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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

ý   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
   

 

 

For the quarterly period ended June 30, 2004

 

 

 

 

OR

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

For the transition period from                             to                              

 

 

 

 

Commission file number 1-9924

 

 

Citigroup Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  52-1568099
(I.R.S. Employer
Identification No.)

399 Park Avenue, New York, New York 10043
(Address of principal executive offices) (Zip Code)

(212) 559-1000
(Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

        Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:

Common stock outstanding as of June 30, 2004: 5,180,258,364

Available on the Web at www.citigroup.com





Citigroup Inc.

TABLE OF CONTENTS

 
   
  Page No.
Part I—Financial Information

Item 1.

 

Financial Statements:

 

 

 

 

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

 

63

 

 

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

 

64

 

 

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

 

65

 

 

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

 

66

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

67

Item 2.

 

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

 

5 - 60

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

45 - 47
75

Item 4.

 

Controls and Procedures

 

61

Part II—Other Information

Item 1.

 

Legal Proceedings

 

86

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

87

Item 6.

 

Exhibits and Reports on Form 8-K

 

87

Signatures

 

89

Exhibit Index

 

90

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 is a bank holding company within the meaning of the U.S. Bank Holding Company Act of 1956 (BHC Act) registered with, and subject to examination by, the Board of Governors of the Federal Reserve System (FRB). Certain of the Company's subsidiaries are subject to supervision and examination by their respective federal and state authorities. This quarterly report on Form 10-Q should be read in conjunction with Citigroup's 2003 Annual Report on Form 10-K.

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

        The principal executive offices of the Company are located at 399 Park Avenue, New York, New York 10043, telephone number 212 559 1000. Additional information about Citigroup is available on the Company's website at www.citigroup.com.

        Citigroup's annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K, and all amendments to these reports, are available free of charge through the Company's website by clicking on the "Investor Relations" page and selecting "SEC Filings." The Securities and Exchange Commission (SEC) website contains reports, proxy and information statements, and other information regarding the Company at www.sec.gov.

GLOBAL CONSUMER

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

        Cards provides MasterCard, VISA 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 June 30, 2004, North America Consumer Finance maintained 2,608 offices, including 2,446 CitiFinancial offices in the U.S., Canada, and Puerto Rico, while International Consumer Finance maintained 997 offices, including 530 in Japan. Consumer Finance offers real-estate-secured loans, unsecured and partially secured personal loans, auto loans and loans to finance consumer-goods purchases. In addition, CitiFinancial, through certain subsidiaries and third parties, makes available various credit-related and other insurance products to its U.S. customers.

        Retail Banking provides banking, lending, investment and insurance services to customers through retail branches, electronic delivery systems, and the Primerica sales force. In North America, Retail Banking includes the operations of Citibanking North America, Consumer Assets, CitiCapital, Primerica, and Mexico Retail Banking. Citibanking North America delivers banking, lending, investment and insurance services through 775 branches in the U.S. and Puerto Rico and through Citibank Online, an Internet banking site on the World Wide Web. The Consumer Assets business originates and services mortgages and student loans for customers across the U.S. The CitiCapital business provides equipment leasing and financing products to small- and middle-market businesses. The business operations of Primerica involve the sale, mainly in North America, of life insurance and other products manufactured by its affiliates, including Smith Barney mutual funds, CitiFinancial mortgages and personal loans and the products of our Life Insurance and Annuities business. The Primerica sales force is composed of over 100,000 independent representatives. Mexico Retail Banking consists of the branch banking operations of Banamex, which maintained 1,347 branches. International Retail Banking consists of 1,110 branches and provides full-service banking and investment services in EMEA, Japan, Asia, and Latin America. The Commercial Markets Group is included in Retail Banking and consists of the operations of CitiCapital, as well as middle-market lending operations in North America and the international regions.

2


GLOBAL CORPORATE AND INVESTMENT BANK

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

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

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

PRIVATE CLIENT SERVICES

        Private Client Services provides investment advice, financial planning and brokerage services to affluent individuals, small and mid-size companies, non-profits and large corporations primarily through a network of more than 12,000 Smith Barney Financial Consultants in more than 500 offices 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 offers a broad range of life insurance, annuity, asset management and personalized wealth management products and services distributed to institutional, high-net-worth and retail clients. Global Investment Management includes Life Insurance and Annuities, Private Bank and Asset Management.

        Life Insurance and Annuities comprises Travelers Life and Annuity (TLA) and International Insurance Manufacturing (IIM). TLA offers retail annuity, institutional annuity, individual life insurance and Corporate Owned Life Insurance (COLI) products. The retail annuity products include individual fixed and variable deferred annuities and payout annuities. Individual life insurance includes term, universal, and variable life insurance. These products are primarily distributed through CitiStreet Retirement Services (CitiStreet), Smith Barney, Primerica, Citibank and affiliates, and a nationwide network of independent agents and the outside broker/dealer channel. The COLI products are variable universal life products distributed through independent specialty brokers. The institutional annuity products include institutional pensions, including guaranteed investment contracts, payout annuities, group annuities sold to employer-sponsored retirement and savings plans, structured settlements and funding agreements. TLA's business is significantly affected by movements in the U.S. equity and fixed income credit markets. U.S. equity and credit market events can have both positive and negative effects on the deposit, revenue and policy retention performance of the business. A sustained weakness in the equity markets will decrease revenues and earnings in variable products. Declines in credit quality of issuers will have a negative effect on earnings. IIM provides annuities, credit, life, health, disability and other insurance products internationally, leveraging the existing distribution channels of the Consumer Finance, Retail Banking and Asset Management (retirement services) businesses. IIM has operations in Mexico, Asia, EMEA, Latin America and Japan. TLA and IIM include the realized investment gains/losses from sales on certain insurance-related investments.

        Private Bank provides personalized wealth management services for high-net-worth clients through 129 offices in 36 countries and territories. With a global network of Private Bankers and Product Specialists, Private Bank leverages its extensive experience with clients' needs and its access to Citigroup to provide clients with comprehensive investment management, investment finance and banking services. Investment management services include investment funds management and capital markets solutions, as well as trust, fiduciary and custody services. Investment finance provides standard and tailored credit services including real estate financing, commitments and letters of credit, while Banking includes services for deposit, checking and savings accounts, as well as cash management and other traditional banking services.

3


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

PROPRIETARY INVESTMENT ACTIVITIES

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

CORPORATE/OTHER

        Corporate/Other includes net corporate treasury results, corporate expenses, certain intersegment eliminations and taxes not allocated to the individual businesses.

INTERNATIONAL

        Citigroup International (whose operations are fully reflected in the product disclosures above), in partnership with our global product groups, offers a broad range of consumer financial services, corporate and investment banking services and investment management to some 50 million customer accounts in more than 100 countries and territories throughout Asia, Japan, EMEA and Latin America.

        The product mix differs in each region, depending upon local conditions and opportunities. Citigroup International also offers an array of wealth management services, with integrated offerings and dedicated service centers.

4


CITIGROUP INC. AND SUBSIDIARIES

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

Financial Summary

 
  Three Months Ended June 30,
  Six Months Ended June 30,
 
  2004
  2003
  2004
  2003
In millions of dollars, except per share amounts

   
   
   
   
Revenues, net of interest expense(1)   $ 22,302   $ 19,354   $ 43,790   $ 37,890
Operating expenses     18,633     9,971     29,275     19,523
Benefits, claims, and credit losses(1)     2,438     3,087     5,544     6,011
   
 
 
 
Income before taxes and minority interest     1,231     6,296     8,971     12,356
Income taxes     49     1,956     2,447     3,875
Minority interest, after-tax     38     41     107     79
   
 
 
 
Net Income   $ 1,144   $ 4,299   $ 6,417   $ 8,402
   
 
 
 
Earnings per share:                        
  Basic   $ 0.22   $ 0.84   $ 1.25   $ 1.64
  Diluted   $ 0.22   $ 0.83   $ 1.23   $ 1.62
   
 
 
 
Return on Average Common Equity     4.6 %   19.2 %   13.1%     19.2%
Return on Risk Capital(2)     9 %         27%      
Return on Invested Capital(2)     5 %         13%      

Total Assets
(in billions of dollars)(3)

 

$

1,396.6

 

$

1,187.4

 

 

 

 

 

 
Total Equity (in billions of dollars)   $ 98.3   $ 93.3            

Tier 1 Capital Ratio

 

 

8.16

%

 

9.02

%

 

 

 

 

 
Total Capital Ratio     11.31 %   11.94 %          
   
 
           

(1)
Revenues, Net of Interest Expense, and Benefits, Claims, and Credit Losses in the table above are disclosed on an owned basis (under Generally Accepted Accounting Principles (GAAP)). If this table were prepared on a managed basis, which includes certain effects of credit card securitization activities including receivables held for securitization and receivables sold with servicing retained, there would be no impact to net income, but Revenues, Net of Interest Expense, and Benefits, Claims, and Credit Losses would each have been increased by $1.290 billion and $1.208 billion in the 2004 and 2003 second quarters, respectively, and by $2.615 billion and $2.310 billion for the respective six-month periods. Although a managed basis presentation is not in conformity with GAAP, the Company believes it provides a representation of performance and key indicators of the credit card business that is consistent with the way management reviews operating performance and allocates resources. Furthermore, investors utilize information about the credit quality of the entire managed portfolio as the results of both the held and securitized portfolios impact the overall performance of the Cards business. See the discussion of the Cards business on page 15.

(2)
Risk Capital is defined as the amount of capital needed to cover unexpected economic losses during extreme events. Return on Risk Capital is defined as annualized net income divided by Average Risk Capital. Return on Invested Capital is a similar calculation but includes adjustments for goodwill and intangibles in both the numerator and denominator, similar to those necessary to translate return on tangible equity to return on total equity. Return on Risk Capital and Return on Invested Capital are non-GAAP performance measures. Management believes Return on Risk Capital is useful to make incremental investment decisions and serves as a key metric for organic growth initiatives. Return on Invested Capital is used for multi-year investment decisions and as a long-term performance measure. For a further discussion on Risk Capital, see page 36.

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

5


Business Focus

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

Citigroup Net Income—Product View

 
  Three Months Ended June 30,
  Six Months Ended June 30,
 
 
  2004
  2003(1)
  2004
  2003(1)
 
In millions of dollars

   
   
   
   
 
Global Consumer                          
Cards   $ 1,012   $ 758   $ 1,992   $ 1,475  
Consumer Finance     594     521     1,161     1,024  
Retail Banking     1,156     1,005     2,278     1,935  
Other(2)     304     (43 )   210     (71 )
   
 
 
 
 
Total Global Consumer     3,066     2,241     5,641     4,363  
   
 
 
 
 
Global Corporate and Investment Bank                          
Capital Markets and Banking     1,502     1,174     2,979     2,377  
Transaction Services     261     180     495     371  
Other(2)(3)     (4,569 )   (10 )   (4,573 )   (3 )
   
 
 
 
 
Total Global Corporate and Investment Bank     (2,806 )   1,344     (1,099 )   2,745  
   
 
 
 
 
Private Client Services     209     185     460     347  
   
 
 
 
 
Global Investment Management                          
Life Insurance and Annuities     230     200     517     444  
Private Bank     152     139     311     264  
Asset Management     69     82     174     165  
   
 
 
 
 
Total Global Investment Management     451     421     1,002     873  
   
 
 
 
 
Proprietary Investment Activities     273     63     299     101  

Corporate/Other

 

 

(49

)

 

45

 

 

114

 

 

(27

)
   
 
 
 
 
Net Income   $ 1,144   $ 4,299   $ 6,417   $ 8,402  
   
 
 
 
 

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

(2)
The 2004 second quarter includes a $756 million after-tax gain ($378 million in Consumer Other and $378 million in GCIB Other) related to the sale of The Samba Financial Group (Samba).

(3)
The 2004 second quarter includes a $4.95 billion after-tax charge related to the WorldCom and Litigation Reserve Charge.

6


Citigroup Net Income—Regional View

 
  Three Months Ended June 30,
  Six Months Ended June 30,
 
 
  2004
  2003(1)
  2004
  2003(1)
 
In millions of dollars

   
   
   
   
 
North America (excluding Mexico)(2)                          
  Consumer   $ 1,785   $ 1,515   $ 3,533   $ 2,988  
  Corporate(3)     (4,244 )   579     (3,498 )   1,240  
  Private Client Services     209     185     460     347  
  Investment Management     339     307     725     663  
   
 
 
 
 
Total North America     (1,911 )   2,586     1,220     5,238  
   
 
 
 
 
Mexico                          
  Consumer     203     172     393     290  
  Corporate     184     74     278     181  
  Investment Management     44     44     98     83  
   
 
 
 
 
Total Mexico     431     290     769     554  
   
 
 
 
 
Europe, Middle East and Africa (EMEA)                          
  Consumer(4)     601     155     805     304  
  Corporate(4)     661     329     925     568  
  Investment Management     7     2     16     (1 )
   
 
 
 
 
Total EMEA     1,269     486     1,746     871  
   
 
 
 
 
Japan                          
  Consumer     147     195     289     371  
  Corporate     87     14     180     54  
  Investment Management     24     20     54     37  
   
 
 
 
 
Total Japan     258     229     523     462  
   
 
 
 
 
Asia (excluding Japan)                          
  Consumer     280     198     527     384  
  Corporate     321     193     629     376  
  Investment Management     43     38     87     70  
   
 
 
 
 
Total Asia     644     429     1,243     830  
   
 
 
 
 
Latin America                          
  Consumer     50     6     94     26  
  Corporate     185     155     387     326  
  Investment Management     (6 )   10     22     21  
   
 
 
 
 
Total Latin America     229     171     503     373  
   
 
 
 
 
Proprietary Investment Activities     273     63     299     101  

Corporate/Other

 

 

(49

)

 

45

 

 

114

 

 

(27

)
   
 
 
 
 
Net Income   $ 1,144   $ 4,299   $ 6,417   $ 8,402  
   
 
 
 
 

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

(2)
Excludes Proprietary Investment Activities and Corporate/Other which are predominantly related to North America.

(3)
The 2004 second quarter includes a $4.95 billion after-tax charge related to WorldCom and Litigation Reserve Charge.

(4)
The 2004 second quarter includes a $756 million after-tax gain ($378 million in Consumer Other and $378 million in GCIB Other) related to the sale of Samba.

7


Management Summary

        Net income of $1.144 billion ($0.22 per diluted share) in the 2004 second quarter was down 73% from the 2003 second quarter. These results included a $4.95 billion after-tax charge ($0.95 per diluted share) related to a settlement on class action litigation brought on behalf of purchasers of WorldCom securities and an increase in litigation reserves. The Company has worked to put the economic impact of these matters behind it. After the WorldCom settlement payment, the Company's litigation reserve for these matters will be $6.7 billion on a pretax basis. The quarterly results also included a $756 million after-tax gain ($0.15 per diluted share) on the sale of the Company's equity investment in Samba. Revenues, net of interest expense, increased 15%, reflecting the Samba gain and growth in volumes throughout most businesses. The credit environment in which the Company is operating is the best in years and resulted in $562 million in general and specific reserve releases. Business volumes and growth were strong in the quarter.

        Earnings in the 2004 second quarter included the continued results of the 2003 acquisitions of the Sears Credit Card and Financial Products business and The Home Depot private label card portfolio, the 2004 acquisition of the consumer finance business of Washington Mutual, and the recent acquisition of KorAm Bank in Korea. The Company achieved double-digit income growth in seven of its nine products as well as in each of its international regions. Growth was aided by the rapid expansion of the U.S. economy, as household incomes continue to increase and job creation strongly revived. Trends in global growth, low inflation and low interest rates are consistent with financial conditions that remain stimulative and were favorable to the Company's business in the quarter.

        The Product results for the 2004 second quarter reflect the Company's focus on increasing customer volumes while maintaining expense discipline and the effects of the continuing improving credit environment. The Global Consumer business continued its consistent growth model with net income increasing 37%, led by Cards growth of 34%, reflecting the impact of acquisitions, controlled credit and the addition of over 6 million accounts in our international business. Retail Banking had a record quarter as loan volumes were up 14% from a year ago, while deposits increased 9% with particularly strong growth in the international operations. Consumer Finance's 14% income growth was driven by an increase of 9% in average loans.

        Capital Markets and Banking was the No. 1 Global Debt and Equity underwriter for the 11th consecutive quarter, which helped achieve a 28% increase in net income. Transaction Services income growth of 45% was driven by higher assets under custody and higher liability balances. Reduced credit costs in these businesses, including a $350 million general loan loss reserve release, helped contribute to the higher levels of net income. Private Client Services net income was up 13% from the prior year primarily due to higher recurring revenue items and higher client asset levels. The Global Investment Management business net income was up 7% from the prior-year quarter as a result of business volumes in Life Insurance and Annuities and positive operating leverage in the Private Bank, partially offset by declines in Asset Management, which experienced higher expense growth. Proprietary Investment Activities experienced higher valuations during the quarter which led, in part, to significantly higher income growth.

        During the 2004 second quarter, Citigroup completed its acquisition of KorAm Bank, the seventh-largest commercial bank in Korea, with over 200 branches across that country. The Company sold its stake in Samba and finalized its purchase of Principal Residential Mortgage. The Company will continue to reduce its stake in certain minority holdings, such as the sale of Fubon Financial and reduced holdings of Nikko Cordial.

        The Company's equity stood at more than $98 billion, with equity capital and trust preferred securities growing to over $105 billion at June 30, 2004. During the 2004 second quarter, the Company paid out $2.1 billion in dividends to its common shareholders, an increase of over 100% from the year-ago quarter. The Company maintained its well-capitalized position with a Tier 1 Capital Ratio of 8.15% at the end of the quarter.

