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FINANCIAL INFORMATION

THE COMPANY   2
  Global Consumer   2
  Global Corporate and Investment Bank   2
  Private Client Services   3
  Global Investment Management   3
  Proprietary Investment Activities   3
  Corporate/Other   3
  International   3
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA   5
MANAGEMENT'S DISCUSSION AND ANALYSIS   6
2003 IN SUMMARY   6
EVENTS IN 2003   8
EVENTS IN 2002   10
EVENTS IN 2001   11
SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES   12
  Accounting Changes and Future Application of Accounting Standards   15
PENSION ASSUMPTIONS   16
BUSINESS FOCUS   17
  Citigroup Net Income—Product View   17
  Citigroup Net Income—Regional View   17
  Selected Revenue and Expense Items   18
GLOBAL CONSUMER   19
  Cards   20
  Consumer Finance   21
  Retail Banking   22
  Other Consumer   24
  Global Consumer Outlook   24
GLOBAL CORPORATE AND INVESTMENT BANK   25
  Capital Markets and Banking   26
  Transaction Services   26
  Other Corporate   27
  Global Corporate and Investment Bank Outlook   27
PRIVATE CLIENT SERVICES   28
  Private Client Services Outlook   28
GLOBAL INVESTMENT MANAGEMENT   29
  Life Insurance and Annuities   30
  Private Bank   32
  Asset Management   33
  Global Investment Management Outlook   34
PROPRIETARY INVESTMENT ACTIVITIES   36
CORPORATE/OTHER   37
MANAGING GLOBAL RISK   38
  Risk Capital   38
  Credit Risk Management Process   39
  Loans Outstanding   39
  Other Real Estate Owned and Other Repossessed Assets   39
  Details of Credit Loss Experience   40
  Cash-Basis, Renegotiated, and Past Due Loans   41
  Foregone Interest Revenue on Loans   41
  Consumer Credit Risk   42
  Consumer Portfolio Review   42
  Corporate Credit Risk   45
  Global Corporate Portfolio Review   47
  Loan Maturities and Sensitivity to Changes in Interest Rates   48
  Market Risk Management Process   48
  Operational Risk Management Process   51
  Country and Cross-Border Risk Management Process   52
BALANCE SHEET REVIEW   54
  Assets   54
  Liabilities   55
CAPITAL RESOURCES AND LIQUIDITY   56
  Capital Resources   56
  Liquidity   58
  Off-Balance Sheet Arrangements   63
CORPORATE GOVERNANCE AND CONTROLS AND PROCEDURES   66
FORWARD-LOOKING STATEMENTS   66
GLOSSARY OF TERMS   67
REPORT OF MANAGEMENT   69
INDEPENDENT AUDITORS' REPORT   69
CONSOLIDATED FINANCIAL STATEMENTS   70
  Consolidated Statement of Income   70
  Consolidated Balance Sheet   71
  Consolidated Statement of Changes in Stockholders' Equity   72
  Consolidated Statement of Cash Flows   73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   74
FINANCIAL DATA SUPPLEMENT   118
  Average Balances and Interest Rates, Taxable Equivalent Basis—Assets   118
  Average Balances and Interest Rates,Taxable Equivalent Basis—Liabilities and Stockholders' Equity   119
  Analysis of Changes in Net Interest Revenue, Taxable Equivalent Basis   120
  Ratios   121
  Average Deposit Liabilities in Offices Outside the U.S.   121
  Maturity Profile of Time Deposits ($100,000 or more) in U.S. Offices   121
  Short-Term and Other Borrowings   121
  Regulation and Supervision   122
  Legal Proceedings   125
10-K CROSS-REFERENCE INDEX   129
CORPORATE INFORMATION   130
  Exhibits, Financial Statement Schedules, and Reports on Form 8-K   130
CITIGROUP BOARD OF DIRECTORS   134

1


THE COMPANY

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

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

        The Company has completed certain strategic business acquisitions during the past three years, details of which can be found in Note 2 to the Consolidated Financial Statements.

        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). Certain of the Company's subsidiaries are subject to supervision and examination by their respective federal and state authorities. Additional information on the Company's regulation and supervision can be found within the Regulation and Supervision section beginning on page 122.

        At December 31, 2003, the Company had approximately 134,000 full-time and 6,000 part-time employees in the United States and approximately 119,000 full-time employees outside the United States.

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

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

GLOBAL CONSUMER

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

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

        Consumer Finance provides community-based lending services through branch networks, regional sales offices and cross-selling initiatives with other Citigroup businesses. The business of CitiFinancial is included in North America Consumer Finance. As of December 31, 2003, North America Consumer Finance maintained 2,328 offices, including 2,082 CitiFinancial offices in the U.S. and Canada, while International Consumer Finance maintained 875 offices, including 552 in Japan. Consumer Finance offers real-estate-secured loans, unsecured and partially secured personal loans, auto loans and loans to finance consumer-goods purchases. In addition, CitiFinancial, through certain subsidiaries and third parties, makes available various credit-related and other insurance products to its U.S. customers.

        Retail Banking provides banking, lending, investment and insurance services to customers through retail branches and electronic delivery systems. In North America, Retail Banking includes the operations of Citibanking North America, Consumer Assets, CitiCapital, Primerica Financial Services (Primerica), and Mexico Retail Banking. Citibanking North America delivers banking, lending, investment and insurance services through 779 branches in the U.S. and Puerto Rico and through Citibank Online, an Internet banking site on the World Wide Web. The Consumer Assets business originates and services mortgages and student loans for customers across the U.S. The CitiCapital business provides leasing and equipment financing products to small- and middle-market businesses. The business operations of Primerica involve the sale, mainly in North America, of life insurance and other products manufactured by its affiliates, including Smith Barney mutual funds, CitiFinancial mortgages and personal loans and the products of our Life Insurance and Annuities business. The Primerica sales force is composed of over 100,000 independent representatives. Mexico Retail Banking consists of the branch banking operations of Banamex. International Retail Banking provides full-service banking and investment services in EMEA, Japan, Asia, and Latin America. The Commercial Markets Group is included in Retail Banking and consists of the operations of CitiCapital, as well as middle-market lending operations in North America and the international regions.

GLOBAL CORPORATE AND INVESTMENT BANK

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

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

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

2


PRIVATE CLIENT SERVICES

Private Client Services provides investment advice, financial planning and brokerage services to affluent individuals, small and mid-size companies, non-profits and large corporations primarily through a network of more than 12,200 Smith Barney Financial Consultants in more than 500 offices worldwide. In addition, Private Client Services provides independent client-focused research to individuals and institutions around the world.

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

GLOBAL INVESTMENT MANAGEMENT

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

        Life Insurance and Annuities comprises Travelers Life and Annuity (TLA) and International Insurance Manufacturing (IIM). TLA offers individual annuity, group annuity, individual life insurance and Corporate Owned Life Insurance (COLI) products. The individual products include fixed and variable deferred annuities, payout annuities, and term, universal, and variable life insurance. These products are primarily distributed through CitiStreet Retirement Services (CitiStreet), Smith Barney, Primerica, Citibank and affiliates, and a nationwide network of independent agents and the outside broker dealer channel. The COLI products are variable universal life products distributed through independent specialty brokers. The group products include institutional pensions, including guaranteed investment contracts (GICs), payout annuities, group annuities sold to employer-sponsored retirement and savings plans, structured settlements and funding agreements. IIM provides annuities, credit, life, health, disability and other insurance products internationally, leveraging the existing distribution channels of the Consumer Finance, Retail Banking and Asset Management (retirement services) businesses. IIM has operations in Mexico, Asia, EMEA, Latin America and Japan. TLA and IIM include the realized investment gains/(losses) from sales on certain insurance-related investments.

        Private Bank provides personalized wealth management services for high-net-worth clients through 126 offices in 37 countries and territories, generating fee and interest income from investment funds management, client trading activity, trust and fiduciary services, custody services, and traditional banking and lending activities. Through its Private Bankers and Product Specialists, Private Bank leverages its extensive experience with clients' needs and its access to Citigroup to provide clients with comprehensive investment and banking services.

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

PROPRIETARY INVESTMENT ACTIVITIES

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

CORPORATE/OTHER

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

INTERNATIONAL

Citigroup International (whose operations are fully reflected in the product disclosures above) serves 54 million customer accounts in approximately 100 countries, working in partnership with the Company's product organizations.

        Citigroup International is organized by region—Asia, EMEA, Japan, and Latin America. Citigroup has a long history in each of these regions, including more than 100 years in a number of countries. The markets we serve account for 85% of the world's population and 65% of its GDP.

        In Asia in 2003, consumer growth was driven by new wealth management initiatives and expanding credit card activities. In large and growing markets like India and China, we are well-positioned to build market share across the spectrum of consumer products. In January 2003, we established a strategic alliance with the Shanghai Pudong Development Bank, which led in February 2004 to the issuance of a dual currency credit card in China, in cooperation with Citibank. The GCIB continued to gain market share with new products, expansion of our customer base, and significant deals such as the underwriting of China Life's $3 billion Initial Public Offering.

        EMEA's earnings were driven by increased sales and substantial cost reduction. The GCIB had strong market share gains, ranking number one in the region in debt and equity underwriting. Retail Banking is our largest consumer business, with a strong presence particularly in Germany. A highlight was the launch of our credit card in Russia, and we continue to expand our consumer offerings in Poland, Italy and Spain. Citigroup also introduced wealth management programs in countries in Eastern Europe and the Middle East.

        Citigroup is Japan's number one foreign corporate bank and consumer bank, and one of the largest consumer finance firms. Nikko

3


Citigroup, our investment banking joint venture, was one of Japan's top equity underwriters and in 2003, was the top mergers and acquisitions advisor in Japan, advising on the Japan Telecom and Resona transactions. Our Private Bank and joint venture with Mitsui Sumitomo Insurance are fast-growing market leaders.

        Citigroup's Latin America operations returned to profitability in 2003. Citigroup has been a leader for 90 years in Latin America, a region that is once again attracting investment. We implemented a successful repositioning of our business in the region that is expected to achieve positive results by aligning investment with the greatest opportunities for returns. In Brazil, we launched a consumer finance business targeting the large retail credit market and opened nine branches in São Paulo. Citigroup concluded the first-ever Venezuela domestic liability management transaction, completed Costa Rica's first international syndication, and acted as deal manager and global coordinator of the landmark $5.3 billion bond swap for Uruguay.

4


Citigroup Inc. and Subsidiaries

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

In millions of dollars, except per share amounts

  2003
  2002
  2001
  2000
  1999
 
Revenues, net of interest expense(1)   $ 77,442   $ 71,308   $ 67,367   $ 63,572   $ 54,809  
Operating expenses     39,168     37,298     36,528     35,809     31,049  
Benefits, claims, and credit losses(1)     11,941     13,473     10,320     8,466     7,513  
   
 
 
 
 
 
Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes     26,333     20,537     20,519     19,297     16,247  
Income taxes     8,195     6,998     7,203     7,027     6,027  
Minority interest, after-tax     285     91     87     39     27  
   
 
 
 
 
 
Income from continuing operations     17,853     13,448     13,229     12,231     10,193  
Income from discontinued operations(2)         1,875     1,055     1,288     1,177  
Cumulative effect of accounting changes(3)         (47 )   (158 )       (127 )
   
 
 
 
 
 
Net Income   $ 17,853   $ 15,276   $ 14,126   $ 13,519   $ 11,243  
   
 
 
 
 
 
Earnings per share(4)                                
Basic earnings per share:                                
Income from continuing operations   $ 3.49   $ 2.63   $ 2.61   $ 2.43   $ 2.02  
Net income     3.49     2.99     2.79     2.69     2.23  
Diluted earnings per share:                                
Income from continuing operations     3.42     2.59     2.55     2.37     1.96  
Net income     3.42     2.94     2.72     2.62     2.17  
Dividends declared per common share(4)   $ 1.10   $ 0.70   $ 0.60   $ 0.52   $ 0.41  
   
 
 
 
 
 
At December 31                                
Total assets(5)   $ 1,264,032   $ 1,097,590   $ 1,051,850   $ 902,610   $ 795,984  
Total deposits     474,015     430,895     374,525     300,586     261,573  
Long-term debt     162,702     126,927     121,631     111,778     88,481  
Mandatorily redeemable securities of subsidiary trusts     6,057     6,152     7,125     4,920     4,920  
Common stockholders' equity     96,889     85,318     79,722     64,461     56,395  
Total stockholders' equity     98,014     86,718     81,247     66,206     58,290  
   
 
 
 
 
 
Ratio of earnings to fixed charges and preferred stock dividends     2.47x     1.94x     1.63x     1.52x     1.55x  
Return on average common stockholders' equity(6)     19.8 %   18.6 %   19.7 %   22.4 %   21.5 %
Common stockholders' equity to assets     7.67 %   7.77 %   7.58 %   7.14 %   7.08 %
Total stockholders' equity to assets     7.75 %   7.90 %   7.72 %   7.33 %   7.32 %
   
 
 
 
 
 

(1)
Revenues, net of interest expense, and benefits, claims, and credit losses in the table above are disclosed on an owned basis (under Generally Accepted Accounting Principles (GAAP)). If this table were prepared on a managed basis, which includes certain effects of securitization activities, including receivables held for securitization and receivables sold with servicing retained, there would be no impact to net income, but revenues, net of interest expense, and benefits, claims, and credit losses would each have been increased by $4.750 billion, $4.123 billion, $3.568 billion, $2.459 billion and $2.707 billion in 2003, 2002, 2001, 2000 and 1999, respectively. Although a managed basis presentation is not in conformity with GAAP, the Company believes it provides a representation of performance and key indicators of the credit card business that is consistent with the way management reviews operating performance and allocates resources. Furthermore, investors utilize information about the credit quality of the entire managed portfolio as the results of both the held and securitized portfolios impact the overall performance of the Cards business. See the discussion of the Cards business on page 20.

(2)
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. See Note 3 to the Consolidated Financial Statements.

(3)
Accounting changes 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). Accounting changes of ($42) million and ($116) million in 2001 resulted from the adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), and the adoption of Emerging Issues Task Force (EITF) Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" (EITF 99-20), respectively. Accounting changes of ($135) million, $23 million and ($15) million in 1999 resulted from the adoption of Statement of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments," the adoption of SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk," and the adoption of SOP 98-5, "Reporting on the Costs of Start-Up Activities," respectively. See Note 1 to the Consolidated Financial Statements.

(4)
All amounts have been adjusted to reflect stock splits.

(5)
Reclassified to conform to the current period's presentation.

(6)
The return on average common stockholders' equity is calculated using net income after deducting preferred stock dividends.

5


MANAGEMENT'S DISCUSSION AND ANALYSIS

2003 IN SUMMARY

Citigroup Performance

        The benefits of size, diversity and franchise strength were demonstrated in 2003 when the Company reported net income of $17.85 billion, a record for Citigroup.

        Net income from continuing operations of $17.85 billion was up 33% from the prior year. The prior year's results included a $1.3 billion after-tax charge related to the establishment of reserves for regulatory settlements and related civil litigation. Excluding this charge from the prior year, net income from continuing operations was up 21%. Income was diversified by both product and region, as shown in the charts below. Revenues increased 9% from 2002, reaching $77.4 billion, outpacing expense growth of 5%. The majority of this growth was organic, largely as a result of continued momentum with clients in an improved market environment. During 2003, the Company completed the acquisition of the Sears Credit Card and Financial Products business, The Home Depot private label card portfolios, and Forum Financial. In January 2004, the Company closed on the acquisition of the consumer finance business of Washington Mutual. Additionally, the Company completed certain targeted dispositions of smaller businesses that were not part of its long-term core strategy.

INCOME FROM CONTINUING OPERATIONS

[EDGAR REPRESENTATION OF GRAPHIC DATA]

In billions of dollars

   
1999   $ 10.19
2000   $ 12.23
2001   $ 13.23
2002   $ 13.45
2003   $ 17.85

2003 INCOME FROM CONTINUING OPERATIONS BY SEGMENT*

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Global Investment Management   10 %
Private Client Services   4 %
Global Corporate and Investment Bank   31 %
Global Consumer   55 %

*
Excludes Proprietary Investment Activities ($230 million) and Corporate/Other ($114 million)

2003 INCOME FROM CONTINUING OPERATIONS BY REGION*

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Asia   10 %
Japan   4 %
EMEA   10 %
Mexico   8 %
North America   64 %
Latin America   4 %

*
Excludes Proprietary Investment Activities ($230 million) and Corporate/Other ($114 million)

        Revenue growth in the year was driven by strong growth in North America Cards, Domestic and International Retail Banking, European Capital Markets and Banking, and Private Banking. Stronger equity markets led to higher Proprietary Investment Activities results, in contrast to last year's loss in this segment. Citigroup has maintained the number-one rank in global debt and equity underwriting for nine consecutive quarters.

        An overall improvement in the credit quality of the corporate lending portfolio reduced corporate credit costs by $1.6 billion from the prior year. Consumer credit trends remained relatively stable, despite continued weakness in Germany and in the Consumer Finance business in Japan.

        Operating expenses increased 11% from the previous year, excluding the 2002 fourth quarter charge related to the establishment of reserves for regulatory settlement and related civil litigation. Including this charge, expense growth increased 5%. A portion of the expense growth was related to future investment—building technology, expanding the branch network, product development and testing, and increased advertising and marketing costs. Expense growth also reflected costs to reposition and streamline operations in various countries in Latin America and in Japan. The remaining expense growth reflects increased employee costs, primarily related to pensions and stock compensation. Options were expensed for the first time in 2003, for options granted in 2003.

NET REVENUE AND OPERATING EXPENSE

[EDGAR REPRESENTATION OF GRAPHIC DATA]

In billions of dollars

  1999
  2000
  2001
  2002
  2003
Net revenue   $ 54.8   $ 63.6   $ 67.4   $ 71.3   $ 77.4
Operating expense   $ 31.0   $ 35.8   $ 36.5   $ 37.3   $ 39.2

        The effective tax rate decreased 296 basis points to 31.1% for the year, reflecting the increase in indefinite reinvestment of earnings in various foreign jurisdictions as well as the release of reserves related to tax settlements and changes in estimates.

        Customer balances showed strong growth. Transaction Services assets under custody increased 25%, Cards managed receivables increased 24%, Private Client assets increased 20%, Travelers Life and Annuities group and individual annuities balances increased 16%, Private Bank client volumes increased 15%, Assets under Management by the Asset Management group increased 13%, Retail Banking deposits increased 10%, Consumer Finance loans increased 8% while Corporate loans decreased 11%.

TOTAL DEPOSITS

[EDGAR REPRESENTATION OF GRAPHIC DATA]

In billions of dollars

   
1999   $ 262
2000   $ 301
2001   $ 375
2002   $ 431
2003   $ 474

        Citigroup's equity capital base and trust preferred securities grew to over $104 billion despite distributing $5.8 billion in dividends to shareholders, and spending $2.4 billion on share repurchases. Stockholders' equity increased by $11.3 billion during 2003.

        The Company's Board of Directors increased the quarterly common dividend twice during 2003 and again in January 2004 by a total of 122% to 40 cents per quarter.

TOTAL CAPITAL (TIER 1 AND TIER 2)

[EDGAR REPRESENTATION OF GRAPHIC DATA]

In billions of dollars

  1999
  2000
  2001
  2002
  2003
Tier 1 and Tier 2   $ 65.9   $ 73.0   $ 75.8   $ 78.3   $ 90.3
Tier 1   $ 51.6   $ 54.5   $ 58.4   $ 59.0   $ 66.9

        The financial services industry has been adversely affected in recent years by a series of highly publicized corporate financial scandals, bankruptcies, and regulatory and law enforcement investigations. In combination, these matters have raised questions about the quality of corporate financial reporting and the effectiveness of corporate governance. Investor confidence has been eroded. In response, Congress passed the Sarbanes-Oxley Act of 2002; the SEC, NASD and NYSE promulgated sweeping regulations and corporate governance reforms; federal and state regulators and law enforcement agencies stepped up their enforcement activities; and plaintiffs filed numerous lawsuits and other legal proceedings seeking significant damages from financial institutions alleged to have had any connection to the bankruptcies, investigations and scandals referred to above. In response, Citigroup has initiated a wide-ranging set of reforms and revised business practices, including revised compliance and business practice programs and procedures with respect to research, structured finance transactions, and IPO allocations, among others. The Company has created Business Practices Committees in each area of the Company's business to review the appropriateness of business transactions and practices—not only from a risk management standpoint, but also from an ethical and reputational standpoint. The Business Practices Committee oversees these committees from the corporate level. The Company instituted these changes in an effort to ensure that it conducts its business in compliance not only with all applicable laws and regulations, but also with the highest ethical standards.

        In 2003, Charles Prince succeeded Sanford Weill as Chief Executive Officer (CEO), thus completing the Company's CEO succession plan. Mr. Weill will remain Chairman of the Board of Directors until 2006. Robert Willumstad added the title of Chief Operating Officer (COO) to his title of President.

6


DILUTED EARNINGS PER SHARE—
INCOME FROM CONTINUING OPERATIONS

[EDGAR REPRESENTATION OF GRAPHIC DATA]

1999   $ 1.96
2000   $ 2.37
2001   $ 2.55
2002   $ 2.59
2003   $ 3.42


RETURN ON COMMON EQUITY

[EDGAR REPRESENTATION OF GRAPHIC DATA]

1999   21.5 %
2000   22.4 %
2001   19.7 %
2002   18.6 %
2003   19.8 %

Outlook for 2004

        Citigroup enters 2004 well-positioned for continued growth with leading market positions, global scale, well-respected brand names, a strong distribution network and the largest capital base of all financial institutions. The investment spending in 2003, coupled with increased customer balances, positions the Company for growth in 2004. However, Citigroup's results are closely tied to the external economic environment. Weakness in global economies, credit deterioration and the continued threat of terrorism are examples of downside risk that could impact future earnings. The consumer business is sensitive to changes in unemployment, bankruptcy and consumer confidence levels. In the consumer business, Citigroup intends to leverage the newly-formed alliances with Sears and The Home Depot. The Company is targeting expansion of its Cards and Retail Banking businesses, particularly in India and China. In the Global Corporate and Investment Bank, management is focused on exploiting the opportunities in global equities, mergers and acquisitions advisory services, and derivatives. The Private Client Services business expects improving market conditions to increase transaction volumes and assets under management. Equity research coverage will be expanded in targeted sectors. The Life Insurance and Annuities and Asset Management businesses are well-positioned to benefit from the growth in the aging population. Customers are becoming more focused on the need to accumulate adequate savings for retirement, to protect these savings and to plan for the transfer of wealth to the next generation. Competition in Life Insurance and Annuities and Asset Management continues to intensify and revenues are sensitive to overall equity and fixed income market conditions. These two businesses remain exposed to downside risk in Argentina's economy and government actions. Opportunities exist for improved share gains in Private Bank, particularly in Asia.

        A detailed review and outlook for each of our businesses is included in the discussions that follow.

        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 66.

7


Events in 2003

Acquisition of Sears' Credit Card and Financial Products Business

        On November 3, 2003, Citigroup acquired the Sears' Credit Card and Financial Products business (Sears), the 8th largest portfolio in the U.S. $28.6 billion of gross receivables were acquired for a 10% premium of $2.9 billion and annual performance payments over the next ten years based on new accounts, retail sales volume and financial product sales. $5.8 billion of intangible assets and goodwill have been recorded as a result of this transaction. In addition, the companies signed a multi-year marketing and servicing agreement across a range of each company's businesses, products and services. The results of Sears are included in the Consolidated Financial Statements from November 2003 forward.

Acquisition of The Home Depot's Private-Label Portfolio

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

Common Stock Dividend Increase and Dividend Reinvestment Plan

        On July 14, 2003, the Company's Board of Directors approved a 75% increase in the quarterly dividend on the Company's common stock to 35 cents a share from 20 cents a share. On January 20, 2004, the Company increased its quarterly dividend by 14% by declaring a 40 cent dividend on its common stock. The increases in the quarterly dividend are part of an effort to reallocate capital to dividends and reduce share repurchases. Additionally, the Company's Board of Directors approved a Dividend Reinvestment Plan (the Plan) for holders of Citigroup common stock. Registered holders of Citigroup common stock may elect to participate in the Plan and have some or all of their dividends reinvested in Citigroup common stock.

Settlement of Certain Legal and Regulatory Matters

        On July 28, 2003, Citigroup entered into final settlement agreements with the Securities and Exchange Commission (SEC), the Office of the Comptroller of the Currency (OCC), the Federal Reserve Bank of New York (FED), and the Manhattan District Attorney's Office that resolve on a civil basis their investigations into Citigroup's structured finance work for Enron. The Company also announced that its settlement agreement with the SEC concludes that agency's investigation into certain Citigroup work for Dynegy. The agreements were reached by Citigroup (and, in the case of the agreement with the OCC, Citibank, N.A.) without admitting or denying any wrongdoing or liability, and the agreements do not establish wrongdoing or liability for the purpose of civil litigation or any other proceeding. Citigroup has paid from previously established reserves an aggregate amount of $145.5 million in connection with these settlements.

        On April 28, 2003, Salomon Smith Barney Inc., now named Citigroup Global Markets Inc. (CGMI), announced final agreements with the SEC, the National Association of Securities Dealers (NASD), the New York Stock Exchange (NYSE) and the New York Attorney General (as lead state among the 50 states, the District of Columbia and Puerto Rico) to resolve on a civil basis all of their outstanding investigations into its research and IPO allocation and distribution practices (the Research Settlement). CGMI reached these final settlement agreements without admitting or denying any wrongdoing or liability. The Research Settlement does not establish wrongdoing or liability for purposes of any other proceeding. Citigroup has paid from previously established reserves an aggregate amount of $300 million and committed to spend an additional $75 million to provide independent third-party research at no charge to clients in connection with these settlements.

Impact from Argentina's Economic Changes

        During 2003, the GCIB and Global Consumer franchises in Argentina began to emerge from the economic crisis, while the Global Investment Management franchise endured another challenging year.

        The Government began to permit loan restructurings and loan repayments resulting in minimal cost of credit for the GCIB for the year. As a result of an improving consumer credit environment, the Global Consumer allowance for credit losses was reduced by $100 million in the third quarter. On the negative side, the Company wrote-off $127 million of its government-issued compensation notes against previously established reserves. This write-off was triggered by, among other things, the government's disallowance of compensation for pesification of certain credit card and overdraft loans. While the notes were adjusted, the disallowance is still being negotiated. The initial payment of approximately $57 million due under the compensation notes was received in August 2003, and the second payment of approximately $59 million was received when due in February 2004. The Company also recognized a $13 million impairment charge on its government Patriotic Bonds. Payments required under bank deposit Amparos (judicial orders requiring previously dollar-denominated deposits that had been re-denominated at government rates to be immediately repaid at market exchange rates) were down significantly from 2002 and losses recorded in 2003, net of the $40 million reserve release, were $2 million.

        The Global Investment Management businesses in Argentina recorded pretax charges of $208 million in 2003. These charges were comprised of: $124 million in write-downs resulting from the mandatory exchange of Argentine Government Promissory Notes (GPNs) for Argentine government bonds denominated in U.S. dollars; a $44 million write-off of impaired Deferred Acquisition Costs reflecting changes in underlying cash flow estimates for the business; $20 million of losses related to the restructuring of voluntary customer annuity liability balances; and $20 million of losses related to a premium deficiency in the death and disability insurance business.

        The restructuring of customer annuity liabilities was approved by the Argentine Ministry of Insurance on July 3, 2003. An insurance subsidiary of the Company offered the plan to its voluntary annuity holders. The election period expired on January 31, 2004, at which time 70% of the voluntary annuity customers elected to participate. During the fourth quarter, the Company contributed $55 million of new capital to its Argentine Global Investment Management companies, primarily to fund the voluntary annuity restructuring plan.

        As the economic situation, as well as legal and regulatory issues, in Argentina remain fluid, we continue to work with the government and our customers and continue to monitor conditions closely. In particular, we are watching the potential impact that government actions may have on our pension and insurance businesses. Other items we continue to monitor include the realizability of government obligations such as the compensation instruments held by the Corporate and Consumer businesses and the government obligations held by the insurance subsidiaries, the potential for re-dollarization of pension annuities and further debt restructurings, and the liquidity and capital needs of the pension and insurance subsidiaries. Additional costs to the Company will depend on future actions by the Argentine government and the Company. Additional losses may be incurred.

        The Company believes it has a sound basis to bring a claim, as a result of various actions of the Argentine government. A recovery on

8


such a claim could serve to reduce the economic loss of the Company in Argentina.

        The above paragraphs contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 66.

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Events in 2002

Impact from Argentina's Economic Changes

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

        During 2002, Citigroup recorded a total of $1.704 billion in net pretax charges, as follows: $1,018 million in net provisions for credit losses; $284 million in investment write-downs; $232 million in losses relating to Amparos (representing judicial orders requiring previously dollar-denominated deposits and insurance contracts that had been redenominated at government rates to be immediately repaid at market exchange rates); $98 million of write-downs of Patriotic Bonds; a $42 million restructuring charge; and a $30 million net charge for currency redenomination and other foreign currency items that includes a benefit from compensation instruments issued in 2002.

        In addition, the impact of the devaluation of the peso during 2002 produced foreign currency translation losses that reduced Citigroup's equity by $595 million, net of tax.

Discontinued Operations

        Travelers Property Casualty Corp. (TPC) (an indirect wholly owned subsidiary of Citigroup on December 31, 2001) sold 231 million shares of its class A common stock representing approximately 23.1% of its outstanding equity securities in an initial public offering (the IPO) on March 27, 2002. In 2002, Citigroup recognized an after-tax gain of $1.158 billion as a result of the IPO. In connection with the IPO, Citigroup entered into an agreement with TPC that provides that, in any fiscal year in which TPC records asbestos-related income statement charges in excess of $150 million, net of any reinsurance, Citigroup will pay to TPC the amount of any such excess up to a cumulative aggregate of $520 million after-tax. A portion of the gross IPO gain was deferred to offset any payments arising in connection with this agreement. During 2002 and 2003, $159 million and $361 million, respectively, were paid pursuant to this agreement.

