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

 

FINANCIAL INFORMATION

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

2006 in Summary

   4

Events in 2006

   8

Events in 2005

   11

Events in 2004

   13

SIGNIFICANT ACCOUNTING POLICIES
AND SIGNIFICANT ESTIMATES

   14

SEGMENT, PRODUCT AND REGIONAL
NET INCOME

   16

Citigroup Net Income—Segment and Product View

   16

Citigroup Net Income—Regional View

   17

SELECTED REVENUE AND EXPENSE ITEMS

   18

GLOBAL CONSUMER

   20

U.S. Consumer

   21

U.S. Cards

   22

U.S. Retail Distribution

   24

U.S. Consumer Lending

   26

U.S. Commercial Business

   28

U.S. Consumer Outlook

   30

International Consumer

   31

International Cards

   32

International Consumer Finance

   34

International Retail Banking

   36

International Consumer Outlook

   38

Other Consumer

   38

CORPORATE AND INVESTMENT BANKING

   39

Capital Markets and Banking

   40

Transaction Services

   42

Other CIB

   44

Corporate and Investment Banking Outlook

   45

GLOBAL WEALTH MANAGEMENT

   47

Smith Barney

   48

Private Bank

   50

Global Wealth Management Outlook

   52

ALTERNATIVE INVESTMENTS

   54

CORPORATE/OTHER

   57

RISK FACTORS

   58

MANAGING GLOBAL RISK

   59

Risk Capital

   59

Credit Risk Management Process

   60

Loans Outstanding

   61

Other Real Estate Owned and Other Repossessed Assets

   61

Details of Credit Loss Experience

   62

Cash-Basis, Renegotiated, and Past Due Loans

   63

Foregone Interest Revenue on Loans

   63

Consumer Credit Risk

   64

Consumer Portfolio Review

   64

Corporate Credit Risk

   67

Citigroup Derivatives

   68

Global Corporate Portfolio Review

   70

Loan Maturities and Fixed/Variable Pricing

   71

Market Risk Management Process

   71

Operational Risk Management Process

   75

Country and Cross-Border Risk Management Process

   76

BALANCE SHEET REVIEW

   77

Segment Balance Sheet at December 31, 2006

   80

Average Balances and Interest Rates—Assets

   82

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

   83

Analysis of Changes in Interest Revenue

   84

Analysis of Changes in Interest Expense and Net Interest Revenue

   85

CAPITAL RESOURCES AND LIQUIDITY

   86

Capital Resources

   86

Liquidity

   89

Funding

   90

Off-Balance Sheet Arrangements

   92

U.S. Consumer Mortgage Lending

   94

Pension and Postretirement Plans

   95

CORPORATE GOVERNANCE AND CONTROLS AND PROCEDURES

   96

FORWARD-LOOKING STATEMENTS

   97

GLOSSARY OF TERMS

   98

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

   100

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

   101

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM—CONSOLIDATED FINANCIAL STATEMENTS

   102

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

   103

CONSOLIDATED FINANCIAL STATEMENTS

   104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   109

FINANCIAL DATA SUPPLEMENT (Unaudited)

   166

Ratios

   166

Average Deposit Liabilities in Offices Outside the U.S.

   166

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

   166

Short-Term and Other Borrowings

   166

LEGAL AND REGULATORY REQUIREMENTS

   167

Securities Regulation

   168

Capital Requirements

   169

General Business Factors

   169

Properties

   169

Legal Proceedings

   169

Unregistered Sales of Equity Securities and Use of Proceeds

   174

Equity Compensation Plan Information

   175

10-K CROSS-REFERENCE INDEX

   177

CORPORATE INFORMATION

   178

Exhibits and Financial Statement Schedules

   178

CITIGROUP BOARD OF DIRECTORS

   180

 

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Table of Contents

THE COMPANY

 

Citigroup Inc. (Citigroup and, together with its subsidiaries, the Company) is a diversified global financial services holding company whose businesses provide a broad range of financial services to consumer and corporate customers. 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, 2006, the Company had approximately 144,000 full-time and 10,000 part-time employees in the United States and approximately 183,000 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 137 and 138, 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 “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   2006     2005     2004     2003     2002  

Revenues, net of interest expense

  $ 89,615     $ 83,642     $ 79,635     $ 71,594     $ 66,246  

Operating expenses

    52,021       45,163       49,782       37,500       35,886  

Provisions for credit losses and for benefits and claims

    7,955       9,046       7,117       8,924       10,972  

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

  $ 29,639     $ 29,433     $ 22,736     $ 25,170     $ 19,388  

Income taxes

    8,101       9,078       6,464       7,838       6,615  

Minority interest, net of taxes

    289       549       218       274       91  

Income from continuing operations before cumulative effect of
accounting changes

  $ 21,249     $ 19,806     $ 16,054     $ 17,058     $ 12,682  

Income from discontinued operations, net of taxes (1)

    289       4,832       992       795       2,641  

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

          (49 )                 (47 )

Net income

  $ 21,538     $ 24,589     $ 17,046     $ 17,853     $ 15,276  

Earnings per share

         

Basic:

         

Income from continuing operations

  $ 4.33     $ 3.90     $ 3.13     $ 3.34     $ 2.48  

Net income

    4.39       4.84       3.32       3.49       2.99  

Diluted:

         

Income from continuing operations

    4.25       3.82       3.07       3.27       2.44  

Net income

    4.31       4.75       3.26       3.42       2.94  

Dividends declared per common share

  $ 1.96     $ 1.76     $ 1.60     $ 1.10     $ 0.70  

At December 31

         

Total assets

  $ 1,884,318     $ 1,494,037     $ 1,484,101     $ 1,264,032     $ 1,097,590  

Total deposits (3)

    712,041       591,828       561,513       473,614       430,530  

Long-term debt

    288,494       217,499       207,910       162,702       126,927  

Mandatorily redeemable securities of subsidiary trusts (4)

    9,579       6,264       6,209       6,057       6,152  

Common stockholders’ equity

    118,783       111,412       108,166       96,889       85,318  

Total stockholders’ equity

    119,783       112,537       109,291       98,014       86,718  

Ratios:

         

Return on common stockholders’ equity (5)

    18.8 %     22.3 %     17.0 %     19.8 %     18.6 %

Return on total stockholders’ equity (5)

    18.6       22.1       16.8       19.5       18.3  

Return on risk capital (6)

    38       38       35       39    

Return on invested capital (6)

    19       22       17       20          

Tier 1 Capital

    8.59 %     8.79 %     8.74 %     8.91 %     8.47 %

Total Capital

    11.65       12.02       11.85       12.04       11.25  

Leverage (7)

    5.16       5.35       5.20       5.56       5.67  

Common stockholders’ equity to assets

    6.30 %     7.46 %     7.29 %     7.67 %     7.77 %

Total stockholders’ equity to assets

    6.36       7.53       7.36       7.75       7.90  

Dividends declared (8)

    45.5       37.1       49.1       32.2       23.8  

Ratio of earnings to fixed charges and preferred stock dividends

    1.51 x     1.79 x     2.00 x     2.41 x     1.89 x

 

(1) Discontinued operations for 2002 to 2006 include the operations (and associated gain on disposition) described in the Company’s June 24, 2005 announced agreement for the sale of substantially all of its Asset Management business to Legg Mason. The majority of the transaction closed on December 1, 2005. Discontinued operations from 2002 to 2006 also includes the operations (and associated gain) described in the Company’s January 31, 2005 announced agreement for the 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 transaction closed on July 1, 2005. On August 20, 2002, Citigroup completed the distribution to its stockholders of a majority portion of its remaining ownership interest in Travelers Property Casualty Corp. (TPC). Following the distribution, Citigroup began accounting for TPC as discontinued operations. As such, 2002 also reflects TPC as a discontinued operation. See Note 3 to the Consolidated Financial Statements on page 118.
(2) Accounting change of ($49) million in 2005 represents the adoption of Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of SFAS No. 143.” Accounting change of ($47) million in 2002 resulted from the adoption of the remaining provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” (SFAS 142).
(3) Reclassified to conform to the current period’s presentation.
(4) 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 86.
(5) The return on average common stockholders’ equity and return on average total stockholders’ equity are calculated using net income after deducting preferred stock dividends.
(6) Risk capital is a measure of risk levels and the trade-off of risk and return. It 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. Return on risk capital is calculated as annualized income from continuing operations divided by average risk capital. Invested capital is defined as risk capital plus goodwill and intangible assets excluding mortgage servicing rights (which are a component of risk capital). Return on invested capital is calculated using income adjusted to exclude a net internal charge Citigroup levies on the goodwill and intangible assets of each business offset by each business’ share of the rebate of the goodwill and intangible asset charge. Return on risk capital and return on invested capital are non-GAAP performance measures; because they are measures of risk with no basis in GAAP, there is no comparable GAAP measure to which they can be reconciled. Management uses return on risk capital to assess businesses’ operational performance and to allocate Citigroup’s balance sheet and risk capital capacity. Return on invested capital is used to assess returns on potential acquisitions and to compare long-term performance of businesses with differing proportions of organic and acquired growth. See page 59 for a further discussion of risk capital.
(7) Tier 1 Capital divided by adjusted average assets.
(8) Dividends declared per common share as a percentage of net income per diluted share.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

 

2006 IN SUMMARY

In 2006, Citigroup earned $21.2 billion from continuing operations on revenues of $89.6 billion. Income was up 7% from 2005, while diluted EPS from continuing operations increased 11%, with the increment in the growth rate reflecting the benefit from our share repurchase program. Net income, which includes discontinued operations, was $21.5 billion, down 12% from the prior year, reflecting the absence of significant gains on sales of businesses recorded in 2005. Income was diversified by segment, product and region.

During 2006, we continued to execute on our key strategic initiatives, including the opening of a record 1,165 new Citibank and Consumer Finance branches (862 in the International sector and 303 in the U.S.), the continued integration of our businesses, investment in technology, and hiring and training our professionals.

Customer volume growth was strong, with average loans up 14%, average deposits up 16% and average interest-earning assets up 16% from year-ago levels. Principal transactions revenues grew 37% and client assets under fee-based management grew 15%. And we completed or announced several strategic acquisitions and partnerships (including Akbank, Guangdong Bank, Egg, Quilter, Grupo Financiero Uno and Grupo Cuscatlan) that will strengthen our franchises.

LOGO

LOGO

LOGO

LOGO

Revenues increased 7% from 2005, reaching $89.6 billion. Our international operations recorded revenue growth of 14% in 2006, including an 8% increase in International Consumer, 22% in International CIB and 31% in International GWM.

Revenue growth benefited from increased loan volumes, including corporate loan growth of 29% and consumer loan growth of 13%. Transaction Services assets under custody increased 21% and Global Wealth Management client assets increased 10%.

Net interest revenue grew 1%, as strong growth in interest-earning assets was offset by flat or inverted yield curves in the major economies. Net interest margin in 2006 was 2.65%, down 41 basis points from 2005 (see the discussion of net interest margin on page 81). This spread compression negatively affected the Company’s operating leverage ratios. Non-interest revenue increased 13% from 2005, reflecting fees from higher customer business volumes, as well as increased principal transactions revenues. CIB revenues grew by 14%, reflecting strong performance in Capital Markets and Banking and Transaction Services. Capital Markets and Banking finished the year ranked #1 in equity underwriting and #2 in completed mergers and acquisitions activity.


 

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LOGO

Operating expenses increased 15% from the previous year. Expense growth included three points from the adoption of SFAS 123(R) and reflected the absence of a $600 million release from the WorldCom and Litigation Reserve Charge recorded in 2005. Excluding these items, operating expenses increased 10% in 2006, reflecting increased investment spending, the impact of foreign exchange, and an increase in other legal expenses. Investment spending included the addition of Consumer branches and investments in technology.

LOGO

During the 2006 fourth quarter, Bob Druskin was appointed Chief Operating Officer of the Company. One of Bob’s primary responsibilities is to complete a structural review of our expense base by the end of the first quarter. His review will include an analysis of the structure of the organization, the multiple back offices, the multiple middle offices and separate corporate centers around the Company, with a goal of creating a more efficient and nimbler organization.

LOGO

During 2006, we continued our focus on disciplined capital allocation and driving returns to our shareholders. Our equity capital base and trust preferred securities grew to $129.4 billion at December 31, 2006. Stockholders’ equity increased by $7.2 billion during 2006 to $119.8 billion, even with the distribution of $9.8 billion in dividends to common shareholders and the repurchase of $7.0 billion of common stock during the year. Citigroup maintained its “well-capitalized” position with a Tier 1 Capital Ratio of 8.59% at December 31, 2006. Return on common equity was 18.8% for 2006. Our total return to shareholders was 19.6% during the year (which represents Citigroup’s stock appreciation assuming the reinvestment of dividends).

LOGO

The Board of Directors increased the quarterly common dividend by 11% during 2006 and by an additional 10% in January 2007, bringing the current quarterly payout to $0.54 per share. During the year, Moody’s upgraded Citibank, N.A.’s credit rating to “Aaa” from “Aa1”. On February 14, 2007, Standard & Poor’s raised Citigroup’s senior debt credit rating to “AA” from “AA-”. The long-term debt rating on Citibank, N.A. was raised to “AA+” from “AA”.


