Not meaningful

        Global Investment Management reported net income of $502 million and $1.504 billion in the 2004 third quarter and nine-month period, respectively, an increase of $139 million or 38% and $268 million or 22% from the comparable periods of 2003. Life Insurance and Annuities reported net income of $282 million and $799 million in the 2004 third quarter and nine-month period, respectively, an increase of $119 million or 73% and $192 million or 32% from the comparable periods of 2003. The increase in income of $119 million in the 2004 third quarter resulted from higher International Insurance Manufacturing (IIM) results of $152 million, partially offset by lower Travelers Life and Annuity (TLA) results of $33 million. The increase in IIM was primarily due to a $175 million increase in our Argentina operations reflecting the absence of prior-year impairments of Argentina Government Promissory Notes (GPNs) of $111 million and the impact of certain liability restructuring actions taken in the Argentina voluntary annuity business of $20 million, combined with a favorable tax ruling on the deductibility of those losses in the 2004 third quarter of $47 million, as well as the impact of higher business volumes, partially offset by the amortization of deferred acquisition costs (DAC). The $33 million decrease in TLA reflects a $28 million decrease in realized insurance investment portfolio gains primarily due to the absence of a single transaction in the prior-year period, and a universal life DAC amortization adjustment related to estimated gross profits, partially offset by the impact of higher business volumes.

        The increase in Life Insurance and Annuities income of $192 million in the 2004 nine-month period reflects higher IIM results of $173 million and higher TLA results of $19 million. The $173 million increase in IIM reflects the absence of the prior-year Argentina losses and the 2004 third quarter favorable tax ruling on those losses, as well as higher business volumes in Japan, Mexico and Asia. The $19 million increase in TLA reflects the impact of higher business volumes and higher retained investment margins, partially offset by lower Dividends Received Deduction (DRD) tax benefits, lower net realized insurance investment portfolio gains and the 2004 third quarter adjustment to universal life DAC amortization.

        Private Bank reported net income of $136 million and $447 million in the 2004 third quarter and nine-month period, respectively, a decrease of $7 million or 5% compared to the prior-year quarter and an increase of $40 million or 10% in the nine-month comparison. The decrease in income of $7 million in the 2004 third quarter primarily resulted from a 35% decline in transactional revenues, reflecting the impact of regulatory actions in Japan and reduced client activity globally, partially offset by growth in recurring fee-based and net interest revenues. The $40 million increase in income in the 2004 nine-month period was primarily driven by growth in recurring fee-based and net interest revenues, partially offset by higher incentive compensation and other employee-related expenses.

        Asset Management reported net income of $84 million and $258 million in the 2004 third quarter and nine-month period, respectively, an increase of $27 million or 47% and $36 million or 16% from the comparable periods of 2003. The increase in the three- and nine-month periods primarily reflects the absence of impairments of a DAC asset relating to the Retirement Services business in Argentina of $42 million and of Argentina GPNs of $9 million, both of which occurred in the 2003 third quarter. The increase also reflects the cumulative impact of positive net flows and the impact of positive market action, partially offset by higher legal expenses, the contract termination to manage assets for St. Paul Travelers, and the impact of higher incentive compensation costs. Actions taken by the Argentine government associated with its anticipated debt restructuring could have an adverse impact on the retirement services business in Argentina and its customers. The extent of the financial impact to the Company will depend on future actions taken by the Argentine government and the Company's response to such actions. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 65.

29


Global Investment Management Net Income—Regional View

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
In millions of dollars                                

North America (excluding Mexico)

 

$

317

 

$

368

 

(14

)

$

1,042

 

$

1,031

 

1
Mexico     54     59   (8 )   152     142   7
EMEA     7     6   17     23     5   NM
Japan     9     25   (64 )   63     62   2
Asia (excluding Japan)     45     60   (25 )   132     130   2
Latin America     70     (155 ) NM     92     (134 ) NM
   
 
     
 
   
Net Income   $ 502   $ 363   38   $ 1,504   $ 1,236   22
   
 
     
 
   

NM
Not meaningful

        Global Investment Management net income increased $139 million or 38% in the 2004 third quarter and $268 million or 22% in the 2004 nine months from the comparable 2003 periods. The $139 million increase in the 2004 third quarter was primarily driven by an increase in Latin America of $225 million, partially offset by decreases in North America (excluding Mexico) of $51 million, in Japan of $16 million, in Asia (excluding Japan) of $15 million and in Mexico of $5 million. The $225 million increase in Latin America was driven by increased Life Insurance and Annuities results of $174 million and increased Asset Management results of $55 million reflecting the absence of prior-year losses in Argentina and a favorable ruling on the tax deductibility of those prior-year Life Insurance and Annuities related losses received in the 2004 third quarter. The decrease in North America (excluding Mexico) of $51 million reflects lower Life Insurance and Annuities results of $33 million primarily due to the absence of a prior-year realized insurance investment portfolio gain arising from a single transaction and lower Asset Management results of $23 million primarily due to increased legal and regulatory expenses, partially offset by the cumulative impact of positive net flows and positive market action. These decreases were partially offset by increased Private Bank results of $5 million primarily due to 2004 third quarter net credit recoveries and increased banking volumes, partially offset by increased employee-related expenses. The decrease in Japan of $16 million was primarily due to decreased Private Bank results of $19 million, reflecting the impact of the Japan FSA sanctions. The decrease in Asia (excluding Japan) of $15 million reflects decreased Life Insurance and Annuities results of $17 million, primarily due to the absence of $18 million in tax benefits arising from the application of APB 23 indefinite investment criteria in the prior year, partially offset by the impact of higher business volumes. The decrease in Mexico of $5 million reflects lower Asset Management results of $5 million primarily due to higher taxes.

        The $268 million increase in the 2004 nine-month period reflects increases in all regions, including increased results in Latin America of $226 million, in EMEA of $18 million, in North America (excluding Mexico) of $11 million, in Mexico of $10 million, in Asia (excluding Japan) of $2 million, and in Japan of $1 million. The $226 million increase in Latin America reflects increased Life Insurance and Annuities results of $178 million and increased Asset Management results of $47 million primarily reflecting the absence of losses in Argentina in the 2003 third quarter and a favorable ruling on the tax deductibility of the Life Insurance and Annuities related losses received in the 2004 third quarter. The $18 million increase in EMEA reflects increased Private Bank results of $27 million driven by increased revenues and the absence of prior-year restructuring costs, including severance, partially offset by decreased Asset Management results of $6 million primarily due to higher expenses. The $11 million increase in North America (excluding Mexico) reflects increased Life Insurance and Annuities results of $19 million, driven by higher business volumes and higher retained investment margins, partially offset by lower tax benefits related to the separate account DRD, lower realized insurance investment portfolio gains and the 2004 third quarter adjustment to universal life DAC amortization. The increased Life Insurance and Annuities results were partially offset by decreased Asset Management results of $9 million primarily due to increased legal and regulatory expenses, partially offset by the cumulative impact of positive net flows and positive market action. The $10 million increase in Mexico was primarily due to increased Private Bank results of $10 million, driven by increased transactional revenues. The $2 million increase in Asia (excluding Japan) reflects increased Private Bank results of $15 million driven by increased transactional revenues, partially offset by increased employee-related costs. The increased Private Bank results were partially offset by decreased Life Insurance and Annuities results of $14 million, primarily due to the absence of $18 million in tax benefits arising from the application of APB 23 indefinite investment criteria in the prior year, partially offset by the impact of higher business volumes. The $1 million increase in Japan reflects increased Life Insurance and Annuities results of $8 million driven by strong business volumes and increased Asset Management results of $5 million as increased revenues combined with a decrease in expenses. These increases were partially offset by decreased Private Bank results of $12 million, reflecting the impact of the Japan FSA sanctions.

30


Life Insurance and Annuities

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars                                  

Revenues, net of interest expense

 

$

1,533

 

$

1,389

 

10

 

$

4,076

 

$

3,714

 

10

 
Provision for benefits and claims     894     925   (3 )   2,259     2,323   (3 )
Operating expenses     297     208   43     751     571   32  
   
 
     
 
     
Income before taxes     342     256   34     1,066     820   30  
Income taxes     60     93   (35 )   267     213   25  
   
 
     
 
     
Net income   $ 282   $ 163   73   $ 799   $ 607   32  
   
 
     
 
     

Average Risk Capital(1)

 

$

3,928

 

 

 

 

 

 

$

4,020

 

 

 

 

 

 
Return on Risk Capital(1)     29 %             27 %          
Return on Invested Capital(1)     22 %             21 %          
   
           
           

(1)
See Footnote (2) to the table on page 5.

        Life Insurance and Annuities reported net income of $282 million and $799 million in the 2004 third quarter and nine-month period, respectively, an increase of $119 million or 73% and $192 million or 32% from the comparable periods of 2003. The $119 million increase from the 2003 third quarter reflects an increase of $152 million in IIM and a decrease of $33 million in TLA. The increase in the three-month period included a $175 million increase attributable to IIM's Argentina operations primarily due to the absence of prior-year impairments of Argentina GPNs of $111 million and the impact of certain liability restructuring actions taken in the Argentina voluntary annuity business of $20 million, combined with a favorable tax ruling on the deductibility of those losses in the 2004 third quarter of $47 million, as well as the impact of higher business volumes in both businesses. These increases were partially offset by the absence of prior-year realized insurance investment portfolio gains in TLA, increased amortization and adjustments of DAC and the absence of prior-year tax benefits in Asia associated with APB 23. The $192 million increase from the 2003 nine months reflects an increase of $173 million in IIM and of $19 million in TLA, primarily driven by the impact of improved Argentina results of $179 million, higher business volumes and improved retained investment margins, partially offset by lower tax benefits related to the separate account DRD and lower net realized insurance investment portfolio gains (losses) in TLA.

        TLA's net income was $204 million and $664 million in the 2004 third quarter and nine-month period, respectively, a decrease of $33 million or 14% and an increase of $19 million or 3% over the corresponding 2003 periods. The decrease in the 2004 third quarter reflects a $28 million decrease in realized insurance investment portfolio gains primarily due to the absence of one transaction in the prior year, and a $21 million adjustment to universal life DAC amortization and deferred revenues related to a change in the pattern of estimated gross profits, partially offset by the impact of higher business volumes and $13 million after-tax reserve releases from the settlement of litigation. The $19 million or 3% increase in the nine-month period further reflects higher business volumes and improved retained investment margins, partially offset by lower tax benefits related to the separate account dividends received deduction.

        IIM's net income was $78 million and $135 million in the 2004 third quarter and nine months, respectively, an increase of $152 million and $173 million from the comparable 2003 periods. The $152 million increase in the 2004 third quarter resulted from the absence of realized investment losses and other actions from Argentina in 2003 of $131 million and a favorable tax ruling on the deductibility of those losses in the 2004 third quarter of $47 million, as well as higher business volumes in our operations in Japan, Asia and Mexico, partially offset by the absence of $18 million in tax benefits arising from the application of APB 23 indefinite investment criteria in Asia in the prior year, lower investment income of $13 million and higher DAC amortization. The $173 million increase in the nine-month period reflects increases in Argentina and higher business volumes in Japan, Mexico and Asia.

        TLA's net investment income was $720 million and $2.147 billion in the 2004 third quarter and nine-month period, an increase of $40 million or 6% and $158 million or 8%, respectively, from the 2003 third quarter and nine-month period. This growth was primarily related to a larger invested asset base resulting from the continued growth in business volumes. TLA's investment yields were 6.37% and 6.48% in the 2004 third quarter and nine-month period, respectively, compared to 6.63% and 6.61% in the prior-year periods.

        During the 2004 third quarter and nine-month period, Life Insurance and Annuities operating expenses of $297 million and $751 million increased $89 million or 43% and $180 million or 32%, respectively, from the comparable 2003 periods. TLA's expenses increased $59 million to $191 million in the third quarter of 2004, and $109 million to $485 million in the first nine months of 2004, from the comparable 2003 periods. These increases were primarily the result of $54 million and $90 million increases in DAC amortization in the 2004 third quarter and nine months versus the comparable periods in 2003, including $39 million related to the universal life DAC amortization adjustment for estimated gross profits, as well as the growth in expenses related to business volume increases for the first nine months of 2004. IIM's expenses increased $30 million to $106 million in the third quarter of 2004 and $71 million to $266 million in the first nine months of 2004 from the comparable 2003 periods. These increases were primarily related to higher business volumes, DAC amortization and the impact of foreign exchange rates.

31


Travelers Life and Annuity

        The majority of the annuity business and a substantial portion of the life business written by TLA are accounted for as investment contracts, such that the premiums are considered deposits and are not included in revenues. Combined net written premiums and deposits is a non-GAAP financial measure which management uses to measure business volumes, and may not be comparable to similarly captioned measurements used by other life insurance companies.

        The following table shows combined net written premiums and deposits, which is a non-GAAP financial measure, by product line for the three-month and nine-month periods ended September 30:

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars                                  

Retail annuities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Fixed   $ 155   $ 115   35   $ 438   $ 433   1  
  Variable     1,233     1,099   12     3,706     2,870   29  
  Individual payout     38     12   NM     70     44   59  
   
 
     
 
     
Total retail annuities(1)     1,426     1,226   16     4,214     3,347   26  
Institutional annuities(2)     2,570     2,409   7     6,275     5,881   7  
Individual life insurance                                  
  New direct periodic premiums and deposits     62     62       170     174   (2 )
  Renewal direct periodic premiums and deposits     172     142   21     557     424   31  
  Single premium deposits     183     124   48     525     254   NM  
  Reinsurance     (44 )   (36 ) (22 )   (119 )   (100 ) (19 )
   
 
     
 
     
Total individual life insurance(3)     373     292   28     1,133     752   51  
   
 
     
 
     
Total   $ 4,369   $ 3,927   11   $ 11,622   $ 9,980   16  
   
 
     
 
     

(1)
Includes $1.4 billion and $4.2 billion of deposits in the three and nine months ended September 30, 2004 and $1.2 billion and $3.3 billion of deposits in the three and nine months ended September 30, 2003, respectively.

(2)
Includes $2.3 billion and $5.8 billion of deposits in the three and nine months ended September 30, 2004 and $2.0 billion and $5.2 billion of deposits in the three and nine months ended September 30, 2003, respectively.

(3)
Includes $354 million and $1.1 billion of deposits in the three and nine months ended September 30, 2004 and $267 million and $676 million of deposits in the three and nine months ended September 30, 2003, respectively.

NM
Not meaningful

        Retail annuities net written premiums and deposits increased 16% in the 2004 third quarter to $1.4 billion and 26% in the 2004 nine-month period to $4.2 billion, from $1.2 billion and $3.3 billion in the prior-year periods. These increases were primarily driven by strong variable annuity sales due to improved equity market conditions in 2004 and sales of a guaranteed minimum withdrawal benefit product. Weak equity markets and competitive pressures adversely affected the first half of 2003. Retail annuities account balances and benefit reserves were $35.6 billion at September 30, 2004, up from $31.6 billion at September 30, 2003. This increase was driven by $2.2 billion in market appreciation of variable annuity investments subsequent to September 30, 2003, primarily $1.9 billion in the fourth quarter of 2003, as well as $1.9 billion in net sales over the previous twelve months, including $1.6 billion of net sales in the 2004 nine-month period, partially due to good in-force retention.

        Institutional annuities net written premiums and deposits (excluding the Company's employee pension plan deposits) were $2.6 billion and $6.3 billion in the third quarter and nine-month period of 2004, an increase of $161 million and $394 million from the prior-year periods. The increase reflects strong Guaranteed Investment Contract (GIC) sales in the 2004 third quarter compared to the prior-year period. Sales in the nine months ended September 30, 2003 included a total of $1.0 billion in two separate transactions to one customer. Institutional annuities account balances and benefit reserves reached $27.2 billion at September 30, 2004, an increase of $2.3 billion or 9% from $24.9 billion at September 30, 2003, primarily reflecting an increase in GIC and payout institutional annuities benefit reserves over the last 12 months.