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

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

Charge for Regulatory and Legal Matters

        During the 2002 fourth quarter, the Company recorded a $1.3 billion after-tax charge ($0.25 per diluted share) related to the establishment of reserves for regulatory settlements and related civil litigation.

Acquisition of Golden State Bancorp

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

Sale of 399 Park Avenue

        During 2002, the Company sold its 399 Park Avenue, New York City headquarters building. The Company is currently the lessee of approximately 40% of the building with terms averaging 15 years. The sale for $1.06 billion resulted in a pretax gain of $830 million, with $527 million ($323 million after-tax) recognized in 2002 representing the gain on the portion of the building the Company does not occupy, and the remainder to be recognized over the term of Citigroup's lease agreements. During 2003, the Company recognized $20 million ($12 million after-tax) of the deferred portion of the gain.

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Events in 2001

Impact from Argentina's Political and Economic Changes

        The Company recognized charges in the 2001 fourth quarter of $235 million (pretax) related to write-downs of Argentine credit exposures and $235 million (pretax) in losses related to the foreign exchange revaluation of the consumer loan portfolio as a result of the political and economic changes in Argentina.

Impact from Enron

        As a result of the financial deterioration and eventual bankruptcy of Enron Corporation in 2001, Citigroup's results were reduced by $228 million (pretax) as a result of the write-down of Enron-related credit exposure and trading positions, and the impairment of Enron-related investments.

September 11th Events

        The September 11, 2001 terrorist attack financially impacted the Company in several areas. Revenues were reduced due to the disruption to Citigroup's businesses. Additional expenses incurred as a result of the attack resulted in after-tax losses of approximately $200 million. The Company also experienced significant property loss, for which it was insured. The Company initially recorded insurance recoveries up to the net book value of the assets written off. During 2002, additional insurance recoveries were recorded when realized. Reductions in equity values during the 2001 third quarter were further impacted by the September 11th attack, which reduced Citigroup's Investment Activities results in the 2001 third quarter. Additionally, after-tax losses related to insurance claims (net of reinsurance impact) totaled $502 million, the bulk of which related to the property and casualty insurance operations of TPC and is reflected as discontinued operations.

Acquisition of Banamex

        In August 2001, Citicorp, an indirect wholly owned subsidiary of Citigroup, completed its acquisition of Grupo Financiero Banamex-Accival (Banamex), a leading Mexican financial institution, for approximately $12.5 billion in cash and Citigroup stock. Citicorp completed the acquisition by settling transactions that were conducted on the Mexican Stock Exchange. Those transactions comprised both the acquisition of Banamex shares tendered in response to Citicorp's offer to acquire all of Banamex's outstanding shares and the simultaneous sale of 126,705,281 Citigroup shares to the tendering Banamex shareholders. On September 24, 2001, Citicorp became the holder of 100% of the issued and outstanding ordinary shares of Banamex following a share redemption by Banamex. The results of Banamex are included from August 2001 forward.

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SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

The Notes to the Consolidated Financial Statements contain a summary of Citigroup's significant accounting policies, including a discussion of recently issued accounting pronouncements. Certain of these policies as well as estimates made by management are considered to be important to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgments and estimates, some of which may relate to matters that are inherently uncertain. Additional information about these policies can be found in Note 1 to the Consolidated Financial Statements. Management has discussed each of these significant accounting policies and the related estimates with the Audit and Risk Management Committee of the Board of Directors.

        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 66.

Valuations of Financial Instruments

        Investments and trading account assets and liabilities, held by the Global Corporate and Investment Bank and Proprietary Investment Activities segments, include fixed maturity and equity securities, derivatives, investments in private equity and other financial instruments. Citigroup carries its investments and trading account assets and liabilities at fair value if they are considered to be available-for-sale or trading securities. For a substantial majority of the Company's investments and trading account assets and liabilities, fair values are determined based upon quoted prices or validated models with externally verifiable model inputs. Changes in values of available-for-sale securities are recognized in a component of stockholders' equity net of taxes, unless the value is impaired and the impairment is not considered to be temporary. Impairment losses that are not considered temporary are recognized in earnings. The Company conducts regular reviews to assess whether other-than-temporary impairment exists. Changing economic conditions, global, regional, or related to specific issuers or industries, could adversely affect these values. Changes in the fair values of trading account assets and liabilities are recognized in earnings. Private equity subsidiaries also carry their investments at fair value with changes in value recognized in earnings.

        If available, quoted market prices provide the best indication of fair value. If quoted market prices are not available for fixed maturity securities, equity securities, derivatives or commodities, the Company discounts the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. Alternatively, matrix or model pricing may be used to determine an appropriate fair value. It is Citigroup's policy that all models used to produce valuations for the published financial statements be validated by qualified personnel independent from those who created the models. The determination of market or fair value considers various factors, including time value and volatility factors, underlying options, warrants and derivatives; price activity for equivalent synthetic instruments; counterparty credit quality; the potential impact on market prices or fair value of liquidating the Company's positions in an orderly manner over a reasonable period of time under current market conditions; and derivative transaction maintenance costs during the period. For derivative transactions, trading profit at inception is recognized when the fair value of that derivative is obtained from a quoted market price, supported by comparison to other observable market transactions, or based upon a valuation technique incorporating observable market data. The Company defers trade-date gains or losses on derivative transactions where the fair value is not determined based upon observable market transactions and market data. The deferral is recognized in income when the market data become observable or over the life of the transaction. Changes in assumptions could affect the fair values of investments and trading account assets and liabilities.

        For our available-for-sale and trading portfolios amounting to assets of $414.5 billion and $320.9 billion and liabilities of $121.9 billion and $91.4 billion at December 31, 2003 and 2002, respectively, fair values were determined in the following ways: externally verified via comparison to quoted market prices or third-party broker quotations; by using models that were validated by qualified personnel independent of the area that created the model and inputs that were verified by comparison to third-party broker quotations or other third-party sources; or by using alternative procedures such as comparison to comparable securities and/or subsequent liquidation prices. At December 31, 2003 and 2002, respectively, approximately 96.5% and 98% of the available-for-sale and trading portfolios' gross assets and liabilities are considered verified and approximately 3.5% and 2% are considered unverified. Of the unverified assets, at December 31, 2003 and 2002, respectively, approximately 66% and 60% consist of cash products, where independent quotes were not available and/or alternative procedures were not feasible, and 34% and 40% consist of derivative products where either the model was not validated and/or the inputs were not verified due to the lack of appropriate market quotations. Such values are actively reviewed by management.

        In determining the fair values of our securities portfolios, management also reviews the length of time trading positions have been held to identify aged inventory. During 2003, the monthly average aged inventory designated as available-for-immediate-sale was approximately $5.4 billion compared with $4.3 billion in 2002. Inventory positions that are both aged and whose values are unverified amounted to less than $2.1 billion and $2.1 billion at December 31, 2003 and 2002, respectively. The fair value of aged inventory is actively monitored and, where appropriate, is discounted to reflect the implied illiquidity for positions that have been available-for-immediate-sale for longer than 90 days. At December 31, 2003 and 2002, such valuation adjustments amounted to $68 million and $56 million, respectively.

        Citigroup's private equity subsidiaries include subsidiaries registered as Small Business Investment Companies and other subsidiaries that engage exclusively in venture capital activities. Investments held by private equity subsidiaries related to the Company's venture capital activities amounted to $4.4 billion and $4.7 billion at December 31, 2003 and 2002, respectively. For investments in publicly traded securities held by private equity subsidiaries amounting to 5 positions with a fair value of approximately $0.9 billion and 13 positions with a fair value of approximately $0.9 billion at December 31, 2003 and 2002, respectively, fair value is based upon quoted market prices. These publicly traded securities include thinly traded securities, large block holdings, restricted shares or other special situations, and the quoted market price is adjusted to produce an estimate of the attainable fair value for the securities. To determine the amount of the adjustment, the Company uses a model that is based on option theory. The model is validated periodically by an independent valuation consulting firm. Such adjustments ranged from 10% to 50% of the investments' quoted prices in 2003 and from 5% to 30% in 2002. For investments that are not publicly traded that are held by private equity subsidiaries amounting to approximately $3.5 billion and $3.8 billion at December 31, 2003 and 2002, respectively, estimates of fair value are made periodically by management based upon relevant third-party arm's length transactions, current and subsequent financings and comparisons to similar companies for which quoted market prices

12


are available. Independent consultants may be used to provide valuations periodically for certain investments that are not publicly traded, or the valuations may be done internally. Internal valuations are reviewed by personnel independent of the investing entity.

        See the discussion of trading account assets and liabilities and investments in Summary of Significant Accounting Policies in Note 1 to the Consolidated Financial Statements. For additional information regarding the sensitivity of these instruments, see "Market Risk Management Process" on page 48.

Allowance for Credit Losses

        The allowance for credit losses represents management's estimate of probable losses inherent in the lending portfolio. This evaluation process is subject to numerous estimates and judgments. The frequency of default, risk ratings, and the loss recovery rates, among other things, are considered in making this evaluation, as are the size and diversity of individual large credits. 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. At December 31, 2003 and 2002, respectively, the total allowance for credit losses, which includes reserves for letters of credit and unfunded commitments, totaled $4.155 billion and $4.647 billion for the corporate loan portfolio and $9.088 billion and $7.021 billion for the consumer portfolio. Attribution of the allowance is made for analytic purposes only, and the entire allowance of $13.243 billion and $11.668 billion at December 31, 2003 and 2002, respectively, is available to absorb probable credit losses inherent in the portfolio, including letters of credit and unfunded commitments.

        During 2003, corporate cash-basis loans decreased $576 million from $3.995 billion to $3.419 billion, and net credit losses decreased from $1.551 billion in 2002 to $1.211 billion, reflecting overall improvement in the credit quality of the portfolio as well as reduced exposure in the energy and telecommunications industries. Management expects the 2004 loss experience for the corporate portfolio to be improved from that of 2003.

        Consumer net credit losses, excluding CitiCapital, increased from $6.797 billion in 2002 to $7.096 billion in 2003. Consumer loans on which accrual of interest has been suspended, excluding Commercial Markets, increased from $4.607 billion to $4.735 billion. The consumer allowance, excluding CitiCapital, rose from $6.410 billion to $8.530 billion from December 31, 2002 to December 31, 2003, including $2.1 billion associated with the acquisition of Sears. The level of the consumer allowance was impacted by increased bankruptcies in Germany and in the Consumer Finance portfolio in Japan. Consumer credit loss rates are expected to rise due to the addition of the Sears and Home Depot portfolios. Excluding the impact of Sears and Home Depot, management expects that 2004 consumer credit loss rates will be comparable to 2003.

        In the corporate loan portfolio, larger-balance, non-homogeneous exposures representing significant individual credit exposures are evaluated based upon the borrower's overall financial condition, resources and payment record; the prospects for support from any financially responsible guarantors; and, if appropriate, the realizable value of any collateral. Reserves are established based upon an estimate of probable losses for individual larger-balance, non-homogeneous loans deemed impaired, a statistical model of expected losses on the performing portfolio, as well as management's detailed knowledge of the portfolio and current conditions. When reserves for individual loans that are deemed to be impaired are established, consideration is given to all available evidence, including, as appropriate, the present value of expected future cash flows discounted at the loan's contractual effective rate, the secondary market value of the loan, and the fair value of collateral less disposal costs.

        The allowance for credit losses attributed to the corporate portfolio is established through a process that begins with statistical estimates of probable losses inherent in the portfolio. These estimates are based upon: (1) Citigroup's internal system of credit risk ratings, which are analogous to the risk ratings of the major rating agencies; (2) the corporate portfolio database; and (3) historical default and loss data, including rating agency information regarding default rates from 1983 to 2002 and internal data, dating to the early 1970s, on severity of losses in the event of default. This statistical process generates an estimate for losses inherent in the portfolio as well as a one-standard-deviation confidence interval around the estimate.

        The statistical estimate for losses inherent in the portfolio is based on historical average default rates and historical average write-off rates. The width of the confidence interval reflects the historical fluctuation of 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.

        The statistical estimate of losses inherent in the portfolio may then be adjusted, both for management's estimate of probable losses on specific exposures, as well as for other considerations, such as environmental factors and trends in portfolio indicators, including cash-basis loans, historical and forecasted write-offs, and portfolio concentrations. In addition, management considers the current business strategy and credit process, including credit limit setting and compliance, credit approvals, loan underwriting criteria and loan workout procedures.

        For December 31, 2003, the statistical estimate for inherent losses in the total corporate portfolio was $2.820 billion, with a standard deviation of $646 million, compared with $3.434 billion and $785 million at December 31, 2002. This analysis included all corporate loans, commitments and unfunded letters of credit. Management then identified those exposures for which name-specific loss estimates were required, and replaced the statistical estimate of losses with management's estimate of losses. Management made adjustments for other considerations, including portfolio trends and economic indicators. As a result of these adjustments, at December 31, 2003, the allowance for credit losses attributable to the corporate portfolio was set at $4.155 billion compared with $4.647 billion in 2002, which includes the reserve for unfunded commitments and letters of credit of $600 million in 2003 and $567 million in 2002 that is included in other liabilities on the balance sheet.

        CitiCapital's allowance is established based upon an estimate of probable losses inherent in the portfolio for individual loans and leases deemed impaired, and the application of annualized weighted average credit loss ratio to the remaining portfolio. The annualized weighted average credit loss ratio reflects both historical and projected losses. Additional reserves are established to provide for imprecision caused by the use of estimated loss data.

        At December 31, 2003, the CitiCapital allowance totaled $558 million, down from $611 million in 2002. The allowance was composed of $58 million and $40 million as of December 31, 2003 and 2002, respectively, of reserves on impaired loans, $420 million and $511 million provided for probable credit losses in the performing portfolio, and $80 million and $60 million reflecting imprecision caused by the use of historical data and projected loss data. The reserve was $53 million lower than a year ago due to the smaller portfolio balance at December 31, 2003. The December 31, 2003 and 2002 reserves for probable credit losses reflect 1.95% and 1.87% annualized weighted average loss ratios on the performing portfolio, respectively. A 0.50% change in the weighted average loss ratio would increase or decrease the December 31, 2003 allowance by $109 million, whereas a

13


0.50% change would have increased or decreased the allowance by $137 million at December 31, 2002.

        Each portfolio of smaller-balance, homogeneous loans, including consumer mortgage, installment, revolving credit and most other consumer loans, primarily in the Global Consumer segment, is collectively evaluated for impairment in order to provide an allowance sufficient to cover all loans that have shown evidence of impairment as of the balance sheet date. The foundation for assessing the adequacy of the allowance for credit losses for consumer loans is a statistical methodology that estimates the losses inherent in the portfolio at the balance sheet date based on historical delinquency flow rates, charge-off statistics, and loss severity. The statistical methodology is applied separately for each individual product within each different geographic region in which the product is offered.

        Under this statistical method, the portfolio of loans is aged and separated into groups based upon the aging of the loan balances (current, 1 to 29 days past due, 30 to 59 days past due, etc.). The statistical methodology results in a base calculation of inherent losses in the loan portfolio for each business within the Global Consumer segment. Management evaluates the adequacy of the allowance for credit losses for each business relative to a range around its base calculation. In general, each business must maintain an allowance for credit losses that is within the specified range. However, management also considers the following factors in evaluating the adequacy of the allowance for credit losses: economic trends, competitive factors, seasonality, portfolio acquisitions, solicitation of new loans, changes in lending policies and procedures, geographical, product, and other environmental factors, changes in bankruptcy laws, and evolving regulatory standards.

        Citigroup has well-established credit loss recognition criteria for its various consumer loan products. These credit loss recognition criteria are based on contractual delinquency status, consistently applied from period to period and in compliance with FFIEC guidelines (excluding recent acquisitions for which we obtained temporary waivers), including bankruptcy loss recognition. The allowance for credit losses is replenished through a charge to the provision for credit losses for all net credit losses incurred during the relevant accounting period and adjusted to reflect current economic trends and the results of the statistical methodology. The provision for credit losses is highly dependent on both bankruptcy loss recognition and the time it takes for loans to move through the delinquency buckets and eventually to write-off (flow rates). An increase in the Company's share of bankruptcy losses would generally result in a corresponding increase in the provision for credit losses. For example, a 10% increase in the Company's portion of bankruptcy losses would generally result in a similar increase in the provision for credit losses. In addition, an acceleration of flow rates would also result in a corresponding increase to the provision for credit losses. The precise impact that an acceleration of flow rates would have on the provision for credit losses would depend upon the product and geography mix that comprises the flow rate acceleration.

        The evaluation of the total allowance includes an assessment of the ability of borrowers with foreign currency obligations to obtain the foreign currency necessary for orderly debt servicing.

        See the discussions of "Consumer Credit Risk" and "Corporate Credit Risk" on pages 42 and 45, respectively, for additional information.

Securitizations

        Securitization is a process by which a legal entity issues certain securities to investors, which securities pay a return based on the principal and interest cash flows from a pool of loans or other financial assets. Citigroup securitizes credit card receivables, mortgages, and other loans that it originated and/or purchased and certain other financial assets. After securitization of credit card receivables, the Company continues to maintain account relationships with customers. Citigroup also assists its clients in securitizing the clients' financial assets and packages and securitizes financial assets purchased in the financial markets. Citigroup may provide administrative, asset management, underwriting, liquidity facilities and/or other services to the resulting securitization entities, and may continue to service the financial assets sold to the securitization entity.

        There are two key accounting determinations that must be made relating to securitizations. In the case where Citigroup originated or previously owned the financial assets transferred to the securitization entity, a decision must be made as to whether that transfer would be considered a sale under generally accepted accounting principles, resulting in the transferred assets being removed from the Company's Consolidated Balance Sheet with a gain or loss recognized. Alternatively, the transfer would be considered a financing, resulting in recognition of a liability in the Company's Consolidated Balance Sheet. The second key determination to be made is whether the securitization entity must be consolidated by the Company and be included in the Company's Consolidated Financial Statements or whether the entity is sufficiently independent that it does not need to be consolidated.

        If the securitization entity's activities are sufficiently restricted to meet certain accounting requirements to be considered a qualifying special-purpose entity (QSPE), the securitization entity is not consolidated by the seller of the transferred assets. In January 2003, the Financial Accounting Standards Board (FASB) issued a new interpretation on consolidation accounting that was adopted by the Company on July 1, 2003. Under this interpretation, FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46), if securitization entities other than QSPEs meet the definition of a variable interest entity (VIE), the Company must evaluate whether it is the primary beneficiary of the entity and, if so, must consolidate it. The entity would be considered a VIE if it requires additional subordinated financial support or if the equity investors lack certain characteristics of a controlling financial interest. In December 2003, FASB issued a revised version of FIN 46-R, which the Company will adopt in the first quarter of 2004. This revised interpretation may change certain of the consolidation determinations reached under FIN 46. Most of the Company's securitization transactions meet the existing criteria for sale accounting and non-consolidation.

        The Company participates in securitization transactions, structured investment vehicles, and other investment funds with its own and with clients' assets totaling $1,158.7 billion at December 31, 2003 and $928.4 billion at December 31, 2002.

        Global Consumer primarily uses QSPEs to conduct its securitization activities, including credit card receivables, mortgage loans, student loans and auto loans. Securitizations completed by Global Consumer are for the Company's own account. QSPEs are qualifying special-purpose entities established in accordance with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140). The Company is the transferor of assets to these QSPEs and, accordingly, does not consolidate these QSPEs. At December 31, 2003 and 2002, respectively, Global Consumer was involved with special-purpose entities (SPEs) with assets of $251.3 billion and $252.2 billion, including QSPEs with assets of $226.4 billion and $248.2 billion.

        GCIB's securitization activities are conducted on behalf of the Company's clients and to generate revenues for services provided to the SPEs. GCIB uses SPEs to securitize mortgage-backed securities and clients' trade receivables, to create investment opportunities for clients

14


through collateralized debt obligations (CDOs), and to meet other client needs through structured financing and leasing transactions. All the mortgage-backed securities transactions use QSPEs, as do certain CDOs and structured financing transactions. At December 31, 2003 and 2002, respectively, GCIB was involved with SPEs with assets of $614.9 billion and $384.4 billion, including QSPEs with assets amounting to $427.5 billion and $249.7 billion.

        Global Investment Management uses SPEs to create investment opportunities for clients through mutual and money market funds, unit investment trusts, and hedge funds, substantially all of which were not consolidated by the Company at December 31, 2003 and 2002. At December 31, 2003 and 2002, respectively, Global Investment Management was involved with SPEs with assets of $236.1 billion and $226.6 billion.

        Proprietary Investment Activities invests in various funds as part of its activities on behalf of the Company and also uses SPEs in creating investment opportunities and alternative investment structures. At December 31, 2003 and 2002, respectively, Proprietary Investment Activities was involved with SPEs with assets of $56.4 billion and $65.2 billion.

        VIEs with total assets of approximately $36.9 billion and $22.6 billion were consolidated at December 31, 2003 and 2002, respectively. Additional information on the Company's securitization activities and VIEs can be found in "Off-Balance Sheet Arrangements" on page 63 and in Note 12 to the Consolidated Financial Statements.

Argentina

        The carrying value of assets and exposures to loss related to the Company's operations in Argentina represents management's estimates based on current economic, legal and political conditions. While these conditions continue to be closely monitored, they remain fluid, and future actions by the Argentine government or further deterioration of its economy could result in changes to those estimates.

        The carrying values of certain assets, including the compensation note, government-guaranteed promissory notes (GPNs) and government Patriotic Bonds, are based on management's estimates of default, recovery rates, and any collateral features. These instruments continue to be monitored and have been written down to represent management's estimate of their collectibility, which could change as economic conditions in Argentina either stabilize or worsen.

        At December 31, 2003, the carrying values of the compensation notes, GPNs, and Patriotic Bonds were $233 million, $107 million, and $47 million, respectively.

        Management continues to monitor the potential impact that government actions may have on the Company's pension and insurance businesses in Argentina. These actions may include redollarization of certain liabilities and forced exchanges of customer assets. At the present time, the potential impact of such actions cannot be determined and additional losses may be incurred in the future.

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 than the amount of the recorded reserve. See Note 29 to the Consolidated Financial Statements and the discussion of "Legal Proceedings" beginning on page 125.

ACCOUNTING CHANGES AND FUTURE APPLICATION OF ACCOUNTING STANDARDS

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

15


PENSION ASSUMPTIONS

Pension expense was $101 million and $24 million for the U.S. plans and $158 million and $133 million for the foreign plans for the years ended December 31, 2003 and 2002, respectively. The Company contributed $500 million in cash to its U.S. pension plans and $279 million in cash to its foreign pension plans during 2003, and $500 million of Citigroup common stock to its U.S. pension plans and $695 million in cash to its foreign plans during 2002. Citigroup common stock comprised 6.45% and 7.87% of the U.S. plans' assets at December 31, 2003 and 2002, respectively. Subsequent to December 31, 2003, the Citigroup Pension Plan sold approximately $500 million of Citigroup common stock. All U.S.-qualified plans and the funded foreign plans are generally funded to the amounts of accumulated benefit obligations. Net pension expense for the year ended December 31, 2004 for the U.S. plans is expected to increase by approximately $145 million as a result of the amortization of unrecognized net actuarial losses, reflecting our use of the calculated value of assets, which is an averaging process that recognizes changes in the fair values of assets over a period of three years, lower discount rates, and a change to the 1994 mortality table. As the foreign pension plans all use the fair value of plan assets, their pension expense will be directly affected by the actual performance of the plans' assets. This paragraph contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 66.

Expected Rate of Return

Citigroup determines its assumptions for the expected rate of return on plan assets for its U.S. plans using a "building block" approach, which focuses on ranges of anticipated rates of return for each asset class. A weighted range of nominal rates is then determined based on target allocations to each asset class. Citigroup considers the expected rate of return to be a longer-term assessment of return expectations and does not anticipate changing this assumption annually unless there are significant changes in economic conditions. This contrasts with the selection of the discount rate, future compensation increase rate, and certain other assumptions, which are reconsidered annually in accordance with generally accepted accounting principles. The expected rate of return was 8.0% at December 31, 2003 and 2002, reflecting the performance of the equity markets. The expected rate of return was changed from 9.5% to 8.0% in September 2002 when plan assets were revalued in connection with the TPC spin-off. This change had the effect of increasing 2002 net pension expense by $45 million for the year ended December 31, 2002.

        In calculating pension expense for the U.S. plans and in determining the expected rate of return, the Company uses the calculated value of assets. The plans' assets were allocated 54% to equities, 26% to fixed income, and 20% to real estate and other investments at December 31, 2003, and 58% to equities, 26% to fixed income, and 16% to real estate and other investments at December 31, 2002. The year-end allocations are within the plans' target ranges. For the year ended December 31, 2003, if the expected rate of return had been increased by 1%, net pension expense for the U.S. plans would have decreased by $88 million, and if the expected rate of return had been decreased by 1%, net pension expense would have increased by $88 million. For the year ended December 31, 2002, if the expected rate of return had been increased by 1%, net pension expense for the U.S. plans would have decreased by $85 million, and if the expected rate of return had been decreased by 1%, net pension expense would have increased by $85 million.

        A similar approach has been taken in selecting the expected rates of return for Citigroup's foreign plans. The expected rate of return for each plan is based upon its expected asset allocation. Market performance over a number of earlier years is evaluated covering a wide range of economic conditions to determine whether there are sound reasons for projecting forward any past trends. The expected rates of return for the foreign plans ranged from 3.25% to 10.5% for 2003 compared with a range of 3.0% to 12.0% in 2002. The wide variation in these rates is a result of differing asset allocations in the plans as well as varying local economic conditions. For example, in certain countries, local law requires that all pension plan assets must be invested in fixed income investments, or in government funds, or in local country securities. Asset allocations for the foreign plans ranged from 100% fixed income investments to a combination of 91% equities and 9% fixed income and other investments at December 31, 2003, compared with an asset allocation range from 100% fixed income investments to a combination of 75% equities and 25% fixed income and other investments at December 31, 2002. For the year ended December 31, 2003, if the expected rate of return had been increased by 1%, net pension expense for the foreign plans would have decreased by $24 million; if the expected rate of return had been decreased by 1%, net pension expense would have increased by $24 million. For the year ended December 31, 2002, if the expected rate of return had been increased by 1%, net pension expense for the foreign plans would have decreased by $21 million; if the expected rate of return had been decreased by 1%, net pension expense would have increased by $21 million.

Discount Rate

        The discount rate for the U.S. pension and postretirement plans is selected by reference to the Moody's Aa Long-Term Corporate Bond Yield. At December 31, 2003, the Moody's Aa Long-Term Corporate Bond Yield was 6.01% and the discount rate for both the pension and postretirement plans was set at 6.25%, while at December 31, 2002, the Moody's Aa Long-Term Corporate Bond Yield was 6.52% and the discount rates was set at 6.75%. For the year ended December 31, 2003, if the discount rate had been increased by 1%, net pension expense for the U.S. plans would have decreased by $52 million, and if the discount rate had been decreased by 1%, net pension expense would have increased by $120 million. For the year ended December 31, 2002, if the discount rate had been increased by 1%, net pension expense for the U.S. plans would have decreased by $5.0 million, and if the discount rate had been decreased by 1%, net pension expense would have increased by $70 million.

        The discount rates for the foreign pension and postretirement plans are selected by reference to high-quality corporate bond rates in countries that have developed corporate bond markets. However, where developed corporate bond markets do not exist, the discount rates are selected by reference to local government bond rates with a premium added to reflect the additional risk for corporate bonds. At December 31, 2003, the discount rates for the foreign plans ranged from 2.0% to 10.0% compared with a range of 2.25% to 12.0% at December 31, 2002. For the year ended December 31, 2003, if the discount rates had been increased by 1%, net pension expense for the foreign plans would have decreased by $43 million; if the discount rates had been decreased by 1%, net pension expense would have increased by $53 million. For the year ended December 31, 2002, if the discount rates had been increased by 1%, net pension expense for the foreign plans would have decreased by $41 million; if the discount rates had been decreased by 1%, net pension expense would have increased by $46 million.

16


BUSINESS FOCUS

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

Citigroup Net Income—Product View

In millions of dollars

  2003
  2002(1)
  2001(1)
 
Global Consumer                    
  Cards   $ 3,631   $ 3,081   $ 2,523  
  Consumer Finance     1,928     2,199     1,905  
  Retail Banking     4,176     3,031     2,444  
  Other     (87 )   (59 )   (59 )
   
 
 
 
  Total Global Consumer     9,648     8,252     6,813  
   
 
 
 

Global Corporate and Investment Bank

 

 

 

 

 

 

 

 

 

 
  Capital Markets and Banking     4,632     3,995     3,917  
  Transaction Services     770     558     440  
  Other(2)     (15 )   (1,394 )   35  
   
 
 
 
  Total Global Corporate and Investment Bank     5,387     3,159     4,392  
   
 
 
 
Private Client Services     778     799     877  
   
 
 
 
Global Investment Management                    
  Life Insurance and Annuities     751     617     871  
  Private Bank     551     463     370  
  Asset Management     394     443     296  
   
 
 
 
  Total Global Investment Management     1,696     1,523     1,537  
   
 
 
 
Proprietary Investment Activities     230     (229 )   225  
Corporate/Other     114     (56 )   (615 )
Income from Continuing Operations     17,853     13,448     13,229  
Income from Discontinued Operations(3)         1,875     1,055  
Cumulative Effect of Accounting Changes(4)         (47 )   (158 )
   
 
 
 
Total Net Income   $ 17,853   $ 15,276   $ 14,126  
   
 
 
 

(1)
Reclassified to conform to the 2003 presentation. See Note 4 to the Consolidated Financial Statements for assets by segment.

(2)
2002 includes a $1.3 billion after-tax charge related to the establishment of reserves for regulatory settlements and related civil litigation.

(3)
On August 20, 2002, Citigroup completed the distribution to its stockholders of a majority portion of its remaining ownership interest in TPC. Following the distribution, Citigroup began accounting for TPC as discontinued operations. See Note 3 to the Consolidated Financial Statements.

