10-K 1 d10k.htm FORM 10-K Form 10-K
Table of Contents

CITIGROUP’S 2007 ANNUAL REPORT ON FORM 10-K

 

THE COMPANY

  2

Citigroup Segments and Products

  2

Citigroup Regions

  2

CITIGROUP INC. AND SUBSIDIARIES
FIVE-YEAR SUMMARY OF
SELECTED FINANCIAL DATA

  3

MANAGEMENT’S DISCUSSION AND
ANALYSIS

  4

2007 in Summary

  4

Outlook for 2008

  5

Events in 2007

  7

Events in 2006

  12

Events in 2005

  14

SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

  16

SEGMENT, PRODUCT AND REGIONAL—
NET INCOME AND REVENUE

  19

Citigroup Net Income—Segment and Product View

  19

Citigroup Net Income—Regional View

  20

Citigroup Revenues—Segment and Product View

  21

Citigroup Revenues—Regional View

  22

GLOBAL CONSUMER

  23

U.S. Consumer

  24

U.S. Consumer Outlook

  25

International Consumer

  26

International Consumer Outlook

  28

MARKETS & BANKING

  29

Markets & Banking Outlook

  31

GLOBAL WEALTH MANAGEMENT

  32

Global Wealth Management Outlook

  33

ALTERNATIVE INVESTMENTS

  34

CORPORATE/OTHER

  37

RISK FACTORS

  38

MANAGING GLOBAL RISK

  39

Risk Aggregation and Risk Convergence

  39

Risk Capital

  39

Credit Risk Management Process

  40

Loans Outstanding

  41

Other Real Estate Owned and Other Repossessed Assets

  41

Details of Credit Loss Experience

  42

Cash-Basis, Renegotiated, and Past Due Loans

  43

Foregone Interest Revenue on Loans

  43

Consumer Credit Risk

  44

Consumer Portfolio Review

  44

Exposure to Real Estate

  48

Corporate Credit Risk

  54

Citigroup Derivatives

  57

Global Corporate Portfolio Review

  60

Loan Maturities and Fixed/Variable Pricing

  60

Market Risk Management Process

  61

Operational Risk Management Process

  64

Country and Cross-Border Risk Management Process

  65

BALANCE SHEET REVIEW

  66

Segment Balance Sheet at December 31, 2007

  69

Average Balances and Interest Rates—Assets

  71

Average Balances and Interest Rates—Liabilities and
Equity, and Net Interest Revenue

  72

Analysis of Changes in Interest Revenue

  73

Analysis of Changes in Interest Expense and Net Interest Revenue

  74

CAPITAL RESOURCES AND LIQUIDITY

  75

Capital Resources

  75

Funding

  80

Liquidity

  82

Off-Balance-Sheet Arrangements

  85

Pension and Postretirement Plans

  97

CORPORATE GOVERNANCE AND
CONTROLS AND PROCEDURES

  98

FORWARD-LOOKING STATEMENTS

  98

GLOSSARY OF TERMS

  99

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

  101

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM—INTERNAL CONTROL OVER FINANCIAL REPORTING

  102

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM— CONSOLIDATED FINANCIAL STATEMENTS

  103

FINANCIAL STATEMENTS AND NOTES
TABLE OF CONTENTS

  104

CONSOLIDATED FINANCIAL STATEMENTS

  105

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  111

FINANCIAL DATA SUPPLEMENT
(Unaudited)

  192

Ratios

  192

Average Deposit Liabilities in Offices Outside the U.S.

  192

Maturity Profile of Time Deposits ($100,000 or more)
in U.S. Offices

  192

Short-Term and Other Borrowings

  192

LEGAL AND REGULATORY REQUIREMENTS

  193

Securities Regulation

  194

Capital Requirements

  194

General Business Factors

  195

Properties

  195

Legal Proceedings

  195

Unregistered Sales of Equity Securities and Use of
Proceeds

  199

Equity Compensation Plan Information

  200

10-K CROSS-REFERENCE INDEX

  202

CORPORATE INFORMATION

  203

Exhibits and Financial Statement Schedules

  203

CITIGROUP BOARD OF DIRECTORS

  205

 

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THE COMPANY

 

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

The Company is a bank holding company within the meaning of the U.S. Bank Holding Company Act of 1956 registered with, and subject to examination by, the Board of Governors of the Federal Reserve System (FRB). Some of the Company’s subsidiaries are subject to supervision and examination by their respective federal and state authorities. At December 31, 2007, the Company had approximately 147,000 full-time and 13,000 part-time employees in the United States and approximately 227,000 full-time employees outside the United States. The Company has completed

certain strategic business acquisitions and divestitures during the past three years, details of which can be found in Notes 2 and 3 to the Consolidated Financial Statements on pages 122 and 125, respectively.

The principal executive offices of the Company are located at 399 Park Avenue, New York, New York 10043, telephone number 212 559 1000. Additional information about Citigroup is available on the Company’s Web site at www.citigroup.com. Citigroup’s annual report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K, and all amendments to these reports are available free of charge through the Company’s Web site by clicking on the “Investor Relations” page and selecting “All SEC Filings.” The Securities and Exchange Commission (SEC) Web site contains reports, proxy and information statements, and other information regarding the Company at www.sec.gov.

Citigroup is managed along the following segment and product lines:


 

LOGO

The following are the six regions in which Citigroup operates. The regional results are fully reflected in the product results.

LOGO

 

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FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA   Citigroup Inc. and Subsidiaries

 

In millions of dollars, except per share amounts   2007     2006     2005     2004     2003  

Revenues, net of interest expense

  $ 81,698     $ 89,615     $ 83,642     $ 79,635     $ 71,594  

Operating expenses

    61,488       52,021       45,163       49,782       37,500  

Provisions for credit losses and for benefits and claims

    18,509       7,955       9,046       7,117       8,924  

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

  $ 1,701     $ 29,639     $ 29,433     $ 22,736     $ 25,170  

Provision (benefits) for income taxes

    (2,201 )     8,101       9,078       6,464       7,838  

Minority interest, net of taxes

    285       289       549       218       274  

Income from continuing operations before cumulative effect of
accounting change

  $ 3,617     $ 21,249     $ 19,806     $ 16,054     $ 17,058  

Income from discontinued operations, net of taxes (1)

          289       4,832       992       795  

Cumulative effect of accounting change, net of taxes (2)

                (49 )            

Net income

  $ 3,617     $ 21,538     $ 24,589     $ 17,046     $ 17,853  

Earnings per share

         

Basic:

         

Income from continuing operations

  $ 0.73     $ 4.33     $ 3.90     $ 3.13     $ 3.34  

Net income

    0.73       4.39       4.84       3.32       3.49  

Diluted:

         

Income from continuing operations

    0.72       4.25       3.82       3.07       3.27  

Net income

    0.72       4.31       4.75       3.26       3.42  

Dividends declared per common share

    2.16       1.96       1.76       1.60       1.10  

At December 31

         

Total assets

  $ 2,187,631     $ 1,884,318     $ 1,494,037     $ 1,484,101     $ 1,264,032  

Total deposits

    826,230       712,041       591,828       561,513       473,614  

Long-term debt

    427,112       288,494       217,499       207,910       162,702  

Mandatorily redeemable securities of subsidiary trusts (3)

    23,594       9,579       6,264       6,209       6,057  

Common stockholders’ equity

    113,598       118,783       111,412       108,166       96,889  

Total stockholders’ equity

    113,598       119,783       112,537       109,291       98,014  

Ratios:

         

Return on common stockholders’ equity (4)

    2.9 %     18.8 %     22.3 %     17.0 %     19.8 %

Return on total stockholders’ equity (4)

    3.0       18.6       22.2       16.8       19.6  

Tier 1 Capital

    7.12 %     8.59       8.79       8.74       8.91  

Total Capital

    10.70       11.65       12.02       11.85       12.04  

Leverage (5)

    4.03       5.16       5.35       5.20       5.56  

Common stockholders’ equity to assets

    5.19 %     6.30 %     7.46 %     7.29 %     7.67 %

Total stockholders’ equity to assets

    5.19       6.36       7.53       7.36       7.75  

Dividend payout ratio (6)

    300.0       45.5       37.1       49.1       32.2  

Book value per common share

  $ 22.74     $ 24.18     $ 22.37     $ 20.82     $ 18.79  

Ratio of earnings to fixed charges and preferred stock dividends

    1.02 x     1.51 x     1.79 x     2.00 x     2.41 x

 

(1) Discontinued operations for 2003 to 2006 include the operations and associated gain on sale of substantially all of its Asset Management business. The majority of the sale closed on December 1, 2005. Discontinued operations from 2003 to 2006 also include the operations and associated gain on sale of Citigroup’s Travelers Life & Annuity, substantially all of Citigroup’s international insurance business and Citigroup’s Argentine pension business to MetLife Inc. The sale closed on July 1, 2005. See Note 3 to the Consolidated Financial Statements on page 125.
(2) Accounting change of $(49) million in 2005 represents the adoption of Financial Accounting Standards Board (FASB) Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of SFAS No. 143, (FIN 47).”
(3) During 2004, the Company deconsolidated the subsidiary issuer trusts in accordance with FIN 46-R. For regulatory capital purposes, these trust securities remain a component of Tier 1 Capital. See “Capital Resources and Liquidity” on page 75.
(4) The return on average common stockholders’ equity is calculated using net income less preferred stock dividends divided by average common stockholders’ equity. The return on total stockholders’ equity is calculated using net income divided by average stockholders’ equity.
(5) Tier 1 Capital divided by adjusted average assets.
(6) Dividends declared per common share as a percentage of net income per diluted share.

 

Certain statements in this Annual Report on Form 10-K, including, but not limited to, statements made in “Management’s Discussion and Analysis,” particularly in the “Outlook” sections, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current

expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those included in these statements due to a variety of factors including, but not limited to, those described under “Risk Factors” on page 38.


 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

 

2007 IN SUMMARY

There were a number of highlights in 2007, including record performance of our International Consumer, Global Wealth Management and Transaction Services business segments.

These positives, however, were offset by disappointing results in our Markets & Banking business, which was significantly affected by write-downs related to direct subprime exposures, including CDOs, leveraged lending, and by significantly higher credit costs in our U.S. Consumer business. In 2007, Citigroup earned $3.6 billion from continuing operations on revenues of $81.7 billion. Income and EPS were both down 83% from 2006 levels.

Customer volume growth was strong, with average loans up 17%, average deposits up 20% and average interest-earning assets up 29% from year-ago levels. International Cards purchase sales were up 37%, while U.S. Cards sales were up 8%. In Global Wealth Management, client assets under fee-based management were up 27%. Branch activity included the opening or acquisition of 712 new branches during 2007 (510 internationally and 202 in the U.S.). We also completed several strategic acquisitions or investments (including Nikko Cordial, Egg, Quilter, GFU, Grupo Cuscatlan, ATD, and Akbank), which were designed to strengthen our franchises.

Revenues of $81.7 billion decreased 9% from 2006, primarily driven by significantly lower revenues in CMB due to write-downs related to subprime CDOs and leveraged lending. Revenues outside of CMB grew 14%. Our international operations recorded revenue growth of 15% in 2007, including a 28% increase in International Consumer and a $1.8 billion increase in International GWM, partially offset by a 9% decrease in International CMB.

Net interest revenue grew 19% from 2006, reflecting volume increases across all products. Net interest margin in 2007 was 2.45%, down 21 basis points from 2006, as higher funding costs exceeded the Company’s actions to better manage interest earning assets and reduce low-yielding asset balances, and increased ownership in Nikko Cordial (see the discussion of net interest margin on page 70). Non-interest revenue decreased 31% from 2006, primarily reflecting subprime write-downs. Securities and Banking finished the year ranked #1 in equity underwriting and #2 in completed mergers and acquisitions activity.

Operating expenses increased 18% from the previous year primarily driven by the impact of acquisitions, increased business volumes, charges related to the structural expense initiative and the impact of foreign exchange.

Our equity capital base and trust preferred securities grew to $137.2 billion at December 31, 2007. Stockholders’ equity decreased by $6.2 billion during 2007 to $113.6 billion, which included the distribution of $10.7 billion in dividends to common shareholders. Citigroup maintained its “well-capitalized” position with a Tier 1 Capital Ratio of 7.12% at December 31, 2007. Return on common equity was 2.9% for 2007.

During December 2007 and January 2008 we raised over $30 billion to strengthen our capital base. See page 75 for a discussion of our pro forma year-end capital ratios.

On January 14, 2008, the Board decreased the quarterly dividend on the Company’s common stock to $0.32 per share. This new dividend level will allow the Company to reinvest in growth opportunities and properly position the Company for both favorable and unfavorable economic conditions.

Credit costs increased $10.6 billion from year-ago levels, driven by an increase in NCLs of $3.1 billion and a net charge of $7.5 billion to build loan loss reserves.

U.S. Consumer credit costs increased $7.1 billion from year-ago levels, driven by a change in estimate of loan losses, increased NCLs and net builds to loan loss reserves. The increases were due to a weakening in credit indicators and sharply higher delinquencies on first and second mortgages related to the deterioration in the U.S. housing market. The NCL ratio increased 27 basis points to 1.46%.

International Consumer credit costs increased $2.3 billion, reflecting a change in estimate of loan losses, along with volume growth and credit weakness in certain countries, the impact of recent acquisitions, and the increase of NCLs in Japan Consumer Finance due to grey zone issues.

Markets & Banking credit costs increased $1.0 billion, driven by higher NCLs associated with subprime-related direct exposures. Corporate cash-basis loans increased $1.2 billion from year-ago levels to $1.8 billion.

The Company recorded an income tax benefit for 2007, resulting from the significant amount of consolidated pretax losses in the Company’s S&B and U.S. Consumer Lending businesses and the tax benefits of permanent differences.

On November 4, 2007, Charles Prince, Chairman and Chief Executive Officer, elected to retire from Citigroup. Robert Rubin served as Chairman between November 4 and December 11. On December 11, 2007, the Board appointed Vikram Pandit as CEO and Sir Win Bischoff as Chairman.


 

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OUTLOOK FOR 2008

We enter the challenging environment of 2008 after a disappointing 2007. We are focused on establishing stability for our Company and developing opportunities for enduring growth. We have a stronger capital structure in place and are working to establish a mix of assets and businesses that maximize returns to shareholders.

Business Reviews

We are currently conducting business reviews through all of our franchises. The possible outcomes from these reviews include the focus on establishing stability for our Company; repositioning of low-return, non-strategic assets that do not support our growth strategy; redirection of capital to higher-return opportunities to drive shareholder value in the future; and streamlining certain businesses.

Our Goals in 2008

 

Our main goal is capital allocation excellence and we are aggressively building a new risk management culture. Our goal is to have the best risk management in the industry, transforming it into a key competitive advantage that will drive bottom-line results.

 

Strong expense management and the ability to execute productively against our plans are core to our priorities. Our re-engineering and expense management program is designed to make Citigroup more efficient.

 

Another priority is to make financial matters better and easier for our clients in every way that we can. Financial markets are becoming more and more complex, encouraging a deepening interdependency between Citigroup and our clients.

 

We intend to leverage the benefits of emerging technology to respond more quickly, communicate more effectively, simplify transactions, and innovate faster, thus serving our global clients better.

 

We are focused on managing our talent more effectively by rewarding demonstrated performance and by putting the right people in the right positions.

 

Economic Environment

As a worldwide business, Citigroup’s financial results are closely tied to the global economic environment. There is a risk of a U.S. and/or global downturn in 2008. A U.S-led economic downturn could negatively impact other markets and economies around the world and could restrict the Company’s growth opportunities internationally. Should economic conditions further deteriorate, the Company could see revenue reductions across its businesses and increased costs of credit. In addition, continuing deterioration of the U.S. or global real estate markets could adversely impact the Company’s revenues, including additional write-downs of subprime and other exposures, additional write-downs of leveraged loan commitments and cost of credit, including increased credit losses in mortgage-related and other activities. Further adverse rating actions by credit rating agencies in respect of structured credit products or other credit-related exposures, or of monoline insurers could result in revenue reductions in those or similar securities. See “Risk Factors” on page 38 for a further discussion of risks.

Credit Costs and Income Taxes

Credit costs in U.S. Consumer are expected to increase across most portfolios due to deterioration in the U.S. housing market, as well as higher levels of unemployment and bankruptcy filings.

Credit costs are expected to increase across all international businesses as their growing portfolios season or mature, and may be affected by economic and credit conditions in the U.S. and around the world.

The impact of changes to consumer lending laws enacted in 2006, as well as deteriorating consumer credit conditions will increase credit costs in the Japan Consumer Finance business.

While corporate loan default rates are near historic lows, they are projected to increase in 2008. Classified loan exposures are on a rising trend and credit markets are difficult. These credit markets negatively affect a wide range of products, including auction rate securities, credit default swaps and the leveraged loan syndication market.

The 2008 effective tax rate is expected to return to a normalized rate depending on pretax income levels and geographic mix of earnings.

A detailed review and outlook for each of our business segments are included in the discussions that follow, and the risks are more fully discussed on pages 38 to 65.


 

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Comparison of Five-Year Cumulative Total Return

The following graph compares the cumulative total return on Citigroup’s common stock with the S&P 500 Index and the S&P Financial Index over the five-year period extending through December 31, 2007. The graph

assumes that $100 was invested on December 31, 2002 in Citigroup’s common stock, the S&P 500 Index and the S&P Financial Index and that all dividends were reinvested.