 

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The U.S. and international credit environments remained stable; this, as well as significantly lower consumer bankruptcy filings, the absence of the $490 million pretax charge in 2005 related to a change in write-off policy in EMEA consumer, and a shift in consumer loans to products with lower net credit losses, drove a $1.191 billion decrease in credit costs compared to year-ago levels. The Global Consumer loss rate was 1.52%, a 49 basis-point decline from 2005. Corporate cash-basis loans declined 47% from year-ago levels to $535 million.

The effective income tax rate on continuing operations declined to 27.3%, primarily reflecting the $598 million benefit for the resolution of the Federal Tax Audit and a net $237 million tax reserve release related to the resolution of the New York Tax Audits. The effective tax rate for 2006 would have been 30.1% without the tax reserve releases.

LOGO

LOGO

Outlook for 2007

We enter 2007 with good business momentum, as we expect to see our investment initiatives generate increasing revenues, and are well-positioned to gain from our balanced approach to growth and competitive advantages.

We expect to continue to achieve growth in loans, deposits and other customer activity resulting from our increased distribution points, expanded product offerings, and the impact from recent targeted acquisitions.

In 2006, our international businesses contributed 43% of our income from continuing operations. We expect to continue to re-weight our revenue mix towards International Consumer, CIB and Global Wealth Management.

Disciplined capital allocation will remain fundamental to our strategic process and we will have a sharp focus on expense management.

Although there may be volatility in our results in any given year, over the long term our revenues are targeted to grow organically at a mid- to high-single-digit rate, with strong expense and credit management driving earnings and earnings per share growth at a faster level. We will seek to augment this growth rate over time through targeted acquisitions.

Credit is broadly stable as 2007 begins; however, we are budgeting for a moderate deterioration of credit in 2007. In addition, the tax benefits we realized in 2006 will not be repeated in 2007, and we anticipate the effective tax rate to return to a more normalized rate of 30% to 31%, not the 27.3% recorded in 2006.

In our Japan Consumer Finance business, we look to break even in 2007.

With our investment spending initiatives, a record number of branches were added in 2006. We are going to moderate our rate of increased investment spending in 2007.

Citigroup’s financial results are closely tied to the external global economic environment. Movements in interest rates and foreign exchange rates present both opportunities and risks for the Company. Weakness in the global economy, credit deterioration, inflation, and geopolitical uncertainty are examples of risks that could adversely impact our earnings.

A detailed review and outlook for each of our business segments and products are included in the discussions that follow, and the risks are more fully discussed on pages 76 to 96.

Certain of the statements above are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See “Forward-Looking Statements” on page 97.


 

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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, 2006. The graph assumes that $100 was invested on December 31, 2001 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
2002    $ 76.08    $ 77.90    $ 85.37
2003      107.72      100.24      111.86
2004      110.65      111.15      124.06
2005      115.77      116.60      132.03
2006      138.41      135.02      157.36

 

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EVENTS IN 2006

Certain of the statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See “Forward-Looking Statements” on page 97.

U.K. Market Expansion

Egg

On January 29, 2007, the Company announced the agreement to acquire Egg Banking plc (Egg), the world’s largest pure online bank and one of the U.K.’s leading online financial services providers, from Prudential PLC for approximately $1.127 billion, subject to adjustments at closing. Egg has more than three million customers and offers various financial products and services including online payment and account aggregation services, credit cards, personal loans, savings accounts, mortgages, insurance and investments. The transaction is subject to regulatory approvals and is expected to close before the end of the 2007 second quarter.

Quilter

On December 13, 2006, the Company announced the agreement to acquire 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. This transaction, which is subject to U.S. and local country regulatory approvals, is expected to close in the 2007 first quarter. Once closed, its business results will be included in Global Wealth Management.

Purchase of 20% Equity Interest in Akbank

On October 17, 2006, the Company announced its planned purchase of a 20% equity interest in Akbank for approximately $3.1 billion. The transaction closed on January 9, 2007. 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 agreed not to increase its percentage ownership in Akbank.

Strategic Investment and Cooperation Agreement with Guangdong Development Bank

On December 17, 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 will be accounted for under the equity method.

In accordance with the parties’ agreement, Citigroup will have significant management influence at GDB to enhance GDB’s management team and corporate governance standards, instill operational and lending best practices, improve risk management and internal controls, upgrade GDB’s information technology infrastructure, and further develop GDB’s customer service and product offerings.

Central American Acquisitions

Grupo Cuscatlan

On December 13, 2006, Citigroup announced the agreement to acquire the subsidiaries of Grupo Cuscatlan for $1.51 billion in cash and stock from Corporacion UBC Internacional S.A. Grupo Cuscatlan is one of the leading financial groups in Central America, with total assets of $5.4 billion, total

loans of $3.5 billion, and total deposits of $3.4 billion. Grupo Cuscatlan has operations in El Salvador, Guatemala, Costa Rica, Honduras and Panama. This acquisition is subject to U.S. and local country regulatory approvals and is expected to close later in the 2007 first quarter.

Grupo Financiero Uno

On October 27, 2006, Citigroup announced that it had reached a definitive agreement to acquire Grupo Financiero Uno (GFU), the largest credit card issuer in Central America, and its affiliates. The acquisition of GFU, with $2.1 billion in assets, will expand the presence of Citigroup’s Latin America consumer franchise, enhancing its credit card business in the region and establishing a platform for regional growth in Consumer Finance and Retail Banking.

GFU is privately held and has more than one million retail clients, representing 1.1 million credit card accounts, $1.2 billion in credit card receivables and $1.3 billion in deposits in Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and Panama. GFU operates a distribution network of 75 branches and more than 100 mini-branches and points of sale.

This acquisition, which is subject to regulatory approvals in the United States and each of the six countries, is anticipated to close later in the 2007 first quarter.

Sale of Avantel

In November 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

On January 8, 2007, Citigroup announced that it would reposition its consumer finance business in Japan. This decision is the result of 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 the 2006 fourth quarter, 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. This repositioning is consistent with the company’s efforts to establish a lower-cost platform for the business and will enable it to compete more effectively in the new interest rate environment in Japan.

Finalizing the 2005 Sale of Asset Management Business

On December 1, 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 CIB business. The transaction did not include


 

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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 in Alternative Investments.

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 118.

Resolution of Tax Audits

New York State and New York City

In September 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 2006 third quarter, 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 March 2006, the Company received a notice from the Internal Revenue Service (IRS) that they had concluded the tax audit for the years 1999 through 2002 (referred to 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

Corporate and Investment 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

 

Finalizing the 2005 Sale of Travelers Life & Annuity

On July 1, 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.

In July 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 118.

Sale of Upstate New York Branches

On June 30, 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 the 2006 second quarter.

Acquisition of Federated Credit Card Portfolio and Credit Card Agreement With Federated Department Stores

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

For the first phase, which closed in October 2005, Citigroup acquired Federated’s receivables under management, totaling approximately $3.3 billion. For the second phase, which closed in May 2006, additional Federated 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 Federated.

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

The Federated and May credit card portfolios comprise a total of approximately 17 million active accounts.

MasterCard Initial Public Offering

In June 2006, MasterCard conducted a series of transactions consisting of: (i) an IPO of new Class A stock, (ii) an exchange of its old Class A stock held by its member banks for shares of its new Class B and Class M stocks, and


 

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(iii) a partial redemption of the new Class B stock held by the member banks. Citigroup, as one of MasterCard’s member banks, received 4,946,587 shares of Class B stock, 48 shares of Class M stock, and $123 million in cash as a result of these transactions. An after-tax gain of $78 million ($123 million pretax) was recognized in the 2006 second quarter related to the cash redemption of shares.

Consolidation of Brazil’s CrediCard

In April 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

On January 1, 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 restricted or deferred stock awards issued to retirement-eligible employees who meet certain age and service requirements must be either expensed on the grant date or accrued over a service period prior to the grant date. 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

Corporate and Investment Banking

    354

Global Wealth Management

    145

Alternative Investments

    7

Corporate/Other

    21

Total

  $ 648

The following table summarizes the quarterly SFAS 123(R) impact on 2006 pretax compensation expense (and after-tax impact) for the quarterly accrual of the estimated stock awards that were granted in January 2007:

 

In millions of dollars   Pretax    After-tax

First quarter 2006

  $ 198    $ 122

Second quarter 2006

    168      104

Third quarter 2006

    195      127

Fourth quarter 2006

    263      173

Total 2006

  $ 824    $ 526

The Company changed the plan’s retirement eligibility for the January 2007 management awards, which affected the amount of the accrual in the 2006 second, third and fourth quarters.

Additional information can be found in Notes 1 and 8 to the Consolidated Financial Statements on pages 129 and 142, respectively.

 

Credit Reserves

During the year ended December 31, 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 CIB. 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 condition in Cards, and Japan, related to the changes in the consumer lending environment (see discussion on page 28).

The net build of $270 million in CIB was primarily comprised of $261 million in Capital Markets 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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EVE NTS 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 2005 third quarter.

These write-offs did not relate to a change in the portfolio credit quality but rather to a change in environmental factors due to law changes and consumer behavior that led Citigroup to re-evaluate its estimates of future long-term recoveries and their appropriateness to the write-off exception.

Hurricane Katrina

In the 2005 third quarter, 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. Since the 2005 third quarter, approximately $241 million of these reserves were utilized or released.

United States Bankruptcy Legislation

On October 17, 2005, the Bankruptcy Reform Act (or 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 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

During the 2005 fourth quarter, 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

On December 20, 2005, Citigroup reduced its stake in Nikko Cordial from approximately 11.2% to 4.9%. The sale resulted in an after-tax gain of $248 million ($386 million pretax). In connection with this sale, Nikko Cordial and Citigroup each contributed an additional approximately $175 million to their joint venture, Nikko Citigroup Limited.

Sale of the Merchant Acquiring Businesses

In December 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 September 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 is 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 of 2000. During the 2005 third quarter, 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

During the 2005 third quarter, 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 169, during the 2005 second quarter, Citigroup settled class action litigation brought on behalf of purchasers of Enron securities.

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

On May 31, 2005, the Company completed the settlement with the Securities and Exchange Commission (SEC), disclosed by Citigroup in January 2005, resolving an investigation by the 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

On August 1, 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.

During the 2005 second quarter, Citigroup also consolidated its capital markets funding activities into two legal entities: (i) Citigroup Inc., which issues long-term debt, trust preferred securities, and preferred and common stock, and (ii) Citigroup Funding Inc. (CFI), a first-tier subsidiary of Citigroup, which issues commercial paper, medium-term notes and structured equity-linked and credit-linked notes, all of which is guaranteed by Citigroup.

As part of the funding consolidation, Citigroup also guaranteed and continues to guarantee various debt obligations of Citigroup Global Markets Holdings Inc. (CGMHI) as well as all of the outstanding debt obligations under CGMHI’s publicly-issued securities. CGMHI no longer files periodic reports with the SEC and continues to be rated on the basis of a guarantee of its financial obligations from Citigroup.

Repositioning Charges

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

Resolution of Glendale Litigation

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

Acquisition of First American Bank

On March 31, 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

On May 1, 2005, Citigroup completed the sale of its manufactured housing loan portfolio, consisting of $1.4 billion in loans, to 21st Mortgage Corp. The Company recognized a $109 million after-tax loss ($157 million pretax) in the 2005 first quarter related to the divestiture.

Divestiture of CitiCapital’s Transportation Finance Business

On January 31, 2005, the Company completed the sale of CitiCapital’s Transportation Finance Business based in Dallas and Toronto to GE Commercial Finance for total cash consideration of approximately $4.6 billion. The sale resulted in an after-tax gain of $111 million ($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 the 2004 fourth quarter.

The Company’s Private Bank operations in Japan had total revenues, net of interest expense, of $200 million and net income of $39 million (excluding the Exit Plan Charge) during the year ended December 31, 2004, and $264 million and $83 million, respectively, for 2003.

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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EVENTS IN 2 004

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

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

Sale of Samba Financial Group

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

Acquisition of KorAm Bank

On April 30, 2004, Citigroup completed its tender offer to purchase all of the outstanding shares of KorAm Bank (KorAm) at a price of KRW 15,500 per share in cash. In total, Citigroup has acquired 99.9% of KorAm’s outstanding shares for a total of KRW 3.14 trillion ($2.7 billion). The results of KorAm are included in the Consolidated Financial Statements from May 2004 forward.

 

Divestiture of Electronic Financial Services Inc.

During January 2004, the Company completed the sale for cash of Electronic Financial Services Inc. (EFS) for $390 million. EFS is a provider of government-issued benefit payments and prepaid stored-value cards used by state and federal government agencies, as well as stored-value services for private institutions. The sale of EFS resulted in an after-tax gain of $180 million ($255 million pretax) in the 2004 first quarter.

Acquisition of Washington Mutual Finance Corporation

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


 

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SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

 

The Notes to the Consolidated Financial Statements on page 109 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 109.

Certain statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See “Forward-Looking Statements” on page 97.