        During the 2004 second quarter, the Company recorded unrealized losses of $2.5 billion (after-tax) in Equity from Non-owner Sources (a component of Stockholders' Equity) to reflect mark-to-market changes in the value of Available for Sale (AFS) fixed income and equity securities in accordance with SFAS 115 (see Note 9 to the Consolidated Financial Statements). Of the $2.5 billion decrease in the AFS portfolio value, $1.9 billion was associated with the Insurance businesses and Banamex. The duration of the AFS securities in the Insurance businesses is closely matched with the related insurance liabilities. The interest rate risk in the Banamex AFS portfolio closely matches the interest rate risk of the customer deposits and capital. These portfolio management practices diminish overall economic exposure to changes in the interest rate environment. The AFS unrealized losses in the 2004 second quarter correspond to sharp increases in medium-and long-term interest rates across both the U.S. and Mexican fixed income markets.

        As global economies continue to strengthen around the world, interest rates have started to rise and are expected to continue. The U.S equity markets were relatively flat for the first six months of 2004 as uncertainties concerning inflation, oil prices, elections and geopolitical risks have weighed against strong economic growth in the U.S. The Company believes it is well-positioned to benefit from its pre-eminent global reach and diversification even in the face of these uncertainties. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 62.

8


EVENTS IN 2004 and 2003

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

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

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

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

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

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

Sale of Samba Financial Group

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

Credit Reserve Releases

        During the 2004 second quarter, the Company released $562 million of reserves from its Allowance for Credit Losses reflecting the improved worldwide credit environment, reduced cash-basis loan balances and lower delinquency rates. The releases consisted of $350 million of GCIB general reserves and $212 million in Global Consumer general and specific reserves.

        The 2004 six-month period included $729 million of credit reserve releases, consisting of $500 million in GCIB and $229 million in Global Consumer.

9


Acquisition of KorAm Bank

        On April 30, 2004, Citigroup completed its tender offer to purchase all the outstanding shares of KorAm Bank (KorAm) at a price of KRW 15,500 per share in cash. In total, Citigroup has acquired 99.3% of KorAm's outstanding shares for a total of KRW 3.07 trillion ($2.73 billion). The results of KorAm are included in the Consolidated Financial Statements from May 2004 forward.

        KorAm is a leading commercial bank in Korea, with 223 domestic branches and total assets at June 30, 2004 of $37 billion. In the 2004 fourth quarter, Citigroup plans to merge its Citibank Korea Branch into KorAm. On June 25, 2004, the union employees of KorAm initiated a strike that was settled on July 12, 2004. Approximately 70% of KorAm's workers were out during that time resulting in the temporary closure of 170 of its branches.

Acquisition of Principal Residential Mortgage, Inc.

        On July 1, 2004, Citigroup completed the acquisition of Principal Residential Mortgage, Inc. (PRMI) from Acquire Principal Residential Mortgage, Inc. for $1.3 billion in cash. PRMI, one of the largest independent mortgage servicers in the United States, originates, purchases, sells and services home loans, consisting primarily of conventional, conforming, fixed-rate prime mortgages.

        The transaction includes approximately $6.6 billion in assets and also includes $137 million of franchise premium, subject to the finalization of the purchase price allocation.

Divestiture of Citicorp Electronic Financial Services Inc.

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

Acquisition of Washington Mutual Finance Corporation

        On January 9, 2004, Citigroup completed the acquisition of Washington Mutual Finance Corporation (WMF) for $1.25 billion in cash. WMF was the consumer finance subsidiary of Washington Mutual, Inc. WMF provides direct consumer installment loans and real-estate-secured loans, as well as sales finance and the sale of insurance. The acquisition includes 427 WMF offices located in 26 states, primarily in the Southeastern and Southwestern United States. WMF has more than 2,300 employees and total assets of $3.8 billion. Citicorp has guaranteed all outstanding unsecured indebtedness of WMF in connection with this acquisition. The results of WMF are included in the Consolidated Financial Statements from January 2004 forward.

Acquisition of Sears' Credit Card and Financial Products Business

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

Acquisition of The Home Depot's Private-Label Portfolio

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

10


Results of Operations

Income and Earnings Per Share

        Citigroup reported income of $1.144 billion or $0.22 per diluted share in the 2004 second quarter, both down 73%, from $4.299 billion or $0.83 in the 2003 second quarter. These results included a $4.95 billion after-tax charge, or $0.95 per diluted share, for the WorldCom and Litigation Reserve Charge. Results also included a $756 million, or $0.15 per diluted share, after-tax gain on the sale of Samba. Return on average common equity was 4.6% compared to 19.2% in the 2003 second quarter. Net income of $6.417 billion or $1.23 per diluted share for the 2004 six-month period were both down 24% from $8.402 billion or $1.62 per diluted share in the 2003 six months.

        In the 2004 second quarter, Global Consumer net income increased $825 million or 37% compared to the 2003 second quarter, while the Global Corporate and Investment Bank decreased $4.2 billion. Private Client net income increased $24 million or 13% from the second quarter of 2003, Global Investment Management grew $30 million or 7%, and Proprietary Investment Activities increased $210 million from the 2003 second quarter. For the six-month period, Global Consumer recorded a $1.3 billion or 29% increase, offset by a decrease of $3.8 billion in the Global Corporate and Investment Bank. Private Client recorded a $113 million or 33% increase from the 2003 six-month period, while Global Investment Management increased $129 million or 15% from the first half of 2003. Proprietary Investment Activities increased $198 million from the prior year's six-month period.

        See individual segment and product discussions on pages 14 - 35 for additional discussion and analysis of the Company's results of operations.

Revenues, Net of Interest Expense

        Total revenues, net of interest expense, of $22.3 billion and $43.8 billion in the 2004 second quarter and six-month period, respectively, were up $2.9 billion or 15% and $5.9 billion or 16% from the respective 2003 periods and included $1.2 billion related to the gain on sale of Samba. Global Consumer revenues were up $2.1 billion or 21% in the 2004 second quarter to $12.1 billion, and were up $3.8 billion or 20% from the 2003 six months to $23.6 billion. The increase was led by a $1.2 billion or 36% increase in Cards from the 2003 second quarter and a $2.5 billion or 37% increase from the 2003 six months, reflecting the results of the acquisitions of the Sears and Home Depot portfolios. Consumer Finance revenues increased $225 million or 9% and $353 million or 7% from the 2003 second quarter and six months, respectively, primarily reflecting the integration of the Washington Mutual consumer finance business. Retail Banking revenues increased $192 million or 5% and $523 million or 6% from the 2003 three-and six-month periods, respectively, due primarily to increased international investment product sales and growth in branch lending.

        GCIB revenues of $6.1 billion and $11.5 billion in the 2004 second quarter and six-month period, respectively, increased $627 million or 12% and $1.0 billion or 10% from the 2003 second quarter and six months, respectively. There was an increase of $88 million or 10% and $123 million or 7% in Transaction Services from the respective 2003 three- and six-month periods, primarily due to increases in securities services and cash management revenue. The increases were partially offset by a decrease in Capital Markets and Banking of $55 million from the 2003 second quarter, reflecting reduced revenues in fixed income and equity underwriting, while there was a $283 million increase from the 2003 six-month period.

        Private Client Services revenues of $1.6 billion and $3.3 billion in the 2004 second quarter and six-month period, respectively, increased $124 million or 9% and $520 million or 19% from the 2003 three- and six-month periods, respectively, due primarily to higher fee-based revenue. Global Investment Management revenues were $2.2 billion in the 2004 second quarter and $4.5 billion in the first half of 2004, up $79 million or 4% from the 2003 second quarter and $453 million or 11% from the prior-year six-month period. Life Insurance and Annuities revenues increased $61 million or 5% from the 2003 three months and $218 million or 9% from the 2003 six months, related primarily to increasing volumes and improved investment income. Asset Management noted increases of $34 million or 9% and $138 million or 19% from the 2003 three- and six-month periods, respectively. Private Bank noted a decrease of $16 million or 3% from the second quarter of 2003 but an increase of $97 million or 10% from the 2003 six-month period. Revenues from Proprietary Investment Activities in the 2004 second quarter and six-month period increased $312 million and $339 million, respectively, from the 2003 periods.

Selected Revenue Items

        Net interest revenue of $11.2 billion and $22.5 billion in the 2004 three- and six-month periods, respectively, increased $1.6 billion or 16% and $3.2 billion or 17% from the respective 2003 periods, primarily reflecting the impact of acquisitions, a changing rate environment and business volume growth in certain markets.

        Total commissions, asset management and administration fees, and other fee revenues of $6.1 billion and $12.2 billion increased by $737 million or 14% and $1.8 billion or 18% compared to the 2003 second quarter and six-month period, respectively, primarily as a result of higher Private Client Services customer activities and assets under fee-based management. Insurance premiums of $896

11


million and $1.8 billion in the 2004 three- and six-month periods, respectively, were up $57 million or 7% and $111 million or 7%, compared to a year ago primarily reflecting organic growth.

        Principal transactions revenues were $1.0 billion and $2.4 billion in the 2004 three- and six-month periods, respectively, down $269 million or 21% and $521 million or 18% from the respective year-ago periods due primarily to decreased volatility and lower FX trading. Realized gains from sales of investments were up $16 million from the second quarter of 2003 to $204 million and down $8 million to $342 million in the 2004 six-month period, primarily due to lower gains on the investment portfolio in 2004. Other revenue of $2.8 billion and $4.6 billion in the three- and six-month periods of 2004, respectively, increased $823 million and $1.2 billion from the 2003 second quarter and six-month period, respectively, primarily reflecting the $1.2 billion gain on the sale of Samba, partially offset in the quarterly comparison from decreases in revenue earned from securitization activity and SFAS 133 hedging activities in the mortgage business.

Operating Expenses

        Total operating expenses were $18.6 billion and $29.3 billion for the 2004 second quarter and six-month periods, up $8.7 billion and $9.8 billion from the comparable 2003 periods. The increases primarily reflected the $7.9 billion pretax reserve for the WorldCom and Litigation Reserve Charge and the impact of acquisitions.

        Expenses in the GCIB increased $8.0 billion from both the 2003 second quarter and six-month period, primarily due to the WorldCom and Litigation Reserve Charge. Global Consumer expenses were up 16% and 17% from the 2003 second quarter and six-month period, respectively, driven by acquisitions as well as increased marketing and advertising costs. Private Client Services expenses increased 7% and 15% from the 2003 periods primarily due to higher production-related compensation reflecting increased revenue and higher legal costs. Global Investment Management noted a 6% and 15% increase in expenses from the 2003 second quarter and six-month period, respectively, and Proprietary Investments Activities noted a 35% and 24% increase from the three- and six-month periods of 2003.

Benefits, Claims, and Credit Losses

        Benefits, claims, and credit losses were $2.4 billion and $5.5 billion in the 2004 second quarter and six-month period, down $649 million and $467 million from the respective 2003 periods. Global Consumer provisions for benefits, claims, and credit losses of $2.1 billion and $4.6 billion were up 2% and 10% from the 2003 second quarter and six months, reflecting the impact of acquisitions, partially offset by an improved credit environment which resulted in credit reserve releases.

        GCIB provision for credit losses of ($347) million in the 2004 second quarter decreased $645 million from the year-ago level, due to loan loss reserve releases resulting from the overall improvement in the credit environment.

        Corporate cash-basis loans at June 30, 2004 and 2003 were $2.6 billion and $4.2 billion, respectively, while the corporate Other Real Estate Owned (OREO) portfolio totaled $98 million and $89 million, respectively. The decrease in corporate cash-basis loans from June 30, 2003 was related to improvements in the overall credit environment, write-offs, and sales of loans in the portfolio. Corporate cash-basis loans decreased $294 million from March 31, 2004, and $800 million from December 31, 2003.

Income Taxes

        The Company's effective tax rate of 4.0% in the 2004 second quarter reflected the tax benefits for not providing U.S. income taxes on the earnings of certain foreign subsidiaries that are indefinitely invested. These benefits, among other items, were applied to the lower level of consolidated earnings in the 2004 second quarter. Without the impact of the separately-reported WorldCom and Litigation Reserve Charge and gain on sale of Samba, the 2004 second quarter effective tax rate would have been 32.6%.

        The 2003 second quarter tax rate was 31.1% and included a $94 million release of a tax reserve in Japan related to a settlement with the authorities and the benefit of indefinitely invested international earnings.

Regulatory Capital

        Total capital (Tier 1 and Tier 2) was $91.4 billion or 11.31% of net risk-adjusted assets, and Tier 1 Capital was $65.9 billion or 8.16% of net risk-adjusted assets at June 30, 2004, compared to $90.3 billion or 12.04% and $66.9 billion or 8.91%, respectively, at December 31, 2003.

12


Accounting Changes and Future Application of Accounting Standards

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

SIGNIFICANT ACCOUNTING POLICIES

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

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

13


GLOBAL CONSUMER

 
  Three Months Ended June 30,
   
  Six Months Ended June 30,
   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars

   
   
   
   
   
   
 
Revenues, net of interest expense   $ 12,072   $ 9,939   21   $ 23,571   $ 19,724   20  
Operating expenses     5,367     4,623   16     10,612     9,099   17  
Provisions for benefits, claims, and credit losses     2,111     2,064   2     4,585     4,187   10  
   
 
     
 
     
Income before taxes and minority interest     4,594     3,252   41     8,374     6,438   30  
Income taxes     1,513     999   51     2,703     2,044   32  
Minority interest, after-tax     15     12   25     30     31   (3 )
   
 
     
 
     
Net income   $ 3,066   $ 2,241   37   $ 5,641   $ 4,363   29  
   
 
     
 
     
Average Risk Capital(1)   $ 21,969             $ 21,853            
Return on Risk Capital(1)     56 %             52 %          
Return on Invested Capital(1)     23 %             22 %          
   
           
           

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

        Global Consumer reported net income of $3.066 billion and $5.641 billion in the 2004 second quarter and six months, respectively, up $825 million or 37% and $1.278 billion or 29% from the comparable 2003 periods, driven by double-digit growth across all products, including the $378 million gain on the sale of Samba. Cards net income increased $254 million or 34% in the 2004 second quarter and $517 million or 35% in the 2004 six-month period from the comparable periods of 2003, mainly reflecting the addition of the Sears, Home Depot and KorAm portfolios, an improved credit environment, and the impact of a lower effective tax rate. Retail Banking net income increased $151 million or 15% in the 2004 second quarter and $343 million or 18% in the 2004 six months from the comparable periods of 2003, primarily reflecting international growth in all regions driven by increases in wealth management products and lending, and the KorAm acquisition in Asia, combined with improved credit in North America. Consumer Finance net income increased $73 million or 14% in the 2004 second quarter and $137 million or 13% in the 2004 six months from prior-year periods, primarily reflecting growth in North America, including the acquisition of WMF, and strong international growth in all regions, partially offset by the absence of a prior-year $94 million tax release in Japan.

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

Global Consumer Net Income—Regional View

 
  Three Months Ended June 30,
   
  Six Months Ended June 30,
   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars

   
   
   
   
   
   
 
North America (excluding Mexico)   $ 1,785   $ 1,515   18   $ 3,533   $ 2,988   18  
Mexico     203     172   18     393     290   36  
EMEA     601     155   NM     805     304   NM  
Japan     147     195   (25 )   289     371   (22 )
Asia (excluding Japan)     280     198   41     527     384   37  
Latin America     50     6   NM     94     26   NM  
   
 
     
 
     
Total Net Income   $ 3,066   $ 2,241   37   $ 5,641   $ 4,363   29  
   
 
     
 
     

NM Not meaningful

        The increase in Global Consumer net income in both the 2004 second quarter and six-month period reflected growth in all regions except Japan. North America (excluding Mexico) net income grew by 18% in both the 2004 second quarter and six months, reflecting the impact of acquisitions and an improved credit environment, resulting in lower net credit losses and credit reserve releases. Mexico contributed net income growth of $31 million and $103 million in the 2004 second quarter and six months, respectively, driven by the impact of loan growth in Cards and lower funding costs. EMEA net income grew $446 million and $501 million in the 2004 second quarter and six months, primarily reflecting the $378 million gain on the sale of Samba in the 2004 second quarter, which is reflected in Consumer Other, and higher wealth management sales and lending in Retail Banking. Income in Japan declined 25% and 22% in the 2004 second quarter and six months, respectively, primarily reflecting the absence of a $94 million prior-year tax release in

14


Consumer Finance. Growth in Asia of $82 million or 41% and $143 million or 37% in the 2004 second quarter and six month periods, respectively, was mainly due to higher wealth management sales in Retail Banking, improved credit and growth in Cards, and the impact of KorAm. The increase in Latin America of $44 million in the 2004 second quarter and $68 million in the 2004 six months was mainly due to improvements in Argentina, including the absence of prior-year repositioning costs in both Retail Banking and Consumer Finance.

Cards

 
  Three Months Ended June 30,
   
  Six Months Ended June 30,
   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
In millions of dollars

   
   
   
   
   
   
Revenues, net of interest expense   $ 4,467   $ 3,296   36   $ 9,065   $ 6,602   37
Operating expenses     1,964     1,463   34     3,902     2,909   34
Provision for credit losses     1,015     678   50     2,243     1,452   54
   
 
     
 
   
Income before taxes and minority interest     1,488     1,155   29     2,920     2,241   30
Income taxes     475     396   20     926     764   21
Minority interest, after-tax     1     1       2     2  
   
 
     
 
   
Net income   $ 1,012   $ 758   34   $ 1,992   $ 1,475   35
   
 
     
 
   
Average assets (in billions of dollars)   $ 94   $ 62   52   $ 95   $ 65   46
Return on assets     4.33 %   4.90 %       4.22 %   4.58 %  
   
 
     
 
   

Average Risk Capital(1)

 

$

5,439

 

 

 

 

 

 

$

5,476

 

 

 

 

 
Return on Risk Capital(1)     75 %             73 %        
Return on Invested Capital(1)     25 %             24 %        
   
           
         

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

        Cards reported net income of $1.012 billion and $1.992 billion in the 2004 second quarter and six months, respectively, up $254 million or 34% and $517 million or 35% from the 2003 periods. North America cards reported net income of $850 million and $1.682 billion in the 2004 second quarter and six months, respectively, up $201 million or 31% and $415 million or 33% from the 2003 periods, mainly reflecting the Sears and Home Depot acquisitions, an improved credit environment including the impact of a $60 million credit reserve release, higher sales, and the benefit of a lower effective tax rate. International cards net income of $162 million and $310 million in the 2004 second quarter and six months, respectively, increased 49% from both the 2003 second quarter and six-month period, reflecting receivables growth, improved credit, a lower effective tax rate and the addition of KorAm.