 

LOGO

DECEMBER 31    CITIGROUP    S&P 500 INDEX    S&P FINANCIAL INDEX
2003    $ 141.58    $ 128.68    $ 131.03
2004      145.44      142.69      145.32
2005      152.17      149.68      154.66
2006      181.92      173.32      184.33
2007      100.58      182.84      149.99

 

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EVENTS IN 2007

ITEMS IMPACTING THE SECURITIES AND BANKING BUSINESS

Losses on Subprime-Related Direct Exposures

During the second half of 2007, the Company’s Securities and Banking (S&B) business recorded unrealized losses of $19.6 billion pretax, net of hedges, on subprime-related direct exposures.

The Company’s remaining $37.3 billion in U.S. subprime net direct exposure in S&B at December 31, 2007 consisted of (a) approximately $8.0 billion of subprime-related exposures in its lending and structuring business and (b) approximately $29.3 billion of net exposures to the super senior tranches of collateralized debt obligations, which are collateralized by asset-backed securities, derivatives on asset-backed securities or both. See “Exposure to Real Estate” on page 48 for a further discussion.

Write-Downs on Highly Leveraged Loans and Commitments

During the second half of 2007, Citigroup recorded write-downs of approximately $1.5 billion pretax, net of underwriting fees, on funded and unfunded highly leveraged finance commitments in the S&B business. Of this amount, approximately $1.1 billion related to debt underwriting activities and $381 million related to lending activities. Write-downs were recorded on all highly leveraged finance commitments where there was value impairment, regardless of the expected funding date. See “Highly Leveraged Funding Commitments” on page 96 for a further discussion.

 

CREDIT, RESTRUCTURING AND INCOME TAXES

Credit Reserves

During 2007, the Company recorded a net build of $7.1 billion to its credit reserves, which included an increase in the allowance for unfunded lending commitments of $150 million. The build consisted of $6.3 billion in Global Consumer ($5.0 billion in U.S. Consumer and $1.3 billion in International Consumer), $100 million in Global Wealth Management and $715 million in Markets & Banking.

The $5.0 billion build in U.S. Consumer reflected a weakening of leading credit indicators including delinquencies on first and second mortgages and deterioration in the housing market (approximately $3.0 billion), a downturn in other economic trends including unemployment and GDP, as well as the impact of housing market deterioration, affecting all other portfolios ($1.3 billion), and a change in the estimate of loan losses inherent in the portfolio, but not yet visible in delinquency statistics (approximately $700 million).

The $1.3 billion build in International Consumer included a change in estimate of loan losses inherent in the portfolio but not yet visible in delinquency statistics (approximately $600 million), along with volume growth and credit deterioration in certain countries. With the exception of Mexico, Japan and India, the International Consumer credit environment remained generally stable.

The build of $715 million in Markets & Banking primarily reflected a slight weakening in overall portfolio credit quality, as well as loan loss reserves for specific counterparties. The loan loss reserves for specific counterparties include $327 million for subprime-related direct exposures.

During 2007, the Company changed its estimate of loan losses inherent in the Global Consumer portfolio that were not yet visible in delinquency statistics. The changes in estimate were accounted for prospectively in accordance with FASB Statement No. 154, “Accounting Changes and Error Corrections” (SFAS 154). For the quarter ended March 31, 2007, the change in estimate decreased the Company’s pretax net income by approximately $170 million, or $0.02 per diluted share. For the quarter ended June 30, 2007, the change in estimate decreased the Company’s pretax net income by $240 million, or $0.03 per diluted share. For the quarter ended September 30, 2007, the change in estimate decreased the Company’s pretax net income by approximately $900 million, or $0.11 per diluted share.

Structural Expense Review

In 2007, the Company completed a review of its structural expense base in a Company-wide effort to create a more streamlined organization, reduce expense growth, and provide investment funds for future growth initiatives.

As a result of the review, a pretax restructuring charge of $1.4 billion ($871 million after-tax) was recorded in Corporate/Other during the first quarter of 2007. Additional charges of $200 million were recognized later in 2007. Separate from the restructuring charge, additional implementation costs of approximately $100 million pretax were recorded throughout 2007.


 

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Because these charges are a Company-wide initiative, they are reflected in Corporate/Other.

See Note 10 on page 138 for additional information.

In addition, during 2007 several businesses took on their own re-engineering initiatives to further reduce expenses beyond this Company-wide review. These additional initiatives resulted in total repositioning charges of $539 million pretax. These charges, which were incurred by Markets & Banking for $438 million, Global Consumer for $35 million and Global Wealth Management for $67 million, are included in each of these business groups’ 2007 results.

Income Taxes

The Company recorded an income tax benefit for 2007. The effective tax rate (benefit) of (129)% primarily resulted from the pretax losses in the Company’s S&B and U.S. Consumer Lending businesses (the U.S. is a higher tax jurisdiction). In addition, the tax benefits of permanent differences, including the tax benefit for not providing U.S. income taxes on the earnings of certain foreign subsidiaries that are indefinitely invested, favorably affected the Company’s effective tax rate.

The Company’s effective tax rate on continuing operations of 27.3% in 2006 included a $598 million benefit from the resolution of the Federal Tax Audit and a $237 million benefit from the resolution of the New York Tax Audits.

CAI’S STRUCTURED INVESTMENT VEHICLES (SIVs)

On December 13, 2007, Citigroup announced its decision to commit, not legally required, to provide a support facility that would resolve uncertainties regarding senior debt repayment facing the Citi-advised Structured Investment Vehicles (SIVs). As a result of the Company’s commitment, Citigroup included the SIVs’ assets and liabilities in its Consolidated Balance Sheet as of December 31, 2007. This resulted in an increase of assets of $59 billion. On February 12, 2008, Citigroup finalized the terms of the support facility, which takes the form of a commitment to provide mezzanine capital to the SIV vehicles in the event the market value of their capital notes approaches zero.

 

RECENTLY ANNOUNCED FINANCIAL ACTIONS TO ENHANCE CITIGROUP’S CAPITAL BASE

During the fourth quarter of 2007 and the first quarter of 2008, the Company raised approximately $30 billion of qualifying Tier 1 Capital. These transactions include the issuance of convertible preferred and straight (non-convertible) preferred securities, equity units and enhanced trust-preferred securities. In addition, Citigroup purchased the Nikko Cordial shares that it did not already own, by issuing 175 million Citigroup common shares (approximately $4.4 billion based on the exchange terms) in exchange for those Nikko Cordial shares.

The Company reported a Tier 1 Capital ratio of 7.12% and a Tangible Common Equity (TCE) as a percent of Risk Weighted Managed Assets (RWMA) ratio of 5.6% at December 31, 2007. On a pro forma basis, after giving effect to the issuance of the new securities referred to above (and including the common shares issued in connection with the Nikko Cordial transaction), the Company’s December 31, 2007 Tier 1 Capital ratio would be approximately 8.8% and its TCE/RWMA would be approximately 6.9%. See “Capital Resources and Liquidity” on page 75 for further details.

Lowering the Company’s Quarterly Dividend to $0.32 Per Share

On January 14, 2008 the Board declared a quarterly dividend on the Company’s common stock of $0.32 per share, which was paid on February 22, 2008, to stockholders of record on February 4, 2008. This action would result in a reduction in the dividend level of approximately $4.4 billion from the previous year. This new dividend level will allow the Company to reinvest in growth opportunities and properly position the Company for both favorable and unfavorable economic conditions. The Board is responsible for setting dividend levels and declaring dividends.

STRATEGIC ACQUISITIONS

U.S.

Acquisition of ABN AMRO Mortgage Group

In 2007, Citigroup acquired ABN AMRO Mortgage Group (AAMG), a subsidiary of LaSalle Bank Corporation and ABN AMRO Bank N.V. AAMG is a national originator and servicer of prime residential mortgage loans. As part of this acquisition, Citigroup purchased approximately $12 billion in assets, including $3 billion of mortgage servicing rights, which resulted in the addition of approximately 1.5 million servicing customers. Results for AAMG are included within Citigroup’s U.S. Consumer Lending business from March 1, 2007 forward.

Acquisition of Old Lane Partners, L.P.

In 2007, the Company completed the acquisition of Old Lane Partners, L.P. and Old Lane Partners, GP, LLC (Old Lane). Old Lane is the manager of a global, multi-strategy hedge fund and a private equity fund with total assets under management and private equity commitments of approximately $4.5 billion. Results for Old Lane are included within Citi Alternative Investments (CAI), Citigroup’s integrated alternative investments platform, from July 2, 2007 forward.


 

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Acquisition of Bisys

In 2007, the Company completed its acquisition of Bisys Group, Inc. (Bisys) for $1.47 billion in cash. In addition, Bisys’ shareholders received $18.2 million in the form of a special dividend paid by Bisys simultaneously. Citigroup completed the sale of the Retirement and Insurance Services Divisions of Bisys to affiliates of J.C. Flowers & Co. LLC, making the net cost of the transaction to Citigroup approximately $800 million. Citigroup retained the Fund Services and Alternative Investment services businesses of Bisys, which provides administrative services for hedge funds, mutual funds and private equity funds. Results for Bisys are included within Citigroup’s Transaction Services business from August 1, 2007 forward.

Acquisition of Automated Trading Desk

In 2007, Citigroup completed its acquisition of Automated Trading Desk (ATD), a leader in electronic market making and proprietary trading, for approximately $680 million ($102.6 million in cash and approximately 11.17 million shares of Citigroup common stock). ATD operates as a unit of Citigroup’s Global Equities business, adding a network of broker-dealer customers to Citigroup’s diverse base of institutional, broker-dealer and retail customers. Results for ATD are included within Citigroup’s Securities and Banking business from October 3, 2007 forward.

Japan

Nikko Cordial

Citigroup began consolidating Nikko Cordial’s financial results and the related minority interest under the equity method of accounting on May 9, 2007, when Nikko Cordial became a 61%-owned subsidiary. Citigroup later increased its ownership stake in Nikko Cordial to approximately 68%. Nikko Cordial results are included within Citigroup’s Securities and Banking, Smith Barney and International Consumer businesses.

On January 29, 2008, Citigroup completed the acquisition of the remaining Nikko Cordial shares that it did not already own, by issuing 175 million Citigroup common shares (approximately $4.4 billion based on the exchange terms) in exchange for those Nikko Cordial shares. The share exchange was completed following the listing of Citigroup’s common shares on the Tokyo Stock Exchange on November 5, 2007.

Latin America

Acquisition of Grupo Financiero Uno

In 2007, Citigroup completed its acquisition of Grupo Financiero Uno (GFU), the largest credit card issuer in Central America, and its affiliates.

The acquisition of GFU, with $2.2 billion in assets, expands the presence of Citigroup’s Latin America consumer franchise, enhances its credit card business in the region and establishes a platform for regional growth in Consumer Finance and Retail Banking. GFU has more than one million retail clients and operates a distribution network of 75 branches and more than 100 mini-branches and points of sale. The results for GFU are included within Citigroup’s International Cards and International Retail Banking businesses from March 5, 2007 forward.

 

Acquisition of Grupo Cuscatlan

In 2007, Citigroup completed the acquisition of the subsidiaries of Grupo Cuscatlan for $1.51 billion ($755 million in cash and 14.2 million shares of Citigroup common stock) from Corporacion UBC Internacional S.A. Grupo Cuscatlan is one of the leading financial groups in Central America, with assets of $5.4 billion, loans of $3.5 billion, and deposits of $3.4 billion. Grupo Cuscatlan has operations in El Salvador, Guatemala, Costa Rica, Honduras and Panama. The results of Grupo Cuscatlan are included from May 11, 2007 forward and are recorded in International Retail Banking.

Agreement to Establish Partnership with Quiñenco– Banco de Chile

In 2007, Citigroup and Quiñenco entered into a definitive agreement to establish a strategic partnership that combines Citigroup operations in Chile with Banco de Chile’s local banking franchise to create a banking and financial services institution with approximately 20% market share of the Chilean banking industry. The transaction closed on January 1, 2008.

Under the agreement, Citigroup contributed Citigroup’s Chilean operations and other assets, and acquired an approximate 32.96% stake in LQIF, a wholly owned subsidiary of Quiñenco that controls Banco de Chile, and is accounted for under the equity method of accounting. As part of the overall transaction, Citigroup also acquired the U.S. branches of Banco de Chile for approximately $130 million. Citigroup has entered into an agreement to acquire an additional 17.04% stake in LQIF for approximately $1 billion within three years. The new partnership calls for active participation by Citigroup in the management of Banco de Chile including board representation at both LQIF and Banco de Chile.

Asia

Acquisition of Bank of Overseas Chinese

In 2007, Citigroup completed its acquisition of Bank of Overseas Chinese (BOOC) in Taiwan for approximately $427 million. BOOC offers a broad suite of corporate banking, consumer and wealth management products and services to more than one million clients through 55 branches in Taiwan. This transaction will strengthen Citigroup’s presence in Asia, making it the largest international bank and 13th largest by total assets among all domestic Taiwan banks. Results for BOOC are included in Citigroup’s International Retail Banking, International Cards and Securities and Banking businesses from December 1, 2007 forward.


 

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EMEA

Acquisition of Quilter

In 2007, the Company completed the acquisition of Quilter, a U.K. wealth advisory firm with over $10.9 billion of assets under management, from Morgan Stanley. Quilter has more than 18,000 clients and 300 staff located in 10 offices throughout the U.K., Ireland and the Channel Islands. Quilter’s results are included in Citigroup’s Smith Barney business from March 1, 2007 forward.

Acquisition of Egg

In 2007, Citigroup completed its acquisition of Egg Banking plc (Egg), one of the U.K.’s leading online financial services providers, from Prudential PLC for approximately $1.39 billion. Egg offers various financial products and services including online payment and account aggregation services, credit cards, personal loans, savings accounts, mortgages, insurance and investments. Results for Egg are included in Citigroup’s International Cards and International Retail Banking businesses from May 1, 2007 forward.

Purchase of 20% Equity Interest in Akbank

In 2007, Citigroup completed its purchase of a 20% equity interest in Akbank for approximately $3.1 billion and is accounted for under the equity method of accounting. Akbank, the second-largest privately owned bank by assets in Turkey, is a premier, full-service retail, commercial, corporate and private bank.

Sabanci Holding, a 34% owner of Akbank shares, and its subsidiaries have granted Citigroup a right of first refusal or first offer over the sale of any of their Akbank shares in the future. Subject to certain exceptions, including purchases from Sabanci Holding and its subsidiaries, Citigroup has otherwise agreed not to increase its percentage ownership in Akbank.

 

OTHER ITEMS

Sale of MasterCard Shares

In 2007, the Company recorded a $367 million after-tax gain ($581 million pretax) on the sale of approximately 4.9 million MasterCard Class B shares that had been received by Citigroup as a part of the MasterCard Initial Public Offering (IPO) completed in June 2006. The gain was recorded in the following businesses:

 

In millions of dollars   2007
Pretax
total
  

2007

After-tax

total

   2006
Pretax
total
  

2006

After-tax

total

U.S. Cards

  $ 394    $ 250    $ 59    $ 37

U.S. Retail Distribution

    55      33      7      5

International Cards

    72      46      35      22

International Retail

    Banking

    41      26      20      13

Markets & Banking

    19      12      2      1

Total

  $ 581    $ 367    $ 123    $ 78

Redecard IPO

In 2007, Citigroup (a 31.9% shareholder in Redecard S.A., the only merchant acquiring company for MasterCard in Brazil) sold approximately 48.8 million Redecard shares in connection with Redecard’s IPO in Brazil. Following the sale of these shares, Citigroup retained approximately 23.9% ownership in Redecard. An after-tax gain of approximately $469 million ($729 million pretax) was recorded in Citigroup’s 2007 financial results in the International Cards business.

Visa Restructuring and Litigation Matters

In 2007, Visa USA, Visa International and Visa Canada were merged into Visa Inc. (Visa). As a result of that reorganization, Citigroup recorded a $534 million (pretax) gain on its holdings of Visa International shares primarily recognized in the International Consumer business, which are carried on Citigroup’s balance sheet at the new cost basis. In addition, Citigroup recorded a $306 million (pretax) charge related to certain of Visa USA’s litigation matters primarily recognized in the U.S. Consumer business.

Both the Visa-related gain and charge are subject to change, depending on the timing and success of Visa’s planned IPO and other factors. For example, in connection with its upcoming planned IPO, Visa has announced plans to withhold, on a pro rata basis, shares to be distributed to its USA member banks (including Citigroup), which would be used to fund an escrow account to satisfy certain of Visa USA’s litigation matters. Such a withholding could enable Citigroup to release portions of its $306 million reserve.

Sale of Simplex Investment Advisors Inc. Shares

In 2007, Nikko Cordial sold all of its shares of Simplex Investment Advisors Inc. (SIA) for an after-tax gain of $106 million ($313 million pretax), which was recorded in International Retail Banking. Nikko Cordial held 42.5% of SIA.


 

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ACCOUNTING CHANGES

Adoption of SFAS 157–Fair Value Measurements

The Company elected to early-adopt SFAS No. 157, “Fair Value Measurements” (SFAS 157), as of January 1, 2007. SFAS 157 defines fair value, expands disclosure requirements around fair value and specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

 

 

Level 1–Quoted prices for identical instruments in active markets.

 

Level 2–Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

Level 3–Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

For some products or in certain market conditions, observable inputs may not be available. For example, during the market dislocations that occurred in the second half of 2007, certain markets became illiquid, and some key inputs used in valuing certain exposures were unobservable. When and if these markets are liquid, the valuation of these exposures will use the related observable inputs available at that time from these markets.

Under SFAS 157, Citigroup is required to take into account its own credit risk when measuring the fair value of derivative positions as well as other liabilities for which fair value accounting has been elected under SFAS 155, “Accounting for Certain Hybrid Financial Instruments” (SFAS 155) and SFAS 159, after taking into consideration the effects of credit-risk mitigants. The adoption of SFAS 157 has also resulted in some other changes to the valuation techniques used by Citigroup when determining the fair value of derivatives, most notably changes to the way that the probability of default of a counterparty is factored in, and the elimination of a derivative valuation adjustment which is no longer necessary under SFAS 157. The cumulative effect at January 1, 2007 of making these changes was a gain of $250 million after-tax ($402 million pretax), or $0.05 per diluted share, which was recorded in the 2007 first quarter earnings within the Securities and Banking business.

