Question: The following information was extracted from
The following information was extracted from Citigroup, Inc.’s 2009 annual report.
From letter to shareholders:
Financial Strength
While Citi started the year as a TARP institution receiving “exceptional financial assistance,†by the end of the year our capital and liquidity positions were among the strongest in the banking world. We repaid TARP and exited the loss-sharing agreement with the U.S. government. Tier 1 Common rose by nearly $82 billion to more than $104 billion, with a ratio of 9.6%, and we had a Tier 1 Capital Ratio39 of 11.7%—one of the highest in the industry. Structural liquidity, at 73%, was in excellent shape. The allowance for loan loss reserves stood at $36 billion or 6.1% of loans. Worldwide, deposits grew by 8% to $836 billion. The other essential component of Citi’s revived financial strength has been a large reduction in our risk exposure. By year end, we had reduced assets on our balance sheet by half a trillion dollars, or 21%, from peak levels in the third quarter of 2007. This includes a substantial decline in our riskiest assets over those years. The actions we took restored Citi’s financial strength and therefore were essential. I deeply regret that they also resulted in significant dilution for our shareholders. Citi remains committed to preserving our considerable financial strength and remaining one of the strongest banks in the world.
From management’s discussion and analysis:
Allowance for Loan Losses:
Allowance for loan losses represents management’s best estimate of probable losses inherent in
the portfolio, as well as probable losses related to large individually evaluated impaired loans and troubled debt restructurings.
Citigroup increased its allowance for loan losses.
During 2009, Citi added a net build of $8.0 billion to its allowance for loan losses. The allowance
for loan losses was $36 billion at December 31, 2009, or 6.1% of loans, compared to $29.6 billion, or 4.3% of loans, at year-end 2008. With the adoption of SFAS 166 and 167 in the first quarter of 2010, loan loss reserves would have been $49.4 billion, or 6.6% of loans, each as of December 31, 2009, and based on current estimates.
Selected details of Citigroup’s credit loss experience follow:
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial assets, an amendment of FASB Statement No. 140,†that will eliminate qualifying special purpose entities (QSPEs). This change will have a significant impact on Citigroup’s Consolidated Financial Statements. Beginning January 1, 2010, the Company will lose sales treatment for certain future asset transfers that would have been considered sales under SFAS 140, and for certain transfers of portions of assets that do not meet the definition of participating interests. Simultaneously, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),†which details three key changes to the consolidation model. First, former QSPEs will now be included in the scope of SFAS 167. In addition, the FASB has changed the method of analyzing which party to a variable interest entity (VIE) should consolidate the VIE (known as the primary beneficiary) to a qualitative determination of which party to the VIE has “power†combined with potentially significant benefits or losses, instead of the current quantitative risks and rewards model.
As a result of implementing these new accounting standards, Citigroup will consolidate certain of the VIEs and former QSPEs with which it currently has involvement. The pro forma impact on certain of Citigroup’s regulatory capital ratios of adopting these new accounting standards (based on financial information as of December 31, 2009), reflecting immediate implementation of the recently issued final risk-based capital rules regarding SFAS 166 and SFAS 167, would be as follows:
Examine the selected details of Citigroup’s credit loss experience.
a. How does the dollar amount of loans charged off in 2009 compare with that of 2008?
b. How much was added to the Provision for loan losses in 2009?
c. What is the trend in the allowance for loan losses as a percentage of total loans over the period 2005–2009?
2. As a consequence of your findings in requirement 1, how (if at all) does this new information
affect your expectation regarding the future performance of Citigroup’s existing loans? To answer this question, it will be helpful to read Citigroup’s Management Discussion and Analysis (available at http://www.citi.com/citi/fin/data/ar09c_en.pdf.), particularly pages 10 and 11.
3. What is the effect of having to comply with SFAS 166 and SFAS 167 on Citigroup’s capital
ratios? Briefly explain why this effect occurs. Refer to the Doyle National Bank discussion earlier in the book.
Transcribed Image Text:
2009 2008 2007 2006 2005 $29,616 (32,784) 2,043 (30,741) (1,602) 38,760 $ 8,940 (11,864) 1,938 $9,782 $11,269 Allowance for loan losses at January 1 Loans charged off Recoveries on loans previously charged off Net loans charged off Other-Net* $16,177 (20,760) (8,640) 1,779 (9,168) 2,352 1,749 (19,011) (1,164) (9,926) (6,861) (301) 6,320 (6,816) (1,525) 6,854 271 Provision for loan losses 33,674 16,832 Balance at December 31 $36,033 $29,616 $16,117 $8,940 $ 9,782 Allowance for loan losses as a percentage of total loans Net consumer credit losses as a percentage of average 6.09% 4.27% 2.07% 1.32% 1.68% consumer loans 5.44% 3.34% 1.87% 1.52% 1.76% Net corporate credit losses as a percentage of average corporate loans 3.12% 0.84% 0.30% 0.05% NM As of December 31, 2009 As Reported Pro Forma Tier 1 Capital Total Capital 11.67% 10.26% 15.25% 13.82%
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