(4)
Accounting changes in 2002 of ($47) million include the adoption of the remaining provisions of SFAS 142. Accounting changes in 2001 of ($42) million and ($116) million include the adoption of SFAS 133 and EITF Issue 99-20, respectively. See Note 1 to the Consolidated Financial Statements.

Citigroup Net Income—Regional View

In millions of dollars

  2003
  2002(1)
  2001(1)
 
North America (excluding Mexico)                    
  Consumer   $ 6,613   $ 5,500   $ 4,692  
  Corporate(2)     2,456     974     1,933  
  Private Client Services     778     799     877  
  Investment Management     1,303     1,085     1,251  
   
 
 
 
    Total North America     11,150     8,358     8,753  
   
 
 
 
Mexico(3)                    
  Consumer     737     521     (13 )
  Corporate     431     450     238  
  Investment Management     284     235     74  
   
 
 
 
    Total Mexico     1,452     1,206     299  
   
 
 
 
Europe, Middle East and Africa (EMEA)                    
  Consumer     749     708     466  
  Corporate     998     857     933  
  Investment Management     6     22     36  
   
 
 
 
    Total EMEA     1,753     1,587     1,435  
   
 
 
 
Japan                    
  Consumer     521     950     965  
  Corporate     132     96     96  
  Investment Management     89     56     33  
   
 
 
 
    Total Japan     742     1,102     1,094  
   
 
 
 
Asia (excluding Japan)                    
  Consumer     837     718     641  
  Corporate     767     722     662  
  Investment Management     163     107     81  
   
 
 
 
    Total Asia     1,767     1,547     1,384  
   
 
 
 
Latin America                    
  Consumer     191     (145 )   62  
  Corporate     603     60     530  
  Investment Management     (149 )   18     62  
   
 
 
 
    Total Latin America     645     (67 )   654  
   
 
 
 
Proprietary Investment Activities     230     (229 )   225  
Corporate/Other     114     (56 )   (615 )
Income from Continuing Operations     17,853     13,448     13,229  
Income from Discontinued Operations(4)         1,875     1,055  
Cumulative Effect of Accounting Changes(5)         (47 )   (158 )
   
 
 
 
Total Net Income   $ 17,853   $ 15,276   $ 14,126  
   
 
 
 

(1)
Reclassified to conform to the 2003 presentation.

(2)
2002 includes a $1.3 billion after-tax charge related to the establishment of reserves for regulatory settlements and related civil litigation.

(3)
Mexico's results include the operations of Banamex from August 2001 forward.

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

(5)
See Note 1 to the Consolidated Financial Statements.

17


Selected Revenue and Expense Items

        Net interest revenue was $39.8 billion in 2003, up $2.1 billion or 6% from 2002, which was up $5.0 billion or 15% from 2001, reflecting the positive impact of a changing rate environment, business volume growth in most markets through organic growth combined with the impact of acquisitions during the year.

        Total commissions, asset management and administration fees, and other fee revenues of $22.0 billion were up $1.6 billion or 8% in 2003, primarily reflecting improved global equity markets and continued strong investment banking results. Insurance premiums of $3.7 billion in 2003 were up 10% from year-ago levels and down $40 million in 2002 compared to 2001. The 2003 increase primarily represents higher business volumes and an increase in pension closeout sales compared to the prior year.

        Principal transactions revenues of $5.1 billion increased $607 million or 13% from 2002, primarily reflecting higher fixed income trading results resulting from the low interest rate environment, partially offset by losses on credit derivatives resulting from tighter credit spreads. Realized gains/(losses) from sales of investments of $510 million in 2003 were up $995 million from 2002, which was down from $237 million from 2001. The increase from 2002 largely resulted from the absence of prior-year impairments relating to investments in the telecommunications and energy sectors. Other revenue of $6.3 billion in 2003 increased $533 million from 2002, which was up $1.3 billion from 2001. The 2003 increase primarily reflected higher securitization gains and activities and stronger Private Equity results. The 2002 increase includes the gain on the sale of 399 Park Avenue in the third quarter.

Operating Expenses

        Operating expenses grew $1.9 billion or 5% to $39.2 billion in 2003, and increased $770 million or 2% from 2001 to 2002. Expense growth during 2003 included investments made relating to acquisitions during the year, increased spending on sales force, marketing and advertising and new business initiatives to support organic growth, higher pension and insurance expense, the cost of expensing options and higher deferred acquisition costs. The increase in 2002 included the charge for the establishment of reserves for regulatory settlements and related civil litigation, which was partially offset by lower compensation and benefits, expense rationalization initiatives, and a benefit of $610 million from the absence of goodwill and other indefinite-lived intangible asset amortizations.

Benefits, Claims, and Credit Losses

        Benefits, claims, and credit losses were $11.9 billion, $13.5 billion and $10.3 billion in 2003, 2002 and 2001, respectively. The 2003 charge was down $1.5 billion from 2002, which was up $3.2 billion from 2001. Policyholder benefits and claims in 2003 increased $417 million or 12% from 2002, primarily as a result of one group pension close-out contract in Life Insurance and Annuities. The 2002 charge was down $42 million from 2001. The provision for credit losses decreased $1.9 billion or 19% from 2002 to $8.0 billion in 2003, reflecting improved credit quality in both consumer and corporate businesses partially offset by the impact of acquisitions. There was a $3.2 billion increase from 2002 to 2001 due to deteriorating credit quality in the corporate portfolio, increased bankruptcy filings, and deteriorating credit quality in selected consumer portions of the portfolios in Japan, Hong Kong and Argentina.

        Global Consumer provisions for benefits, claims, and credit losses of $8.0 billion in 2003 were down $421 million or 5% from 2002, reflecting decreases in Cards and Retail Banking, partially offset by increases in Consumer Finance. Total net credit losses (excluding Commercial Markets) were $7.093 billion and the related loss ratio was 2.38% in 2003, as compared to $6.740 billion and 2.67% in 2002 and $5.334 billion and 2.36% in 2001. The consumer loan delinquency ratio (90 days or more past due) increased to 2.42% at December 31, 2003 from 2.40% at December 31, 2002 and decreased from 2.61% at December 31, 2001. See page 42 for a reconciliation of total consumer credit information.

        The GCIB provision for credit losses of $732 million in 2003 decreased $1.5 billion or 68% from 2002, which increased $1.4 billion from 2001. The decrease reflects this year's improving credit environment contrasted with prior-year provisions for Argentina and exposures in the telecommunications and energy industries.

        Corporate cash-basis loans at December 31, 2003, 2002 and 2001 were $3.419 billion, $3.995 billion, and $2.887 billion, respectively. The decrease in cash-basis loans from 2002 reflects improved credit quality, write-offs against previously established reserves, as well as repayments. Corporate cash-basis loans at December 31, 2002 increased $1.1 billion from December 31, 2001 primarily due to borrowers in the energy and telecommunications industries.

Income Taxes

        The Company's effective tax rate of 31.1% in 2003 decreased 296 basis points, primarily representing benefits for not providing U.S. income taxes on the earnings of certain foreign subsidiaries that are indefinitely invested, a $200 million release of a tax reserve that had been held at the legacy Associates' businesses and was deemed to be in excess of expected tax liabilities, a $94 million release of a tax reserve in Japan related to a settlement with the authorities and a $51 million benefit from adjustments to the separate account Dividends Received Deduction in Travelers Life and Annuity. The Company's effective tax rate was 34.1% in 2002 and 35.1% in 2001.


The net income line in the following business segment and operating unit discussions excludes the cumulative effect of accounting changes and income from discontinued operations. The cumulative effect of accounting changes and income from discontinued operations is disclosed within the Corporate/Other business segment. See Notes 1 and 4 to the Consolidated Financial Statements.

        Certain amounts in prior years have been reclassified to conform to the current year's presentation. Business segment and product reclassifications include the reclassification of CitiCapital from Capital Markets and Banking to Retail Banking; the reclassification of realized insurance investment gains/losses from Proprietary Investment Activities to Life Insurance and Annuities and Consumer Finance; the allocation of Citicorp Electronic Financial Services, Inc. from Other Consumer to Corporate/Other; and the reallocation of certain Treasury functions in Mexico from Retail Banking to Capital Markets and Banking.


18


GLOBAL CONSUMER—2003 NET INCOME

[EDGAR REPRESENTATION OF GRAPHIC DATA]

In billions of dollars

   
2001   $ 6.813
2002   $ 8.252
2003   $ 9.648

GLOBAL CONSUMER—2003 NET INCOME BY PRODUCT*

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Retail Banking   43 %
Consumer Finance   20 %
Cards   37 %

*
Excludes Other Consumer loss of $87 million

GLOBAL CONSUMER—2003 NET INCOME BY REGION

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Asia   9 %
Japan   5 %
EMEA   8 %
Mexico   8 %
North America   68 %
Latin America   2 %

GLOBAL CONSUMER

In millions of dollars

  2003
  2002
  2001
Revenues, net of interest expense   $ 41,195   $ 37,964   $ 33,576
Operating expenses     18,836     16,743     16,128
Provisions for benefits, claims, and credit losses     8,038     8,459     6,714
   
 
 
Income before taxes and minority interest     14,321     12,762     10,734
Income taxes     4,622     4,470     3,894
Minority interest, after-tax     51     40     27
   
 
 
Net income   $ 9,648   $ 8,252   $ 6,813
   
 
 

        Global Consumer reported net income of $9.648 billion in 2003, up $1.396 billion or 17% from 2002, driven by double-digit growth in Retail Banking and Cards, that was partially offset by a decline in Consumer Finance. Retail Banking net income increased $1.145 billion or 38% in 2003 primarily due to the impact of the Golden State Bancorp (GSB) acquisition and strong international growth including improvement in Argentina. Cards net income increased $550 million or 18% in 2003 mainly reflecting the addition of the Sears and Home Depot portfolios, growth in Citi Cards and Asia, and lower credit losses in Latin America. Consumer Finance net income decreased $271 million or 12% in 2003 primarily due to continued weakness in Japan, partially offset by growth in North America, including the acquisition of GSB, and in EMEA.

        Net income in 2002 increased $1.439 billion or 21% from 2001, reflecting double-digit growth in all segments that was primarily driven by the impact of acquisitions and strong organic growth in North America, and was partially offset by losses due to the economic conditions in Argentina and the impact of higher net credit losses in Consumer Finance in Japan.

        In November 2003, Citigroup completed the acquisition of Sears, which added $15.4 billion of private-label card receivables, $13.2 billion of bankcard receivables and 32 million accounts. In July 2003, Citigroup completed the acquisition of the Home Depot portfolio, which added $6 billion in receivables and 12 million accounts. In July 2003, Citigroup also acquired the remaining stake in Diners Club Europe, adding 1 million accounts and $0.6 billion of receivables. In November 2002, Citigroup completed the acquisition of GSB, which added $25 billion in deposits and $35 billion in loans, including $33 billion in Retail Banking and $2 billion in Consumer Finance. In February and May 2002, CitiFinancial Japan acquired the consumer finance businesses of Taihei Co., Ltd. (Taihei) and Marufuku Co., Ltd. (Marufuku), adding $1.1 billion in loans. In August 2001, Citicorp completed its acquisition of Banamex, adding approximately $20 billion in consumer deposits and $10 billion in loans, including $8 billion in Retail Banking and $2 billion in Cards. In July 2001, Citibanking North America completed the acquisition of European American Bank (EAB), adding $9 billion in deposits and $4 billion in loans. These business acquisitions were accounted for as purchases; therefore, their results are included in the Global Consumer results from the dates of acquisition.

        Global Consumer has divested itself of several non-strategic businesses and portfolios as opportunities to exit became available. Certain divestitures include the sale of the $1.2 billion CitiCapital Fleet Services portfolio and $1.7 billion of credit card portfolios in 2003 as well as the 2002 sale of the $2.0 billion mortgage portfolio in Japan Retail Banking.

        The table below shows net income by region for Global Consumer:

Global Consumer Net Income—Regional View

In millions of dollars

  2003
  2002
  2001
 
North America (excluding Mexico)   $ 6,613   $ 5,500   $ 4,692  
Mexico     737     521     (13 )
EMEA     749     708     466  
Japan     521     950     965  
Asia (excluding Japan)     837     718     641  
Latin America     191     (145 )   62  
   
 
 
 
Net income   $ 9,648   $ 8,252   $ 6,813  
   
 
 
 

        The increase in Global Consumer net income in 2003 reflected growth in all regions except Japan. North America (excluding Mexico) net income grew by 20%, reflecting the impact of acquisitions combined with organic revenue growth and improved credit. Net income in Mexico grew by 41%, driven by improved credit costs in Retail Banking and improved operating margins in Cards. Growth in Asia of $119 million or 17% was mainly due to increased investment product sales in Retail Banking and improved credit in Cards. The increase in Latin America was mainly due to improvements in Argentina, including lower losses related to customer liability settlements combined with the impact of changes in the level of the allowance for credit losses. Net income in EMEA increased $41 million or 6% as revenue growth driven by higher business volumes in

19


all products was partially offset by investment spending, including repositioning costs. 2002 results included a $52 million gain from the disposition of an equity investment. Income in Japan declined by 45% reflecting the impact of portfolio contraction and lower spreads combined with increased credit losses in Consumer Finance and the absence of a prior-year gain on the sale of the mortgage portfolio in Retail Banking, partially offset by a $94 million release of a tax reserve resulting from a settlement with tax authorities recorded in the current year.

CARDS

In millions of dollars

  2003
  2002
  2001
 
Revenues, net of interest expense   $ 14,669   $ 13,688   $ 11,978  
Operating expenses     6,227     5,535     5,422  
Provision for credit losses     2,935     3,410     2,593  
   
 
 
 
Income before taxes and minority interest     5,507     4,743     3,963  
Income taxes     1,872     1,660     1,440  
Minority interest, after-tax     4     2      
   
 
 
 
Net income   $ 3,631   $ 3,081   $ 2,523  
   
 
 
 
Average assets (in billions of dollars)   $ 70   $ 63   $ 60  
Return on assets     5.19 %   4.89 %   4.21 %
   
 
 
 

        Cards reported net income of $3.631 billion in 2003, up $550 million or 18% from 2002. North America Cards reported net income of $3.130 billion, up 16% over 2002, reflecting increased spreads and improved credit costs, as well as the Home Depot and Sears acquisitions. International Cards income increased by 33% over 2002 to $501 million in 2003, reflecting a lower provision for credit losses in Argentina and growth in Asia. Globally, 2002 net income of $3.081 billion was up $558 million or 22% from 2001, driven by revenue growth and expense management as well as the acquisition of Banamex in August 2001.

        As shown in the following table, average managed loans grew 8% in 2003, reflecting growth of 7% in North America and 17% in International Cards. In North America, growth was led by Citi Cards where the additions of the Home Depot and Sears portfolios were partially offset by a decline in introductory promotional rate balances that was driven by a change in acquisition marketing strategies in the current year, as well as by the sale of $1.7 billion of non-strategic portfolios. The increase in International Cards reflected growth in Asia and EMEA, the addition of Diners Club Europe, and the benefit of strengthening currencies. Average managed loans grew 6% in 2002, reflecting growth in all regions except Latin America, where loans declined due to the negative impact of foreign currency translation and lower loan volumes in Argentina. Sales in 2003 were $291.1 billion, up 5% from 2002. North America sales were up 3% to $251.5 billion in 2003, as the impact of acquisitions and improved purchase sales were partially offset by the change in acquisition marketing strategies. International Cards sales grew 19%, reflecting growth in EMEA, Asia, and Japan, as well as the addition of Diners Club Europe. In 2002, sales were up 5% from 2001, reflecting growth in Citi Cards, EMEA and Asia combined with the impact of the events of September 11th on 2001 sales levels.

In billions of dollars

  2003
  2002
  2001
Sales                  
  North America   $ 251.5   $ 244.9   $ 234.3
  International     39.6     33.4     31.5
   
 
 
Total sales   $ 291.1   $ 278.3   $ 265.8
   
 
 

Average managed loans

 

 

 

 

 

 

 

 

 
  North America   $ 118.0   $ 110.2   $ 104.6
  International     12.5     10.7     10.0
   
 
 
Total average managed loans   $ 130.5   $ 120.9   $ 114.6
   
 
 
Total on-balance sheet average loans   $ 55.9   $ 49.2   $ 46.2
   
 
 

        Revenues, net of interest expense, of $14.669 billion in 2003 increased $981 million or 7% from 2002, reflecting growth in North America of $637 million or 6% and in International Cards of $344 million or 15%. Revenue growth in North America reflected the impact of acquisitions, net interest margin expansion, the benefit of increased purchase sales and cardholder services fees, and gains from the sale of non-strategic portfolios. Revenue growth in 2003 was partially offset by increased credit losses on securitized receivables, which are recorded as a reduction to other revenue after receivables are securitized. In 2003 and 2002, revenues included net gains of $342 million and $425 million, respectively, primarily as a result of changes in estimates related to the timing of revenue recognition on securitized portfolios. Revenue growth in International Cards was mainly driven by receivables and sales increases in Asia and EMEA, the addition of Diners Club Europe, as well as the net effect of foreign currency translation. In 2002, revenues increased $1.710 billion or 14% from 2001, primarily reflecting the impact of changes in estimates related to the timing of revenue recognition on securitized portfolios, the benefit of spread improvements and receivables growth, and the acquisition of Banamex.

        Operating expenses of $6.227 billion in 2003 were $692 million or 13% higher than 2002, reflecting the impact of acquisitions and foreign currency translation and increased investment spending, including higher advertising and marketing expenditures, costs associated with expansion into Russia and China, and repositioning costs, mainly in EMEA and Latin America. In 2002, expenses increased 2% from 2001, reflecting the addition of Banamex and increased advertising and marketing costs in Citi Cards that were partially offset by disciplined expense management, including expense reduction initiatives in Diners Club N.A.

        The provision for credit losses in 2003 was $2.935 billion compared to $3.410 billion in 2002 and $2.593 billion in 2001. The decrease in the provision for credit losses in 2003 was mainly due to an increase in the level of securitized receivables combined with credit improvements in North America and Latin America, including a $44 million reduction in the allowance for credit losses in Argentina due to improvement in credit experience and lower portfolio volumes. The decline in 2003 was partially offset by the impact of acquisitions. In 2002, the provision for credit losses included a $206 million addition to the allowance for credit losses established in accordance with FFIEC guidance related to past-due interest and late fees on the on-balance sheet credit card receivables in Citi Cards and a $109 million net provision for credit losses resulting from deteriorating credit in Argentina.

        The securitization of credit card receivables is limited to the Citi Cards business within North America. At December 31, 2003, securitized credit card receivables were $76.1 billion, compared to $67.1 billion at December 31, 2002 and $67.0 billion at December 31, 2001. There were no credit card receivables held-for-sale at December 31, 2003, compared to $6.5 billion at December 31, 2002 and 2001.

20


Because securitization changes Citigroup's role from that of a lender to that of a loan servicer, it removes the receivables from Citigroup's balance sheet and affects the amount of revenue and the manner in which revenue and the provision for credit losses are classified in the income statement. For securitized receivables and receivables held-for-sale, gains are recognized upon sale, and amounts that would otherwise be reported as net interest revenue, fee and commission revenue, and credit losses on loans are instead reported as fee and commission revenue (for servicing fees) and other revenue (for the remaining revenue, net of credit losses and the amortization of previously recognized securitization gains). Because credit losses are a component of these cash flows, revenues over the term of the transactions may vary depending upon the credit performance of the securitized receivables. However, Citigroup's exposure to credit losses on the securitized receivables is contractually limited to the cash flows from the receivables.

        Including securitized receivables and receivables held-for-sale, managed net credit losses in 2003 were $7.694 billion with a related loss ratio of 5.90%, compared to $7.169 billion and 5.93% in 2002 and $6.048 billion and 5.28% in 2001. The decline in the ratio from the prior year was primarily driven by improvements in North America and the international markets, particularly in Hong Kong, Taiwan, and Argentina, partially offset by the addition of the Sears portfolio. Contributing to the improvement in North America was the addition of the Home Depot portfolio, which at acquisition was recorded at fair market value and represented $2.8 billion of average loans in the net credit loss calculation. The increase in the net credit loss ratio in 2002 compared to 2001 was primarily due to increases in Citi Cards, reflecting industry-wide trends in the U.S., combined with increases in Asia resulting from higher bankruptcy losses in Hong Kong. Loans delinquent 90 days or more were $3.392 billion or 2.14% at December 31, 2003, compared to $2.397 billion or 1.84% at December 31, 2002 and $2.386 billion or 1.97% at December 31, 2001. The increase in delinquent loans in 2003 was primarily attributable to the Sears and Home Depot acquisitions. A summary of delinquency and net credit loss experience related to the on-balance sheet loan portfolio is included in the table on page 43.

CONSUMER FINANCE

In millions of dollars

  2003
  2002
  2001
 
Revenues, net of interest expense   $ 10,003   $ 9,807   $ 9,004  
Operating expenses     3,488     3,114     3,444  
Provisions for benefits, claims, and credit losses     3,727     3,294     2,564  
   
 
 
 
Income before taxes     2,788     3,399     2,996  
Income taxes     860     1,200     1,091  
   
 
 
 
Net income   $ 1,928   $ 2,199   $ 1,905  
   
 
 
 
Average assets (in billions of dollars)   $ 105   $ 96   $ 88  
Return on assets     1.84 %   2.29 %   2.16 %
   
 
 
 

Consumer Finance reported net income of $1.928 billion in 2003, down $271 million or 12% from 2002, principally reflecting a decline in International Consumer Finance resulting from continued weakness in Japan, which was partially offset by the acquisition of GSB in November of 2002 and a $94 million release of a tax reserve related to a settlement with tax authorities, which increased income in Japan. Net income of $2.199 billion in 2002 grew $294 million or 15% from 2001, primarily reflecting revenue growth and continued efficiencies resulting from the integration of Associates in North America, partially offset by higher net credit losses in the U.S. and Japan. Net income growth in 2002 also included after-tax benefits of $117 million due to the absence of goodwill and other indefinite-lived intangible asset amortization.

In billions of dollars

  2003
  2002
  2001
Average loans                  
Real-estate-secured loans   $ 52.1   $ 48.0   $ 45.1
Personal     22.5     21.6     19.9
Auto     11.1     8.4     6.3
Sales finance and other     5.0     4.0     3.7
   
 
 
Total average loans   $ 90.7   $ 82.0   $ 75.0
   
 
 

        As shown in the preceding table, average loans grew 11% in 2003 resulting from acquisitions, growth in real-estate-secured loans, the impact of funding auto loan volumes internally and strengthening currencies in the international markets. Growth in real-estate-secured loans mainly reflected the continued cross-selling of products through Primerica as well as portfolio acquisitions in North America and growth in the U.K. Average auto loans in 2003 increased $2.7 billion or 32% from 2002, primarily resulting from the addition of GSB auto loans in November of 2002, as well as a shift in funding policy to fund business volumes internally. In Japan, average loans of $12.1 billion declined 1% from 2002, as the benefit of foreign currency translation was more than offset by the impact of charge-offs, higher pay-downs, reduced loan demand and tighter underwriting standards. Average loans grew 9% in 2002 resulting from growth in real-estate-secured loans, an increase in auto loans in the U.S., and the acquisitions of Taihei and Marufuku in Japan.

        As shown in the following table, the average net interest margin of 10.10% in 2003 declined 53 basis points from 2002, primarily reflecting compression in the international markets, particularly in Japan. In North America, the average net interest margin was 8.40% in 2003, declining 3 basis points from the prior year as the benefit of lower cost of funds was offset by lower yields, reflecting the lower interest rate environment and the continued shift to higher-quality credits. The average net interest margin for International Consumer Finance was 15.80% in 2003, declining 175 basis points from the prior year, primarily driven by Japan. The compression of net interest margin in Japan reflected a decline in higher-yielding personal loans combined with a change in the treatment of adjustments and refunds of interest and continued high levels of non-performing loans. Beginning in the second quarter of 2003, adjustments and refunds of interest charged to customer accounts are accounted for as a reduction of net interest margin whereas, in prior periods, such amounts were treated as credit costs. The net interest margin decline in Japan was offset, in part, by margin expansion in Europe, which was driven by lower cost of funds and higher yields. The average net interest margin of 10.63% in 2002 increased 24 basis points from 2001 as improved margins in North America were partially offset by compression in International Consumer Finance that was mainly due to strong growth in lower-risk real-estate-secured loans, which have lower yields.

 
  2003
  2002
  2001
 
Average net interest margin              
North America   8.40 % 8.43 % 8.11 %
International   15.80 % 17.55 % 18.05 %
Total   10.10 % 10.63 % 10.39 %
   
 
 
 

        Revenues, net of interest expense, of $10.003 billion in 2003 increased $196 million or 2% from 2002. The increase in revenue reflected growth of $490 million or 8% in North America, partially offset by a decline of $294 million or 8% in International Consumer Finance. Revenue growth in North America was primarily driven by growth in receivables, which included the addition of the GSB auto

21


portfolio, partially offset by declines in insurance-related revenue. In International Consumer Finance, the decline in revenue was primarily due to lower volumes and spreads in Japan, which was partially offset by the timing of acquisitions in 2002, the net effect of foreign currency translation, and growth in Asia. Revenues of $9.807 billion in 2002 increased $803 million or 9% from 2001, reflecting the impact of acquisitions in North America and Japan combined with volume-related growth in North America and EMEA.

        Operating expenses of $3.488 billion in 2003 increased $374 million or 12% from 2002, reflecting increases of $218 million or 12% in North America and $156 million or 13% in International Consumer Finance. The increase in operating expenses in North America was primarily due to increased volumes and the addition of the GSB auto portfolio, as well as increased staffing costs and collection and compliance expenses. The increase in operating expenses for International Consumer Finance reflected the impact of foreign currency translation, additional costs in Japan attributable to actions taken to restructure the business in response to the continued challenging business environment and the timing of acquisitions in the prior year, partially offset by expense savings from branch closings and headcount reductions in Japan. Operating expenses of $3.114 billion in 2002 decreased $330 million or 10% from 2001, mainly reflecting the benefits from the integration of Associates in the U.S., the absence of goodwill and other indefinite-lived intangible asset amortization, and the benefit of foreign currency translation.

        The provisions for benefits, claims, and credit losses were $3.727 billion in 2003, up from $3.294 billion in 2002 and $2.564 billion in 2001, primarily reflecting increases in Japan due to deteriorating credit conditions, the timing of acquisitions, and the impact of foreign currency translation, partially offset by a decline in policyholder benefits and claims in North America. Net credit losses and the related loss ratio were $3.517 billion and 3.88% in 2003, up from $3.026 billion and 3.69% in 2002 and $2.246 billion and 2.99% in 2001. In North America, net credit losses were $2.059 billion and the related loss ratio was 2.94% in 2003, compared to $1.865 billion and 3.00% in 2002 and $1.527 billion and 2.65% in 2001. The decrease in the ratio in 2003 was mainly driven by improvements in the real-estate-secured and auto portfolios, which were partially offset by increased loss rates in the personal loan portfolio. The increases in net credit losses and the related loss ratio in 2002 were mainly due to increases in the personal and auto loan portfolios in the U.S. Net credit losses in International Consumer Finance were $1.458 billion and the related loss ratio was 7.02% in 2003, up from $1.161 billion and 5.88% in 2002 and $719 million and 4.14% in 2001, primarily due to increased bankruptcy and contractual losses in Japan. The 2003 net credit loss ratio for International Consumer Finance was reduced by 56 basis points as a result of the change in treatment of adjustments and refunds as discussed above.

        Loans delinquent 90 days or more were $2.221 billion or 2.36% of loans at December 31, 2003, compared to $2.197 billion or 2.48% at December 31, 2002 and $2.269 billion or 2.92% at December 31, 2001. The decrease in the delinquency ratio in 2003 was primarily due to improvements in North America, partially offset by deterioration in Japan.

RETAIL BANKING

In millions of dollars

  2003
  2002
  2001
 
Revenues, net of interest expense   $ 16,405   $ 14,181   $ 12,450  
Operating expenses     8,865     7,702     6,946  
Provisions for benefits, claims, and credit losses     1,376     1,755     1,645  
   
 
 
 
Income before taxes and minority interest     6,164     4,724     3,859  
Income taxes     1,941     1,655     1,388  
Minority interest, after-tax     47     38     27  
   
 
 
 
Net income   $ 4,176   $ 3,031   $ 2,444  
   
 
 
 
Average assets (in billions of dollars)   $ 232   $ 187   $ 154  
Return on assets     1.80 %   1.62 %   1.59 %
   
 
 
 

Retail Banking reported net income of $4.176 billion in 2003, up $1.145 billion or 38% from 2002. The increase in Retail Banking reflected growth in both North America and International Retail Banking net income of $808 million or 39% and $337 million or 35%, respectively. Growth in North America was primarily due to the acquisition of GSB, strong growth in customer volumes including mortgage originations as well as loan and deposit balances, combined with improved credit costs in Mexico and CitiCapital. The increase in International Retail Banking income reflected improvements in Argentina and growth in EMEA and Asia, which more than offset the prior-year gain on sale of the mortgage portfolio in Japan. Net income of $3.031 billion in 2002 grew $587 billion or 24% from 2001, reflecting the impact of acquisitions, revenue growth in Citibanking North America and Consumer Assets, and growth in International Retail Banking across all regions except Latin America, which was impacted by economic weakness in Argentina.

In billions of dollars

  2003
  2002
  2001
Average customer deposits                  
  North America   $ 153.4   $ 128.9   $ 68.3
  International     86.2     78.8     78.0
   
 
 
Total average customer deposits   $ 239.6   $ 207.7   $ 146.3
   
 
 

Average loans

 

 

 

 

 

 

 

 

 
  North America   $ 122.9   $ 97.6   $ 84.4
  International     36.0     34.3     34.2
   
 
 
Total average loans   $ 158.9   $ 131.9   $ 118.6
   
 
 

        As shown in the preceding table, Retail Banking grew average customer deposits and average loans in 2003. The growth in North America average customer deposits and average loans of 19% and 26%, respectively, was largely driven by the acquisition of GSB. In addition, North America experienced customer deposit growth in Citibanking North America that was partially offset by the negative impact of foreign currency translation in Mexico. Average loan growth in North America also reflected higher mortgage and student loan balances in Consumer Assets that were partially offset by a decline in CitiCapital resulting from the liquidation of non-core portfolios, including the sale in 2003 of the $1.2 billion CitiCapital Fleet Services portfolio. International Retail Banking average customer deposits grew across all regions, except Latin America, and benefited from the impact of foreign currency translation. Average loans in International Retail Banking grew 5% as the impact of foreign currency translation and growth in installment loans, primarily in Germany, partially offset a decline in mortgage loans in all regions. Retail Banking growth in average customer deposits and average loans in 2002 primarily reflected the timing of the Banamex and GSB acquisitions as well as organic growth in North America.