SFAS 157 also precludes the use of block discounts for instruments traded in an active market, which were previously applied to large holdings of publicly traded equity securities, and requires the recognition of trade-date gains related to certain derivative trades that use unobservable inputs in determining their fair value. Previous accounting guidance allowed the use

of block discounts in certain circumstances and prohibited the recognition of day-one gains on certain derivative trades when determining the fair value of instruments not traded in an active market. The cumulative effect of these changes resulted in an increase to January 1, 2007 retained earnings of $75 million.

Adoption of SFAS 159–Fair Value Option

In conjunction with the adoption of SFAS 157, the Company early-adopted SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159), as of January 1, 2007. SFAS 159 provides an option on an instrument-by-instrument basis for most financial assets and liabilities to be reported at fair value with changes in fair value reported in earnings. After the initial adoption, the election is made at the time of the acquisition of a financial asset, financial liability, or a firm commitment, and it may not be revoked. SFAS 159 provides an opportunity to mitigate volatility in reported earnings that resulted prior to its adoption from being required to apply fair value accounting to certain economic hedges (e.g., derivatives) while having to measure the assets and liabilities being economically hedged using an accounting method other than fair value.

Under the SFAS 159 transition provisions, the Company elected to apply fair value accounting to certain financial instruments held at January 1, 2007 with future changes in value reported in earnings. The adoption of SFAS 159 resulted in an after-tax decrease to January 1, 2007 retained earnings of $99 million ($157 million pretax).

See Note 26 to the Consolidated Financial Statements on page 167 for additional information.

SUBSEQUENT EVENT

On February 20, 2008, the Company entered into a $500 million credit facility with the Falcon multi-strategy fixed income funds (the “Funds”) managed by Citigroup Alternative Investments. As a result of providing this facility, the Company became the primary beneficiary of the Funds and will include the Funds’ assets and liabilities in its Consolidated Balance Sheet commencing on February 20, 2008. The consolidation of the Funds will increase Citigroup’s assets and liabilities by approximately $10 billion.


 

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EVENTS IN 2006

Strategic Investment and Cooperation Agreement with Guangdong Development Bank

In 2006, a Citigroup-led consortium acquired an 85.6% stake in Guangdong Development Bank (“GDB”). Citigroup’s share is 20% of GDB and its investment of approximately $725 million is accounted for under the equity method of accounting.

Sale of Avantel

In 2006, Citigroup sold its investment in Avantel, a leading long-distance telecom service provider in Mexico, to AXTEL. The transaction resulted in an after-tax gain of $145 million ($234 million pretax) in the 2006 fourth quarter. The investment in Avantel was initially acquired by Citigroup as part of its acquisition of Banamex in 2001 and was subsequently increased with the purchase of an additional stake in 2005.

Repositioning of the Japan Consumer Finance Business

In 2007, Citigroup announced that it would reposition its consumer finance business in Japan. This decision resulted from changes in the operating environment in the consumer finance business in Japan, and the passage on December 13, 2006, of changes to Japan’s consumer lending laws. The change in law will lower the interest rates permissible on new consumer finance loans by 2010.

In 2006, the Company recorded a $375 million after-tax ($581 million pretax) charge to increase reserves for estimated losses resulting from customer refund settlements in the business. This charge was recorded as a reduction to interest revenue on loans. The Company also recorded a $40 million after-tax ($60 million pretax) repositioning charge for costs associated with closing approximately 270 branches and 100 automated loan machines.

Finalizing the 2005 Sale of Asset Management Business

In 2005, the Company sold substantially all of its Asset Management Business to Legg Mason Inc. (Legg Mason) in exchange for Legg Mason’s broker-dealer and capital markets businesses, $2.298 billion of Legg Mason’s common and preferred shares (valued as of the closing date), and $500 million in cash. This cash was obtained via a lending facility provided by Citigroup’s lending business. The transaction did not include Citigroup’s asset management business in Mexico, its retirement services business in Latin America (both of which are included in International Retail Banking) or its interest in the CitiStreet joint venture (which is included in Smith Barney). The total value of the transaction at the time of closing was approximately $4.369 billion, resulting in an after-tax gain for Citigroup of approximately $2.082 billion ($3.404 billion pretax), which was reported in discontinued operations.

Concurrent with this sale, the Company sold Legg Mason’s capital markets business to Stifel Financial Corp. (The transactions described in the above two paragraphs are referred to as the “Sale of the Asset Management Business.”)

With the receipt of Legg Mason’s broker-dealer business, the Company added 1,226 financial advisors in 124 branch offices to its Global Wealth Management business.

During March 2006, the Company sold 10.3 million shares of Legg Mason stock through an underwritten public offering. The net sale proceeds of $1.258 billion resulted in a pretax gain of $24 million for the Company.

In September 2006, the Company received from Legg Mason the final closing adjustment payment related to this sale. This payment resulted in an additional after-tax gain of $51 million ($83 million pretax), recorded in discontinued operations.

Additional information can be found in Note 3 to the Consolidated Financial Statements on page 125.

RESOLUTION OF TAX AUDITS

New York State and New York City

In 2006, Citigroup reached a settlement agreement with the New York State and New York City taxing authorities regarding various tax liabilities for the years 1998 – 2005 (referred to above and hereinafter as the “resolution of the New York Tax Audits”).

For the third quarter of 2006, the Company released $254 million from its tax contingency reserves, which resulted in increases of $237 million in after-tax Income from continuing operations and $17 million in after-tax Income from discontinued operations.

Federal

In 2006, the Company received a notice from the Internal Revenue Service (IRS) that they had concluded the tax audit for the years 1999 through 2002 (referred to above and hereinafter as the “resolution of the Federal Tax Audit”). For the 2006 first quarter, the Company released a total of $657 million from its tax contingency reserves related to the resolution of the Federal Tax Audit.

The following table summarizes the 2006 tax benefits, by business, from the resolution of the New York Tax Audits and Federal Tax Audit:

 

In millions of dollars   New York City
and New York
State Audits
  

Federal

Audit

   Total

Global Consumer

  $ 79    $ 290    $ 369

Markets & Banking

    116      176      292

Global Wealth Management

    34      13      47

Alternative Investments

         58      58

Corporate/Other

    8      61      69

Continuing Operations

  $ 237    $ 598    $ 835

Discontinued Operations

  $ 17    $ 59    $ 76

Total

  $ 254    $ 657    $ 911

 

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Finalizing the 2005 Sale of Travelers Life & Annuity

In 2005, the Company sold Citigroup’s Travelers Life & Annuity and substantially all of Citigroup’s international insurance businesses to MetLife. The businesses sold were the primary vehicles through which Citigroup engaged in the Life Insurance and Annuities business. This transaction encompassed Travelers Life & Annuity’s U.S. businesses and its international operations, other than Citigroup’s life insurance business in Mexico (which is now included within International Retail Banking). (This transaction is referred to hereinafter as the “Sale of the Life Insurance and Annuities Business”.)

At closing, Citigroup received $1.0 billion in MetLife equity securities and $10.830 billion in cash, which resulted in an after-tax gain of approximately $2.120 billion ($3.386 billion pretax), which was included in discontinued operations.

During 2006, Citigroup recognized an $85 million after-tax gain from the sale of MetLife shares. This gain was reported within Income from continuing operations in the Alternative Investments business.

In July 2006, the Company received the final closing adjustment payment related to this sale, resulting in an after-tax gain of $75 million ($115 million pretax), which was recorded in discontinued operations.

Additional information can be found in Note 3 to the Consolidated Financial Statements on page 125.

Sale of Upstate New York Branches

In 2006, Citigroup sold the Upstate New York Financial Center Network, consisting of 21 branches in Rochester, N.Y. and Buffalo, N.Y. to M&T Bank (referred to hereinafter as the “Sale of New York Branches”). Citigroup received a premium on deposit balances of approximately $1 billion. An after-tax gain of $92 million ($163 million pretax) was recognized in 2006.

Acquisition of Federated Credit Card Portfolio and Credit Card Agreement With Federated Department Stores (Macy’s)

In 2005, Citigroup announced a long-term agreement with Federated Department Stores, Inc. (Macy’s) under which the companies partner to acquire and manage approximately $6.2 billion of Macy’s credit card receivables, including existing and new accounts, executed in three phases.

For the first phase, which closed in October 2005, Citigroup acquired Macy’s receivables under management, totaling approximately $3.3 billion. For the second phase, which closed in May 2006, additional Macy’s receivables totaling approximately $1.9 billion were transferred to Citigroup from the previous provider. For the final phase, in July 2006, Citigroup acquired the approximately $1.0 billion credit card receivable portfolio of The May Department Stores Company (May), which merged with Macy’s.

Citigroup paid a premium of approximately 11.5% to acquire these portfolios. The multi-year agreement also provides Macy’s the ability to participate in the portfolio performance, based on credit sales and certain other performance metrics.

The Macy’s and May credit card portfolios comprised a total of approximately 17 million active accounts.

 

 

 

 

 

 

 

Consolidation of Brazil’s CrediCard

In 2006, Citigroup and Banco Itau dissolved their joint venture in CrediCard, a Brazilian consumer credit card business. In accordance with the dissolution agreement, Banco Itau received half of CrediCard’s assets and customer accounts in exchange for its 50% ownership, leaving Citigroup as the sole owner of CrediCard.

Adoption of the Accounting for Share-Based Payments

In 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)), which replaced the existing SFAS 123 and superseded Accounting Principles Board (APB) 25. SFAS 123(R) requires companies to measure and record compensation expense for stock options and other share-based payments based on the instruments’ fair value, reduced by expected forfeitures.

In adopting this standard, the Company conformed to recent accounting guidance that requires restricted or deferred stock awards issued to retirement-eligible employees who meet certain age and service requirements to be either expensed on the grant date or accrued over a service period prior to the grant date. This charge consisted of $398 million after-tax ($648 million pretax) for the immediate expensing of awards granted to retirement-eligible employees in January 2006.

The following table summarizes the SFAS 123(R) impact, by segment, on the 2006 first quarter pretax compensation expense for stock awards granted to retirement-eligible employees in January 2006:

 

In millions of dollars   2006 first quarter

Global Consumer

  $121

Markets & Banking

  354

Global Wealth Management

  145

Alternative Investments

  7

Corporate/Other

  21

Total

  $648

Additional information can be found in Notes 1 and 8 to the Consolidated Financial Statements on pages 111 and 129, respectively.

Credit Reserves

In 2006, the Company recorded a net release/utilization of its credit reserves of $356 million, consisting of a net release/utilization of $626 million in Global Consumer and a net build of $270 million in CMB. The net release/utilization in Global Consumer was primarily due to lower bankruptcy filings, a stable credit environment in the U.S. Consumer portfolio and International portfolio and a release of approximately $200 million related to Hurricane Katrina. Partially offsetting the net releases were builds in Mexico, primarily driven by target market expansion in Cards, Taiwan, due to the impact of industry-wide credit conditions in Cards, and Japan, related to the changes in the consumer lending environment. Developments in 2007 have led to a significant build in reserves in Global Consumer in 2007, as described above.

The net build of $270 million in CMB was primarily composed of $261 million in Securities and Banking, which included a $232 million reserve increase for unfunded lending commitments during the year. The net build reflected growth in loans and unfunded commitments and a change in credit rating of certain counterparties in certain industries.


 

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EVENTS IN 2005

Change in EMEA Consumer Write-off Policy

Prior to the third quarter of 2005, certain Western European consumer portfolios were granted an exception to Citigroup’s global write-off policy. The exception extended the write-off period from the standard 120-day policy for personal installment loans, and was granted because of the higher recovery rates experienced in these portfolios. During 2005, Citigroup observed lower actual recovery rates, stemming primarily from a change in bankruptcy and wage garnishment laws in Germany and, as a result, rescinded the exception to the global standard. The net charge was $332 million ($490 million pretax) resulting from the recording of $1.153 billion of write-offs and a corresponding utilization of $663 million of reserves in the third quarter of 2005.

Hurricane Katrina

In 2005, the Company recorded a $222 million after-tax charge ($357 million pretax) for the estimated probable losses incurred from Hurricane Katrina. This charge consisted primarily of additional credit costs in U.S. Cards, U.S. Commercial Business, U.S. Consumer Lending and U.S. Retail Distribution businesses, based on total credit exposures of approximately $3.6 billion in the Federal Emergency Management Agency (FEMA) Individual Assistance designated areas. This charge did not include an after-tax estimate of $75 million ($109 million pretax) for fees and interest due from related customers that were waived during 2005. These reserves were utilized or released in subsequent years.

United States Bankruptcy Legislation

In 2005, the Bankruptcy Reform Act (the Act) became effective. The Act imposed a means test to determine if people who file for Chapter 7 bankruptcy earn more than the median income in their state and could repay at least $6,000 of unsecured debt over five years. Bankruptcy filers who meet this test are required to enter into a repayment plan under Chapter 13, instead of canceling their debt entirely under Chapter 7. As a result of these more stringent guidelines, bankruptcy claims accelerated prior to the effective date. The incremental bankruptcy losses over the Company’s estimated baseline in 2005 that was attributable to the Act in U.S. Cards business was approximately $970 million on a managed basis ($550 million in the Company’s on-balance-sheet portfolio and $420 million in the securitized portfolio). In addition, the U.S. Retail Distribution business incurred incremental bankruptcy losses of approximately $90 million during 2005.

Bank and Credit Card Customer Rewards Costs

In 2005, the Company conformed its global policy approach for the accounting of rewards costs for bank and credit card customers. Conforming the global policy resulted in the write-off of $354 million after-tax ($565 million pretax) of unamortized deferred rewards costs. Previously, accounting practices for these costs varied across the Company.

The revised policy requires all businesses to recognize rewards costs as incurred.

Sale of Nikko Cordial Stake

During 2005, Citigroup reduced its stake in Nikko Cordial from approximately 11.2% to 4.9%, which resulted in an after-tax gain of $248 million ($386 million pretax).

 

Sale of the Merchant Acquiring Businesses

In 2005, Citigroup sold its European merchant acquiring business to EuroConex for $127 million. This transaction resulted in a $62 million after-tax gain ($98 million pretax).

In 2005, Citigroup sold its U.S. merchant acquiring business, Citigroup Payment Service Inc., to First Data Corporation for $70 million, resulting in a $41 million after-tax gain ($61 million pretax).

Homeland Investment Act Benefit

The Company’s 2005 full-year results from continuing operations include a $198 million tax benefit from the Homeland Investment Act provision of the American Jobs Creation Act of 2004, net of the impact of remitting income earned in 2005 and prior years that would otherwise have been indefinitely invested overseas. The amount of dividends that were repatriated relating to this benefit was approximately $3.2 billion.

Copelco Litigation Settlement

In 2000, Citigroup purchased Copelco Capital, Inc., a leasing business, from Itochu International Inc. and III Holding Inc. (formerly known as Copelco Financial Services Group, Inc., collectively referred to herein as “Itochu”) for $666 million. During 2001, Citigroup filed a lawsuit asserting breach of representations and warranties, among other causes of action, under the Stock Purchase Agreement entered into between Citigroup and Itochu in March 2000. During the third quarter of 2005, Citigroup and Itochu signed a settlement agreement that mutually released all claims, and under which Itochu paid Citigroup $185 million, which was recorded in pretax income.

Mexico Value Added Tax (VAT) Refund

In 2005, Citigroup Mexico received a $182 million refund of VAT taxes from the Mexican government related to the 2003 and 2004 tax years as a result of a Mexico Supreme Court ruling. The refund was recorded as a reduction of $140 million (pretax) in Other operating expense and $42 million (pretax) in Other revenue.

Settlement of Enron Class Action Litigation

As described in the “Legal Proceedings” discussion on page 195, in 2005, Citigroup settled class action litigation brought on behalf of purchasers of Enron securities.

Settlement of the Securities and Exchange Commission’s Transfer Agent Investigation

In 2005, the Company settled an investigation by the Securities and Exchange Commission (SEC) into matters relating to arrangements between certain Smith Barney mutual funds (the Funds), an affiliated transfer agent, and an unaffiliated sub-transfer agent.

Under the terms of the settlement, Citigroup paid a total of $208 million, consisting of $128 million in disgorgement and $80 million in penalties. These funds, less $24 million already credited to the Funds, have been paid to the U.S. Treasury and will be distributed pursuant to a distribution plan prepared by Citigroup and to be approved by the SEC. The terms of the settlement had been fully reserved by Citigroup in prior periods.


 

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Merger of Bank Holding Companies

In 2005, Citigroup merged its two intermediate bank holding companies, Citigroup Holdings Company and Citicorp, into Citigroup Inc. Coinciding with this merger, Citigroup assumed all existing indebtedness and outstanding guarantees of Citicorp. See Note 28 on page 176.

Repositioning Charges

The Company recorded a $272 million after-tax ($435 million pretax) charge in 2005 for repositioning costs. The repositioning charges were predominantly severance-related costs recorded in CMB ($151 million after-tax) and in Global Consumer ($95 million after-tax). These repositioning actions were consistent with the Company’s objectives of controlling expenses while continuing to invest in growth opportunities.

Resolution of Glendale Litigation

During 2005, the Company recorded a $72 million after-tax gain ($114 million pretax) following the resolution of Glendale Federal Bank v. United States, an action brought by Glendale Federal Bank.