        Net written premiums and deposits for the individual life insurance business were $373 million and $1.1 billion in the third quarter and nine-month period of 2004, an increase of $81 million and $381 million from the respective 2003 periods. These increases were driven by the $59 million and $271 million increases in single premium universal life sales for the third quarter and nine-month period of 2004, respectively, versus the 2003 periods, as well as the $30 million and $133 million increases in renewal direct periodic premiums in the three- and nine-month periods, respectively. Life insurance in force was $97.1 billion at September 30, 2004, an increase of $10.2 billion or 12% from $86.9 billion at September 30, 2003.

32


International Insurance Manufacturing

        The majority of the annuity business and a substantial portion of the life business written by IIM are accounted for as investment contracts, such that the premiums are considered deposits and are not included in revenues. Combined net written premiums and deposits is a non-GAAP financial measure which management uses to measure business volumes, and may not be comparable to similarly captioned measurements used by other life insurance companies.

        The following table shows combined net written premiums and deposits, which is a non-GAAP financial measure, by product line for the three-month and nine-month periods ended September 30, 2004 and 2003:

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
  2004
  2003
  2004
  2003
In millions of dollars                        

Annuity products

 

 

 

 

 

 

 

 

 

 

 

 
  Japan   $ 931   $ 999   $ 3,409   $ 1,488
  All other premiums and deposits     528     174     977     536
   
 
 
 
Total annuity products     1,459     1,173     4,386     2,024
Life products     277     212     1,088     426
   
 
 
 
Total(1)(2)   $ 1,736   $ 1,385   $ 5,474   $ 2,450
   
 
 
 

(1)
Includes 100% of net written premiums and deposits for the Company's joint ventures in Japan and Hong Kong.

(2)
Includes $1.5 billion and $4.9 billion of deposits in the three and nine months ended September 30, 2004, and $1.3 billion and $2.1 billion of deposits in the three and nine months ended September 30, 2003.

        IIM annuity product net written premiums and deposits increased $286 million and $2.4 billion to $1.5 billion and $4.4 billion in the 2004 third quarter and nine-month period, respectively. The third quarter increase reflects increased sales in Australia driven by the timing of a tax law change, partially offset by decreased sales in Japan through the Company's joint venture with Mitsui Sumitomo due to the entry of new competitors. The increase in the nine-month period was primarily driven by strong variable annuity sales in Japan and Australia.

        IIM life products net written premiums and deposits were $277 million and $1.1 billion in the third quarter and nine-month period of 2004, increases of $65 million and $662 million from the prior-year periods, which were primarily driven by increased sales of Endowment and Unit Linked products in Hong Kong and higher sales in the United Kingdom, as well as strong Variable Universal Life sales in Mexico in the nine-month period.

33


Private Bank

 
  Three Months Ended September 30,
   
  Nine Months Ended
September 30,

   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
In millions of dollars                                

Revenues, net of interest expense

 

$

482

 

$

510

 

(5

)

$

1,560

 

$

1,491

 

5
Operating expenses     292     298   (2 )   917     884   4
Provision for credit losses     (7 )   2   NM     (4 )   12   NM
   
 
     
 
 
Income before taxes     197     210   (6 )   647     595   9
Income taxes     61     67   (9 )   200     188   6
   
 
     
 
 
Net income   $ 136   $ 143   (5 ) $ 447   $ 407   10
   
 
 
 
 
 
Client business volumes under management (in billions of dollars)   $ 212   $ 186   14   $ 212   $ 186   14
   
 
 
 
 
 
Average Risk Capital(1)   $ 761             $ 725          
Return on Risk Capital(1)     71 %             82 %        
Return on Invested Capital(1)     69 %             80 %        

(1)
See Footnote (2) to the table on page 5.

NM
Not meaningful

        Private Bank reported net income of $136 million in the 2004 third quarter and $447 million in the 2004 nine months, a decrease of $7 million or 5% compared to the prior-year quarter and an increase of $40 million or 10% in the nine-month comparison. The decrease in income of $7 million in the 2004 third quarter resulted from a 35% decline in transactional revenues, reflecting the impact of the Japan FSA sanctions and reduced client activity globally, partially offset by growth in recurring fee-based and net interest revenues. The increase in income of $40 million in the 2004 nine-month period was mainly driven by growth in recurring fee-based and net interest revenues, partially offset by higher incentive compensation and other employee-related costs.

 
  September 30,
   
 
  %
Change

 
  2004
  2003
In billions of dollars                

Client Business Volumes:

 

 

 

 

 

 

 

 
Proprietary Managed Assets   $ 41   $ 34   21
Other Assets under Fee-Based Management     8     7   14
Banking and Fiduciary Deposits     47     42   12
Investment Finance     41     37   11
Other, Principally Custody Accounts     75     66   14
   
 
   
Total   $ 212   $ 186   14
   
 
 

        Client business volumes were $212 billion at the end of the 2004 third quarter, up $26 billion or 14% from $186 billion at the end of the 2003 third quarter. Double-digit growth in client business volumes was led by an increase in custody assets, which were higher in all regions. Proprietary managed assets increased $7 billion or 21% predominantly in the U.S. reflecting the impact of positive net flows. Banking and fiduciary deposits grew $5 billion or 12%, with double-digit growth in the U.S. and EMEA. Investment finance volumes, which include loans, letters of credit, and commitments, increased $4 billion or 11% reflecting growth in all regions including increased real estate-secured loans in the U.S. and growth in margin lending in the international businesses.

        Revenues, net of interest expense, were $482 million in the 2004 third quarter and $1.560 billion in the 2004 nine months, down $28 million or 5% from the prior-year quarter but up $69 million or 5% from the 2003 nine-month period. In the 2004 third quarter, a decline in client transaction activity, particularly in Japan, resulted in a $50 million or 35% decline in related transaction revenues compared to the prior-year quarter and a 1% decline in the nine-month comparison. Continued growth in client business volumes partially offset the impact of lower client transaction activity as recurring fee-based and net interest revenues increased $22 million or 6% from the 2003 quarter and $75 million or 7% from the 2003 nine-month period, despite the impact of spread compression in the deposit and lending portfolios.

        Operating expenses of $292 million and $917 million in the 2004 third quarter and nine months, respectively, were down $6 million or 2% from the prior-year quarter but up $33 million or 4% from the 2003 nine-month period, primarily reflecting in the three-month comparison a decrease in incentive and other variable compensation associated with the corresponding decrease in revenue as well as the absence of prior-year restructuring costs, including severance, in Europe. In the nine-month comparison, an increase in employee-related costs and incentive compensation was partially offset by a decline in legal-related expenses.

        The provision for credit losses was ($7) million and ($4) million in the 2004 third quarter and nine months, respectively, compared to $2 million and $12 million in the 2003 third quarter and nine months, respectively. The improvement from the prior year was mainly due to net recoveries in the U.S., Japan and Asia. Loans 90 days or more past due were $150 million or 0.39% of total loans outstanding at September 30, 2004, compared with $146 million or 0.39% at June 30, 2004 and $124 million or 0.36% at September 30, 2003.

34


Asset Management

 
  Three Months Ended September 30,
   
  Nine Months Ended
September 30,

   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
In millions of dollars                                
Revenues, net of interest expense   $ 463   $ 421   10   $ 1,346   $ 1,166   15
Operating expenses     333     322   3     935     840   11
   
 
 
 
 
 
Income before taxes and minority interest     130     99   31     411     326   26
Income taxes     46     42   10     148     103   44
Minority interest, after-tax               5     1   NM
   
 
 
 
 
 
Net income   $ 84   $ 57   47   $ 258   $ 222   16
   
 
 
 
 
 
Assets under management (in billions of dollars) (1) (2)   $ 500.7   $ 495.4   1   $ 500.7   $ 495.4   1
   
 
 
 
 
 
Average Risk Capital(3)   $ 689             $ 693          
Return on Risk Capital(3)     49 %             50 %        
Return on Invested Capital(3)     12 %             12 %        

(1)
Includes $34 billion and $32 billion in 2004 and 2003, respectively, for Private Bank clients.

(2)
Includes $38 billion in 2003 of St. Paul Travelers (formerly Travelers Property and Casualty Corp. (TPC)) assets which Asset Management managed on a third-party basis following the August 2002 distribution by Citigroup to its stockholders of a majority portion of its remaining ownership interest in TPC.

(3)
See Footnote (2) to the table on page 5.

NM
Not meaningful

        Asset Management reported net income of $84 million and $258 million in the 2004 third quarter and nine months, an increase of $27 million or 47% and $36 million or 16% from the respective 2003 periods. The increase in the three- and nine-month periods primarily reflects the absence of impairments of a DAC asset relating to the retirement services business in Argentina of $42 million and of Argentina GPNs of $9 million which occurred in the 2003 third quarter. The increase also reflects the cumulative impact of positive net flows and the impact of positive market action, partially offset by higher legal expenses as well as the termination of the contract to manage assets for St. Paul Travelers. The increase in income in the nine-month period was also partially offset by the impact of higher incentive compensation costs.

        Assets under management for the 2004 third quarter were $501 billion, an increase of $5 billion or 1% from the 2003 third quarter. The increase primarily reflects positive market action/other of $22 billion (which includes the impact of foreign exchange), positive cumulative net flows (excluding U.S. Retail Money Market funds) of $21 billion, and the addition of $3 billion in assets from the acquisition of KorAm. These increases were partially offset by the termination of the contract to manage $36 billion of assets for St. Paul Travelers and net outflows of U.S. Retail Money Market funds of $5 billion. Retail/Private Bank client assets were $232.4 billion as of September 30, 2004, up 6% compared to the prior-year period, primarily reflecting positive market action. Institutional client assets of $197.9 billion as of September 30, 2004 were up 14% compared to the prior-year period, primarily reflecting the impact of long-term product flows and positive market action. Retirement Services assets were $12.9 billion as of September 30, 2004, up 6% from the prior-year period. Other assets under management of $57.5 billion as of September 30, 2004 were down 36% from the prior-year period, reflecting the termination of the contract to manage $36 billion of assets for St. Paul Travelers.

        Revenues, net of interest expense, of $463 million and $1.346 billion in the 2004 third quarter and nine months increased $42 million or 10% and $180 million or 15% from the respective 2003 periods. The increase in the three- and nine-month periods was primarily due to the impact of positive market action, including the impact of FX, the cumulative impact of positive net flows and the absence of GPN impairments in Argentina of $9 million which occurred in the 2003 third quarter. These increases were partially offset by the termination of the contract to manage assets for St. Paul Travelers, the impact of outflows of U.S. Retail Money Market funds, and certain revenue sharing arrangements which decreased both revenues and expenses by $4 million and $13 million in the 2004 third quarter and nine months, respectively. Additionally, the nine-month period was positively impacted by the assets consolidated under FIN 46-R (which are denominated in euro) which generated $8 million of gains (offset in minority interest) due to foreign currency translation.

        Operating expenses of $333 million and $935 million in the 2004 third quarter and nine months increased $11 million or 3% and $95 million or 11% from the respective 2003 periods, primarily driven by higher expenses related to legal matters, partially offset by the absence of the DAC impairment in Argentina of $42 million and the impact of certain fee-sharing arrangements, which decreased both revenue and expenses by $4 million and $13 million in the 2004 third quarter and nine months, respectively. The nine-month period was also negatively impacted by higher employee compensation expenses.

        Minority interest, after tax, of $5 million for the 2004 nine months was due to the impact of consolidating certain assets under FIN 46-R.

35


PROPRIETARY INVESTMENT ACTIVITIES

 
  Three Months Ended September 30,
   
  Nine Months Ended
September 30,

   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars                                  
Revenues, net of interest expense   $ 287   $ 510   (44 ) $ 1,004   $ 888   13  
Operating expenses     112     84   33     322     253   27  
Provision for credit losses                   1   (100 )
   
 
 
 
 
 
 
Income before taxes and minority interest     175     426   (59 )   682     634   8  
Income taxes     54     153   (65 )   219     235   (7 )
Minority interest, after-tax     10     145   (93 )   53     170   (69 )
   
 
 
 
 
 
 
Net Income   $ 111   $ 128   (13 ) $ 410   $ 229   79  
   
 
 
 
 
 
 
Average Risk Capital(1)   $ 3,629             $ 3,651            
Return on Risk Capital(1)     12 %             15 %          
Return on Invested Capital(1)     10 %             13 %          

(1)
See Footnote (2) to the table on page 5.

        Proprietary Investment Activities reported revenues, net of interest expense, of $287 million in the 2004 third quarter, a decrease of $223 million or 44% from the 2003 third quarter. The decrease resulted primarily from lower other revenues of $171 million, lower mark-to-market gains on public securities of $68 million and lower net realized gains on sales of investments of $60 million, partially offset by higher net impairment/valuation revenues of $76 million. Operating expenses of $112 million in the 2004 third quarter increased $28 million or 33% from the 2003 third quarter, primarily reflecting increased private equity business activity in the Emerging Markets portfolio and higher incentive compensation within CAI. Minority interest, after-tax, of $10 million in the 2004 third quarter decreased $135 million or 93% from the 2003 third quarter primarily due to the absence of prior-year dividends and a mark-to-market valuation on the recapitalization of an investment held within the Citigroup Venture Capital (CVC) Equity Partners Fund, a majority-owned private equity fund.

        For the 2004 nine months, revenues, net of interest expense, of $1.004 billion increased $116 million or 13% from the 2003 nine-month period. The increase resulted primarily from higher net impairment/valuation revenues of $450 million and net realized gains on sales of investments of $75 million, primarily from higher Private Equity results, partially offset by lower mark-to-market gains on public securities of $323 million and other revenues of $86 million. The higher net impairment/valuation revenues were primarily driven by investment activity in Emerging Markets and Europe. The higher net realized gains were primarily driven by the sale of investments in Europe and of a portion of Citigroup's ownership interest in The St. Paul Travelers Companies' (formerly Travelers Property and Casualty (TPC)). The lower mark-to-market results on public securities resulted from investment losses in Emerging Markets and the United States. Operating expenses of $322 million in the 2004 nine-month period increased $69 million or 27% from the 2003 nine-month period primarily reflecting increased private equity business activity within Emerging Markets and higher incentive compensation within CAI. Minority interest, after-tax, of $53 million in the 2004 nine-month period decreased $117 million from the 2003 nine-month period primarily due to the absence of prior year dividends and a mark-to-market valuation on the recapitalization of an investment held within the CVC Equity Partners Fund.

        See Note 5 to the Consolidated Financial Statements for additional information on investments in fixed maturity and equity securities.

        The following sections contain information concerning revenues, net of interest expense, for the two main investment classifications of Proprietary Investment Activities.

        Private Equity includes equity and mezzanine debt financing on both a direct and an indirect basis, in companies primarily located in the United States and Western Europe, including investments made by the CVC Equity Partners Fund, investments in companies located in developing economies, CVC/Opportunity Equity Partners, LP (Opportunity), and the investment portfolio related to the Banamex acquisition in August 2001. Opportunity is a third-party managed fund through which Citigroup co-invests in companies that were privatized by the government of Brazil in the mid-1990s. The remaining investments in the Banamex portfolio were liquidated during 2003.

        Certain private equity investments held in investment company subsidiaries and Opportunity are carried at fair value with unrealized gains and losses recorded in income. Direct investments in companies located in developing economies are principally carried at cost with impairments recognized in income for "other than temporary" declines in value.