22


        As shown in the following table, revenues, net of interest expense, of $16.405 billion in 2003 increased $2.224 billion or 16% from 2002. Revenues in North America grew $1.483 billion or 15%, primarily due to the acquisition of GSB and growth in Consumer Assets and in Primerica. Excluding the acquisition of GSB, growth in North America (excluding Mexico) was driven by the benefit of increased loan and deposit volumes, higher mortgage servicing and securitization income, and growth in fee revenues, which was partially offset by lower net funding and positioning spreads in Citibanking North America and the impact of the liquidation of non-core portfolios in CitiCapital. Revenue growth of $63 million or 3% in Primerica was driven by volume-related growth in insurance premiums and improved investment income. Revenues in Mexico declined $12 million or 1% as the negative impact of foreign currency translation and the net write-down of certain investments offset growth in deposit volumes and spreads. International Retail Banking revenues increased $741 million or 17%, reflecting growth across all regions except Japan, which declined due to a $65 million gain on sale of the $2.0 billion mortgage portfolio in the prior year. Excluding Japan, growth reflected the net effect of foreign currency translation, increased loan volumes in EMEA, mainly in Germany, and strong investment and insurance product sales in Asia. The revenue increase in Latin America reflected improvements in Argentina resulting from lower losses and the release of reserves related to customer deposit liabilities and a decline in government-mandated inflation indexed accruals. These improvements were partially offset by a benefit in the prior year related to a change in the allocation of re-denomination losses among products based on the pesification decree issued by the Argentine government in February 2002. Revenues of $14.181 billion in 2002 grew $1.731 billion or 14% from 2001, reflecting the timing of acquisitions in North America, organic growth in Citibanking North America, Consumer Assets, EMEA, and Asia, and was partially offset by the impact of events in Argentina.

In millions of dollars

  2003
  2002
  2001
Revenues, net of interest expense                  
Citibanking North America, Consumer Assets, and CitiCapital   $ 7,351   $ 5,919   $ 5,258
Primerica Financial Services     2,121     2,058     2,055
Mexico     1,836     1,848     832
   
 
 
North America     11,308     9,825     8,145
   
 
 

EMEA

 

 

2,450

 

 

2,009

 

 

1,697
Japan     448     491     434
Asia     1,679     1,486     1,403
Latin America     520     370     771
   
 
 
International     5,097     4,356     4,305
   
 
 
Total revenues, net of interest expense   $ 16,405   $ 14,181   $ 12,450
   
 
 

        Operating expenses of $8.865 billion in 2003 increased $1.163 billion or 15% from 2002, reflecting increases in North America and in International Retail Banking. In North America, the growth of $810 million or 15% was mainly driven by the addition of GSB and volume-related increases in Consumer Assets, as well as investments in technology. Expense growth in North America was reduced by the impact of foreign currency translation in Mexico. International Retail Banking expenses increased $353 million or 14%, reflecting the impact of foreign currency translation, higher sales commissions and increased investment spending, including costs associated with branch and sales-force expansion, higher advertising, investments in technology and repositioning costs in Latin America and EMEA. Operating expenses in 2002 were up $756 million or 11% compared to 2001, primarily reflecting the impact of acquisitions and other volume-related increases.

        The provisions for benefits, claims, and credit losses were $1.376 billion in 2003, down from $1.755 billion in 2002 and $1.645 billion in 2001, reflecting a lower provision for credit losses. The decrease in the provision for credit losses in 2003 was mainly due to lower credit costs in Mexico, including a credit recovery of $64 million in 2003, and in CitiCapital, which benefited from the liquidation of non-core portfolios. The provision for credit losses in 2003 also included a $57 million net reduction in the allowance for credit losses in Argentina due to improvement in credit experience and lower portfolio volumes that was essentially offset by additions to the allowance for credit losses in Germany. In 2002, the provision for credit losses included a $108 million provision related to Argentina. The increase in the provisions in 2002 compared to 2001 was also due to the inclusion of a full year for Banamex, combined with the impact of loan growth and higher net credit losses. Net credit losses (excluding Commercial Markets) were $614 million and the related loss ratio was 0.52% in 2003, compared to $644 million and 0.71% in 2002 and $543 million and 0.68% in 2001. The decrease in net credit losses (excluding Commercial Markets) in 2003 was mainly due to improvements in Mexico, partially offset by higher write-downs of the Argentina compensation note that were written down against previously established reserves. Commercial Markets net credit losses were $462 million and the related loss ratio was 1.09% in 2003, compared to $712 million and 1.76% in 2002 and $823 million and 2.14% in 2001. The decline in Commercial Markets net credit losses was mainly due to improvement in CitiCapital and, in the 2003 comparison, a recovery in Mexico.

        Loans delinquent 90 days or more (excluding Commercial Markets) were $3.802 billion or 3.07% of loans at December 31, 2003, compared to $3.647 billion or 3.18% at December 31, 2002 and $2.755 billion or 3.31% at December 31, 2001. The increase in delinquent loans in 2003 was primarily due to the impact of foreign currency translation combined with increases in Germany, and was partly offset by declines in Consumer Assets, Asia and Argentina. The increase in delinquent loans in 2002 was mainly in Consumer Assets and reflected the addition of GSB and a higher level of buybacks from GNMA pools where credit risk is maintained by government agencies.

        Cash-basis loans in Commercial Markets were $1.350 billion or 3.38% of loans at December 31, 2003, compared to $1.299 billion or 2.90% at December 31, 2002 and $1.301 billion or 3.13% at December 31, 2001. The increase in cash-basis loans in 2003 primarily reflected increases in the vehicle leasing and transportation portfolios in CitiCapital and was offset in part by improvements and foreign currency translation in Mexico.

        Average assets of $232 billion in 2003 increased $45 billion from 2002, which, in turn, increased $33 billion from 2001. The increases in 2003 and 2002 primarily reflected the impact of acquisitions combined with growth in loans.

23


OTHER CONSUMER

In millions of dollars

  2003
  2002
  2001
 
Revenues, net of interest expense   $ 118   $ 288   $ 144  
Operating expenses     256     392     316  
Provisions for benefits, claims, and credit losses             (88 )
   
 
 
 
Income before tax benefits     (138 )   (104 )   (84 )
Income tax benefits     (51 )   (45 )   (25 )
   
 
 
 
Net loss   ($ 87 ) ($ 59 ) ($ 59 )
   
 
 
 

Other Consumer—which includes certain treasury and other unallocated staff functions, global marketing and other programsreported losses of $87 million, $59 million, and $59 million in 2003, 2002, and 2001, respectively. Included in the 2002 results was a $52 million after-tax gain resulting from the disposition of an equity investment in EMEA, a $25 million after-tax release of a reserve related to unused travelers checks in a non-core business, and gains from the sales of buildings in Asia. Excluding these items, the reduction in losses in 2003 was primarily due to prior-year legal costs in connection with settlements reached during 2002 and lower global marketing costs.

        Revenues, expenses, and the provision for benefits, claims, and credit losses reflect offsets to certain line-item reclassifications reported in other Global Consumer operating segments.

GLOBAL 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 66.

        During 2004, the Global Consumer businesses will continue to maintain a focus on tight expense control and productivity improvements. While the businesses will also focus on expanding the base of stable and recurring revenues and managing credit risk, revenue and credit performance will also be impacted by U.S. and global economic conditions, including the level of interest rates, bankruptcy filings and unemployment rates, as well as political policies and developments around the world. The Company remains diversified across a number of geographies, product groups, and customer segments and continues to monitor the economic situation in all of the countries in which it operates.

        Cards—In 2003, Cards reported record income of $3.6 billion, an increase of 18% over 2002, while completing the acquisitions of the Home Depot, Sears, and Diners Club Europe portfolios and launching card offerings in both China and Russia. In 2004, Cards expects to deliver strong earnings growth as receivables continue to grow and credit losses continue to improve.

        In 2004, Citi Cards expects continued income and receivables growth through the integration of Sears and Home Depot, an expanded private-label platform, new product launches, and organic growth. In Mexico, the Company will continue to leverage the expertise and experience of the global Cards franchise. International Cards is also expecting strong earnings growth in 2004 with a focus on expanding the revenue base through growth in sales, receivables, and accounts while continuing to invest in both new and existing markets.

        Consumer Finance—In 2003, Consumer Finance reported income of $1.9 billion, a decrease of 12% from 2002, largely reflecting continued difficult business conditions in Japan. In 2004, Consumer Finance expects moderate income growth.

        In North America, CitiFinancial expects to deliver income growth through growth in receivables and a continued focus on expense management combined with the integration of Washington Mutual Finance Corporation, which was acquired in January 2004 and added approximately $4.0 billion in assets. In the international markets, growth in 2004 will continue to be impacted by the challenging operating environment that persists in Japan. Net credit losses in Japan began to stabilize in the 2003 third quarter, and, in 2004, a more moderate level of bankruptcy filings and slightly improved economic conditions are expected. However, we also expect the consumer finance operations in Japan to continue to experience volume pressure as the business is repositioned. To mitigate the impact of the challenging environment, the business will continue to maintain its focus on operating efficiencies. In other international markets, important growth opportunities are anticipated as we continue to focus on gaining market share in both new and established markets including India, Poland, Romania, Italy, South Korea, and Thailand.

        Retail Banking—In 2003, Retail Banking reported record income of $4.2 billion, an increase of 38% from 2002, reflecting the successful integration of GSB and core business improvements in all markets. In 2004, Retail Banking expects to deliver growth in core businesses driven by the benefits of investment spending, including the impact of repositioning businesses in Latin America and EMEA, and continuing to expand our footprint and penetration into select markets, such as the growing Hispanic banking market.

        In 2004, Citibanking North America will continue to enhance the customer experience by emphasizing increased sales productivity in the financial centers, deeper customer relationships through cross-selling and wealth management initiatives, and further investments in technology that drive cost efficiencies and improve customer satisfaction. In Consumer Assets, CitiMortgage is expected to achieve growth by continuing to leverage Citigroup distribution channels while aligning the cost structure of the business to reflect lower mortgage origination volumes. The Student Loans business will continue to benefit from the strong Citi brand and best-in-class sales platforms and technology. Primerica expects to sustain momentum in recruiting and production volumes through focused product offerings, sales and product training programs, and continued dedication to its cross-selling relationships, while further developing its international presence. CitiCapital's focus on strategic segments and the continued liquidation of low-return portfolios are expected to deliver growth in 2004. The Retail Banking business in Mexico expects to drive growth through new loan, deposit, and investment products while continuing to improve operating margins. In the international markets, EMEA is expected to build upon the investments in both new and established markets and deliver strong results through a continued focus on distribution channels, product innovation, and customer support. In Asia and Japan, the businesses will continue to build on their strengths in developing customer relationships through investment product sales, deposit gathering, and branch lending. In Latin America, the business is building on repositioning initiatives that focus on strategic countries and markets while continuing to manage through the economic uncertainties in the region.

24


GLOBAL CORPORATE AND INVESTMENT BANK—2003 NET INCOME

[EDGAR REPRESENTATION OF GRAPHIC DATA]

In billions of dollars

   
2001   $ 4.392
2002   $ 3.159
2003   $ 5.387


GLOBAL CORPORATE AND INVESTMENT BANK—2003 NET INCOME BY PRODUCT*

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Transaction Services   14 %
Capital Markets and Banking   86 %

*
Excludes Other Corporate loss of $15 million


GLOBAL CORPORATE AND INVESTMENT BANK—2003 NET INCOME BY REGION

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Latin America   11 %
Asia   14 %
Japan   2 %
EMEA   19 %
Mexico   8 %
North America   46 %


GLOBAL CORPORATE AND INVESTMENT BANK

In millions of dollars

  2003
  2002
  2001
Revenues, net of interest expense   $ 20,040   $ 19,143   $ 19,550
Operating expenses     11,455     12,093     11,905
Provision for credit losses     732     2,255     844
   
 
 
Income before taxes and minority interest     7,853     4,795     6,801
Income taxes     2,429     1,611     2,383
Minority interest, after-tax     37     25     26
   
 
 
Net income   $ 5,387   $ 3,159   $ 4,392
   
 
 

        Global Corporate and Investment Bank (GCIB) reported net income of $5.387 billion, $3.159 billion, and $4.392 billion in 2003, 2002, and 2001, respectively. The increase in 2003 net income reflects increases of $1.379 billion in Other Corporate, primarily reflecting the absence of a $1.3 billion after-tax charge in 2002 related to the establishment of reserves for regulatory settlements and related civil litigation, $637 million or 16% in Capital Markets and Banking, and $212 million or 38% in Transaction Services. The decrease in 2002 net income reflects a decrease of $1.429 billion in Other Corporate, offset by increases of $118 million or 27% in Transaction Services and $78 million or 2% in Capital Markets and Banking.

        Capital Markets and Banking net income of $4.632 billion in 2003 increased $637 million or 16% compared to 2002, primarily reflecting a lower provision for credit losses, increases in Fixed Income and the absence of prior-year redenomination losses in Argentina, partially offset by mark-to-market losses on credit derivatives (which serve as an economic hedge for the loan portfolio) as credit spreads tightened. Net income of $3.995 billion in 2002 increased $78 million or 2% compared to 2001, reflecting lower compensation and benefits, increases in Sales and Trading and Fixed Income, mark-to-market gains on credit derivatives associated with the loan portfolio, 2001 restructuring charges of $121 million (after-tax), and the benefit from the absence of goodwill and other indefinite-lived intangible asset amortization. The increase was partially offset by a higher provision for credit losses, redenomination losses in Argentina, and lower business volumes in Investment Banking and Equities.

        Transaction Services net income of $770 million in 2003 increased $212 million or 38% from 2002, primarily due to a lower provision for credit losses, the benefit of lower taxes due to the application of APB 23 indefinite investment criteria and business consolidation, as well as lower expenses resulting from expense control initiatives. Transaction Services net income of $558 million in 2002 increased $118 million or 27% from 2001, primarily due to the impact of expense control initiatives, higher business volumes and investment gains in Europe and Asia, partially offset by trade finance write-offs in Argentina.

        The increase in Other Corporate in 2003 was primarily due to the absence of a $1.3 billion after-tax charge in 2002 related to the establishment of reserves for regulatory settlements and related civil litigation. The resulting decline in Other Corporate in 2002 was partially offset by a $52 million after-tax gain resulting from the disposition of a portion of an equity investment in EMEA.

        The businesses of GCIB are significantly affected by the levels of activity in the global capital markets which, in turn, are influenced by macro-economic and political policies and developments, among other factors, in approximately 100 countries in which the businesses operate. Global economic and market events can have both positive and negative effects on the revenue performance of the businesses and can affect credit performance.

GCIB Net Income—Regional View

In millions of dollars

  2003
  2002
  2001
North America (excluding Mexico)   $ 2,456   $ 974   $ 1,933
Mexico     431     450     238
EMEA     998     857     933
Japan     132     96     96
Asia (excluding Japan)     767     722     662
Latin America     603     60     530
   
 
 
Net income   $ 5,387   $ 3,159   $ 4,392
   
 
 

        GCIB net income increased in 2003 primarily due to increases in North America (excluding Mexico), Latin America, and EMEA. North America (excluding Mexico) net income increased $1.482 billion, primarily due to the absence of a $1.3 billion after-tax charge in 2002 related to the establishment of reserves for regulatory settlements and related civil litigation. Additional increases in North America (excluding Mexico) resulted from a lower provision for credit losses and increases in Fixed Income, which were partially offset by mark-to-market losses in credit derivatives and lower deal volume. Latin America increased $543 million in 2003, primarily due to the absence of prior-year redenomination losses, provisions, and write-downs in

25


Argentina. EMEA net income increased $141 million in 2003, primarily due to increases in Fixed Income, partially offset by a higher provision for credit losses associated with a single European counterparty.

CAPITAL MARKETS AND BANKING

In millions of dollars

  2003
  2002
  2001
Revenues, net of interest expense   $ 16,425   $ 15,739   $ 16,153
Operating expenses     8,910     7,671     9,212
Provision for credit losses     738     2,046     823
   
 
 
Income before taxes and minority interest     6,777     6,022     6,118
Income taxes     2,108     2,003     2,183
Minority interest, after-tax     37     24     18
   
 
 
Net income   $ 4,632   $ 3,995   $ 3,917
   
 
 

        Capital Markets and Banking reported net income of $4.632 billion in 2003 compared to $3.995 billion in 2002 and $3.917 billion in 2001. Net income increased $637 million or 16% during 2003, primarily due to a lower provision for credit losses, increases in Fixed Income, and the absence of prior-year redenomination losses in Argentina, partially offset by mark-to-market losses on credit derivatives as credit spreads tightened and declines in Sales and Trading (due to lower positioning gains). Net income of $3.995 billion in 2002 increased $78 million or 2% compared to 2001, reflecting lower compensation and benefits, increases in Sales and Trading and Fixed Income, mark-to-market gains on credit derivatives associated with the loan portfolio, 2001 restructuring charges of $121 million (after-tax), and the benefit from the absence of goodwill and other indefinite-lived intangible asset amortization. The increase was partially offset by a higher provision for credit losses, redenomination losses in Argentina, and lower business volumes in Investment Banking and Equities.

        Revenues, net of interest expense, of $16.425 billion in 2003 increased $686 million or 4% from 2002. Revenue growth in 2003 was driven by increases in Fixed Income and the absence of prior-year redenomination losses and write-downs of sovereign securities in Argentina, partially offset by mark-to-market losses on credit derivatives as credit spreads tightened, declines in Sales and Trading, and lower business volumes in Equities. Fixed Income growth was primarily due to higher originations and trading as companies took advantage of the low interest rate environment. Revenues, net of interest expense, of $15.739 billion in 2002 decreased $414 million or 3% from 2001, primarily reflecting redenomination losses and write-downs of sovereign securities in Argentina and declines in Investment Banking and Equities, partially offset by growth in Sales and Trading and Fixed Income, mark-to-market gains on credit derivatives associated with the loan portfolio, a gain on sale of interests in certain European market exchanges, and the acquisition of Banamex.

        Operating expenses were $8.910 billion in 2003 compared to $7.671 billion in 2002 and $9.212 billion in 2001. Operating expenses increased $1.239 billion or 16% in 2003 compared to 2002, primarily due to increased compensation and benefits, which is impacted by the revenue and credit performance of the business. The increase in 2003 also reflects costs associated with the repositioning of the Company's business in Latin America (primarily severance-related) and higher legal fees. Operating expenses decreased $1.541 billion or 17% in 2002 compared to 2001, primarily due to lower compensation and benefits, expense rationalization initiatives, a benefit from the absence of goodwill and other indefinite-lived intangible asset amortization of $69 million (pretax), and 2001 restructuring charges of $200 million (pretax), partially offset by severance-related charges. Compensation and benefits decreased, primarily reflecting lower incentive compensation, which is impacted by the revenue and credit performance of the business, and savings from restructuring actions initiated in 2001.

        The provision for credit losses was $738 million in 2003 compared to $2.046 billion in 2002 and $823 million in 2001. The provision for credit losses decreased $1.308 billion in 2003, primarily due to the absence of prior-year provisions for Argentina and exposures in the energy and telecommunications industries, as well as reserve releases reflecting improved credit trends, partially offset by the provision of $338 million for credit losses related to exposure to a single European counterparty. The increase in 2002 primarily reflects higher provisions for exposures in the energy and telecommunications industries and in Argentina.

        Cash-basis loans were $3.263 billion, $3.423 billion, and $2.423 billion at December 31, 2003, 2002, and 2001, respectively. The decrease in 2003 is primarily due to decreases to corporate borrowers in Argentina and New Zealand, as well as reductions in the telecommunications industry, partially offset by the reclassification of cash-basis loans ($248 million) in Mexico from Transaction Services to Capital Markets and Banking and increases in exposure to a single European counterparty and the energy industry. The increase in 2002 primarily reflects increases in the energy and telecommunications industries, as well as corporate borrowers in Argentina, Brazil, Thailand, and Australia.

TRANSACTION SERVICES

In millions of dollars

  2003
  2002
  2001
Revenues, net of interest expense   $ 3,627   $ 3,620   $ 3,600
Operating expenses     2,556     2,583     2,874
Provision for credit losses     (6 )   209     21
   
 
 
Income before taxes and minority interest     1,077     828     705
Income taxes     307     269     257
Minority interest, after-tax         1     8
   
 
 
Net income   $ 770   $ 558   $ 440
   
 
 

        Transaction Services reported net income of $770 million in 2003, up $212 million or 38% from 2002, primarily due to a lower provision for credit losses, the benefit of lower taxes due to the application of APB 23 indefinite investment criteria, business consolidation, and lower expenses resulting from expense control initiatives. Net income of $558 million in 2002 increased $118 million or 27% from 2001, primarily due to the impact of expense control initiatives, higher business volumes and investment gains in Europe and Asia, partially offset by trade finance write-offs in Argentina.

        As shown in the following table, average liability balances and assets under custody experienced growth in 2003 and 2002. Average liability balances of $99 billion, $85 billion and $77 billion in 2003, 2002, and 2001, respectively, primarily reflected growth in Europe and Asia. Assets under custody increased 25% to $6.4 trillion in 2003 and 6% to $5.1 trillion in 2002, primarily reflecting market appreciation and increases in customer volumes.

 
  2003
  2002
  2001
Liability balances (average in billions)   $ 99   $ 85   $ 77
Assets under custody (EOP in trillions)   $ 6.4   $ 5.1   $ 4.8
   
 
 

        Revenues, net of interest expense, increased $7 million to $3.627 billion in 2003, due to increased business volumes reflected by higher liability balances, gains on the early termination of intracompany deposits (which were offset in Capital Markets and Banking), and a

26


benefit from foreign exchange currency translation. The increase was partially offset by lower spreads reflecting the low interest rate environment in 2003 as well as price compression. Revenues, net of interest expense, were $3.620 billion in 2002, up $20 million or 1% from 2001, primarily reflecting higher business volumes, including the partial-year benefit of the Banamex acquisition, and investment gains in Europe and Asia, partially offset by spread compression.

        Operating expenses decreased $27 million or 1% in 2003 to $2.556 billion from $2.583 billion in 2002, primarily reflecting expense control initiatives. The decrease in operating expenses in 2003 was partially offset by costs associated with the repositioning of the Company's business in Latin America, primarily severance-related, and investment spending related to higher business volumes and integration costs associated with new business relationships. Operating expenses of $2.583 billion in 2002 decreased $291 million or 10% from $2.874 billion in 2001, primarily reflecting expense control initiatives across all regions and operational efficiency improvements resulting from prior-year investments in technology initiatives.

        The provision for credit losses was ($6) million, $209 million, and $21 million in 2003, 2002, and 2001, respectively. The provision for credit losses decreased by $215 million from 2002, primarily due to prior-year write-offs in Argentina and reserve releases reflecting improved credit trends. The reduction in credit costs was partially offset by 2003 provisions for selected borrowers in Brazil and a single European counterparty.

        Cash-basis loans, which were primarily trade finance receivables in the Transaction Services business were $156 million, $572 million, and $464 million at December 31, 2003, 2002, and 2001, respectively. Cash-basis loans decreased $416 million in 2003, primarily due to a reclassification of cash-basis loans ($248 million) in Mexico from Transaction Services to Capital Markets and Banking, along with charge-offs in Argentina and Poland. The increase in 2002 was primarily due to an increase in trade finance receivables in Argentina and Brazil.

OTHER CORPORATE

In millions of dollars

  2003
  2002
  2001
 
Revenues, net of interest expense   ($ 12 ) ($ 216 ) ($ 203 )
Operating expenses     (11 )   1,839     (181 )
   
 
 
 
Loss before income taxes (benefits)     (1 )   (2,055 )   (22 )
Income taxes (benefits)     14     (661 )   (57 )
   
 
 
 
Net income (loss)   ($ 15 ) ($ 1,394 ) $ 35  
   
 
 
 

Other Corporate—which includes intra-GCIB segment eliminations, certain one-time non-recurring items, and tax amounts not allocated to GCIB products—reported a net loss of $15 million in 2003 compared to a net loss of $1.394 billion in 2002, primarily reflecting a $1.3 billion after-tax charge related to the establishment of reserves for regulatory settlements and related civil litigation. Net income of $35 million in 2001 was a result of gains on building sales in Asia and the release of a rent reserve in 2001 that was no longer required.

GLOBAL CORPORATE AND INVESTMENT BANK 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 66.

        GCIB is significantly affected by the levels of activity in the global capital markets which, in turn, are influenced by macro-economic and political policies and developments, among other factors, in approximately 100 countries in which the businesses operate. Global economic and market events can have both positive and negative effects on the revenue and credit performance of the businesses.

        Losses on corporate lending activities and the level of cash-basis loans can vary widely with respect to timing and amount, particularly within any narrowly-defined business or loan type.

        Capital Markets and Banking in 2003 was driven by improving credit trends and strong growth in Fixed Income as corporations continued to take advantage of the low interest rate environment. In addition, the business continued to focus on expense reduction initiatives.

        In 2004, focus will remain on expanding our market share positions and outperforming the industry, credit risk mitigation, and expense management. While initiatives will focus on expanding market share in priority countries through organic growth, revenue and credit performance was dependent upon the strength and stability of U.S. and global economic conditions. Net credit losses and cash-basis loans are expected to improve from 2003 levels, reflecting improving global economic conditions. Citigroup remains diversified across many geographies and industry groups. Citigroup continues to monitor the economic situation in emerging market countries closely and, where appropriate, adjusts exposures and pursues risk management initiatives.

        Transaction Services was adversely impacted in 2003 by a low interest rate environment and heightened price compression, which were offset by improved credit trends and increased business volumes.

        In 2004, the business will focus on realizing the benefit of key customer mandates, continuing expansion of market share, as well as interest rate risk management, continued credit improvement and expense control. While revenue performance depends on the interest rate environment and the sustained economy in the U.S. and global markets, the business will maintain focus on building business volumes and developing more effective spread management. Additionally, the business will continue to leverage Citigroup's global corporate relationship client base through cross-selling initiatives.

27


PRIVATE CLIENT SERVICES

In millions of dollars

  2003
  2002
  2001
Revenues, net of interest expense   $ 5,827   $ 5,830   $ 6,091
Operating expenses     4,567     4,555     4,711
Provision for credit losses     1     6     4
   
 
 
Income before taxes     1,259     1,269     1,376
Income taxes     481     470     499
   
 
 
Net income   $ 778   $ 799   $ 877
   
 
 

        Private Client Services reported net income of $778 million in 2003 compared to $799 million in 2002 and $877 million in 2001. Private Client Services net income decreased $21 million or 3% during 2003, primarily due to a higher effective tax rate and increased legal, advertising and marketing costs. Net income in 2002 declined $78 million or 9% compared to 2001, primarily due to lower asset-based fee revenue, a decline in net interest revenue on securities-based lending, and lower transaction volumes, which were partially offset by lower production-related compensation and the impact of continued expense control initiatives.

        Revenues, net of interest expense, decreased $3 million in 2003 to $5.827 billion, primarily due to decreases in asset-based revenue, reflecting declines in fees from managed accounts and lower net interest revenue on security-based lending, partially offset by increased transactional revenue. The decrease in managed account revenue reflects a change in client asset mix during 2003. Revenues, net of interest expense, decreased $261 million or 4% in 2002 to $5.830 billion, primarily due to declines in fees from managed accounts, lower net interest revenue on security-based lending, and lower customer transaction volumes.

        Total assets under fee-based management were $209 billion, $158 billion, and $185 billion as of December 31, 2003, 2002, and 2001, respectively. The increase in 2003 was primarily due to positive net flows and higher equity market values, while the decrease in 2002 primarily reflects a decline in market values. Total client assets, including assets under fee-based management of $1.068 trillion in 2003, increased $177 billion or 20% from $891 billion in 2002, which in turn decreased $76 billion from 2001. The increase in 2003 is primarily due to higher equity market values and positive net flows of $28 billion, while the decrease in 2002 primarily reflects market depreciation, partially offset by positive net flows of $34 billion. Balances in Smith Barney's Bank Deposit Program totaled $41 billion in 2003, which remained flat from 2002. Private Client Services had 12,207 financial consultants as of December 31, 2003, compared with 12,690 as of December 31, 2002 and 12,927 as of December 31, 2001. Annualized revenue per financial consultant of $471,000 in 2003 increased 3% from $456,000 in 2002, which in turn decreased 5% from $478,000 in 2001.

        The following table details trends in total assets under fee-based management, total client assets and annualized revenue per financial consultant:

In billions of dollars

  2003
  2002
  2001
Consulting group and internally managed accounts   $ 137   $ 106   $ 126
Financial consultant managed accounts     72     52     59
   
 
 
Total assets under fee-based management(1)     209     158     185
   
 
 
Private Client assets     912     762     848
Other investor assets within Citigroup Global Markets     156     129     119
   
 
 
Total Private Client assets(1)   $ 1,068   $ 891   $ 967
   
 
 
Annualized revenue per FC (in thousands of dollars)   $ 471   $ 456   $ 478
   
 
 

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

        Operating expenses increased $12 million in 2003 to $4.567 billion from $4.555 billion in 2002, which in turn decreased $156 million or 3% from $4.711 billion in 2001. The increase in 2003 primarily reflects higher legal and advertising and marketing costs. The decrease in 2002 is mainly due to lower production-related compensation resulting from a decline in revenue combined with the impact of expense control initiatives.