Acquisition of First American Bank

In 2005, Citigroup completed the acquisition of First American Bank in Texas (FAB). The transaction established Citigroup’s retail branch presence in Texas, giving Citigroup 106 branches, $4.2 billion in assets and approximately 120,000 new customers in the state at the time of the transaction’s closing. The results of FAB are included in the Consolidated Financial Statements from March 2005 forward.

 

Divestiture of the Manufactured Housing Loan Portfolio

In 2005, Citigroup completed the sale of its manufactured housing loan portfolio, consisting of $1.4 billion in loans, to 21st Mortgage Corp. The Company recognized a $109 million after-tax loss ($157 million pretax) in the divestiture.

Divestiture of CitiCapital’s Transportation Finance Business

In 2005, the Company completed the sale of CitiCapital’s Transportation Finance Business based in Dallas and Toronto to GE Commercial Finance for total cash consideration of approximately $4.6 billion. The sale resulted in an after-tax gain of $111 million ($161 million pretax).

Shutdown of the Private Bank in Japan and Related Charge and Other Activities in Japan

On September 29, 2005, the Company officially closed its Private Bank business in Japan.

In September 2004, the Financial Services Agency of Japan (FSA) issued an administrative order against Citibank Japan. This order included a requirement that Citigroup exit all private banking operations in Japan by September 30, 2005. In connection with this required exit, the Company established a $400 million ($244 million after-tax) reserve (the Exit Plan Charge) during 2004.

On October 25, 2004, Citigroup announced its decision to wind down Cititrust and Banking Corporation (Cititrust), a licensed trust bank in Japan, after concluding that there were internal control, compliance and governance issues in that subsidiary. On April 22, 2005, the FSA issued an administrative order requiring Cititrust to suspend from engaging in all new trust business in 2005. Cititrust closed all customer accounts in 2005.


 

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SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

 

The Notes to the Consolidated Financial Statements on page 111 contain a summary of the Company’s significant accounting policies, including a discussion of recently issued accounting pronouncements. These policies, as well as estimates made by management, are integral to the presentation of the Company’s financial condition. It is important to note that they require management to make difficult, complex or subjective judgments and estimates, at times, regarding matters that are inherently uncertain. Management has discussed each of these significant accounting policies, the related estimates and its judgments with the Audit and Risk Management Committee of the Board of Directors. Additional information about these policies can be found in Note 1 to the Consolidated Financial Statements on page 111.

Valuations of Financial Instruments

The Company holds fixed income and equity securities, derivatives, retained interests in securitizations, investments in private equity and other financial instruments. In addition, the Company purchases securities under agreements to resell and sells securities under agreements to repurchase. The Company holds its investments, trading assets and liabilities, and resale and repurchase agreements on the balance sheet to meet customer needs, to manage liquidity needs and interest rate risks, and for proprietary trading and private equity investing.

Substantially all of these assets and liabilities are reflected at fair value on the Company’s balance sheet. In addition, certain loans, short-term borrowings, long-term debt and deposits as well as certain securities borrowed and loaned positions that are collateralized with cash are carried at fair value. In total, approximately 38.9% and 35.2% of assets, and 23.1% and 8.9% of liabilities, are accounted for at fair value as of December 31, 2007 and 2006, respectively. The increase is driven by the election of the fair value option as permitted under SFAS 159 for certain assets and liabilities, including securities purchased under agreements to resell and securities sold under agreements to repurchase, as well as certain structured and non-structured liabilities.

When available, the Company generally uses quoted market prices to determine fair value, and classifies such items within Level 1 of the fair value hierarchy. If quoted market prices are not available, fair value is based upon internally developed valuation models that use, where possible, current market-based or independently sourced market parameters, such as interest rates, currency rates, option volatilities, etc. More than 800 models are used across Citigroup. Where a model is internally developed and used to price a significant product, it is subject to validation and testing by independent personnel. Such models are often based on a discounted cash flow analysis.

Items valued using such internally generated valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable.

As seen during the second half of 2007, the credit crisis has caused some markets to become illiquid, thus reducing the availability of certain observable data used by the Company’s valuation techniques. When or if the

liquidity returns to these markets, the valuations will revert to using the related observable inputs in verifying internally calculated values.

With the Company’s early adoption of SFAS 157 and SFAS 159 as of January 1, 2007, the following specific changes were made in the valuation of the Company’s financial assets and liabilities:

 

  (i) Amendments to the way that the probability of default of a counterparty is factored into the valuation of derivative positions and inclusion for the first time of the impact of Citigroup’s own-credit risk on the valuation of derivatives and other liabilities measured at fair value;
  (ii) Elimination of the derivatives portfolio servicing adjustment which is no longer necessary under SFAS 157;
  (iii) Block discounts for large holdings of publicly traded equity securities were discontinued; and
  (iv) Trade-date gains related to certain derivatives using unobservable inputs were recognized immediately, superseding the previous guidance, which prohibited the recognition of these day-one gains.

The cumulative effect of these changes totaled $325 million after-tax. $250 million, which related to the first two items above and was recorded as an increase in the current year’s earnings. The remaining $75 million, related to items (iii) and (iv) above and was recorded as an increase to January 1, 2007 opening Retained earnings.

Changes in the valuation of the trading assets and liabilities, as well as all other assets (excluding available-for-sale securities) and liabilities, carried at fair value, are recorded in the Consolidated Statement of Income. Changes in the valuation of available-for-sale securities generally are recorded in Accumulated other comprehensive income, which is a component of stockholders’ equity on the Consolidated Balance Sheet. A full description of the Company’s related policies and procedures can be found in Notes 1, 26 and 27 to the Consolidated Financial Statements on pages 111, 167 and 176, respectively.

Key Controls over Fair-Value Measurement

The Company’s processes include a number of key controls that are designed to ensure that fair value is measured appropriately. Such controls include a model validation policy requiring that valuation models be validated by qualified personnel independent from those who created the models and escalation procedures to ensure that valuations using unverifiable inputs are identified and monitored on a regular basis by senior management.

Allowance for Credit Losses

Management provides reserves for an estimate of probable losses inherent in the funded loan portfolio on the balance sheet in the form of an allowance for loan losses. In addition, management has established and maintains reserves for the potential credit losses related to the Company’s off-balance- sheet exposures of unfunded lending commitments, including standby letters of credit and guarantees. These reserves are established in accordance with Citigroup’s Loan Loss Reserve Policies, as approved by the Audit and Risk Management Committee of the Company’s Board of Directors. The


 

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Company’s Chief Risk Officer and Chief Financial Officer review the adequacy of the credit loss reserves each quarter with representatives from the Risk and Finance staffs for each applicable business area.

During these reviews, the above-mentioned representatives covering the business area having classifiably managed portfolios (that is, portfolios where internal credit-risk ratings are assigned, which are primarily Markets & Banking, Global Consumer’s commercial lending businesses, and Global Wealth Management) present recommended reserve balances for their funded and unfunded lending portfolios along with supporting quantitative and qualitative data. The quantitative data include:

 

 

Estimated probable losses for non-performing, non-homogeneous exposures within a business line’s classifiably managed portfolio. Consideration is given to all available evidence when determining this estimate including, as appropriate: (i) the present value of expected future cash flows discounted at the loan’s contractual effective rate; (ii) the borrower’s overall financial condition, resources and payment record; and (iii) the prospects for support from financially responsible guarantors or the realizable value of any collateral.

 

Statistically calculated losses inherent in the classifiably managed portfolio for performing and de minimis non-performing exposures. The calculation is based upon: (i) Citigroup’s internal system of credit-risk ratings, which are analogous to the risk ratings of the major rating agencies; (ii) the Corporate portfolio database; and (iii) historical default and loss data, including rating agency information regarding default rates from 1983 to 2006, and internal data, dating to the early 1970s, on severity of losses in the event of default.

 

Additional adjustments include: (i) statistically calculated estimates to cover the historical fluctuation of the default rates over the credit cycle, the historical variability of loss severity among defaulted loans, and the degree to which there are large obligor concentrations in the global portfolio; and (ii) adjustments made for specifically known items, such as current environmental factors and credit trends.

In addition, representatives from both the Risk Management and Finance staffs that cover business areas which have delinquency-managed portfolios containing smaller homogeneous loans (primarily Global Consumer’s non-commercial lending areas) present their recommended reserve balances based upon leading credit indicators including delinquencies on first and second mortgages and deterioration in the housing market, a downturn in other economic trends including unemployment and GDP, changes in the portfolio size, and a change in the estimated loan losses inherent in the portfolio but not yet visible in the delinquencies (change in estimate of loan losses). This methodology is applied separately for each individual product within each different geographic region in which these portfolios exist.

This evaluation process is subject to numerous estimates and judgments. The frequency of default, risk ratings, loss recovery rates, the size and diversity of individual large credits, and the ability of borrowers with foreign currency obligations to obtain the foreign currency necessary for orderly debt servicing, among other things, are all taken into account during this review. Changes in these estimates could have a direct impact on the credit costs in any quarter and could result in a change in the allowance. Changes to the reserve flow through the income statement on the lines “provision for loan losses” and “provision for unfunded lending commitments.” For a further description of the loan loss reserve and related accounts, see Notes 1 and 18 to the Consolidated Financial Statements on pages 111 and 147, respectively.

 

Securitizations

The Company securitizes a number of different asset classes as a means of strengthening its balance sheet and to access competitive financing rates in the market. Under these securitization programs, assets are sold into a trust and used as collateral by the trust as a means of obtaining financing. The cash flows from assets in the trust service the corresponding trust securities. If the structure of the trust meets certain accounting guidelines, trust assets are treated as sold and no longer reflected as assets of the Company. If these guidelines are not met, the assets continue to be recorded as the Company’s assets, with the financing activity recorded as liabilities on Citigroup’s balance sheet.

The Financial Accounting Standards Board (FASB) is currently working on amendments to the accounting standards governing asset transfers and securitization accounting. Upon completion of these standards, the Company will need to re-evaluate its accounting and disclosures. The SEC has requested that FASB complete its deliberations by the end of 2008. Due to the FASB’s ongoing deliberations, the Company is unable to accurately determine the effect of future amendments at this time.

The Company assists its clients in securitizing their financial assets and also packages and securitizes financial assets purchased in the financial markets. The Company may also provide administrative, asset management, underwriting, liquidity facilities and/or other services to the resulting securitization entities, and may continue to service some of these financial assets.

A complete description of the Company’s accounting for securitized assets can be found in “Off-Balance-Sheet Arrangements” on page 85 and in Notes 1 and 23 to the Consolidated Financial Statements on pages 111 and 156, respectively.

Income Taxes

The Company is subject to the income tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which the Company operates. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of these inherently complex tax laws. The Company must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions, both domestic and foreign.

Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit.

The Company implemented FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), on January 1, 2007, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. See Note 11 to the Consolidated Financial Statements on page 139.


 

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The Company treats interest and penalties on income taxes as a component of income tax expense.

Deferred taxes are recorded for the future consequences of events that have been recognized for financial statements or tax returns, based upon enacted tax laws and rates. Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not.

See Note 11 to the Consolidated Financial Statements on page 139 for a further description of the Company’s provision and related income tax assets and liabilities.

Legal Reserves

The Company is subject to legal, regulatory and other proceedings and claims arising from conduct in the ordinary course of business. These proceedings include actions brought against the Company in its various roles, including acting as a lender, underwriter, broker-dealer or investment advisor. Reserves are established for legal and regulatory claims in accordance with applicable accounting requirements based upon the probability and estimability of losses. The Company reviews outstanding claims with internal counsel, as well as external counsel when appropriate, to assess probability and estimates of loss. The risk of loss is reassessed as new information becomes available, and reserves are adjusted as appropriate. The actual cost of resolving a claim may be substantially higher, or lower, than the amount of the recorded reserve. See Note 29 to the Consolidated Financial Statements on page 181 and the discussion of “Legal Proceedings” beginning on page 195.

Accounting Changes and Future Application of Accounting Standards

See Note 1 to the Consolidated Financial Statements on page 111 for a discussion of Accounting Changes and the Future Application of Accounting Standards.


 

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SEGMENT, PRODUCT AND REGIONALNET INCOME AND REVENUE

 

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

CITIGROUP NET INCOMESEGMENT AND PRODUCT VIEW

 

In millions of dollars   2007     2006      2005     

% Change

2007 vs. 2006

   

% Change

2006 vs. 2005

 

Global Consumer

           

U.S. Cards

  $ 2,873     $ 3,890      $ 2,754      (26 )%   41 %

U.S. Retail Distribution

    1,343       2,027        1,752      (34 )   16  

U.S. Consumer Lending

    (626 )     1,912        1,938      NM     (1 )

U.S. Commercial Business

    518       561        729      (8 )   (23 )

Total U.S. Consumer (1)

  $ 4,108     $ 8,390      $ 7,173      (51 )%   17 %

International Cards

  $ 2,013     $ 1,137      $ 1,373      77 %   (17 )%

International Consumer Finance

    (508 )     40        642      NM     (94 )

International Retail Banking

    2,688       2,840        2,083      (5 )   36  

Total International Consumer

  $ 4,193     $ 4,017      $ 4,098      4 %   (2 )%

Other

  $ (433 )   $ (351 )    $ (374 )    (23 )%   6 %

Total Global Consumer

  $ 7,868     $ 12,056      $ 10,897      (35 )%   11 %

Markets & Banking

           

Securities and Banking

  $ (7,604 )   $ 5,763      $ 5,327      NM     8 %

Transaction Services

    2,215       1,426        1,135      55 %   26  

Other

    136       (62 )      433      NM     NM  

Total Markets & Banking

  $ (5,253 )   $ 7,127      $ 6,895      NM     3 %

Global Wealth Management

           

Smith Barney

  $ 1,351     $ 1,005      $ 871      34 %   15 %

Private Bank

    623       439        373      42     18  

Total Global Wealth Management

  $ 1,974     $ 1,444      $ 1,244      37 %   16 %

Alternative Investments

  $ 672     $ 1,276      $ 1,437      (47 )%   (11 )%

Corporate/Other

    (1,644 )     (654 )      (667 )    NM     2  

Income from Continuing Operations

  $ 3,617     $ 21,249      $ 19,806      (83 )%   7 %

Income from Discontinued Operations (2)

          289        4,832          (94 )

Cumulative Effect of Accounting Change

                 (49 )         

Total Net Income

  $ 3,617     $ 21,538      $ 24,589      (83 )%   (12 )%

 

(1) U.S. disclosure includes Canada and Puerto Rico.
(2) See Note 3 on page 125.

NM Not meaningful.

 

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CITIGROUP NET INCOMEREGIONAL VIEW

 

In millions of dollars   2007     2006      2005     

% Change

2007 vs. 2006

   

% Change

2006 vs. 2005

 

U.S. (1)

           

Global Consumer

  $ 3,675     $ 8,039      $ 6,799      (54 )%   18 %

Markets & Banking

    (7,537 )     2,209        2,950      NM     (25 )

Global Wealth Management

    1,416       1,210        1,141      17     6  

Total U.S.

  $ (2,446 )   $ 11,458      $ 10,890      NM     5 %

Mexico

           

Global Consumer

  $ 1,387     $ 1,605      $ 1,432      (14 )%   12 %

Markets & Banking

    396       346        450      14     (23 )

Global Wealth Management

    46       36        44      28     (18 )

Total Mexico

  $ 1,829     $ 1,987      $ 1,926      (8 )%   3 %

EMEA

           

Global Consumer

  $ 504     $ 725      $ 374      (30 )%   94 %

Markets & Banking

    (1,902 )     2,011        1,130      NM     78  

Global Wealth Management

    77       23        8      NM     NM  

Total EMEA

  $ (1,321 )   $ 2,759      $ 1,512      NM     82 %

Japan

           

Global Consumer

  $ (126 )   $ 119      $ 706      NM     (83 )%

Markets & Banking

    128       272        498      (53 )%   (45 )

Global Wealth Management

    95              (82 )        100  

Total Japan

  $ 97     $ 391      $ 1,122      (75 )%   (65 )%

Asia

           

Global Consumer

  $ 1,749     $ 1,366      $ 1,350      28 %   1 %

Markets & Banking

    2,578       1,651        1,248      56     32  

Global Wealth Management

    314       163        116      93     41  

Total Asia

  $ 4,641     $ 3,180      $ 2,714      46 %   17 %

Latin America

           

Global Consumer

  $ 679     $ 202      $ 236      NM     (14 )%

Markets & Banking

    1,084       638        619      70 %   3 %

Global Wealth Management

    26       12        17      NM     (29 )

Total Latin America

  $ 1,789     $ 852      $ 872      NM     (2 )%

Alternative Investments

  $ 672     $ 1,276      $ 1,437      (47 )%   (11 )%

Corporate/Other

    (1,644 )     (654 )      (667 )    NM     2  

Income from Continuing Operations

  $ 3,617     $ 21,249      $ 19,806      (83 )%   7 %

Income from Discontinued Operations (2)

          289        4,832          (94 )

Cumulative Effect of Accounting Change

                 (49 )         

Total Net Income

  $ 3,617     $ 21,538      $ 24,589      (83 )%   (12 )%

Total International

  $ 7,035     $ 9,169      $ 8,146      (23 )%   13 %

 

(1) Excludes Alternative Investments and Corporate/Other, which are predominantly related to the U.S. The U.S. regional disclosure includes Canada and Puerto Rico. Global Consumer for the U.S. includes Other Consumer.
(2) See Note 3 on page 125.

NM Not meaningful.