        As shown in the following table, average managed loans grew 22% in both the 2004 second quarter and six months, reflecting growth of 21% in North America in both periods and 31% and 27%, respectively, in International Cards. In North America, the addition of the Sears and Home Depot portfolios and growth in Mexico were partially offset by a decline in introductory promotional rate balances that was driven by a change in account acquisition marketing strategies in 2003, as well as the sale of $1.7 billion of non-strategic portfolios in 2003. International Cards growth reflected growth in all regions led by Asia and EMEA, which included the addition of KorAm and Diners Club Europe, respectively, and the benefit of strengthening currencies.

        Total card sales were $87.0 billion and $166.1 billion in the 2004 second quarter and six months, respectively, up 27% and 24% from the 2003 periods. North America sales were up 24% and 22% over the prior-year quarter and six months to $74.3 billion and $142.1 billion, respectively, reflecting the impact of acquisitions and higher purchase sales. International Cards sales grew 41% and 36% over the prior-year quarter and six months to $12.7 billion and $24.0 billion, reflecting broad-based growth led by Asia and EMEA, again reflecting the addition of KorAm and Diners Club Europe, respectively, and the benefit of strengthening currencies.

 
  Three Months Ended June 30,
   
  Six Months Ended June 30,
   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In billions of dollars

   
   
   
   
   
   
 
Sales                                  
  North America   $ 74.3   $ 59.7   24   $ 142.1   $ 116.8   22  
  International     12.7     9.0   41     24.0     17.6   36  
   
 
     
 
     
Total Sales   $ 87.0   $ 68.7   27   $ 166.1   $ 134.4   24  

Average managed loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  North America   $ 136.9   $ 112.7   21   $ 138.0   $ 114.0   21  
  International     15.4     11.8   31     14.9     11.7   27  
   
 
     
 
     
Total average managed loans   $ 152.3   $ 124.5   22   $ 152.9   $ 125.7   22  

Average securitized receivables

 

 

(75.6

)

 

(71.1

)

(6

)

 

(75.8

)

 

(69.4

)

(9

)
Average loans held-for-sale     (2.1 )   (3.0 ) 30     (1.1 )   (4.1 ) 73  
   
 
     
 
     

Total on-balance sheet average loans

 

$

74.6

 

$

50.4

 

48

 

$

76.0

 

$

52.2

 

46

 
   
 
     
 
     

15


        Revenues, net of interest expense, of $4.467 billion and $9.065 billion in the 2004 second quarter and six months, respectively, increased $1.171 billion or 36% and $2.463 billion or 37% from the 2003 periods. Revenue growth in North America of $997 million or 37% and $2.149 billion or 40% in the 2004 second quarter and six months was mainly due to the impact of acquisitions, net interest margin expansion, the benefit of increased purchase sales, and increased loans in Mexico. Revenue growth in North America was partially offset by increased credit losses on securitized receivables (which are recorded as a contra-revenue item after receivables are securitized), the absence of a 2003 second quarter gain from the sale of $1.7 billion in non-strategic portfolios, and the absence of net gains of $69 million and $215 million in the 2003 second quarter and six months resulting from changes in estimates related to the timing of revenue recognition on securitized portfolios. Revenue growth in International Cards of $174 million or 29% and $314 million or 26% in the 2004 second quarter and six months was mainly driven by loan and sales growth in all regions, the additions of Diners Club Europe and KorAm, and the benefit of foreign currency translation.

        Operating expenses in the 2004 second quarter and six months of $1.964 billion and $3.902 billion were $501 million or 34% and $993 million or 34% higher than the prior-year periods, primarily reflecting the impact of acquisitions and foreign currency translation, combined with increased marketing and advertising costs in both North America and International Cards.

        The provision for credit losses in the 2004 second quarter and six months was $1.015 billion and $2.243 billion, respectively, compared to $678 million and $1.452 billion in the prior-year periods. The increase in the provision for credit losses was mainly in North America and reflected the impact of the Sears and Home Depot acquisitions. These acquisitions more than offset a decline in net credit losses and the release of credit reserves of $69 million resulting from the improved credit environment, as well as the impact of increased levels of securitized receivables.

        The securitization of credit card receivables is limited to the CitiCards business within North America. At June 30, 2004, securitized credit card receivables were $76.4 billion, compared to $72.0 billion at June 30, 2003. Credit card receivables held-for-sale were $6.3 billion at June 30, 2004 compared to $3.0 billion a year ago. 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, commission and fees revenue, and credit losses on loans are instead reported as commission and fees 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 transaction may vary depending on the credit performance of the securitized receivables. However, Citigroup's exposure to credit losses on the securitized receivables is limited to the cash flows from the receivables.

        Including securitized receivables and receivables held-for-sale, managed net credit losses in the 2004 second quarter were $2.373 billion, with a related loss ratio of 6.27%, compared to $2.554 billion and 6.69% in the 2004 first quarter, and $1.887 billion and 6.08% in the 2003 second quarter. The increase in the ratio from the prior-year second quarter reflected the addition of the Sears portfolio, which impacted both the bankcard and private label portfolios in North America, as well as the impact of lower introductory promotional rate balances, and was partially offset by the improved credit environments in North America and the International regions, led by Asia. The decrease in the ratio versus the 2004 first quarter primarily reflects the improved credit environment.

        Loans delinquent 90 days or more on a managed basis were $2.808 billion or 1.82% of loans at June 30, 2004, compared to $3.152 billion or 2.08% at March 31, 2004 and $2.313 billion or 1.88% at June 30, 2003. The net impact of acquisitions was more than offset by the improved credit environment in driving the declines versus both the prior year and the prior quarter.

Consumer Finance

 
  Three Months Ended June 30,
   
  Six Months Ended June 30,
   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars

   
   
   
   
   
   
 
Revenues, net of interest expense   $ 2,677   $ 2,452   9   $ 5,365   $ 5,012   7  
Operating expenses     873     835   5     1,796     1,700   6  
Provisions for benefits, claims, and credit losses     894     957   (7 )   1,810     1,887   (4 )
   
 
     
 
     
Income before taxes     910     660   38     1,759     1,425   23  
Income taxes     316     139   NM     598     401   49  
   
 
     
 
     
Net income   $ 594   $ 521   14   $ 1,161   $ 1,024   13  
   
 
     
 
     
Average assets (in billions of dollars)   $ 110   $ 105   5   $ 111   $ 105   6  
Return on assets     2.17 %   1.99 %     $ 2.10 % $ 1.97 %    
   
 
     
 
     

Average Risk Capital(1)

 

$

3,798

 

 

 

 

 

 

$

3,754

 

 

 

 

 

 
Return on Risk Capital(1)     63 %             62 %          
Return on Invested Capital(1)     21 %             21 %          
   
           
           

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

NM Not meaningful

16


        Consumer Finance reported net income of $594 million and $1.161 billion in the 2004 second quarter and six months, respectively, up $73 million or 14% and $137 million or 13% from the comparable 2003 periods, principally reflecting growth in North America, including the acquisition of WMF, and strong international growth in all regions, except for a decline in Japan. The decline in Japan resulted from the absence of a $94 million prior-year tax reserve release related to a settlement with tax authorities.

 
  Three Months Ended June 30,
   
  Six Months Ended June 30,
   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
In billions of dollars

   
   
   
   
   
   
Average loans                                
Real estate-secured loans   $ 56.7   $ 51.7   10   $ 56.6   $ 51.4   10
Personal     24.4     22.2   10     24.5     22.4   9
Auto     11.5     11.1   4     11.5     11.0   5
Sales finance and other     5.2     4.8   8     5.4     4.5   20
   
 
     
 
   
Total average loans   $ 97.8   $ 89.8   9   $ 98.0   $ 89.3   10
   
 
     
 
   

        As shown in the preceding table, average loans grew $8.0 billion or 9% compared to the 2003 second quarter, reflecting growth in North America of $7.8 billion. North American growth reflected the addition of WMF, which contributed $3.8 billion in average loans, and growth in real estate-secured and auto loans. Growth in the International markets was driven by real estate-secured and personal loans in both EMEA and Asia, and included the impact of strengthening currencies. In Japan, average loans in both the 2004 second quarter and six-month period declined 5% from the comparable 2003 periods, as the benefit of foreign currency translation was more than offset by the impact of higher pay-downs, reduced loan demand, and tighter underwriting standards.

        As shown in the following table, the average net interest margin of 10.19% in the 2004 second quarter increased 11 basis points from the 2003 second quarter, reflecting increases in both North America and International Consumer Finance. In North America, the average net interest margin was 8.52% in the 2004 second quarter, increasing 12 basis points from the prior-year quarter, as the benefit of lower cost of funds and the addition of WMF was partially offset by lower yields. The decline in yields in North America reflected the lower interest rate environment and the continued shift to higher-quality credits, particularly in the auto loan business. The average net interest margin for International Consumer Finance was 16.33% in the 2004 second quarter, increasing 64 basis points from the prior-year quarter, primarily driven by margin expansion in EMEA and Asia due to lower funding costs and improved yields, and improvement in Japan. The increase in Japan primarily resulted from fewer adjustments and refunds of interest, and lower funding costs.

 
  Three Months Ended June 30,
   
 
  2004
  2003
  Change
Average Net Interest Margin            
North America   8.52 % 8.40 % 12 bps
International   16.33 % 15.69 % 64 bps
Total   10.19 % 10.08 % 11 bps
   
 
 

        Revenues, net of interest expense, of $2.677 billion and $5.365 billion in the 2004 second quarter and six months, respectively, increased $225 million or 9% and $353 million or 7% from the prior-year periods. Revenue in North America increased $181 million or 11% and $381 million or 12% from the 2003 second quarter and six-month period, respectively, primarily driven by the acquisition of WMF and growth in receivables, partially offset by declines in insurance-related revenue. Revenue in International Consumer Finance increased $44 million or 5% from the 2003 second quarter, mainly due to growth in EMEA and Asia, including the impact of foreign currency translation, partially offset by a decline in Japan due to lower volumes. International Consumer Finance revenue for the 2004 six-month period declined $28 million or 2% from the prior year, mainly driven by lower volumes and spreads in Japan, partially offset by the benefit of foreign currency translation and growth in EMEA and Asia.

        Operating expenses of $873 million and $1.796 billion in the 2004 second quarter and six months, respectively, increased $38 million or 5% and $96 million or 6% from the prior-year periods. Operating expenses in North America increased $24 million or 5% and $74 million or 7%, respectively, from the prior-year periods primarily due to the acquisition of WMF. In International Consumer Finance, operating expenses increased $14 million or 4% from the prior-year quarter and $22 million or 3% from the prior-year six months, reflecting the impact of foreign currency translation, volume growth and front office expansion in Asia and EMEA, partially offset by lower operating expenses in Japan reflecting expense savings from office closings, headcount reductions and the absence of prior-year repositioning costs.

        The provisions for benefits, claims, and credit losses were $894 million in the 2004 second quarter, down from $916 million in the 2004 first quarter and $957 million in the 2003 second quarter, as decreases in the provision for credit losses in Japan due to lower bankruptcies, and improved credit conditions in the U.S., were partially offset by the impact of the WMF acquisition. Net credit losses and the related loss ratio were $857 million and 3.52% in the 2004 second quarter, compared to $870 million and 3.57% in the 2004 first quarter and $897 million and 4.01% in the 2003 second quarter. In North America, the net credit loss ratio of 2.69% in the 2004 second quarter was down from 2.79% in the 2004 first quarter and 2.98% in the 2003 second quarter, reflecting improvements in the real estate and auto businesses, partially offset by the impact of WMF. The net credit loss ratio for International Consumer Finance was 6.57% in the 2004 second quarter, up from 6.31% in the 2004 first quarter and down from 7.43% in the 2003 second quarter. The

17


increase from the prior quarter was primarily due to the impact on the ratio of lower loan volumes in Japan. The decrease in the ratio from the prior-year quarter primarily reflected improved conditions in Japan, where lower bankruptcy losses were partially offset by the impact on the ratio of lower loan volumes.

        Loans delinquent 90 days or more were $1.948 billion or 1.96% of loans at June 30, 2004, compared to $2.127 billion or 2.15% at March 31, 2004 and $2.182 billion or 2.41% a year ago. The decrease in the delinquency ratio versus the prior year and prior quarter was mainly due to improvements in North America.

Retail Banking

 
  Three Months Ended June 30,
   
  Six Months Ended June 30,
   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars

   
   
   
   
   
   
 
Revenues, net of interest expense   $ 4,371   $ 4,179   5   $ 8,600   $ 8,077   6  
Operating expenses     2,451     2,241   9     4,723     4,343   9  
Provisions for benefits, claims, and credit losses     202     429   (53 )   532     848   (37 )
   
 
     
 
     
Income before taxes and minority interest     1,718     1,509   14     3,345     2,886   16  
Income taxes     548     493   11     1,039     922   13  
Minority interest, after-tax     14     11   27     28     29   (3 )
   
 
     
 
     
Net income   $ 1,156   $ 1,005   15   $ 2,278   $ 1,935   18  
   
 
     
 
     
Average assets (in billions of dollars)   $ 259   $ 230   13   $ 249   $ 229   9  
Return on assets     1.80 %   1.75 %       1.84 %   1.70 %    
   
 
     
 
     

Average Risk Capital(1)

 

$

12,732

 

 

 

 

 

 

$

12,623

 

 

 

 

 

 
Return on Risk Capital(1)     37 %             36 %          
Return on Invested Capital(1)     18 %             18 %          
   
           
           

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

        Retail Banking reported net income of $1.156 billion and $2.278 billion in the 2004 second quarter and six months, respectively, up $151 million or 15% and $343 million or 18% from the 2003 periods. The increase in Retail Banking was driven by growth in International Retail Banking of $135 million or 50% and $232 million or 43% in the 2004 second quarter and six months, respectively, reflecting growth across all regions. Net income in North America increased $16 million or 2% and $111 million or 8% in the 2004 second quarter and six months, respectively, primarily due to improved credit costs.

 
  Three Months Ended June 30,
   
  Six Months Ended June 30,
   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
In billions of dollars

   
   
   
   
   
   
Average customer deposits                                
  North America(1)   $ 157.4   $ 154.1   2   $ 155.7   $ 153.5   1
  International     102.1     84.3   21     99.2     82.9   20
   
 
     
 
   
Total average customer deposits(1)   $ 259.5   $ 238.4   9   $ 254.9   $ 236.4   8

Average loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  North America   $ 133.7   $ 122.1   10   $ 131.0   $ 123.4   6
  International     45.8     35.6   29     42.0     35.2   19
   
 
     
 
   
Total average loans   $ 179.5   $ 157.7   14   $ 173.0   $ 158.6   9
   
 
     
 
   

(1)
Includes bank deposit program balances generated from the Smith Barney channel managed by Citibanking North America.

        As shown in the preceding table, Retail Banking grew average customer deposits and average loans compared to 2003. Average customer deposit growth in North America primarily reflected increases in both higher-margin demand and savings deposits partially offset by declines in time and mortgage escrow deposits. Average loan growth in North America reflected increased mortgages and student loans in Consumer Assets, partially offset by a decline in CitiCapital resulting from the run-off of non-core portfolios and the sale of the $1.2 billion CitiCapital Fleet Services portfolio in 2003. In the International markets, average customer deposits grew 21% from the prior-year quarter driven by growth in Asia, EMEA and Japan and the impact of foreign currency translation. The growth in Asia included the impact of the KorAm acquisition, which added $6.7 billion in average customer deposits, while the growth in EMEA was primarily in Germany. International Retail Banking average loans increased 29% from the prior-year quarter due to growth in Asia and EMEA, and included the impacts of the KorAm acquisition and foreign currency translation. Growth in both average loans and average customer deposits was negatively impacted by volume declines in Latin America, largely reflecting the impact of strategic repositioning in the area.

        As shown in the following table, revenues, net of interest expense, of $4.371 billion and $8.600 billion in the 2004 second quarter and six months, respectively, increased $192 million or 5% and $523 million or 6% from the 2003 periods. The growth in revenues

18


reflected an increase in International Retail Banking, partially offset by a decline in North America. Revenues in North America decreased $88 million or 3% compared to the prior-year quarter and $6 million in the six-month comparison. The decline in the 2004 second quarter in North America primarily reflected lower results in Consumer Assets and Mexico, offset by increases in CitiCapital, Primerica and Citibanking North America. The decline in Consumer Assets primarily resulted from lower securitization revenues, including the adoption of SAB 105, resulting in a one-time decrease in revenues of $35 million, and an $80 million net pretax loss on mortgage servicing hedge ineffectiveness resulting from the volatile rate environment. In Mexico, revenues declined due to foreign currency translation and the absence of prior-year benefits resulting from revised estimates of reserves related to certain investments, partially offset by the gain on the sale of a mortgage portfolio and the impact of higher deposit volumes. The increase in CitiCapital primarily resulted from the reclassification of operating leases from loans to other assets and the related operating lease depreciation expense from revenue to expense. This reclassification increased both revenues and expenses by $135 million pretax. The increase in Primerica resulted from increased life insurance and investment fee revenues, while in Citibanking North America the increase was driven by the benefit of higher deposit and loan volumes, partially offset by lower net funding spreads. The decline in North America Retail Banking revenues in the six-month period was driven by a decline in Consumer Assets, primarily from the lower securitization revenues, including the SAB 105 impact, and the hedge ineffectiveness, offset by increases in the remaining North America Retail Banking products.