Valuations of Financial Instruments

The Company holds fixed income and equity securities, derivatives, investments in private equity and other financial instruments. The Company holds its investments and trading assets and liabilities 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. Fair values are considered verified if they meet one of the following criteria:

 

 

Externally substantiated via comparison to quoted market prices or third-party broker quotations;

 

By using models that are validated by qualified personnel independent of the area that created the model and inputs that are verified by comparison to third-party broker quotations or other third-party sources where available; or

 

By using alternative procedures such as comparison to comparable securities and/or subsequent liquidation prices.

At December 31, 2006 and 2005, respectively, approximately 94.9% and 94.5% of the available-for-sale and trading portfolios’ gross assets and liabilities (prior to netting positions pursuant to FIN 39 and excluding Global Consumer’s credit card and mortgage securitization interest-only strips) are considered verified and approximately 5.1% and 5.5% are considered unverified. Of the unverified assets, at December 31, 2006 and 2005, respectively, approximately 50.3% and 60.6% consist of cash products, where independent quotes were not available and/or alternative procedures were not feasible, and 49.7% and 39.4% consist of derivative products where either the model was not validated and/or the inputs could not be substantiated due to the lack of appropriate market quotations. Such values are actively reviewed by management.

Changes in the valuation of the trading assets and liabilities flow through the income statement. Changes in the valuation of available-for-sale assets generally flow through other comprehensive income, which is a component of equity on the balance sheet. A full description of the Company’s related policies and procedures can be found in Notes 1, 14 and 15 to the Consolidated Financial Statements on pages 129, 153, and 154, respectively.

 

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 credit losses. In addition, management has established and maintained reserves for the potential 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 Committee of the Company’s Board of Directors. Under these policies, the Company’s Senior Risk Officer and Chief Financial Officer review the adequacy of the credit loss reserves each quarter with representatives from Risk and Finance staffs for each applicable business area.

During these reviews, these above-mentioned representatives covering the business area having classifiably-managed portfolios (that is, portfolios where internal credit-risk ratings are assigned, which are primarily Corporate and Investment 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 2005, 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 historical delinquency flow rates, charge-off statistics and loss severity. This methodology is applied separately for each individual product within each different geographic region in which these portfolios exist. Adjustments are also made for specifically known items, such as changing regulations, current environmental factors and credit trends.


 

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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 17 to the Consolidated Financial Statements on pages 129 and 157, 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 to access financing. The cash flows from assets in the trust service the corresponding trust securities. If the structure of the trust meets stringent 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. 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 these financial assets.

A complete description of the Company’s accounting for securitized assets can be found in “Off-Balance Sheet Arrangements” on page 92 and in Notes 1 and 22 to the Consolidated Financial Statements on pages 109 and 143, 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 government 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 reviews these balances quarterly and as new information becomes available, the balances are adjusted, as appropriate.

The Company is in the process of implementing FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions, and which will be effective as of January 1, 2007. See Note 1 to the Consolidated Financial Statements on page 109.

See Note 10 to the Consolidated Financial Statements on page 130 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 based upon the probability and estimability of losses and to fairly present, in conjunction with the disclosures of these matters in the Company’s financial statements and SEC filings, management’s view of the Company’s exposure. The Company reviews outstanding claims with internal as well as external counsel 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 27 to the Consolidated Financial Statements on page 155 and the discussion of “Legal Proceedings” beginning on page 169.

Accounting Changes and Future Application of Accounting Standards

See Note 1 to the Consolidated Financial Statements on page 109 for a discussion of Accounting Changes and the Future Application of Accounting Standards.


 

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SEGMENT, PRODUCT AND REGIONAL NET INCOME

 

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

CITIGROUP NET INCOME—SEGMENT AND PRODUCT VIEW

 

In millions of dollars   2006     2005 (1)      2004 (1)     

% Change

2006 vs. 2005

   

% Change

2005 vs. 2004

 

Global Consumer

           

U.S. Cards

  $ 3,890     $ 2,754      $ 3,562      41 %   (23 )%

U.S. Retail Distribution

    2,027       1,752        2,019      16     (13 )

U.S. Consumer Lending

    1,912       1,938        1,664      (1 )   16  

U.S. Commercial Business

    561       729        765      (23 )   (5 )

Total U.S. Consumer (2)

  $ 8,390     $ 7,173      $ 8,010      17 %   (10 )%

International Cards

  $ 1,137     $ 1,373      $ 1,137      (17 )%   21 %

International Consumer Finance

    40       642        586      (94 )   10  

International Retail Banking

    2,840       2,083        2,157      36     (3 )

Total International Consumer

  $ 4,017     $ 4,098      $ 3,880      (2 )%   6 %

Other

  $ (351 )   $ (374 )    $ 97      6 %   NM  

Total Global Consumer

  $ 12,056     $ 10,897      $ 11,987      11 %   (9 )%

Corporate and Investment Banking

           

Capital Markets and Banking

  $ 5,763     $ 5,327      $ 5,395      8 %   (1 )%

Transaction Services

    1,426       1,135        1,045      26     9  

Other

    (62 )     433        (4,398 )    NM     NM  

Total Corporate and Investment Banking

  $ 7,127     $ 6,895      $ 2,042      3 %   NM  

Global Wealth Management

           

Smith Barney

  $ 1,005     $ 871      $ 891      15 %   (2 )%

Private Bank

    439       373        318      18     17  

Total Global Wealth Management

  $ 1,444     $ 1,244      $ 1,209      16 %   3 %

Alternative Investments

  $ 1,276     $ 1,437      $ 768      (11 )%   87 %

Corporate/Other

    (654 )     (667 )      48      2     NM  

Income from Continuing Operations

  $ 21,249     $ 19,806      $ 16,054      7 %   23 %

Income from Discontinued Operations

    289       4,832        992      (94 )   NM  

Cumulative Effect of Accounting Change

          (49 )                

Total Net Income

  $ 21,538     $ 24,589      $ 17,046      (12 )%   44 %

 

(1) Reclassified to conform to the current period’s presentation. See Note 4 to the Consolidated Financial Statements on page 120 for assets by segment and the segment balance sheet on page 80.
(2) U.S. disclosure includes Canada and Puerto Rico.

NM Not meaningful.

 

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CITIGROUP NET INCOME—REGIONAL VIEW

 

In millions of dollars   2006     2005 (1)      2004 (1)     

% Change

2006 vs. 2005

   

% Change

2005 vs. 2004

 

U.S. (2)

           

Global Consumer

  $ 8,039     $ 6,799      $ 7,729      18 %   (12 )%

Corporate and Investment Banking

    2,209       2,950        (2,190 )    (25 )   NM  

Global Wealth Management

    1,210       1,141        1,179      6     (3 )

Total U.S.

  $ 11,458     $ 10,890      $ 6,718      5 %   62 %

Mexico

           

Global Consumer

  $ 1,605     $ 1,432      $ 978      12 %   46 %

Corporate and Investment Banking

    346       450        659      (23 )   (32 )

Global Wealth Management

    36       44        52      (18 )   (15 )

Total Mexico

  $ 1,987     $ 1,926      $ 1,689      3 %   14 %

Latin America

           

Global Consumer

  $ 202     $ 236      $ 296      (14 )%   (20 )%

Corporate and Investment Banking

    638       619        813      3     (24 )

Global Wealth Management

    12       17        43      (29 )   (60 )

Total Latin America

  $ 852     $ 872      $ 1,152      (2 )%   (24 )%

EMEA

           

Global Consumer

  $ 725     $ 374      $ 1,180      94 %   (68 )%

Corporate and Investment Banking

    2,011       1,130        1,136      78     (1 )

Global Wealth Management

    23       8        15      NM     (47 )

Total EMEA

  $ 2,759     $ 1,512      $ 2,331      82 %   (35 )%

Japan

           

Global Consumer

  $ 119     $ 706      $ 616      (83 )%   15 %

Corporate and Investment Banking

    272       498        334      (45 )   49  

Global Wealth Management

          (82 )      (205 )    100     60  

Total Japan

  $ 391     $ 1,122      $ 745      (65 )%   51 %

Asia

           

Global Consumer

  $ 1,366     $ 1,350      $ 1,188      1 %   14 %

Corporate and Investment Banking

    1,651       1,248        1,290      32     (3 )

Global Wealth Management

    163       116        125      41     (7 )

Total Asia

  $ 3,180     $ 2,714      $ 2,603      17 %   4 %

Alternative Investments

  $ 1,276     $ 1,437      $ 768      (11 )%   87 %

Corporate/Other

    (654 )     (667 )      48      2     NM  

Income from Continuing Operations

  $ 21,249     $ 19,806      $ 16,054      7 %   23 %

Income from Discontinued Operations

    289       4,832        992      (94 )   NM  

Cumulative Effect of Accounting Change

          (49 )                

Total Net Income

  $ 21,538     $ 24,589      $ 17,046      (12 )%   44 %

Total International

  $ 9,169     $ 8,146      $ 8,520      13 %   (4 )%

 

(1) Reclassified to conform to the current period’s presentation.
(2) 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 (except for the Samba gain which is allocated to EMEA).

NM Not meaningful.

 

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SELECTED REVENUE AND EXPENSE ITEMS

 

Revenues

Net interest revenue in 2006 was $39.5 billion, up $248 million, or 1%, from net interest revenue of $39.2 billion in 2005. Increases in business volumes during 2006 were offset by spread compression, as the Company’s cost of funding increased more significantly than the rates on interest-earning assets, and due to a $666 million charge against net interest revenue related to changes in Japan consumer lending laws in International Consumer Finance. Rates on the Company’s interest-earning assets were affected by competitive pricing, as well as business mix shifts. Net interest revenue in 2005 decreased $2.4 billion, or 6%, from 2004 as the impact of spread compression and competitive pricing exceeded increases in business volumes.

Total commissions and fees and administration and other fiduciary fees revenue of $26.5 billion was up $3.2 billion, or 14%, in 2006. Strong investment banking results, higher business volumes in transaction services, the integration of Legg Mason in Smith Barney, and the absence of a $565 million write-off of deferred rewards costs recorded in 2005 drove the increase. The 2005 total commissions and fees and administration and other fiduciary fees revenue of $23.3 billion was up $1.8 billion, or 8%, from 2004. The 2005 increase was attributable to the mark-to-market of Consumer Lending mortgage servicing assets, higher transactional volumes, and strong results in bank card fees and investment banking, offset by the write-off of deferred rewards costs.

Insurance premiums of $3.2 billion in 2006 were up $70 million, or 2%, from 2005 and up $406 million, or 15%, in 2005 compared to 2004. The consecutive year-over-year increases were driven by higher business volumes.

Principal transactions revenues of $7.7 billion in 2006 increased $1.3 billion, or 20%, from 2005, primarily in equity markets. Principal transactions revenue in 2005 increased $2.7 billion, or 73%, from 2004, primarily driven by the fixed income and equity markets.

Realized gains from sales of investments of $1.8 billion in 2006 were down $171 million from 2005, due to the absence of 2005 gains of $484 million on the sale of portions of St. Paul Travelers shares in Alternative Investments and of $386 million on the sale of Nikko Cordial stock in CIB, offset by 2006 gains of $252 million on the sale of $23.4 billion of mortgage-backed securities in Consumer Lending, and $225 million on the sale of the remaining St. Paul Travelers shares in Alternative Investments. The increase from 2004 of $1.1 billion was primarily attributable to the gains on the sale of Nikko Cordial stock and sales of St. Paul Travelers shares over the course of the year.

Other revenue of $11.0 billion in 2006 increased $1.4 billion, or 14%, from 2005, primarily driven by a $234 million gain on the sale of Avantel in International Retail Banking and higher replenishment gains from securitization activities as well as higher net excess spread revenues from previously securitized receivables in U.S. Cards, offset by a decrease in Alternative Investments due to lower investment performance. Other revenue increased $365 million, or 4%, from $9.2 billion in 2004 to $9.6 billion in 2005. This was due to higher securitization activity in U.S. Cards and positive investment performance in Alternative Investments offset by the absence of the $1.2 billion gain on the sale of Samba recorded in 2004.

 

Operating Expenses

Operating expenses increased $6.9 billion, or 15%, to $52.0 billion in 2006. The increase was primarily in compensation and benefits due to higher headcount, increased incentive compensation in CIB, and SFAS 123(R) costs, as well as investment spending. Operating expenses of $45.2 billion in 2005 declined $4.6 billion, or 9%, from 2004. The decrease was due to the absence of a reserve charge of $7.9 billion for the WorldCom and Litigation Reserve Charge and $400 million related to Private Bank Japan Exit Plan Charge recorded in 2004, offset by a $600 million release from the WorldCom and Litigation Reserve Charge and increased expenses related to higher incentive compensation in CIB and higher pension and insurance expenses.

Global Consumer reported an 11% increase from 2005 to 2006. U.S. Consumer increased 5% on increased business volumes and investments in new branches. International Consumer increased 18% primarily due to branch expansions and the integration of CrediCard. International Consumer primarily drove the increase of 5% from 2004 to 2005 in Global Consumer as a result of branch expansion and repositioning charges.

CIB reported a 21% rise in expenses over the prior year as a result of higher incentive compensation (due to revenue increase of 14%), SFAS 123(R) costs and the absence of the reserve release from the WorldCom and Litigation Reserve Charge in 2005.