        As of September 30, 2004 and September 30, 2003, Private Equity included assets of $5.806 billion and $6.114 billion, respectively, with the portfolio primarily invested in industrial, consumer goods, communication and technology companies. The decline in the portfolio of $308 million relates to sales of private and public equity investments, the impact of valuation adjustments, and the liquidation of the Banamex portfolio.

36


        Revenues for Private Equity, net of interest expense, are composed of the following:

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars                          

Net realized gains (losses)(1)

 

$

26

 

$

87

 

$

315

 

$

289

 
Public mark-to-market     22     90     (110 )   215  
Net impairments/valuations(2)     91     8     275     (224 )
Other(3)     86     265     281     381  
   
 
 
 
 
Revenues, net of interest expense   $ 225   $ 450   $ 761   $ 661  
   
 
 
 
 

(1)
Includes the changes in unrealized gains (losses) related to mark-to-market reversals for investments sold during the year.

(2)
Includes valuation adjustments on private equity investments.

(3)
Includes other investment income (including dividends), management fees, and funding costs.

        Revenues, net of interest expense, of $225 million in the 2004 third quarter decreased $225 million from the 2003 third quarter, resulting from lower other revenues of $179 million, lower mark-to-market gains on public securities of $68 million and lower net realized gains on sales of investments of $61 million, partially offset by higher net impairment/valuation revenues of $83 million. The lower other revenue and realized gains are primarily due to the absence of revenues realized on private equity investments in the United States and Europe in 2003. The higher net impairment/valuation revenue is primarily from gains in an Emerging Markets private equity fund.

        For the 2004 nine months, revenues, net of interest expense, of $761 million increased $100 million from the 2003 nine-month period resulting from higher net impairment/valuation revenues of $499 million and higher net realized gains on sales of investments of $26 million, partially offset by lower mark-to-market gains on public securities of $325 million and lower other revenues of $100 million resulting from decreased dividends and fees. The higher net impairment/valuation revenues were primarily driven by investments in Emerging Markets and Europe. The higher net realized gains were driven by the sale of investments in Europe. The decrease in revenue related to the mark-to-market on public securities for the 2004 nine months was primarily driven by an investment in an Indian software company, reflecting a general decline in public market values in the Indian software sector.

        Other Investment Activities includes CAI, various proprietary investments, including Citigroup's ownership interest in The St. Paul Travelers Companies' (formerly Travelers Property and Casualty (TPC)) outstanding equity securities, certain hedge fund investments and the LDC Debt/Refinancing portfolios. The LDC Debt/Refinancing portfolios include investments in certain countries that refinanced debt under the 1989 Brady Plan or plans of a similar nature and earnings are generally derived from interest and restructuring gains/losses.

        Other Investment Activities investments are primarily carried at fair value, with impairment write-downs recognized in income for "other than temporary" declines in value. On April 1, 2004, the merger of TPC and the St. Paul Companies was completed. Existing shares of TPC common stock were converted to 0.4334 shares of common stock of the St. Paul Travelers Companies (St. Paul). As of September 30, 2004, the Company held approximately 39.8 million shares or 5.9% of St. Paul's outstanding equity securities. The St. Paul common stock position is classified as available-for-sale. As of September 30, 2004, Other Investment Activities included assets of $2.626 billion, including $1.354 billion in St. Paul shares, $831 million in hedge funds (the majority of which represents money managed for third-party customers including St. Paul which are consolidated under FIN 46-R guidelines), $230 million in the LDC Debt/ Refinancing portfolios, and $211 million in other assets. As of September 30, 2003, total assets of Other Investment Activities were $2.958 billion, including $1.606 billion in St. Paul shares, $750 million in hedge funds, $409 million in the LDC Debt/Refinancing portfolios and $193 million in other assets.

        The major components of Other Investment Activities revenues, net of interest expense are as follows:

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
  2004
  2003
  2004
  2003
In millions of dollars                        

LDC Debt/Refinancing portfolios

 

$


 

$

1

 

$

1

 

$

6
Hedge fund investments     (15 )   8     5     61
Other     77     51     237     160
   
 
 
 
Revenues, net of interest expense   $ 62   $ 60   $ 243   $ 227
   
 
 
 

        Revenues, net of interest expense, in the 2004 third quarter of $62 million increased $2 million from the 2003 third quarter, resulting from increases in other revenues of $26 million, partially offset by a $23 million decrease in hedge fund results. The higher other revenues resulted from increased revenues in real estate and CAI.

        For the 2004 nine months, revenues, net of interest expense, of $243 million, increased $16 million from the 2003 nine-month period, resulting from increases in other revenues of $77 million, partially offset by a $56 million decrease in hedge fund revenues and a $5

37


million decrease in LDC Debt/Refinancing revenues. The higher other revenues were primarily from net realized gains on the sale of St. Paul shares and increased revenue in CAI.

        Proprietary Investment Activities results may fluctuate in the future as a result of market and asset-specific factors. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 65.

CORPORATE/OTHER

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars                          

Revenues, net of interest expense

 

($

264

)

$

185

 

($

108

)

$

612

 
Operating expenses     (31 )   204     20     628  
Provision for benefits, claims, and credit losses     2     (1 )       (1 )
   
 
 
 
 
Income (loss) before taxes and minority interest     (235 )   (18 )   (128 )   (15 )
Income taxes (benefits)     (211 )   (173 )   (211 )   (148 )
Minority interest, after-tax         3     (7 )   8  
   
 
 
 
 
Net Income (loss)   ($ 24 ) $ 152   $ 90   $ 125  
   
 
 
 
 

        Corporate/Other reported a net loss of $24 million in the 2004 third quarter and net income of $90 million in the 2004 nine-month period, a decrease in income of $176 million and $35 million from the comparable 2003 periods. The decrease in the three-month period was primarily attributable to lower treasury earnings and increased taxes held at the Corporate level, partially offset by lower unallocated employee-related expenses. The decrease in the nine-month period was primarily attributable to lower net treasury results and higher unallocated employee-related costs, partially offset by the sale of EFS, which resulted in an after-tax gain of $180 million in the 2004 first quarter, and lower taxes held at the Corporate level.

        Revenues, net of interest expense, of ($264) million and ($108) million in the 2004 third quarter and nine months, respectively, decreased $449 million and $720 million, from the corresponding prior-year periods. The third quarter and nine-month decreases are primarily due to lower net treasury results and intersegment eliminations. The lower net treasury results for the three months were primarily due to higher interest expenses resulting from both higher volumes and increasing rates. For the nine months, in addition to the above, earnings were impacted by lower gains on fixed income investments. The 2004 third quarter decrease further reflects the absence of the prior-year revenues earned in the EFS business while the nine-month period reflects the gain on the sale of EFS, partially offset by the absence of prior-year EFS revenues.

        Operating expenses of ($31) million and $20 million in the 2004 third quarter and nine months decreased $235 million and $608 million, respectively, from the 2003 periods. The third quarter and nine-month period decreases are primarily due to lower intersegment eliminations, the absence of prior-year operating expenses in EFS and higher unallocated employee-related expenses in the nine-month comparison.

        Income tax benefits of $211 million in the three and nine months ended September 30, 2004 reflect the impact of a $147 million tax reserve release due to the closing of a tax audit. Income tax benefits of $173 million and $148 million in the three and nine months ended September 30, 2003, respectively, reflect the impact of a $200 million reserve release in the prior year related to the legacy Associates' business.

38


MANAGING GLOBAL RISK

        The Citigroup risk management framework recognizes the diversity of Citigroup's global business activities by balancing strong corporate oversight with well-defined independent risk management functions within each business. The Citigroup Risk Management Framework is described in detail in Citigroup's 2003 Annual Report on Form 10-K.

        The risk management framework is grounded on the following principles, which apply universally across all businesses and all risk types:

    Risk management is integrated within the business plan and strategy.

    All risks and resulting returns are owned and managed by an accountable business unit.

    All risks are managed within a limit framework; risk limits are endorsed by business management and approved by independent risk management.

    All risk management policies are clearly and formally documented.

    All risks are measured using defined methodologies, including stress testing.

    All risks are comprehensively reported across the organization.

        The Citigroup Senior Risk Officer is responsible for establishing standards for the measurement, approval, reporting and limiting of risk, for managing, evaluating, and compensating the senior independent risk managers at the business level, for approving business-level risk management policies, for approving business risk-taking authority through the allocation of limits and capital, and for reviewing, on an ongoing basis, major risk exposures and concentrations across the organization. Risks are regularly reviewed with the independent business-level risk managers, the Citigroup senior business managers, and as appropriate, the Citigroup Board of Directors.

        The independent risk managers at the business level are responsible for establishing and implementing risk management policies and practices within their business, while ensuring consistency with Citigroup standards. As noted above, the independent risk managers report directly to the Citigroup Senior Risk Officer, however they remain accountable, on a day-to-day basis, for appropriately meeting and responding to the needs and issues of their business unit, and for overseeing the risks present.

        The following sections summarize the processes for managing credit, market, operational and country risks within Citigroup's major businesses.

RISK CAPITAL

        As of January 1, 2004, the Company implemented a methodology to consistently quantify Risk Capital requirements within and across Citigroup businesses.

        Risk Capital is defined at Citigroup as the amount of capital resources required to cover the potential unexpected economic losses resulting from extremely severe events over a one-year time period.

    "Economic losses" includes losses that appear on the income statement and fair value adjustments to the financial statements, as well as any further declines in the value of assets or increases in the value of liabilities not captured on the income statement.

    "Unexpected losses" is the difference between the potential losses at the 99.97% confidence level and the expected (average) loss over the one-year time period.

        Return on Risk Capital is defined as annualized net income divided by Average Risk Capital. Return on Invested Capital is a similar calculation but includes adjustments for goodwill and intangibles in both the numerator and denominator, similar to those necessary to translate return on tangible equity to return on total equity. Return on Risk Capital and Return on Invested Capital are non-GAAP performance measures. Management believes Return on Risk Capital is useful to make incremental investment decisions and serves as a key metric for organic growth initiatives. Return on Invested Capital is used for multi-year investment decisions and as a long-term performance measure.

        Methodologies to measure Risk Capital have been jointly developed by Risk Management, Financial Control and Citigroup businesses, and approved by the Citigroup Senior Risk Officer and Citigroup Chief Financial Officer. It is expected, due to the evolving nature of Risk Capital, that these methodologies will continue to be refined.

39


        The drivers of "economic losses" are risks, which can be broadly categorized as Credit Risk (including Cross-Border Risk), Market Risk, Operational Risk, and Insurance Risk:

    Credit risk losses primarily result from a borrower's or counterparty's inability to meet its obligations.

    Market risk losses arise primarily from fluctuations in the market value of trading and non-trading positions.

    Operational risk losses result from inadequate or failed internal processes, people, systems or from external events.

    Insurance risks arise from unexpectedly high payouts on insurance liabilities.

        These risks are measured and aggregated within businesses and across Citigroup to facilitate the understanding of the Company's exposure to extreme downside events and any changes in its level or its composition.

        Risk Capital for Citigroup was calculated to be approximately $50.0 billion, $51.5 billion, and $47.5 billion at September 30, 2004, June 30, 2004, and March 31, 2004, respectively, with the following breakdown by risk type:

 
  September 30, 2004
  June 30, 2004
  March 31, 2004
 
In billions of dollars                    
Credit risk   $ 31.6   $ 31.1   $ 28.4  
Market risk     15.1     17.1     17.8  
Operational risk     8.6     8.7     5.7  
Insurance risk     0.2     0.2     0.2  
Intersector diversification(1)     (5.5 )   (5.6 )   (4.6 )
   
 
 
 
Total Citigroup   $ 50.0   $ 51.5   $ 47.5  
   
 
 
 
Return on Risk Capital (Quarterly)     42 %   9 %   45 %
  (2004 Nine Months, Six Months)     32 %   27 %      
Return on Invested Capital (Quarterly)     21 %   5 %   21 %
  (2004 Nine Months, Six Months)     16 %   13 %      
   
 
 
 

(1)
Reduction in Risk represents diversification between risk sectors.

        The decrease in Citigroup's risk capital from June 30, 2004 to September 30, 2004 was primarily driven by a decrease in market risk, partly offset by an increase in credit risk due to portfolio growth.

        The increase in Citigroup's risk capital from March 31, 2004 to June 30, 2004 was primarily driven by an increase in operational and credit risk, partially offset by lower market risk and an increase in intersector diversification. Operational risk capital increased to reflect the WorldCom and Litigation Reserve Charge. Credit risk capital rose primarily due to the acquisition of KorAm and increased credit volume. The WorldCom and Litigation Reserve Charge increased risk capital for the GCIB by $2.6 billion and $1.3 billion at the Citigroup level after intersector diversification.

        Return on Risk Capital and Return on Invested Capital are provided for each segment and product and are disclosed on pages 16 to 36 of this Management's Discussion and Analysis.

        Tier 1 Capital plus the allowance for credit losses qualifying for Tier 2 Capital of $80.2 billion compared favorably to Citigroup Risk Capital requirements of $50.0 billion at September 30, 2004. The difference between Tier 1 Capital plus Reserves and Risk Capital requirements represents a significant level of surplus capital for internal growth, and the flexibility to pursue acquisition opportunities.

40


CREDIT RISK MANAGEMENT PROCESS

        Credit risk is the potential for financial loss resulting from the failure of a borrower or counterparty to honor its financial or contractual obligations. Credit risk arises in many of the Company's business activities including lending activities, sales and trading activities, derivatives activities, securities transactions, settlement activities, and when the Company acts as an intermediary on behalf of its clients and other third parties. The credit risk management process at Citigroup relies on corporate-wide standards to ensure consistency and integrity, with business-specific policies and practices to ensure applicability and ownership.

Details of Credit Loss Experience

    3rd Qtr. 2004
  2nd Qtr. 2004
  1st Qtr. 2004
  4th Qtr. 2003
  3rd Qtr. 2003
 
In millions of dollars                                
Allowance for credit losses at beginning of period   $ 12,715   $ 12,506   $ 12,643   $ 10,843   $ 11,167  
   
 
 
 
 
 
Provision for credit losses                                
Consumer(4)     1,431     1,935     2,290     1,951     1,538  
Corporate     (402 )   (347 )   (60 )   242     76  
   
 
 
 
 
 
      1,029     1,588     2,230     2,193     1,614  
   
 
 
 
 
 
Gross credit losses:                                
Consumer(4)                                
In U.S. offices     1,542     1,769     1,952     1,640     1,264  
In offices outside the U.S.     848     803     794     821     891  
Corporate                                
In U.S. offices     27     9     18     57     110  
In offices outside the U.S.     157     79     248     441     302  
   
 
 
 
 
 
      2,574     2,660     3,012     2,959     2,567  
   
 
 
 
 
 
Credit recoveries:                                
Consumer(4)                                
In U.S. offices     283     260     275     212     186  
In offices outside the U.S.     172     165     164     205     228  
Corporate(1)                                
In U.S. offices     27     12     35     12     3  
In offices outside the U.S.     178     98     53     62     78  
   
 
 
 
 
 
      660     535     527     491     495  
   
 
 
 
 
 
Net credit losses                                
In U.S. offices     1,259     1,506     1,660     1,473     1,185  
In offices outside the U.S.     655     619     825     995     887  
   
 
 
 
 
 
      1,914     2,125     2,485     2,468     2,072  
   
 
 
 
 
 
Other—net(2)     204     746     118     2,075     134  
   
 
 
 
 
 
Allowance for credit losses at end of period   $ 12,034   $ 12,715   $ 12,506   $ 12,643   $ 10,843  
   
 
 
 
 
 
Allowance for unfunded lending commitments(3)     600     600     600     600     526  
   
 
 
 
 
 
Total allowance for loans, leases, and unfunded lending commitments   $ 12,634   $ 13,315   $ 13,106   $ 13,243   $ 11,369  
   
 
 
 
 
 
Net consumer credit losses(4)   $ 1,935   $ 2,147   $ 2,307   $ 2,044   $ 1,741  
As a percentage of average consumer loans     1.93 %   2.22 %   2.45 %   2.26 %   2.08 %
   
 
 
 
 
 
Net corporate credit losses   $ (21 ) $ (22 ) $ 178   $ 424   $ 331  
As a percentage of average corporate loans     NM     NM     0.73 %   1.72 %   1.29 %
   
 
 
 
 
 

(1)
From the 2003 fourth quarter forward, collections from credit default swaps are included within Principal Transactions on the Consolidated Statement of Income.