        International Retail Banking revenues increased $280 million or 23% and $529 million or 22% in the 2004 second quarter and six-month period, respectively, reflecting growth in all regions and the impact of strengthening currencies. Revenue increases in Asia benefited from the KorAm acquisition, increased investment product sales, favorable foreign currency translation and growth in branch lending. Growth in EMEA was driven by improved investment product sales and increased branch lending, mainly in Germany, as well as the impact of favorable foreign currency translation, while the Latin America increase primarily related to interest rate movements in Argentina. The increase in Japan was related to increased deposit and investment product sales.

 
  Three Months Ended June 30,
   
  Six Months Ended June 30,
   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars

   
   
   
   
   
   
 
Revenues, net of interest expense                                  
  Citibanking North America, Consumer Assets and CitiCapital   $ 1,858   $ 1,937   (4 ) $ 3,674   $ 3,732   (2 )
  Primerica Financial Services     529     515   3     1,060     1,030   3  
  Mexico     479     502   (5 )   956     934   2  
   
 
     
 
     
North America     2,866     2,954   (3 )   5,690     5,696    
   
 
     
 
     
  EMEA     721     585   23     1,406     1,133   24  
  Japan     119     113   5     244     221   10  
  Asia     540     418   29     1,007     809   24  
  Latin America     125     109   15     253     218   16  
   
 
     
 
     
International     1,505     1,225   23     2,910     2,381   22  
   
 
     
 
     
Total revenues, net of interest expense   $ 4,371   $ 4,179   5   $ 8,600   $ 8,077   6  
   
 
     
 
     

        Operating expenses in the 2004 second quarter and six months increased $210 million or 9% and $380 million or 9%, respectively, from the comparable 2003 periods. In North America, expenses grew $130 million or 8% and $218 million or 7% from the 2003 second quarter and six months, respectively. The increase primarily reflected the impact of the operating lease reclassification in CitiCapital of $135 million and higher volume-related expenses in Citibanking North America including increased advertising and marketing costs, partially offset by declines in Mexico. Mexico's expenses declined in the 2004 second quarter primarily due to foreign currency translation, and was partially offset by increased legal costs in the 2004 six-month period. International Retail Banking operating expenses increased $80 million or 12% and $162 million or 12% from the 2003 second quarter and six months, respectively, mainly reflecting the addition of KorAm, the impact of foreign currency translation, and increased investments for branch expansion, technology and advertising and marketing, partially offset by the absence of prior-year repositioning costs, mainly in Latin America and, for the six-month period, in EMEA.

        The provisions for benefits, claims, and credit losses were $202 million and $532 million in the 2004 second quarter and six months, respectively, down $227 million or 53% and $316 million or 37% from the comparable periods in 2003. The declines were driven by credit reserve releases of $138 million in the 2004 second quarter and lower net credit losses in CitiCapital, Consumer Assets, Citibanking North America, Asia and Latin America. An increase in credit costs for EMEA was primarily driven by Germany. Net credit losses (excluding Commercial Markets) were $176 million and the related loss ratio was 0.51% in the 2004 second quarter, compared to $155 million and 0.49% in the 2004 first quarter, and $165 million and 0.58% in the 2003 second quarter. The increase in credit losses from the 2004 first quarter was mainly driven by lower recoveries in Mexico. The decrease in the net credit loss ratio (excluding Commercial Markets) from the 2003 second quarter was primarily due to improvements in all regions except EMEA and Mexico. The increase in EMEA primarily resulted from increases in Germany. Commercial Markets net credit losses were $31 million and the related loss ratio was 0.31% in the 2004 second quarter, compared to $50 million and 0.51% in the 2004 first quarter, and $139 million and 1.30% in the 2003 second quarter. The 2004 second quarter improvement in Commercial Markets net credit

19


losses from both the 2004 first quarter and 2003 second quarter was due to declines in CitiCapital, Mexico and Citibanking North America.

        Loans delinquent 90 days or more (excluding Commercial Markets) were $3.576 billion or 2.46% of loans at June 30, 2004, compared to $3.698 billion or 2.86% at March 31, 2004, and $3.706 billion or 3.29% a year ago. Compared to a year ago, the decrease in delinquent loans resulted from improvements in Consumer Assets, Asia and Latin America, partially offset by an increase in Germany, which included the impact of foreign currency translation. The decline in Consumer Assets mainly reflected a lower level of buybacks from GNMA pools where credit risk is maintained by government agencies. The decline in Asia was mainly in Taiwan and was partially offset by the impact of KorAm.

        Cash-basis loans in Commercial Markets were $1.173 billion or 2.96% of loans at June 30, 2004, $1.213 billion or 3.11% at March 31, 2004, and $1.165 billion or 2.76% at June 30, 2003. Cash-basis loans improved from the prior quarter primarily due to improvements in Mexico and CitiCapital, where the business continues to work through the liquidation of non-core portfolios. These declines were partially offset by increases in Citibanking North America and EMEA. Compared to the 2003 second quarter, the increase in cash-basis loans reflected increases in EMEA, mainly in Germany, and in Mexico, and was partially offset by improvements in CitiCapital and the other international regions.

        Average assets of $259 billion and $249 billion in the 2004 second quarter and six months, respectively, increased $29 billion and $20 billion from the comparable periods of 2003. The increase in average assets primarily reflected the impact of the KorAm acquisition and growth in mortgages, partially offset by a reduction in CitiCapital due to the liquidation of non-core portfolios.

Other Consumer

 
  Three Months Ended June 30,
  Six Months Ended June 30,
 
 
  2004
  2003
  2004
  2003
 
In millions of dollars

   
   
   
   
 
Revenues, net of interest expense   $ 557   $ 12   $ 541   $ 33  
Operating expenses     79     84     191     147  
   
 
 
 
 
Income before taxes (benefits)     478     (72 )   350     (114 )
Income taxes (benefits)     174     (29 )   140     (43 )
   
 
 
 
 
Net income (loss)   $ 304   $ (43 ) $ 210   $ (71 )
   
 
 
 
 

        Other Consumer—which includes certain treasury and other unallocated staff functions, global marketing and other programs—reported income of $304 million and $210 million in the 2004 second quarter and six months, respectively, compared to losses of $43 million and $71 million in the comparable 2003 periods. The increase of $347 million and $281 million in the 2004 second quarter and six months, respectively, was primarily due to a $378 million after-tax gain related to the sale of Samba in the 2004 second quarter. The increases were partially offset by lower treasury results, including the impact of higher capital funding costs, and for the six-month period, an increase in legal reserves.

20


GLOBAL CORPORATE AND INVESTMENT BANK

 
  Three Months Ended June 30,
   
  Six Months Ended June 30,
   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
 
  In millions of dollars

Revenues, net of interest expense   $ 6,064   $ 5,437   12   $ 11,535   $ 10,523   10
Operating expenses     11,148     3,186   NM     14,167     6,136   NM
Provision for credit losses     (347 )   298   NM     (407 )   414   NM
   
 
     
 
   
Income (loss) before taxes and minority
    interest
    (4,737 )   1,953   NM     (2,225 )   3,973   NM
Income taxes (benefit)     (1,951 )   597   NM     (1,162 )   1,211   NM
Minority interest, after-tax     20     12   67     36     17   NM
   
 
     
 
   
Net income (loss)   $ (2,806 ) $ 1,344   NM   $ (1,099 ) $ 2,745   NM
   
 
     
 
   
Average Risk Capital(1)   $ 18,810             $ 17,546          
Return on Risk Capital(1)     (60 )%             (13 )%        
Return on Invested Capital(1)     (48 )%             (10 )%        
   
           
         

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

NM Not meaningful

        GCIB reported a net loss of $2.806 billion and $1.099 billion in the 2004 second quarter and six months, down $4.150 billion and $3.844 billion from the 2003 second quarter and six months, respectively. The 2004 second quarter reflects a decrease of $4.559 billion in Other Corporate from the 2003 second quarter, reflecting the $4.95 billion WorldCom and Litigation Reserve Charge, partially offset by a $378 million after-tax gain on the sale of Samba and by increases of $328 million or 28% in Capital Markets and Banking and $81 million or 45% in Transaction Services. The 2004 six months reflects a decrease of $4.570 billion in Other Corporate, offset by increases of $602 million or 25% in Capital Markets and Banking and $124 million or 33% in Transaction Services. The increase in the average risk capital is due largely to the impact on operational risk capital of the WorldCom and Litigation Reserve Charge, the acquisition of KorAm, as well as higher credit volume.

        Capital Markets and Banking net income of $1.502 billion and $2.979 billion in the 2004 second quarter and six months, respectively, increased $328 million or 28% and $602 million or 25% from the 2003 periods. The increase in the 2004 second quarter is primarily due to a lower provision for credit losses and increases in Fixed Income Markets and Lending revenue, partially offset by declines in Investment Banking and Equity Markets revenues. The increase in the 2004 six months primarily reflects a lower provision for credit losses as well as increases in Fixed Income Markets, Lending, and Equity Markets revenues, partially offset by decreases in Investment Banking revenues. Expenses in both comparative periods were essentially unchanged.

        Transaction Services net income of $261 million and $495 million in the 2004 second quarter and six months increased $81 million or 45% from the 2003 second quarter and $124 million or 33% from the 2003 six months, respectively. The increases in net income in 2004 were primarily due to lower provision for credit losses, higher revenue reflecting growth in assets under custody and liability balances, and improved spreads, partially offset by higher expenses.

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

GCIB Net Income—Regional View

 
  Three Months Ended June 30,
   
  Six Months Ended June 30,
   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
 
  In millions of dollars

North America (excluding Mexico)   $ (4,244 ) $ 579   NM   $ (3,498 ) $ 1,240   NM
Mexico     184     74   NM     278     181   54
EMEA     661     329   NM     925     568   63
Japan     87     14   NM     180     54   NM
Asia (excluding Japan)     321     193   66     629     376   67
Latin America     185     155   19     387     326   19
   
 
 
 
 
 
Total Net Income   $ (2,806 ) $ 1,344   NM   $ (1,099 ) $ 2,745   NM
   
 
 
 
 
 

NM Not meaningful

21


        GCIB net income decreased in the 2004 second quarter and six months primarily as a result of the WorldCom and Litigation Reserve Charge in North America (excluding Mexico), partially offset by increases in EMEA, Asia (excluding Japan) and Mexico. EMEA net income increased $332 million in the 2004 second quarter and $357 million in the 2004 six months primarily due to the $378 million after-tax gain on the sale of Samba. Asia (excluding Japan) net income increased $128 million in the 2004 second quarter, primarily due to loan loss reserve releases, as a result of improving credit quality, and the acquisition of KorAm. The increase in Asia (excluding Japan) net income of $253 million in the 2004 six months was also due to increases in Fixed Income (mainly in global distressed debt trading) and Equities (mainly in derivatives and cash trading), and strong foreign exchange trading results positively impacted by the weakening of the U.S. dollar. Japan net income increased $73 million and $126 million in the 2004 second quarter and six months, respectively, due to increases in Equities and Investment Banking. Mexico net income increased $110 million and $97 million in the 2004 second quarter and six months, respectively, primarily due to loan loss reserve releases resulting from improving credit quality.

Capital Markets and Banking

 
  Three Months Ended June 30,
   
  Six Months Ended
June 30,

   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
In millions of dollars

   
   
   
   
   
   
Revenues, net of interest expense   $ 4,495   $ 4,550   (1 ) $ 9,026   $ 8,743   3
Operating expenses     2,537     2,546       4,891     4,900  
Provision for credit losses     (276 )   286   NM     (302 )   393   NM
   
 
     
 
   
Income before taxes and minority interest     2,234     1,718   30     4,437     3,450   29
Income taxes     713     532   34     1,424     1,056   35
Minority interest, after-tax     19     12   58     34     17   100
   
 
     
 
   
Net income   $ 1,502   $ 1,174   28   $ 2,979   $ 2,377   25
   
 
     
 
   
Average Risk Capital(1)   $ 17,470             $ 16,245          
Return on Risk Capital(1)     35 %             37 %        
Return on Invested Capital(1)     27 %             29 %        
   
           
         

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

NM Not meaningful

        Capital Markets and Banking net income of $1.502 billion and $2.979 billion in the 2004 second quarter and six months, respectively, increased $328 million or 28% and $602 million or 25% from the 2003 periods. The increase in the 2004 second quarter is primarily due to a lower provision for credit losses and increases in Fixed Income Markets and Lending revenue, partially offset by declines in Investment Banking and Equity Markets revenues. The increase in the 2004 six months primarily reflects a lower provision for credit losses as well as increases in Fixed Income Markets, Lending, and Equity Markets revenues, partially offset by decreases in Investment Banking revenues. Expenses in both comparative periods were essentially unchanged.

        Revenues, net of interest expense, of $4.495 billion and $9.026 billion in the 2004 second quarter and six months decreased $55 million or 1% from the 2003 second quarter and increased $283 million or 3% from the 2003 six months, respectively. Revenues decreased in the 2004 second quarter driven by declines in Investment Banking and Equity Markets, partially offset by increases in Fixed Income Markets and Lending. Investment Banking's decline primarily reflects reduced activity in fixed income and equity underwriting, partially offset by increases in advisory and other fees, primarily higher M&A. The Equity Markets decline reflects weak derivative activity, due to declines in volatility, and decreases in convertibles reflecting rising interest rates and widening spreads. The Fixed Income Markets increase is primarily driven by gains on interest rate hedges on accrual products, higher commodities, and increases in municipals and mortgage trading. Lending increased primarily due to the absence of prior-year losses in credit derivatives (which serve as an economic hedge for the loan portfolio) and the acquisition of KorAm.

        The increase in revenues in the 2004 six months was driven by increases in Fixed Income Markets, Lending, and Equity Markets, partially offset by decreases in Investment Banking. Fixed Income Markets increased primarily due to higher commodities, gains on interest rate hedges on accrual products, and increases in municipals as well as distressed debt and mortgage trading. Lending's increase primarily reflects the absence of prior-year losses on credit derivatives and the acquisition of KorAm. The Equity Markets increase is primarily driven by higher derivatives and cash trading, partially offset by declines in convertibles. Investment Banking declined primarily due to lower fixed income underwriting, partially offset by increases in equity underwriting and advisory and other fees, primarily higher M&A.

        Operating expenses of $2.537 billion and $4.891 billion in the 2004 second quarter and six months were basically unchanged from the 2003 periods primarily due to lower compensation and benefits expense (primarily reflecting lower incentive compensation accrual), partially offset by the acquisition of KorAm.

22


        The provision for credit losses was ($276) million in the 2004 second quarter and ($302) million in the 2004 six months, down $562 million and $695 million, respectively, from the 2003 periods primarily due to loan loss reserve releases as a result of improving credit quality, and lower credit losses in the power and energy industry, Argentina and Brazil. The current quarter included the release of $276 million in loan loss reserves, which consisted of releases of $158 million in Mexico, $59 million in Latin America, $36 million in Asia, $13 million in Japan and $10 million in EMEA.

        Cash-basis loans were $2.501 billion at June 30, 2004, compared to $2.811 billion at March 31, 2004, $3.263 billion at December 31, 2003, and $3.691 billion at June 30, 2003. Cash-basis loans net of write-offs decreased $1.190 billion from June 30, 2003, primarily due to decreases to borrowers in the telecommunications and power and energy industries and charge-offs against reserves as well as paydowns from corporate borrowers in Argentina, Mexico, Hong Kong, and New Zealand, partially offset by increases in Korea reflecting the acquisition of KorAm and a reclassification of cash-basis loans ($248 million) in Mexico from Transaction Services to Capital Markets and Banking. Cash-basis loans decreased $310 million from March 31, 2004, primarily due to charge-offs taken against reserves and paydowns from borrowers in the power and energy industry, Mexico, Australia and Argentina, partially offset by increases in Korea reflecting the acquisition of KorAm.

Transaction Services

 
  Three Months Ended June 30,
   
  Six Months Ended June 30,
   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
In millions of dollars

   
   
   
   
   
   
Revenues, net of interest expense   $ 984   $ 896   10   $ 1,923   $ 1,800   7
Operating expenses     692     634   9     1,350     1,259   7
Provision for credit losses     (71 )   12   NM     (105 )   21   NM
   
 
     
 
   
Income before taxes and minority interest     363     250   45     678     520   30
Income taxes and minority interest, after-tax     102     70   46     183     149   23
   
 
     
 
   
Net income   $ 261   $ 180   45   $ 495   $ 371   33
   
 
     
 
   
Average Risk Capital(1)   $ 1,340             $ 1,302          
Return on Risk Capital(1)     78 %             76 %        
Return on Invested Capital(1)     48 %             47 %        
   
           
         

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

NM Not meaningful

        Transaction Services net income of $261 million and $495 million in the 2004 second quarter and six months increased $81 million or 45% from the 2003 second quarter and $124 million or 33% from the 2003 six months, respectively. The increases in net income in 2004 were primarily due to lower provision for credit losses, higher revenue reflecting growth in assets under custody and liability balances and improved spreads, partially offset by higher expenses.

        As shown in the following table, average liability balances of $113 billion grew 18% compared to the 2003 second quarter, primarily due to increases in Asia and Europe reflecting positive flow and foreign exchange impact. Assets under custody reached $7.0 trillion, an increase of $1.4 trillion or 25% compared to the 2003 second quarter, primarily reflecting market appreciation and increases in customer volumes.

 
  Three Months Ended
June 30,

  Three Months Ended
June 30,

   
 
  %
Change

 
  2004
  2003
Liability balances (average in billions)   $ 113   $ 96   18
Assets under custody (EOP in trillions)     7.0     5.6   25

        Revenues, net of interest expense, of $984 million and $1.923 billion in the 2004 second quarter and six months increased $88 million or 10% from the 2003 second quarter and $123 million or 7% from the 2003 six months, respectively. The increases in both periods were primarily driven by growth in assets under custody and liability balances, improved spreads and new business initiatives, including the acquisition of Forum Financial during the fourth quarter of 2003 and of KorAm in the second quarter of 2004. The 2003 six-month period included gains on the early termination of intracompany deposits (which were offset in Capital Markets and Banking).

        Operating expenses of $692 million and $1.350 billion in the 2004 second quarter and six months increased $58 million or 9% from the 2003 second quarter and $91 million or 7% from the 2003 six months, respectively. Expenses increased in the 2004 periods primarily due to higher business volumes, including the effect of the acquisitions of Forum Financial and KorAm, as well as increased compensation and benefits costs.