Global Wealth Management expenses increased 20% driven by costs associated with the integration of the financial consultants from Legg Mason and SFAS 123(R) costs. The change in expenses from 2004 to 2005 was flat.

Alternative Investments increased 21% from the prior year, which was up 37% from 2004, due to compensation expenses.

Provisions for Credit Losses and for Benefits and Claims

The provision for credit losses for 2006 was $7.0 billion, down $1.2 billion, or 15%, from 2005, which in turn, was up $1.9 billion from 2004. Policyholder benefits and claims were $967 million, $867 million, and $884 million for 2006, 2005, and 2004, respectively.

Global Consumer provisions for loan losses and for policyholder benefits and claims of $7.6 billion in 2006 were down $1.5 billion, or 16% from 2005.

The declines in consumer were mainly due to lower bankruptcy filings, a stable credit environment that drove lower net credit loss ratios, and the absence of a $490 million charge to standardize the EMEA consumer loan write-off policies with the global write-off policy in the prior year.

Offsetting these declines were increases: in the Mexico cards portfolio; in Asia, primarily related to industry-wide credit conditions in the Taiwan cards market; and in Japan, primarily related to legislative and other actions affecting the consumer finance industry in that country.

The increase from 2004 of $966 million, or 12%, to $9.1 billion in 2005 was primarily due to increases in International Retail Banking, U.S. Retail Distribution, International Cards, and U.S. Commercial Business, partially offset by decreases in U.S. Cards, International Consumer Finance and U.S. Consumer Lending. Net credit losses were $7.262 billion, and the related loss ratio was 1.52% in 2006, as compared to $8.683 billion and 2.01% in 2005 and $8.471 billion and 2.13% in 2004.


 

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The CIB provision for credit losses in 2006 increased $401 million from 2005 to $359 million. The 2005 provision was up $933 million from 2004. The increase in 2006 primarily resulted from the absence of gross credit recoveries in the prior year. Corporate cash-basis loans at December 31, 2006, 2005 and 2004 were $535 million, $1.004 billion and $1.906 billion, respectively.

Income Taxes

The Company’s effective tax rate on continuing operations of 27.3% in 2006 declined from 30.8% in 2005. The 2006 tax provision on continuing operations 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. The 2005 tax provision on continuing operations included a $198 million 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, and a $65 million release due to the resolution of an audit. The 2006 effective tax rate also declined from 2005 because of the impact of increased indefinitely invested international earnings. The Company’s effective tax rate on continuing operations was 28.4% in 2004. See additional discussion on page 15 and in Note 10 to the Consolidated Financial Statements on page 130.

 


The net income line in the following business segment and operating unit discussions excludes the cumulative effect of accounting change and income from discontinued operations. The cumulative effect of accounting change and income from discontinued operations are disclosed within the Corporate/Other business segment. See Notes 1 and 3 to the Consolidated Financial Statements on pages 129 and 138, respectively. Certain amounts in prior years have been reclassified to conform to the current year’s presentation.

 



 

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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 8,110 branches, approximately 18,800 ATMs, and 809 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   2006     2005     2004    

% Change

2006 vs. 2005

   

% Change

2005 vs. 2004

 

Net interest revenue

  $ 29,301     $ 29,526     $ 30,766     (1 )%   (4 )%

Non-interest revenue

    20,998       18,719       17,121     12     9  

Revenues, net of interest expense

  $ 50,299     $ 48,245     $ 47,887     4 %   1 %

Operating expenses

    25,933       23,318       22,151     11     5  

Provisions for loan losses and for benefits and claims

    7,579       9,063       8,097     (16 )   12  

Income before taxes and minority interest

  $ 16,787     $ 15,864     $ 17,639     6 %   (10 )%

Income taxes

    4,666       4,904       5,592     (5 )   (12 )

Minority interest, net of taxes

    65       63       60     3     5  

Net income

  $ 12,056     $ 10,897     $ 11,987     11 %   (9 )%

Average assets (in billions of dollars)

  $ 610     $ 533     $ 487     14 %   9 %

Return on assets

    1.98 %     2.04 %     2.46 %    

Average risk capital (1)

  $ 28,168     $ 26,857     $ 22,816     5 %   18 %

Return on risk capital (1)

    43 %     41 %     53 %    

Return on invested capital (1)

    20 %     18 %     22 %            

Key indicators – (in billions of dollars)

         

Average managed loans

  $ 531.6     $ 482.2     $ 439.9     10 %   10 %

Average deposits

  $ 252.1     $ 231.7     $ 213.6     9 %   8 %

EOP AUMs

  $ 219.6     $ 188.0     $ 168.2     17 %   12 %

Total branches

    8,110       7,237       6,690     12 %   8 %

 

(1) See footnote 6 to the table on page 3.

 

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U.S. Consumer

LOGO

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

 

In millions of dollars   2006     2005     2004    

% Change

2006 vs. 2005

   

% Change

2005 vs. 2004

 

Net interest revenue

  $ 16,646     $ 17,510     $ 19,706     (5 )%   (11 )%

Non-interest revenue

    13,948       12,597       11,201     11     12  

Revenues, net of interest expense

  $ 30,594     $ 30,107     $ 30,907     2 %   (3 )%

Operating expenses

    14,149       13,449       13,214     5     2  

Provisions for loan losses and for benefits and claims

    3,800       5,600       5,444     (32 )   3  

Income before taxes and minority interest

  $ 12,645     $ 11,058     $ 12,249     14 %   (10 )%

Income taxes

    4,197       3,823       4,181     10     (9 )

Minority interest, net of taxes

    58       62       58     (6 )   7  

Net income

  $ 8,390     $ 7,173     $ 8,010     17 %   (10 )%

Average assets (in billions of dollars)

  $ 417     $ 357     $ 327     17 %   9 %

Return on assets

    2.01 %     2.01 %     2.45 %    

Average risk capital (1)

  $ 15,394     $ 13,843     $ 11,507     11 %   20 %

Return on risk capital (1)

    55 %     52 %     70 %    

Return on invested capital (1)

    24 %     21 %     25 %            

Key indicators – (in billions of dollars)

         

Average managed loans

  $ 416.8     $ 375.7     $ 346.1     11 %   9 %

Average deposits

  $ 104.6     $ 95.4     $ 88.5     10 %   8 %

EOP AUMs

  $ 81.4     $ 72.6     $ 68.5     12 %   6 %

Total branches (actual number)

    3,441       3,173       3,056     8 %   4 %

 

(1) See footnote 6 to the table on page 3.

 

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U.S. Cards

LOGO

U.S. Cards is one of the largest providers of credit cards in North America, with more than 150 million customer accounts in the United States, Canada and Puerto Rico. In addition to MasterCard (including Diners), Visa, and American Express, U.S. Cards is the largest provider of credit card services to the oil and gas industry and the leading provider of consumer private-label credit cards and commercial accounts on behalf of merchants such as The Home Depot, Federated, Sears, Dell Computer, Radio Shack, Staples and Zales Corporation.

Revenues are primarily generated from net interest revenue on receivables, interchange fees on purchase sales and other delinquency and servicing fees.

 

In millions of dollars   2006     2005     2004    

% Change

2006 vs. 2005

   

% Change

2005 vs. 2004

 

Net interest revenue

  $ 4,626     $ 5,304     $ 7,445     (13 )%   (29 )%

Non-interest revenue

    8,882       7,520       6,762     18     11  

Revenues, net of interest expense

  $ 13,508     $ 12,824     $ 14,207     5 %   (10 )%

Operating expenses

    6,068       6,002       5,920     1     1  

Provision for loan losses and for benefits and claims

    1,487       2,567       2,887     (42 )   (11 )

Income before taxes and minority interest

  $ 5,953     $ 4,255     $ 5,400     40 %   (21 )%

Income taxes and minority interest, net of taxes

    2,063       1,501       1,838     37     (18 )

Net income

  $ 3,890     $ 2,754     $ 3,562     41 %   (23 )%

Average assets (in billions of dollars)

  $ 63     $ 66     $ 74     (5 )%   (11 )%

Return on assets

    6.17 %     4.17 %     4.81 %    

Average risk capital (1)

  $ 5,581     $ 5,774     $ 4,125     (3 )%   40 %

Return on risk capital (1)

    70 %     48 %     86 %    

Return on invested capital (1)

    29 %     20 %     28 %            

Key indicators – on a managed basis: (in billions of dollars)

         

Return on managed assets

    2.66 %     1.90 %     2.41 %    

Purchase sales

  $ 304.3     $ 278.2     $ 257.0     9 %   8 %

Managed average yield (2)

    14.02 %     13.75 %     13.53 %    

Managed net interest margin (2)

    10.26 %     10.85 %     11.76 %            

 

(1) See footnote 6 to the table on page 3.
(2) As a percentage of average managed loans.

 

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2006 vs. 2005

Net Interest Revenue declined, reflecting lower on-balance sheet receivables, 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 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. Also driving the increase was the acquisition of the Federated portfolio in the 2005 fourth quarter, and the absence of a $545 million charge to conform accounting practices for customer reward taken in the 2005 fourth quarter. These increases were partially offset by lower fee revenues due to lower bankruptcy filings and higher rewards program costs.

Operating expenses increased slightly, primarily reflecting the full-year impact of the acquisition of the Federated portfolio as well as the adoption of SFAS 123(R), partially offset by effective expense management and a decline in advertising and marketing expenses, largely reflecting the timing of advertising campaigns.

Provision for loan losses and for benefits and claims declined, primarily reflecting lower bankruptcies and the favorable credit environment which led to a 35% decline in net credit losses and a continued decline in loan loss reserves.

2005 vs. 2004

Net Interest Revenue declined as pricing actions in floating rate products were offset by: higher cost of funds; higher payment rates resulting from the overall improved economy and a customer shift to real-estate-secured lending, which led to lower loan balances; an increased proportion of transactional activity; and a mix shift in the private label business to lower-rate products. Non-Interest Revenue increased as the positive impact of 8% growth in purchase sales and the addition of the Federated portfolio in the 2005 fourth quarter more than offset a $545 million charge to conform accounting practices for customer rewards.

Operating expenses remained essentially unchanged, primarily reflecting the addition of the Federated portfolio and repositioning expenses of $19 million taken in the 2005 first quarter. This was partially offset by a decline in advertising and marketing expenses, largely reflecting the timing of advertising campaigns, as the Company invested significant resources in 2004 in the “Live Richly” and “Identity Theft” media campaigns.

Provision for loan losses declined, due to a $789 million, or 22%, decline in net credit losses, resulting from the positive credit environment and improvements in the Sears portfolio, partially offset by lower credit reserve releases in 2005 of $170 million, versus $639 million in 2004.


 

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U.S. Retail Distribution

LOGO

U.S. Retail Distribution provides banking, lending, investment and insurance products and services to customers through 972 Citibank branches, 2,469 CitiFinancial branches, the Primerica Financial Services (PFS) salesforce, the Internet, direct mail and telesales. Revenues are primarily derived from net interest revenue on loans and deposits, and fees on banking, insurance and investment products.

 

In millions of dollars   2006     2005     2004    

% Change

2006 vs. 2005

   

% Change

2005 vs. 2004

 

Net interest revenue

  $ 5,980     $ 5,957     $ 5,749         4 %

Non-interest revenue

    3,604       3,558       3,596     1 %   (1 )

Revenues, net of interest expense

  $ 9,584     $ 9,515     $ 9,345     1 %   2 %

Operating expenses

    4,878       4,407       4,358     11     1  

Provisions for loan losses and for benefits and claims

    1,698       2,410       2,017     (30 )   19  

Income before taxes

  $ 3,008     $ 2,698     $ 2,970     11 %   (9 )%

Income taxes

    981       946       951     4     (1 )

Net income

  $ 2,027     $ 1,752     $ 2,019     16 %   (13 )%

Revenues, net of interest expense, by business:

         

Citibank branches

  $ 3,149     $ 3,103     $ 3,065     1 %   1 %

CitiFinancial branches

    4,195       4,190       4,139         1  

Primerica Financial Services

    2,240       2,222       2,141     1     4  

Total revenues

  $ 9,584     $ 9,515     $ 9,345     1 %   2 %

Net income by business:

         

Citibank branches

  $ 380     $ 506     $ 515     (25 )%   (2 )%

CitiFinancial branches

    1,077       696       960     55     (28 )

Primerica Financial Services

    570       550       544     4     1  

Total net income

  $ 2,027     $ 1,752     $ 2,019     16 %   (13 )%

Average assets (in billions of dollars)

  $ 69     $ 64     $ 60     8 %   7 %

Return on assets

    2.94 %     2.74 %     3.37 %    

Average risk capital (1)

  $ 3,552     $ 2,977     $ 2,717     19 %   10 %

Return on risk capital (1)

    57 %     59 %     74 %    

Return on invested capital (1)

    22 %     17 %     20 %            

Key indicators: (in billions of dollars)

         

Average loans

  $ 44.4     $ 40.4     $ 37.8     10 %   7 %

Average deposits

  $ 85.7     $ 78.0     $ 74.0     10 %   5 %

EOP Investment AUMs

  $ 81.4     $ 72.6     $ 68.5     12 %   6 %

 

(1) See footnote 6 to the table on page 3.