(2)
The 2004 second quarter includes the addition of $715 million of credit loss reserves related to the acquisition of KorAm. The 2004 first quarter includes the addition of $148 million of credit loss reserves related to the acquisition of WMF. The 2003 fourth quarter includes the addition of $2.1 billion of credit loss reserves related to the acquisition of Sears' Credit Card Business.

(3)
Represents additional credit loss reserves for unfunded corporate lending commitments and letters of credit recorded within Other Liabilities on the Consolidated Balance Sheet.

(4)
Includes Commercial Markets Group loans and loans made to Private Bank clients.

NM
Not meaningful

41


Cash-Basis, Renegotiated, and Past Due Loans

    Sept. 30, 2004
  June 30, 2004
  Mar. 31, 2004
  Dec. 31, 2003
  Sept. 30, 2003
In millions of dollars                              
Corporate cash-basis loans                              
Collateral dependent (at lower of cost or collateral value)(1)   $ 15   $ 59   $ 71   $ 8   $ 36
Other(2)     2,185     2,560     2,842     3,411     3,753
   
 
 
 
 
Total   $ 2,200   $ 2,619   $ 2,913   $ 3,419   $ 3,789
   
 
 
 
 
Corporate cash-basis loans(2)                              
In U.S. offices   $ 334   $ 503   $ 518   $ 640   $ 856
In offices outside the U.S.     1,866     2,116     2,395     2,779     2,933
   
 
 
 
 
Total   $ 2,200   $ 2,619   $ 2,913   $ 3,419   $ 3,789
   
 
 
 
 
Renegotiated loans (includes Corporate and Commercial Markets Loans)                              
In U.S. offices   $ 69   $ 81   $ 91   $ 107   $ 110
In offices outside the U.S.     26     30     33     33     51
   
 
 
 
 
Total   $ 95   $ 111   $ 124   $ 140   $ 161
   
 
 
 
 
Consumer loans on which accrual of interest had been suspended                              
In U.S. offices   $ 2,622   $ 2,712   $ 2,877   $ 3,127   $ 3,086
In offices outside the U.S.     2,830     2,860     3,029     2,958     2,690
   
 
 
 
 
Total   $ 5,452   $ 5,572   $ 5,906   $ 6,085   $ 5,776
   
 
 
 
 
Accruing loans 90 or more days delinquent(3)(4)                              
In U.S. offices   $ 3,298   $ 2,770   $ 2,983   $ 3,298   $ 2,322
In offices outside the U.S.     358     503     545     576     490
   
 
 
 
 
Total   $ 3,656   $ 3,273   $ 3,528   $ 3,874   $ 2,812
   
 
 
 
 

(1)
A cash-basis loan is defined as collateral dependent when repayment is expected to be provided solely by the liquidation of underlying collateral and there are no other available and reliable sources of repayment, in which case the loans are written down to the lower of cost or collateral value.

(2)
The 2004 third quarter and 2004 second quarter includes the addition of $313 million and $227 million of corporate cash-basis loans, respectively, related to the acquisition of KorAm. The $86 million increase reflects the Company's ongoing review of KorAm's loan portfolio.

(3)
Substantially all consumer loans, of which $1,874 million, $1,459 million, $1,522 million, $1,643 million, and $1,672 million are government-guaranteed student loans and Federal Housing Authority mortgages at September 30, 2004, June 30, 2004, March 31, 2004, December 31, 2003, and September 30, 2003, respectively.

(4)
The September 30, 2004, June 30, 2004, March 31, 2004, and December 31, 2003 balances include the Sears and Home Depot data.

Other Real Estate Owned and Other Repossessed Assets

    Sept. 30,
2004

  June 30,
2004

  Mar. 31,
2004

  Dec. 31,
2003

  Sept. 30,
2003

In millions of dollars                              
Other real estate owned(1)                              
Consumer   $ 373   $ 369   $ 396   $ 437   $ 460
Corporate     95     98     94     105     95
   
 
 
 
 
Total other real estate owned   $ 468   $ 467   $ 490   $ 542   $ 555
   
 
 
 
 
Other repossessed assets(2)   $ 100   $ 97   $ 123   $ 151   $ 182
   
 
 
 
 

(1)
Represents repossessed real estate, carried at lower of cost or fair value, less costs to sell.

(2)
Primarily transportation equipment, carried at lower of cost or fair value, less costs to sell.

42


CONSUMER PORTFOLIO REVIEW

        In the consumer portfolio, credit loss experience is often expressed in terms of annualized net credit losses as a percentage of average loans. Pricing and credit policies reflect the loss experience of each particular product and country. Consumer loans are generally written off no later than a predetermined number of days past due on a contractual basis, or earlier in the event of bankruptcy. The specific write-off criteria is set according to loan product and country.

        Commercial Markets, which is included within Retail Banking, includes loans and leases made principally to small- and middle-market businesses. Commercial Markets loans are placed on a non-accrual basis when it is determined that the payment of interest or principal is doubtful of collection or when interest or principal is past due for 90 days or more, except when the loan is well-secured and in the process of collection. Commercial Markets non-accrual loans are not strictly determined on a delinquency basis; therefore, they have been presented as a separate component in the consumer credit disclosures.

        The following table summarizes delinquency and net credit loss experience in both the managed and on-balance sheet loan portfolios in terms of loans 90 days or more past due, net credit losses, and as a percentage of related loans. The table also summarizes the accrual status of Commercial Markets loans as a percentage of related loans. The managed loan portfolio includes credit card receivables held-for-sale and securitized, and the table reconciles to a held basis, the comparable GAAP measure. Only North America Cards from a product view and North America from a regional view are impacted. 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. For a further discussion of managed basis reporting, see the Cards business on page 17 and Note 12 to the Consolidated Financial Statements.

43


Consumer Loan Delinquency Amounts, Net Credit Losses, and Ratios

 
  Total
Loans

  90 Days or More
Past Due(1)

  Average
Loans

  Net Credit Losses(1)
 
In millions of dollars,
except total and average loan amounts in billions

  Sept. 30,
2004

  Sept. 30,
2004

  Jun. 30,
2004

  Sept. 30,
2003

  3rd Qtr.
2004

  3rd Qtr.
2004

  2nd Qtr.
2004

  3rd Qtr.
2003

 
Product View:                                                  
                                                   
Cards   $ 157.3   $ 2,842   $ 2,808   $ 2,353   $ 154.8   $ 2,142   $ 2,373   $ 1,789  
  Ratio           1.81 %   1.82 %   1.83 %         5.50 %   6.27 %   5.62 %
    North America     141.2     2,593     2,565     2,098     139.1     1,981     2,248     1,653  
      Ratio           1.84 %   1.85 %   1.82 %         5.66 %   6.61 %   5.77 %
    International     16.1     249     243     255     15.7     161     125     136  
      Ratio           1.55 %   1.55 %   1.88 %         4.09 %   3.25 %   4.27 %
Consumer Finance     101.6     1,938     1,948     2,127     99.9     832     857     898  
  Ratio           1.91 %   1.96 %   2.30 %         3.31 %   3.52 %   3.92 %
    North America     80.4     1,479     1,444     1,642     78.9     487     515     520  
      Ratio           1.84 %   1.84 %   2.29 %         2.46 %   2.69 %   2.93 %
    International     21.2     459     504     485     21.0     345     342     378  
      Ratio           2.17 %   2.38 %   2.32 %         6.52 %   6.57 %   7.34 %
Retail Banking     154.6     3,907     3,576     3,707     149.9     176     176     210  
  Ratio           2.53 %   2.46 %   3.19 %         0.47 %   0.51 %   0.72 %
    North America     108.1     2,473     2,054     2,318     104.7     25     45     21  
      Ratio           2.29 %   2.03 %   2.80 %         0.09 %   0.18 %   0.10 %
    International     46.5     1,434     1,522     1,389     45.2     151     131     189  
      Ratio           3.08 %   3.46 %   4.16 %         1.33 %   1.28 %   2.28 %
Private Bank(2)     38.4     150     146     124     37.4     (8 )       4  
  Ratio           0.39 %   0.39 %   0.36 %         (0.08 %)   (0.01 %)   0.05 %
Other Consumer     1.1                 1.2              
   
 
 
 
 
 
 
 
 
Managed loans (excluding Commercial Markets)(3)   $ 453.0   $ 8,837   $ 8,478   $ 8,311   $ 443.2   $ 3,142   $ 3,406   $ 2,901  
Ratio           1.95 %   1.94 %   2.23 %         2.82 %   3.21 %   3.14 %
   
 
 
 
 
 
 
 
 
Securitized receivables (all in North America Cards)     (79.9 )   (1,142 )   (1,222 )   (1,414 )   (76.2 )   (1,122 )   (1,244 )   (1,127 )
Credit card receivables held-for-sale(4)     (7.5 )   (176 )   (133 )   (120 )   (7.4 )   (128 )   (46 )   (83 )
   
 
 
 
 
 
 
 
 
On-balance sheet loans (excluding Commercial Markets)(5)   $ 365.6   $ 7,519   $ 7,123   $ 6,777   $ 359.6   $ 1,892   $ 2,116   $ 1,691  
Ratio           2.06 %   2.01 %   2.28 %         2.09 %   2.44 %   2.31 %
   
 
 
 
 
 
 
 
 
 
   
  Cash-Basis Loans(1)
   
  Net Credit Losses(1)
 
Commercial Markets Groups   $ 39.3   $ 1,000   $ 1,173   $ 1,283   $ 40.1   $ 43   $ 31   $ 50  
  Ratio           2.55 %   2.96 %   3.17 %         0.43 %   0.31 %   0.47 %
Total Consumer Loans   $ 404.9                     $ 399.7   $ 1,935   $ 2,147   $ 1,741  
   
 
 
 
 
 
 
 
 
                                                   
Regional View:                                                  
North America (excluding Mexico)   $ 344.0   $ 6,241   $ 5,758   $ 5,752   $ 336.7   $ 2,466   $ 2,763   $ 2,190  
  Ratio           1.81 %   1.73 %   2.02 %         2.91 %   3.42 %   3.10 %
Mexico     8.0     386     380     374     7.9     23     45     10  
  Ratio           4.85 %   5.07 %   5.77 %         1.13 %   2.35 %   0.58 %
EMEA     35.4     1,656     1,720     1,489     34.7     209     204     160  
  Ratio           4.68 %   5.02 %   4.80 %         2.40 %   2.40 %   2.13 %
Japan     16.1     290     340     343     16.3     304     303     343  
  Ratio           1.81 %   2.02 %   2.02 %         7.40 %   7.26 %   8.36 %
Asia (excluding Japan)     46.2     234     248     307     44.6     139     88     101  
  Ratio           0.51 %   0.57 %   0.96 %         1.24 %   0.88 %   1.29 %
Latin America     3.3     30     32     46     3.0     1     3     97  
  Ratio           0.90 %   1.11 %   1.56 %         0.06 %   0.42 %   13.13 %
   
 
 
 
 
 
 
 
 
Managed loans (excluding Commercial Markets)(3)   $ 453.0   $ 8,837   $ 8,478   $ 8,311   $ 443.2   $ 3,142   $ 3,406   $ 2,901  
Ratio           1.95 %   1.94 %   2.23 %         2.82 %   3.21 %   3.14 %
   
 
 
 
 
 
 
 
 

(1)
The ratios of 90 days or more past due, cash-basis loans, and net credit losses are calculated based on end-of-period and average loans, respectively, both net of unearned income.

(2)
Private Bank results are reported as part of the Global Investment Management segment.

(3)
This table presents credit information on a managed basis (a non-GAAP measure) and shows the impact of securitizations to reconcile to a held basis, the comparable GAAP measure. Only North America Cards from a product view, and North America from a regional view, are impacted. See a discussion of managed basis reporting on page 43.

(4)
Included within Other Assets on the Consolidated Balance Sheet.

(5)
Total loans and total average loans exclude certain interest and fees on credit cards of approximately $4 billion and $4 billion, respectively, for the third quarter of 2004, which are included in Consumer Loans on the Consolidated Balance Sheet.

44


Consumer Loan Balances, Net of Unearned Income

 
  End of Period
  Average
 
In billions of dollars

  Sept. 30,
2004

  June 30,
2004

  Sept. 30,
2003

  3rd Qtr.
2004

  2nd Qtr.
2004

  3rd Qtr.
2003

 
Total managed   $ 492.3   $ 477.4   $ 413.7   $ 483.3   $ 467.1   $ 409.0  
Securitized receivables     (79.9 )   (76.4 )   (73.6 )   (76.2 )   (75.6 )   (72.1 )
Loans held-for-sale(1)     (7.5 )   (6.3 )   (3.0 )   (7.4 )   (2.1 )   (4.1 )
   
 
 
 
 
 
 
On-balance sheet(2)   $ 404.9   $ 394.7   $ 337.1   $ 399.7   $ 389.4   $ 332.8  
   
 
 
 
 
 
 

(1)
Included within Other Assets on the Consolidated Balance Sheet.

(2)
Total loans and total average loans exclude certain interest and fees on credit cards of approximately $4 billion and $4 billion, respectively, for the third quarter of 2004, approximately $4 billion and $4 billion, respectively, for the second quarter of 2004, and approximately $2 billion and $2 billion, respectively, for the third quarter of 2003, which are included in Consumer Loans on the Consolidated Balance Sheet.

        Total delinquencies 90 days or more past due (excluding Commercial Markets) in the managed portfolio were $8.837 billion or 1.95% of loans at September 30, 2004, compared to $8.478 billion or 1.94% at June 30, 2004 and $8.311 billion or 2.23% at September 30, 2003. Total cash-basis loans in Commercial Markets were $1.000 billion or 2.55% of loans at September 30, 2004, compared to $1.173 billion or 2.96% at June 30, 2004 and $1.283 billion or 3.17% at September 30, 2003. Total managed net credit losses (excluding Commercial Markets) in the 2004 third quarter were $3.142 billion and the related loss ratio was 2.82%, compared to $3.406 billion and 3.21% in the 2004 second quarter and $2.901 billion and 3.14% in the 2003 third quarter. In Commercial Markets, total net credit losses were $43 million and the related loss ratio was 0.43% in the 2004 third quarter, compared to $31 million and 0.31% in the 2004 second quarter and $50 million and 0.47% in the 2003 third quarter. For a discussion of trends by business, see business discussions on pages 16 to 23 and page 34.

        Citigroup's total allowance for loans, leases and unfunded lending commitments of $12.634 billion is available to absorb probable credit losses in the entire portfolio. For analytical purposes only, the portion of Citigroup's allowance for credit losses attributed to the consumer portfolio was $8.894 billion at September 30, 2004, $9.316 billion at June 30, 2004 and $7.038 billion at September 30, 2003. The increase in the allowance for credit losses from September 30, 2003 was primarily due to additions of $2.1 billion, $274 million and $148 million associated with the acquisitions of Sears, KorAm and WMF, respectively, as well as the reclassification in the 2004 second quarter of certain valuation reserves related to capital leases into the allowance for credit losses. These additions were partially offset by the impact of general reserve releases of $191 million and $436 million in the 2004 second and third quarters, respectively, related to improving credit conditions in North America, Latin America, Asia and Japan.