 

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CITIGROUP REVENUESSEGMENT AND PRODUCT VIEW

 

In millions of dollars   2007     2006      2005     

% Change

2007 vs. 2006

   

% Change

2006 vs. 2005

 

Global Consumer

           

U.S. Cards

  $ 13,418     $ 13,508      $ 12,824      (1 )%   5 %

U.S. Retail Distribution

    10,209       9,584        9,515      7     1  

U.S. Consumer Lending

    6,459       5,519        5,469      17     1  

U.S. Commercial Business

    1,649       1,983        2,299      (17 )   (14 )

Total U.S. Consumer (1)

  $ 31,735     $ 30,594      $ 30,107      4 %   2 %

International Cards

  $ 9,228     $ 5,959      $ 4,850      55 %   23 %

International Consumer Finance

    3,182       3,318        3,819      (4 )   (13 )

International Retail Banking

    12,878       10,518        9,727      22     8  

Total International Consumer

  $ 25,288     $ 19,795      $ 18,396      28 %   8 %

Other

  $ (39 )   $ (90 )    $ (258 )    57 %   65 %

Total Global Consumer

  $ 56,984     $ 50,299      $ 48,245      13 %   4 %

Markets & Banking

           

Securities and Banking

  $ 2,684     $ 21,218      $ 18,970      (87 )%   12 %

Transaction Services

    7,840       5,971        4,891      31     22  

Other

    (2 )     (2 )      2          NM  

Total Markets & Banking

  $ 10,522     $ 27,187      $ 23,863      (61 )%   14 %

Global Wealth Management

           

Smith Barney

  $ 10,529     $ 8,160      $ 6,825      29 %   20 %

Private Bank

    2,457       2,017        1,859      22     8  

Total Global Wealth Management

  $ 12,986     $ 10,177      $ 8,684      28 %   17 %

Alternative Investments

  $ 2,103     $ 2,901      $ 3,430      (28 )%   (15 )%

Corporate/Other

    (897 )     (949 )      (580 )    5     (64 )

Total Net Revenues

  $ 81,698     $ 89,615      $ 83,642      (9 )%   7 %

 

(1) U.S. disclosure includes Canada and Puerto Rico.

NM Not meaningful.

 

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CITIGROUP REVENUESREGIONAL VIEW

 

In millions of dollars   2007     2006      2005     

% Change

2007 vs. 2006

   

% Change

2006 vs. 2005

 

U.S. (1)

           

Global Consumer

  $ 31,696     $ 30,504      $ 29,849      4 %   2 %

Markets & Banking

    (4,971 )     10,155        9,901      NM     3  

Global Wealth Management

    9,787       8,793        7,628      11     15  

Total U.S.

  $ 36,512     $ 49,452      $ 47,378      (26 )%   4 %

Mexico

           

Global Consumer

  $ 5,777     $ 5,191      $ 4,373      11 %   19 %

Markets & Banking

    814       781        777      4     1  

Global Wealth Management

    153       129        124      19     4  

Total Mexico

  $ 6,744     $ 6,101      $ 5,274      11 %   16 %

EMEA

           

Global Consumer

  $ 6,649     $ 5,387      $ 5,201      23 %   4 %

Markets & Banking

    4,235       8,757        6,849      (52 )   28  

Global Wealth Management

    543       331        295      64     12  

Total EMEA

  $ 11,427     $ 14,475        12,345      (21 )%   17 %

Japan

           

Global Consumer

  $ 2,797     $ 2,455      $ 3,251      14 %   (24 )%

Markets & Banking

    1,191       1,052        1,224      13     (14 )

Global Wealth Management

    1,244              (6 )        100  

Total Japan

  $ 5,232     $ 3,507      $ 4,469      49 %   (22 )%

Asia

           

Global Consumer

  $ 6,253     $ 4,933      $ 4,461      27 %   11 %

Markets & Banking

    6,496       4,714        3,697      38     28  

Global Wealth Management

    1,038       738        440      41     68  

Total Asia

  $ 13,787     $ 10,385      $ 8,598      33 %   21 %

Latin America

           

Global Consumer

  $ 3,812     $ 1,829      $ 1,110      NM     65 %

Markets & Banking

    2,757       1,728        1,415      60     22  

Global Wealth Management

    221       186        203      19     (8 )

Total Latin America

  $ 6,790     $ 3,743      $ 2,728      81 %   37 %

Alternative Investments

  $ 2,103     $ 2,901      $ 3,430      (28 )%   (15 )%

Corporate/Other

    (897 )     (949 )      (580 )    5     (64 )

Total Net Revenues

  $ 81,698     $ 89,615      $ 83,642      (9 )%   7 %

Total International

  $ 43,980     $ 38,211      $ 33,414      15 %   14 %

 

(1) Excludes Alternative Investments and Corporate/Other, which are predominantly related to the U.S. The U.S. regional disclosure includes Canada and Puerto Rico. Global Consumer for the U.S. includes Other Consumer.

NM Not meaningful.

 

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GLOBAL CONSUMER

 

LOGO

Citigroup’s Global Consumer Group provides a wide array of banking, lending, insurance and investment services through a network of 8,527 branches, approximately 20,000 ATMs and 530 Automated Lending Machines (ALMs), the Internet, telephone and mail, and the Primerica Financial Services salesforce. Global Consumer serves more than 200 million customer accounts, providing products and services to meet the financial needs of both individuals and small businesses.

 

In millions of dollars   2007     2006 (1)     2005    

% Change

2007 vs. 2006

   

% Change

2006 vs. 2005

 

Net interest revenue

  $ 32,932     $ 29,380     $ 29,526     12 %    

Non-interest revenue

    24,052       20,919       18,719     15     12 %

Revenues, net of interest expense

  $ 56,984     $ 50,299     $ 48,245     13 %   4 %

Operating expenses

    29,298       25,933       23,318     13     11  

Provisions for loan losses and for benefits and claims

    17,020       7,579       9,063     NM     (16 )

Income before taxes and minority interest

  $ 10,666     $ 16,787     $ 15,864     (36 )%   6 %

Income taxes

    2,627       4,666       4,904     (44 )   (5 )

Minority interest, net of taxes

    171       65       63     NM     3  

Net income

  $ 7,868     $ 12,056     $ 10,897     (35 )%   11 %

Average assets (in billions of dollars)

  $ 735     $ 610     $ 533     20 %   14 %

Return on assets

    1.07 %     1.98 %     2.04 %    

Key indicators (in billions of dollars)

         

Average loans

  $ 496.1     $ 434.9     $ 392.6     14 %   11 %

Average deposits

  $ 291.8     $ 252.1     $ 231.7     16 %   9 %

Total branches

    8,527       8,110       7,237     5 %   12 %

 

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

NM Not meaningful.

 

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U.S. Consumer

LOGO

U.S. Consumer is composed of four businesses: Cards, Retail Distribution, Consumer Lending and Commercial Business.

 

In millions of dollars   2007     2006 (1)     2005    

% Change

2007 vs. 2006

   

% Change

2006 vs. 2005

 

Net interest revenue

  $ 17,480     $ 16,712     $ 17,510     5 %   (5 )%

Non-interest revenue

    14,255       13,882       12,597     3     10  

Revenues, net of interest expense

  $ 31,735     $ 30,594     $ 30,107     4 %   2 %

Operating expenses

    15,045       14,149       13,449     6     5  

Provisions for loan losses and for benefits
and claims

    10,917       3,800       5,600     NM     (32 )

Income before taxes and minority interest

  $ 5,773     $ 12,645     $ 11,058     (54 )%   14 %

Income taxes

    1,629       4,197       3,823     (61 )   10  

Minority interest, net of taxes

    36       58       62     (38 )   (6 )

Net income

  $ 4,108     $ 8,390     $ 7,173     (51 )%   17 %

Average assets (in billions of dollars)

  $ 498     $ 417     $ 357     19 %   17 %

Return on assets

    0.83 %     2.01 %     2.01 %    

Key indicators (in billions of dollars)

         

Average loans

  $ 352.5     $ 320.1     $ 286.1     10 %   12 %

Average deposits

    121.8       104.6       95.4     16 %   10 %

Total branches (actual number)

    3,545       3,441       3,173     3 %   8 %

 

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

NM Not meaningful.

 

 

2007 vs. 2006

Net Interest Revenue was 5% higher than the prior year, as growth in average deposits and loans of 16% and 10%, respectively, was partially offset by a decrease in net interest margin. Net interest margin declined mainly due to an increase in the cost of funding driven by a shift to higher cost Direct Bank and time deposits and a shift away from high yielding credit card assets toward lower yielding mortgage assets which more than offset a general increase in consumer loan yields.

Non-Interest Revenue increased 3%, primarily due to 6% growth in Cards purchase sales, a pretax gain on the sale of MasterCard shares of $449 million compared to a gain on the MasterCard IPO of $66 million in 2006,

the impact of the acquisition of ABN AMRO Mortgage Group in the first quarter of 2007, higher gains on sales of mortgage loans, and growth in net servicing revenues. This increase is partially offset by lower securitization revenues in Cards primarily reflecting the net impact of higher funding costs and higher credit losses in the securitization trusts. The results of 2006 also included $163 million pretax gain from the sale of upstate New York branches in the second quarter.

Operating expense growth was primarily driven by the VISA litigation-related pretax charge of $292 million, the ABN AMRO integration, higher collection costs, higher volume-related expenses, and increased investment spending due to 202 new branch openings in 2007 (110 in CitiFinancial and


 

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92 in Citibank). Expense growth in 2007 was favorably affected by the absence of the charge related to the initial adoption of SFAS 123(R) in the first quarter of 2006.

Provisions for loan losses and for benefits and claims increased $7.1 billion primarily reflecting a weakening of leading credit indicators including delinquencies on first and second mortgages and deterioration in the housing market, a downturn in other economic trends including unemployment and GDP affecting all other portfolios and a change in estimate of loan losses inherent in the portfolio but not yet visible in delinquency statistics. The increase in provision for loan losses also reflects the absence of loan loss reserve releases recorded in the prior year, as well as an increase in bankruptcy filings in 2007 versus unusually low filing levels experienced in 2006. The net credit loss ratio increased 27 basis points to 1.46%.

Net income in 2007 also reflected the absence of a $229 million tax benefit resulting from the resolution of the 2006 Tax Audits.

2006 vs. 2005

Net interest revenue declined by 5%, as growth in average deposits and loans of 10% and 12%, respectively, were more than offset by net interest margin compression. Net interest margin declined primarily due to a shift in customer liabilities from savings and other demand deposits to certificates of deposit and e-Savings accounts as well as lower on-balance-sheet receivables and a change in the mix of receivables toward introductory rate products, and a higher cost of funds, which was partially offset by higher risk-based fees.

Non-Interest Revenue increased by 10% due to the positive impact of a 9% growth in purchase sales, higher replenishment gains from securitization activities, and higher net excess spread revenues from previously securitized receivables, higher gains on sales of real estate loans, student loans, and mortgage-backed securities, a $163 million gain on the Sale of New York Branches in the second quarter of 2006, partially offset by lower servicing revenues. Also driving the increase was the acquisition of the Macy’s (formerly known as Federated) portfolio in the 2005 fourth quarter, and the absence of a $545 million charge to conform accounting practices for customer rewards taken in the fourth quarter of 2005. Offsetting the increase was the absence of the $162 million legal settlement benefit in the 2005 third quarter related to the purchase of Copelco, the $161 million gain on sale of the CitiCapital Transportation Finance business in the first quarter of 2005 and the absence of a $110 million gain in the 2005 first quarter related to the resolution of the Glendale litigation.

Operating expenses increased 5%, primarily reflecting the full-year impact of the acquisition of the Macy’s portfolio, higher volume-related expenses, increased investment spending on 303 new branch openings during the year (101 in Citibank and 202 in CitiFinancial), the impact of SFAS 123(R), costs associated with the launch of e-Savings, and the absence of a $23 million expense benefit due to the Copelco settlement recorded in 2005. This increase is partially offset by effective expense management and a decline in advertising and marketing expenses in Cards and lower expenses from the absence of the transportation finance business and severance costs in Commercial Business in 2005.

Provision for loan losses and for benefits and claims declined by 32% attributable primarily to a favorable credit environment which led to a continued decline in loan loss reserves in Cards, lower overall bankruptcy filings in 2006 in Retail Distribution and a loan loss reserve release of $63 million in Commercial Business. Also driving the decrease was the absence of a $165 million loan loss reserve build in the 2005 third quarter related to the reorganization of the former Consumer Finance business, and a reserve build in 2005 related to Hurricane Katrina of $110 million in CitiFinancial branches and the continued liquidation of non-core portfolios in Commercial Business. The net credit loss ratio for U.S. Consumer decreased 51 basis points to 1.19%.

Net income in 2006 also reflected a $229 million tax benefit resulting from the resolution of the 2006 Tax Audits.

U.S. CONSUMER OUTLOOK

In 2008, the U.S. Consumer businesses will continue to focus on expanding its customer base, offering an integrated and innovative set of products and services, and leveraging previous acquisitions and prior strategic investments. Revenues will be affected by customer demand, the level of interest rates, credit performance, as well as the stability of the U.S. capital markets, all of which are important to cards securitizations and asset valuations. The businesses will also focus on tight expense control, productivity improvements and effective credit management.

The U.S. Consumer business could be negatively affected as discussed under “Economic Environment” on page 5.

In addition, the U.S. Consumer business is expected to operate in a challenging credit and economic environment, due to expected deterioration in credit costs across all products, particularly in the first mortgage and second mortgage portfolios. In addition, higher levels of unemployment and bankruptcy filings and lower residential real estate prices are expected. Net credit losses, delinquencies and defaults are expected to continue to trend upwards.


 

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International Consumer

LOGO

International Consumer is composed of three businesses: Cards, Consumer Finance and Retail Banking. International Consumer operates in five geographies: Mexico, Latin America, EMEA, Japan, and Asia.

 

In millions of dollars   2007     2006     2005    

% Change

2007 vs. 2006

   

% Change

2006 vs. 2005

 

Net interest revenue

  $ 15,619     $ 12,866     $ 12,180     21 %   6 %

Non-interest revenue

    9,669       6,929       6,216     40     11  

Revenues, net of interest expense

  $ 25,288     $ 19,795     $ 18,396     28 %   8 %

Operating expenses

    13,550       11,201       9,520     21     18  

Provisions for loan losses and for benefits

    and claims

    6,103       3,779       3,463     61     9  

Income before taxes and minority interest

  $ 5,635     $ 4,815     $ 5,413     17 %   (11 )%

Income taxes

    1,307       791       1,314     65     (40 )

Minority interest, net of taxes

    135       7       1     NM     NM  

Net income

  $ 4,193     $ 4,017     $ 4,098     4 %   (2 )%

Revenues, net of interest expense, by region:

         

Mexico

  $ 5,777     $ 5,191     $ 4,373     11 %   19 %

EMEA

    6,649       5,387       5,201     23     4  

Japan

    2,797       2,455       3,251     14     (24 )

Asia

    6,253       4,933       4,461     27     11  

Latin America

    3,812       1,829       1,110     NM     65  

Total revenues

  $ 25,288     $ 19,795     $ 18,396     28     8 %

Net income by region:

         

Mexico

  $ 1,387     $ 1,605     $ 1,432     (14 )%   12 %

EMEA

    504       725       374     (30 )   94  

Japan

    (126 )     119       706     NM     (83 )

Asia

    1,749       1,366       1,350     28     1  

Latin America

    679       202       236     NM     (14 )

Total net income

  $ 4,193     $ 4,017     $ 4,098     4 %   (2 )%

Average assets (in billions of dollars)

  $ 226     $ 183     $ 167     23 %   10 %

Return on assets

    1.86 %     2.20 %     2.45 %    

Key indicators (in billions of dollars)

         

Average loans

  $ 143.6     $ 114.8     $ 106.5     25 %   8 %

Average deposits

  $ 170.0     $ 147.5     $ 136.3     15 %   8 %

Total branches (actual number)

    4,982       4,669       4,064     7 %   15 %

NM Not meaningful.

 

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2007 vs. 2006

Net interest revenue increased 21% overall, 29% after excluding the impact of Japan Consumer Finance. The increase was driven by a 25% growth in average receivables and a 15% growth in average deposits, including the impact of the acquisitions of GFU, Egg, and Grupo Cuscatlan, and the integration of the CrediCard portfolio. The positive impact of foreign currency translation also contributed to the revenue increase. Results in 2007 include a $261 million pretax charge in Japan Consumer Finance to increase reserves for estimated losses due to customer settlements.

Non-interest revenue increased 40%, primarily due to a 33% increase in Cards purchase sales, a 20% increase in investment product sales, increased ownership in Nikko Cordial, and gains on sales of non-core assets including a $729 million pretax gain on Redecard shares, a $507 million pretax gain on Visa International Inc. shares, a $313 million pretax gain on the sale of an ownership interest in Nikko Cordial’s Simplex Investment Advisors, and a pretax MasterCard gain of $113 million compared to a gain on the MasterCard IPO of $55 million in 2006. The positive impact of foreign currency translation also contributed to the revenue increase. The increase in non-interest revenue was partially offset by the absence of a prior-year gain on the sale of Avantel of $234 million.

Operating expenses increased 21%, reflecting acquisitions, increased ownership in Nikko Cordial, the integration of the CrediCard portfolio, volume growth across the products and regions, the impact of foreign currency translation and continued investment spending. During 2007, 510 Retail Banking and Consumer Finance branches were opened or acquired. The increase in 2007 expenses was partially offset by savings from structural expense initiatives announced in April 2007, and the absence of the charge related to the initial adoption of SFAS 123(R) in the first quarter of 2006.

Provisions for loan losses and for benefits and claims increased substantially, including a change in estimate of loan losses inherent in the loan portfolio but not yet visible in delinquency statistics, along with volume growth and credit deterioration in certain countries, the impact of recent acquisitions, and the increase in net credit losses in Japan Consumer Finance due to the continuing adverse operating environment and the impact of Japan consumer lending laws passed in the fourth quarter of 2006. Higher past-due accounts in Mexico cards and the integration of the CrediCard portfolio also contributed to the increase.