 

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2006 vs. 2005

Net Interest Revenue was approximately even with the prior year as growth in deposits and loans, each up 10%, were largely 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. Non-Interest Revenue increased slightly on a $132 million gain on the Sale of New York Branches in the 2006 second quarter, higher investment product sales, and higher banking fees. Offsetting these increases was the absence of a $110 million gain in the 2005 first quarter related to the resolution of the Glendale litigation.

Operating expense growth was primarily driven by 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), and costs associated with the launch of e-Savings.

Provisions for loan losses and for benefits and claims declined primarily due to 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, a prior-year reserve build related to Hurricane Katrina of $110 million in CitiFinancial branches, and lower overall bankruptcy filings in the current year. The net credit loss ratio declined 81 basis points to 2.67%. Overall credit conditions remained favorable in 2006.

Deposit growth reflected balance increases in certificates of deposit, e-Savings accounts (which generated $9.9 billion in end-of-period deposits), premium checking and partly rate-sensitive money market products as well as the impact of the FAB acquisition. Loan growth reflected improvements in all channels and products. Investment product sales in Citibank branches increased 26%, driven by favorable market conditions and additional distribution points.

2005 vs. 2004

Net Interest Revenue increased primarily due to deposit and loan growth of 5% and 7%, respectively, which were partially offset by a decrease in net interest margin. Net interest margin declined as higher short-term funding rates more than offset an increase in asset yields. Non-Interest Revenue was flat to the prior-year period. Increased investment product sales, the impact of the FAB acquisition, and the gain of $110 million related to the resolution of the Glendale litigation in the 2005 first quarter were offset by lower banking fees and a $20 million charge in the 2005 fourth quarter to conform accounting practices for customer rewards.

Operating expense growth was primarily due to higher volume-related expenses, increased investment spending driven by branch expansion, and the impact of the FAB acquisition.

Provision for loan losses and for benefits and claims increased due to an increase in bankruptcy filings from a change in law that became effective on October 17, 2005. This led to an approximately $93 million increase in net credit losses and a $42 million increase in loan loss reserves. In addition, the Company increased loan loss reserves by $110 million for the impact of Hurricane Katrina. Also, the reorganization of the former Consumer Finance business into components of the current U.S. Retail Distribution and U.S. Consumer Lending businesses resulted in a reallocation of loan loss reserves between U.S. Retail Distribution and U.S. Consumer Lending. CitiFinancial Branches increased loan loss reserves by $165 million, reflecting an increase in reserves for bankruptcy coverage in Personal Loans, while Real Estate Lending and Auto (both now in U.S. Consumer Lending) had corresponding loan loss reserve releases of $76 million and $89 million, respectively. Excluding the impact of increased bankruptcy filings and Hurricane Katrina, overall credit conditions remained favorable in 2005.

Deposit growth reflected an increase in demand balances and rate-sensitive money market balances, as well as the impact of the FAB acquisition. Loan growth reflected improvements in all channels and products from home equity and personal loans to increased volumes in the PFS channel. Investment product sales increased 9% driven by increased volumes.


 

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U.S. Consumer Lending

LOGO

U.S. Consumer Lending provides home mortgages and home equity loans to prime and non-prime customers, auto financing to non-prime consumers and educational loans to students. Loans are originated throughout the United States and Canada through the Citibank, CitiFinancial and Smith Barney branch networks, Primerica Financial Services agents, third-party brokers, direct mail, the Internet and telesales. Loans are also purchased in the wholesale markets. U.S. Consumer Lending also provides mortgage servicing to a portfolio of mortgage loans owned by third parties. Revenues are comprised of loan fees, net interest revenue and mortgage servicing fees.

 

In millions of dollars    2006     2005     2004    

% Change

2006 vs. 2005

   

% Change

2005 vs. 2004

 

Net interest revenue

   $ 4,841     $ 4,931     $ 4,915     (2 )%    

Non-interest revenue

     678       538       146     26     NM  

Revenues, net of interest expense

   $ 5,519     $ 5,469     $ 5,061     1 %   8 %

Operating expenses

     1,813       1,700       1,629     7     4  

Provisions for loan losses and for benefits and claims

     660       614       658     7     (7 )

Income before taxes and minority interest

   $ 3,046     $ 3,155     $ 2,774     (3 )%   14 %

Income taxes

     1,076       1,155       1,052     (7 )   10  

Minority interest, net of taxes

     58       62       58     (6 )   7  

Net income

   $ 1,912     $ 1,938     $ 1,664     (1 )%   16 %

Revenues, net of interest expense, by business:

          

Real Estate Lending

   $ 3,620     $ 3,558     $ 3,196     2 %   11 %

Student Loans

     632       652       612     (3 )   7  

Auto

     1,267       1,259       1,253     1      

Total revenues

   $ 5,519     $ 5,469     $ 5,061     1 %   8 %

Net income by business:

          

Real Estate Lending

   $ 1,401     $ 1,378     $ 1,180     2 %   17 %

Student Loans

     220       234       227     (6 )   3  

Auto

     291       326       257     (11 )   27  

Total net income

   $ 1,912     $ 1,938     $ 1,664     (1 )%   16 %

Average assets (in billions of dollars)

   $ 241     $ 189     $ 156     28 %   21 %

Return on assets

     0.79 %     1.03 %     1.07 %    

Average risk capital (1)

   $ 3,930     $ 3,280     $ 2,689     20 %   22 %

Return on risk capital (1)

     49 %     59 %     62 %    

Return on invested capital (1)

     28 %     32 %     30 %            

Key indicators: (in billions of dollars)

          

Net interest margin: (2)

          

Real Estate Lending

     2.01 %     2.46 %     2.92 %    

Student Loans

     1.61 %     1.96 %     2.64 %    

Auto

     8.78 %     10.52 %     11.72 %    

Originations:

          

Real Estate Lending

   $ 142.1     $ 131.9     $ 115.3     8 %   14 %

Student Loans

   $ 11.0     $ 10.8     $ 7.8     2 %   38 %

Auto

   $ 9.1     $ 6.4     $ 5.3     42 %   21 %

 

(1) See footnote 6 to the table on page 3.
(2) As a percentage of average loans.
NM Not meaningful

 

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2006 vs. 2005

Net Interest Revenue declined, reflecting net interest margin compression that was partially offset by a 19% increase in average loan balances. Non-Interest Revenue increased on higher gains on sales of real estate loans, student loans, and mortgage-backed securities, partially offset by lower servicing revenues. Average loan growth reflected a strong increase in originations, with increases in real estate and auto lending of 8% and 42%, respectively.

During 2006, the Real Estate business expanded its Mortgage-Backed Securities Program as part of an integrated mortgage business model that includes origination, purchase, investing, securitizing and servicing. At December 31, 2006, the balance in mortgage-backed securities was $66 billion, and the balance in real estate loans was $173 billion. From time to time the Company may vary the mix of loans and securities depending on the opportunities and other factors affecting the portfolio. In 2006, realized gains on sales of these securities totaled $252 million.

Operating expenses increased primarily due to higher loan origination volumes, investment spending, and the impact of SFAS 123(R).

Provisions for loan losses and for benefits and claims increased primarily on higher credit losses in the Real Estate Lending and Auto businesses, partially offset by higher loan loss reserve releases of $63 million in the Real Estate business. Credit losses increased due to volume growth and seasoning in Real Estate, as well as volume growth in Autos.

2005 vs. 2004

Net Interest Revenue was flat compared to the prior-year period as a 20% increase in average loan balances was offset by net interest margin compression. Non-Interest Revenue increased due to improved net servicing revenues, higher securitization and portfolio sales gains, and the benefit of the Principal Residential Mortgage, Inc. (PRMI) acquisition. The increase in net revenues was driven by the absence of a loss in the prior year due to servicing hedge ineffectiveness caused by the volatile rate environment. Average loan growth reflected a 16% increase in originations across all businesses.

Operating expenses increased primarily due to higher volumes and the impact of the PRMI acquisition.

Provisions for loan losses and for benefits and claims decreased due to lower net credit losses of $136 million, primarily in the Auto and Real Estate Lending businesses, partially offset by lower loan loss reserve releases of $91 million. The lower loan loss reserve releases reflected a $110 million reserve build related to the estimated impact of Hurricane Katrina in the 2005 third quarter, partially offset by reserve releases of $89 million in Auto and $76 million in Real Estate Lending related to the reorganization of the U.S. Consumer Finance businesses. The continued favorable credit environment drove a decline in the net credit loss ratio.

A 20% increase in prime mortgage originations and home equity loans drove loan growth. Non-prime mortgage originations declined 20%, reflecting the Company’s decision to avoid offering teaser rate and interest-only mortgages to lower FICO score customers.


 

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U.S. Commercial Business

LOGO

U.S. Commercial Business provides equipment leasing, financing, and banking services to small- and middle-market businesses ($5 million to $500 million in annual revenues) and financing for investor-owned multifamily and commercial properties. Revenues are comprised of net interest revenue and fees on loans and leases.

 

In millions of dollars   2006     2005     2004    

% Change

2006 vs. 2005

   

% Change

2005 vs. 2004

 

Net interest revenue

  $ 1,199     $ 1,318     $ 1,597     (9 )%   (17 )%

Non-interest revenue

    784       981       697     (20 )   41  

Revenues, net of interest expense

  $ 1,983     $ 2,299     $ 2,294     (14 )%    

Operating expenses

    1,390       1,340       1,307     4     3 %

Provision for loan losses

    (45 )     9       (118 )   NM     NM  

Income before taxes

  $ 638     $ 950     $ 1,105     (33 )%   (14 )%

Income taxes

    77       221       340     (65 )   (35 )

Net income

  $ 561     $ 729     $ 765     (23 )%   (5 )%

Average assets (in billions of dollars)

  $ 44     $ 38     $ 37     16 %   3 %

Return on assets

    1.28 %     1.92 %     2.07 %    

Average risk capital (1)

  $ 2,331     $ 1,813     $ 1,976     29 %   (8 )%

Return on risk capital (1)

    24 %     40 %     39 %    

Return on invested capital (1)

    12 %     26 %     27 %            

Key indicators: (in billions of dollars):

         

Average earning assets

  $ 36.7     $ 33.0     $ 33.7     11 %   (2 )%

 

(1) See footnote 6 to the table on page 3.

NM Not meaningful

 

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2006 vs. 2005

Net Interest Revenue declined as continued net interest margin compression was offset by growth in core loan and deposit balances, up 15% and 9%, respectively. Non-Interest Revenue declined primarily due to the absence of the $162 million legal settlement benefit in the 2005 third quarter related to the purchase of Copelco, and the $161 million gain on sale of the CitiCapital Transportation Finance business in the 2005 first quarter, partly offset by the $31 million gain on the Sale of New York Branches in the 2006 second quarter.

Operating expense growth was primarily from higher volume-related expenses, the absence of a $23 million expense benefit due to the Copelco settlement recorded in the prior-year and SFAS 123(R); these were partially offset by lower expenses from the absence of the transportation finance business and severance costs in the prior year.

Provision for loan losses declined primarily due to higher loan loss reserve releases of $63 million from a favorable credit environment, and the continued liquidation of non-core portfolios.

Deposit and core loan growth reflected strong transaction volumes and balances across all business units, partially offset by declines in the liquidating portfolio.

 

2005 vs. 2004

Net Interest Revenue declined primarily due to the continuing impact of net interest margin compression, partially offset by strong growth in core loan and deposit balances, up 13% and 20%, respectively. Non-Interest Revenue increased primarily due to a $162 million legal settlement benefit in the 2005 third quarter related to the purchase of Copelco, a $161 million gain on the sale of the CitiCapital Transportation Finance business in the 2005 first quarter, and the reclassification of operating leases from loans to other assets and the related operating lease depreciation expense from revenue to expense. The reclassification of operating leases increased both revenues and expenses by $123 million. The impact of the FAB acquisition also contributed to higher revenues.

Operating expenses increased primarily due to the impact of the operating lease reclassification from revenue to expense of $123 million and the impact of the FAB acquisition, partially offset by lower expenses from the sold transportation finance businesses and a $23 million expense benefit related to the Copelco legal settlement.

Provision for loan losses increased primarily due to the absence of $216 million in loan loss reserve releases during 2004, partially offset by lower net credit losses due to an improved credit environment and the continued liquidation of non-core portfolios.

Deposit and core loan growth reflected strong transaction volumes and balances across all business units and the impact of the FAB acquisition, partially offset by declines in the liquidating portfolio, primarily due to the impact of the sale of the CitiCapital Transportation Finance business.


 

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U.S. CONSUMER OUTLOOK

Certain of the statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See “Forward-Looking Statements” on page 97.

In 2007, the U.S. Consumer businesses will focus on continued expansion of its customer base, investments in expanding the branch network, offering a more integrated set of products and services, and the benefit of acquisitions and strategic investments made previously. The businesses will also focus on tight expense control, productivity improvements and effective credit management. Revenues and credit performance will be affected by U.S. economic conditions, including the level of interest rates, bankruptcy filings and unemployment rates.

In 2007, the U.S. Consumer business is expected to operate in a stable economic environment. Net interest revenue pressure is expected to continue, but at a lesser pace, due to the flat yield curve and the competitive pricing environment. Credit costs are expected to increase slightly as the unusually low bankruptcy filings experienced in 2006 are expected to rise back to more normalized levels. Inflation is expected to remain well-contained.