        On-balance sheet consumer loans of $404.9 billion increased $67.8 billion or 20% from September 30, 2003, primarily driven by the additions of the Sears, KorAm and WMF portfolios, combined with growth in mortgage and other real estate-secured loans in Consumer Assets, Consumer Finance and Private Bank. The impact of strengthening currencies also contributed to growth in consumer loans, as did increases in student loans in North America and margin lending in Private Bank. Excluding the impact of acquisitions, credit card receivables declined, partially due to the impact of higher securitization levels, a decline in introductory promotional rate balances reflecting a shift in acquisition marketing strategies and higher payment rates by customers. In CitiCapital North America, loans declined $3.5 billion reflecting the reclassification of operating leases from loans to other assets of $2.0 billion during the 2004 second quarter and the continued liquidation of non-core portfolios. A decline in Japan reflected continued contraction in the Consumer Finance portfolio.

        Net credit losses, delinquencies and the related ratios are affected by the credit performance of the portfolios, including bankruptcies, unemployment, global economic conditions, portfolio growth and seasonal factors, as well as macro-economic and regulatory policies.

45


CORPORATE PORTFOLIO REVIEW

        Corporate loans are identified as impaired and placed on a nonaccrual basis when it is determined that the payment of interest or principal is doubtful of collection or when interest or principal is past due for 90 days or more, except when the loan is well-secured and in the process of collection. Impaired corporate loans are written down to the extent that principal is judged to be uncollectible. Impaired collateral-dependent loans are written down to the lower of cost or collateral value, less disposal costs.

        The following table summarizes corporate cash-basis loans and net credit losses:

In millions of dollars

  Sept. 30, 2004
  June 30, 2004
  Dec. 31, 2003
  Sept. 30, 2003
 
Corporate Cash-Basis Loans                          
Capital Markets and Banking   $ 2,149   $ 2,501   $ 3,263   $ 3,588  
Transaction Services     51     118     156     201  
   
 
 
 
 
Total Corporate Cash-Basis Loans(1)   $ 2,200   $ 2,619   $ 3,419   $ 3,789  
   
 
 
 
 
Net Credit Losses                          
Capital Markets and Banking   $ (6 ) $ (23 ) $ 412   $ 331  
Transaction Services     (15 )   2     13      
Other         (1 )   (1 )    
   
 
 
 
 
Total Net Credit Losses   $ (21 ) $ (22 ) $ 424   $ 331  
   
 
 
 
 
Corporate Allowance for Credit Losses   $ 3,140   $ 3,399   $ 3,555   $ 3,805  
Corporate Allowance for Credit Losses on Unfunded Lending Commitments(2)     600     600     600     526  
   
 
 
 
 
Total Corporate Allowance for Loans, Leases, and Unfunded Lending Commitments   $ 3,740   $ 3,999   $ 4,155   $ 4,331  
   
 
 
 
 
Corporate Allowance As a Percentage of Total Corporate Loans(3)     2.80 %   3.01 %   3.62 %   3.70 %
   
 
 
 
 

(1)
The 2004 third and second quarters include the addition of $313 million and $227 million of cash-basis loans, respectively, related to the acquisition of KorAm.

(2)
Represents additional reserves recorded within Other Liabilities on the Consolidated Balance Sheet.

(3)
Does not include the Allowance for Unfunded Lending Commitments.

        Corporate cash-basis loans were $2.200 billion, $2.619 billion, $3.419 billion and $3.789 billion at September 30, 2004, June 30, 2004, December 31, 2003, and September 30, 2003, respectively. Cash-basis loans decreased $1.589 billion from September 30, 2003 due to decreases in Capital Markets and Banking and Transaction Services. Capital Markets and Banking at September 30, 2004 primarily reflects decreases to borrowers in the telecommunications and power and energy industries and charge-offs against reserves as well as paydowns from corporate borrowers in Argentina, Mexico, Australia, New Zealand and Hong Kong, partially offset by an increase from the KorAm acquisition. Transaction Services decreased primarily due to a reclassification of cash-basis loans along with charge-offs in Argentina and Poland. Cash-basis loans decreased $419 million compared to June 30, 2004 primarily due to a decrease in Capital Markets and Banking. This decrease primarily consisted of charge-offs taken against reserves and paydowns from borrowers in the power and energy industry as well as corporate borrowers in Argentina, Thailand and Mexico, partially offset by an increase in Russia.

        Total corporate Other Real Estate Owned (OREO) was $95 million, $98 million, $105 million and $95 million at September 30, 2004, June 30, 2004, December 31, 2003 and September 30, 2003, respectively.

        Total corporate loans outstanding at September 30, 2004 were $112 billion as compared to $113 billion at June 30, 2004, $98 billion at December 31, 2003 and $103 billion at September 30, 2003.

        Total corporate net credit losses of ($21) million at September 30, 2004 decreased $352 million as compared to September 30, 2003, primarily reflecting recoveries and lower net credit losses from counterparties in the power and energy industry as well as counterparties in North America, Argentina, Brazil, Australia and Singapore. The $17 million decrease from the 2004 second quarter in Transaction Services primarily reflects recoveries as well as lower net credit losses from counterparties in Argentina.

        The allowance for credit losses is established by management based upon estimates of probable losses in the portfolio. This evaluative process includes the utilization of statistical models to analyze such factors as default rates, both historic and projected, geographic and industry concentrations and environmental factors. Larger non-homogeneous credits are evaluated on an individual loan basis examining such factors as the borrower's financial strength and payment history, the financial stability of any guarantors and, for secured loans, the realizable value of any collateral. Additional reserves are established to provide for imprecision caused by the use of historical and projected loss data. Judgmental assessments are used to determine residual losses on the leasing portfolio.

        Citigroup's allowance for credit losses for loans, leases, and unfunded lending commitments of $12.634 billion is available to absorb probable credit losses in the entire portfolio. For analytical purposes only, the portion of Citigroup's allowance for credit losses attributed to the corporate portfolio was $3.740 billion at September 30, 2004 compared to $3.999 billion at June 30, 2004, $4.155 billion at December 31, 2003, and $4.331 billion at September 30, 2003. The allowance attributed to corporate loans, leases and

46


unfunded lending commitments as a percentage of corporate loans was 3.33% at September 30, 2004 as compared to 3.54%, 4.24% and 4.21% at June 30, 2004, December 31, 2003 and September 30, 2003, respectively. The $591 million decrease in total corporate reserves for the twelve months ending September 30, 2004 primarily reflects write-offs against previously-established reserves in the telecommunications and power and energy industries and reserve releases of $950 million due to improving credit quality in the portfolio. The $259 million decrease in total corporate reserves from June 30, 2004 reflects a $250 million reserve release due to improving credit quality in the portfolio, partially offset by $117 million of additional reserves related to the KorAm acquisition. The $250 million reserve release was geographically attributed to Mexico ($150 million), Latin America ($83 million), Japan ($14 million) and EMEA ($3 million). 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. Corporate net credit losses and cash-basis loans are expected to remain stable through 2004. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 65.

47


MARKET RISK MANAGEMENT PROCESS

        Market risk at Citigroup—like credit risk—is managed through corporate-wide standards and business policies and procedures. Market risks are measured in accordance with established standards to ensure consistency across businesses and the ability to aggregate like risks at the Citigroup-level. Each business is required to establish, and have approved by independent market risk management, a market risk limit framework, including risk measures, limits and controls, that clearly defines approved risk profiles and is within the parameters of Citigroup's overall risk appetite.

        Businesses, working in conjunction with independent Market Risk Management, must ensure that market risks are independently measured, monitored, and reported to ensure transparency in risk-taking activities and integrity in risk reports. In all cases, the businesses are ultimately responsible for the market risks that they take and for remaining within their defined limits.

        Market risk encompasses liquidity risk and price risk, both of which arise in the normal course of business of a global financial intermediary. Liquidity risk is the risk that some entity, in some location and in some currency, may be unable to meet a financial commitment to a customer, creditor, or investor when due. Liquidity risk is discussed in the "Capital Resources and Liquidity" section beginning on page 53. Price risk is the risk to earnings that arises from changes in interest rates, foreign exchange rates, equity and commodity prices, and in their implied volatilities. Price risk arises in Non-trading Portfolios, as well as in Trading Portfolios.

Non-Trading Portfolios

        A uniform market risk management policy exists for Citigroup's non-trading portfolios. Under this policy, there is a single set of standards for defining, measuring, limiting and reporting market risk in non-trading portfolios in order to ensure consistency across businesses, stability in methodologies and transparency of risk.

        Price risk in non-trading portfolios is measured predominantly through Interest Rate Exposure and factor sensitivity techniques. These techniques are supplemented with additional measurements, including stress testing the impact on earnings and equity for non-linear interest rate movements, and analysis of portfolio duration, basis risk, spread risk, volatility risk, and cost-to-close.

        Business units manage the potential earnings effect of interest rate movements by managing the asset and liability mix, either directly or through the use of derivative financial products. These include interest rate swaps and other derivative instruments that are designated and effective as hedges. The utilization of derivatives is determined based on changing market conditions as well as to changes in the characteristics and mix of the related assets and liabilities.

        Interest Rate Exposure is the primary corporate-wide method for measuring price risk in Citigroup's non-trading portfolios (excluding the insurance companies). Interest Rate Exposure measures the pretax earnings impact of specified upward and downward instantaneous parallel 50, 100, and 200 basis point shifts in the individual currency yield curve assuming a static portfolio. Citigroup measures this impact over one-year, five-year, and ten-year time horizons under business-as-usual conditions.

        The Interest Rate Exposure is calculated separately for each currency and reflects the repricing gaps in the position as well as option positions, both explicit and embedded. Citigroup aggregates its Interest Rate Exposure on a daily basis by business, geography, and currency.

48


Citigroup Interest Rate Exposure (Impact on Pretax Earnings)(1)

        The table below illustrates the impact to Citigroup's pretax earnings over a one-year and five-year time horizon from an instantaneous 100 basis point (bps) increase and a 100 bps decrease in the yield curves applicable to various currencies, the primary scenarios evaluated by senior management.

 
  September 30, 2004
  June 30, 2004
  September 30, 2003
 
 
  100 bps
Increase

  100 bps
Decrease

  100 bps
Increase

  100 bps
Decrease

  100 bps
Increase

  100 bps
Decrease

 
In millions of dollars                                      
U.S. dollar                                      
  Twelve months and less   $ (369 ) $ 131   $ (647 ) $ 525   $ (745 ) $ 598  
  Discounted five year   $ 514   $ (1,906 ) $ (73 ) $ (1,014 ) $ 505   $ (1,258 )
   
 
 
 
 
 
 
Mexican peso                                      
  Twelve months and less   $ 41   $ (41 ) $ 46   $ (46 ) $ 20   $ (20 )
  Discounted five year   $ 145   $ (146 ) $ 196   $ (196 ) $ 101   $ (101 )
   
 
 
 
 
 
 
Euro                                      
  Twelve months and less   $ (67 ) $ 66   $ (89 ) $ 89   $ (105 ) $ 105  
  Discounted five year   $ 75   $ (76 ) $ 28   $ (28 ) $ (84 ) $ 84  
   
 
 
 
 
 
 
Japanese yen                                      
  Twelve months and less   $ 47     NM (2) $ 60     NM (2) $ 53     NM (2)
  Discounted five year   $ 163     NM (2) $ 215     NM (2) $ 71     NM (2)
   
 
 
 
 
 
 
Pound sterling                                      
  Twelve months and less   $ 33   $ (34 ) $ 38   $ (38 ) $ 26   $ (26 )
  Discounted five year   $ 169   $ (171 ) $ 186   $ (186 ) $ 136   $ (136 )
   
 
 
 
 
 
 

(1)
Excludes the insurance companies (see below).
(2)
Not meaningful. A 100 bps decrease in interest rates would imply negative rates for the Japanese yen yield curve.

        The changes in U.S. dollar Interest Rate Exposure from the prior quarter reflect changes in the aggregate asset/liability mix and Citigroup's view of prevailing interest rates. The changes in U.S. dollar Interest Rate Exposure from the prior-year quarter reflect changes in the aggregate asset/liability mix, changes in actual and projected pre-payments for mortgages and mortgage-related investments, the impact on stockholders' equity of retained earnings net of the WorldCom and Litigation Reserve Charge, as well as Citigroup's view of prevailing interest rates. As of September 30, 2004, a 100 bps increase in U.S. dollar interest rates would have a negative impact over the next twelve months of less than 1% of the previous twelve months net interest income (interest revenue less interest expense).

Insurance Companies

        The table below reflects the estimated decrease in the fair value of financial instruments held in the insurance companies, as a result of a 100 basis point increase in interest rates.

 
  September 30, 2004
  June 30, 2004
  September 30, 2003
In millions of dollars                  
Assets:                  
Investments   $ 2,398   $ 2,295   $ 2,220
   
 
 
Liabilities:                  
Long-term debt   $ 5   $ 7   $ 8
Contractholder funds     1,085     1,003     965
   
 
 

        A significant portion of the insurance companies liabilities (Insurance policy and claim reserves) are not financial instruments and are excluded from the above sensitivity analysis. The corresponding changes in the fair values of the Insurance policy and claim reserves are decreases of $683 million, $649 million, and $691 million at September 30, 2004, June 30, 2004 and September 30, 2003, respectively. Furthermore, the analysis does not change the economics of asset-liability matching risk mitigation strategies employed by the insurance businesses. The duration of Invested assets are closely matched with the related Insurance liabilities, diminishing the exposure to interest rate generated volatility. Including Insurance policy and claim liabilities, along with the aforementioned duration matching techniques, significantly decreases the impact implied in the above table.

Trading Portfolios

        Price risk in trading portfolios is measured through a complementary set of tools, including factor sensitivities, Value-at-Risk, and stress testing. Each trading portfolio has its own market risk limit framework, encompassing these measures and other controls, including permitted product lists and a new product approval process for complex products, established by the business and approved by independent market risk management.

49


        Factor sensitivities are defined as the change in the value of a position for a defined change in a market risk factor (e.g., the change in the value of a U.S. Treasury bill for a 1 basis point change in interest rates). It is the responsibility of independent market risk management to ensure that factor sensitivities are calculated, monitored and, in some cases, limited, for all relevant risks taken in a trading portfolio.

        Value-at-Risk estimates the potential decline in the value of a position or a portfolio, under normal market conditions, over a one-day holding period, at a 99% confidence level. The Value-at-Risk method incorporates the factor sensitivities of the trading portfolio with the volatilities and correlations of those factors. Citigroup's Value-at-Risk is based on the volatilities of, and correlations between, approximately 100,000 market risk factors, including factors that track the specific issuer risk in debt and equity securities.

        Stress testing is performed on trading portfolios on a regular basis, to estimate the impact of extreme market movements. Stress testing is performed on individual trading portfolios, as well as on aggregations of portfolios and businesses, as appropriate. It is the responsibility of independent market risk management, in conjunction with the businesses, to develop stress scenarios, review the output of periodic stress testing exercises, and utilize the information to make judgments as to the ongoing appropriateness of exposure levels and limits.

        Risk Capital for market risk in trading portfolios is based on an annualized Value-at-Risk figure, with adjustments for unused limit capacity and intra-day trading activity.

        Citigroup periodically performs extensive back-testing of many hypothetical test portfolios as one check on the accuracy of its Value-at-Risk. Back-testing is the process in which the ex-ante daily Value-at-Risk of a test portfolio is compared to the ex-post daily change in the market value of its transactions. Back-testing is conducted to ascertain if in fact we are measuring potential market loss at the 99% confidence level. A daily trading loss in excess of a 99% confidence level Value-at-Risk should occur on average only 1% of the time. In all cases, thus far, Citigroup's Value-at-Risk has met this requirement.