PRIVATE CLIENT SERVICES 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 66. In 2003, Private Client Services delivered industry-leading profit margins primarily due to increased revenues reflecting higher client assets and trading volumes and expense management. However, federal and state regulators have focused on, and continue to devote substantial attention to, the mutual fund industry. There have been numerous proposals for legislative and regulatory reforms. It is difficult at this time to predict whether changes resulting from new laws and regulations will affect the industry or our investment advisory, financial planning and brokerage businesses, and, if so, to what degree.

        In 2004, given expected improving market conditions, focus for Private Client Services will be on franchise growth through customer acquisition, selected recruiting of experienced Financial Consultants, and continued expansion of fee-based services. Improving market conditions should also increase transaction volumes and support revenue growth. In Global Equity Research, major initiatives include strategically expanding research coverage in targeted sectors, continuing expense management, as well as refining the scope and management structure of our global research platform.

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GLOBAL INVESTMENT MANAGEMENT—2003 NET INCOME

[EDGAR REPRESENTATION OF GRAPHIC DATA]

In billions of dollars

   
2001   $ 1.537
2002   $ 1.523
2003   $ 1.696
          

GLOBAL INVESTMENT MANAGEMENT—2003 NET INCOME BY PRODUCT

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Asset Management   23 %
Private Bank   32 %
Life Insurance and Annuities   45 %
          

GLOBAL INVESTMENT MANAGEMENT—2003 NET INCOME BY REGION*

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Asia   9 %
Japan   5 %
Mexico   15 %
North America   71 %

*Excludes Latin America loss of $149 million and EMEA income of $6 million
    

GLOBAL INVESTMENT MANAGEMENT

In millions of dollars

  2003
  2002
  2001
Revenues, net of interest expense   $ 8,685   $ 7,621   $ 7,845
Operating expenses     3,119     2,697     2,712
Provisions for benefits, claims, and credit losses     3,173     2,744     2,768
   
 
 
Income before taxes and minority interest     2,393     2,180     2,365
Income taxes     685     656     800
Minority interest, after-tax     12     1     28
   
 
 
Net income   $ 1,696   $ 1,523   $ 1,537
   
 
 

Global Investment Management reported net income of $1.696 billion in 2003, which was up $173 million or 11% from 2002. Life Insurance and Annuities net income of $751 million in 2003 increased $134 million compared to 2002, reflecting a $219 million or 39% increase in Travelers Life and Annuity (TLA) to $781 million, partially offset by a decrease of $85 million in International Insurance Manufacturing (IIM). The increase in TLA's income was primarily driven by higher net realized insurance investment portfolio gains of $236 million, higher business volumes, and lower taxes, partially offset by higher deferred acquisition cost (DAC) amortization and reduced investment yields. The IIM net loss of $30 million in 2003 represented a decrease in income of $85 million from 2002, driven by impairments of Argentina Government Promissory Notes (GPNs) of $114 million and the impact of certain liability restructuring actions taken in the Argentina voluntary annuity business of $20 million, partially offset by increases in Asia of $24 million and Mexico of $20 million. Private Bank net income of $551 million in 2003 was up $88 million or 19% from 2002, primarily reflecting increased investment management and capital markets activity, lending activity, and a lower provision for credit losses, partially offset by higher expenses, reflecting incentive compensation expense associated with higher revenues and higher other employee-related costs, and the impact of narrowing interest rate spreads. Asset Management net income of $394 million in 2003 was down $49 million or 11% from 2002, primarily reflecting the impact of impairments in Argentina and reduced fee revenues, partially offset by the cumulative impact of positive net flows and lower expenses.

        Global Investment Management net income of $1.523 billion in 2002 decreased $14 million or 1% from 2001. Life Insurance and Annuities net income of $617 million in 2002 decreased $254 million or 29% from 2001, primarily related to higher net realized insurance investment portfolio losses and lower investment yields in 2002, partially offset by the impact of the Banamex acquisition and higher business volumes. Private Bank net income of $463 million in 2002 was up $93 million or 25% from 2001, reflecting increased client revenues, the impact of lower interest rates, and the benefit of lower taxes due to the application of APB 23 indefinite investment criteria, partially offset by increased expenses to expand front-end sales and servicing capabilities. Asset Management income of $443 million in 2002 was up $147 million or 50% from 2001, driven by the full-year impact of the Banamex acquisition, the cumulative impact of positive flows, and lower expenses including the absence of goodwill and indefinite-lived intangible asset amortization in 2002. These increases were partially offset by negative market action, the cumulative impact of outflows of U.S. Retail Money Market funds to the Smith Barney Bank Deposit Program, and declines in the Latin America retirement services businesses due to the 2002 economic conditions in Argentina.

        The table below shows net income by region for Global Investment Management:

Global Investment Management Net Income—Regional View

In millions of dollars

  2003
  2002
  2001
North America (excluding Mexico)   $ 1,303   $ 1,085   $ 1,251
Mexico     284     235     74
EMEA     6     22     36
Japan     89     56     33
Asia (excluding Japan)     163     107     81
Latin America     (149 )   18     62
   
 
 
Net income   $ 1,696   $ 1,523   $ 1,537
   
 
 

        Global Investment Management net income increased $173 million in 2003 from the prior year, primarily driven by increases in North America, Asia, Mexico, and Japan, partially offset by declines in Latin America and EMEA. North America net income of $1.303 billion in 2003 increased $218 million from 2002, resulting from higher Life Insurance and Annuities results of $224 million, primarily the result of improved net realized insurance investment portfolio gains/(losses) of $240 million. Asia net income of $163 million in 2003 increased $56 million from 2002, primarily driven by lower taxes due to the application of APB 23 indefinite investment criteria in Life

29


Insurance and Annuities, as well as higher client trading and performance fee revenues in Private Bank. Mexico net income of $284 million in 2003 increased $49 million from 2002, primarily reflecting an increase of $20 million in Life Insurance and Annuities (higher business volumes and the impact of a lower tax rate), an increase of $20 million in Private Bank (higher client trading revenues), and an increase of $9 million in Asset Management (higher business volumes and the impact of a lower tax rate). Japan net income in 2003 of $89 million increased $33 million from 2002, primarily related to increased client trading and lending activity in Private Bank. Latin America net loss of $149 million in 2003 represented a decrease in income of $167 million from 2002, reflecting actions taken in Argentina in Life Insurance and Annuities and Asset Management in 2003. EMEA net income of $6 million in 2003 decreased $16 million from 2002, primarily due to higher employee-related expenses including severance in Private Bank.

LIFE INSURANCE AND ANNUITIES

In millions of dollars

  2003
  2002
  2001
Revenues, net of interest expense   $ 4,948   $ 4,076   $ 4,431
Provision for benefits and claims     3,162     2,726     2,745
Operating expenses     788     501     395
   
 
 
Income before taxes and minority interest     998     849     1,291
Income taxes     247     232     410
Minority interest, after-tax             10
   
 
 
Net income   $ 751   $ 617   $ 871
   
 
 

Life Insurance and Annuities comprises Travelers Life and Annuity (TLA) and International Insurance Manufacturing (IIM).

        Life Insurance and Annuities reported net income of $751 million in 2003, a $134 million or 22% increase from $617 million in 2002. The $134 million increase was driven by a $219 million increase in TLA, partially offset by an $85 million decrease in IIM. The $134 million increase reflects lower net realized insurance investment portfolio losses of $187 million, higher business volumes, and the impact of lower taxes. These increases were partially offset by certain asset impairments and other actions taken in Argentina, an increase in benefits and claims related to business volume growth, an increase in operating expenses driven by higher deferred acquisition cost (DAC) amortization, and the impact of lower retained investment margins. Net income in 2002 of $617 million decreased $254 million or 29% from $871 million in 2001, driven by a decrease of $291 million in TLA, partially offset by an increase in IIM of $37 million. The $254 million decrease from 2001 is primarily related to net realized insurance investment portfolio losses of $219 million in 2002 compared with net realized insurance investment portfolio gains of $35 million in 2001 and lower investment yields in 2002, partially offset by the impact of the Banamex acquisition and higher business volumes.

        TLA's net income was $781 million in 2003 as compared to $562 million in 2002, an increase of $219 million. The $219 million increase primarily resulted from higher net realized insurance investment portfolio gains of $236 million, largely resulting from the absence of prior-year impairments relating to investments in WorldCom Inc. and the energy sector. The 2003 results included a decline of $17 million, which resulted from increased DAC amortization and reduced investment yields, partially offset by higher business volumes and fee revenues, and higher tax benefits related to adjustments to the separate account Dividends Received Deduction of $51 million. TLA's 2002 net income decreased $291 million to $562 million from $853 million in 2001. The decline was primarily driven by higher net realized insurance investment portfolio losses in 2002 of $249 million and decreased retained investment margins as a result of lower fixed income investment earnings and declining equity markets, partially offset by strong volumes in the group annuity and individual life insurance businesses.

        The following table shows the major invested asset balances by type as of December 31, and the associated net investment income and yields for the years ending December 31:

In millions of dollars

  2003
  2002
  2001
 
Fixed maturities   $ 40,596   $ 35,290   $ 30,044  
Equity investments     2,371     2,065     1,959  
Real estate     2,242     2,411     2,594  
   
 
 
 
Total invested assets   $ 45,209   $ 39,766   $ 34,597  
Net investment income   $ 2,637   $ 2,570   $ 2,571  
   
 
 
 
Investment yield     6.48 %   7.02 %   8.08 %
   
 
 
 

        TLA's NII of $2.637 billion in 2003 increased $67 million or 3% over 2002 despite overall rate deterioration, and was driven by increased volumes resulting from the $5.443 billion increase in the invested asset base, as well as risk arbitrage activity. The rate deterioration was driven by lower fixed income yields, which suffered from the lower interest rate environment and prior-year credit issues. Net investment income in 2002 was flat compared to 2001, with the rate deterioration largely offsetting higher business volumes. During 2002, fixed maturities suffered from the lower rate environment and credit issues, while lower equity investment returns were largely offset by growth in real estate income. Real estate is primarily comprised of mortgage loan investments and real estate joint ventures, which performed well in 2002 with notable commercial sales.

        The amortization of capitalized DAC is a significant component of TLA expenses. TLA's recording of DAC varies based upon product type. DAC for deferred annuities, both fixed and variable, and payout annuities employs a level yield methodology as per SFAS 91. DAC for universal life (UL) and COLI are amortized in relation to estimated gross profits as per SFAS 97, and traditional life and health insurance products are amortized in relation to anticipated premiums as per SFAS 60. The following is a roll forward of capitalized DAC by type:

In millions of dollars

  Deferred
and payout
annuities

  UL and
COLI

  Other
  Total
 
Balance Jan. 1, 2002   $ 1,175   $ 441   $ 106   $ 1,722  
   
 
 
 
 
Deferred expenses and other     352     175     26     553  
Amortization expense     (147 )   (24 )   (20 )   (191 )
Underlying lapse and interest rates adjustment     22             22  
Amortization related to SFAS 91 reassessment     (11 )           (11 )
   
 
 
 
 
Balance Dec. 31, 2002     1,391     592     112     2,095  
Deferred expenses and other     343     222     23     588  
Amortization expense     (220 )   (35 )   (20 )   (275 )
   
 
 
 
 
Balance Dec. 31, 2003   $ 1,514   $ 779   $ 115   $ 2,408  
   
 
 
 
 

        DAC capitalization increased 6% during 2003, driven by the increase in UL and COLI, which was consistent with the increase in premiums and deposits for those lines of business. The increase in

30


amortization expense in 2003 was primarily driven by deferred annuities. During the first quarter of 2002, there was a one-time decrease in deferred annuity DAC amortization of $22 million due to changes in underlying lapse and interest rate assumptions. In contrast to equity market performance differences, these adjustments are to be treated retrospectively as per SFAS 91 by adjusting the DAC asset through amortization expense and employing the new assumptions prospectively. In the fourth quarter of 2002, TLA increased its deferred annuities DAC amortization by $11 million due to a significant decline in its individual annuity account balances and benefit reserves, largely resulting from negative market action of $3.7 billion. Under SFAS 91, variances in expected versus actual market returns are treated prospectively, resulting in a new amortization pattern over the remaining estimated life of the business. The new amortization pattern was the primary driver of the increase in DAC amortization expense in 2003. The 2003 UL and COLI amortization also increased 46% over 2002, primarily due to volume growth.

        IIM's net loss of $30 million in 2003 represented a decrease in income of $85 million from net income of $55 million in 2002, primarily resulting from a decrease in Latin America of $140 million, partially offset by increases in Asia of $24 million and in Mexico of $20 million. The $140 million decrease in Latin America was primarily driven by impairments of GPNs of $114 million and the impact of certain liability restructuring actions taken in the Argentina voluntary annuity business of $20 million. The GPN impairment was the result of an Argentine government decree, which required the mandatory exchange (the Exchange) of existing GPNs to Argentine government bonds denominated in U.S. dollars. Upon the Exchange, the assets were considered impaired and written down to fair market value based on prevailing market prices on the decree date. Certain GPNs, which were held in general accounts, were considered impaired through recognition as an insurance investment portfolio loss ($56 million). The impact of these items on the 2003 decline in income was partially offset by an Amparos charge recorded by the Company in 2002 relating to Siembra's voluntary annuity business in the amount of $21 million. See "Impact from Argentina's Economic Changes" and "Argentina" on pages 8 and 15, respectively, for a further discussion of these actions. The $24 million increase in Asia was driven by the benefit of lower taxes due to the application of APB 23 indefinite investment criteria, while the $20 million increase in Mexico was the result of higher business volumes and the impact of a lower tax rate.

        IIM's net income of $55 million in 2002 was an increase of $37 million over 2001, primarily reflecting a $26 million increase in Mexico due to the full-year impact of the Banamex acquisition, a $13 million increase in Asia, and a $10 million increase in Latin America, partially offset by lower results in Japan and EMEA. The increase in Asia primarily represents increased investment income and business volume growth. The increase in Latin America primarily represents lower benefits and claims expense due to 2001 changes in Argentine regulations, foreign exchange gains on U.S. dollar-denominated investments, write-downs of Argentine GPNs in 2001, and the net impact of the Amparos and other reserve activity. The 2001 fourth quarter included a net charge for the write-down of Argentine GPNs held in the Siembra insurance companies, which were held in support of existing contractholders' liabilities. The decline in Japan and EMEA earnings primarily resulted from start-up operations in these regions.

Travelers Life and Annuity

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

        The following table shows combined net written premiums and deposits, which is a non-GAAP financial measure, by product line, for the three years ended December 31:

In millions of dollars

  2003
  2002
  2001
 
Individual annuities                    
Fixed   $ 544   $ 1,294   $ 1,148  
Variable     4,002     4,081     4,972  
Individual payout     56     58     59  
   
 
 
 
Total individual annuities(1)     4,602     5,433     6,179  

GICs and other group annuities(2)

 

 

7,402

 

 

6,292

 

 

7,068

 

Individual life insurance

 

 

 

 

 

 

 

 

 

 
Direct periodic premiums and deposits     826     771     652  
Single premium deposits     405     285     208  
Reinsurance     (139 )   (113 )   (96 )
   
 
 
 
Total individual life insurance(3)     1,092     943     764  
   
 
 
 
Total   $ 13,096   $ 12,668   $ 14,011  
   
 
 
 

(1)
Includes $4.6 billion, $5.4 billion and $6.2 billion of deposits in 2003, 2002, and 2001, respectively.

(2)
Includes $6.5 billion, $5.7 billion and $6.3 billion of deposits in 2003, 2002, and 2001, respectively.

(3)
Includes $1.0 billion, $0.8 billion and $0.7 billion of deposits in 2003, 2002, and 2001, respectively.

Individual annuity net written premiums and deposits decreased 15% to $4.602 billion in 2003 from $5.433 billion in 2002, primarily driven by a 58% decline in fixed annuity sales due to competitive pressures and current market perception of fixed rate policies. Variable annuity sales declined slightly in 2003, primarily driven by the continuation in the first half of 2003 of the weak equity market conditions from 2002. The sales decline in the first half of the year was partially offset by an increase in sales in the second half of the year as equity market conditions improved. Net written premiums and deposits decreased 12% in 2002 to $5.433 billion from $6.179 billion in 2001. The decrease was driven by a decline in variable annuity sales due to declining equity market conditions, but was partially offset by strong fixed annuity sales increases over the prior-year period.

        Individual annuity account balances and benefit reserves were $33.8 billion at December 31, 2003, up from $28.4 billion at December 31, 2002 and $30.0 billion at December 31, 2001. The $5.4 billion or 19% increase in 2003 from 2002 was driven by $4.1 billion in market appreciation of variable annuity investments subsequent to December 31, 2002 and $1.3 billion of net sales from good in-force policy retention. The $1.6 billion or 5% decline in account balances and benefit reserves in 2002 from 2001 was due to a $3.7 billion decrease in market values of variable annuities subsequent to December 31, 2001, partially offset by $2.2 billion in net sales from strong in-force policy retention.

        Group annuity net written premiums and deposits (excluding the Company's employee pension plan deposits) grew $1.1 billion to $7.402 billion in 2003. This 18% increase reflects higher variable and fixed rate Guaranteed Investment Contract (GIC) sales, including $1.0 billion in fixed GIC sales to one customer. This increase was also driven by group payout annuity sales, which increased $396 million or 54%, primarily related to several large pension close-out contracts and a $106 million or 21% increase in structured settlement deposits. In 2002, net written premiums and deposits decreased $776 million from 2001, reflecting lower fixed GIC and large case employer pension sales. The decline in fixed GIC net written premiums and deposits

31


reflects lower European Medium Term Note sales due to market conditions in 2002. Group Annuity account balances and benefit reserves were $25.2 billion at December 31, 2003, $22.3 billion at December 31, 2002, and $21.0 billion at December 31, 2001, reflecting the continued strong GIC and employer sponsored payout sales.

        Net written premiums and deposits for the individual life insurance business were $1.092 billion in 2003, a 16% increase over 2002. This increase was driven by a 42% increase in single premium sales and a 7% increase in periodic premium sales, primarily from new sales by the independent agent and high-end estate planning channels, partially offset by a 43% decrease in COLI sales. Net written premiums and deposits of $943 million in 2002 increased 23% over 2001, primarily driven by increased independent agent and high-end estate planning sales and COLI sales. Life insurance in force was $89.3 billion, $82.0 billion, and $75.0 billion at December 31, 2003, 2002, and 2001, respectively.

PRIVATE BANK

In millions of dollars

  2003
  2002
  2001
 
Revenues, net of interest expense   $ 1,995   $ 1,704   $ 1,545  
Operating expenses     1,183     1,007     946  
Provision for credit losses     11     18     23  
   
 
 
 
Income before taxes     801     679     576  
Income taxes     250     216     206  
   
 
 
 
Net income   $ 551   $ 463   $ 370  
   
 
 
 
Average assets (in billions of dollars)   $ 38   $ 29   $ 26  
Return on assets     1.45 %   1.60 %   1.42 %
   
 
 
 
Client business volumes under management (in billions of dollars)   $ 195   $ 170   $ 159  
   
 
 
 

        Private Bank reported net income of $551 million in 2003, up $88 million or 19% from 2002, primarily reflecting increased investment management and capital markets activity, lending activity, and a lower provision for credit losses, partially offset by higher expenses, reflecting incentive compensation expense associated with higher revenues and higher other employee-related costs, and the impact of narrowing interest rate spreads. Net income of $463 million in 2002 was up $93 million or 25% from 2001, primarily reflecting increased client revenues, the impact of lower interest rates, and the benefit of lower taxes due to the application of APB 23 indefinite investment criteria, partially offset by increased expenses to expand front-end sales and servicing capabilities.

        Client business volumes under management, which include custody accounts, assets under fee-based management, deposits, and loans, were $195 billion at the end of the year, up 15% from $170 billion in 2002, reflecting increases in other (principally custody) accounts of $12 billion, banking and fiduciary deposits of $7 billion, loans of $4 billion, and assets under fee-based management of $2 billion. Regionally, the increase primarily reflected growth in Asia of $8 billion, EMEA of $6 billion, and North America (including Mexico) of $6 billion. The regional disclosures contained herein are aligned with the Citigroup management structure and therefore the business in Mexico is reflected in the results of North America and is excluded from Latin America.

        Revenues, net of interest expense, were $1.995 billion in 2003, up $291 million or 17% from 2002, primarily driven by revenue increases from investment management and capital markets activity, lending and banking activities, partially offset by the impact of a narrowing of interest rate spreads. Investment management and capital markets activity includes client trading, management, performance and placement fees, and investment product fees. On a regional basis, the 2003 increase also reflected continued favorable trends in North America (including Mexico), up $103 million or 14% from 2002, primarily in lending, banking, and client trading activity. International revenues increased $188 million or 20% from 2002, primarily due to growth in Asia of $86 million or 28% (client trading and performance fees), Japan of $68 million or 34% (client trading and lending, primarily consisting of commercial real estate), Latin America of $27 million or 15% (client trading and management, placement and performance fees), and EMEA of $7 million or 3% (client trading and performance fees). Revenues, net of interest expense, were $1.704 billion in 2002, up $159 million or 10% from 2001, primarily driven by higher investment management and capital markets activity, increased lending activity and the benefit of lower interest rates. The 2002 increase also reflected increases in North America (including Mexico) of $133 million or 21% (lending and client trading activity), Japan of $44 million or 29% (client trading), and Asia of $18 million or 6% (client trading and lending, offset by absence of 2001 performance and placement fees), partially offset by declines in Latin America and EMEA.

        Operating expenses of $1.183 billion in 2003 were up $176 million or 17% from 2002, primarily reflecting increased incentive compensation associated with higher revenues, higher other employee-related costs including severance, and increased salary and benefits costs due to a change in employee mix of front-end sales staff. The increase in employee-related expenses included costs relating to incremental repositioning efforts of $15 million, primarily related to EMEA. The increased expenses in North America (including Mexico) reflect the increased revenues in the region, with expenses up $43 million or 12% from 2002, driven by higher incentive compensation and the impact of the inclusion of Banamex into Private Bank results beginning in August 2002. International expenses increased $133 million or 20% from 2002, primarily due to higher employee-related costs, including incentive compensation, in Asia and Japan and higher severance costs in EMEA. The $133 million increase in operating expenses internationally was driven by increases in Asia of $50 million or 28%, EMEA of $43 million or 19%, Japan of $29 million or 26%, and Latin America of $11 million or 8%. Operating expenses were $1.007 billion in 2002, up $61 million or 6% from 2001, primarily reflecting higher levels of employee-related expenses, including increased front-end sales and servicing capabilities, and investment spending in technology.

        The provision for credit losses was $11 million in 2003, down $7 million or 39% from 2002, primarily reflecting an improvement in credit experience in North America (including Mexico) and Asia, partially offset by higher net write-offs in Japan and Asia. The provision for credit losses was $18 million in 2002, down $5 million or 22% from 2001, primarily reflecting lower write-offs in North America and Japan and an improvement in credit experience in Asia, partially offset by higher write-offs in EMEA. Net credit losses in 2003 remained at a nominal level of 0.05% of average loans outstanding, compared with 0.05% in 2002 and 0.06% in 2001. Loans 90 days or more past due at year-end 2003 were $121 million or 0.35% of total loans outstanding, compared with $174 million or 0.56% at the end of 2002.

        Average assets of $38 billion in 2003 increased $9 billion or 31% from $29 billion in 2002, which in turn increased $3 billion or 12% from $26 billion in 2001. The increase from the prior-year period was primarily related to increased lending activity (higher margin lending, mortgage financing and refinancing activity, and tailored loans) and the consolidation of a previously unconsolidated entity due to changes in the contractual relationship with this entity. The increase in 2002 was primarily related to increased lending activity (higher real-estate-secured and tailored loans).

32


ASSET MANAGEMENT

In millions of dollars

  2003
  2002
  2001
Revenues, net of interest expense   $ 1,742   $ 1,841   $ 1,869
Operating expenses     1,148     1,189     1,371
   
 
 
Income before taxes and minority interest     594     652     498
Income taxes     188     208     184
Minority interest, after-tax     12     1     18
   
 
 
Net income   $ 394   $ 443   $ 296
   
 
 
Assets under management (in billions of dollars) (1) (2)   $ 521   $ 463   $ 438
   
 
 

(1)
Includes $33 billion, $31 billion, and $31 billion in 2003, 2002, and 2001, respectively, for Private Bank clients.

(2)
Includes $39 billion and $35 billion in 2003 and 2002, respectively, of TPC assets, which Asset Management manages on a third-party basis following the spin-off.

        Asset Management includes the businesses of Citigroup Asset Management (CAM), Citigroup Alternative Investments (CAI) Institutional business, Banamex asset management and retirement services businesses, and Citigroup's other retirement services businesses in North America and Latin America.

        Asset Management reported net income of $394 million in 2003 which was down $49 million or 11% compared to 2002, primarily reflecting lower results in the Latin America Retirement Services (LARS) businesses of $50 million, reduced fee revenues in CAM due to changes in product mix and revenue sharing agreements with internal Citigroup distributors, and the cumulative impact of outflows of U.S. Retail Money Market Funds. Partially offsetting these declines were the cumulative impact of positive net flows and lower expenses. The $50 million decline in LARS from 2002 primarily reflected 2003 impairments of a Deferred Acquisition Cost (DAC) asset relating to the retirement services business in Argentina of $42 million and of Argentine GPNs of $9 million relating to the Exchange, as well as the impact of increased insurance costs on earned fees. See "Impact from Argentina's Economic Changes" and "Argentina" on pages 8 and 15, respectively, for a further discussion of these actions. Additional items impacting LARS was a loss incurred on the sale of an El Salvador retirement services business of $10 million, partially offset by the impact of less severe economic conditions in Argentina. Net income of $443 million in 2002 was up $147 million or 50% compared to 2001, primarily reflecting the full-year impact of the Banamex acquisition of $121 million, the cumulative impact of positive flows, and lower expenses, partially offset by negative market action, the cumulative impact of outflows of U.S. Retail Money Market Funds to the Smith Barney (SB) Bank Deposit Program, and declines in the Latin America retirement services businesses due to the economic crisis in Argentina in 2002.

        The following table is a roll forward of assets under management by business as of December 31:

Assets Under Management

In billions of dollars

  2003
  2002
 
Retail and Private Bank              
Balance, beginning of year   $ 205   $ 237  
Net flows excluding U.S. Retail Money Market funds     5     11  
U.S. Retail Money Market fund flows     (4 )   (13 )
Market action/other     25     (30 )
   
 
 
Balance, end of year     231     205  
Institutional              
Balance, beginning of year     164     143  
Long-term product flows     9     11  
Liquidity flows     (2 )   13  
   
 
 
Net flows     7     24  
Market action/other     14     (3 )
   
 
 
Balance, end of year     185     164  
Retirement Services     12     11  
Other(1)     93     83  
   
 
 
Total assets under management   $ 521   $ 463  
   
 
 

(1)
Includes CAI Institutional alternative investment AUMs and TPC AUMs.

        Assets under management (AUMs) rose to $521 billion as of December 31, 2003, up $58 billion or 13% from $463 billion in 2002, primarily reflecting positive market action/other of $39 billion, which includes the impact of FX, net flows excluding U.S. Retail Money Market funds of $12 billion, and increases in Other of $10 billion. The increase in Other includes higher TPC AUMs of $4 billion, which Asset Management manages on a third-party basis following the August 20, 2002 distribution. The increase in assets was partially offset by net outflows of U.S. Retail Money Market funds of $4 billion. Retail and Private Bank client assets were $231 billion as of December 31, 2003, up $26 billion or 13% from $205 billion in 2002. Institutional client assets of $185 billion as of December 31, 2003 were up $21 billion or 13% compared to a year ago. Retirement Services assets of $12 billion as of December 31, 2003, increased $1 billion or 7% from 2002, primarily due to market action in both Banamex retirement services and LARS.

        Sales of proprietary mutual funds and managed account products at Private Client Services fell 20% to $17 billion in 2003 from the prior year, and represented 30% of Private Client Services' retail channel sales for the year. The lower sales reflect a decline in market share in the channel. Sales of mutual and money funds through Global Consumer's banking network (excluding Mexico) were $8 billion for the year, representing 34% of total sales, including $5 billion in International and $3 billion in the U.S. Of the $3 billion, Primerica sold $2 billion of proprietary U.S. mutual and money funds in 2003, representing 74% of Primerica's total fund sales, up 1% compared to 2002. Institutional long-term product sales of $30 billion increased 4% over the prior year, primarily due to Japanese sub-advisory flows, and included $20 billion of sales to GCIB clients.

        Revenues, net of interest expense, decreased $99 million or 5% to $1.742 billion in 2003. This compared to $1.841 billion in 2002, was down $28 million or 1% from 2001. The decrease in 2003 was primarily due to the impact of reduced fee revenues in CAM, the impact of increased insurance costs on fees earned in a retirement services business in Argentina, the loss on sale of the El Salvador retirement services business, outflows of U.S. Retail Money Market funds, and $9 million relating to the Exchange in Argentina.

33


Partially offsetting these declines were the cumulative impact of positive net flows in CAM, higher performance fees in CAI Institutional, the absence of a prior-year pesification loss in Argentina, and an increase related to certain assets consolidated under FIN 46. These consolidated assets incurred FX movements on the Euro, creating $17 million of gains (offset in minority interest). The reduced fee revenues resulted from changes in product mix and revenue sharing arrangements with internal Citigroup distributors, and a change in the presentation of certain fee-sharing arrangements, which decreased both revenues and expenses by $40 million. The $28 million decrease in 2002 from 2001 primarily reflected the decline in the Latin America retirement services business due to the economic crisis in Argentina during that time period, the impact of negative market action, and the cumulative impact of outflows of U.S. Retail Money Market Funds including the cumulative impact of transfers to the SB Bank Deposit Program, partially offset by the full-year impact of the Banamex acquisition, increases in CAI Institutional, and the cumulative impact of positive flows in CAM.