U.S. Cards—In 2007, the competitive environment is expected to remain challenging. U.S. Cards expects to generate earnings growth as managed receivables increase and expenses remain controlled through improved productivity levels and efficiencies of scale. Growth in managed receivables will be driven by new product launches and private-label expansion. Credit costs will increase slightly from the unusually favorable credit environment in 2006, reflecting increased bankruptcy filing levels.

U.S. Retail Distribution—In 2007, U.S. Retail Distribution expects to generate increases in loans, deposits and accounts, which will in turn drive

earnings growth. The business expects to continue to expand its footprint with a continued program of new branch openings in both the Citibank and CitiFinancial businesses, to continue to grow our Citibank Direct business and to expand cross-marketing opportunities. The challenging interest rate environment is expected to continue, with a corresponding shift in deposits to lower-profit time deposits and CDs, which will affect revenue growth. Credit costs are expected to increase slightly, as unusually low bankruptcy levels in 2006 are expected to rise back to more normalized levels.

U.S. Consumer Lending—In 2007, U.S. Consumer Lending expects to generate earnings growth across its product lines. In Real Estate Lending, an expected decline in the level of new housing starts and existing home sales is expected to be mitigated by an increase in the Retail Distribution network of branches, higher sales from Primerica agents and the Smith Barney network, and from the acquisition of ABN AMRO Mortgage Group. With the acquisition of ABN AMRO, the combined company will move from number five to number four in mortgage loan servicing and strengthen CitiMortgage’s number three market position in originations, based on 2006 third quarter data. Results are also expected to reflect higher portfolio balances and servicing activities. Credit costs are expected to increase modestly due to seasoning in the rapidly growing Home Equity portfolio.

U.S. Commercial Business—In 2007, U.S. Commercial Business expects to generate increases in loans, deposits and accounts by continuing to expand its core business portfolio and through leveraging the expanded Retail Branch network. The business will also focus on tight expense control, effective credit management, and productivity improvements. The credit environment is expected to remain stable.


 

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International Consumer

LOGO

International Consumer is comprised 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   2006      2005      2004    

% Change

2006 vs. 2005

   

% Change

2005 vs. 2004

 

Net interest revenue

  $ 12,866      $ 12,180      $ 11,188     6 %   9 %

Non-interest revenue

    6,929        6,216        5,236     11     19  

Revenues, net of interest expense

  $ 19,795      $ 18,396      $ 16,424     8 %   12 %

Operating expenses

    11,201        9,520        8,549     18     11  

Provisions for loan losses and for benefits and claims

    3,779        3,463        2,653     9     31  

Income before taxes and minority interest

  $ 4,815      $ 5,413      $ 5,222     (11 )%   4 %

Income taxes

    791        1,314        1,340     (40 )   (2 )

Minority interest, net of taxes

    7        1        2     NM     (50 )

Net income

  $ 4,017      $ 4,098      $ 3,880     (2 )%   6 %

Revenues, net of interest expense, by region:

           

Mexico

  $ 5,191      $ 4,373      $ 3,607     19 %   21 %

Latin America

    1,829        1,110        979     65     13  

EMEA

    5,387        5,201        4,735     4     10  

Japan

    2,455        3,251        3,290     (24 )   (1 )

Asia

    4,933        4,461        3,813     11     17  

Total revenues

  $ 19,795      $ 18,396      $ 16,424     8 %   12 %

Net income by region:

           

Mexico

  $ 1,605      $ 1,432      $ 978     12 %   46 %

Latin America

    202        236        296     (14 )   (20 )

EMEA

    725        374        802     94     (53 )

Japan

    119        706        616     (83 )   15  

Asia

    1,366        1,350        1,188     1     14  

Total net income

  $ 4,017      $ 4,098      $ 3,880     (2 )%   6 %

Average assets (in billions of dollars)

  $ 183      $ 167      $ 150     10 %   11 %

Return on assets

    2.20 %      2.45 %      2.59 %    

Average risk capital (1)

  $ 12,774      $ 13,014      $ 11,309     (2 )%   15 %

Return on risk capital (1)

    31 %      31 %      34 %    

Return on invested capital (1)

    15 %      16 %      16 %            

Key indicators – (in billions of dollars)

           

Average managed loans

  $ 114.8      $ 106.5      $ 93.8     8 %   14 %

Average deposits

  $ 147.5      $ 136.3      $ 125.1     8 %   9 %

EOP AUMs

  $ 138.2      $ 115.4      $ 99.7     20 %   16 %

Total branches (actual number)

    4,669        4,064        3,634     15 %   12 %

 

(1) See footnote 6 to the table on page 3.

NM Not meaningful.

 

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International Cards

LOGO

International Cards provides MasterCard, Visa and Diners branded credit and charge cards, as well as private label cards and co-branded cards, to more than 30 million customer accounts in 43 countries outside of the U.S. and Canada. Revenues are primarily generated from net interest revenue on receivables, interchange fees on purchase sales and other delinquency and servicing fees.

 

In millions of dollars   2006      2005      2004    

% Change

2006 vs. 2005

   

% Change

2005 vs. 2004

 

Net interest revenue

  $ 3,717      $ 2,776      $ 2,351     34 %   18 %

Non-interest revenue

    2,242        2,074        1,723     8     20  

Revenues, net of interest expense

  $ 5,959      $ 4,850      $ 4,074     23 %   19 %

Operating expenses

    2,908        2,371        2,131     23     11  

Provision for loan losses

    1,566        739        510     NM     45  

Income before taxes and minority interest

  $ 1,485      $ 1,740      $ 1,433     (15 )%   21 %

Income taxes

    345        364        293     (5 )   24  

Minority interest, net of taxes

    3        3        3          

Net income

  $ 1,137      $ 1,373      $ 1,137     (17 )%   21 %

Revenues, net of interest expense, by region:

           

Mexico

  $ 1,826      $ 1,311      $ 870     39 %   51 %

Latin America

    869        297        280     NM     6  

EMEA

    1,302        1,277        1,157     2     10  

Japan

    288        302        295     (5 )   2  

Asia

    1,674        1,663        1,472     1     13  

Total revenues

  $ 5,959      $ 4,850      $ 4,074     23 %   19 %

Net income by region:

           

Mexico

  $ 513      $ 564      $ 377     (9 )%   50 %

Latin America

    147        108        120     36     (10 )

EMEA

    149        188        164     (21 )   15  

Japan

    63        75        100     (16 )   (25 )

Asia

    265        438        376     (39 )   16  

Total net income

  $ 1,137      $ 1,373      $ 1,137     (17 )%   21 %

Average assets (in billions of dollars)

  $ 31      $ 26      $ 21     19 %   24 %

Return on assets

    3.67 %      5.28 %      5.41 %    

Average risk capital (1)

  $ 2,190      $ 1,794      $ 1,240     22 %   45 %

Return on risk capital (1)

    52 %      77 %      92 %    

Return on invested capital (1)

    24 %      34 %      34 %            

Key indicators: (in billions of dollars):

           

Purchase sales

  $ 80.6      $ 68.7      $ 59.1     17 %   16 %

Average yield (2)

    19.09 %      17.82 %      16.74 %    

Net interest margin (2)

    13.83 %      12.38 %      12.79 %            

 

(1) See footnote 6 to the table on page 3.
(2) As a percentage of average loans.

NM Not meaningful

 

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2006 vs. 2005

Net Interest Revenue increased, driven by a 20% growth in average receivables and the integration of the CrediCard portfolio in Latin America. The Non-Interest Revenue increase reflected a 17% increase in purchase sales, the integration of the CrediCard portfolio, and a gain on the MasterCard IPO of $35 million in the 2006 second quarter, 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 increase in both net interest revenue and non-interest revenue.

Operating expenses increased, reflecting the integration of the CrediCard portfolio, volume growth across the regions, continued investment spending, the adoption of SFAS 123(R), the impact of foreign currency translation, and the absence of prior-year expense credits related to Mexico VAT.

Provision for loan losses increased, driven by portfolio growth and target market expansion in Mexico, the industry-wide credit deterioration in Taiwan, credit losses relating to the CrediCard integration in Latin America, and volume growth in all regions.

Regional Net Income

Mexico income declined primarily due to lower levels of tax benefits and higher expenses, partially offset by higher sales volumes and average loans from portfolio growth and target market expansion (which increased both revenues and the provision for loan losses), and a gain from the MasterCard IPO. Latin America income increased, primarily due to volume and purchase sales growth. EMEA income declined, reflecting absence of the prior-year gain on the sale of a merchant-acquiring business of $57 million and higher net credit losses, partially offset by higher purchase sales, volume growth, and higher tax benefits. Asia income declined due to an increase in credit costs related to credit conditions in Taiwan and costs associated with a Korea labor settlement, partially offset by higher purchase sales and loan growth.

 

2005 vs. 2004

Net Interest Revenue increased primarily due to growth in purchase sales and average loans, as well as the impact of the KorAm acquisition, and the impact of foreign currency translation, partially offset by spread compression. Volume growth was diversified across regions, led by Mexico. Net interest spread compression reflected rising funding costs and a primarily fixed rate portfolio.

Non-Interest Revenue increased, primarily driven by a gain on the sale of a merchant-acquiring business in EMEA of $95 million, higher purchase sales, the impact of the KorAm acquisition, and the impact of foreign currency translation. This was partially offset by the absence of a prior-year gain on the sale of Orbitall (credit card processing company in Brazil) of $42 million.

Operating expenses increased, primarily driven by the impact of higher expansion expenses in Asia and EMEA, integration expenses of CrediCard in the Brazil franchise, the KorAm acquisition, and the impact of foreign currency translations. A VAT refund in Mexico during the 2005 third quarter partially offset expense growth.

Provision for loan losses reflected an increase in net credit losses, due primarily to volume growth in Mexico, which was partially offset by declines in Asia. During 2005, loan loss reserves increased by $175 million, reflecting portfolio expansion and the absence of prior-year reserve releases of $103 million, recorded mostly in Asia and Latin America.

Regional Net Income

Mexico income increased due to higher sales volumes and average loans, as well as a tax benefit related to the Homeland Investment Act and the VAT refund. Latin America income declined primarily due to the 2004 gain on the sale of Orbitall and the absence of 2004 credit reserve releases. EMEA income increased primarily due to the gain on the sale of a merchant-acquiring business, partially offset by increased expense related to business expansion and customer acquisition initiatives. Japan income declined primarily due to tax credits received in 2004. Asia income increased due to strong sales, loan balance increases, and improved net credit loss experience.


 

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International Consumer Finance

LOGO

International Consumer Finance provides community-based lending services through a branch network, centralized sales platforms and cross-selling initiatives with International Cards and International Retail Banking. As of December 31, 2006, International Consumer Finance maintained 2,588 sales points comprised of 1,779 branches in more than 25 countries, and 809 Automated Loan Machines (ALMs) in Japan. International Consumer Finance offers real-estate-secured loans, unsecured or partially secured personal loans, auto loans, and loans to finance consumer-goods purchases. Revenues are primarily derived from net interest revenue and fees on loan products.

 

In millions of dollars   2006      2005      2004    

% Change

2006 vs. 2005

   

% Change

2005 vs. 2004

 

Net interest revenue

  $ 3,149      $ 3,674      $ 3,600     (14 )%   2%  

Non-interest revenue

    169        145        82     17     77  

Revenues, net of interest expense

  $ 3,318      $ 3,819      $ 3,682     (13 )%   4%  

Operating expenses

    1,750        1,612        1,479     9     9  

Provision for loan losses

    1,573        1,272        1,364     24     (7)  

Income before taxes and minority interest

  $ (5 )    $ 935      $ 839     NM     11%  

Income taxes

    (45 )      293        253     NM     16  

Net income

  $ 40      $ 642      $ 586     (94 )%   10%  

Revenues, net of interest expense, by region:

           

Mexico

  $ 236      $ 184      $ 165     28 %   12%  

Latin America

    155        123        96     26     28  

EMEA

    771        743        717     4     4  

Japan

    1,694        2,475        2,526     (32 )   (2)  

Asia

    462        294        178     57     65  

Total revenues

  $ 3,318      $ 3,819      $ 3,682     (13 )%        4 %

Net income (loss) by region:

           

Mexico

  $ 41      $ 36      $ 41     14 %   (12)%  

Latin America

    (2 )      10        28     NM     (64)  

EMEA

    4        36        126     (89 )   (71)  

Japan

    (62 )      505        362     NM     40  

Asia

    59        55        29     7     90  

Total net income

  $ 40      $ 642      $ 586     (94 )%   10%  

Average assets (in billions of dollars)

  $ 28      $ 26      $ 26     8 %   —%  

Return on assets

    0.14 %      2.47 %      2.25 %    

Average risk capital (1)

  $ 1,114      $ 918      $ 1,003     21 %   (8)%  

Return on risk capital (1)

    4 %      70 %      58 %    

Return on invested capital (1)

    1 %      18 %      16 %            

Key indicators:

           

Average yield (2)

    16.06 %      18.68 %      18.33 %    

Net interest margin (2)

    13.23 %      16.48 %      16.53 %    

Number of sales points:

           

Other branches

    1,644        1,130        754     45 %   50%  

Japan branches

    135        325        405     (58 )%   (20)%  

Japan Automated Loan Machines

    809        682        512     19 %   33%  

Total

    2,588        2,137        1,671     21 %   28%  

 

(1) See footnote 6 to the table on page 3.
(2) As a percentage of average loans.