Net income was also affected by the absence of a prior-year APB 23 tax benefit of $288 million in Mexico, as well as the absence of a prior-year $99 million tax benefit resulting from the resolution of the 2006 Tax Audits.

 

2006 vs. 2005

Net interest revenue increased 6%, reflecting growth in average receivables and deposits of 8% each, and the integration of the CrediCard portfolio in Latin America. The results were negatively impacted by Japan Consumer Finance due to the changes in the operating environment and the passage of changes to consumer lending laws on December 13, 2006. The total impact included a $581 million pretax charge to increase reserves for estimated losses due to customer settlements. Excluding Japan, net interest revenue increased 15% from the prior year. The positive impact of foreign currency translation also contributed to the revenue increase.

Non-interest revenue increased 11%, reflecting an increase in investment product sales of 36%, a 17% increase in purchase sales, the integration of the CrediCard portfolio, the 2006 fourth quarter $234 million gain in Mexico on the sale of Avantel, a gain on the MasterCard IPO of $55 million in the 2006 second quarter, and higher insurance and other fees, partially offset by the absence of a prior-year gain on the sale of a merchant-acquiring business in EMEA of $95 million. The positive impact of foreign currency translation also contributed to the revenue increase. Assets under management grew by 20%.

Operating expenses increased, reflecting the integration of the CrediCard portfolio, volume growth across the regions, continued investment spending driven by 862 new Retail Banking and Consumer Finance branch openings, the adoption of SFAS 123(R), a $60 million pretax repositioning charge in Japan to close approximately 270 branches and 100 ALMs, the impact of foreign currency translation, the costs associated with the labor settlement in Korea, and the absence of prior-year expense credits related to Mexico VAT.

Provisions for loan losses and for benefits and claims increased primarily due to reserve builds and higher net credit losses in Japan Consumer Finance due to legislative and other actions affecting the consumer finance industry, target market expansion in Mexico cards, the industry-wide credit deterioration in Taiwan, the CrediCard integration in Latin America, and volume growth. The increase was partially offset by the absence of the 2005 charge of $490 million to standardize the loan write-off policy in EMEA, the 2005 increase of $127 million loan loss reserves in Germany retail banking to reflect increased experience with the effects of bankruptcy law liberalization, a $159 million gain from the sale of charged-off assets in Germany, and a $168 million loan loss reserve release in Korea related to improvements in the credit environment in this market.

Net income in 2006 also reflected higher APB 23 tax benefits of $288 million in Mexico, and a $99 million benefit from the resolution of the 2006 Tax Audits, partially offset by the absence of a 2005 third quarter Homeland Investment Act tax benefit of $61 million in Mexico.


 

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INTERNATIONAL CONSUMER OUTLOOK

International Consumer is diversified across a number of geographies, product groups, and customer segments. In 2008, International Consumer expects to drive growth in loans, deposits and investment product sales from expanding its customer base through organic growth, investments in expanding the branch network, and the benefit from 2007 acquisitions. As a result, International Consumer expects earnings growth in 2008.

Revenues and credit costs are expected to be affected by global economic conditions, including the level of interest rates, the credit environment, unemployment rates, and political and regulatory developments in the U.S. and around the world.

The International Consumer business could be negatively affected by the “Economic Environment” discussed on page 5.

The Japan Consumer Finance business environment is expected to remain difficult. The impact of changes to consumer lending laws enacted in 2006 as well as deteriorating consumer credit conditions are expected to drive credit costs higher in the Japan Consumer Finance business. The Company will continue to actively monitor developments in customer refund claims and defaults, political developments and the way courts view grey zone claims, refunds and defaults. The Company continues to evaluate the positioning and prospects of the business as the environment changes.

In addition to Japan Consumer Finance, increased credit costs are expected across all international businesses as their growing portfolios season or mature, and are expected to be affected by economic and credit conditions in the U.S. and around the world.


 

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MARKETS & BANKING

 

Markets & Banking provides a broad range of trading, investment banking, and commercial lending products and services to companies, governments, institutions and investors in approximately 100 countries. Markets & Banking includes Securities and Banking, Transaction Services and Other.

 

In millions of dollars   2007     2006      2005     

% Change

2007 vs. 2006

   

% Change

2006 vs. 2005

 

Net interest revenue

  $ 12,312     $ 8,492      $ 8,100      45 %   5 %

Non-interest revenue

    (1,790 )     18,695        15,763      NM     19  

Revenues, net of interest expense

  $ 10,522     $ 27,187      $ 23,863      (61 )%   14 %

Operating expenses

    19,588       17,119        14,133      14     21  

Provision for credit losses

    1,390       359        (42 )    NM     NM  

Income (loss) before taxes and minority interest

  $ (10,456 )   $ 9,709      $ 9,772      NM     (1 )%

Income taxes (benefits)

    (5,216 )     2,528        2,818      NM     (10 )

Minority interest, net of taxes

    13       54        59      (76 )%   (8 )

Net income (loss)

  $ (5,253 )   $ 7,127      $ 6,895      NM     3 %

Revenues, net of interest expense, by region:

           

U.S.

  $ (4,971 )   $ 10,155      $ 9,901      NM     3 %

Mexico

    814       781        777      4 %   1  

EMEA

    4,235       8,757        6,849      (52 )   28  

Japan

    1,191       1,052        1,224      13     (14 )

Asia

    6,496       4,714        3,697      38     28  

Latin America

    2,757       1,728        1,415      60     22  

Total revenues

  $ 10,522     $ 27,187      $ 23,863      (61 )%   14 %

Total revenues, net of interest expense by product:

           

Securities and Banking

  $ 2,684     $ 21,218      $ 18,970      (87 )%   12 %

Transaction Services

    7,840       5,971        4,891      31     22  

Other

    (2 )     (2 )      2          NM  

Total revenues

  $ 10,522     $ 27,187      $ 23,863      (61 )%   14 %

Net income (loss) by region:

           

U.S.

  $ (7,537 )   $ 2,209      $ 2,950      NM     (25 )%

Mexico

    396       346        450      14 %   (23 )

EMEA

    (1,902 )     2,011        1,130      NM     78  

Japan

    128       272        498      (53 )   (45 )

Asia

    2,578       1,651        1,248      56     32  

Latin America

    1,084       638        619      70     3  

Total net income (loss)

  $ (5,253 )   $ 7,127      $ 6,895      NM     3 %

Net income (loss) by product:

           

Securities and Banking

  $ (7,604 )   $ 5,763      $ 5,327      NM     8 %

Transaction Services

    2,215       1,426        1,135      55 %   26  

Other

    136       (62 )      433      NM     NM  

Total net income (loss)

  $ (5,253 )   $ 7,127      $ 6,895      NM     3 %

NM Not meaningful.

 

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2007 vs. 2006

Revenues, net of interest expense decreased 61% driven by $20.4 billion of pretax write-downs and losses related to deterioration in the mortgage-backed and credit markets. The losses consisted primarily of approximately $18.9 billion related to direct subprime-related exposures, of which approximately $14.2 billion was related to exposures in the most senior tranches of collateralized debt obligations, which are collateralized by asset-backed securities, derivatives on asset-backed securities or both. The losses were also driven by write-downs of approximately $1.5 billion pretax, net of underwriting fees, on funded and unfunded highly leveraged finance commitments. Of this amount, approximately $1.3 billion of impairment was recognized for transactions that had been funded as of December 31, 2007, and $0.2 billion of impairment was recognized on transactions that were unfunded as of December 31, 2007. Securities and Banking’s remaining $37.3 billion in U.S. subprime net direct exposure as at December 31, 2007 consisted of (a) approximately $8.0 billion of subprime-related exposures in its lending and structuring business and (b) approximately $29.3 billion of net exposures to the super senior tranches of collateralized debt obligations which are collateralized by asset-backed securities, derivatives on asset-backed securities or both. See “Exposure to Real Estate” on page 48 for a further discussion. The decreases were offset partially by increased revenues in Equity Markets, from cash trading and strong growth in equity finance, in Advisory from strong deal volumes, in Equity Underwriting and in Lending. Transaction Services revenues increased 31% reflecting growth in liability balances, transaction volumes and assets under custody mainly in Cash Management and Securities and Funds Services. Average liability balances grew 29% to $245 billion in 2007 vs. 2006 due to growth across all regions, reflecting positive flow from new and existing customers.

Operating expenses increased 14% due to higher business volumes, higher non-incentive compensation staff expenses and increased costs driven by The Bisys Group Inc., Nikko Cordial, Grupo Cuscatlan, and ATD acquisitions. Operating expenses also increased driven by the implementation of a headcount reduction plan to reduce ongoing expenses. This resulted in a $438 million pretax charge to compensation and benefits in connection with headcount reductions. Expense growth in 2007 was favorably affected by the absence of a $354 million charge related to the initial adoption of SFAS 123(R) in 2006 and a $300 million pretax release of litigation reserves in 2007.

The provision for credit losses increased approximately $1 billion, driven by higher net credit losses, mainly from loans with subprime-related direct exposure, and a higher net charge to increase loan loss and unfunded lending commitment reserves reflecting a slight weakening in overall portfolio credit quality, as well as loan loss reserves for specific counterparties. Subprime-related loans accounted for approximately $860 million of credit costs in 2007, of which $704 million was recorded in the fourth quarter.

 

2006 vs. 2005

Revenues, net of interest expense, increased, driven by broad-based growth across products, particularly in EMEA, Asia and Latin America. Fixed Income Markets revenue increases reflected growth in emerging markets trading, municipals, foreign exchange and credit products. Equity Markets revenues increased, driven by strong growth globally, including cash trading, derivatives products and convertibles. Investment Banking revenue growth was driven by higher debt and equity underwriting revenues and increased advisory fees. These gains were partially offset by a revenue decline in Lending, as improved credit conditions led to lower hedging results, the 2005 $386 million pretax gain on the sale of Nikko Cordial shares and lower revenue in Commodities. Transaction Services revenues increased 22%, mainly in Cash Management and Securities and Funds Services, driven by growth in customer liabilities, up $39 billion or 24%, and assets under custody, up $1.8 trillion or 21%. In addition, higher interest rates, increased volumes, and higher sales contributed to the growth.

Operating expenses were impacted by $764 million of SFAS 123(R) charges and higher production-related incentive compensation, as well as a growth in headcount and increased investment spending on strategic growth initiatives.

The provision for credit losses increased, reflecting growth in loans and unfunded lending commitments and an update to historical data used for certain loss estimates.


 

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MARKETS & BANKING OUTLOOK

Markets & Banking (CMB) is significantly affected by the levels of activity in, and volatility of, the global capital markets, which are influenced by macroeconomic and political developments, among other factors. The CMB business could be negatively impacted by the “Economic Environment” discussed on page 5.

As 2008 begins to unfold, the market perception is that the credit environment will deteriorate. While corporate default rates are near historic lows, they are projected to increase in 2008. Classified loan exposures are on a rising trend and current credit markets negatively affect the backlog of leveraged loans continues to be an overhang for the business and the market. Deterioration in the U.S. mortgage market may continue and could impact the uncertainty of mortgage securities pricing and trading. Pricing in the leveraged loan market may also continue to decline.

In 2008, Securities and Banking initiatives will continue to focus on the delivery of financial solutions tailored to clients’ needs and the targeting of client segments with strong growth prospects. The development of additional global emerging markets leaders and the continued role of the sovereign wealth funds are likely to be major drivers of investment banking revenues and in particular cross-border mergers and acquisitions and associated capital raising. Revenues from derivatives and foreign exchange are also likely to benefit as clients seek to minimize the financial risk to their businesses from market volatility.

The business also intends to leverage its position to deliver global access to local markets. The business will continue its multi-year build-out of structured-products capabilities in equities, commodities and currencies, which began to show a contribution to Securities and Banking’s performance in 2007 and should become a platform for future growth.

In 2008, Transaction Services will focus on generating organic revenue and earnings growth, leveraging its strong global platform. The rising needs of emerging markets and of the world’s increasingly sophisticated capital markets are expected to continue to drive part of this growth, as well as clients’ continued consolidation of their cash management relationships. This business growth is expected to be partially offset by the impact of lower interest rates and potentially lower asset values.

Throughout 2008, CMB will look to optimize its portfolio of businesses by allocating capital to the higher-returning businesses and clients. In addition, further expense synergies are expected to be achieved through more re-engineering of operations and processes within CMB and across Citigroup as a whole.

In 2008, the business expects higher state and local tax expense than was incurred in 2007. The level will depend on the geographic mix of income. Partially offsetting this additional expense is an expected increase in benefits from tax-advantaged investments.


 

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GLOBAL WEALTH MANAGEMENT

 

LOGO

Global Wealth Management is composed of the Smith Barney Private Client businesses (including Citigroup Wealth Advisors, Nikko Cordial, Quilter and the legacy Citicorp Investment Services business), Citi Private Bank and Citi Investment Research.

 

In millions of dollars   2007    2006    2005     

% Change

2007 vs. 2006

   

% Change

2006 vs. 2005

 

Net interest revenue

  $ 2,174    $ 1,922    $ 1,695      13 %   13 %

Non-interest revenue

    10,812      8,255      6,989      31     18  

Revenues, net of interest expense

  $ 12,986    $ 10,177    $ 8,684      28 %   17 %

Operating expenses

    9,806      8,006      6,696      22     20  

Provision for loan losses

    100      24      29      NM     (17 )

Income before taxes and minority interest

  $ 3,080    $ 2,147    $ 1,959      43 %   10 %

Income taxes

    1,034      703      715      47     (2 )

Minority interest, net of taxes

    72                     

Net income

  $ 1,974    $ 1,444    $ 1,244      37 %   16 %

Revenues, net of interest expense by region:

            

U.S.

  $ 9,787    $ 8,793    $ 7,628      11 %   15 %

Mexico

    153      129      124      19     4  

EMEA

    543      331      295      64     12  

Japan

    1,244           (6 )        100  

Asia

    1,038      738      440      41     68  

Latin America

    221      186      203      19     (8 )

Total revenues

  $ 12,986    $ 10,177    $ 8,684      28 %   17 %

Net income (loss) by region:

            

U.S.

  $ 1,416    $ 1,210    $ 1,141      17 %   6 %

Mexico

    46      36      44      28     (18 )

EMEA

    77      23      8      NM     NM  

Japan

    95           (82 )        100  

Asia

    314      163      116      93     41  

Latin America

    26      12      17      NM     (29 )

Total net income

  $ 1,974    $ 1,444    $ 1,244      37 %   16 %

Key indicators: (in billions of dollars)

            

Total assets under fee-based management

  $ 507    $ 399    $ 346      27 %   15 %

Total client assets

    1,784      1,438      1,310      24     10  

Net client asset flows

    15      14      29      7     (52 )

Financial advisors (FA) / bankers (actual number)

    15,454      13,694      13,916      13     (2 )

Annualized revenue per FA / banker (in thousands of dollars)

    880      740      679      19     9  

Average deposits and other customer liability balances

    117      104      93      13     12  

Average loans

    54      42      40      29     5  

NM Not meaningful.

 

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2007 vs. 2006

Revenues, net of interest expense, increased 28% primarily due to the impact of acquisitions; an increase in fee-based revenues reflecting the continued advisory-based strategy; an increase in international revenues driven by strong Capital Markets activity in Asia and growth in investments revenue in EMEA; as well as strong U.S. branch transactional revenue and syndicate sales.

Total client assets, including assets under fee-based management, increased $346 billion, or 24%, reflecting the inclusion of client assets from the Nikko Cordial and the Quilter acquisitions, as well as organic growth. Net flows increased slightly compared to the prior year. Global Wealth Management had 15,454 financial advisors/bankers as of December 31, 2007, compared with 13,694 as of December 31, 2006, driven by the Nikko Cordial and Quilter acquisitions, as well as hiring in the Private Bank.

Operating expenses increased 22% primarily due to the impact of acquisitions, higher variable compensation associated with the increase in revenues, increased customer activity and charges related to headcount reductions. Expense growth in 2007 was favorably affected by the absence of the charge related to the initial adoption of SFAS 123(R) in the first quarter of 2006.

The provision for loan losses increased $76 million in 2007, primarily driven by portfolio growth and a reserve for specific non-performing loans in the Private Bank.

Net income growth also reflected a $65 million APB 23 benefit in the Private Bank in 2007 and the absence of a $47 million tax benefit resulting from the resolution of 2006 Tax Audits.

 

2006 vs. 2005

Revenues, net of interest expense, increased 17% primarily due to an increase in fee-based and recurring revenues, reflecting the continued shift toward offering fee-based advisory products and services in Smith Barney. Smith Barney’s launch of the Tiered-Pricing Program in September 2006 also drove revenue growth, along with strength in the Managed Accounts, Mutual Fund and Annuity businesses. Strong growth in Asia led an increase in Private Bank net revenues, driven by an increase in transactional revenues from strong Capital Markets activity. Results also reflected the acquisition of Legg Mason in December 2005.

Total client assets increased $128 billion, or 10%. Total assets under fee-based management were up $53 billion, or 15%, driven by net client asset flows and positive market action. Net flows were down compared to the prior year primarily on client attrition. Global Wealth Management had 13,694 financial advisors/bankers as of December 31, 2006, compared with 13,916 as of December 31, 2005.

Operating expenses increased as the absence of Japan expenses was offset by higher compensation expense, including $373 million of SFAS 123(R) costs; investment spending to expand onshore markets; and integration costs of the Legg Mason retail brokerage business.

Citigroup Investment Research

Citigroup Investment Research provides independent client-focused research to individuals and institutions around the world. The majority of expense for this organization is charged to the Global Equities business in Securities and Banking and to Smith Barney.