        New and/or complex products in trading portfolios are required to be reviewed and approved by the Capital Markets Approval Committee (CMAC). The CMAC is responsible for ensuring that all relevant risks are identified and understood, and can be measured, managed and reported in accordance with applicable business policies and practices. The CMAC is made up of senior representatives from market and credit risk management, legal, accounting, operations and other support areas.

        The level of price risk exposure at any given point in time depends on the market environment and expectations of future price and market movements, and will vary from period to period.

        For Citigroup's major trading centers, the aggregate pretax Value-at-Risk in the trading portfolios was $119 million at September 30, 2004. Daily exposures averaged $99 million during the 2004 third quarter and ranged from $89 million to $122 million.

        The following table summarizes Value-at-Risk in the trading portfolios as of September 30, 2004, June 30, 2004, and September 30, 2003, including the quarterly averages:

 
  September 30,
2004

  Third
Quarter 2004
Average

  June 30,
2004

  Second
Quarter 2004
Average

  September 30,
2003

  Third
Quarter 2003
Average

 
In millions of dollars                                      
Interest rate   $ 118   $ 99   $ 96   $ 94   $ 75   $ 83  
Foreign exchange     15     17     14     14     15     17  
Equity     24     21     23     25     20     13  
Commodity     13     15     20     16     4     4  
Covariance adjustment     (51 )   (53 )   (54 )   (53 )   (40 )   (39 )
   
 
 
 
 
 
 
Total   $ 119   $ 99   $ 99   $ 96   $ 74   $ 78  
   
 
 
 
 
 
 

        The table below provides the ranges of Value-at-Risk in the trading portfolios that were experienced during the third and second quarters of 2004 and the third quarter of 2003:

 
  Third Quarter 2004
  Second Quarter 2004
  Third Quarter 2003
 
  Low
  High
  Low
  High
  Low
  High
In millions of dollars                                    
Interest rate   $ 86   $ 126   $ 83   $ 112   $ 69   $ 107
Foreign exchange     10     24     9     28     11     27
Equity     15     28     21     32     9     24
Commodity     8     22     12     20     3     7
   
 
 
 
 
 

50


OPERATIONAL RISK MANAGEMENT PROCESS

        Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events. It includes reputation and franchise risks associated with business practices or market conduct that the Company may undertake with respect to activities in a fiduciary role, as principal as well as agent, or through a special-purpose vehicle.

        The Citigroup Operational Risk Policy codifies the core governing principles for operational risk management and provides the framework to identify, control, monitor, measure, and report operational risks in a consistent manner across the Company.

Risk and Control Self-Assessment

        The Company's Risk and Control Self-Assessment (RCSA) incorporates standards for risk and control self-assessment that are applicable to all businesses and establish RCSA as the process whereby risks that are inherent in a business' strategy, objectives, and activities are identified and the effectiveness of the controls over those risks are evaluated and monitored. The Company's RCSA is based on principles of The Committee of Sponsoring Organizations of the Treadway Commission, which have been adopted as the minimum standards for all internal control reviews that comply with Sarbanes-Oxley Section 404, Federal Deposit Insurance Corporation Improvement Act (FDICIA) or operational risk requirements. The policy requires, on a quarterly basis, businesses and staff functions to perform an RCSA that includes documentation of the control environment and policies, assessing the risks and controls, testing commensurate with risk level, corrective action tracking for control breakdowns or deficiencies and periodic reporting, including reporting to senior management and the Audit and Risk Management Committee of the Board. The entire process is subject to audit by Citigroup's Audit and Risk Review with reporting to the Audit and Risk Management Committee of the Board.

Information Security and Continuity of Business

        Citigroup formed an Executive Council of senior business managers to oversee information security and continuity of business policy and implementation. These are important issues for the Company and the entire industry in light of the risk environment. Significant upgrades to the Company's processes are continuing.

        The Company's Information Security Program complies with the Gramm-Leach Bliley Act and other regulatory guidance. The Citigroup Information Security Office conducted an end-to-end review of company-wide risk management processes for mitigating, monitoring, and responding to information security risk.

        Citigroup mitigates business continuity risks by its long-standing practice of annual testing and review of recovery procedures by business units. The Citigroup Office of Business Continuity and the Global Continuity of Business Committee oversee this broad program area. Together, these groups issued a corporate-wide Continuity of Business policy effective January 2003 to improve consistency in contingency planning standards across the Company.

COUNTRY AND CROSS-BORDER RISK MANAGEMENT PROCESS

Country Risk

        The Citigroup Country Risk Committee is chaired by senior international business management, and includes as its members business managers and independent risk managers from around the world. The committee's primary objective is to strengthen the management of country risk, defined as the total risk to the Company of an event that impacts a country. The committee regularly reviews all risk exposures within a country, makes recommendations as to actions, and follows up to ensure appropriate accountability.

Cross-Border Risk

        The Company's cross-border outstandings reflect various economic and political risks, including those arising from restrictions on the transfer of funds as well as the inability to obtain payment from customers on their contractual obligations as a result of actions taken by foreign governments such as exchange controls, debt moratorium and restrictions on the remittance of funds.

        Management oversight of cross-border risk is performed through a formal country risk review process that includes setting of cross-border limits, at least annually, in each country in which Citigroup has cross-border exposure, monitoring of economic conditions globally and within individual countries with proactive action as warranted, and the establishment of internal risk management policies. Under Federal Financial Institutions Examination Council (FFIEC) guidelines, total cross-border outstandings include cross-border claims on third parties as well as investments in and funding of local franchises. Cross-border claims on third parties (trade and short-, medium- and long-term claims) include cross-border loans, securities, deposits with banks, investments in affiliates, and other monetary assets, as well as net revaluation gains on foreign exchange and derivative products.

51


        The cross-border outstandings are reported by assigning externally-guaranteed outstandings to the country of the guarantor and outstandings for which tangible, liquid collateral is held outside of the obligor's country to the country in which the collateral is held. For securities received as collateral, outstandings are assigned to the domicile of the issuer of the securities.

        Investments in and funding of local franchises represents the excess of local country assets over local country liabilities. Local country assets are claims on local residents recorded by branches and majority-owned subsidiaries of Citigroup domiciled in the country, adjusted for externally guaranteed outstandings and certain collateral. Local country liabilities are obligations of branches and majority-owned subsidiaries of Citigroup domiciled in the country, for which no cross-border guarantee is issued by Citigroup offices outside the country.

        In regulatory reports under FFIEC guidelines, cross-border resale agreements are presented based on the domicile of the issuer of the securities that are held as collateral. However, for purposes of the following table, cross-border resale agreements are presented based on the domicile of the counterparty because the counterparty has the legal obligation for repayment. Similarly, under FFIEC guidelines, long trading securities positions are required to be reported on a gross basis. However, for purposes of the following table, certain long and short securities positions are presented on a net basis consistent with internal cross-border risk management policies, reflecting a reduction of risk from offsetting positions.

        The table below shows all countries where total FFIEC cross-border outstandings exceed 0.75% of total Citigroup assets:

 
  Cross-Border Claims on Third Parties

  September 30, 2004

  December 31, 2003

 
 
 
  Trading
and Short-
Term
Claims(1)

  Resale
Agree-
ments

  All
Other

  Total
  Net
Investments
in and
Funding of
Local
Franchises(2)

  Total
Cross-
Border
Out-
standings

  Commit-
ments(3)

  Total
Cross-
Border
Out-
standings

  Commit-
ments(3)

In billions of dollars                                                      
United Kingdom   $ 5.4   $ 15.9   $ 3.5   $ 24.8   $   $ 24.8   $ 60.7   $ 32.4   $ 28.3
Germany     16.6     1.3     1.5     19.4     3.4     22.8     19.4     21.7     14.5
France     8.4     8.1     1.0     17.5         17.5     13.6     14.8     7.9
Korea     2.2     0.2     0.2     2.6     10.0     12.6     2.9     4.8     0.2
Canada     3.6     0.6     1.5     5.7     5.5     11.2     2.4     10.2     2.2
Netherlands     8.1     1.3     1.7     11.1         11.1     4.8     8.4     3.7
Japan     2.9     6.0     1.0     9.9         9.9     0.5     11.7     0.5
Italy     5.2     1.4     0.5     7.1     1.6     8.7     2.7     14.2     2.3
Australia     1.7     0.3     0.6     2.6         2.6     0.4     8.2     0.2
   
 
 
 
 
 
 
 
 

(1)
Trading and short-term claims include cross-border debt and equity securities held in the trading account, trade finance receivables, net revaluation gains on foreign exchange and derivative contracts, and other claims with a maturity of less than one year.

(2)
If local country liabilities exceed local country assets, zero is used for net investments in and funding of local franchises.

(3)
Commitments (not included in total cross-border outstandings) include legally binding cross-border letters of credit and other commitments and contingencies as defined by the FFIEC.

        Total cross-border outstandings for September 30, 2004 under FFIEC guidelines, including cross-border resale agreements based on the domicile of the issuer of the securities that are held as collateral, and long securities positions reported on a gross basis amounted to $9.3 billion for the United Kingdom, $36.6 billion for Germany, $16.9 billion for France, $12.9 billion for Korea, $12.3 billion for Canada, $12.4 billion for the Netherlands, $9.4 billion for Japan, $12.9 billion for Italy, and $5.5 billion for Australia.

        Total cross-border outstandings for December 31, 2003 under FFIEC guidelines, including cross-border resale agreements based on the domicile of the issuer of the securities that are held as collateral, and long securities positions reported on a gross basis amounted to $14.6 billion for the United Kingdom, $41.4 billion for Germany, $17.5 billion for France, $4.1 billion for Korea, $11.5 billion for Canada, $10.0 billion for the Netherlands, $11.9 billion for Japan, $18.7 billion for Italy, and $9.8 billion for Australia.

52


CAPITAL RESOURCES AND LIQUIDITY

CAPITAL RESOURCES

Overview

        Citigroup's capital management framework is designed to ensure the capital position and ratios of Citigroup and its subsidiaries are consistent with the Company's risk profile, all applicable regulatory standards or guidelines, and external ratings considerations. The capital management process embodies centralized senior management oversight and ongoing review at the entity and country level as applicable.

        The capital plans, forecasts, and positions of Citigroup and its principal subsidiaries are reviewed by, and subject to oversight of, Citigroup's Finance and Capital Committee. Current members of this committee include Citigroup's Chief Executive Officer, President and Chief Operating Officer, Chief Financial Officer, Corporate Treasurer, Senior Risk Officer, and several senior business managers.

        The Finance and Capital Committee's capital management responsibilities include: determination of the overall financial structure of Citigroup and its principal subsidiaries, including debt/equity ratios and asset growth guidelines; ensuring appropriate actions are taken to maintain capital adequacy for Citigroup and its regulated entities; determination and monitoring of hedging of capital and foreign exchange translation risk associated with non-dollar earnings; and review and recommendation of share repurchase levels and dividends on common and preferred stock. The Finance and Capital Committee establishes applicable capital targets for Citigroup on a consolidated basis and for significant subsidiaries. These targets exceed applicable regulatory standards.

        Citigroup and Citicorp are subject to risk-based capital guidelines issued by the Board of Governors of the Federal Reserve System (FRB). These guidelines are used to evaluate capital adequacy based primarily on the perceived credit risk associated with balance sheet assets, as well as certain off-balance sheet exposures such as unfunded loan commitments, letters of credit, and derivative and foreign exchange contracts. The risk-based capital guidelines are supplemented by a leverage ratio requirement. To be "well-capitalized" under federal bank regulatory agency definitions, a bank holding company must have a Tier 1 Capital Ratio of at least 6%, a combined Tier 1 and Tier 2 Capital ratio of at least 10%, and a leverage ratio of at least 3%, and not be subject to a directive, order, or written agreement to meet and maintain specific capital levels.

        As noted in the table below, Citigroup maintained its well-capitalized position during the first nine months of 2004 and the full year of 2003. The decreases in the Tier 1 and Total Capital Ratios which occurred during the first half of 2004 were primarily due to the WorldCom and Litigation Reserve Charge and the acquisition of KorAm Bank.

Citigroup Ratios

 
  September 30, 2004
  June 30, 2004
  December 31, 2003
 
Tier 1 Capital   8.37 % 8.16 % 8.91 %
Total Capital (Tier 1 and Tier 2)   11.49 % 11.31 % 12.04 %
Leverage(1)   5.01 % 4.88 % 5.56 %
Common stockholders' equity   7.12 % 6.96 % 7.67 %
   
 
 
 

(1)
Tier 1 Capital divided by adjusted average assets.

53


Components of Capital Under Regulatory Guidelines

 
  Sept. 30, 2004
  June 30, 2004
  Dec. 31, 2003
 
In millions of dollars                    
                     
Tier 1 Capital                    
Common stockholders' equity   $ 102,241   $ 97,186   $ 96,889  
Qualifying perpetual preferred stock     1,125     1,125     1,125  
Qualifying mandatorily redeemable securities of subsidiary trusts     6,241     6,152     6,257  
Minority interest     993     1,134     1,158  
Less: Net unrealized gains on securities available-for-sale(1)     (2,243 )   (1,105 )   (2,908 )
Accumulated net gains on cash flow hedges, net of tax     (219 )   (575 )   (751 )
Intangible assets:(2)                    
Goodwill     (30,809 )   (30,215 )   (27,581 )
Other disallowed intangible assets     (7,282 )   (7,159 )   (6,725 )
50% investment in certain subsidiaries(3)     (58 )   (53 )   (45 )
Other     (344 )   (609 )   (548 )
   
 
 
 
Total Tier 1 Capital     69,645     65,881     66,871  
   
 
 
 
Tier 2 Capital                    
Allowance for credit losses(4)     10,536     10,227     9,545  
Qualifying debt(5)     15,211     14,907     13,573  
Unrealized marketable equity securities gains(1)     275     393     399  
Less: 50% investment in certain subsidiaries(3)     (57 )   (52 )   (45 )
   
 
 
 
Total Tier 2 Capital     25,965     25,475     23,472  
   
 
 
 
Total Capital (Tier 1 and Tier 2)   $ 95,610   $ 91,356   $ 90,343  
   
 
 
 
Risk-adjusted assets(6)   $ 832,172   $ 807,513   $ 750,293  
   
 
 
 

(1)
Tier 1 Capital excludes unrealized gains and losses on debt securities available-for-sale in accordance with regulatory risk-based capital guidelines. The federal bank regulatory agencies permit institutions to include in Tier 2 Capital up to 45% of pretax net unrealized holding gains on available-for-sale equity securities with readily determinable fair values. Institutions are required to deduct from Tier 1 Capital net unrealized holding losses on available-for-sale equity securities with readily determinable fair values, net of tax.
(2)
The increase in intangible assets during 2004 was primarily due to the acquisitions of Lava Trading, Inc. in August 2004, PRMI in July 2004, KorAm in May 2004, and WMF in January 2004.
(3)
Represents unconsolidated banking and finance subsidiaries.
(4)
Includable up to 1.25% of risk-adjusted assets. Any excess allowance is deducted from risk-adjusted assets.
(5)
Includes qualifying subordinated debt in an amount not exceeding 50% of Tier 1 Capital.
(6)
Includes risk-weighted credit equivalent amounts, net of applicable bilateral netting agreements, of $43.6 billion for interest rate, commodity and equity derivative contracts, as of September 30, 2004, compared to $40.0 billion as of June 30, 2004, and $39.1 billion as of December 31, 2003. Market risk-equivalent assets included in risk-adjusted assets amounted to $45.7 billion at September 30, 2004, $39.1 billion at June 30, 2004, and $40.6 billion at December 31, 2003. Risk-adjusted assets also includes the effect of other off-balance sheet exposures such as unused loan commitments and letters of credit and reflects deductions for certain intangible assets and any excess allowance for credit losses.