NM Not meaningful

 

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2006 vs. 2005

Net Interest Revenue declined, driven by lower results in Japan due to the recent 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 23% from the prior year, driven by higher volumes in Asia, Latin America, and Mexico. Non-Interest Revenue increased, primarily on higher insurance and other fees and the impact of foreign currency translation.

Operating expense increased primarily due to a $60 million pretax repositioning charge in Japan to close approximately 270 branches and 100 ALMs. Excluding Japan, expenses increased primarily due to investment spending, with 520 new branch openings and higher volume-related expenses.

Provision for loan losses increased primarily due to legislative and other actions affecting the consumer finance industry in Japan, including loan loss reserve builds and higher net credit losses. An increase in net credit losses in EMEA and Asia, driven by higher volumes, also contributed to higher credit costs in 2006. The increases were partially offset by the absence of the standardization of the loan write-off policy in Spain and Italy in the 2005 third quarter.

The increase in average loans outside of Japan was mainly driven by growth in the personal loan and real-estate-secured portfolios. In Japan, average loans declined by 5%, due to the impact of foreign currency translation and tightened credit related to the passing of changes to consumer lending laws.

 

2005 vs. 2004

Net Interest Revenue increased, driven by growth in all regions except Japan, mainly due to higher loan volumes. Net Interest Revenue in Japan declined due to lower personal and real-estate- secured loan balances, partially offset by the impact of foreign currency translation. Non-Interest Revenue increased primarily on higher insurance and other fees and the impact of foreign currency translation.

Operating expense increased, reflecting the impact of investment spending associated with the expansion of 376 branches outside of Japan and repositioning charges in EMEA during the 2005 first quarter of $38 million. These were partially offset by declines in Japan due to the closing of branches and the transition to ALMs.

Provision for loan losses declined due to improved credit conditions, including lower bankruptcy losses in Japan of $96 million. This was partially offset by higher personal loan losses in the U.K., standardization of the loan write-off policy in Spain and Italy, and lower credit reserve releases. The net credit loss ratio declined 61 basis points to 5.75%.

Growth in average loans was mainly driven by increases in the real-estate-secured and personal-loan portfolios in EMEA and Asia, partially offset by a decline in EMEA auto loans. In Japan, average loans declined by 10%, due to the impact of higher pay-downs, reduced loan demand, and the impact of foreign currency translation.


 

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International Retail Banking

LOGO

International Retail Banking delivers a wide array of banking, lending, insurance and investment services through a network of local branches and electronic delivery systems, including ATMs, call centers and the Internet. International Retail Banking serves 52 million customer accounts for individuals and small businesses. Revenues are primarily derived from net interest revenue on deposits and loans, and fees on mortgage, banking, and investment products.

 

In millions of dollars   2006     2005     2004    

% Change

2006 vs. 2005

   

% Change

2005 vs. 2004

 

Net interest revenue

  $ 6,000     $ 5,730     $ 5,237     5 %   9 %

Non-interest revenue

    4,518       3,997       3,431     13     16  

Revenues, net of interest expense

  $ 10,518     $ 9,727     $ 8,668     8 %   12 %

Operating expenses

    6,543       5,537       4,939     18     12  

Provisions for loan losses and for benefits and claims

    640       1,452       779     (56 )   86  

Income before taxes and minority interest

  $ 3,335     $ 2,738     $ 2,950     22 %   (7 )%

Income taxes

    491       657       794     (25 )   (17 )

Minority interest, net of taxes

    4       (2 )     (1 )   NM     (100 )

Net income

  $ 2,840     $ 2,083     $ 2,157     36 %   (3 )%

Revenues, net of interest expense, by region:

         

Mexico

  $ 3,129     $ 2,878     $ 2,572     9 %   12 %

Latin America

    805       690       603     17     14  

EMEA

    3,314       3,181       2,861     4     11  

Japan

    473       474       469         1  

Asia

    2,797       2,504       2,163     12     16  

Total revenues

  $ 10,518     $ 9,727     $ 8,668     8 %   12 %

Net income by region:

         

Mexico

  $ 1,051     $ 832     $ 560     26 %   49 %

Latin America

    57       118       148     (52 )   (20 )

EMEA

    572       150       512     NM     (71 )

Japan

    118       126       154     (6 )   (18 )

Asia

    1,042       857       783     22     9  

Total net income

  $ 2,840     $ 2,083     $ 2,157     36 %   (3 )%

Average assets (in billions of dollars)

  $ 124     $ 115     $ 103     8 %   12 %

Return on assets

    2.29 %     1.81 %     2.09 %    

Average risk capital (1)

  $ 9,470     $ 10,302     $ 9,067     (8 )%   14 %

Return on risk capital (1)

    30 %     20 %     24 %    

Return on invested capital (1)

    16 %     11 %     13 %            

Key indicators: (in billions of dollars):

         

Average deposits

  $ 147.5     $ 136.3     $ 125.1     8 %   9 %

AUMs (EOP)

  $ 138.2     $ 115.4     $ 103.4     20 %   12 %

Average loans

  $ 64.1     $ 61.7     $ 53.6     4 %   15 %
(1) See footnote 6 to the table on page 3.
NM Not meaningful.

 

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2006 vs. 2005

Net Interest Revenue increased, reflecting growth in loans and deposits of 4% and 8%, respectively. Non-Interest Revenue increased primarily due to improvements in all regions except Japan, driven by an increase in investment product sales of 36%, the 2006 fourth quarter $234 million gain in Mexico on the sale of Avantel, increased insurance and other banking fees, and the impact of foreign currency translation. Assets under management grew by 20%.

Operating expenses increased on increased investment spending (which included 342 new branch openings), higher business volumes, SFAS 123(R) charges, higher advertising and marketing costs, and the costs associated with the labor settlement in Korea.

Provisions for loan losses and for benefits and claims declined primarily due to the absence of the 2005 third quarter charge of $476 million to standardize the loan write-off policy in Germany and Belgium and the 2005 second quarter increase of $127 million in the Germany credit reserve to reflect increased experience with the effects of bankruptcy law liberalization. Additionally, the decline was due to 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 tax benefits in Mexico and Asia, including utilization of $288 million of APB 23 benefits in Mexico, a 2006 first quarter $55 million benefit from the resolution of the Federal Tax Audit, an $18 million benefit related to the resolution of the New York Tax Audits, and the impact of a lower overall effective tax rate, partially offset by the absence of a 2005 third quarter Homeland Investment Act tax benefit of $61 million in Mexico.

Regional Net Income

Mexico income growth was driven by a 2006 fourth quarter $145 million after-tax gain on the sale of Avantel, utilization in 2006 of APB 23 tax benefits totaling $288 million, and growth in average loans and deposits. Partially offsetting the income growth was the absence of both a $79 million prior- year value added tax refund and a $50 million gain from the favorable impact of restructuring Mexican government bonds, net interest margin compression, and higher expenses from increased investment spending. Latin America income declined primarily due to increased expenses associated with new branches in Brazil, partly offset by strong growth in loans and deposits, up 46% and 7%, respectively. EMEA income increased, driven primarily by the absence of the 2005 third quarter $323 million after-tax change to standardize the loan write-off policy, the absence of an $81 million loan loss reserve build in the 2005 second quarter, strong growth in customer deposits and investment product sales, and higher Germany asset sales. Partially offsetting the increased income were higher expenses from increased business volumes and investment spending tied to retail bank branch expansion. Japan income declined due to lower deposits and higher expenses, mainly due to the consolidation and compliance activities related to the shutdown of Japan Private Bank and the impact of foreign currency translation. Asia income increased, benefiting from higher deposit revenues and investment product sales and loan loss reserve releases in Korea and Australia; this was partly offset by increased investment spending tied to retail bank branch expansion and the costs associated with the Korea labor settlement.

 

2005 vs. 2004

Net Interest Revenue increased, with improved deposit revenues in all regions; higher branch lending revenues in EMEA, Asia and Latin America; the benefits of foreign currency translation; and the impact of the KorAm acquisition. Non-Interest Revenue increased primarily driven by higher investment revenues in all regions except Latin America; the impact of the KorAm acquisition, the impact in Mexico of the 2005 second quarter gain related to Fobaproa and the 2005 third quarter value added tax refund; and the benefits of foreign currency translation. Average loans grew 15%, primarily in Asia, Mexico, and Japan, while average deposits grew by 9%, primarily in Asia, Mexico, and EMEA. Assets under management increased by 17%.

Operating expenses increased due to the expansion of the distribution network in all regions except Japan, foreign currency translation, the impact of first quarter 2005 repositioning expenses of $70 million, and the impact of the KorAm acquisition. This was partially offset by the VAT refund of $93 million in Mexico. Total branches grew by a net 131 during 2005, reflecting the opening of 183 new branches.

Provisions for loan losses and for benefits and claims increased as a sustained improvement in credit quality was more than offset by a $476 million pretax charge to standardize loan write-off policies in EMEA to the global write-off policy and a $127 million increase in the German credit reserves to reflect increased experience with the effects of bankruptcy law liberalization. As a result, the consumer net credit loss ratio increased to 3.05% in 2005. The standardization of the loan write-off policies resulted in a significant drop in the 90 days past-due ratio, which fell to 1.29% in 2005, compared to 3.36% in 2004 and 4.61% in 2003.

Net income in 2005 also reflected a $61 million net tax benefit from the Homeland Investment Act.

Regional Net Income

Mexico income increased on strong sales and customer balance growth, as well as the VAT refund of $79 million and tax benefits from the Homeland Investment Act. Latin America income declined, driven by repositioning expenses in 2005, and the impact of investment initiatives, primarily in Brazil. EMEA income declined, driven by the impact of the write-off policy standardization, increases in credit loss reserves in Germany, and repositioning expenses reflected in the first quarter of 2005. Japan income declined due primarily to expense growth associated with the consolidation and compliance activities related to the shutdown of the Japan Private Bank. Asia income increased, benefiting primarily from strongly improved revenues due to increased business volumes, the impact of the KorAm acquisition, and benefits from foreign currency translation.


 

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INTERNATIONAL CONSUMER OUTLOOK

Certain of the statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See “Forward-Looking Statements” on page 97.

International Consumer is diversified across a number of geographies, product groups, and customer segments and monitors the economic situation in all of the countries in which it operates. In 2007, International Consumer will continue to invest to build on the competitive advantages of its existing global network of branches, offices and sales professionals. The business expects earnings growth from expanding its customer base through organic growth, investments in expanding the branch network, and the benefit from strategic investments and 2006 acquisitions, as well as the recently announced acquisition of Egg. The Egg acquisition when combined with the U.K. Consumer operations will create a broad-spectrum consumer financial services provider. These key variables are expected to drive growth in loans, deposits and investment product sales. The businesses will also focus on tight expense control, productivity improvements and effective credit management. Revenues and credit costs will be affected by global economic conditions, including the level of interest rates, the credit environment, unemployment rates, and political and regulatory developments around the world. International economies are expected to be stable, with an improvement in economic activity expected in Western Europe and many Asian nations.

International Cards — In 2007, continued investment in customer acquisition in both new and existing markets is expected to drive increased purchase sales and loan volumes. Credit costs are expected to show some deterioration as the growing portfolio seasons, while the underlying credit environment is forecast to remain stable.

International Consumer Finance — In 2007, investment in new branches and sales professionals will continue in key expansion markets. In Japan, the impact of the changes to consumer lending laws enacted in 2006 will continue to affect the operating environment. The repositioning of the Japan business is consistent with the Company’s efforts to establish a lower-cost platform and will enable it to compete more effectively in the new interest rate environment. The business expects to break even during 2007. Excluding  Japan, organic growth in existing branches, coupled with new branch openings, is expected to drive revenue and earnings growth. Offerings of new loan products and services in new markets will continue, and gains in market share across several key international regions are forecast. The credit environment in Japan will be impacted by the changes enacted in 2006. Outside of Japan, credit costs are expected to increase slightly, in line with the growing portfolio.

International Retail Banking — In 2007, the business will continue to invest in branch expansion and build on a strong presence in several key

markets. The business is expected to generate revenue and earnings growth through an expanded base of customers, as well as increases in loan and deposit balances and increased investment product sales. Credit costs are expected to deteriorate following the loan loss releases in 2006, and as the growing portfolio seasons, while the underlying credit environment is forecast to remain stable. During 2006, the business benefited from a higher level of APB 23 tax benefits, which are expected to be at lower levels in 2007.

 

Other Consumer

Other Consumer includes certain treasury and other unallocated staff functions and global marketing.

 

In millions of dollars   2006     2005      2004  

Net interest revenue

  $ (211 )   $ (164 )    $ (128 )

Non-interest revenue

    121       (94 )      684  

Revenues, net of interest expense

  $ (90 )   $ (258 )    $ 556  

Operating expenses

    583       349        388  

Income (loss) before tax benefits

  $ (673 )   $ (607 )    $ 168  

Income taxes (benefits)

    (322 )     (233 )      71  

Net income (loss)

  $ (351 )   $ (374 )    $ 97  

2006 vs. 2005

Revenues and expenses reflect certain unallocated items that are not reported in the Global Consumer operating segments.