GLOBAL WEALTH MANAGEMENT OUTLOOK

Global Wealth Management is affected by the levels of activity in the capital markets, which are influenced by macro-economic and political developments, among other factors.

The Global Wealth Management business could also be negatively impacted by the “Economic Environment” discussed on page 5.

In 2008, Global Wealth Management expects to see continued asset and revenue growth resulting from the 2007 investments in its wealth management platform, as well as from past acquisitions. However, declines in asset values due to economic conditions could adversely impact asset and revenue levels.

Investments are expected to continue in 2008 and will include initiatives intended to improve technology platforms, strengthen our global competitive position and improve Financial Advisor retention.


 

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ALTERNATIVE INVESTMENTS

 

LOGO

Alternative Investments (CAI) manages capital on behalf of Citigroup, as well as for third-party institutional and high-net-worth investors. CAI is an integrated alternative investment platform that manages a wide range of products across five asset classes, including private equity, hedge funds, real estate, structured products and managed futures.

 

In millions of dollars   2007     2006      2005     

% Change

2007 vs. 2006

   

% Change

2006 vs. 2005

 

Net interest revenue

  $ (11 )   $ 259      $ 261      NM     (1 )%

Non-interest revenue

    2,114       2,642        3,169      (20 )%   (17 )

Total revenues, net of interest expense

  $ 2,103     $ 2,901      $ 3,430      (28 )%   (15 )%

Net realized and net change in unrealized gains

  $ 1,417     $ 2,107      $ 2,582      (33 )%   (18 )%

Fees, dividends and interest

    262       449        509      (42 )   (12 )

Other

    (200 )     (118 )      (1 )    (69 )   NM  

Total proprietary investment activities revenues

  $ 1,479     $ 2,438      $ 3,090      (39 )%   (21 )%

Client revenues (1)

    624       463        340      35     36  

Total revenues, net of interest expense

  $ 2,103     $ 2,901      $ 3,430      (28 )%   (15 )%

Operating expenses

    913       763        633      20     21  

Provision for loan losses

          (13 )      (2 )    NM     NM  

Income before taxes and minority interest

  $ 1,190     $ 2,151      $ 2,799      (45 )%   (23 )%

Income taxes

  $ 431     $ 706      $ 950      (39 )%   (26 )%

Minority interest, net of taxes

    87       169        412      (49 )   (59 )

Net income

  $ 672     $ 1,276      $ 1,437      (47 )%   (11 )%

Revenue by product:

           

Client (1)

  $ 624     $ 463      $ 340      35 %   36 %

Private Equity

  $ 1,660     $ 1,743      $ 2,563      (5 )%   (32 )%

Hedge Funds

    (99 )     211        69      NM     NM  

Other

    (82 )     484        458      NM     6  

Proprietary

  $ 1,479     $ 2,438      $ 3,090      (39 )%   (21 )%

Total

  $ 2,103     $ 2,901      $ 3,430      (28 )%   (15 )%

Key indicators: (in billions of dollars)

           

Capital under management:

           

Client

  $ 48.7     $ 38.5      $ 25.4      26 %   52 %

Proprietary

    10.5       10.7        12.2      (2 )   (12 )

Total

  $ 59.2     $ 49.2      $ 37.6      20 %   31 %

 

(1) Includes fee income.

NM Not meaningful.

 

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The Proprietary Portfolio of CAI consists of private equity, single- and multi-manager hedge funds, real estate and Legg Mason, Inc. (Legg Mason) preferred shares. Private equity, which constitutes the largest proprietary investments on both a direct and an indirect basis, is in the form of equity and mezzanine debt financing in companies across a broad range of industries worldwide, including investments in developing economies. Such investments include Citigroup Venture Capital International Brazil, LP (CVC/Brazil, formerly CVC/Opportunity Equity Partners, LP), which has invested primarily in companies privatized by the government of Brazil in the mid-1990s.

The Client Portfolio is composed of single- and multi-manager hedge funds, real estate, managed futures, private equity, and a variety of leveraged fixed income products (credit structures). Products are distributed to investors directly by CAI and through Citigroup GWM’s Private Bank and Smith Barney platform. Revenue includes management and performance fees earned on the portfolio.

Investments held by investment company subsidiaries (including CVC/Brazil) are carried at fair value, with the net change in unrealized gains and losses recorded in income. The Company’s investment in CVC/Brazil is subject to a variety of unresolved matters, including pending litigation involving some of its portfolio companies, which could affect future valuations of these companies. Certain private equity investments in companies located in developing economies that are not held in investment company subsidiaries are either carried at cost or accounted for by the equity method, with unrealized losses recognized in income for other-than-temporary declines in value. Investments classified as available-for-sale are carried at fair value with the net change in unrealized gains and losses recorded in equity as accumulated other comprehensive income, with unrealized losses recognized in income for other-than-temporary declines in value. All other investment activities are primarily carried at fair value, with the net change in unrealized gains and losses recorded in income.

The investment in Legg Mason resulted from the sale of Citigroup’s Asset Management business to Legg Mason on December 1, 2005. Sale proceeds included a combination of Legg Mason common and convertible preferred equity securities valued at $2.298 billion. The total equivalent number of common shares was 18.7 million, of which 10.3 million were sold in March 2006. No shares were sold during 2007 and 6.8 million shares were sold during 2008 up until February 21, 2008. As of February 21, 2008, Citigroup owns 1.6 million shares, of which 0.9 million shares are subject to cash-settled equity swaps at a strike price of $72 per share. The Legg Mason equity securities are classified on Citigroup’s Consolidated Balance Sheet as Trading account assets.

On July 2, 2007, the Company completed the acquisition of Old Lane Partners, LP and Old Lane Partners, GP, LLC (Old Lane). Old Lane is the manager of a global, multi-strategy hedge fund and a private equity fund with total assets under management and private equity commitments of approximately $4.5 billion.

Alternative Investments, through its Global Credit Structures investment center, is the investment manager for seven Structured Investment Vehicles (SIVs). On December 13, 2007, the Company announced its decision, not legally required, to commit to providing a support facility that would resolve uncertainties regarding senior debt repayment facing the Citi-advised SIVs. The Company’s decision was a response to the ratings review for a possible downgrade of the outstanding senior debt of the SIVs announced by two rating agencies, and the continued reduction of liquidity in the SIV-related asset-backed commercial paper and medium-term note markets. These markets are the traditional funding sources for the SIVs. The Company’s actions are designed to support the current ratings of the SIVs’ senior debt and to allow the SIVs to continue to pursue their current orderly asset reduction plan. As a result of this commitment, the Company became the SIVs’ primary beneficiary and consolidated the SIVs’ assets and liabilities onto its balance sheet. On February 12, 2008, Citigroup finalized the terms of the support facility, which takes the form of a commitment to provide mezzanine capital to the SIV vehicles in the event the market value of their capital notes approaches zero.


 

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2007 vs. 2006

Revenues, net of interest expense, of $2.103 billion for 2007 decreased $798 million, or 28%.

Total proprietary revenues, net of interest expense, of $1.479 billion for 2007 were composed of revenues from private equity of $1.660 billion, other investment activity of $(82) million and hedge funds of $(99) million. Private equity revenue decreased $83 million from 2006, driven by lower gains and higher funding costs. Other investment activities revenue decreased $566 million from 2006, largely due to the 2006 liquidation of Citigroup’s investment in St. Paul shares and MetLife shares and a lower market value on Legg Mason shares in 2007. Hedge fund revenue decreased $310 million, largely due to lower investment performance. Client revenues increased $161 million, reflecting increased management fees from a 40% growth in average client capital under management, and the acquisition of Old Lane.

Operating expenses in 2007 of $913 million increased $150 million from 2006, primarily due to higher employee-related expenses and the acquisition of Old Lane.

Minority interest, net of taxes, in 2007 of $87 million decreased $82 million from 2006, primarily due to lower private equity gains related to underlying investments held by consolidated majority-owned legal entities. The impact of minority interest is reflected in fees, dividends, and interest, and net realized and net change in unrealized gains/(losses) consistent with proceeds received by minority interests.

Net income in 2006 reflects higher tax benefits including $58 million resulting from the resolution of the Federal Tax Audit in 2006.

Proprietary capital under management of $10.5 billion decreased approximately $200 million from 2006 due to capital reductions in certain hedge fund strategies partially offset by new investments in private equity.

Client capital under management of $48.7 billion in 2007 increased $10.2 billion from 2006, due to the acquisition of Old Lane and capital raised offset by lower investment performance in fixed income-oriented products.

 

2006 vs. 2005

Revenues, net of interest expense, of $2.901 billion for 2006 decreased $529 million, or 15%.

Total proprietary revenues, net of interest expense, were composed of revenues from private equity of $1.743 billion, other investment activity of $484 million and hedge funds of $211 million. Private equity revenue declined $820 million from 2005, primarily driven by the absence of prior-year gains

from the sale of portfolio assets. Other investment activities revenue increased $26 million from 2005, largely due to realized gains from the liquidation of Citigroup’s investment in MetLife shares and real estate investment returns, partially offset by lower realized gains from the sale of Citigroup’s investment in St. Paul shares. Hedge fund revenue increased $142 million, led by higher investment performance and an increased asset base. Client revenues increased $123 million, reflecting increased management and performance fees from a 39% growth in average client capital under management.

Operating expenses in 2006 increased from 2005, primarily due to higher employee-related expenses including the impact of SFAS 123(R).

Minority interest, net of taxes, declined on the absence of prior-year private equity gains related to underlying investments held by consolidated majority-owned legal entities. The impact of minority interest is reflected in fees, dividends, and interest, and net realized and net change in unrealized gains/(losses) consistent with proceeds received by minority interests.

Proprietary capital under management decreased $1.5 billion, primarily driven by the sale of Citigroup’s remaining holdings of St. Paul and MetLife shares and the partial sell down of Legg Mason shares in the first quarter of 2006, which were partially offset by investments in private equity and hedge funds.

Client capital under management increased $13.1 billion due to inflows from institutional and high-net-worth clients in private equity, real estate and hedge funds.


 

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CORPORATE/OTHER

 

Corporate/Other includes treasury results, unallocated corporate expenses, offsets to certain line-item reclassifications reported in the business segments (intersegment eliminations), the results of discontinued operations, the cumulative effect of accounting change and unallocated taxes.

 

In millions of dollars   2007     2006      2005  

Net interest revenue

  $ (471 )   $ (486 )    $ (342 )

Non-interest revenue

    (426 )     (463 )      (238 )

Revenues, net of interest expense

  $ (897 )   $ (949 )    $ (580 )

Restructuring expense

    1,528               

Operating expenses

    355       200        383  

Provisions for loan losses and for benefits and claims

    (1 )     6        (2 )

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

  $ (2,779 )   $ (1,155 )    $ (961 )

Income tax benefits

    (1,077 )     (502 )      (309 )

Minority interest, net of taxes

    (58 )     1        15  

Loss from continuing operations before cumulative effect of accounting change

  $ (1,644 )   $ (654 )    $ (667 )

Income from discontinued operations

          289        4,832  

Cumulative effect of accounting change

                 (49 )

Net income (loss)

  $ (1,644 )   $ (365 )    $ 4,116  

2007 vs. 2006

Revenues, net of interest expense, improved primarily due to improved treasury results and a gain on the sale of certain corporate-owned assets, partially offset by higher intersegment eliminations.

Restructuring expenses. See Note 10 to the Consolidated Financial Statements on page 138 for details on the 2007 restructuring charge.

Other operating expenses increased primarily due to increased staffing, technology and other unallocated expenses, partially offset by higher intersegment eliminations.

Income tax benefits increased due to a higher pretax loss in 2007, offset by a prior-year tax reserve release of $69 million relating to the resolution of the 2006 Tax Audits.

Discontinued operations represent the operations in the Company’s Sale of the Asset Management Business and the Sale of the Life Insurance and Annuities Business. For 2006, income from discontinued operations included gains and tax benefits relating to the final settlement of the Life Insurance and Annuities and Asset Management Sale Transactions and a gain from the Sale of the Asset Management Business in Poland, as well as a tax reserve release of $76 million relating to the resolution of the 2006 Tax Audits. See Note 3 to the Consolidated Financial Statements on page 125.

 

2006 vs. 2005

Revenues, net of interest expense, declined primarily due to lower intersegment eliminations.

Operating expenses declined, primarily due to lower intersegment eliminations, partially offset by increased staffing and technology costs.

Income tax benefits increased due to a higher pretax loss in the current year, a tax reserve release of $61 million relating to the resolution of the Federal Tax Audit and a release of $8 million relating to the resolution of the New York Tax Audits.

Discontinued operations represent the operations in the Company’s Sale of the Asset Management Business and the Sale of the Life Insurance and Annuities Business. For 2006, income from discontinued operations included gains and tax benefits relating to the final settlement of the Life Insurance and Annuities and Asset Management Sale Transactions and a gain from the Sale of the Asset Management Business in Poland. Tax benefits included a tax reserve release of $59 million relating to the resolution of the Federal Tax Audit and a tax benefit of $17 million related to the resolution of the New York Tax Audits. See Note 3 to the Consolidated Financial Statements on page 125.


 

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RISK FACTORS

 

Economic conditions. The profitability of Citigroup’s businesses may be affected by global and local economic conditions, such as the levels and liquidity of the global financial and other asset markets, the absolute and relative level and volatility of interest rates and equity prices, investor sentiment, inflation, and the availability and cost of credit.

The Company generally maintains large trading portfolios in the fixed income, currency, commodity and equity markets and has significant investment positions, including investments held by its private equity business. In addition, the Company periodically holds portfolios in advance of syndication or distribution activities. The revenues derived from these portfolios are directly affected by economic and market conditions (including without limitation through the valuation of these portfolios). The valuation of a significant portion of the trading portfolios is valued using models whose inputs are not observable in the market and are therefore based on management’s best estimate.

The credit quality of Citigroup’s on-balance-sheet assets and off-balance-sheet exposures is also affected by economic conditions, as more loan delinquencies would likely result in a higher level of charge-offs and increased provisions for credit losses, and lower levels of other revenues adversely affecting the Company’s earnings. The Company’s consumer businesses are particularly affected by factors such as: prevailing interest rates; the rate of unemployment; the level of consumer confidence; residential real estate values, especially in the U.S.; changes in consumer spending; and the number of personal bankruptcies.

Credit, market and market liquidity risk. As discussed above, the Company’s earnings may be impacted through its market risk and credit risk positions and by changes in economic conditions. In addition, Citigroup’s earnings are dependent upon the extent to which management can successfully implement effective risk management processes and manage its positions within the global markets. In particular environments, the Company may not be able to mitigate its risk exposures as effectively as desired, and may have unwanted exposures to certain risk factors.

The Company’s earnings are also dependent upon its ability to properly value financial instruments. In certain illiquid markets, processes to ascertain value and estimates of value, both of which require substantial elements of judgment, are required. The Company’s earnings are also dependent upon how effectively it assesses the cost of credit and manages its portfolio of risk concentrations. In addition to the direct impact of the successful management of these risk factors, management effectiveness is taken into consideration by the rating agencies, which determine the Company’s own credit ratings and thereby affect the Company’s cost of funds. Moreover, actions by third parties, such as rating agency downgrades of instruments to which the Company has exposure and independent actions by market participants, can result in reduced liquidity and valuations of those instruments.

Competition. Merger activity in the financial services industry has produced companies that are capable of offering a wide array of financial products and services at competitive prices. Globalization of the capital markets and financial services industries exposes Citigroup to competition at both the global and local levels. In addition, technological advances and the growth of e-commerce and regulatory developments have made it possible for non-depository institutions to offer products and services that

traditionally were banking products. Citigroup’s ability to grow its businesses, and therefore its earnings, is affected by these competitive pressures and is dependent on Citigroup’s ability to attract and retain talented and dedicated employees.

Country risk. Citigroup’s international revenues are subject to risk of loss from unfavorable political and diplomatic developments, currency fluctuations, social instability, and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps and tax policies. In addition, revenues from the trading of international securities and investment in international securities may be subject to negative fluctuations as a result of the above factors. The impact of these fluctuations could be accentuated because certain international trading markets, particularly those in emerging market countries, are typically smaller, less liquid and more volatile than U.S. trading markets.

For geographic distributions of net income, see page 20. For a discussion of international loans, see Note 17 to the Consolidated Financial Statements on page 145 and “Country and Cross-Border Risk Management Process” on page 65.

Operational risk. Citigroup is exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical and record-keeping errors, integration of numerous acquired businesses, and computer/telecommunications systems malfunctions. Given the high volume of transactions at Citigroup, certain errors may be repeated or compounded before they are discovered and rectified. In addition, the Company’s necessary dependence upon automated systems to record and process its transaction volume may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. The Company may also be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, natural disasters, acts of terrorism, epidemics, computer viruses, and electrical/telecommunications outages), which may give rise to losses in service to customers and/or monetary loss to the Company. All of these risks are also applicable where the Company relies on outside vendors to provide services to it and its customers.

Fiscal and monetary policies. The Company’s businesses and earnings are affected by the policies adopted by regulatory authorities and bodies of the United States and other governments. For example, in the United States, policies of the Federal Reserve Board directly influence the rate of interest paid by commercial banks on their interest-bearing deposits and also may affect the value of financial instruments held by the Company. In addition, such changes in monetary policy may affect the credit quality of the Company’s customers. The actions of the Federal Reserve Board and international central banking authorities directly impact the Company’s cost of funds for lending, capital raising and investment activities.