        The provision for credit losses of $(71) and $(105) million in the 2004 second quarter and six months decreased $83 million from the 2003 second quarter and $126 million from the 2003 six months, respectively, primarily due to general loan loss reserve releases of $74 million in the 2004 second quarter and $96 million in 2004 six months as a result of improving credit quality and lower write-offs in Latin America.

23



        Cash-basis loans, which in the Transaction Services business are primarily trade finance receivables, were $118 million, $102 million, $156 million, and $513 million at June 30, 2004, March 31, 2004, December 31, 2003 and June 30, 2003, respectively. Cash-basis loans decreased $395 million from June 30, 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 of $16 million from March 31, 2004 was primarily due to an increase in cash basis loans in EMEA.

Other Corporate

 
  Three Months Ended June 30,
  Six Months Ended June 30,
 
 
  2004
  2003
  2004
  2003
 
In millions of dollars

   
 
Revenues, net of interest expense   $ 585   $ (9 ) $ 586   $ (20 )
Operating expenses     7,919     6     7,926     (23 )
   
 
 
 
 
(Loss) before taxes     (7,334 )   (15 )   (7,340 )   3  
Income tax (benefits)     (2,765 )   (5 )   (2,767 )   6  
   
 
 
 
 
Net (loss)   $ (4,569 ) $ (10 ) $ (4,573 ) $ (3 )
   
 
 
 
 

        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 $4.569 billion and $4.573 billion for the 2004 second quarter and six months, respectively, compared to a net loss of $10 million and $3 million in the 2003 second quarter and six months. The increase in Other Corporate net losses in 2004 reflects the $4.95 billion (after-tax) WorldCom and Litigation Reserve Charge, partially offset by a $378 million after-tax gain on the sale of Samba.

24


PRIVATE CLIENT SERVICES

 
  Three Months
Ended June 30,

   
  Six Months
Ended June 30,

   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars

   
   
   
   
   
   
 
Revenues, net of interest expense   $ 1,578   $ 1,454   9   $ 3,307   $ 2,787   19  
Operating expenses     1,234     1,156   7     2,554     2,228   15  
Provision for credit losses                   1   (100 )
   
 
     
 
     
Income before taxes     344     298   15     753     558   35  
Income taxes     135     113   19     293     211   39  
   
 
     
 
     
Net income   $ 209   $ 185   13   $ 460   $ 347   33  
   
 
     
 
     
Average Risk Capital(1)   $ 1,261             $ 1,260            
Return on Risk Capital(1)     67 %             73 %          
Return on Invested Capital(1)     50 %             56 %          
   
           
           

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

        Private Client Services net income of $209 million in the 2004 second quarter increased $24 million or 13% from 2003, primarily due to higher asset-based fee revenue, partially offset by increases in production-related compensation, higher legal expense, and lower transactional revenue. Net income of $460 million in the 2004 six months increased $113 million or 33% from 2003, primarily due to increases in both asset-based revenue and transactional revenue, partially offset by higher production-related compensation and legal costs.

        Revenues, net of interest expense, of $1.578 billion in the 2004 second quarter increased $124 million or 9% from the prior-year period, primarily due to increases in asset-based fee revenue reflecting higher assets under fee-based management, partially offset by decreases in transactional revenue reflecting lower customer trading volumes. Revenue, net of interest expense, of $3.307 billion for the six months ended 2004 increased $520 million or 19% from 2003, reflecting increases in both asset-based fee revenue and transactional revenue. Fee-based revenue increased $354 million or 26%, resulting from growth in assets under fee-based management. Transactional revenue increased $166 million or 12%, primarily due to increased customer trading volumes resulting in higher total commissions.

        Total assets under fee-based management were $222 billion as of June 30, 2004, up $40 billion or 22% from a year ago. Total client assets, including assets under fee-based management, of $1,087 billion in the 2004 second quarter increased $128 billion or 13% compared to the prior year, principally due to market appreciation and positive net inflows. Net inflows were $5 billion in the 2004 second quarter compared to $9 billion in the prior year. Private Client Services had 12,094 financial consultants as of June 30, 2004, compared with 12,317 as of June 30, 2003. Annualized revenue per financial consultant of $527,000 increased 12% from the prior-year quarter.

        Operating expenses of $1.234 billion in the 2004 second quarter and $2.554 billion in the 2004 six months, increased $78 million or 7% and $326 million or 15%, respectively, from the comparable 2003 periods. The increases were mainly due to higher production-related compensation reflecting increased revenue and higher legal costs.

 
  June 30, 2004
  June 30, 2003
  %
Change

In billions of dollars

   
   
   
Consulting Group and Internally Managed Accounts   $ 146   $ 121   21
Financial Consultant Managed Accounts     76     61   25
   
 
   
Total Assets under Fee-Based Management(1)   $ 222   $ 182   22
   
 
   
Private Client assets   $ 924   $ 834   11
Other Investor Assets within Citigroup Global Markets     163     125   30
   
 
   
Total Private Client Assets(1)   $ 1,087   $ 959   13
   
 
   
Annualized Revenue per Financial Consultant (in thousands of dollars)   $ 527   $ 469   12
]  
 
   

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

25


GLOBAL INVESTMENT MANAGEMENT

 
  Three Months
Ended June 30,

   
  Six Months
Ended June 30,

   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars

   
 
Revenues, net of interest expense   $ 2,157   $ 2,078   4   $ 4,504   $ 4,051   11  
Operating expenses     808     759   6     1,681     1,467   15  
Provisions for benefits, claims, and credit losses     677     724   (6 )   1,368     1,408   (3 )
   
 
     
 
     
Income before taxes and minority interest     672     595   13     1,455     1,176   24  
Income taxes     222     173   28     448     302   48  
Minority interest, after-tax     (1 )   1   NM     5     1   NM  
   
 
     
 
     
Net income   $ 451   $ 421   7   $ 1,002   $ 873   15  
   
 
     
 
     
Average Risk Capital(1)   $ 5,461             $ 5,469            
Return on Risk Capital(1)     33 %             37 %          
Return on Invested Capital(1)     20 %             22 %          
   
           
           

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

NM
Not meaningful

        Global Investment Management net income of $451 million in the 2004 second quarter and $1.002 billion in the 2004 six months increased $30 million or 7% and $129 million or 15% from the comparable 2003 periods. Life Insurance and Annuities net income of $230 million in the 2004 second quarter and $517 million in the 2004 six months increased $30 million or 15% and $73 million or 16% from the comparable 2003 periods. The increase in net income of $30 million in the 2004 second quarter reflects higher Travelers Life and Annuity (TLA) results of $22 million and higher International Insurance Manufacturing (IIM) results of $8 million. The $22 million increase in TLA primarily resulted from higher business volumes, higher retained investment margins and a release of institutional annuities benefits reserves, partially offset by higher deferred acquisition cost (DAC) amortization and an increase in net realized insurance investment portfolio losses. The $8 million increase in IIM primarily resulted from business volume growth in Japan, Asia and Mexico.

        The increase in Life Insurance and Annuities income of $73 million in the 2004 six-month period reflects higher TLA results of $52 million and higher IIM results of $21 million. The $52 million increase in TLA primarily resulted from strong business volumes and higher retained investment margins, partially offset by the impact of lower tax benefits related to the Dividend Received Deduction (DRD). The IIM increase primarily resulted from business volume growth in Japan, Mexico and Asia and favorable investment results in Latin America.

        Private Bank net income was $152 million in the 2004 second quarter and $311 million in the 2004 six months, up $13 million or 9% and $47 million or 18% from the comparable 2003 periods. The increase in net income of $13 million in the 2004 second quarter primarily reflects the impact of positive operating leverage, as an 8% reduction in expenses more than offset a 3% decline in revenue, which primarily resulted from lower client transaction activity. The increase in income of $47 million in the 2004 six-month period primarily reflects increased recurring spread and fee-based revenues combined with the benefit of increased client transaction activity.

        Asset Management net income was $69 million in the 2004 second quarter and $174 million in the 2004 six months, down $13 million or 16% and up $9 million or 5% from the comparable 2003 periods. The 2004 second quarter income decline primarily reflects the impact of increased reserves for net claims and operating losses in the retirement services business in Argentina, the absence of current-year tax benefits on the increase in reserves, and higher employee compensation and legal expenses, partially offset by the impact of positive market action and the cumulative impact of positive net flows. The increase in the six-month period primarily reflects the impact of positive market action, the cumulative impact of positive net flows and lower capital funding costs in Mexico, partially offset by the increased reserves for net claims and operating losses in Argentina and the absence of current-year tax benefits on the increase in reserves, as well as higher employee compensation and legal expenses. Actions taken by the Argentine government associated with its anticipated debt restructuring could have an adverse impact on the retirement services business in Argentina and its customers. The extent of the financial impact to the Company will depend on future actions taken by the Argentine government and the Company's response to such actions. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 62.

26


Global Investment Management Net Income—Regional View

 
  Three Months
Ended June 30,

   
  Six Months
Ended June 30,

   
 
  %
Change

  %
Change

 
  2004
  2003
  2004
  2003
In millions of dollars

   
North America (excluding Mexico)   $ 339   $ 307   10   $ 725   $ 663   9
Mexico     44     44       98     83   18
EMEA     7     2   NM     16     (1 ) NM
Japan     24     20   20     54     37   46
Asia (excluding Japan)     43     38   13     87     70   24
Latin America     (6 )   10   NM     22     21   5
   
 
     
 
   
Net Income   $ 451   $ 421   7   $ 1,002   $ 873   15
   
 
     
 
   

NM
Not meaningful

        Global Investment Management net income increased $30 million or 7% in the 2004 second quarter and $129 million or 15% in the 2004 six months from the comparable 2003 periods. The $30 million increase in the 2004 second quarter was driven by increases in North America (excluding Mexico) of $32 million, Asia of $5 million, EMEA of $5 million and Japan of $4 million, partially offset by a decline in Latin America of $16 million. North America (excluding Mexico) net income of $339 million in the 2004 second quarter increased $32 million or 10% from the prior-year period, primarily reflecting an increase of $22 million in Life Insurance & Annuities, resulting from higher business volumes, higher retained investment margins, and a release of institutional annuities benefit reserves, partially offset by higher DAC amortization and an increase in realized insurance investment portfolio losses. The income growth in Asia reflected higher business volumes in Life Insurance & Annuities and Private Bank, while the increase in EMEA was driven by higher revenues in Private Bank. Continued business volume increases in Life Insurance & Annuities drove the increase in income in Japan. Latin America net loss of $6 million in the 2004 second quarter reflects a decline in income of $16 million over the prior-year period, primarily driven by the impact of higher reserves for net claims and operating losses in a retirement services business in Argentina, as well as the absence of current-year tax benefits on the increase in reserves.

        The $129 million increase in the 2004 six-month period reflects increases in North America (excluding Mexico) of $62 million, Asia of $17 million, Japan of $17 million, EMEA of $17 million, Mexico of $15 million, and Latin America of $1 million. The $62 million increase in North America (excluding Mexico) in the six-month period primarily reflected an increase of $52 million in Life Insurance & Annuities, driven by strong business volumes and higher retained investment margins, partially offset by the impact of lower tax benefits related to the DRD. Asia net income increased $17 million over the prior-year period, primarily reflecting higher client transaction activity in Private Bank. The increases in Japan in the six-month period resulted from an increase in Private Bank and higher business volumes in Life Insurance & Annuities, while the increase in EMEA reflects higher client transaction activity in Private Bank. Mexico net income increased $15 million from the prior-year period, primarily reflecting revenue growth in Private Bank and higher business volumes in Life Insurance & Annuities.

27


Life Insurance and Annuities

 
  Three Months
Ended June 30,

   
  Six Months
Ended June 30,

   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars

   
   
   
   
   
   
 
Revenues, net of interest expense   $ 1,240   $ 1,179   5   $ 2,543   $ 2,325   9  
Provision for benefits and claims     678     718   (6 )   1,365     1,398   (2 )
Operating expenses     223     184   21     454     363   25  
   
 
     
 
     
Income before taxes     339     277   22     724     564   28  
Income taxes     109     77   42     207     120   73  
   
 
     
 
     
Net income   $ 230   $ 200   15   $ 517   $ 444   16  
   
 
     
 
     
Average Risk Capital(1)   $ 4,060             $ 4,066            
Return on Risk Capital(1)     23 %             26 %          
Return on Invested Capital(1)     18 %             20 %          
   
           
           

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

        Life Insurance and Annuities reported net income of $230 million and $517 million in the 2004 second quarter and six-month period, respectively, an increase of $30 million or 15% and $73 million or 16%, from the comparable periods of 2003. The $30 million increase from the 2003 second quarter reflects an increase of $22 million in TLA and an increase of $8 million in IIM, and was primarily driven by the impact of higher business volumes, higher retained investment margins, and a one-time institutional annuities benefit reserve release, partially offset by higher net realized insurance investment portfolio losses, and an increase in operating expenses due to the higher business volumes. The $73 million increase from the 2003 six months reflects an increase of $52 million in TLA and an increase of $21 million in IIM, and was attributed to higher business volumes and higher retained investment margins, partially offset by lower tax benefits related to the separate account Dividend Received Deduction (DRD).

        TLA's net income was $203 million and $460 million in the 2004 second quarter and six-month period, respectively, an increase of $22 million or 12% and $52 million or 13% over the corresponding 2003 periods. The increase in the 2004 second quarter resulted from higher business volumes, higher retained investment margins and an $11 million release of institutional annuities benefit reserves, partially offset by higher DAC amortization of $16 million and a $13 million increase in realized insurance investment portfolio losses. The $52 million or 13% increase in the six-month period reflects higher business volumes and higher retained investment margins, offset by a $23 million tax benefit related to an adjustment to the DRD in the first six months of 2004 versus a $39 million DRD related tax benefit in the prior-year period.

        IIM's net income was $27 million and $57 million in the 2004 second quarter and six months, respectively, an increase of $8 million or 42% and $21 million or 58% from the comparable 2003 periods. The $8 million or 42% increase in the 2004 second quarter resulted from higher business volumes in our operations in Japan, Asia and Mexico. The $21 million or 58% increase in the six-month period reflects higher business volumes in Japan, Mexico and Asia as well as favorable investment results in Latin America due to improvements in the valuation of Argentine GPNs.

        TLA's net investment income was $702 million and $1.427 billion in the 2004 second quarter and six-month period, an increase of $54 million or 8% and $118 million or 9%, respectively, from the 2003 second quarter and six-month period. This growth was primarily related to a larger invested asset base resulting from the continued growth in business volumes. TLA's investment yields were 6.36% and 6.54% in the 2004 second quarter and six-month period, respectively, compared to 6.42% and 6.60% in the prior-year periods.

        During the 2004 second quarter and six-month period, Life Insurance and Annuities operating expenses of $223 million and $454 million increased $39 million or 21% and $91 million or 25%, respectively, from the comparable 2003 periods. TLA's expenses increased $24 million to $145 million in the second quarter of 2004, and $50 million to $294 million in the first six months of 2004, from the comparable 2003 periods. These increases were primarily the result of the $24 million and $36 million increase in DAC amortization in the 2004 second quarter and six months versus the comparable periods in 2003, as well as the growth in expenses related to business volume increases for the first six months of 2004. IIM's expenses increased $15 million to $78 million in the second quarter of 2004 and $41 million to $160 million in the first six months of 2004 from the comparable 2003 periods. These increases were primarily related to higher business volumes and the impact of foreign exchange rates.

Travelers Life and Annuity

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

28


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

 
  Three Months
Ended June 30,

   
  Six Months
Ended June 30,

   
 
 
  %
Change

  %
Change

 
 
  2004
  2003
  2004
  2003
 
In millions of dollars

   
   
   
   
   
   
 
Retail annuities                                  
  Fixed   $ 135   $ 177   (24 ) $ 283   $ 318   (11 )
  Variable     1,255     960   31     2,473     1,771   40  
  Individual payout     18     12   50     32     32    
   
 
     
 
     
Total retail annuities(1)     1,408     1,149   23     2,788     2,121   31  
Institutional annuities(2)     2,127     1,361   56     3,705     3,472   7  
Individual life insurance                                  
  New direct periodic premiums and deposits     53     42   26     108     112   (4 )
  Renewal direct periodic premiums and deposits     152     143   6     385     282   37  
  Single premium deposits     173     81   NM     342     130   NM  
  Reinsurance     (38 )   (34 ) (12 )   (75 )   (64 ) (17 )
   
 
     
 
     
Total individual life insurance(3)     340     232   47     760     460   65  
   
 
     
 
     
Total   $ 3,875   $ 2,742   41   $ 7,253   $ 6,053   20  
   
 
     
 
     

(1)
Includes $1.4 billion and $2.8 billion of deposits in the three and six months ended June 30, 2004 and $1.1 billion and $2.1 billion of deposits in the three and six months ended June 30, 2003, respectively.

(2)
Includes $2.0 billion and $3.5 billion of deposits in the three and six months ended June 30, 2004 and $1.2 billion and $3.2 billion of deposits in the three and six months ended June 30, 2003, respectively.

(3)
Includes $318 million and $715 million of deposits in the three and six months ended June 30, 2004 and $207 million and $409 million of deposits in the three and six months ended June 30, 2003, respectively.

NM
Not meaningful

        Retail annuities net written premiums and deposits increased 23% in the 2004 second quarter to $1.4 billion and 31% in the 2004 six month period to $2.8 billion, from $1.1 billion and $2.1 billion in the prior-year periods. These increases were primarily driven by strong variable annuity sales due to improved equity market conditions in 2004, and sales of a guaranteed minimum withdrawal benefit product. Weak equity markets and competitive pressures adversely affected the comparable 2003 periods. Retail annuities account balances and benefit reserves were $35.4 billion at June 30, 2004, up from $30.7 billion at June 30, 2003. This increase was driven by $3.0 billion in market appreciation of variable annuity investments subsequent to June 30, 2003, including $617 million in the 2004 six-month period, as well as $1.8 billion in net sales over the previous twelve months, including $1.0 billion of net sales in the 2004 six-month period, partially due to good in-force retention.