        Common stockholders' equity increased approximately $5.4 billion during the first nine months of 2004 to $102.2 billion at September 30, 2004, representing 7.1% of assets, compared to $96.9 billion and 7.7% at year-end 2003. The increase in common stockholders' equity during the first nine months of 2004 reflected net income of $11.7 billion and $2.4 billion related to the net issuance of shares pursuant to employee benefit plans and other activity, offset by dividends declared on common and preferred stock of $6.3 billion, $1.6 billion related to the after-tax net change in equity from non-owner sources, treasury stock acquired of $0.5 billion including shares repurchased from the Citigroup Employee Pension Fund, and $0.3 billion related to the net issuance of restricted and deferred stock. The decrease in the common stockholders' equity ratio during the first nine months of 2004 reflected the above items and the 13.6% increase in total assets.

        Total mandatorily redeemable securities of subsidiary trusts (trust preferred securities), which qualify as Tier 1 Capital, at September 30, 2004, June 30, 2004 and December 31, 2003 were $6.241 billion, $6.152 billion and $6.257 billion, respectively. The amount outstanding at December 31, 2003 included $5.217 billion of parent-obligated securities and $840 million of subsidiary-obligated securities. During the 2004 first quarter, the Company deconsolidated the subsidiary issuer trusts in accordance with FIN 46-R. On September 27, 2004 Citigroup issued $600 million in Trust Preferred Securities (Citigroup XI). On October 14, 2004, Citigroup redeemed for cash all of the $600 million Trust Preferred Securities of Citigroup Capital VI, at the redemption price of $25 per preferred security plus any accrued distribution to but excluding the date of redemption. The FRB has issued interim guidance that continues to recognize trust preferred securities as a component of Tier 1 Capital. On May 6, 2004, the FRB issued a proposed rule that would retain trust preferred securities in Tier 1 Capital of Bank Holding Companies (BHCs), subject to conditions. See "Regulatory Capital and Accounting Standards Developments" on page 57. If Tier 2 Capital treatment had been required at September 30, 2004, Citigroup would have continued to be "well-capitalized."

        On July 20, 2004, the federal banking and thrift regulatory agencies issued the final rule on capital requirements for asset-backed commercial paper (ABCP) programs. The final rule, which generally became effective September 30, 2004, increased the capital requirement on most short-term liquidity facilities that provide support to ABCP programs by imposing a 10% credit conversion factor on such facilities. Additionally, the final rule permanently excludes ABCP program assets consolidated under FIN 46-R and any minority interests from the calculation of risk-weighted assets and Tier 1 Capital, respectively. The denominator of the leverage

54


ratio calculation remains unaffected by the final rule, as the risk-based capital treatment does not alter the reporting of the on-balance sheet assets under GAAP guidelines. The impact of adopting the final rule on Citigroup's Tier 1 Capital ratio was approximately 4.0 basis points.

        Citicorp's subsidiary depository institutions in the United States are subject to risk-based capital guidelines issued by their respective primary federal bank regulatory agencies, which are similar to the FRB's guidelines. To be "well-capitalized" under federal bank regulatory agency definitions, Citicorp's depository institutions must have a Tier 1 Capital Ratio of at least 6%, a combined Tier 1 and Tier 2 Capital ratio of at least 10%, and a leverage ratio of at least 5%, and not be subject to a directive, order, or written agreement to meet and maintain specific capital levels. At September 30, 2004, all of Citicorp's subsidiary depository institutions were "well-capitalized" under the federal regulatory agencies' definitions.

        Similar to Citigroup, Citicorp's capital ratios include the benefit of the inclusion of trust preferred securities.

Citicorp Ratios

 
  September 30, 2004
  June 30, 2004
  December 31, 2003
 
Tier 1 Capital   8.42 % 8.39 % 8.44 %
Total Capital (Tier 1 and Tier 2)   12.46 % 12.55 % 12.68 %
Leverage(1)   6.53 % 6.45 % 6.70 %
Common stockholder's equity   9.96 % 9.72 % 9.97 %
   
 
 
 

(1)
Tier 1 Capital divided by adjusted average assets.

Citicorp Components of Capital Under Regulatory Guidelines

 
  September 30, 2004
  June 30, 2004
  December 31, 2003
In billions of dollars                  
                   
Tier 1 Capital   $ 55.8   $ 53.8   $ 50.7
Total Capital (Tier 1 and Tier 2)   $ 82.5   $ 80.5   $ 76.2
   
 
 

Other Subsidiary Capital Considerations

        Certain of the Company's U.S. and non-U.S. broker/dealer subsidiaries, including Citigroup Global Markets Inc. (CGMI), an indirect wholly owned subsidiary of Citigroup Global Markets Holdings Inc. (CGMHI), are subject to various securities and commodities regulations and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. The Company's U.S. registered broker/dealer subsidiaries are subject to the Securities and Exchange Commission's net capital rule, Rule 15c3-1 (the Net Capital Rule), promulgated under the Exchange Act. The Net Capital Rule requires the maintenance of minimum net capital, as defined. The Net Capital Rule also limits the ability of broker/dealers to transfer large amounts of capital to parent companies and other affiliates. Compliance with the Net Capital Rule could limit those operations of the Company that require the intensive use of capital, such as underwriting and trading activities and the financing of customer account balances, and also could restrict CGMHI's ability to withdraw capital from its broker/dealer subsidiaries, which in turn could limit CGMHI's ability to pay dividends and make payments on its debt. CGMHI monitors its leverage and capital ratios on a daily basis. Certain of the Company's broker/dealer subsidiaries are also subject to regulation in the countries outside of the U.S. in which they do business. Such regulations may include requirements to maintain specified levels of net capital or its equivalent. The Company's U.S. and non-U.S. broker/dealer subsidiaries were in compliance with their respective capital requirements at September 30, 2004.

        Certain of the Company's Insurance Subsidiaries are subject to regulatory capital requirements. The National Association of Insurance Commissioners (NAIC) adopted risk-based capital (RBC) requirements for life insurance companies. The RBC requirements are to be used as minimum capital requirements by the NAIC and states to identify companies that merit further regulatory action. The formulas have not been designed to differentiate among adequately capitalized companies that operate with levels of capital higher than RBC requirements. Therefore, the Company believes it is not appropriate to use the formulas to rate or to rank such companies. At September 30, 2004, all of the Company's life insurance companies had adjusted capital in excess of amounts requiring Company or any regulatory action.

55


Share Repurchases

        Under its long-standing repurchase program, the Company buys back common shares in the market or otherwise from time to time, primarily to provide shares for use under its equity compensation plans.

        The following table summarizes the Company's share repurchases during 2004:

 
  Total Shares
Repurchased

  Average Price Paid
per Share

  Dollar Value
of Remaining
Authorized
Repurchase Program

In millions, except per share amounts                
                 
January 2004                
  Open market repurchases(1)         $ 2,732
  Employee transactions(2)   12.8   $ 49.72     N/A
  Private equity transactions(3)   10.0   $ 50.22   $ 2,230
February 2004                
  Open market repurchases   0.5   $ 48.89   $ 2,208
  Employee transactions   0.6   $ 49.36     N/A
March 2004                
  Employee transactions   8.6   $ 45.38     N/A
   
 
 
First quarter 2004                
  Open market repurchases   0.5   $ 48.89      
  Employee transactions   22.0   $ 48.02      
  Private equity transactions   10.0   $ 50.22      
   
 
 
Total first quarter 2004   32.5   $ 48.71   $ 2,208
   
 
 
April 2004                
  Employee transactions   0.9   $ 51.69     N/A
May 2004                
  Employee transactions   0.1   $ 47.29     N/A
June 2004                
  Employee transactions   0.2   $ 46.92     N/A
   
 
 
Second quarter 2004                
  Employee transactions   1.2   $ 50.57      
   
 
 
Total second quarter 2004   1.2   $ 50.57   $ 2,208
   
 
 
July 2004                
  Employee transactions   1.7   $ 45.73     N/A
August 2004                
  Employee transactions   0.6   $ 45.44     N/A
September 2004                
  Open market repurchases   0.1   $ 44.19   $ 2,206
  Employee transactions   0.2   $ 46.36     N/A
   
 
 
Third quarter 2004                
  Open market repurchases   0.1   $ 44.19      
  Employee transactions   2.5   $ 45.69      
   
 
 
Total third quarter 2004   2.6   $ 45.66   $ 2,206
   
 
 
Year-to-date 2004                
  Open market repurchases   0.6   $ 48.47      
  Employee transactions   25.7   $ 47.92      
  Private equity transactions   10.0   $ 50.22      
   
 
 
Total year-to-date 2004   36.3   $ 48.56   $ 2,206
   
 
 

(1)
All repurchases were transacted under an existing authorized share repurchase plan which was publicly announced on July 17, 2002 with a total repurchase authority of $7.5 billion. Smith Barney, which is included within the Private Client Services segment, executes all transactions in the open market.

(2)
Shares added to treasury stock related to activity on employee stock option plan reload exercises where the employee delivers existing shares to cover the reload option exercise or under the Company's employee Restricted Stock Program where employees utilize certain shares that have vested to satisfy tax requirements.

(3)
10.0 million shares were repurchased from the Citigroup Employee Pension Fund in January 2004 at prevailing market prices.

56


Regulatory Capital and Accounting Standards Developments

        The Basel Committee on Banking Supervision (the Basel Committee), consisting of central banks and bank supervisors from 13 countries, has developed a new set of risk-based capital standards (the New Accord), on which it has received significant input from Citigroup and other major banking organizations. The Basel Committee published the text of the New Accord on June 26, 2004. The Basel Committee has added an additional year of impact analysis and parallel testing for banks adopting the advanced approaches, with implementation extended until year-end 2007. The U.S. banking regulators issued an advance notice of proposed rulemaking in August 2003 to address issues in advance of publishing their proposed rules incorporating the new Basel standards. The final version of these rules will apply to Citigroup and other large U.S. banks and BHCs. Citigroup is assessing the impact of these future capital standards, while continuing to participate in efforts to refine the U.S. standards and monitor the progress of related Basel initiatives.

        On May 6, 2004, the FRB issued a proposed rule that would retain trust preferred securities in the Tier 1 Capital of BHCs, but with stricter quantitative limits and clearer qualitative standards. Under the proposal, after a three-year transition period, the aggregate amount of trust preferred securities and certain other capital elements includable in Tier 1 Capital would be limited to 25% of Tier 1 Capital elements, net of goodwill. Under these proposed rules Citigroup currently would have less than 11% against this limit. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 Capital, subject to restrictions. Internationally-active BHCs (such as Citigroup) would generally be expected to limit trust preferred securities and certain other capital elements to 15% of Tier 1 Capital elements, net of goodwill. Under this 15% limit, Citigroup would be able to retain the full amount of its trust preferred securities within Tier 1 Capital.

        Additionally, from time to time, the FRB and the FFIEC propose amendments to, and issue interpretations of, risk-based capital guidelines and reporting instructions. Such proposals or interpretations could, if implemented in the future, affect reported capital ratios and net risk-adjusted assets. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 65.

LIQUIDITY

Management of Liquidity

        Management of liquidity at Citigroup is the responsibility of the Corporate Treasurer. A uniform liquidity risk management policy exists for Citigroup and its major operating subsidiaries. Under this policy, there is a single set of standards for the measurement of liquidity risk in order to ensure consistency across businesses, stability in methodologies and transparency of risk. Management of liquidity at each operating subsidiary and/or country is performed on a daily basis and is monitored by Corporate Treasury.

        A primary tenet of Citigroup's liquidity management is strong decentralized liquidity management at each of its principal operating subsidiaries and in each of its countries, combined with an active corporate oversight function. Along with the role of the Corporate Treasurer, the Global Asset and Liability Committee (ALCO) undertakes this oversight responsibility. The Global ALCO functions as an oversight forum composed of Citigroup's Chief Financial Officer, Senior Risk Officer, Corporate Treasurer, independent Senior Treasury Risk Officer, Head of Risk Architecture and the senior corporate and business treasurers and business chief financial officers. One of the objectives of the Global ALCO is to monitor and review the overall liquidity and balance sheet positions of Citigroup and its principal subsidiaries and to address corporate-wide policies and make recommendations back to senior management and the business units. Similarly, ALCOs are also established for each country and/or major line of business.

        Each principal operating subsidiary and/or country must prepare an annual funding and liquidity plan for review by the Corporate Treasurer and approval by the independent Senior Treasury Risk Officer. The funding and liquidity plan includes analysis of the balance sheet as well as the economic and business conditions impacting the liquidity of the major operating subsidiary and/or country. As part of the funding and liquidity plan, liquidity limits, liquidity ratios, market triggers, and assumptions for periodic stress tests are established and approved.

        Liquidity limits establish boundaries for potential market access in business-as-usual conditions and are monitored against the liquidity position on a daily basis. These limits are established based on the size of the balance sheet, depth of the market, experience level of local management, stability of the liabilities, and liquidity of the assets. Finally, the limits are subject to the evaluation of the entities' stress test results. Generally, limits are established such that in stress scenarios, entities need to be self-funded or net providers of liquidity.

        A series of standard corporate-wide liquidity ratios have been established to monitor the structural elements of Citigroup's liquidity. For bank entities these include cash capital (defined as core deposits, long-term liabilities, and capital compared with illiquid assets), liquid assets against liquidity gaps, core deposits to loans, long-term assets to long-term liabilities and deposits to loans. Several measures exist to review potential concentrations of funding by individual name, product, industry, or geography. For the Parent Company, Insurance Entities and CGMHI, there are ratios established for liquid assets against short-term obligations. Triggers to elicit management discussion, which may result in other actions, have been established against these ratios. In addition, each

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individual major operating subsidiary or country establishes targets against these ratios and may monitor other ratios as approved in its funding and liquidity plan.

        Market triggers are internal or external market or economic factors that may imply a change to market liquidity or Citigroup's access to the markets. Citigroup market triggers are monitored by the Corporate Treasurer and the independent Senior Treasury Risk Officer and are discussed with the Global ALCO. Appropriate market triggers are also established and monitored for each major operating subsidiary and/or country as part of the funding and liquidity plans. Local triggers are reviewed with the local country or business ALCO and independent risk management.

        Simulated liquidity stress testing is periodically performed for each major operating subsidiary and/or country. The scenarios include assumptions about significant changes in key funding sources, credit ratings, contingent uses of funding, and political and economic conditions in certain countries. The results of stress tests of individual countries and operating subsidiaries are reviewed to ensure that each individual major operating subsidiary or country is either self-funded or a net provider of liquidity. In addition, a Contingency Funding Plan is prepared on a periodic basis for Citigroup. The plan includes detailed policies, procedures, roles and responsibilities, and the results of corporate stress tests. The product of these stress tests is a menu of alternatives that can be utilized by the Corporate Treasurer in a liquidity event.

        Citigroup maintains sufficient liquidity at the Parent Company to meet all maturing unsecured debt obligations due within a one-year time horizon without incremental access to the unsecured markets.

Funding

        As a financial holding company, substantially all of Citigroup's net earnings are generated within its operating subsidiaries. These subsidiaries make funds available to Citigroup, primarily in the form of dividends. Certain subsidiaries' dividend paying abilities may be limited by covenant restrictions in credit agreements, regulatory requirements and/or rating agency requirements that also impact their capitalization levels.

        Citicorp is a legal entity separate and distinct from Citibank, N.A. and its other subsidiaries and affiliates. There are various legal limitations on the extent to which Citicorp's banking subsidiaries may extend credit, pay dividends or otherwise supply funds to Citicorp. The approval of the Office of the Comptroller of the Currency is required if total dividends declared by a national bank in any calendar year exceed net profits (as defined) for that year combined with its retained net profits for the preceding two years. In addition, dividends for such a bank may not be paid in excess of the bank's undivided profits. State-chartered bank subsidiaries are subject to dividend limitations imposed by applicable state law.