 

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MANAGING GLOBAL RISK


 

 

Reputational and legal risk. Various issues may give rise to reputational risk and cause harm to the Company and its business prospects. These issues include appropriately dealing with potential conflicts of interest; legal and regulatory requirements; ethical issues; money laundering laws; privacy laws; information security policies; sales and trading practices; and conduct by companies in which we hold strategic investments or joint venture partners. Failure to address these issues appropriately could also give rise to additional legal risk to the Company, which could increase the number of litigation claims and the amount of damages asserted against the Company, or subject the Company to regulatory enforcement actions, fines and penalties.

Certain regulatory considerations. As a worldwide business, Citigroup and its subsidiaries are subject to extensive regulation, new legislation and changing accounting standards and interpretations thereof in many jurisdictions. Legislation is introduced, including tax, consumer protection, privacy and other legislation, from time to time in Congress, in the states and in foreign jurisdictions that may change banking and financial services laws and the operating environment of the Company and its subsidiaries in substantial and unpredictable ways. The Company cannot determine whether such legislation will be enacted and the ultimate effect that it would have on the Company’s results.

 

Citigroup’s risk management framework is designed to balance strong corporate oversight with well-defined independent risk management functions within each business.

The Citigroup Chief Risk Officer is responsible for:

 

 

establishing standards for the measurement and reporting of risk,

 

identifying and monitoring risk on a Company-wide basis,

 

managing and compensating the senior independent risk managers,

 

ensuring that the risk function has adequate staffing, analytics and expertise, and

 

approving business-level risk management policies.

The risk managers supporting each of our businesses are responsible for establishing and implementing risk management policies and practices within their business, overseeing and critically evaluating the risk in their business, and for applying risk control policies that enhance and address the requirements of the business.

RISK AGGREGATION AND RISK CONVERGENCE

While the major risk factors are described individually on the following pages, these risks often need to be reviewed and managed in conjunction with one another and across the various businesses.

The Chief Risk Officer, as noted above, monitors and controls major risk exposures and concentrations across the organization. Specifically, this means looking at like risks across businesses (“risk aggregation”) and looking at the confluence of risk types within and across businesses (“risk convergence”).

During the course of 2007, including in the fourth quarter, Risk Management, working with input from the businesses and Finance, provided enhanced periodic updates to senior management and the Board of Directors on significant potential exposures across the Citigroup organization arising from risk concentrations (e.g., residential real estate), financial market participants (e.g., monoline insurers), and other systemic issues (e.g., commercial paper markets). These risk assessments are forward-looking exercises, intended to inform senior management and the Board of Directors about the potential economic impacts to Citi that may occur, directly or indirectly, as a result of hypothetical scenarios. These exercises are a supplement to the standard limit-setting and risk capital exercises described later in this section, as the risk assessment process incorporates events in the marketplace and within Citi that impact our outlook on the form, magnitude, correlation and timing of identified risks that may arise. In addition to enhancing awareness and understanding of potential exposures, these assessments then serve as the starting point for developing risk management and mitigation strategies.

RISK CAPITAL

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

 

 

“Economic losses” include losses that appear on the income statement and fair value adjustments to the financial statements, as well as any further declines in value not captured on the income statement.

 

“Unexpected losses” are the difference between potential extremely severe losses and Citigroup’s expected (average) loss over a one-year time period.

 

“Extremely severe” is defined as potential loss at a 99.97% confidence level, based on the distribution of observed events and scenario analysis.

The drivers of “economic losses” are risks, which can be broadly categorized as credit risk (including cross-border risk), market risk and operational risk:


 

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

 

Market risk losses arise from fluctuations in the market value of trading and non-trading positions, including changes in value resulting from fluctuations in rates.

 

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

These risks are measured and aggregated within businesses and across Citigroup to facilitate the understanding of the Company’s exposure to extreme downside events.

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

 

sales and trading

 

derivatives

 

securities transactions

 

settlement

 

when the Company acts as an intermediary on behalf of its clients and other third parties.

LOGO

LOGO

 

LOGO

LOGO


 

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LOANS OUTSTANDING

 

In millions of dollars at year end   2007     2006 (2)     2005 (2)     2004 (2)     2003 (2)  

Consumer loans

         

In U.S. offices:

         

Mortgage and real estate (1)

  $ 251,927     $ 225,900     $ 192,045     $ 161,755     $ 129,412  

Installment, revolving credit, and other

    140,797       131,008       127,432       134,128       135,993  

Lease financing

    3,151       4,743       5,095       6,030       8,523  
    $ 395,875     $ 361,651     $ 324,572     $ 301,913     $ 273,928  

In offices outside the U.S.:

         

Mortgage and real estate (1)

  $ 55,152     $ 44,457     $ 39,619     $ 39,601     $ 28,743  

Installment, revolving credit, and other

    139,369       105,393       89,559       92,647       76,037  

Lease financing

    1,124       960       866       1,619       2,216  
    $ 195,645     $ 150,810     $ 130,044     $ 133,867     $ 106,996  
  $ 591,520     $ 512,461     $ 454,616     $ 435,780     $ 380,924  

Unearned income

    787       460       4       (554 )     (992 )

Consumer loans—net

  $ 592,307     $ 512,921     $ 454,620     $ 435,226     $ 379,932  

Corporate loans

         

In U.S. offices:

         

Commercial and industrial

  $ 38,870     $ 27,437     $ 22,081     $ 14,437     $ 15,207  

Lease financing

    1,630       2,101       1,952       1,879       2,010  

Mortgage and real estate (1)

    2,220       168       29       100       95  
    $ 42,720     $ 29,706     $ 24,062     $ 16,416     $ 17,312  

In offices outside the U.S.:

         

Commercial and industrial

  $ 116,145     $ 105,872     $ 80,116     $ 77,052     $ 62,884  

Mortgage and real estate (1)

    4,156       5,334       5,206       3,928       1,751  

Loans to financial institutions

    20,467       21,827       16,889       12,921       12,063  

Lease financing

    2,292       2,024       2,082       2,485       2,859  

Governments and official institutions

    442       1,857       882       1,100       1,496  
    $ 143,502     $ 136,914     $ 105,175     $ 97,486     $ 81,053  
  $ 186,222     $ 166,620     $ 129,237     $ 113,902     $ 98,365  

Unearned income

    (536 )     (349 )     (354 )     (299 )     (291 )

Corporate loans—net

  $ 185,686     $ 166,271     $ 128,883     $ 113,603     $ 98,074  

Total loans—net of unearned income

  $ 777,993     $ 679,192     $ 583,503     $ 548,829     $ 478,006  

Allowance for loan losses—on drawn exposures

    (16,117 )     (8,940 )     (9,782 )     (11,269 )     (12,643 )

Total loans—net of unearned income

    and allowance for credit losses

  $ 761,876     $ 670,252     $ 573,721     $ 537,560     $ 465,363  

Allowance for loan losses as a percentage of total loans—

    net of unearned income

    2.07 %     1.32 %     1.68 %     2.05 %     2.64 %

 

(1) Loans secured primarily by real estate.
(2) Reclassified to conform to current year’s presentation.

OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS

 

In millions of dollars at year end   2007    2006    2005    2004    2003

Other real estate owned (1)(2)

             

Consumer

  $ 707    $ 385    $ 279    $ 320    $ 437

Corporate

    512      316      150      126      105

Total other real estate owned

  $ 1,219    $ 701    $ 429    $ 446    $ 542

Other repossessed assets (3)

  $ 99    $ 75    $ 62    $ 93    $ 151

 

(1) Represents repossessed real estate, carried at lower of cost or fair value less costs to sell.
(2) Includes the impact of foreclosures on subprime residential mortgages in the U.S. real estate portfolio.
(3) Primarily commercial transportation equipment and manufactured housing, carried at lower of cost or fair value less costs to sell.

 

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DETAILS OF CREDIT LOSS EXPERIENCE

 

In millions of dollars at year end   2007     2006     2005     2004     2003  

Allowance for loan losses at beginning of year

  $ 8,940     $ 9,782     $ 11,269     $ 12,643     $ 11,101  

Provision for loan losses

         

Consumer

    16,191     $ 6,636     $ 8,224     $ 7,205     $ 7,316  

Corporate

    1,233       102       (295 )     (972 )     730  
    $ 17,424     $ 6,738     $ 7,929     $ 6,233     $ 8,046  

Gross credit losses

         

Consumer (1)

         

In U.S. offices

  $ 5,850     $ 4,510     $ 5,922     $ 6,937     $ 5,783  

In offices outside the U.S.

    5,905       4,717       4,664       3,304       3,270  

Corporate

         

Mortgage and real estate

         

In U.S. offices

                             

In offices outside the U.S.

    3       1             6       27  

Governments and official institutions outside the U.S.

                            111  

Loans to financial institutions

         

In U.S. offices

                             

In offices outside the U.S.

    69       6       10       3       13  

Commercial and industrial

         

In U.S. offices

    632       85       78       52       383  

In offices outside the U.S.

    241       222       287       571       939  
    $ 12,700     $ 9,541     $ 10,961     $ 10,873     $ 10,526  

Credit recoveries

         

Consumer (1)

         

In U.S. offices

  $ 723     $ 691     $ 1,061     $ 1,079     $ 763  

In offices outside the U.S.

    1,249       1,274       842       691       735  

Corporate

         

Mortgage and real estate

         

In U.S. offices

    3       1                    

In offices outside the U.S.

          18       5       3       1  

Governments and official institutions outside the U.S.

    4       7       55       1        

Loans to financial institutions

         

In U.S. offices

                      6        

In offices outside the U.S.

    1       4       15       35       12  

Commercial and industrial

         

In U.S. offices

    49       20       104       100       34  

    In offices outside the U.S.

    220       182       473       357       215  
    $ 2,249     $ 2,197     $ 2,555     $ 2,272     $ 1,760  

Net credit losses

         

In U.S. offices

  $ 5,707     $ 3,883     $ 4,835     $ 5,804     $ 5,369  

In offices outside the U.S.

    4,744       3,461       3,571       2,797       3,397  

Total

  $ 10,451     $ 7,344     $ 8,406     $ 8,601     $ 8,766  

Other—net (2)

  $ 204     $ (236 )   $ (1,010 )   $ 994     $ 2,262  

Allowance for loan losses at end of year

  $ 16,117     $ 8,940     $ 9,782     $ 11,269     $ 12,643  

Allowance for unfunded lending commitments (3)

  $ 1,250     $ 1,100     $ 850     $ 600     $ 600  

Total allowance for loans, leases and unfunded lending commitments

  $ 17,367     $ 10,040     $ 10,632     $ 11,869     $ 13,243  

Net consumer credit losses

  $ 9,783     $ 7,262     $ 8,683     $ 8,471     $ 7,555  

As a percentage of average consumer loans

    1.78 %     1.52 %     2.01 %     2.13 %     2.22 %

Net corporate credit losses/(recoveries)

  $ 668     $ 82     $ (277 )   $ 130     $ 1,211  

As a percentage of average corporate loans

    0.35 %     0.05 %     NM       0.11 %     1.17 %

 

(1) Consumer credit losses primarily relate to U.S. mortgages, revolving credit and installment loans. Recoveries primarily relate to revolving credit and installment loans.
(2) 2007 primarily includes reductions to the loan loss reserve of $475 million related to securitizations and transfers to loans held-for-sale, reductions of $83 million related to the transfer of the U.K. CitiFinancial portfolio to held-for-sale, and additions of $610 million related to the acquisition of Egg, Nikko Cordial, Grupo Cuscatlan and Grupo Financiero Uno. 2006 primarily includes reductions to the loan loss reserve of $429 million related to securitizations and portfolio sales and the addition of $84 million related to the acquisition of the CrediCard portfolio. 2005 primarily includes reductions to the loan loss reserve of $584 million related to securitizations and portfolio sales, a reduction of $110 million related to purchase accounting adjustments from the KorAm acquisition, and a reduction of $90 million from the sale of CitiCapital’s transportation portfolio. 2004 primarily includes the addition of $715 million of loan loss reserves related to the acquisition of KorAm and the addition of $148 million of loan loss reserves related to the acquisition of WMF. 2003 primarily includes the addition of $2.1 billion of loan loss reserves related to the acquisition of the Sears credit card business.
(3) Represents additional credit loss reserves for unfunded corporate lending commitments and letters of credit recorded with Other Liabilities on the Consolidated Balance Sheet.

NM Not meaningful.

 

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CASH-BASIS, RENEGOTIATED, AND PAST DUE LOANS

 

In millions of dollars at year end   2007    2006    2005    2004    2003

Corporate cash-basis loans (1)

             

Collateral dependent (at lower of cost or collateral value)

  $ 11    $ 19    $ 6    $ 7    $ 8

Other (2)

    1,747      516      998      1,899      3,411

Total

  $ 1,758    $ 535    $ 1,004    $ 1,906    $ 3,419

Corporate cash-basis loans (1)

             

In U.S. offices

  $ 266    $ 128    $ 81    $ 254    $ 640

In offices outside the U.S.

    1,492      407      923      1,652      2,779

Total

  $ 1,758    $ 535    $ 1,004    $ 1,906    $ 3,419

Renegotiated loans (includes Corporate and Commercial Business Loans)

             

In U.S. offices

  $ 58    $ 4    $ 22    $ 63    $ 107

In offices outside the U.S.

    60      18      10      20      33

Total

  $ 118    $ 22    $ 32    $ 83    $ 140

Consumer loans on which accrual of interest had been suspended (3)(4)

             

In U.S. offices

  $ 4,857    $ 2,490    $ 2,307    $ 2,485    $ 3,127

In offices outside the U.S.

    2,353      2,022      1,713      2,978      2,958

Total

  $ 7,210    $ 4,512    $ 4,020    $ 5,463    $ 6,085

Accruing loans 90 or more days delinquent (5) (6)

             

In U.S. offices

  $ 2,723    $ 2,260    $ 2,886    $ 3,153    $ 3,298

In offices outside the U.S.

    701      524      391      401      576

Total

  $ 3,424    $ 2,784    $ 3,277    $ 3,554    $ 3,874

 

(1) Excludes purchased distressed loans as they are accreting interest in accordance with Statement of Position 03-3, “Accounting for Certain Loans on Debt Securities Acquired in a Transfer” (SOP 03-3). Prior to 2004, these loans were classified with Other Assets. The carrying value of these loans was $2.399 billion at December 31, 2007, $949 million at December 31, 2006 and $1,120 million at December 31, 2005 and $1,213 million at December 31, 2004. The balance in 2003 was immaterial.
(2) Includes the impact of subprime activity in the U.S. and U.K.
(3) From December 31, 2005 forward, balance includes the impact of the change in the EMEA Consumer Write-Off Policy.
(4) Includes the impact of the deterioration in the U.S. consumer real estate market.
(5) The December 31, 2004 balance includes the Principal Residential Mortgage Inc. (PRMI) data. The December 31, 2003 balance includes the Sears and Home Depot data.
(6) Substantially composed of consumer loans of which $2.454 billion, $1.436 billion, $1.591 billion, $1.867 billion, and $1.643 billion are government-guaranteed student loans and Federal Housing Authority mortgages at December 31, 2007, 2006, 2005, 2004, and 2003, respectively.

 

FOREGONE INTEREST REVENUE ON LOANS (1)

 

In millions of dollars  

In U.S.

offices

  

In non-
U.S.

offices

  

2007

total

Interest revenue that would have been

    accrued at original contractual rates (2)

  $ 379    $ 520    $ 899

Amount recognized as interest revenue (2)

    58      227      285

Foregone interest revenue

  $ 321    $ 293    $ 614

 

(1) Relates to corporate cash-basis, renegotiated loans and consumer loans on which accrual of interest had been suspended.
(2) Interest revenue in offices outside the U.S. may reflect prevailing local interest rates, including the effects of inflation and monetary correction in certain countries.

 

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Table of Contents

 

CONSUMER CREDIT RISK

Within Global Consumer, credit risk management is responsible for establishing the Global Consumer Credit Policy, approving business-specific policies and procedures, monitoring business risk management performance, providing ongoing assessment of portfolio credit risk, ensuring the appropriate level of loan loss reserves, and approving new products and new risks.

Approval policies for a product or business are tailored to internal profitability and credit risk portfolio performance.

CONSUMER PORTFOLIO REVIEW

Citigroup’s consumer loan portfolio is comparatively diversified by both product and location.

LOGO

LOGO

 

In the Consumer portfolio, credit loss experience is often expressed in terms of annualized net credit losses as a percentage of average loans. 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.

U.S. Commercial Business includes loans and leases made principally to small and middle market businesses. These are placed on a non-accrual basis when it is determined that the payment of interest or principal is past due for 90 days or more, except when the loan is well secured and in the process of collection.

The following table summarizes delinquency and net credit loss experience in both the managed and on-balance-sheet consumer loan portfolios. The managed loan portfolio includes held-for-sale and securitized credit card receivables. Only U.S. Cards from a product view and U.S. from a regional view are impacted. Although a managed basis presentation is not in conformity with GAAP, the Company believes managed credit statistics provide a representation of performance and key indicators of the credit card business that are consistent with the way management reviews operating performance and allocates resources. For example, the U.S. Cards business considers both on-balance-sheet and securitized balances (together, its managed portfolio) when determining capital allocation and general management decisions and compensation. Furthermore, investors use information about the credit quality of the entire managed portfolio, as the results of both the on-balance-sheet and securitized portfolios impact the overall performance of the U.S. Cards business. For a further discussion of managed-basis reporting, see Note 23 to the Consolidated Financial Statements on page 156.


 

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Table of Contents

 

Consumer Loan Delinquency Amounts, Net Credit Losses, and Ratios

 

In millions of dollars, except total and average loan amounts in billions  

Total

loans

   90 days or more past due (1)    

Average

loans

   Net credit losses (1)  
Product View:   2007    2007     2006     2005     2007    2007      2006      2005  

U.S.:

                   

U.S. Cards

  $ 42.0    $ 779     $ 718     $ 1,161     $ 38.7