        Operating expenses of $1.148 billion in 2003 decreased $41 million or 3% from 2002. The decrease in 2003 primarily reflected continued expense management, the change in presentation of certain fee-sharing arrangements, and the absence of 2002 first quarter restructuring charges in Argentina (LARS), for which the remaining reserve was released in 2003, partially offset by the DAC impairment in Argentina of $42 million and the impact of higher expenses related to legal matters of $24 million. Operating expenses of $1.189 billion in 2002 decreased $182 million or 13% from 2001 primarily resulting from a decline in the Latin America retirement services businesses due to economic conditions, the absence of goodwill and indefinite-lived intangible asset amortization in 2002 and reduced personnel, occupancy, and advertising and marketing expenses, partially offset by the impact of the Banamex acquisition.

        Minority interest, after-tax, of $12 million in 2003 increased $11 million from 2002, primarily due to the impact of consolidating certain assets under FIN 46. The $17 million decline from 2001 to 2002, primarily related to the impact of acquiring the remaining interest in Banamex Afore, a retirement services business, in January 2002.

GLOBAL INVESTMENT MANAGEMENT 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 66.

        Life Insurance and Annuities—Travelers Life and Annuity should benefit from growth in the aging population, which is becoming more focused on the need to accumulate adequate savings for retirement, to protect these savings and to plan for the transfer of wealth to the next generation. TLA is well-positioned to take advantage of the favorable long-term demographic trends through its strong financial position, widespread brand-name recognition, and broad array of competitive life, annuity, retirement, and estate-planning products sold through established distribution channels.

        However, competition in both product pricing and customer service is intensifying. There has been consolidation within the industry, and among other financial services organizations that are increasingly involved in the sale and/or distribution of insurance products. Also, the annuities business is interest rate and market sensitive. TLA's business is significantly affected by movements in the U.S. equity and fixed income credit markets. U.S. equity and credit market events can have both positive and negative effects on the deposit, revenue and policy retention performance of the business. A sustained weakness in the equity markets will decrease revenues and earnings in variable annuity products. Declines in credit quality of issuers will have a negative effect on earnings.

        IIM leverages the distribution strength of Citigroup globally by manufacturing insurance linked to credit products as well as stand-alone indemnity and investment-related products. In the less-developed markets where populations are generally under-insured, increasing disposable income, pension reform, greater awareness of the benefits of insurance among the general population, and promotion of the insurance industry by local governments are expected to continue assisting IIM's growth. In mature but restructuring economies, such as Japan, IIM is capturing a share of the insurance market on products associated with the movement of savings from traditional products to new alternatives, including variable annuities. The growth of IIM is affected by the expansion of Citigroup's consumer business, including the volume of new loans and credit cards. It is also highly dependent on local regulations governing the cross-selling of insurance products to Citigroup customers and the evolution of consumer buying patterns. In Argentina, the potential impact from changes in economic conditions on the valuation of IIM's assets relative to liabilities will continue to be a key concern, including the impact of Argentine government actions on insurance contract liabilities in that country. For further information regarding the situation in Argentina, see the discussions in "Impact from Argentina's Economic Changes" and "Argentina" on pages 8 and 15, respectively.

        Private Bank—The strong performance of Private Bank in 2003 can be attributed to four major components: integrated client solutions, innovative product capabilities, a focus on key markets worldwide, and a leveraging of the global reach of Citigroup. These components have enabled Private Bank to offer top-tier capabilities and investment solutions to the wealthiest families around the world by drawing upon the vast resources of Citigroup's businesses.

        Private Bank is well-positioned to continue this growth in 2004. Consistent with Citigroup priorities, Private Bank will focus on new geographic markets including China, India, and South Korea; continue to build-out the investments business globally; maintain and expand a successful partnership with other Citigroup entities worldwide; and continue to deepen wallet share with existing clients. Private Bank expects its market-leading regions to continue their strong performance in 2004, in addition to a significant contribution from EMEA.

        Asset Management—The Asset Management business experienced a decline in income for 2003, primarily reflecting changes in economic conditions in Argentina. However, the assets under management increased as a result of improving equity markets and strong net flows.

        The global economic outlook and equity market levels will continue to affect the level of assets under management and revenues in the asset management businesses in the near-term, but underlying demand for asset management services remains strong. Overall, demographic trends remain favorable: aging populations and insufficient retirement savings will continue to drive growth in the industry across the retail/high-net-worth, institutional, and retirement services markets. Competition will continue to increase as open architecture distribution expands and major global financial services firms focus on opportunities in asset management.

        For 2004, the business will focus on leveraging the full breadth of its global investment capabilities, continuing to capture the economic value of Citigroup's global distribution network, expansion of third-party distribution in key geographies, and emphasis on penetration of the institutional pension segment.

        Federal and state regulators have focused on, and continue to devote substantial attention to, the mutual fund and variable insurance product industries. As a result of publicity relating to widespread

34


perceptions of industry abuses, there have been numerous proposals for legislative and regulatory reforms, including mutual fund governance, new disclosure requirements concerning mutual fund share classes, commission breakpoints, revenue sharing, advisory fees, market timing, late trading, portfolio pricing, annuity products, hedge funds, and other issues. It is difficult to predict at this time whether changes resulting from new laws and regulations will affect the industries or our investment management businesses, and, if so, to what degree.

35


PROPRIETARY INVESTMENT ACTIVITIES

In millions of dollars

  2003
  2002
  2001
 
Revenues, net of interest expense   $ 1,008   ($ 35 ) $ 503  
Operating expenses     393     238     177  
Provision for credit losses         31      
   
 
 
 
Income (loss) before taxes and minority interest     615     (304 )   326  
Income taxes (benefits)     210     (98 )   106  
Minority interest, after-tax     175     23     (5 )
   
 
 
 
Net income (loss)   $ 230   ($ 229 ) $ 225  
   
 
 
 

        Proprietary Investment Activities reported revenues, net of interest expense, of $1.008 billion in 2003, increased $1.043 billion from 2002 reflecting higher Private Equity results of $1.420 billion, primarily from higher net mark-to-market gains on public securities, higher net impairment/valuation revenues, higher fee revenues and lower funding costs, partially offset by lower Other Investment Activities revenues of $377 million. The decline in Other Investment Activities was driven by the absence of the 2002 gain on the sale of 399 Park Avenue of $527 million, partially offset by higher fee revenues in CAI and dividends from TPC shares. Revenues, net of interest expense, of ($35) million in 2002 decreased $538 million from 2001, primarily reflecting lower Private Equity results of $1.126 billion, driven by lower net realized gains, partially offset by the gain on the sale of 399 Park Avenue.

        Operating expenses of $393 million in 2003 increased $155 million from the prior year, primarily reflecting increased expenses in CAI of $96 million and in Private Equity of $65 million. The increase in CAI expenses resulted from the full-year impact of CAI's contract with TPC, whereby CAI manages TPC's investments following the August 20, 2002 distribution, as well as from client business growth and higher levels of performance-driven incentive compensation. The $65 million increase in Private Equity expenses resulted from higher performance-based compensation and business growth. The decrease in the provision for credit losses of $31 million from 2002, primarily relates to the absence of Private Equity loan write-offs that occurred in 2002.

        Minority interest, after-tax, of $175 million in 2003 increased $152 million from 2002, primarily due to the impact of dividends and a mark-to-market valuation on the recapitalization of an investment held within the Citigroup Venture Capital (CVC) Equity Partners Fund in 2003. Minority interest, after-tax, of $23 million in 2002 increased $28 million from 2001 due to the net impact of majority-owned investment funds established in late 2001 and 2002.

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

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

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

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

        As of December 31, 2003 and December 31, 2002, Private Equity included assets of $5.610 billion and $6.251 billion, respectively, with the portfolio primarily invested in industrial, consumer goods, communication, and technology companies. The decline in the portfolio of $641 million from 2002 relates to sales of U.S. private and public equity investments, the impact of impairments, and the liquidation of the Banamex portfolio. On a regional basis as of December 31, 2003, Private Equity included assets of $2.535 billion in North America (including Mexico), $1.790 billion in EMEA, $961 million in Latin America, $317 million in Asia, and $7 million in Japan. As of December 31, 2002, Private Equity included assets of $3.404 billion in North America (including Mexico), $1.391 billion in EMEA, $1.156 billion in Latin America, $295 million in Asia, and $5 million in Japan.

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

In millions of dollars

  2003
  2002
  2001
 
Net realized gains (losses)(1)   $ 388   $ 180   $ 1,333  
Public mark-to-market     258     (209 )   (499 )
Net impairments/valuations(2)     (240 )   (670 )   (601 )
Other(3)     260     (55 )   139  
   
 
 
 
Revenues, net of interest expense   $ 666   ($ 754 ) $ 372  
   
 
 
 

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

(2)
Includes valuation adjustments on private equity investments.

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

        Revenues, net of interest expense, of $666 million in 2003 increased $1.420 billion from 2002, primarily relating to higher net mark-to-market gains on public securities of $467 million, higher net impairment/valuation revenues of $430 million, higher other revenues of $315 million, and higher net realized gains on sales of investments of $208 million. The higher net mark-to-market gains on public securities primarily resulted from the improved equity market conditions that existed in 2003. The higher net impairment/valuation revenues were driven by higher net impairment/valuation revenues on emerging market investments, lower impairments on other private equity investments, and higher valuation revenues in 2003 from the recapitalization of certain private equity investments held within the CVC Equity Partners Fund. The higher net impairment/valuation revenues in emerging markets included $264 million in lower impairments in Argentina and lower other Latin America impairments, partially offset by lower revenues on the Opportunity fund investment of $210 million. Other revenues increased $315 million due to higher dividends and fees, largely the result of the recapitalization of certain Private Equity investments and from an investment that had an initial public offering, all of which are held within the CVC Equity Partners Fund, as well as the impact of lower funding costs. The increase in net realized gains on sales of investments of $208 million was driven by higher sales of venture capital and emerging market investments, including the liquidation of the remaining Banamex holdings. Revenues, net of interest expense, of ($754) million in 2002 declined $1.126 billion from 2001, driven by lower net realized gains of $1.153 billion, lower other revenues of $194 million, and lower net

36


impairment/valuation revenues of $69 million, partially offset by lower net public mark-to-market losses of $290 million. These declines included $738 million relating to Latin America, resulting from lower revenues on the Opportunity fund investment of $388 million, higher impairments of $340 million, including $271 million on certain investments in Argentina, and lower net realized gains.

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

        Other Investment Activities investments are primarily carried at fair value, with impairment write-downs recognized in income for "other than temporary" declines in value. The TPC common stock position is classified as available-for-sale. As of December 31, 2003, Other Investment Activities included assets of $2.909 billion, including $1.693 billion in TPC shares, $692 million in hedge funds, the majority of which represents money managed for TPC, $365 million in the LDC Debt/Refinancing portfolios, and $159 million in other assets. As of December 31, 2002, total assets of Other Investment Activities were $3.181 billion, including $1.464 billion in TPC shares, $948 million in hedge funds, $579 million in the LDC Debt/Refinancing portfolios, and $190 million in other assets.

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

In millions of dollars

  2003
  2002
  2001
LDC Debt/Refinancing portfolios   $ 10   $ 14   $ 59
Hedge fund investments     80     71     10
Other     252     634     62
   
 
 
Revenues, net of interest expense   $ 342   $ 719   $ 131
   
 
 

        Revenues, net of interest expense, of $342 million in 2003 decreased $377 million from the prior year due to the absence of a $527 million gain in 2002 from the sale of 399 Park Avenue, partially offset by a $96 million increase in CAI revenues due to improved performance and business growth and a $50 million increase in revenue from TPC shares, including dividends and net realized gains. Revenues, net of interest expense, of $719 million in 2002 increased $588 million from 2001, primarily resulting from the gain of $527 million from the sale of 399 Park Avenue, higher hedge fund revenues of $61 million and higher CAI revenues of $43 million, partially offset by $45 million in lower LDC Debt/Refinancing portfolio revenues. The decline in LDC Debt/Refinancing portfolio revenues primarily resulted from lower interest earnings, as the portfolios are in run-off.

        Proprietary Investment Activities results may fluctuate in the future as a result of market and asset-specific factors. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 66.

CORPORATE/OTHER

In millions of dollars

  2003
  2002
  2001
 
Revenues, net of interest expense   $ 687   $ 785   ($ 198 )
Operating expenses     798     972     895  
Provisions for benefits, claims, and credit losses     (3 )   (22 )   (10 )
   
 
 
 
Loss from continuing operations before taxes, minority interest, and cumulative effect of accounting changes     (108 )   (165 )   (1,083 )
Income tax benefits     (232 )   (111 )   (479 )
Minority interest, after-tax     10     2     11  
   
 
 
 
Income (loss) from continuing operations     114     (56 )   (615 )
Income from discontinued operations         1,875     1,055  
Cumulative effect of accounting changes         (47 )   (158 )
   
 
 
 
Net income   $ 114   $ 1,772   $ 282  
   
 
 
 

        Corporate/Other reported revenues, net of interest expense, of $687 million in 2003, which decreased $98 million from 2002, were primarily due to lower intersegment eliminations, partially offset by higher net treasury results. The treasury increase resulted from a gain on the sale of a convertible bond and favorable interest rate positioning, partially offset by lower realized gains on fixed income investments. Revenues, net of interest expense, of $785 million in 2002 increased $983 million from 2001, primarily due to higher net treasury results and the impact of higher intersegment eliminations. The increased treasury revenues primarily related to favorable interest rate positioning and lower funding costs, including the impact of lower interest rates and earnings on fixed income investments, partially offset by the impact of increased borrowing levels.

        Operating expenses of $798 million in 2003 decreased $174 million from 2002, primarily due to lower intersegment eliminations, partially offset by higher unallocated corporate costs and a $50 million pretax expense for the contribution of appreciated venture capital securities to the Citigroup Foundation. The increase in unallocated corporate costs included higher insurance, employee-related, and legal costs. The Citigroup Foundation contributions had minimal impact on Citigroup's earnings after related tax benefits. Operating expenses of $972 million in 2002 increased $77 million from 2001, primarily due to higher intersegment eliminations and employee-related costs, partially offset by a decrease in certain net unallocated corporate costs and the absence of a $57 million 2001 fourth-quarter pretax expense for the contribution of appreciated venture capital securities to the Citigroup Foundation. This contribution had minimal impact on Citigroup's earnings after related tax benefits and investment gains.

        The provisions for benefits, claims, and credit losses in 2003, 2002, and 2001 were primarily the result of intersegment eliminations. Income tax benefits of $232 million in 2003 included the impact of a tax reserve release of $200 million that had been held at the legacy Associates' businesses and was deemed to be in excess of expected tax liabilities. Income tax benefits of $111 million in 2002 included the tax benefit resulting from the loss incurred on the sale of the Associates property and casualty operations to TPC, which was spun-off in the 2002 third quarter.

        Discontinued operations (see Note 3 to the Consolidated Financial Statements) includes the operations of TPC through August 20, 2002. Income from discontinued operations in 2002 also included gains on the sale of stock by a subsidiary of $1.270 billion ($1.158 billion after-tax), primarily consisting of an after-tax gain of $1.061 billion as a result of the TPC IPO of 231 million shares of its class A common stock. Income from discontinued operations in 2001 reflected catastrophe losses from the property and casualty business associated with the events of September 11th.

37


        The 2002 cumulative effect of accounting changes of $47 million reflected the 2002 impact of adopting SFAS 142 relating to goodwill and indefinite-lived intangible assets. The 2001 cumulative effect of accounting changes of $158 million included a charge of $42 million related to the adoption of SFAS 133 and a charge of $116 million reflecting the impact of adopting EITF 99-20. See Note 1 to the Consolidated Financial Statements for further details of the cumulative effect of accounting changes.

MANAGING GLOBAL RISK

        The Citigroup risk management framework recognizes the diversity of Citigroup's global business activities by balancing strong corporate oversight with well-defined independent risk management functions within each business.

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

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

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

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

RISK CAPITAL

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

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

        Risk Capital facilitates both the quantification of risk levels and the assessment of "book" capital adequacy. During 2004, Citigroup will extend the application of Risk Capital beyond risk measurement and capital adequacy, and will also calculate "Return on Risk Capital," facilitating internal performance assessments within and across businesses.

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

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

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

        At December 31, 2003, Risk Capital for Citigroup was calculated to be approximately $46.7 billion, with the following breakdown by risk type:

In billions of dollars

   
 
Credit risk   $ 28.7  
Market risk     16.8  
Operational risk     6.1  
Insurance risk     0.3  
Intersector diversification     (5.2 )
   
 
Total Citigroup   $ 46.7  
   
 

        Management believes that Citigroup is well capitalized based on many measures of risk, including Risk Capital. Tier 1 Capital plus the allowance for credit losses qualifying for Tier 2 Capital of $76.4 billion compared favorably to Citigroup Risk Capital requirements of $46.7 billion. The difference between Tier 1 Capital plus Reserves and Risk Capital requirements represents a significant level of surplus capital for internal growth, and the flexibility to pursue acquisition opportunities.

38


CREDIT RISK MANAGEMENT PROCESS

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

LOANS OUTSTANDING

In millions of dollars at year-end

  2003
  2002(1)
  2001(1)
  2000(1)
  1999(1)
 
Consumer loans                                
In U.S. offices:                                
  Mortgage and real estate   $ 129,507   $ 121,178   $ 80,099   $ 73,166   $ 59,376  
  Installment, revolving credit, and other     136,725     113,620     100,801     95,643     80,589  
  Lease financing     8,523     12,027     13,206     12,993     8,813  
   
 
 
 
 
 
      274,755     246,825     194,106     181,802     148,778  
   
 
 
 
 
 
In offices outside the U.S.:                                
  Mortgage and real estate     28,743     26,564     28,688     24,988     24,808  
  Installment, revolving credit, and other     76,718     65,343     57,681     56,557     51,555  
  Lease financing     2,216     2,123     2,143     2,092     1,080  
   
 
 
 
 
 
      107,677     94,030     88,512     83,637     77,443  
   
 
 
 
 
 
      382,432     340,855     282,618     265,439     226,221  
Unearned income     (2,500 )   (3,174 )   (4,644 )   (5,390 )   (5,426 )
   
 
 
 
 
 
Consumer loans—net     379,932     337,681     277,974     260,049     220,795  
   
 
 
 
 
 
Corporate loans                                
In U.S. offices:                                
  Commercial and industrial     15,207     22,041     15,997     19,594     12,948  
  Lease financing     2,010     2,017     4,473     812     700  
  Mortgage and real estate(2)     95     2,573     2,784     3,490     5,439  
   
 
 
 
 
 
      17,312     26,631     23,254     23,896     19,087  
   
 
 
 
 
 
In offices outside the U.S.:                                
  Commercial and industrial     62,884     67,456     72,515     68,069     60,722  
  Mortgage and real estate     1,751     1,885     1,874     1,720     1,728  
  Loans to financial institutions     12,063     8,583     10,163     9,559     7,692  
  Lease financing     2,859     2,784     2,036     2,024     1,854  
  Governments and official institutions     1,496     3,081     4,033     1,952     3,250  
   
 
 
 
 
 
      81,053     83,789     90,621     83,324     75,246  
   
 
 
 
 
 
      98,365     110,420     113,875     107,220     94,333  
Unearned income     (291 )   (296 )   (455 )   (247 )   (227 )
   
 
 
 
 
 
Corporate loans—net     98,074     110,124     113,420     106,973     94,106  
   
 
 
 
 
 
Total loans—net of unearned income     478,006     447,805     391,394     367,022     314,901  
Allowance for credit losses—on drawn exposures     (12,643 )   (11,101 )   (9,688 )   (8,561 )   (8,453 )
   
 
 
 
 
 
Total loans—net of unearned income and allowance for credit losses   $ 465,363   $ 436,704   $ 381,706   $ 358,461   $ 306,448  
   
 
 
 
 
 

(1)
Reclassified to conform to the 2003 presentation.

(2)
Excludes loans held by the insurance subsidiaries which are included within Other Assets on the Consolidated Balance Sheet in 2003.

OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS

In millions of dollars at year-end

  2003
  2002(1)
  2001(1)
  2000(1)
  1999(1)
Other real estate owned(2)                              
Consumer   $ 437   $ 495   $ 393   $ 366   $ 332
Corporate(3)     105     75     147     189     200
Corporate/Other             8     8     14
   
 
 
 
 
Total other real estate owned   $ 542   $ 570   $ 548   $ 563   $ 546
   
 
 
 
 
Other repossessed assets(4)   $ 151   $ 230   $ 439   $ 292   $ 256
   
 
 
 
 

(1)
Reclassified to conform to the 2003 presentation.

(2)
Represents repossessed real estate, carried at lower of cost or fair value, less costs to sell.

(3)
Excludes Other Real Estate Owned for the insurance subsidiaries businesses in the amount of $36 million, $118 million, $102 million and $311 million for 2002, 2001, 2000 and 1999, respectively, which are included in Other Assets on the Consolidated Balance Sheet in 2003.

(4)
Primarily commercial transportation equipment and manufactured housing, carried at lower of cost or fair value, less costs to sell.

39


DETAILS OF CREDIT LOSS EXPERIENCE

In millions of dollars

  2003
  2002(1)
  2001(1)
  2000(1)
  1999(1)
 
Allowance for credit losses at beginning of year   $ 11,101   $ 9,688   $ 8,561   $ 8,453   $ 8,196  
   
 
 
 
 
 
Provision for credit losses                                
Consumer     7,316     7,714     5,947     4,997     4,410  
Corporate     730     2,281     853     342     350  
   
 
 
 
 
 
      8,046     9,995     6,800     5,339     4,760  
   
 
 
 
 
 
Gross credit losses                                
Consumer(2)                                
  In U.S. offices     5,783     5,826     4,991     3,827     3,176  
  In offices outside the U.S.     3,270     2,865     2,132     1,973     1,812  
Corporate                                
Mortgage and real estate                                
  In U.S. offices         5     13     10     59  
  In offices outside the U.S.     27     23     3     22     11  
Governments and official institutions outside the U.S.     111                  
Loans to financial institutions                                
  In U.S. offices             10          
  In offices outside the U.S.     13     4             11  
Commercial and industrial                                
  In U.S. offices     383     825     572     149     73  
  In offices outside the U.S.     939     1,018     567     277     466  
   
 
 
 
 
 
      10,526     10,566     8,288     6,258     5,608  
   
 
 
 
 
 
Credit recoveries                                
Consumer(2)                                
  In U.S. offices     763     729     543     544     440  
  In offices outside the U.S.     735     510     423     404     359  
Corporate(3)                                
Mortgage and real estate                                
  In U.S. offices         1     1     9     12  
  In offices outside the U.S.     1         1     1     2  
Governments and official institutions outside the U.S.         2         1      
Loans to financial institutions in offices outside the U.S.     12     6     9     9     5  
  Commercial and industrial                                
    In U.S. offices     34     147     154     27     16  
    In offices outside the U.S.     215     168     129     69     91  
   
 
 
 
 
 
      1,760     1,563     1,260     1,064     925  
   
 
 
 
 
 
Net credit losses                                
  In U.S. offices     5,369     5,779     4,888     3,406     2,840  
  In offices outside the U.S.     3,397     3,224     2,140     1,788     1,843  
   
 
 
 
 
 
      8,766     9,003     7,028     5,194     4,683  
   
 
 
 
 
 
Other—net(4)     2,262     421     1,355     (37 )   180  
   
 
 
 
 
 
Allowance for credit losses at end of year   $ 12,643   $ 11,101   $ 9,688   $ 8,561   $ 8,453  
   
 
 
 
 
 
Allowance for unfunded lending commitments(5)     600     567     450     450     450  
   
 
 
 
 
 
Total allowance for loans, leases, and unfunded lending commitments   $ 13,243   $ 11,668   $ 10,138   $ 9,011   $ 8,903  
   
 
 
 
 
 
Net consumer credit losses   $ 7,555   $ 7,452   $ 6,157   $ 4,852   $ 4,189  
As a percentage of average consumer loans     2.22 %   2.55 %   2.33 %   2.03 %   2.03 %
   
 
 
 
 
 
Net corporate credit losses   $ 1,211   $ 1,551   $ 871   $ 342   $ 494  
As a percentage of average corporate loans     1.17 %   1.44 %   0.76 %   0.35 %   0.53 %
   
 
 
 
 
 

(1)
Reclassified to conform to the 2003 presentation.

(2)
Consumer credit losses and recoveries primarily relate to revolving credit and installment loans.

(3)
Amounts in 2003, 2002 and 2001 include $12 million (through the 2003 third quarter), $114 million and $52 million, respectively, of collections from credit default swaps purchased from third parties. From the 2003 fourth quarter forward, collections from credit default swaps are included within Principal Transactions on the Consolidated Statement of Income.

(4)
2003 primarily includes the addition of $2.1 billion of credit loss reserves related to the acquisition of the Sears credit card business. 2002 primarily includes the addition of $452 million of credit loss reserves related to the acquisition of GSB. 2001 primarily includes the addition of credit loss reserves related to the acquisitions of Banamex and EAB. 2000 and 1999 include the addition of credit loss reserves related to other acquisitions. All periods also include the impact of foreign currency translation.

(5)
Represents additional credit loss reserves for unfunded corporate lending commitments and letters of credit recorded within Other Liabilities on the Consolidated Balance Sheet.

40


CASH-BASIS, RENEGOTIATED, AND PAST DUE LOANS

In millions of dollars at year end

  2003
  2002(1)
  2001(1)
  2000(1)
  1999(1)
Corporate cash-basis loans                              
Collateral dependent (at lower of cost or collateral value)(2)   $ 8   $ 64   $ 365   $ 108   $ 200
Other(5)     3,411     3,931     2,522     1,436     1,131
   
 
 
 
 
Total   $ 3,419   $ 3,995   $ 2,887   $ 1,544   $ 1,331
   
 
 
 
 
Corporate cash-basis loans(3)(5)                              
In U.S. offices   $ 640   $ 887   $ 678   $ 293   $ 184
In offices outside the U.S.     2,779     3,108     2,209     1,251     1,147
   
 
 
 
 
Total   $ 3,419   $ 3,995   $ 2,887   $ 1,544   $ 1,331
   
 
 
 
 
Corporate renegotiated loans(4)                              
In U.S. offices   $ 107   $ 115   $ 263   $ 305   $ 256
In offices outside the U.S.     33     55     74     94     56
   
 
 
 
 
Total   $ 140   $ 170   $ 337   $ 399   $ 312
   
 
 
 
 
Consumer loans on which accrual of interest had been suspended(5)                              
In U.S. offices   $ 3,127   $ 3,114   $ 3,101   $ 2,158   $ 1,933
In offices outside the U.S.     2,958     2,792     2,266     1,626     1,833
   
 
 
 
 
Total   $ 6,085   $ 5,906   $ 5,367   $ 3,784   $ 3,766
   
 
 
 
 
Accruing loans 90 or more days delinquent(6)(7)                              
In U.S. offices   $ 3,298   $ 2,639   $ 1,822   $ 1,247   $ 874
In offices outside the U.S.     576     447     776     385     452
   
 
 
 
 
Total   $ 3,874   $ 3,086   $ 2,598   $ 1,632   $ 1,326
   
 
 
 
 

(1)
Reclassified to conform to the 2003 presentation.

(2)
A cash-basis loan is defined as collateral dependent when repayment is expected to be provided solely by the liquidation of the underlying collateral and there are no other available and reliable sources of repayment, in which case the loans are written down to the lower of cost or collateral value.

(3)
Cash-basis loans for the insurance subsidiaries and Proprietary Investment Activities businesses were $62 million, $21 million, $46 million and $55 million for 2002, 2001, 2000 and 1999, respectively, which are included in Other Assets on the Consolidated Balance Sheet in 2003.

(4)
Includes corporate and commercial markets loans.

(5)
The December 31, 2002 balance includes GSB data. The December 31, 2001 balance includes Banamex data.

(6)
The December 31, 2003 balance includes the Sears and Home Depot data. The December 31, 2002 balance includes GSB data. The December 31, 2001 balance includes Banamex data.

(7)
Substantially comprised of consumer loans of which $1,643 million, $1,764 million, $920 million, $503 million, and $379 million are government-guaranteed student loans and Federal Housing Authority mortgages at December 31, 2003, 2002, 2001, 2000, and 1999, respectively.

FOREGONE INTEREST REVENUE ON LOANS(1)

In millions of dollars

  In U.S.
offices

  In non-
U.S.
offices

  2003
Total

Interest revenue that would have been accrued at original contractual rates(2)   $ 346   $ 585   $ 931
Amount recognized as interest revenue(2)     49     145     194
   
 
 
Foregone interest revenue   $ 297   $ 440   $ 737
   
 
 

(1)
Relates to corporate cash-basis, renegotiated loans and consumer loans on which accrual of interest had been suspended.

(2)
Interest revenue in offices outside the U.S. may reflect prevailing local interest rates, including the effects of inflation and monetary correction in certain countries.

41


CONSUMER CREDIT RISK

        Within Global Consumer, business-specific credit risk policies and procedures are derived from the following risk management framework:

CONSUMER PORTFOLIO REVIEW

Citigroup's consumer loan portfolio is well diversified by both customer and product. Consumer loans comprise 79% of the total loan portfolio. These loans represent thousands of borrowers with relatively small individual balances. The loans are diversified with respect to the location of the borrower, with 72% originated in the United States and 28% originated from offices outside the United States. Mortgage and real estate loans constitute 41% of the total consumer loan portfolio; and installment, revolving credit and other consumer loans and leases constitute 59% of the portfolio.

        In the consumer portfolio, credit loss experience is often expressed in terms of annualized net credit losses as a percentage of average loans. Pricing and credit policies reflect the loss experience of each particular product and country. Consumer loans are generally written off no later than a predetermined number of days past due on a contractual basis, or earlier in the event of bankruptcy. The specific write-off criteria is set according to loan product and country (see Note 1 to the Consolidated Financial Statements).

        Commercial Markets, which is included within Retail Banking, includes loans and leases made principally to small- and middle-market businesses. Commercial Markets loans, which comprise 11% of the total consumer loan portfolio, are placed on a non-accrual basis when it is determined that the payment of interest or principal is doubtful of collection or when interest or principal is past due for 90 days or more, except when the loan is well secured and in the process of collection. Commercial Markets non-accrual loans are not strictly determined on a delinquency basis; therefore, they have been presented as a separate component in the consumer credit disclosures.