        As of September 30, 2004, Citicorp's national and state-chartered bank subsidiaries can declare dividends to their respective parent companies, without regulatory approval, of approximately $10.5 billion. In determining whether and to what extent to pay dividends, each bank subsidiary must also consider the effect of dividend payments on applicable risk-based capital and leverage ratio requirements as well as policy statements of the federal regulatory agencies that indicate that banking organizations should generally pay dividends out of current operating earnings. Consistent with these considerations, Citicorp estimates that, as of September 30, 2004, its bank subsidiaries can directly or through their parent holding company distribute dividends to Citicorp of approximately $8.9 billion of the available $10.5 billion.

        Citicorp also receives dividends from its nonbank subsidiaries. These nonbank subsidiaries are generally not subject to regulatory restrictions on their payment of dividends except that the approval of the Office of Thrift Supervision (OTS) may be required if total dividends declared by a savings association in any calendar year exceed amounts specified by that agency's regulations.

        As discussed in the "Capital Resources" section beginning on page 53, the ability of CGMHI to declare dividends could be restricted by capital considerations of its broker/dealer subsidiaries.

        The Travelers Insurance Company (TIC) is subject to various regulatory restrictions that limit the maximum amount of dividends available to its parent without prior approval of the Connecticut Insurance Department. A maximum of $845 million of statutory surplus is available by the end of the year 2004 for such dividends without the prior approval of the Connecticut Insurance Department, of which $772 million was paid during the first nine months of 2004.

        During 2004, it is not anticipated that any restrictions on the subsidiaries' dividending capability will restrict Citigroup's ability to meet its obligations as and when they become due. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 65.

        Primary sources of liquidity for Citigroup and its principal subsidiaries include deposits, collateralized financing transactions, senior and subordinated debt, issuance of commercial paper, proceeds from issuance of trust preferred securities, and purchased/wholesale funds. Citigroup and its principal subsidiaries also generate funds through securitizing financial assets including credit card

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receivables and single-family or multi-family residences. Finally, Citigroup's net earnings provide a significant source of funding to the corporation.

        Citigroup's funding sources are well-diversified across funding types and geography, a benefit of the strength of the global franchise. Funding for the Parent and its major operating subsidiaries includes a large geographically diverse retail and corporate deposit base of $534.5 billion at September 30, 2004. A significant portion of these deposits have been, and are expected to be, long-term and stable and are considered core.

        Citigroup and its subsidiaries have a significant presence in the global capital markets. A substantial portion of the publicly underwritten debt issuance is originated in the name of Citigroup. Debt is also issued in the name of CGMHI, which issues medium-term notes and structured notes, primarily in response to specific investor inquiries. Publicly underwritten debt was also formerly issued by Citicorp, Associates First Capital Corporation (Associates), and CitiFinancial Credit Company, which includes WMF. Citicorp has guaranteed various debt obligations of Associates and CitiFinancial Credit Company, each an indirect subsidiary of Citicorp. Other significant elements of long-term debt in the Consolidated Balance Sheet include advances from the Federal Home Loan Bank system, asset-backed outstandings related to the purchase of Sears, and debt of foreign subsidiaries.

        Citigroup's borrowings are diversified by geography, investor, instrument and currency. Decisions regarding the ultimate currency and interest rate profile of liquidity generated through these borrowings can be separated from the actual issuance through the use of derivative financial products.

        Citigroup, Citicorp, and CGMHI are the primary legal entities issuing commercial paper directly to investors. Citigroup and Citicorp, both of which are bank holding companies, maintain liquidity reserves of cash and securities to support their combined outstanding commercial paper. CGMHI maintains liquidity reserves of cash and liquid securities to support its outstanding commercial paper.

        Citicorp, CGMHI, and some of their nonbank subsidiaries have credit facilities with Citicorp's subsidiary banks, including Citibank, N.A. Borrowings under these facilities must be secured in accordance with Section 23A of the Federal Reserve Act. There are various legal restrictions on the extent to which a bank holding company and certain of its nonbank subsidiaries can borrow or otherwise obtain credit from banking subsidiaries or engage in certain other transactions with or involving those banking subsidiaries. In general, these restrictions require that any such transactions must be on terms that would ordinarily be offered to unaffiliated entities and secured by designated amounts of specified collateral.

        Citigroup uses its liquidity to service debt obligations, to pay dividends to its stockholders, to support organic growth, to fund acquisitions and to repurchase its shares in the market or otherwise pursuant to Board of Directors-approved plans.

        Each of Citigroup's major operating subsidiaries finances its operations on a basis consistent with its capitalization, regulatory structure and the environment in which it operates. Additional liquidity considerations for Citigroup's principal subsidiaries follow.

Citicorp

        Citicorp, a U.S. bank holding company with no significant operating activities of its own, is a wholly owned indirect subsidiary of Citigroup. While Citicorp is a separately-rated entity, it did not access external markets for any long-term debt or equity issuance during the first nine months of 2004. Citicorp continues to issue commercial paper within Board-established limits and certain management guidelines.

        On a combined basis, at the Holding Company level, Citigroup and Citicorp maintain sufficient liquidity to meet all maturing unsecured debt obligations due within a one-year time horizon without incremental access to the unsecured markets. In aggregate, bank subsidiaries maintain "cash capital," (defined as core deposits, long-term liabilities, and capital) in excess of their illiquid assets.

        Citicorp's assets and liabilities, which are principally held through its bank and nonbank subsidiaries, are diversified across many currencies, geographic areas, and businesses. Particular attention is paid to those businesses that for tax, sovereign risk, or regulatory reasons cannot be freely and readily funded in the international markets. Citicorp's assets consist primarily of consumer and corporate loans, available-for-sale and trading securities, and placements.

        A diversity of funding sources, currencies, and maturities is used to gain a broad access to the investor base. Citicorp's deposits, which represent 60% and 58% of total funding at September 30, 2004 and December 31, 2003, respectively, are broadly diversified by both geography and customer segments.

        Asset securitization programs remain an important source of liquidity. See Note 12 to the Consolidated Financial Statements for additional information about securitization activities.

        Citigroup Finance Canada Inc., a wholly owned subsidiary of Associates, has an unutilized credit facility of Canadian $1.0 billion as of September 30, 2004 that matures in 2005. The facility is guaranteed by Citicorp. In connection therewith, Citicorp is required to

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maintain a certain level of consolidated stockholder's equity (as defined in the credit facility's agreements). At September 30, 2004, this requirement was exceeded by approximately $69.6 billion.

CGMHI

        CGMHI's total assets were $436 billion at September 30, 2004, an increase from $351 billion at year-end 2003. Due to the nature of the CGMHI's trading activities, it is not uncommon for CGMHI's asset levels to fluctuate significantly from period to period.

        CGMHI's consolidated statement of financial condition is highly liquid, with the vast majority of its assets consisting of marketable securities and collateralized short-term financing agreements arising from securities transactions. The highly liquid nature of these assets provides CGMHI with flexibility in financing and managing its business. CGMHI monitors and evaluates the adequacy of its capital and borrowing base on a daily basis in order to allow for flexibility in its funding, to maintain liquidity, and to ensure that its capital base supports the regulatory capital requirements of its subsidiaries.

        CGMHI funds its operations through the use of collateralized and uncollateralized short-term borrowings, long-term borrowings, and its equity. Collateralized short-term financing, including repurchase agreements, and secured loans is CGMHI's principal funding source. Such borrowings are reported net by counterparty, when applicable, pursuant to the provisions of Financial Accounting Standards Board Interpretation No. 41, "Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements" (FIN 41). Excluding the impact of FIN 41, short-term collateralized borrowings totaled $275.1 billion at September 30, 2004. Uncollateralized short-term borrowings provide CGMHI with a source of short-term liquidity and are also utilized as an alternative to secured financing when they represent a less expensive funding source. Sources of short-term uncollateralized borrowings include commercial paper, unsecured bank borrowings, promissory notes and corporate loans. Short-term uncollateralized borrowings totaled $27.0 billion at September 30, 2004.

        CGMHI has a $2.5 billion 364-day committed uncollateralized revolving line of credit with unaffiliated banks. This facility has a two-year term-out provision with any borrowings maturing in May 2007. CGMHI also has three-year facilities totaling $1.4 billion with unaffiliated banks with any borrowings maturing in May 2007 and $1.6 billion in committed uncollateralized 364-day facilities with unaffiliated banks that extend through various dates through 2007. CGMHI may borrow under these revolving credit facilities at various interest rate options (LIBOR or base rate) and compensates the banks for these facilities through facility fees. At September 30, 2004, there were no outstanding borrowings under these facilities. CGMHI also has committed long-term financing facilities with unaffiliated banks. At September 30, 2004, CGMHI had drawn down the full $1.7 billion then available under these facilities. A bank can terminate these facilities by giving CGMHI prior notice (generally one year). CGMHI compensates the banks for these facilities through facility fees. Under all of these facilities, CGMHI is required to maintain a certain level of consolidated adjusted net worth (as defined in the agreements). At September 30, 2004, this requirement was exceeded by approximately $6.7 billion. CGMHI also has substantial borrowing arrangements consisting of facilities that CGMHI has been advised are available, but where no contractual lending obligation exists. These arrangements are reviewed on an ongoing basis to ensure flexibility in meeting CGMHI's short-term requirements.

        CGMHI's borrowing relationships are with a broad range of banks, financial institutions and other firms, including affiliates, from which it draws funds. The volume of CGMHI's borrowings generally fluctuates in response to changes in the level of CGMHI's financial instruments, commodities and contractual commitments, customer balances, the amount of securities purchased under agreements to resell and securities borrowed transactions. As CGMHI's activities increase, borrowings generally increase to fund the additional activities. Availability of financing to CGMHI can vary depending upon market conditions, credit ratings and the overall availability of credit to the securities industry. CGMHI seeks to expand and diversify its funding mix as well as its creditor sources. Concentration levels for these sources, particularly for short-term lenders, are closely monitored both in terms of single investor limits and daily maturities.

        CGMHI monitors liquidity by tracking asset levels, collateral and funding availability to maintain flexibility to meet its financial commitments. As a policy, CGMHI attempts to maintain sufficient capital and funding sources in order to have the capacity to finance itself on a fully collateralized basis in the event that CGMHI's access to uncollateralized financing is temporarily impaired. This is documented in CGMHI's contingency funding plan. This plan is reviewed periodically to keep the funding options current and in line with market conditions. The management of this plan includes an analysis used to determine CGMHI's ability to withstand varying levels of stress, including ratings downgrades, which could impact its liquidation horizons and required margins. CGMHI maintains a loan value of unencumbered securities in excess of its outstanding short-term unsecured liabilities. This is monitored on a daily basis. CGMHI also ensures that long-term illiquid assets are funded with long-term liabilities.

The Travelers Insurance Company (TIC)

        At September 30, 2004, TIC had $46.8 billion of life and annuity product deposit funds and reserves. Of that total, $26.6 billion is not subject to discretionary withdrawal based on contract terms. The remaining $20.2 billion is for life and annuity products that are subject to discretionary withdrawal by the contractholder. Included in the amount that is subject to discretionary withdrawal is $7.5 billion of liabilities that is surrenderable with market value adjustments. Also included is an additional $4.6 billion of the life

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insurance and individual annuity liabilities which is subject to discretionary withdrawals at an average surrender charge of 6.4%. In the payout phase, these funds are credited at significantly reduced interest rates. The remaining $8.1 billion of liabilities is surrenderable without charge. Approximately 6.0% of this relates to individual life products. These risks would have to be underwritten again if transferred to another carrier, which is considered a significant deterrent against withdrawal by long-term policyholders. Insurance liabilities that are surrendered or withdrawn are reduced by outstanding policy loans and related accrued interest prior to payout.

        TIC's primary tool for liquidity management is a cash reporting tool and forecast performed on a daily basis. In addition, TIC monitors its ability to cover contractual obligations under extreme stress conditions through the use of liquid securities in its investment portfolio.

OFF-BALANCE SHEET ARRANGEMENTS

        Citigroup and its subsidiaries are involved with several types of off-balance sheet arrangements, including special purpose entities (SPEs), lines and letters of credit, and loan commitments. The principal uses of SPEs are to obtain sources of liquidity by securitizing certain of Citigroup's financial assets, to assist our clients in securitizing their financial assets, and to create other investment products for our clients.

        SPEs may be organized as trusts, partnerships, or corporations. In a securitization, the Company transferring assets to an SPE converts those assets into cash before they would have been realized in the normal course of business. The SPE obtains the cash needed to pay the transferor for the assets received by issuing securities to investors in the form of debt and equity instruments, certificates, commercial paper, and other notes of indebtedness. Investors usually have recourse to the assets in the SPE and often benefit from other credit enhancements, such as a cash collateral account or overcollateralization in the form of excess assets in the SPE, or from a liquidity facility, such as a line of credit or asset purchase agreement. Accordingly, the SPE can typically obtain a more favorable credit rating from rating agencies, such as Standard and Poor's, Moody's Investors Service, or Fitch Ratings, than the transferor could obtain for its own debt issuances, resulting in less expensive financing costs. The transferor can use the cash proceeds from the sale to extend credit to additional customers or for other business purposes. The SPE may also enter into derivative contracts in order to convert the yield or currency of the underlying assets to match the needs of the SPE's investors or to limit or change the credit risk of the SPE. The Company may be the counterparty to any such derivative. The securitization process enhances the liquidity of the financial markets, may spread credit risk among several market participants, and makes new funds available to extend credit to consumers and commercial entities.

        Citigroup also acts as intermediary or agent for its corporate clients, assisting them in obtaining sources of liquidity by selling the clients' trade receivables or other financial assets to an SPE. The Company also securitizes clients' debt obligations in transactions involving SPEs that issue collateralized debt obligations. In yet other arrangements, the Company packages and securitizes assets purchased in the financial markets in order to create new security offerings for institutional and private bank clients as well as retail customers. In connection with such arrangements, Citigroup may purchase and temporarily hold assets designated for subsequent securitization.

        Our credit card receivable and mortgage loan securitizations are organized as Qualifying SPEs (QSPEs) and are, therefore, not VIEs subject to FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). SPEs may be QSPEs or VIEs or neither. When an entity is deemed a variable interest entity (VIE) under FIN 46, the entity in question must be consolidated by the primary beneficiary; however, we are not the primary beneficiary of most of these entities and as such do not consolidate most of them.

Securitization of Citigroup's Assets

        In certain of these off-balance sheet arrangements, including credit card receivable and mortgage loan securitizations, Citigroup is securitizing assets that were previously recorded in its Consolidated Balance Sheet. A summary of certain cash flows received from and paid to securitization trusts is included in Note 12 to the Consolidated Financial Statements.

Credit Card Receivables

        Credit card receivables are securitized through trusts, which are established to purchase the receivables. Citigroup sells receivables into the trusts on a non-recourse basis. After securitization of credit card receivables, the Company continues to maintain credit card customer account relationships and provides servicing for receivables transferred to the SPE trusts. As a result, the Company considers both the securitized and unsecuritized credit card receivables to be part of the business it manages. The documents establishing the trusts generally require the Company to maintain an ownership interest in the trusts. The Company also arranges for third parties to provide credit enhancement to the trusts, including cash collateral accounts, subordinated securities, and letters of credit. As specified in certain of the sale agreements, the net revenue with respect to the investors' interest collected by the trusts each month is accumulated up to a predetermined maximum amount and is available over the remaining term of that transaction to make payments of interest to trust investors, fees, and transact