The net loss decrease was primarily due to the absence of the 2005 first quarter loss on the sale of a Manufactured Housing loan portfolio of $109 million after-tax, the 2006 first quarter tax benefit of $40 million on the resolution of the Federal Tax Audit, and other tax benefits of $17 million, partially offset by SFAS 123(R) charges of $25 million after-tax and higher staff payments and legal costs.

2005 vs. 2004

Revenues and expenses reflect certain unallocated items that are not reported in the Global Consumer operating segments.

The net income decline was primarily due to the absence of a $378 million after-tax gain related to the sale of Samba in the 2004 second quarter, and the 2005 first quarter loss on the sale of a Manufactured Housing Loan portfolio of $109 million after-tax, partially offset by the absence of a $14 million after-tax write-down of assets in a non-core business in the 2004 fourth quarter and lower legal costs. Excluding the impact of the Samba gain, the decline in 2004 was primarily due to lower treasury results, including the impact of higher capital funding costs, the $14 million after-tax write-down of assets in the 2004 fourth quarter, and higher staff-related, global marketing and legal costs.


 

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CORPORATE AND INVESTMENT BANKING

LOGO

Corporate and Investment Banking (CIB) provides corporations, governments, institutions and investors in approximately 100 countries with a broad range of financial products and services. CIB includes Capital Markets and Banking, Transaction Services and Other CIB.

 

In millions of dollars   2006     2005     2004    

% Change

2006 vs. 2005

   

% Change

2005 vs. 2004

 

Net interest revenue

  $ 8,492     $ 8,100     $ 9,050     5 %   (10 )%

Non-interest revenue

    18,695       15,763       12,736     19     24  

Revenues, net of interest expense

  $ 27,187     $ 23,863     $ 21,786     14 %   10 %

Operating expenses

    17,119       14,133       20,530     21     (31 )

Provision for credit losses

    359       (42 )     (975 )   NM     96  

Income before taxes and minority interest

  $ 9,709     $ 9,772     $ 2,231     (1 )%   NM  

Income taxes

    2,528       2,818       96     (10 )   NM  

Minority interest, net of taxes

    54       59       93     (8 )   (37 )%

Net income

  $ 7,127     $ 6,895     $ 2,042     3 %   NM  

Revenues, net of interest expense, by region:

         

U.S.

  $ 10,155     $ 9,901     $ 8,961     3 %   10 %

Mexico

    781       777       770     1     1  

Latin America

    1,728       1,415       1,318     22     7  

EMEA

    8,757       6,849       6,512     28     5  

Japan

    1,052       1,224       817     (14 )   50  

Asia

    4,714       3,697       3,408     28     8  

Total revenues

  $ 27,187     $ 23,863     $ 21,786     14 %   10 %

Net income by region:

         

U.S.

  $ 2,209     $ 2,950     $ (2,190 )   (25 )%   NM  

Mexico

    346       450       659     (23 )   (32 )%

Latin America

    638       619       813     3     (24 )

EMEA

    2,011       1,130       1,136     78     (1 )

Japan

    272       498       334     (45 )   49  

Asia

    1,651       1,248       1,290     32     (3 )

Total net income

  $ 7,127     $ 6,895     $ 2,042     3 %   NM  

Average risk capital (1)

  $ 21,627     $ 21,226     $ 19,047     2 %   11 %

Return on risk capital (1)

    33 %     32 %     11 %    

Return on invested capital (1)

    24 %     24 %     8 %            

 

(1) See footnote 6 to the table on page 3.
NM Not meaningful.

 

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Capital Markets and Banking

LOGO

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

 

In millions of dollars   2006     2005     2004    

% Change

2006 vs. 2005

   

% Change

2005 vs. 2004

 

Net interest revenue

  $ 5,483     $ 5,804     $ 7,314     (6 )%   (21 )%

Non-interest revenue

    15,735       13,166       9,792     20     34  

Revenues, net of interest expense

  $ 21,218     $ 18,970     $ 17,106     12 %   11 %

Operating expenses

    13,136       11,501       9,959     14     15  

Provision for credit losses

    323       (61 )     (777 )   NM     92  

Income before taxes and minority interest

  $ 7,759     $ 7,530     $ 7,924     3 %   (5 )%

Income taxes

    1,944       2,145       2,440     (9 )   (12 )

Minority interest, net of taxes

    52       58       89     (10 )   (35 )

Net income

  $ 5,763     $ 5,327     $ 5,395     8 %   (1 )%

Revenues, net of interest expense, by region:

         

U.S.

  $ 8,888     $ 8,860     $ 8,116         9 %

Mexico

    578       586       594     (1 )%   (1 )

Latin America

    1,091       896       883     22     1  

EMEA

    6,611       5,093       4,393     30     16  

Japan

    942       1,140       744     (17 )   53  

Asia

    3,108       2,395       2,376     30     1  

Total revenues

  $ 21,218     $ 18,970     $ 17,106     12 %   11 %

Net income by region:

         

U.S.

  $ 2,176     $ 2,422     $ 2,502     (10 )%   (3 )%

Mexico

    281       376       544     (25 )   (31 )

Latin America

    442       466       621     (5 )   (25 )

EMEA

    1,549       810       486     91     67  

Japan

    249       485       322     (49 )   51  

Asia

    1,066       768       920     39     (17 )

Total net income

    5,763     $ 5,327     $ 5,395     8 %   (1 )%

Average risk capital (1)

  $ 20,141     $ 19,898     $ 17,667     1 %   13 %

Return on risk capital (1)

    29 %     27 %     31 %    

Return on invested capital (1)

    21 %     20 %     24 %            

Revenue details:

         

Investment banking revenue:

         

Advisory and other fees

  $ 1,329     $ 1,212     $ 927     10 %   31 %

Equity underwriting

    1,237       1,136       1,108     9     3  

Debt underwriting

    2,688       2,151       2,187     25     (2 )

Revenue allocated to the Global Wealth Management Segment:

         

Equity underwriting

    (261 )     (309 )     (316 )   16     2  

Debt underwriting

    (195 )     (113 )     (99 )   (73 )   (14 )

Total investment banking revenue

  $ 4,798     $ 4,077     $ 3,807     18 %   7 %

Lending

    1,987       2,265       1,986     (12 )   14  

Equity markets

    3,892       3,074       2,308     27     33  

Fixed income markets

    10,974       9,599       9,148     14     5  

Other Capital Markets and Banking (2)

    (433 )     (45 )     (143 )   NM     69  

Total Capital Markets and Banking Revenue (2)

  $ 21,218     $ 18,970     $ 17,106     12 %   11 %
(1) See footnote 6 to the table on page 3.
(2) Capital Markets and Banking revenues reflect Citigroup’s portion (49%) of the results of the Nikko Citigroup Joint Venture on each respective line with an offset in Other Capital Markets and Banking to conform to the GAAP presentation.
NM Not meaningful.

 

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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.

Operating expenses were impacted by $737 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, driven by a $372 million pretax charge to increase loan loss reserves, reflecting growth in loans and unfunded lending commitments and an update to historical data used for certain loss estimates.

Regional Net Income

Net income in the U.S. declined, primarily due to higher compensation expenses (the impact from SFAS 123(R) charges) as well as lower revenues in Commodities and Lending, partially offset by higher Fixed Income and Equity Markets revenues and tax benefits from the resolution of the Federal Tax Audit and the New York Tax Audits.

Mexico net income was down, as growth in Fixed Income Markets revenues was offset by lower equity underwriting and lending revenues. Lower net income also reflected the absence of a $39 million tax benefit from provisions of the Homeland Investment Act, as well as higher compensation expense and the absence of loan loss recoveries recorded in the prior-year period.

Latin America net income declined on an increase in credit costs due to the absence of loan loss recoveries recorded in the prior-year period, higher investment spending, and the impact of SFAS 123(R) charges. These declines were partially offset by strong revenue growth in Equity and Fixed Income Markets in Brazil Investment Banking and by the tax benefits from the resolution of the Federal Tax Audit.

EMEA net income increased on double-digit growth across all major product lines in the region from higher volumes and growth in customer activity and tax benefits from the resolution of the Federal Tax Audit. The increase in net income was partially offset by higher compensation expense due to staff additions and the impact from SFAS 123(R) charges, and higher credit costs on growth in loans and unfunded loan commitments.

Net income in Japan declined as strong growth in Fixed Income was offset by a decrease in equities, the absence of a $248 million after-tax gain on the sale of Nikko Cordial shares in the 2005 fourth quarter, and higher expenses.

Net income in Asia increased, driven by broad-based double-digit growth across several products, including Fixed Income and Equity Markets and Advisory. Continued benign credit conditions and incremental tax benefits from APB 23 in Australia, and globally the resolution of the Federal Tax Audit, further bolstered full-year results.

 

2005 vs. 2004

Revenues, net of interest expense, increased, driven by growth across all products. Equity Markets revenues increased, driven by growth in cash trading, alternative execution and derivatives products. Fixed Income Markets revenue increases reflected growth in interest rate products, commodity derivatives, foreign exchange, and securitized markets. Investment Banking revenue growth was driven by increased advisory fees on strong growth in completed M&A transactions and growth in equity underwriting. Lending revenue growth was mainly due to hedging gains in credit derivatives. Revenues also include a $386 million pretax gain on the sale of Nikko Cordial shares.

Operating expenses increased due to higher incentive compensation, including repositioning costs of $212 million pretax (in the 2005 first quarter), increased investment spending on strategic growth initiatives, and the impact of the acquisitions of Knight and Lava Trading. Expenses included a $160 million pretax charge to increase reserves for previously disclosed legal matters recorded in the 2005 fourth quarter.

The provision for credit losses increased, reflecting an increase to loan loss reserves in 2005 and the absence of loan loss reserve releases recorded in the prior year. The provision for credit losses in 2005 included $289 million to increase loan loss reserves for increases in off-balance sheet exposure, and a slight decline in credit quality.

Net income in the U.S. decreased primarily due to an increased provision for credit losses.

The negative impact of a flat yield curve on revenues and the absence of loan loss reserve releases recorded in the prior year caused a decline in Mexican net income.

Latin America net income decreased primarily due to the absence of loan loss reserve releases recorded in 2004 and a decline in revenues from completed corporate finance transactions. Credit quality in Argentina and Brazil improved.

EMEA net income increased as a result of strong revenues across all businesses and lower credit provisions. Revenues increased in Fixed Income Markets, Equity Markets, Investment Banking, and Lending, on higher volumes and growth in customer activity.

Net income in Japan increased due to strong growth in Equity Markets and Fixed Income Markets revenues and a $248 million after-tax gain on the sale of Nikko Cordial shares recorded in the 2005 fourth quarter.

Net income in Asia decreased primarily due to lower Fixed Income Markets revenues, mainly in global distressed debt trading and foreign exchange trading.


 

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Transaction Services

LOGO

Transaction Services is comprised of Cash Management, Trade Services and Securities & Fund Services (SFS). Cash Management and Trade Services provide comprehensive cash management and trade finance for corporations and financial institutions worldwide. SFS provides custody and fund services to investors such as insurance companies and pension funds, clearing services to intermediaries such as broker-dealers, and depository and agency/trust services to multi-national corporations and governments globally. Revenue is generated from fees for transaction processing, net interest revenue on Trade Services loans and deposits in Cash Management and SFS, and fees on assets under custody in SFS.

 

In millions of dollars   2006      2005      2004    

% Change

2006 vs. 2005

   

% Change

2005 vs. 2004

 

Net interest revenue

  $ 3,009      $ 2,296      $ 1,745     31 %   32 %

Non-interest revenue

    2,962        2,595        2,333     14     11  

Revenues, net of interest expense

  $ 5,971      $ 4,891      $ 4,078     22 %   20 %

Operating expenses

    3,950        3,316        2,846     19     17  

Provision for credit losses

    36        19        (198 )   89     NM  

Income before taxes and minority interest

  $ 1,985      $ 1,556      $ 1,430     28 %   9 %

Income taxes

    557        420        381     33     10  

Minority interest, net of taxes

    2        1        4     100     (75 )

Net income

  $ 1,426      $ 1,135      $ 1,045     26 %   9 %

Revenues, net of interest expense, by region:

           

U.S.

  $ 1,265      $ 1,039      $ 827     22 %   26 %

Mexico

    203        191        176     6     9  

Latin America

    637        519        435     23     19  

EMEA

    2,146        1,756        1,535     22     14  

Japan

    110        84        73     31     15  

Asia

    1,610        1,302        1,032     24     26  

Total revenues

  $ 5,971      $ 4,891      $ 4,078     22 %   20 %

Net income by region:

           

U.S.

  $ 90      $ 95      $ 84     (5 )%   13 %

Mexico

    68        74        115     (8 )   (36 )

Latin America

    192        153        192     25     (20 )

EMEA

    465        320        272     45     18  

Japan

    23        13        12     77     8  

Asia

    588        480        370     23     30  

Total net income

  $ 1,426      $ 1,135      $ 1,045     26 %   9 %