        The following table summarizes delinquency and net credit loss experience in both the managed and on-balance sheet loan portfolios in terms of loans 90 days or more past due, net credit losses, and as a percentage of related loans. The table also summarizes the accrual status of Commercial Markets loans as a percentage of related loans. The managed loan portfolio includes credit card receivables held-for-sale and securitized, and the table reconciles to a held basis, the comparable GAAP measure. Only North America Cards from a product view and North America from a regional view are impacted. Although a managed basis presentation is not in conformity with GAAP, the Company believes it provides a representation of performance and key indicators of the credit card business that is consistent with the way management reviews operating performance and allocates resources. Furthermore, investors utilize information about the credit quality of the entire managed portfolio, as the results of both the held and securitized portfolios impact the overall performance of the Cards business. For a further discussion of managed basis reporting, see the Cards business on page 20 and Note 12 to the Consolidated Financial Statements.

42


Consumer Loan Delinquency Amounts, Net Credit Losses, and Ratios

 
  Total
Loans

   
   
   
  Average
Loans

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

  90 Days or More Past Due(1)
  Net Credit Losses(1)
 
  2003
  2003
  2002(2)
  2001(2)
  2003
  2003
  2002(2)
  2001(2)
 
Cards   $ 158.4   $ 3,392   $ 2,397   $ 2,386   $ 130.5   $ 7,694   $ 7,169   $ 6,048  
  Ratio           2.14 %   1.84 %   1.97 %         5.90 %   5.93 %   5.28 %
    North America Cards     143.7     3,133     2,185     2,210     118.0     7,171     6,669     5,655  
      Ratio           2.18 %   1.85 %   1.99 %         6.08 %   6.05 %   5.41 %
    International Cards     14.7     259     212     176     12.5     523     500     393  
      Ratio           1.76 %   1.78 %   1.66 %         4.19 %   4.68 %   3.96 %
Consumer Finance     94.1     2,221     2,197     2,269     90.7     3,517     3,026     2,246  
  Ratio           2.36 %   2.48 %   2.92 %         3.88 %   3.69 %   2.99 %
    North America Consumer Finance     72.6     1,683     1,786     2,001     69.9     2,059     1,865     1,527  
      Ratio           2.32 %   2.64 %   3.36 %         2.94 %   3.00 %   2.65 %
    International Consumer Finance     21.5     538     411     268     20.8     1,458     1,161     719  
    Ratio           2.50 %   1.98 %   1.49 %         7.02 %   5.88 %   4.14 %
Retail Banking     123.9     3,802     3,647     2,755     116.7     614     644     543  
    Ratio           3.07 %   3.18 %   3.31 %         0.52 %   0.71 %   0.68 %
    North America Retail Banking     88.5     2,299     2,419     1,681     83.4     139     268     177  
      Ratio           2.60 %   2.90 %   3.21 %         0.17 %   0.45 %   0.36 %
    International Retail Banking     35.4     1,503     1,228     1,074     33.3     475     376     366  
    Ratio           4.24 %   3.91 %   3.46 %         1.42 %   1.20 %   1.17 %
Private Bank(3)     34.8     121     174     135     33.1     18     14     14  
  Ratio           0.35 %   0.56 %   0.54 %         0.05 %   0.05 %   0.06 %
Other Consumer     0.9         1     11     1.0         10     51  
   
 
 
 
 
 
 
 
 
Managed loans (excluding Commercial Markets)(4)   $ 412.1   $ 9,536   $ 8,416   $ 7,556   $ 372.0   $ 11,843   $ 10,863   $ 8,902  
    Ratio           2.31 %   2.30 %   2.43 %         3.18 %   3.36 %   2.98 %

 
Securitized receivables (all in North America Cards)     (76.1 )   (1,421 )   (1,285 )   (1,282 )   (71.4 )   (4,529 )   (3,760 )   (3,251 )
Credit card receivables held-for-sale(5)             (121 )   (110 )   (3.2 )   (221 )   (363 )   (317 )

 
On-balance sheet loans (excluding Commercial Markets)   $ 336.0   $ 8,115   $ 7,010   $ 6,164   $ 297.4   $ 7,093   $ 6,740   $ 5,334  
    Ratio           2.42 %   2.40 %   2.61 %         2.38 %   2.67 %   2.36 %

 
          Cash-Basis Loans
        Net Credit Losses
 
Commercial Markets Groups(6)   $ 39.9   $ 1,350   $ 1,299   $ 1,301   $ 42.2   $ 462   $ 712   $ 823  
    Ratio           3.38 %   2.90 %   3.13 %         1.09 %   1.76 %   2.14 %
   
 
Total Consumer Loans(7)   $ 375.9                     $ 339.6     7,555     7,452     6,157  

 
Regional View:                                                  

 
North America (excluding Mexico)   $ 317.8   $ 6,794   $ 6,135   $ 5,458   $ 284.8   $ 9,322   $ 8,623   $ 7,322  
    Ratio           2.14 %   2.18 %   2.34 %         3.27 %   3.55 %   3.26 %
Mexico     6.9     388     355     524     6.7     55     195     98  
    Ratio           5.65 %   5.43 %   6.65 %         0.82 %   2.85 %   2.49 %
EMEA     34.0     1,669     1,253     830     30.3     617     440     362  
    Ratio           4.90 %   4.47 %   3.69 %         2.04 %   1.77 %   1.68 %
Japan     17.4     355     258     192     16.8     1,331     1,035     590  
    Ratio           2.04 %   1.46 %   1.16 %         7.91 %   5.71 %   3.52 %
Asia (excluding Japan)     33.1     286     340     395     30.5     398     393     289  
    Ratio           0.86 %   1.19 %   1.46 %         1.30 %   1.42 %   1.09 %
Latin America     2.9     44     75     157     2.9     120     177     241  
    Ratio           1.50 %   2.48 %   3.49 %         4.10 %   5.08 %   4.45 %
   
 
Managed loans (excluding Commercial Markets)(4)   $ 412.1   $ 9,536   $ 8,416   $ 7,556   $ 372.0   $ 11,843   $ 10,863   $ 8,902  
    Ratio           2.31 %   2.30 %   2.43 %         3.18 %   3.36 %   2.98 %

 

(1)
The ratios of 90 days or more past due and net credit losses are calculated based on end-of-period and average loans, respectively, both net of unearned income.
(2)
Reclassified to conform to the 2003 presentation.
(3)
Private Bank results are reported as part of the Global Investment Management segment.
(4)
This table presents credit information on a managed basis (a non-GAAP measure) and shows the impact of securitizations to reconcile to a held basis, the comparable GAAP measure. Only North America Cards from a product view, and North America from a regional view, are impacted. See a discussion of managed basis reporting on page 43.
(5)
Included within Other Assets on the Consolidated Balance Sheet.
(6)
Includes CitiCapital collateral-dependent loans.
(7)
Total loans and total average loans exclude certain interest and fees on credit cards of approximately $4 billion and $2 billion, respectively, which are included in Consumer Loans on the Consolidated Balance Sheet.

43


Consumer Loan Balances, Net of Unearned Income

 
  End of Period
  Average
 
In billions of dollars

 
  2003
  2002(1)
  2001(1)
  2003
  2002(1)
  2001(1)
 
Total managed(2) (including Commercial Markets)   $ 452.0   $ 410.3   $ 352.8   $ 414.2   $ 364.1   $ 337.2  
Securitized receivables (all in North America Cards)     (76.1 )   (67.1 )   (68.3 )   (71.4 )   (65.2 )   (63.8 )
Credit card receivables held-for-sale(3)         (6.5 )   (6.5 )   (3.2 )   (6.5 )   (9.2 )
   
 
 
On-balance sheet(4) (including Commercial Markets)   $ 375.9   $ 336.7   $ 278.0   $ 339.6   $ 292.4   $ 264.2  

 

(1)
Reclassified to conform to the 2003 presentation in the Consumer Credit table.
(2)
This table presents loan information on a managed basis (a non-GAAP measure) and shows the impact of securitizations to reconcile to a held basis, the comparable GAAP measure. See a discussion of managed basis reporting on page 43.
(3)
Included within Other Assets on the Consolidated Balance Sheet.
(4)
Total loans and total average loans exclude certain interest and fees on credit cards of approximately $4 billion and $2 billion, respectively, for 2003 and approximately $1 billion and $1 billion, respectively, for 2002, which are included in Consumer Loans on the Consolidated Balance Sheet.

        Total delinquencies 90 days or more past due (excluding Commercial Markets) in the managed portfolio were $9.536 billion or 2.31% of loans at December 31, 2003, compared to $8.416 billion or 2.30% at December 31, 2002 and $7.556 billion or 2.43% at December 31, 2001. Total cash-basis loans in Commercial Markets were $1.350 billion or 3.38% of loans at December 31, 2003, compared to $1.299 billion or 2.90% at December 31, 2002 and $1.301 billion or 3.13% at December 31, 2001. Total managed net credit losses (excluding Commercial Markets) in 2003 were $11.843 billion and the related loss ratio was 3.18%, compared to $10.863 billion and 3.36% in 2002 and $8.902 billion and 2.98% in 2001. In Commercial Markets, total net credit losses were $462 million and the related loss ratio was 1.09% in 2003, compared to $712 million and 1.76% in 2002 and $823 million and 2.14% in 2001. For a discussion of trends by business, see business discussions on pages 19 to 24 and page 32.

        Citigroup's total allowance for loans, leases and corporate lending commitments of $13.243 billion is available to absorb probable credit losses inherent in the entire portfolio. For analytical purposes only, the portion of Citigroup's allowance for credit losses attributed to the consumer portfolio was $9.088 billion at December 31, 2003, $7.021 billion at December 31, 2002 and $6.190 billion at December 31, 2001. The increase in the allowance for credit losses from 2002 was primarily due to an addition of $2.1 billion associated with the acquisition of Sears and the impact of foreign currency translation, partially offset by the write-off of Argentine compensation notes in the 2003 third quarter. During the year, the impact of improved credit conditions in North America and Latin America, mainly in Argentina which also experienced a decline in loan volumes, was partially offset by increases in the allowance for credit losses attributable to credit conditions in Germany and Japan. The increase in 2002 was primarily related to the $452 million addition associated with the GSB acquisition, a $206 million increase in Citi Cards established in accordance with FFIEC guidance related to past-due interest and late fees and the benefit of strengthening currencies.

        On-balance sheet consumer loans of $375.9 billion increased $39.2 billion or 12% from December 31, 2002, primarily driven by the additions of the Sears and Home Depot portfolios, combined with the impact of strengthening currencies and growth in mortgage and other real-estate-secured loans in Consumer Assets, Consumer Finance and Private Bank. Growth in student loans in North America and margin lending in Private Bank also contributed to the growth in consumer loans. Loans in Japan declined in 2003, as a high level of charge-offs and pay-downs were combined with reduced loan demand in the Consumer Finance portfolio. In CitiCapital, loans declined in 2003 and 2002, reflecting the liquidation of non-core portfolios including a decline of approximately $1.2 billion resulting from the 2003 sale of the CitiCapital Fleet Services portfolio. The increase in 2002 was primarily driven by the addition of GSB loans, receivable growth in Citi Cards, and growth in mortgage and other real-estate-secured loans, partially offset by the 2002 sale of the $2.0 billion mortgage portfolio in Japan.

        Net credit losses, delinquencies and the related ratios are affected by the credit performance of the portfolios, including bankruptcies, unemployment, global economic conditions, portfolio growth and seasonal factors, as well as macro-economic and regulatory policies. Net credit losses are expected to increase from 2003 due to the inclusion of a full year's credit losses for acquired portfolios. Credit loss ratios in North America Cards are expected to increase due to the integration of the Sears and Home Depot portfolios, including the impact of conforming to Citigroup and FFIEC guidelines. Excluding the impact of Sears and Home Depot, management expects that 2004 consumer credit loss rates will be comparable to 2003. This paragraph contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 66.

44


CORPORATE CREDIT RISK

        For corporate clients and investment banking activities across the organization, the credit process is grounded in a series of fundamental policies, including:

Ultimate business accountability for managing credit risks;

Joint business and independent risk management responsibility for establishing limits and risk management practices;

Single center of control for each credit relationship that coordinates credit activities with that client, directly approves or co-approves all extensions of credit to that client, reviews aggregate exposures, and ensures compliance with exposure limits;

Portfolio limits, including obligor limits by risk rating and by maturity, to ensure diversification and maintain risk/capital alignment;

A minimum two-authorized credit officer-signature requirement on extensions of credit—one from a sponsoring credit officer in the business and one from a credit officer in independent credit risk management;

Uniform risk measurement standards, including risk ratings, which must be assigned to every obligor and facility in accordance with Citigroup standards; and

Consistent standards for credit origination, measurement and documentation, as well as problem recognition, classification and remedial action.

        These policies apply universally across corporate clients and investment banking activities. Businesses that require tailored credit processes, due to unique or unusual risk characteristics in their activities, may only do so under a Credit Program that has been approved by independent credit risk management. In all cases, the above policies must be adhered to, or specific exceptions must be granted by independent credit risk management.

        The following table presents the corporate credit portfolio, before consideration of collateral, by maturity at December 31, 2003. The corporate portfolio is broken out by direct outstandings which include drawn loans, overdrafts, interbank placements, banker's acceptances, certain investment securities and leases, and unfunded commitments which include unused commitments to lend, letters of credit and financial guarantees.

In billions of dollars

  Within 1
Year

  Greater
than 1
Year but
Within 5

  Greater
than 5
Years

  Total
Exposure

Direct outstandings   $ 136   $ 37   $ 11   $ 184
Unfunded commitments     138     70     10     218
   
 
 
 
Total   $ 274   $ 107   $ 21   $ 402
   
 
 
 

Credit Exposure Arising from Derivatives and Foreign Exchange

        The following table summarizes the components of derivatives receivables, representing the fair value of the derivative contracts before taking into account the effects of legally enforceable master netting agreements at December 31, 2003 and 2002. The fair value represents the cost to replace the contracts at current market rates should the counterparty default.

Type of Derivative

In millions of dollars

  2003
  2002
Interest rate   $ 163,446   $ 172,390
Foreign exchange     72,239     44,055
Credit derivatives     2,101     1,479
Equity     7,564     6,258
Commodity and other     4,945     1,885
   
 
Total   $ 250,295   $ 226,067
   
 

        Legally enforceable master netting agreements are in place which permit the Company to net receivables and payables with the same counterparty across different underlying derivative contracts. The amount of netting under these agreements at December 31, 2003 and 2002 was $186.1 billion and $182.7 billion, respectively. In addition, the Company obtained cash collateral from counterparties that further served to reduce exposure. After taking into account the benefit of netting and collateral, derivatives receivables recorded on the balance sheet as Trading Account Assets at December 31, 2003 and 2002 were $55.3 billion and $37.5 billion, respectively.

        The Company's credit exposure on derivatives and foreign exchange contracts is primarily to professional counterparties in the financial sector, with 79% arising from transactions with banks, investment banks, governments and central banks, and other financial institutions.

        For purposes of managing credit exposure on derivative and foreign exchange contracts, particularly when looking at exposure to a single counterparty, the Company measures and monitors credit exposure taking into account the current mark-to-market value of each contract plus a prudent estimate of its potential change in value over its life. This measurement of the potential future exposure for each credit facility is based on a stressed simulation of market rates and generally takes into account legally enforceable risk-mitigating agreements for each obligor such as netting and margining. The following table presents the global derivatives portfolio by internal obligor credit rating at December 31, 2003 and 2002, as a percentage of credit exposure:

 
  2003
  2002
 
AAA/AA/A   78 % 76 %
BBB   12 % 14 %
BB/B   8 % 8 %
Unrated   2 % 2 %

The following table presents the global derivative portfolio by industry of the obligor as a percentage of credit exposure:

 
  2003
  2002
 
Financial institutions   70 % 72 %
Governments   9 % 8 %
Corporations   21 % 20 %
   
 
 

45


Portfolio Mix

        The corporate credit portfolio is geographically diverse by region. The following table shows direct outstandings and unfunded commitments by region:

 
  Dec. 31,
2003

  Dec. 31,
2002

 
North America   43 % 43 %
EMEA   29 % 27 %
Japan   3 % 4 %
Asia   13 % 13 %
Latin America   5 % 6 %
Mexico   7 % 7 %
   
 
 
Total   100 % 100 %
   
 
 

        It is corporate credit policy to maintain accurate and consistent risk ratings across the corporate credit portfolio. This facilitates the comparison of credit exposures across all lines of business, geographic region and product. All internal risk ratings must be derived in accordance with the Corporate Risk Rating Policy. Any exception to the policy must be approved by the Citigroup Senior Risk Officer. The Corporate Risk Rating Policy establishes standards for the derivation of obligor and facility risk ratings that are generally consistent with the approaches used by the major rating agencies.

        Obligor risk ratings reflect an estimated probability of default for an obligor, and are derived primarily through the use of statistical models which are validated periodically, external rating agencies (under defined circumstances), or approved scoring or judgmental methodologies. Facility risk ratings are assigned, using the obligor risk rating, and then taken into consideration are factors that affect the loss-given-default of the facility such as parent support, collateral, or structure.

        Internal obligor ratings equivalent to BBB and above are considered investment-grade. Ratings below the equivalent of BBB are considered non-investment-grade.

        The following table presents the corporate credit portfolio by facility risk rating at December 31, 2003 and 2002, as a percentage of the total portfolio:

 
  Direct Outstandings and Unfunded Commitments
 
 
  2003
  2002
 
AAA/AA/A   53 % 52 %
BBB   26 % 24 %
BB/B   16 % 20 %
CCC or below   2 % 2 %
Unrated   3 % 2 %
   
 
 
    100 % 100 %
   
 
 

        The corporate credit portfolio is diversified by industry with a concentration only to the financial sector which includes banks, other financial institutions, investment banks, and government and central banks. The following table shows the allocation of direct outstandings and unfunded commitments to industries as a percentage of the total corporate portfolio:

 
  Direct Outstandings
and Unfunded Commitments

 
 
  2003
  2002
 
Government and central banks   14 % 13 %
Other financial institutions   8 % 8 %
Banks   6 % 6 %
Insurance   5 % 5 %
Investment banks   5 % 3 %
Utilities   4 % 5 %
Agricultural and food preparation   4 % 4 %
Telephone and cable   4 % 4 %
Petroleum   3 % 3 %
Industrial machinery and equipment   3 % 3 %
Autos   3 % 2 %
Freight transportation   2 % 2 %
Global information technology   2 % 3 %
Chemicals   2 % 2 %
Metals   2 % 2 %
Other industries(1)   33 % 35 %
   
 
 
Total   100 % 100 %

(1)
Includes all other industries, none of which exceeds 2% of total outstandings.

Credit Risk Mitigation

        As part of its overall risk management activities, the Company makes use of credit derivatives and other risk mitigants to hedge portions of the credit risk in its portfolio, in addition to outright asset sales. The effect of these transactions is to transfer credit risk to creditworthy, independent third parties. Beginning in the fourth quarter of 2003, the results of the mark-to-market and any realized gains or losses on credit derivatives are reflected in the Principal Transactions line on the Consolidated Statement of Income. At December 31, 2003 and 2002, $11.1 billion and $9.6 billion, respectively, of credit risk exposure was economically hedged. The reported amounts of direct outstandings and unfunded commitments in this report do not reflect the impact of these hedging transactions. At December 31, 2003 and 2002, the credit protection was economically hedging underlying credit exposure with the following risk rating distribution:

Rating of Hedged Exposure

 
  2003
  2002
 
AAA/AA/A   32 % 35 %
BBB   57 % 55 %
BB/B   10 % 9 %
CCC or below   1 % 1 %
   
 
 
    100 % 100 %
   
 
 

46


        At December 31, 2003 and 2002, the credit protection was economically hedging underlying credit exposure with the following industry distribution:

Industry of Hedged Exposure

 
  2003
  2002
 
Utilities   14 % 12 %
Other financial institutions   11 % 8 %
Telephone and cable   9 % 14 %
Agriculture and food preparation   8 % 7 %
Autos   7 % 3 %
Global information technology   5 % 6 %
Industrial machinery and equipment   5 % 6 %
Business services   4 % 4 %
Banks   4 % 3 %
Petroleum   4 % 4 %
Other(1)   29 % 33 %
   
 
 
    100 % 100 %

(1)
Includes all other industries none of which is greater than 4% of the total hedged amount.

GLOBAL CORPORATE PORTFOLIO REVIEW

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

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

In millions of dollars

  2003
  2002(1)
  2001(1)
 
Corporate cash-basis loans(2)                    
  Capital Markets and Banking   $ 3,263   $ 3,423   $ 2,423  
  Transaction Services     156     572     464  
   
 
 
 
Total corporate cash-basis loans   $ 3,419   $ 3,995   $ 2,887  
   
 
 
 
Net credit losses                    
  Capital Markets and Banking   $ 1,191   $ 1,349   $ 850  
  Transaction Services     23     165     21  
  Private Client Services(3)         6      
  Investment Activities(4)     (3 )   31      
   
 
 
 
Total net credit losses   $ 1,211   $ 1,551   $ 871  
   
 
 
 
Corporate allowance for credit losses   $ 3,555   $ 4,080   $ 3,498  
Corporate allowance for credit losses on unfunded lending commitments(5)     600     567     450  
Total corporate allowance for loans, leases and unfunded lending commitments   $ 4,155   $ 4,647   $ 3,948  
   
 
 
 
As a percentage of total corporate loans(6)     3.62 %   3.70 %   3.08 %
   
 
 
 

(1)
Reclassified to conform to the 2003 presentation.

(2)
Cash-basis loans for the insurance subsidiaries and Proprietary Investment Activities businesses were $62 million for 2002 and $21 million for 2001, which are included in Other Assets on the Consolidated Balance Sheet in 2003.

(3)
Private Client Services is included within the Private Client Services segment.

(4)
Investment Activities results are reported in the Proprietary Investment Activities segment.

(5)
Represents additional reserves recorded within Other Liabilities on the Consolidated Balance Sheet.

(6)
Does not include the allowance for unfunded lending commitments.

        Corporate cash-basis loans were $3.419 billion, $3.995 billion and $2.887 billion at December 31, 2003, 2002 and 2001, respectively. Cash-basis loans decreased $576 million from December 31, 2002 due to a $416 million decrease in Transaction Services and a $160 million decrease in Capital Markets and Banking. Transaction Services decreased primarily due to a reclassification of cash-basis loans ($248 million) in Mexico to Capital Markets and Banking and charge-offs in Argentina and Poland. Capital Markets and Banking decreased primarily due to decreases to corporate borrowers in Argentina and New Zealand, as well as reductions in the telecommunications industry, partially offset by the reclassification of cash-basis loans ($248 million) in Mexico from Transaction Services and increases on exposure to a single European counterparty and the energy industry.

        Cash-basis loans increased $1.108 billion in 2002 due to increases in Capital Markets and Banking and Transaction Services. Capital Markets and Banking primarily reflects increases in the energy and telecommunications industries combined with increases in Argentina, Brazil, Thailand, and Australia. Transaction Services increased primarily due to increases in trade finance receivables in Argentina and Brazil.

        Total corporate Other Real Estate Owned (OREO) was $105 million, $75 million and $155 million at December 31, 2003, 2002 and 2001, respectively. The $80 million decrease in 2002 from 2001 reflects improvements in the North America real estate portfolio.

        Total corporate loans outstanding at December 31, 2003 were $98 billion as compared to $110 billion and $113 billion at December 31, 2002 and 2001, respectively.

        Total corporate net credit losses of $1,211 million in 2003 decreased $340 million compared to 2002, primarily due to the absence of prior-year net credit losses for Argentina and exposures in the energy and telecommunications industries, reflecting improvements in the overall credit environment, partially offset by $345 million of credit losses related to exposure to a single European counterparty and credit losses to corporate borrowers in Poland. Total corporate net credit losses of $1.551 billion in 2002 increased $680 million compared to 2001 primarily due to higher net credit losses in the energy and telecommunications industries and Argentina.

        Citigroup's allowance for credit losses for loans, leases and lending commitments of $13.243 billion is available to absorb probable credit losses inherent in the entire portfolio. For analytical purposes only, the portion of Citigroup's allowance for credit losses attributed to the corporate portfolio was $4.155 billion at December 31, 2003, compared to $4.647 billion at December 31, 2002 and $3.948 billion at December 31, 2001. The allowance attributed to corporate loans and leases as a percentage of corporate loans was 3.62% at December 31, 2003, as compared to 3.70% and 3.08% at December 31, 2002 and 2001, respectively. The $492 million decrease in the total allowance at December 31, 2003 from December 31, 2002 primarily reflects reserve releases of $300 million due to continued improvement in the portfolio. The $699 million increase in the total allowance at December 31, 2002 from December 31, 2001 primarily reflects reserves established as a result of the impact of the deterioration in the Argentine economy and the telecommunications and energy industries on the commercial portfolio. Losses on corporate lending activities and the level of cash-basis loans can vary widely with respect to timing and amount, particularly within any narrowly-defined business or loan type. Corporate net credit losses and cash-basis loans are expected to improve from 2003 levels reflecting improving global economic conditions. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 66.

47


LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES

In millions of dollars at year-end

  Due Within 1 Year
  Over 1 Year but Within 5 Years
  Over 5 Years
  Total
Maturities of the gross corporate loan portfolio                        
In U.S. offices                        
  Commercial and Industrial loans   $ 5,922   $ 7,064   $ 2,221   $ 15,207
  Mortgage and real estate     37     44     14     95
  Lease financing     783     934     293     2,010
In offices outside the U.S.     52,034     25,301     3,718     81,053
   
 
 
 
Total corporate loan Portfolio   $ 58,776   $ 33,343   $ 6,246   $ 98,365
   
 
 
 
Sensitivity of loans due after one year to changes in interest rates(1)                        
Loans at predetermined interest rates         $ 7,401   $ 2,548      
Loans at floating or adjustable interest rates           25,942     3,698      
         
 
     
Total         $ 33,343   $ 6,246      
         
 
     

(1)
Based on contractual terms. Repricing characteristics may effectively be modified from time to time using derivative contracts. See Notes 25 and 27 to the Consolidated Financial Statements.

MARKET RISK MANAGEMENT PROCESS

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

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

        Market risk encompasses liquidity risk and price risk, both of which arise in the normal course of business of a global financial intermediary. Liquidity risk is the risk that some entity, in some location and in some currency, may be unable to meet a financial commitment to a customer, creditor, or investor when due. Liquidity risk is discussed in the "Capital Resources and Liquidity" section on page 56. Price risk is the risk to earnings that arises from changes in interest rates, foreign exchange rates, equity and commodity prices, and in their implied volatilities. Price risk arises in Non-trading Portfolios, as well as in Trading Portfolios.

Non-Trading Portfolios

        During the second quarter of 2003, Citigroup implemented a revised market risk management policy for its non-trading portfolios. Under this policy, there is a uniform set of standards for defining, measuring, limiting and reporting market risk in non-trading portfolios in order to ensure consistency across businesses, stability in methodologies and transparency of risk.

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

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

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

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

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

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

 
  December 31, 2003
  December 31, 2002
 
In millions of dollars

 
  Increase
  Decrease
  Increase
  Decrease
 
U.S. dollar                          
Twelve months and less   ($ 793 ) $ 266   ($ 822 ) $ 969  
Discounted five year   $ 558   ($ 2,739 ) ($ 362 ) $ 589  

 
Mexican peso(2)                          
Twelve months and less   $ 55   ($ 55 ) $ 34   ($ 34 )
Discounted five year   $ 226   ($ 226 ) $ 11   ($ 11 )

 
Euro(3)                          
Twelve months and less   ($ 86 ) $ 86              
Discounted five year   $ 32   ($ 32 )            

             
Japanese yen(3)                          
Twelve months and less   $ 65     NM(4 )            
Discounted five year   $ 142     NM(4 )            

             
Pound sterling(3)                          
Twelve months and less   $ 31   ($ 31 )            
Discounted five year   $ 142   ($ 142 )            

             

             

(1)
Excludes the insurance companies (see below).

(2)
Mexican peso amounts as of December 31, 2002 have been restated from a statistical equivalent basis to a 100 basis point change in interest rates.

(3)
Prior-period data as of December 31, 2002 for the euro, Japanese yen and pound sterling under the revised Citigroup market risk management policy is not available. Earnings-at-risk for these currencies was not material in prior periods.

(4)
Not meaningful. A 100 basis point decrease in interest rates would imply negative rates for the Japanese yen yield curve.

        The change in U.S. dollar Interest Rate Exposure from the prior year reflects changes in the aggregate asset/liability mix, changes in actual and projected pre-payments for mortgages and mortgage-related investments, as well as Citigroup's view of prevailing interest rates.

48


Insurance Companies

        The table below reflects the estimated decrease in the fair value of financial instruments held in the Insurance companies as of December 31, 2003 and 2002, as a result of a 100 basis point increase in interest rates.

In millions of dollars

  2003
  2002
Assets            
  Investments   $ 2,226   $ 1,897

Liabilities            
  Long-term debt   $ 8   $ 11
  Contractholder funds     996     932

        A significant portion of the insurance companies' liabilities (e.g., insurance policy and claims reserves) are not financial instruments and are excluded from the above sensitivity analysis. Corresponding changes in fair value of these accounts, based on the present value of estimated cash flows, would materially mitigate the impact of the net decrease in values implied above. The analysis also excludes all financial instruments, including long-term debt, identified with trading activities. The analysis reflects the estimated gross change in value resulting from a change in interest rates only and is not comparable to the interest rate exposure used for the Citigroup non-trading portfolios or the value-at-risk used for the trading portfolios.

Trading Portfolios

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

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

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

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

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

        Total revenue of the trading business consists of customer revenue, which includes spreads from customer flow and positions taken to facilitate customer orders, proprietary trading activities in both cash and derivative transactions and net interest revenue. All trading positions are marked-to-market with the result reflected in earnings. Even if a desk experiences a mark-to-market loss equivalent to its value-at-risk, its daily profit and loss could still be positive, primarily due to customer flow revenue. In 2003, negative trading-related revenue was recorded for four of 251 trading days. Of the four days on which negative revenue was recorded, only one was greater than $30 million and this day was less than $35 million. The following histogram of total daily revenue or loss captures trading volatility and shows the number of days in which the Company's trading-related revenues fell within particular ranges.