        Institutional annuities net written premiums and deposits (excluding the Company's employee pension plan deposits) were $2.1 billion and $3.7 billion in the second quarter and six-month period of 2004, an increase of $766 million and $233 million from the prior-year periods. The increase reflects strong Guaranteed Investment Contract (GIC) sales in the 2004 second quarter compared to the prior-year period. Sales in the six months ended June 30, 2003 included an $800 million sale to a customer in the 2003 first quarter. Institutional annuities account balances and benefit reserves reached $26.5 billion at June 30, 2004, an increase of $2.9 billion or 12% from $23.6 billion at June 30, 2003, primarily reflecting an increase in GIC and payout institutional annuities benefit reserves over the last 12 months.

        Net written premiums and deposits for the individual life insurance business were $340 million and $760 million in the second quarter and six-month period of 2004, an increase of $108 million and $300 million from the respective 2003 periods. These increases were driven by the $92 million and $212 million respective increases in single premium universal life sales for the second quarter and six-month period of 2004 versus the 2003 periods. Life insurance in force was $94.2 billion at June 30, 2004, an increase of $9.7 billion or 11% from $84.5 billion at June 30, 2003.

29


International Insurance Manufacturing

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

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

 
  Three Months
Ended June 30,

  Six Months
Ended June 30,

 
  2004
  2003
  2004
  2003
In millions of dollars

   
   
   
   
Annuity products                        
  Japan   $ 1,063   $ 286   $ 2,478   $ 489
  All other premiums and deposits     242     200     449     362
   
 
 
 
Total annuity products     1,305     486     2,927     851
Life products     475     116     811     214
   
 
 
 
Total(1)(2)   $ 1,780   $ 602   $ 3,738   $ 1,065
   
 
 
 

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

(2)
Includes $1.6 billion and $3.4 billion of deposits in the three and six months ended June 30, 2004, and $490 million and $845 million of deposits in the three and six months ended June 30, 2003.

        IIM annuity product net written premiums and deposits increased $819 million and $2.1 billion to $1.3 billion and $2.9 billion in the 2004 second quarter and six-month period, respectively. The increase in both periods was driven by strong variable annuity sales in Japan through the Company's joint venture with Mitsui Sumitomo.

        IIM life products net written premiums and deposits were $475 million and $811 million in the second quarter and six-month period of 2004, increases of $359 million and $597 million from the prior-year periods, which were primarily driven by strong Variable Universal Life sales in Mexico as well as sales of Endowment and Unit Linked products in Hong Kong.

30


Private Bank

 
  Three Months Ended June 30,
   
  Six Months Ended June 30,
   
 
 
  %
Change

  %
Change

 
In millions of dollars

  2004
  2003
  2004
  2003
 
Revenues, net of interest expense   $ 505   $ 521   (3 ) $ 1,078   $ 981   10  
Operating expenses     286     311   (8 )   625     586   7  
Provision for credit losses     (1 )   6   NM     3     10   (70 )
   
 
     
 
     
Income before taxes     220     204   8     450     385   17  
Income taxes     68     65   5     139     121   15  
   
 
     
 
     
Net income   $ 152   $ 139   9   $ 311   $ 264   18  
   
 
     
 
     
Average assets (in billions of dollars)   $ 41   $ 38   8   $ 41   $ 36   14  
Return on assets     1.49 %   1.47 %       1.53 %   1.48 %    
   
 
     
 
     
Client business volumes under management (in billions of dollars)   $ 203   $ 180   13   $ 203   $ 180   13  
   
 
     
 
     
Average Risk Capital(1)   $ 727             $ 708            
Return on Risk Capital(1)     84 %             88 %          
Return on Invested Capital(1)     82 %             86 %          
   
           
           

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

NM
Not meaningful

        Private Bank reported net income of $152 million in the 2004 second quarter and $311 million in the 2004 six months, up $13 million or 9% and $47 million or 18% from the corresponding 2003 periods. Growth in the 2004 second quarter was driven by positive operating leverage as an 8% reduction in expenses more than offset a 3% decline in revenue, which primarily resulted from lower client transaction activity. In the six-month comparison, the increase in income was mainly driven by growth in recurring spread and fee-based revenues combined with the benefit of increased client transaction activity.

 
  June 30,
   
 
  %
Change

In billions of dollars

  2004
  2003
Client Business Volumes:                
Proprietary Managed Assets   $ 36   $ 33   9
Other Assets under Fee-Based Management     8     7   14
Banking and Fiduciary Deposits     46     41   12
Investment Finance     40     35   14
Other, Principally Custody Accounts     73     64   14
   
 
   
Total   $ 203   $ 180   13
   
 
   

        Client business volumes were $203 billion at the end of the 2004 second quarter, up $23 billion or 13% from $180 billion at the end of the 2003 second quarter. Growth in client business volumes was led by an increase in custody assets, which were higher in all regions. Investment finance volumes, which include loans, letters of credit, and commitments, increased $5 billion or 14% reflecting growth in all regions including increased real estate-secured loans in the U.S. and growth in margin lending in the international businesses. Banking and fiduciary deposits grew $5 billion or 12%, with double-digit growth in the U.S., Japan and Europe. Proprietary managed assets increased $3 billion or 9% as net inflows were partially offset by the impact of negative market action.

        Revenues, net of interest expense, were $505 million in the 2004 second quarter and $1.078 billion in the 2004 six months, down $16 million or 3% from the prior-year quarter but up $97 million or 10% from the 2003 six-month period. In the three months ended June 30, 2004, a decline in client transaction activity, particularly in capital markets in Asia and Japan, resulted in an $18 million or 12% decline in related transaction revenues. In the six months ended June 30, 2004, the benefit of continued growth in client business volumes combined with an increase in transaction activity was partially offset by the impact of spread compression in the deposit and lending portfolios.

        Operating expenses of $286 million and $625 million in the 2004 second quarter and six months, respectively, were down $25 million or 8% from the prior-year quarter but up $39 million or 7% from the 2003 six-month period, primarily reflecting changes in incentive and other variable compensation associated with the corresponding changes in revenue, as well as lower technology and legal-related costs, which were partially offset by increased costs associated with an investment in front-end staff.

        The provision for credit losses was ($1) million and $3 million in the 2004 second quarter and six months, respectively, compared to $6 million and $10 million in the 2003 second quarter and six months, respectively. The improvement from the prior year was mainly due to net recoveries in Japan and Asia combined with the absence of prior-year increases to the loan loss reserve. Loans 90 days or more past due were $146 million or 0.39% of total loans outstanding at June 30, 2004, compared with $155 million or 0.43% at March 31, 2004 and $140 million or 0.42% at June 30, 2003.

31


Asset Management

 
  Three Months Ended June 30,
   
  Six Months Ended June 30,
   
 
  %
Change

  %
Change

In millions of dollars

  2004
  2003
  2004
  2003
Revenues, net of interest expense   $ 412   $ 378   9   $ 883   $ 745   19
Operating expenses     299     264   13     602     518   16
   
 
     
 
   
Income before taxes and minority interest     113     114   (1 )   281     227   24
Income taxes     45     31   45     102     61   67
Minority interest, after-tax     (1 )   1   NM     5     1   NM
   
 
     
 
   
Net income   $ 69   $ 82   (16 ) $ 174   $ 165   5
   
 
     
 
   
Assets under management (in billions of dollars)(1)(2)   $ 490.5   $ 492.5     $ 490.5   $ 492.5  
   
 
     
 
   
Average Risk Capital(3)   $ 674             $ 696          
Return on Risk Capital(3)     41 %             50 %        
Return on Invested Capital(3)     10 %             12 %        
   
           
         

(1)
Includes $33 billion and $31 billion in 2004 and 2003, respectively, for Private Bank clients.

(2)
Includes $3 billion and $40 billion in 2004 and 2003 of St. Paul Travelers (formerly Travelers Property and Casualty Corp. (TPC)) assets which Asset Management manages on a third-party basis following the August 2002 distribution by Citigroup to its stockholders of a majority portion of its remaining ownership interest in TPC.

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

NM
Not meaningful

        Asset Management reported net income of $69 million and $174 million in the 2004 second quarter and six months, a decrease of $13 million or 16% and an increase of $9 million or 5% from the respective 2003 periods. The decrease in the three-month period primarily reflects the impact of increased reserves for net claims and operating losses in a retirement services business in Argentina and the absence of current-year tax benefits on the increase in reserves, higher employee compensation costs and legal expenses, and the contract termination to manage assets for St. Paul Travelers, partially offset by the impact of positive market action and the cumulative impact of positive net flows. The increase for the six-month period primarily reflects the impact of positive market action, the cumulative impact of positive net flows and lower capital funding costs in Mexico, partially offset by the increased reserves for net claims and operating losses in Argentina and the absence of current-year tax benefits on the increase in reserves as well as higher employee compensation costs and legal expenses.

        Assets under management for the 2004 second quarter were $491 billion, a decrease of $2 billion from the 2003 second quarter. The decrease primarily reflects the contract termination to manage $36 billion of assets for St. Paul Travelers and net outflows of U.S. Retail Money Market Funds of $6 billion. Partially offsetting these decreases were increases due to positive market action/other of $22 billion (which includes the impact of FX), net flows (excluding U.S. Retail Money Market Funds) of $14 billion, the addition of $3 billion in assets from the acquisition of KorAm, and an increase in the CAI Institutional business of $2 billion. Retail/Private Bank client assets were $233 billion as of June 30, 2004, up 7% compared to the prior-year period, primarily due to positive market action/other, including the impact of FX, and positive net flows, partially offset by net outflows of U.S. Retail Money Market funds. Institutional client assets of $189 billion as of June 30, 2004 were up 9% compared to the prior-year period, reflecting long-term product flows and the impact of positive market action, partially offset by net outflows in the Institutional liquidity funds. Retirement Services assets were $12 billion as of June 30, 2004, flat compared to the prior-year period. Other assets under management of $56 billion as of June 30, 2004 were down $34 billion from the prior-year period, primarily reflecting the termination of a contract to manage $36 billion of assets for St. Paul Travelers.

        Revenues, net of interest expense, of $412 million and $883 million in the 2004 second quarter and six months increased $34 million or 9% and $138 million or 19% from the respective 2003 periods. The increase was primarily due to the impact of positive market action, including the impact of FX, the cumulative impact of positive net flows and lower capital funding costs in Mexico. These increases were partially offset by the impact of reserves for net claims and operating losses in Argentina, the impact of outflows of U.S. Retail Money Market Funds, the termination of a contract to manage assets for St. Paul Travelers and the impact of certain fee sharing arrangements, which decreased both revenues and expenses by $5 million and $9 million in the 2004 second quarter and six months, respectively. Additionally, the six-month period was positively impacted by the assets consolidated under FIN 46-R (which are denominated in euro) which generated $10 million of gains (offset in minority interest) due to foreign currency translation, partially offset by lower performance fees in the CAI institutional business.

        Operating expenses of $299 million and $602 million in the 2004 second quarter and six months were up $35 million or 13% and $84 million or 16% from the respective 2003 periods, primarily driven by higher employee compensation and higher expenses related to legal matters, partially offset by the impact of certain fee-sharing arrangements, which decreased both revenues and expenses by $5 million and $9 million in the 2004 second quarter and six months, respectively.

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

32


PROPRIETARY INVESTMENT ACTIVITIES

 
  Three Months Ended June 30,
   
  Six Months Ended June 30,
   
 
 
  %
Change

  %
Change

 
In millions of dollars

  2004
  2003
  2004
  2003
 
Revenues, net of interest expense   $ 537   $ 225   NM   $ 717   $ 378   90  
Operating expenses     123     91   35     210     169   24  
Provision for credit losses     (1 )   1   NM         1   (100 )
   
 
     
 
     
Income before taxes and minority interest     415     133   NM     507     208   NM  
Income taxes     135     53   NM     165     82   NM  
Minority interest, after-tax     7     17   (59 )   43     25   72  
   
 
     
 
     
Net Income   $ 273   $ 63   NM   $ 299   $ 101   NM  
   
 
     
 
     
Average Risk Capital(1)   $ 3,678             $ 3,663            
Return on Risk Capital(1)     30 %             16 %          
Return on Invested Capital(1)     28 %             15 %          
   
           
           

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

NM
Not meaningful

        Proprietary Investment Activities revenues, net of interest expense, of $537 million in the 2004 second quarter increased $312 million from the 2003 second quarter. The increase resulted primarily from higher net impairment/valuation revenues of $258 million, net realized gains on sales of investments of $140 million, and other revenues of $51 million, partially offset by mark-to-market losses on public securities of $137 million. Operating expenses of $123 million in the 2004 second quarter increased $32 million or 35% from the 2003 second quarter, primarily reflecting increased private equity business activity in the Emerging Markets portfolio. Minority interest, after-tax, of $7 million in the 2004 second quarter decreased $10 million from the 2003 second quarter reflecting lower investment performance in majority-owned hedge funds.

        For the 2004 six months, revenues, net of interest expense, of $717 million increased $339 million or 90% from the 2003 six-month period. The increase resulted primarily from higher net impairment/valuation revenues of $374 million, net realized gains on sales of investments of $135 million, and other revenues of $85 million, primarily from higher Private Equity results, partially offset by mark-to-market losses on public securities of $255 million. Operating expenses of $210 million in the 2004 six-month period increased $41 million or 24% from the 2003 six-month period primarily reflecting increased expenses related to investments held within the Emerging Markets portfolio. Minority interest, after-tax, of $43 million in the 2004 six-month period increased $18 million from 2003 six-month period, reflecting a mark-to-market valuation on the recapitalization of investments held within the Emerging Markets private equity portfolio, partially offset by lower investment performance in majority-owned hedge funds.

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

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

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

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

        As of June 30, 2004 and June 30, 2003, Private Equity included assets of $5.185 billion and $6.218 billion, respectively, with the portfolio primarily invested in industrial, consumer goods, communication and technology companies. The decline in the portfolio of $1.033 billion relates to sales of private and public equity investments, the impact of valuation adjustments, and the liquidation of the Banamex portfolio.

33


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

 
  Three Months Ended June 30,
  Six Months Ended June 30,
 
In millions of dollars

  2004
  2003
  2004
  2003
 
Net realized gains (losses)(1)   $ 255   $ 161   $ 289   $ 202  
Public mark-to-market     (18 )   122     (132 )   125  
Net impairments/valuations(2)     98     (220 )   184     (232 )
Other(3)     125     72     195     116  
   
 
 
 
 
Revenues, net of interest expense   $ 460   $ 135   $ 536   $ 211  
   
 
 
 
 

(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 $460 million in the 2004 second quarter increased $325 million from the 2003 second quarter, resulting from higher net impairment/valuation revenues of $318 million, net realized gains on sales of investments of $94 million, and other revenues of $53 million resulting from increased dividends and fees and lower funding costs, partially offset by mark-to-market losses on public securities of $140 million. The higher net impairment/valuation revenues and net realized gains on sale of investments in the 2004 second quarter were primarily driven by investment activity in Emerging Markets and Europe. The higher mark-to-market losses on public securities was primarily driven by the absence of prior-year mark-to-market gains on investments in the United States and Emerging Markets.

        For the 2004 six months, revenues, net of interest expense, of $536 million increased $325 million from the 2003 six-month period resulting from higher net impairment/valuation revenues of $416 million, net realized gains on sales of investments of $87 million, other revenues of $79 million resulting from increased dividends and fees and lower funding costs, partially offset by mark-to-market losses on public securities of $257 million. The higher net impairment/valuation revenues and net realized gains on sale of investments for the 2004 six months were primarily driven by investment activity in Emerging Markets and Europe. The higher net mark-to-market losses on public securities for the 2004 six months was primarily driven by an investment in an Indian software company, reflecting a general decline in public market values in the Indian software sector.

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

        Other Investment Activities investments are primarily carried at fair value, with impairment write-downs recognized in income for "other than temporary" declines in value. On April 1, 2004, the merger of TPC and the St. Paul Companies was completed. Existing shares of TPC common stock were converted to 0.4334 shares of common stock of the St. Paul Travelers Companies (St. Paul). As of June 30, 2004, the Company held approximately 40.4 million shares or 6.1% of St. Paul's outstanding equity securities. The St. Paul common stock position is classified as available-for-sale. As of June 30, 2004, Other Investment Activities included assets of $3.257 billion, including $1.670 billion in St. Paul shares, $1.148 billion in hedge funds (the majority of which represents money managed for third-party customers including St. Paul which are consolidated under FIN 46-R guidelines), $264 million in the LDC Debt/ Refinancing portfolios, and $175 million in other assets. As of June 30, 2003, total assets of Other Investment Activities were $2.914 billion, including $1.597 billion in St. Paul shares, $637 million in hedge funds, $511 million in the LDC Debt/Refinancing portfolios and $169 million in other assets.

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

 
  Three Months Ended June 30,
  Six Months Ended June 30,
In millions of dollars

  2004
  2003
  2004
  2003
LDC Debt/Refinancing portfolios   $   $ 2   $ 1   $ 5
Hedge fund investments     (30 )   38     20     53
Other     107     50     160     109
   
 
 
 
Revenues, net of interest expense   $ 77   $ 90   $ 181   $ 167
   
 
 
 

        Revenues, net of interest expense, in the 2004 second quarter of $77 million decreased $13 million from the 2003 second quarter, resulting from a $68 million decrease in hedge fund results and a $2 million decrease in LDC Debt/Refinancing revenues, partially offset by increases in other revenues of $57 million, primarily from net realized gains on the sale of St. Paul shares.

        For the 2004 six months, revenues, net of interest expense, of $181 million, increased $14 million from the 2003 six-month period, resulting from increases in other revenues of $51 million, primarily from net realized gains on the sale of St. Paul shares, partially offset by a $33 million decrease in hedge fund revenues and a $4 million decrease in LDC Debt/Refinancing revenues.