Histogram of Daily Trading-Related Revenue—
Twelve Months Ended December 31, 2003

GRAPHIC

49


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

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

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

        For Citigroup's major trading centers, the aggregate pretax Value-at-Risk in the trading portfolios was $83 million at December 31, 2003 and 2002. Daily exposures averaged $80 million in 2003 and ranged from $64 million to $128 million.

        The following table summarizes Value-at-Risk in the trading portfolios as of December 31, 2003 and 2002, along with the averages:

In millions of dollars

  Dec. 31,
2003

  2003
Average

  Dec. 31,
2002

  2002
Average

 
Interest rate   $ 83   $ 79   $ 75   $ 54  
Foreign exchange     14     21     25     16  
Equity     17     15     12     18  
Commodity     13     8     5     13  
Covariance adjustment     (44 )   (43 )   (34 )   (35 )
   
 
 
 
 
Total   $ 83   $ 80   $ 83   $ 66  
   
 
 
 
 

        The table below provides the range of Value-at-Risk in the trading portfolios that was experienced during 2003 and 2002:

 
  2003
  2002
In millions of dollars

  Low
  High
  Low
  High
Interest rate   $ 55   $ 107   $ 41   $ 75
Foreign exchange     11     34     5     32
Equity     7     87     8     51
Commodity     2     32     4     26
   
 
 
 

50


OPERATIONAL RISK MANAGEMENT PROCESS

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

        The management of operational risk is continuing to evolve into a distinct discipline with its own risk management structure, tools, and process, much like credit and market risk. The Citigroup Operational Risk Policy (the Policy) codifies the core governing principles for operational risk management and provides the framework to identify, control, monitor, measure, test, and report operational risks in a consistent manner across the Company. The Policy requires each business to identify its operational risks and establish controls for those risks to ensure compliance with laws, regulations, regulatory administrative actions, and Citigroup policies. It also requires that all businesses report their operational risk losses in accordance with Policy definitions into a standardized database.

        Citigroup's operational risk framework includes the following core operational risk principles, which apply to all of Citigroup's businesses (certain newly acquired businesses are granted temporary exemptions to this policy):


        The operational risk framework including the Policy and its requirements facilitates the aggregation of operational risks across products and businesses and promotes effective communication of those risks to management. Information about the businesses' operational risks and losses is reported regularly to the Citigroup Risk Management Committee and to the Citigroup Board of Directors. This includes information about the allocation of Risk Capital for operational risk to each business. Risk Capital is calculated based on an estimate of the operational loss potential for each major line of business adjusted for the quality of its control environment. Citigroup's methodologies for calculating capital continue to evolve to accommodate use of the increasing amounts of data that are becoming available as a product of the operational risk framework. Citigroup's operational risk framework facilitates the Company's response to the requirements of emerging regulatory guidance on operational risk, including those related to Basel 2 capital calculations.

Risk and Control Self-Assessment

        During 2003, a formal governance structure was established to provide direction, oversight, and monitoring of Citigroup's RCSA programs. The Policy was amended to incorporate standards for risk and control self-assessment that are applicable to all businesses and to establish RCSA as the process whereby risks that are inherent in a business' strategy, objectives, and activities are identified and the effectiveness of the controls over those risks are evaluated and monitored. RCSA is based on COSO (The Committee of Sponsoring Organizations of the Treadway Commission) principles, which have been adopted as the minimum standards for all internal control reviews that comply with Sarbanes-Oxley, FDICIA or operational risk requirements. The policy requires, on a quarterly basis, businesses and staff functions to perform an RCSA that includes documentation of the control environment and policies, assessing the risks and controls, testing commensurate with risk level, corrective action tracking for control breakdowns or deficiencies and periodic reporting, including reporting to senior management and the Audit Committee. Beginning in 2004, the entire process is subject to audit by Citigroup's Audit and Risk Review with reporting to the Audit and Risk Management Committee of the Board.

Information Security and Continuity of Business

        In October 2003, Citigroup formed an Executive Council of senior business managers to oversee information security and continuity of business policy and implementation. These are important issues for the Company and the entire industry in light of the risk environment. Significant upgrades to the Company's processes are continuing.

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

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

51


COUNTRY AND CROSS-BORDER RISK MANAGEMENT PROCESS

Country Risk

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

Cross-Border Risk

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

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

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

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

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

52


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

December 31, 2003
  December 31, 2002
 
  Cross-Border Claims on Third Parties
  Investments in Local
Franchises

   
   
   
   
   
In billions of
dollars

  Trading
and Short-
Term
Claims(1)

  Resale
Agreements

  All
Other

  Total
  Local
Country
Assets

  Local
Country
Liabilities

  Net
Investments
in and
Funding of
Local
Franchises(2)

  Total
Cross-
Border Out-
standings

  Commitments(3)
  Total
Cross-
Border
Out-
standings

  Commitments(3)
United Kingdom   $ 8.1   $ 21.6   $ 2.7   $ 32.4   $ 36.5   $ 59.1   $   $ 32.4   $ 28.3   $ 13.8   $ 26.3
Germany     13.3     2.2     1.5     17.0     19.6     14.9     4.7     21.7     14.5     19.0     10.9
France     6.3     7.4     1.1     14.8     0.8     0.9         14.8     7.9     15.9     5.9
Italy     11.4     1.0     0.3     12.7     3.9     2.4     1.5     14.2     2.3     11.3     1.6
Japan     2.3     7.8     1.6     11.7     30.8     42.2         11.7     0.5     9.4     0.4
Canada     3.1     0.3     1.2     4.6     12.5     6.9     5.6     10.2     2.2     7.0     2.1
Netherlands     6.0     0.7     1.7     8.4     0.1     1.3         8.4     3.7     9.9     4.1
Australia     2.6     0.5     0.7     3.8     18.2     13.8     4.4     8.2     0.2     3.3     0.2
Mexico (4)     2.4         4.3     6.7     41.3     40.4     0.9     7.6     0.5     9.1     0.5
Brazil     2.1         1.5     3.6     5.2     3.3     1.9     5.5     0.1     7.5    

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

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

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

(4)
For further information on Mexico, see Note 26 to the Consolidated Financial Statements.

        Total cross-border outstandings under FFIEC guidelines, including cross-border resale agreements based on the domicile of the issuer of the securities that are held as collateral, and long securities positions reported on a gross basis at December 31, 2003, 2002, and 2001, respectively, were (in billions): the United Kingdom ($14.6, $9.9, and $9.3), Germany ($41.4, $26.5, and $19.5), France ($17.5, $11.7, and $13.5), Italy ($18.7, $20.3, and $12.8), Japan ($11.9, $9.3, and $6.5), Canada ($11.5, $7.3, and $8.9), the Netherlands ($10.0, $7.8, and $6.9), Australia ($9.8, $3.4, and $2.2), Mexico ($9.0, $10.4, and $13.2), and Brazil ($6.8, $8.8, and $11.9).

        Cross-border commitments (in billions) at December 31, 2001 were $16.8 for the United Kingdom, $7.3 for Germany, $8.7 for France, $2.4 for Italy, $3.3 for Japan, $3.4 for Canada, $3.0 for the Netherlands, $0.2 for Australia, $0.6 for Mexico, and $0.3 for Brazil.

        The sector percentage allocation for bank, public and private cross-border claims, respectively, on third parties under FFIEC guidelines at December 31, 2003 was: the United Kingdom (17%, 16%, and 67%), Germany (25%, 56%, and 19%), France (21%, 46%, and 33%), Italy (4%, 81%, and 15%), Japan (3%, 42%, and 55%), Canada (21%, 27%, and 52%), the Netherlands (27%, 13%, and 60%), Australia (25%, 31%, and 44%), Mexico (0%, 47%, and 53%), and Brazil (11%, 18%, and 71%).

        The following table shows cross-border outstandings to our 10 largest non-OECD countries:

December 31, 2003
  December 31, 2002
 
  Cross-Border Claims on Third Parties
  Investments in Local
Franchises

   
   
   
   
   
In billions of
dollars

  Trading
and Short-
Term
Claims(1)

  Resale
Agreements

  All
Other

  Total
  Local
Country
Assets

  Local
Country
Liabilities

  Net
Investments
in and
Funding of
Local
Franchises(2)

  Total
Cross-
Border Out-
standings

  Commitments(3)
  Total
Cross-
Border
Out-
standings

  Commitments(3)
Taiwan   $ 1.2   $ 4.4   $ 0.8   $ 6.4   $ 8.1   $ 11.6   $   $ 6.4   $ 0.2   $ 2.6   $ 0.5
Brazil     2.1         1.5     3.6     5.2     3.3     1.9     5.5     0.1     7.5    
India     1.3         0.9     2.2     7.3     5.6     1.7     3.9     0.4     3.1     0.3
Chile     0.3         0.4     0.7     3.1     2.2     0.9     1.6     0.2     1.2     0.1
Russia     0.3     0.4     0.4     1.1     1.5     1.1     0.4     1.5     0.1     1.4    
Thailand     0.3     0.5         0.8     2.8     2.1     0.7     1.5     0.1     1.3     0.1
Singapore     1.0     0.1     0.1     1.2     12.7     24.1         1.2     0.2     1.0     1.2
Hong Kong     0.9     0.1     0.1     1.1     8.9     20.1         1.1     0.1     1.1     0.2
South Africa     0.6         0.3     0.9     2.2     3.7         0.9     0.2     0.6     0.4
Colombia     0.5         0.1     0.6     1.0     0.8     0.2     0.8     0.1     1.0     0.1
   
 
 
 
 
 
 
 
 
 
 

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

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

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

53


BALANCE SHEET REVIEW

General

        At December 31, 2003, total assets were $1.3 trillion, an increase of $166.4 billion or 15% from the prior year. At December 31, 2003, total assets were primarily comprised of loans (net of unearned income) of $478.0 billion or 38% of total assets, trading assets of $235.3 billion or 19% of total assets, investments of $182.9 billion or 14% of total assets and federal funds sold and securities borrowed or purchased under agreements to resell of $172.2 billion or 14% of total assets. Total average interest-earning assets were $1,007.1 billion compared to $867.0 billion in 2002. Supporting this asset growth was a $43.1 billion or 10% increase in total deposits, a $41.3 billion or 26% increase in short- and long-term borrowings, a $30.4 billion or 33% increase in trading account liabilities, an $18.5 billion or 11% increase in federal funds purchased and securities loaned or sold under agreements to repurchase, and a $9.1 billion or 18% increase in contractholder funds and separate and variable accounts. In addition, at December 31, 2003, total stockholders' equity increased $11.3 billion to $98.0 billion, up 13% from the prior year. See "Capital Resources and Liquidity" on page 56 for further discussions on capital and liquidity.

Factors Affecting Financial Position

2003

        In July 2003, Citigroup completed the acquisition of The Home Depot private-label portfolio (Home Depot), which added $6.0 billion in receivables and 12 million accounts. See Note 2 to the Consolidated Financial Statements.

        On November 3, 2003, Citigroup acquired the Sears' Credit Card and Financial Products business (Sears). This transaction resulted in an increase in assets at December 31, 2003 of approximately $32.4 billion, primarily comprised of $28.6 billion in credit card receivables and $5.8 billion in intangible assets and goodwill, slightly offset by the addition of $2.1 billion in credit loss reserves. The transaction also resulted in an increase in long-term debt of approximately $10.0 billion. See Note 2 to the Consolidated Financial Statements.

2002

        On August 20, 2002, Citigroup completed the tax-free distribution to its stockholders of a majority portion of its remaining ownership interest in TPC. This non-cash transaction resulted in a reduction in assets at December 31, 2002 of approximately $53.6 billion, primarily comprised of $30.1 billion in investments and $9.8 billion in reinsurance recoverable. Liabilities were reduced by approximately $42.5 billion, primarily comprised of a $34.1 billion reduction in insurance policy claims. See Note 3 to the Consolidated Financial Statements.

        On November 6, 2002, Citigroup completed its acquisition of GSB. This transaction resulted in an increase in assets at December 31, 2002 of approximately $56.0 billion. The impact on the balance sheet primarily included increases of approximately $35.0 billion in consumer loans, $4.0 billion in investment securities, $4.0 billion in goodwill, $25.0 billion in deposits, and $13.0 billion in long-term debt. See Note 2 to the Consolidated Financial Statements.

Assets

Cash and Due from Banks

        At December 31, 2003, the balance was $21.1 billion, an increase of $3.8 billion from the prior year. Net cash used by operating and investing activities of continuing operations was $14.9 billion and $46.3 billion, respectively, while net cash provided by financing activities of continuing operations was $64.4 billion. The effect of exchange rate changes on cash and cash equivalents was $579 million in 2003 and $98 million in 2002.

Federal Funds Sold and Securities Borrowed or Purchased Under Agreements to Resell

        At December 31, 2003, the balance was $172.2 billion, an increase of $32.2 billion from the prior year, attributable to an increase in resale agreements of $27.5 billion, and deposits paid for securities borrowed of $4.8 billion. Resale agreements increased primarily to cover trading liability positions, largely in non-U.S. portfolios. The increases in securities borrowed related to conduit and prime brokerage activities. Average domestic federal funds sold and securities borrowed or purchased under agreements to resell were $105.4 billion yielding 2.1% in 2003, compared to $91.2 billion and 3.8% in 2002, while average foreign balances were $64.5 billion yielding 2.9% in 2003, compared to $57.4 billion and 3.3% in 2002. Average federal funds sold and securities borrowed or purchased under agreements to resell represented 17% of total average interest-earning assets during 2003. See Note 6 to the Consolidated Financial Statements.

Trading Account Assets

        At December 31, 2003, the balance was $235.3 billion, an increase of $80.1 billion or 52% from the prior year. The increase was primarily attributable to an increase in U.S. Treasury and federal agency securities of $23.4 billion (the majority of which was client driven), $18 billion in revaluation gains (primarily on foreign exchange derivative contracts), corporate and other debt securities of $16.5 billion, equity securities of $12.4 billion, and foreign government securities of $5.8 billion. See Note 8 to the Consolidated Financial Statements.

Investments

        At December 31, 2003, the balance was $182.9 billion, an increase of $13.4 billion from the prior year. The Company was primarily invested in fixed maturity securities, including mortgage-backed securities, U.S. Treasury and federal agencies securities, state and municipal securities, foreign government, and U.S. corporate securities. The increase in the investment portfolio was primarily due to growth in the fixed maturity securities of $14.3 billion. At December 31, 2003, the Company's investment in TPC was $1.7 billion. Average investments represented 18% of total interest-earning assets at December 31, 2003. The average rate earned on these investments in 2003 was 4.3%, compared to 5.5% in the prior year. See Note 5 to the Consolidated Financial Statements.

Loans

        Total loans outstanding (net of unearned income) at December 31, 2003 were $478.0 billion compared to $447.8 billion in the prior year, an increase of $30.2 billion or 7%. Total average loans comprised 44% of total interest-earning assets in 2003, compared to 46% in the prior year. The increase reflects growth in the consumer loan portfolio of $42.3 billion, of which approximately $28.6 billion is attributable to the Sears acquisition and $6.0 billion to the Home Depot acquisition, offset by a $12.1 billion decrease in the corporate loan portfolio. The 13% increase in the consumer loan portfolio was comprised of $34.5 billion or 19% in installment, revolving credit, and other, and $10.5 billion or 7% in mortgage and real estate loans, slightly offset by a $3.4 billion or 24% decrease in lease financing. For more information, see "Consumer Portfolio Review" on page 42. The 11% decline in the corporate portfolio was driven by decreases of $11.4 billion or 13% in

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commercial and industrial loans, $2.6 billion or 59% in mortgage and real estate loans, and $1.6 billion or 51% in government and official institutions, slightly offset by an increase of $3.5 billion or 41% in loans to financial institutions. For further information, see "Global Corporate Portfolio Review" on page 47. During 2003, average consumer loans of $341.4 billion yielded an average rate of 9.3%, compared to $292.6 billion and 10.4% in the prior year. Average corporate loans of $103.8 billion yielded an average rate of 6.2% in 2003, compared to $107.9 billion and 6.9% in the prior year. See Note 10 to the Consolidated Financial Statements.

        Total loans held-for-sale, included in other assets at December 31, 2003, were $9.2 billion compared to $15.9 billion in the prior year, a decrease of $6.7 billion or 42%. The decrease is attributable to a decline in credit cards of $8.4 billion, offset by an increase of $1.7 billion in mortgages.

Liabilities

Deposits

        The Company's largest source of funding is derived from its large, geographically diverse deposit base. At December 31, 2003, total deposits were $474.0 billion, an increase of $43.1 billion or 10% from the prior year. This increase is driven by increases in corporate, retail and private banking deposits. The growth in corporate deposits held by the Transaction Services business reflects the addition of new clients, primarily in Asia and Europe. The increase in retail deposits results primarily from growth in demand deposits in the consumer businesses in North America, Asia, EMEA and Japan, as well as the impact of strengthening foreign currencies relative to the U.S. dollar. Private banking deposit growth results from increases in banking and fiduciary deposits. Interest-bearing foreign deposits comprise 58% of total deposits, interest-bearing domestic deposits comprise 31%, non-interest-bearing domestic deposits comprise 6%, and non-interest-bearing foreign deposits comprise 5%. Average deposits increased $45.8 billion to $394.1 billion in 2003 yielding an average rate of 1.8%, compared to 2.3% in the prior year.

Federal Funds Purchased and Securities Loaned or Sold Under Agreements to Repurchase

        At December 31, 2003, federal funds purchased and securities loaned or sold under agreements to repurchase increased $18.5 billion or 11% to $181.2 billion, compared to $162.6 billion at the prior year-end. This increase is attributable to increases of $9.8 billion in federal funds purchased and repurchase agreements and an increase of $8.7 billion in deposits received for securities loaned. Average volume in 2003 increased to $180.2 billion yielding 2.7%, compared to $169.0 billion and 3.9% in 2002. See Note 6 to the Consolidated Financial Statements.

Trading Account Liabilities

        At December 31, 2003, trading account liabilities of $121.9 billion increased $30.4 billion from the prior year. The 33% increase includes a $17.7 billion increase in revaluation losses (primarily on foreign exchange derivative transactions), and a $12.8 billion increase in securities sold, not yet purchased. The $12.8 billion increase is attributable to an increase of $8.2 billion in debt securities, predominantly foreign, and an increase of $4.6 billion in short U.S. Treasury securities. See Note 8 to the Consolidated Financial Statements.

Debt

        At December 31, 2003, total Citigroup debt was $221.3 billion, comprised of long-term debt of $162.7 billion, short-term borrowings of $36.2 billion, and investment banking and brokerage borrowings of $22.4 billion, up 24% from $178.9 billion in the prior year. During 2003 the Company took advantage of low interest rates and the positive credit environment to extend the maturities of new borrowings. This $42.4 billion increase from 2002 includes increases of $35.8 billion in long-term debt, $5.6 billion in short-term borrowings, and $1.1 billion in investment banking and brokerage borrowings.

        The long-term debt balance at December 31, 2003 primarily includes $145.8 billion of senior notes and $16.1 billion of subordinated debt, with maturities ranging from 2004 to 2098. During 2003, U.S. dollar- and non-U.S. dollar-denominated fixed and variable rate debt increased by $32.1 billion, and subordinated debt increased by $3.2 billion. Average long-term debt outstanding during 2003 was $175.8 billion.

        The 18% increase in short-term borrowings in 2003 includes an increase of $7.3 billion in other borrowings, offset by a decrease of $1.8 billion in commercial paper.

        The 5% increase in investment banking and brokerage borrowings in 2003 includes a $1.8 billion increase in other short-term and bank borrowings and a $0.7 billion decrease in commercial paper.

        For more information on debt, see Notes 13 and 19 to the Consolidated Financial Statements and "Capital Resources and Liquidity," beginning on page 56.

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CAPITAL RESOURCES AND LIQUIDITY

CAPITAL RESOURCES

Overview

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

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

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

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

        As noted in the table below, Citigroup maintained a well-capitalized position during 2003. See also Note 20 to the Consolidated Financial Statements.

Citigroup Regulatory Capital Ratios

At year-end

  2003
  2002
 
Tier 1 capital   8.91 % 8.47 %
Total capital (Tier 1 and Tier 2)   12.04 % 11.25 %
Leverage(1)   5.56 % 5.67 %
Common stockholders' equity   7.67 % 7.77 %
   
 
 

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

Components of Capital Under Regulatory Guidelines

In millions of dollars at year-end

  2003
  2002
 
Tier 1 capital              
Common stockholders' equity   $ 96,889   $ 85,318  
Qualifying perpetual preferred stock     1,125     1,400  
Qualifying mandatorily redeemable securities of subsidiary trusts     6,257     6,152  
Minority interest     1,158     1,236  
Less: Net unrealized gains on securities available-for-sale(1)     (2,908 )   (1,957 )
Accumulated net gains on cash flow hedges, net of tax     (751 )   (1,242 )
Intangible assets:(2)              
  Goodwill     (27,581 )   (26,961 )
  Other disallowed intangible assets     (6,725 )   (4,322 )
50% investment in certain subsidiaries(3)     (45 )   (37 )
Other     (548 )   (575 )
   
 
 
Total Tier 1 capital     66,871     59,012  
   
 
 

Tier 2 capital

 

 

 

 

 

 

 
Allowance for credit losses(4)     9,545     8,873  
Qualifying debt(5)     13,573     10,288  
Unrealized marketable equity securities gains(1)     399     180  
Less: 50% investment in certain subsidiaries(3)     (45 )   (36 )
   
 
 
Total Tier 2 capital     23,472     19,305  
   
 
 
Total capital (Tier 1 and Tier 2)   $ 90,343   $ 78,317  
   
 
 
Risk-adjusted assets(6)   $ 750,293   $ 696,339  
   
 
 

(1)
Tier 1 capital excludes unrealized gains and losses on debt securities available-for-sale in accordance with regulatory risk-based capital guidelines. The federal bank regulatory agencies permit institutions to include in Tier 2 capital up to 45% of pretax net unrealized holding gains on available-for-sale equity securities with readily determinable fair values. Institutions are required to deduct from Tier 1 capital net unrealized holding losses on available-for-sale equity securities with readily determinable fair values, net of tax.

(2)
The increase in intangible assets is primarily due to the acquisition of the Sears credit card portfolio in November 2003.

(3)
Represents unconsolidated banking and finance subsidiaries.

(4)
Includable up to 1.25% of risk-adjusted assets. Any excess allowance is deducted from risk-adjusted assets.

(5)
Includes qualifying subordinated debt in an amount not exceeding 50% of Tier 1 capital.

(6)
Includes risk-weighted credit equivalent amounts, net of applicable bilateral netting agreements, of $39.1 billion for interest rate, commodity and equity derivative contracts and foreign exchange contracts, as of December 31, 2003, compared to $31.5 billion as of December 31, 2002. Market risk-equivalent assets included in risk-adjusted assets amounted to $40.6 billion and $30.6 billion at December 31, 2003 and 2002, respectively. Risk-adjusted assets also includes the effect of other off-balance sheet exposures such as unused loan commitments and letters of credit and reflects deductions for certain intangible assets and any excess allowance for credit losses.

        The increase in common stockholders' equity during the year principally reflected net income of $17.9 billion, and $2.7 billion related to the issuance of shares pursuant to employee benefit plans and other activity. These increases were offset by dividends declared on common and preferred stock of $5.8 billion, treasury stock acquired of $2.4 billion, including shares repurchased from the Banamex Employee Pension fund, Mr. Sanford I. Weill, and the Citigroup Employee Pension Fund, $0.6 billion related to the after-tax net change in equity from nonowner sources, and the net issuance of restricted and deferred stock of $0.2 billion. The decrease in the common stockholders' equity ratio during the year reflected the above items and the 15% increase in total assets.

        The TPC distribution in 2002 was treated as a dividend to stockholders for accounting purposes that reduced Citigroup stockholders' equity by approximately $7.0 billion.

        Total mandatorily redeemable securities of subsidiary trusts (trust preferred securities), which qualify as Tier 1 capital, at December 31, 2003 and December 31, 2002 were $6.257 billion and $6.152 billion,

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respectively. The amount outstanding at December 31, 2003 included $5.217 billion of parent-obligated securities and $840 million of subsidiary-obligated securities, and at December 31, 2002 included $4.657 billion of parent-obligated securities and $1.495 billion of subsidiary-obligated securities. The Company continues to consolidate issuer trusts under FIN 46. When FIN 46-R becomes effective in the first quarter of 2004, deconsolidation of the subsidiary trusts will be required. The Company is currently exploring restructuring alternatives to meet the new requirements for continued consolidation. Although the FRB has issued interim guidance that continues to recognize trust preferred securities as a component of Tier 1 capital, it is possible that a change may result in these securities' qualifying for Tier 2 capital rather than Tier 1 capital. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 66. If Tier 2 capital treatment had been required at December 31, 2003, Citigroup would have continued to be "well-capitalized."

        Similar to Citigroup, Citicorp's capital ratios include the benefit of the inclusion of trust preferred securities. See Note 19 to the Consolidated Financial Statements.

        Citicorp's subsidiary depository institutions in the United States are subject to risk-based capital guidelines issued by their respective primary federal bank regulatory agencies, which are similar to the FRB's guidelines. To be "well capitalized" under federal bank regulatory agency definitions, Citicorp's depository institutions must have a Tier 1 capital ratio of at least 6%, a combined Tier 1 and Tier 2 capital ratio of at least 10%, and a leverage ratio of at least 5%, and not be subject to a directive, order, or written agreement to meet and maintain specific capital levels. At December 31, 2003, all of Citicorp's subsidiary depository institutions were "well-capitalized" under the federal regulatory agencies' definitions.

Citicorp Ratios

At year-end

  2003
  2002
 
Tier 1 capital   8.44 % 8.11 %
Total capital (Tier 1 and Tier 2)   12.68 % 12.31 %
Leverage(1)   6.70 % 6.82 %
Common stockholder's equity   9.97 % 10.11 %
   
 
 

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

Citicorp Components of Capital Under Regulatory Guidelines

In billions of dollars at year-end

  2003
  2002
Tier 1 capital   $ 50.7   $ 45.3
Total capital (Tier 1 and Tier 2)   $ 76.2   $ 68.7
   
 

Other Subsidiary Capital Considerations

        Certain of the Company's U.S. and non-U.S. broker/dealer subsidiaries, including Citigroup Global Markets, Inc., a wholly-owned subsidiary of Citigroup Global Markets Holdings Inc. (CGMHI), are subject to various securities and commodities regulations and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. The Company's U.S. registered broker/dealer subsidiaries are subject to the Securities and Exchange Commission's net capital rule, Rule 15c3-1 (the Net Capital Rule), promulgated under the Exchange Act. The Net Capital Rule requires the maintenance of minimum net capital, as defined. The Net Capital Rule also limits the ability of broker/dealers to transfer large amounts of capital to parent companies and other affiliates. Compliance with the Net Capital Rule could limit those operations of the Company that require the intensive use of capital, such as underwriting and trading activities and the financing of customer account balances, and also could restrict CGMHI's ability to withdraw capital from its broker/dealer subsidiaries, which in turn could limit CGMHI's ability to pay dividends and make payments on its debt. See Notes 13 and 20 to the Consolidated Financial Statements. CGMHI monitors its leverage and capital ratios on a daily basis. Certain of the Company's broker/dealer subsidiaries are also subject to regulation in the countries outside of the U.S. in which they do business. Such regulations may include requirements to maintain specified levels of net capital or its equivalent. The Company's U.S. and non-U.S. broker/dealer subsidiaries were in compliance with their respective capital requirements at December 31, 2003.

        Certain of the Company's Insurance Subsidiaries are subject to regulatory capital requirements. The National Association of Insurance Commissioners (NAIC) adopted risk-based capital (RBC) requirements for life insurance companies. The RBC requirements are to be used as minimum capital requirements by the NAIC and states to identify companies that merit further regulatory action. The formulas have not been designed to differentiate among adequately capitalized companies that operate with levels of capital higher than RBC requirements. Therefore, the Company believes it is not appropriate to use the formulas to rate or to rank such companies. At December 31, 2003 and 2002, all of the Company's life insurance companies had adjusted capital in excess of amounts requiring Company or any regulatory action.

Capital Securities Issuance and Redemptions

        During 2003, Citigroup issued $1,600 million of trust preferred securities qualifying as Tier 1 capital, consisting of $1,100 million of Citigroup Capital IX and $500 million of Citigroup Capital X, which settled on February 13, 2003 and September 30, 2003, respectively. These issuances were partially offset by Citigroup's or its subsidiaries' redemption of $1,325 million of higher coupon, callable trust preferred securities as detailed below.

        On March 3, 2003, Citigroup and CGMHI redeemed, for cash, all of the $200 million trust preferred securities of Citigroup Capital IV and the $400 million trust preferred securities of SSBH Capital I, respectively, at the redemption price of $25 per trust preferred security plus any accrued interest and unpaid distributions thereon.

        On October 3, 2003, Citicorp redeemed for cash all of the $225 million trust preferred securities of Citicorp Capital III. On November 15, 2003, Citigroup redeemed for cash all of the $500 million trust preferred securities of Citigroup Capital V.

        On March 3, 2003, Citigroup redeemed the Series Q and R Preferred Stock. The combined aggregate amount redeemed was $275 million, plus accrued dividends to the date of redemption thereon.

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Share Repurchases

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

        The following table summarizes the Company's repurchase program during 2003 and 2002:

In millions of dollars, except per share amounts

  Total Shares
Repurchased(1)

  Average Price
Paid per Share

  Dollar Value
of Remaining
Authorized
Repurchase
Program

2003:                
First quarter   34.3   $ 34.17   $ 3,957
Second quarter   8.9     40.21     3,589
Third quarter   5.7     46.15     3,353
   
 
 
  October   6.5     47.18     3,018
  November   1.8