34


        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 62.

CORPORATE/OTHER

 
  Three Months Ended June 30,
  Six Months Ended June 30,
 
In millions of dollars

  2004
  2003
  2004
  2003
 
Revenues, net of interest expense   $ (106 ) $ 221   $ 156   $ 427  
Operating expenses     (47 )   156     51     424  
Provision for benefits, claims, and credit losses     (2 )       (2 )    
   
 
 
 
 
Income (loss) before taxes and minority interest     (57 )   65     107     3  
Income taxes (benefits)     (5 )   21         25  
Minority interest, after-tax     (3 )   (1 )   (7 )   5  
   
 
 
 
 
Net Income (loss)   $ (49 ) $ 45   $ 114   $ (27 )
   
 
 
 
 

        Corporate/Other reported a net loss of $49 million in the 2004 second quarter and net income of $114 million in the six months ended June 30, 2004, which represented a decrease in income of $94 million from the 2003 three-month period and an increase in income of $141 million from the 2003 six-month period. The decrease in the three-month period was primarily attributable to lower net treasury results, while the increase in the six-month period was primarily attributable to the sale of EFS, which resulted in an after-tax gain of $180 million in the 2004 first quarter.

        Revenues, net of interest expense, of ($106) million and $156 million in the 2004 second quarter and six months, respectively, decreased $327 million and $271 million, from the corresponding prior-year periods. The second quarter decrease was driven by lower intersegment eliminations, lower net treasury results and the absence of the prior-year revenues earned in the EFS business. The six-month decrease was primarily due to lower intersegment eliminations and lower net treasury results, partially offset by the EFS gain. The lower net treasury results for the three months were primarily due to lower realized gains on fixed income investments and lower benefit from yen capital hedging. For the six months, in addition to the above, earnings were also impacted by higher interest expense.

        Operating expenses of ($47) million and $51 million in the 2004 second quarter and six months decreased $203 million and $373 million, respectively, from the 2003 periods. The second quarter and six-month period decreases are primarily due to lower intersegment eliminations, the absence of prior-year operating expenses in EFS and lower employee related costs.

35


MANAGING GLOBAL RISK

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

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

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

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

36


        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 Company's exposure to extreme downside events and any changes in its level or its composition.

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

In billions of dollars

  June 30, 2004
  March 31, 2004
 
Credit risk   $ 31.1   $ 28.4  
Market risk     17.1     17.8  
Operational risk     8.7     5.7  
Insurance risk     0.2     0.2  
Intersector diversification(1)     (5.6 )   (4.6 )
   
 
 
Total Citigroup   $ 51.5   $ 47.5  
   
 
 
Return on Risk Capital     9 %   45 %
Return on Risk Capital (2004 Six Months)     27 %      

Return on Invested Capital

 

 

5

%

 

21

%
Return on Invested Capital (2004 Six Months)     13 %      
   
 
 

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

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

        Return on Risk Capital and Return on Invested Capital are provided for each segment and product and are disclosed on pages 14 to 33 of this Management's Discussion and Analysis.

        Tier 1 capital plus the allowance for credit losses qualifying for Tier 2 capital of $76.1 billion compared favorably to Citigroup Risk Capital requirements of $51.5 billion at June 30, 2004. The difference between Tier 1 capital plus Reserves and Risk Capital requirements represents a significant level of surplus capital for internal growth, and the flexibility to pursue acquisition opportunities.

37


CREDIT RISK MANAGEMENT PROCESS

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

Details of Credit Loss Experience

 
  2nd Qtr. 2004
  1st Qtr. 2004
  4th Qtr. 2003
  3rd Qtr. 2003
  2nd Qtr. 2003
 
In millions of dollars

   
   
   
   
   
 
Allowance for credit losses at beginning of period   $ 12,506   $ 12,643   $ 10,843   $ 11,167   $ 11,049  
   
 
 
 
 
 
Provision for credit losses                                
Consumer     1,935     2,290     1,951     1,538     1,888  
Corporate     (347 )   (60 )   242     76     298  
   
 
 
 
 
 
      1,588     2,230     2,193     1,614     2,186  
   
 
 
 
 
 
Gross credit losses:                                
Consumer                                
In U.S. offices     1,769     1,952     1,640     1,264     1,383  
In offices outside the U.S.     803     794     821     891     832  
Corporate                                
In U.S. offices     9     18     57     110     159  
In offices outside the U.S.     79     248     441     302     174  
   
 
 
 
 
 
      2,660     3,012     2,959     2,567     2,548  
   
 
 
 
 
 
Credit recoveries:                                
Consumer                                
In U.S. offices     260     275     212     186     173  
In offices outside the U.S.     165     164     205     228     158  
Corporate(1)                                
In U.S. offices     12     35     12     3     19  
In offices outside the U.S.     98     53     62     78     57  
   
 
 
 
 
 
      535     527     491     495     407  
   
 
 
 
 
 
Net credit losses                                
In U.S. offices     1,506     1,660     1,473     1,185     1,350  
In offices outside the U.S.     619     825     995     887     791  
   
 
 
 
 
 
      2,125     2,485     2,468     2,072     2,141  
   
 
 
 
 
 
Other—net(2)     746     118     2,075     134     73  
   
 
 
 
 
 
Allowance for credit losses at end of period   $ 12,715   $ 12,506   $ 12,643   $ 10,843   $ 11,167  
   
 
 
 
 
 
Allowance for unfunded lending commitments(3)     600     600     600     526     567  
   
 
 
 
 
 
Total allowance for loans, leases, and unfunded lending commitments   $ 13,315   $ 13,106   $ 13,243   $ 11,369   $ 11,734  
   
 
 
 
 
 
Net consumer credit losses   $ 2,147   $ 2,307   $ 2,044   $ 1,741   $ 1,884  
As a percentage of average consumer loans     2.22 %   2.45 %   2.26 %   2.08 %   2.28 %
   
 
 
 
 
 
Net corporate credit losses   $ (22 ) $ 178   $ 424   $ 331   $ 257  
As a percentage of average corporate loans     NM     0.73 %   1.72 %   1.29 %   0.98 %
   
 
 
 
 
 

(1)
Includes $12 million of collections from credit default swaps purchased from third parties in the second quarter of 2003. From the 2003 fourth quarter forward, collections from credit default swaps are included within Principal Transactions on the Consolidated Statement of Income.

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

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

NM
Not meaningful

38


Cash-Basis, Renegotiated, and Past Due Loans

 
  June 30, 2004
  Mar. 31, 2004
  Dec. 31, 2003
  Sept. 30, 2003
  June 30, 2003
In millions of dollars

   
   
   
   
   
Corporate cash-basis loans                              
Collateral dependent (at lower of cost or collateral value)(1)   $ 59   $ 71   $ 8   $ 36   $ 62
Other(2)     2,560     2,842     3,411     3,753     4,142
   
 
 
 
 
Total   $ 2,619   $ 2,913   $ 3,419   $ 3,789   $ 4,204
   
 
 
 
 
Corporate cash-basis loans(2)                              
In U.S. offices   $ 503   $ 518   $ 640   $ 856   $ 977
In offices outside the U.S.     2,116     2,395     2,779     2,933     3,227
   
 
 
 
 
Total   $ 2,619   $ 2,913   $ 3,419   $ 3,789   $ 4,204
   
 
 
 
 
Renegotiated loans (includes Corporate and Commercial Markets Loans)                              
In U.S. offices   $ 81   $ 91   $ 107   $ 110   $ 126
In offices outside the U.S.     30     33     33     51     52
   
 
 
 
 
Total   $ 111   $ 124   $ 140   $ 161   $ 178
   
 
 
 
 
Consumer loans on which accrual of interest had been suspended(2)                              
In U.S. offices   $ 2,712   $ 2,877   $ 3,127   $ 3,086   $ 2,966
In offices outside the U.S.     2,860     3,029     2,958     2,690     2,800
   
 
 
 
 
Total   $ 5,572   $ 5,906   $ 6,085   $ 5,776   $ 5,766
   
 
 
 
 
Accruing loans 90 or more days delinquent(3)(4)                              
In U.S. offices   $ 2,770   $ 2,983   $ 3,298   $ 2,322   $ 2,493
In offices outside the U.S.     503     545     576     490     436
   
 
 
 
 
Total   $ 3,273   $ 3,528   $ 3,874   $ 2,812   $ 2,929
   
 
 
 
 

(1)
A cash-basis loan is defined as collateral dependent when repayment is expected to be provided solely by the liquidation of underlying collateral and there are no other available and reliable sources of repayment, in which case the loans are written down to the lower of cost or collateral value.
(2)
The 2004 second quarter includes the addition of $227 million of corporate cash-basis loans and $46 million of consumer cash-basis loans, respectively, related to the acquisition of KorAm.
(3)
Substantially all consumer loans, of which $1,459 million, $1,522 million, $1,643 million, $1,672 million, and $1,767 million are government-guaranteed student loans and Federal Housing Authority mortgages at June 30, 2004, March 31, 2004, December 31, 2003, September 30, 2003, and June 30, 2003, respectively.
(4)
The June 30, 2004, March 31, 2004, and December 31, 2003 balances include the Sears and Home Depot data.

Other Real Estate Owned and Other Repossessed Assets

 
  June 30,
2004

  Mar. 31,
2004

  Dec. 31,
2003

  Sept. 30,
2003

  June 30,
2003

In millions of dollars

   
   
   
   
   
Other real estate owned(1)                              
Consumer   $ 369   $ 396   $ 437   $ 460   $ 479
Corporate     98     94     105     95     89
   
 
 
 
 
Total other real estate owned   $ 467   $ 490   $ 542   $ 555   $ 568
   
 
 
 
 
Other repossessed assets(2)   $ 97   $ 123   $ 151   $ 182   $ 228
   
 
 
 
 

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

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

39


CONSUMER PORTFOLIO REVIEW

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

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

        The following table summarizes delinquency and net credit loss experience in both the managed and on-balance sheet loan portfolios in terms of loans 90 days or more past due, net credit losses, and as a percentage of related loans. The table also summarizes the accrual status of Commercial Markets loans as a percentage of related loans. The managed loan portfolio includes credit card receivables held-for-sale and securitized, and the table reconciles to a held basis, the comparable GAAP measure. Only North America Cards from a product view and North America from a regional view are impacted. Although a managed basis presentation is not in conformity with GAAP, the Company believes it provides a representation of performance and key indicators of the credit card business that is consistent with the way management reviews operating performance and allocates resources. Furthermore, investors utilize information about the credit quality of the entire managed portfolio, as the results of both the held and securitized portfolios impact the overall performance of the Cards business. For a further discussion of managed basis reporting, see the Cards business on page 15 and Note 12 to the Consolidated Financial Statements.

40


Consumer Loan Delinquency Amounts, Net Credit Losses, and Ratios

 
  Total
Loans

  90 Days or More
Past Due(1)

  Average
Loans

  Net Credit Losses(1)
 
Product View:

  Jun. 30,
2004

  Jun. 30,
2004

  Mar. 31,
2004

  Jun. 30,
2003

  2nd Qtr.
2004

  2nd Qtr.
2004

  1st Qtr.
2004

  2nd Qtr.
2003

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

   
   
   
   
   
   
   
   
 
Cards   $ 154.4   $ 2,808   $ 3,152   $ 2,313   $ 152.3   $ 2,373   $ 2,554   $ 1,887  
  Ratio           1.82 %   2.08 %   1.88 %         6.27 %   6.69 %   6.08 %
    North America     138.7     2,565     2,891     2,066     136.9     2,248     2,414     1,751  
      Ratio           1.85 %   2.10 %   1.86 %         6.61 %   6.99 %   6.23 %
    International     15.7     243     261     247     15.4     125     140     136  
      Ratio           1.55 %   1.80 %   2.04 %         3.25 %   3.85 %   4.60 %
Consumer Finance     99.6     1,948     2,127     2,182     97.8     857     870     897  
  Ratio           1.96 %   2.15 %   2.41 %         3.52 %   3.57 %   4.01 %
    North America     78.4     1,444     1,589     1,681     76.9     515     529     514  
      Ratio           1.84 %   2.06 %   2.40 %         2.69 %   2.79 %   2.98 %
    International     21.2     504     538     501     20.9     342     341     383  
      Ratio           2.38 %   2.47 %   2.45 %         6.57 %   6.31 %   7.43 %
Retail Banking     145.4     3,576     3,698     3,706     139.2     176     155     165  
  Ratio           2.46 %   2.86 %   3.29 %         0.51 %   0.49 %   0.58 %
    North America     101.4     2,054     2,163     2,385     98.1     45     26     60  
      Ratio           2.03 %   2.30 %   3.00 %         0.18 %   0.11 %   0.29 %
    International     44.0     1,522     1,535     1,321     41.1     131     129     105  
      Ratio           3.46 %   4.35 %   3.99 %         1.28 %   1.48 %   1.28 %
Private Bank(2)     37.3     146     155     140     36.3         4     4  
  Ratio           0.39 %   0.43 %   0.42 %         (0.01 %)   0.04 %   0.05 %
Other Consumer     1.1                 1.2         (1 )    
   
 
 
 
 
 
 
 
 
Managed loans (excluding Commercial Markets)(3)   $ 437.8   $ 8,478   $ 9,132   $ 8,341   $ 426.8   $ 3,406   $ 3,582   $ 2,953  
Ratio           1.94 %   2.19 %   2.31 %         3.21 %   3.47 %   3.26 %
   
 
 
 
 
 
 
 
 
Securitized receivables (all in North America Cards)     (76.4 )   (1,222 )   (1,399 )   (1,385 )   (75.6 )   (1,244 )   (1,325 )   (1,159 )
Credit card receivables held-for-sale(4)     (6.3 )   (133 )       (58 )   (2.1 )   (46 )       (49 )
   
 
 
 
 
 
 
 
 
On-balance sheet loans (excluding Commercial Markets)(5)   $ 355.1   $ 7,123   $ 7,733   $ 6,898   $ 349.1   $ 2,116   $ 2,257   $ 1,745  
Ratio           2.01 %   2.27 %   2.41 %         2.44 %   2.68 %   2.42 %
   
 
 
 
 
 
 
 
 

 


 

 


 

Cash-Basis Loans(1)


 

 


 

Net Credit Losses(1)


 
Commercial Markets Groups   $ 39.6   $ 1,173   $ 1,213   $ 1,165   $ 40.3   $ 31   $ 50   $ 139  
  Ratio           2.96 %   3.11 %   2.76 %         0.31 %   0.51 %   1.30 %
   
 
 
 
 
 
 
 
 
Total Consumer Loans   $ 394.7                     $ 389.4   $ 2,147   $ 2,307   $ 1,884  
   
 
 
 
 
 
 
 
 

Regional View:


 

 


 

 


 

 


 

 


 

 


 

 


 

 


 

 


 
North America (excluding Mexico)   $ 332.5   $ 5,758   $ 6,316   $ 5,860   $ 325.4   $ 2,763   $ 2,959   $ 2,306  
  Ratio           1.73 %   1.96 %   2.14 %         3.42 %   3.72 %   3.34 %
Mexico     7.5     380     395     358     7.6     45     14     19  
  Ratio           5.07 %   5.43 %   5.39 %         2.35 %   0.77 %   1.12 %
EMEA     34.3     1,720     1,722     1,412     34.1     204     207     169  
  Ratio           5.02 %   5.08 %   4.67 %         2.40 %   2.46 %   2.26 %
Japan     16.8     340     382     333     16.8     303     305     349  
  Ratio           2.02 %   2.14 %   2.10 %         7.26 %   7.07 %   8.64 %
Asia (excluding Japan)     43.8     248     281     325     40.1     88     91     104  
  Ratio           0.57 %   0.83 %   1.06 %         0.88 %   1.09 %   1.40 %
Latin America     2.9     32     36     53     2.8     3     6     6  
  Ratio           1.11 %   1.27 %   1.80 %         0.42 %   0.76 %   0.83 %
   
 
 
 
 
 
 
 
 
Managed loans (excluding Commercial Markets)(3)   $ 437.8   $ 8,478   $ 9,132   $ 8,341   $ 426.8   $ 3,406   $ 3,582   $ 2,953  
Ratio           1.94 %   2.19 %   2.31 %         3.21 %   3.47 %   3.26 %
   
 
 
 
 
 
 
 
 

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

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

(3)
This table presents credit information on a managed basis (a non-GAAP measure) and shows the impact of securitizations to reconcile to a held basis, the comparable GAAP measure. Only North America Cards from a product view, and North America from a regional view, are impacted. See a discussion of managed basis reporting on page 40.

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

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

41


Consumer Loan Balances, Net of Unearned Income

 
  End of Period
  Average
 
 
  June 30,
2004

  Mar. 31,
2004

  June 30,
2003

  2nd Qtr.
2004

  1st Qtr.
2004

  2nd Qtr.
2003

 
In billions of dollars

   
 
Total managed   $ 477.4   $ 456.0   $ 402.9   $ 467.1   $ 454.2   $ 405.9  
Securitized receivables     (76.4 )   (76.2 )   (72.0 )   (75.6 )   (75.9 )   (71.1 )
Loans held-for-sale(1)     (6.3 )       (3.0 )   (2.1 )       (3.0 )
   
 
 
 
 
 
 
On-balance sheet(2)   $ 394.7   $ 379.8   $ 327.9   $ 389.4   $ 378.3   $ 331.8  
   
 
 
 
 
 
 

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

(2)
Total loans and total average loans exclude certain interest and fees on credit cards of approximately $4 billion and $4 billion, respectively, for the second quarter of 2004, approximately $4 billion and $4 billion, respectively, for the first quarter of 2004, and approximately $2 billion and $1 billion, respectively, for the second quarter of 2003, which are included in Consumer Loans on the Consolidated Balance Sheet.

        Total delinquencies 90 days or more past due (excluding Commercial Markets) in the managed portfolio were $8.478 billion or 1.94% of loans at June 30, 2004, compared to $9.132 billion or 2.19% at March 31, 2004 and $8.341 billion or 2.31% at June 30, 2003. Total cash-basis loans in Commercial Markets were $1.173 billion or 2.96% of loans at June 30, 2004, compared to $1.213 billion or 3.11% at March 31, 2004 and $1.165 billion or 2.76% at June 30, 2003. Total managed net credit losses (excluding Commercial Markets) in the 2004 second quarter were $3.406 billion and the related loss ratio was 3.21%, compared to $3.582 billion and 3.47% in the 2004 first quarter and $2.953 billion and 3.26% in the 2003 second quarter. In Commercial Markets, total net credit losses were $31 million and the related loss ratio was 0.31% in the 2004 second quarter, compared to $50 million and 0.51% in the 2004 first quarter and $139 million and 1.30% in the 2003 second quarter. For a discussion of trends by business, see business discussions on pages 14 to 20 and page 31.

        Citigroup's total allowance for loans, leases and unfunded lending commitments of $13.315 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 $9.316 billion at June 30, 2004, $9.218 billion at March 31, 2004 and $7.136 billion at June 30, 2003. The increase in the allowance for credit losses from June 30, 2003 was primarily due to additions of $2.1 billion, $274 million and $148 million associated with the acquisitions of Sears, KorAm and WMF, respectively, as well as the reclassification in the 2004 second quarter of certain valuation reserves related to capital leases into the allowance for credit losses. These additions were partially offset by the impact of credit reserve releases of $212 million in Global Consumer, primarily related to improving credit conditions in North America, and the write-down of Argentine compensation notes in the 2003 third quarter.

        On-balance sheet consumer loans of $394.7 billion increased $66.8 billion or 20% from June 30, 2003, primarily driven by the additions of the Sears, KorAm, WMF and Home Depot portfolios, combined with growth in mortgage and other real estate-secured loans in Consumer Assets, Consumer Finance and Private Bank and the impact of strengthening currencies. Growth in student loans in North America and margin lending in Private Bank also contributed to the growth in consumer loans. Excluding the impact of acquisitions, growth in credit card receivables was partially offset by a decline in introductory promotional rate balances reflecting a shift in acquisition marketing strategies and higher securitization levels. In CitiCapital, loans declined $6.3 billion reflecting the reclassification of operating leases from loans to other assets of $2.0 billion during the 2004 second quarter and the continued liquidation of non-core portfolios, including a reduction of approximately $1.2 billion resulting from the 2003 third quarter sale of the CitiCapital Fleet Services portfolio.

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

42


CORPORATE PORTFOLIO REVIEW

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

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

 
  June 30, 2004
  Mar. 31, 2004
  Dec. 31, 2003
  June 30, 2003
 
In millions of dollars

   
 
Corporate Cash-Basis Loans                          
Capital Markets and Banking(1)   $ 2,501   $ 2,811   $ 3,263   $ 3,691  
Transaction Services     118     102     156     513  
   
 
 
 
 
Total Corporate Cash-Basis Loans   $ 2,619   $ 2,913   $ 3,419   $ 4,204  
   
 
 
 
 
Net Credit Losses                          
Capital Markets and Banking   $ (23 ) $ 184   $ 412   $ 256  
Transaction Services     2     (7 )   13     1  
Other     (1 )   1     (1 )    
   
 
 
 
 
Total Net Credit Losses   $ (22 ) $ 178   $ 424   $ 257  
   
 
 
 
 
Corporate Allowance for Credit Losses   $ 3,399   $ 3,288   $ 3,555   $ 4,031  
Corporate Allowance for Credit Losses on
    Unfunded Lending Commitments(2)
    600     600     600     567  
   
 
 
 
 
Total Corporate Allowance for Loans, Leases, and Unfunded Lending Commitments   $ 3,999   $ 3,888   $ 4,155   $ 4,598  
   
 
 
 
 
Corporate Allowance As a Percentage of Total Corporate Loans(3)     3.01 %   3.27 %   3.62 %   3.70 %
   
 
 
 
 

(1)
The 2004 second quarter includes the addition of $227 million of cash-basis loans related to the acquisition of KorAm.

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

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

        Corporate cash-basis loans were $2.619 billion, $2.913 billion, $3.419 billion and $4.204 billion at June 30, 2004, March 31, 2004, December 31, 2003, and June 30, 2003, respectively. Cash-basis loans decreased $1.585 billion from June 30, 2003 due to decreases in Capital Markets and Banking and Transaction Services. Capital Markets and Banking at June 30, 2004 primarily reflects decreases to borrowers in the telecommunications and power and energy industries and charge-offs against reserves as well as paydowns from corporate borrowers in Argentina, Mexico, Hong Kong and New Zealand, partially offset by an increase from the KorAm acquisition. Transaction Services decreased primarily due to a reclassification of cash-basis loans along with charge-offs in Argentina and Poland. Cash-basis loans decreased $294 million compared to March 31, 2004 primarily due to a decrease in Capital Markets and Banking. This decrease primarily consisted of charge-offs taken against reserves and paydowns from borrowers in the power and energy industry as well as corporate borrowers in Mexico, Australia and Argentina, partially offset by an increase from the KorAm acquisition.

        Total corporate Other Real Estate Owned (OREO) was $98 million, $94 million, $105 million and $89 million at June 30, 2004, March 31, 2004, December 31, 2003 and June 30, 2003, respectively.

        Total corporate loans outstanding at June 30, 2004 were $113 billion as compared to $100 billion at March 31, 2004, $98 billion at December 31, 2003 and $109 billion at June 30, 2003.

        Total corporate net credit losses of ($22) million at June 30, 2004 decreased $279 million as compared to June 30, 2003, primarily reflecting recoveries and lower net credit losses from counterparties in the telecommunications and power and energy industries as well as counterparties in Brazil, Europe and Argentina. The $200 million decrease from the 2004 first quarter primarily reflects recoveries as well as lower net credit losses from counterparties in Europe, Mexico and Poland.

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

        Citigroup's allowance for credit losses for loans, leases, and unfunded lending commitments of $13.315 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 $3.999 billion at June 30, 2004 compared to $3.888 billion at March 31, 2004, $4.155 billion at December 31, 2003, and $4.598 billion at June 30, 2003. The allowance attributed to corporate loans, leases and unfunded

43


lending commitments as a percentage of corporate loans was 3.54% at June 30, 2004 as compared to 3.87%, 4.24% and 4.22% at March 31, 2004, December 31, 2003 and June 30, 2003, respectively. The $599 million decrease in total corporate reserves for the 12 months ending June 30, 2004 primarily reflects write-offs against previously-established reserves in the telecommunications and power and energy industries and reserve releases of $800 million due to improving credit quality in the portfolio. The $111 million increase in total corporate reserves from March 31, 2004 reflects $441 million of additional reserves related to the KorAm acquisition partially offset by a $350 million reserve release due to improving credit quality in the portfolio. The $350 million reserve release was geographically attributed to Mexico ($200 million), Latin America ($75 million), Asia (excluding Japan) ($45 million), Japan ($17 million) and EMEA ($13 million). Losses on corporate lending activities and the level of cash-basis loans can vary widely with respect to timing and amount, particularly within any narrowly-defined business or loan type. Corporate net credit losses and cash-basis loans are expected to improve from 2003 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 62.

44


MARKET RISK MANAGEMENT PROCESS

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

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

        Market risk encompasses liquidity risk and price risk, both of which arise in the normal course of business of a global financial intermediary. Liquidity risk is the risk that some entity, in some location and in some currency, may be unable to meet a financial commitment to a customer, creditor, or investor when due. Liquidity risk is discussed in the "Capital Resources and Liquidity" section beginning on page 50. Price risk is the risk to earnings that arises from changes in interest rates, foreign exchange rates, equity and commodity prices, and in their implied volatilities. Price risk arises in Non-trading Portfolios, as well as in Trading Portfolios.

Non-Trading Portfolios

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

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

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

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

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

45


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

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

 
  June 30, 2004
  March 31, 2004
  June 30, 2003
 
 
  100 bps
Increase

  100 bps
Decrease

  100 bps
Increase

  100 bps
Decrease

  100 bps
Increase

  100 bps
Decrease

 
 
  In millions of dollars

 
U.S. dollar                                      
  Twelve months and less   $ (647 ) $ 525   $ (529 ) $ (71 ) $ (461 ) $ 627  
  Discounted five year   $ (73 ) $ (1,014 ) $ 1,024   $ (3,391 ) $ 1,200   $ (935 )
Mexican peso                                      
  Twelve months and less   $ 46   $ (46 ) $ 63   $ (63 ) $ 6   $ (6 )
  Discounted five year     196   $ (196 ) $ 213   $ (213 ) $ 83   $ (83 )
Euro                                      
  Twelve months and less   $ (89 ) $ 89   $ (106 ) $ 106   $ (108 ) $ 108  
  Discounted five year   $ 28   $ (28 ) $ (47 ) $ 47   $ (95 ) $ 95  
Japanese yen                                      
  Twelve months and less   $ 60     NM (2) $ 83     NM (2) $ 54     NM (2)
  Discounted five year   $ 215     NM (2) $ 264     NM (2) $ (71 )   NM (2)
Pound sterling                                      
  Twelve months and less   $ 38   $ (38 ) $ 63   $ (63 ) $ 13   $ (13 )
  Discounted five year   $ 186   $ (186 ) $ 217   $ (217 ) $ 143   $ (143 )

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

(2)
Not meaningful. A 100 basis point decrease in interest rates would imply negative rates for the Japanese yen yield curve.

        The changes in U.S. dollar Interest Rate Exposure from the prior quarter and prior-year quarter reflect changes in the aggregate asset/liability mix, changes in actual and projected pre-payments for mortgages and mortgage-related investments, the impact on stockholders' equity of the WorldCom and Litigation Reserve Charge, as well as Citigroup's view of prevailing interest rates. As of June 30, 2004 a 100 bps increase in U.S. dollar interest rates would have a negative impact over the next twelve months of 1.5% of the previous twelve months net interest income (interest revenue less interest expense).

Insurance Companies

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

 
  June 30, 2004
  March 31, 2004
  June 30, 2003
 
  In millions of dollars

Assets:                  
Investments   $ 2,295   $ 2,269   $ 2,120
   
 
 
Liabilities:                  
Long-term debt   $ 7   $ 7   $ 9
Contractholder funds     1,003     1,017     983
   
 
 

        A significant portion of the insurance companies liabilities (Insurance policy and claim reserves) are not financial instruments and are excluded from the above sensitivity analysis. The corresponding changes in the fair values of the Insurance policy and claim reserves are decreases of $649 million, $687 million, and $727 million at June 30, 2004, March 31, 2004 and June 30, 2003, respectively. Furthermore, the analysis does not change the economics of asset-liability matching risk mitigation strategies employed by Insurance businesses. The duration of Invested assets are closely matched with the related Insurance liabilities, diminishing the exposure to interest rate generated volatility. Including insurance policy and claim liabilities, along with the aforementioned duration matching techniques, significantly decreases the impact implied in the above table.

Trading Portfolios

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

        Factor sensitivities are defined as the change in the value of a position for a defined change in a market risk factor (e.g., the change in the value of a U.S. Treasury bill for a 1 basis point change in interest rates). It is the responsibility of independent market risk

46


management to ensure that factor sensitivities are calculated, monitored and, in some cases, limited, for all relevant risks taken in a trading portfolio.

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

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

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

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

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

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

        For Citigroup's major trading centers, the aggregate pretax Value-at-Risk in the trading portfolios was $99 million at June 30, 2004. Daily exposures averaged $96 million during the 2004 second quarter and ranged from $83 million to $112 million.

        The following table summarizes Value-at-Risk in the trading portfolios as of June 30, 2004, March 31, 2004, and June 30, 2003, including the quarterly averages:

 
  June 30,
2004

  Second
Quarter 2004
Average

  March 31,
2004

  First
Quarter 2004
Average

  June 30,
2003

  Second
Quarter 2003
Average

 
In millions of dollars

   
 
Interest rate   $ 96   $ 94   $ 94   $ 86   $ 94   $ 82  
Foreign exchange     14     14     18     19     27     25  
Equity     23     25     28     42     16     11  
Commodity     20     16     16     15     4     4  
Covariance adjustment     (54 )   (53 )   (59 )   (62 )   (50 )   (41 )
   
 
 
 
 
 
 
Total   $ 99   $ 96   $ 97   $ 100   $ 91   $ 81  
   
 
 
 
 
 
 

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

 
  Second Quarter 2004
  First Quarter 2004
  Second Quarter 2003
 
  Low
  High
  Low
  High
  Low
  High
In millions of dollars

   
Interest rate   $ 83   $ 112   $ 76   $ 94   $ 69   $ 106
Foreign exchange     9     28     12     29     18     33
Equity     21     32     15     180     7     16
Commodity     12     20     12     19     2     7
   
 
 
 
 
 

47


OPERATIONAL RISK MANAGEMENT PROCESS

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

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

Risk and Control Self-Assessment

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

Information Security and Continuity of Business

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

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

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

COUNTRY AND CROSS-BORDER RISK MANAGEMENT PROCESS

Country Risk

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

Cross-Border Risk

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

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

48


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

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

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

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

 
   
   
   
   
   
  June 30, 2004
  December 31, 2003
 
  Cross-Border Claims on Third Parties
  Net
Investments
in and
Funding of
Local
Franchises(2)

   
   
   
   
 
  Total
Cross-
Border
Out-
standings

   
  Total
Cross-
Border
Out-
standings

   
 
  Trading
and Short-
Term
Claims(1)

  Resale
Agree-
ments

  All
Other

  Total
  Commit-
ments(3)

  Commit-
ments(3)

In billions of dollars

   
   
   
   
   
   
   
   
   
United Kingdom   $ 8.3   $ 21.8   $ 3.4   $ 33.5   $   $ 33.5   $ 46.0   $ 32.4   $ 28.3
Germany     16.9     3.2     1.8     21.9     3.8     25.7     17.0     21.7     14.5
France     10.4     7.8     1.0     19.2         19.2     9.1     14.8     7.9
Netherlands     10.8     1.1     1.5     13.4         13.4     4.1     8.4     3.7
Japan     2.3     8.2     1.7     12.2         12.2     0.5     11.7     0.5
Korea     2.3     0.4         2.7     8.9     11.6     3.9     4.8     0.2
Italy     6.8     1.7     0.3     8.8     2.3     11.1     2.4     14.2     2.3
Canada     2.6     1.0     1.4     5.0     5.8     10.8     2.6     10.2     2.2
Australia     2.8     0.5     0.6     3.9     1.9     5.8     0.8     8.2     0.2
   
 
 
 
 
 
 
 
 

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

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

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

        Total cross-border outstandings for June 30, 2004 under FFIEC guidelines, including cross-border resale agreements based on the domicile of the issuer of the securities that are held as collateral, and long securities positions reported on a gross basis amounted to $13.3 billion for the United Kingdom, $38.4 billion for Germany, $20.1 billion for France, $15.3 billion for the Netherlands, $10.2 billion for Japan, $11.3 billion for Korea, $16.0 billion for Italy, $12.5 billion for Canada, and $7.6 billion for Australia.

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

49


CAPITAL RESOURCES AND LIQUIDITY

CAPITAL RESOURCES

Overview

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

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

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

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

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

Citigroup Ratios

 
  June 30, 2004
  March 31, 2004
  December 31, 2003
 
Tier 1 Capital   8.16 % 8.96 % 8.91 %
Total capital (Tier 1 and Tier 2)   11.31 % 12.25 % 12.04 %
Leverage(1)   4.88 % 5.40 % 5.56 %
Common stockholders' equity   6.96 % 7.65 % 7.67 %
   
 
 
 

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

50


Components of Capital Under Regulatory Guidelines

 
  June 30, 2004
  Mar. 31, 2004
  Dec. 31, 2003
 
In millions of dollars

   
   
   
 
Tier 1 Capital                    
Common stockholders' equity   $ 97,186   $ 100,759   $ 96,889  
Qualifying perpetual preferred stock     1,125     1,125     1,125  
Qualifying mandatorily redeemable securities of subsidiary trusts     6,152     6,350     6,257  
Minority interest     1,134     1,192     1,158  
Less: Net unrealized gains on securities available-for-sale(1)     (1,105 )   (3,777 )   (2,908 )
Accumulated net gains on cash flow hedges, net of tax     (575 )   (554 )   (751 )
Intangible assets:(2)                    
Goodwill     (30,215 )   (28,549 )   (27,581 )
Other disallowed intangible assets     (7,159 )   (6,994 )   (6,725 )
50% investment in certain subsidiaries(3)     (53 )   (50 )   (45 )
Other     (609 )   (538 )   (548 )
   
 
 
 
Total Tier 1 Capital     65,881     68,964     66,871  
   
 
 
 
Tier 2 capital                    
Allowance for credit losses(4)     10,227     9,779     9,545  
Qualifying debt(5)     14,907     15,188     13,573  
Unrealized marketable equity securities gains(1)     393     464     399  
Less: 50% investment in certain subsidiaries(3)     (52 )   (49 )   (45 )
   
 
 
 
Total Tier 2 capital     25,475     25,382     23,472  
   
 
 
 
Total capital (Tier 1 and Tier 2)   $ 91,356   $ 94,346   $ 90,343  
   
 
 
 
Risk-adjusted assets(6)   $ 807,513   $ 769,914   $ 750,293  
   
 
 
 

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

(2)
The increase in intangible assets during 2004 was primarily due to the acquisition of KorAm in May 2004, and the acquisition of WMF in January 2004.

(3)
Represents unconsolidated banking and finance subsidiaries.

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

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

(6)
Includes risk-weighted credit equivalent amounts, net of applicable bilateral netting agreements, of $40.0 billion for interest rate, commodity and equity derivative contracts and foreign exchange contracts, as of June 30, 2004, compared to $42.4 billion as of March 31, 2004 and $39.1 billion as of December 31, 2003. Market risk-equivalent assets included in risk-adjusted assets amounted to $39.1 billion at June 30, 2004, $42.5 billion at March 31, 2004, and $40.6 billion at December 31, 2003. Risk-adjusted assets also includes the effect of other off-balance sheet exposures such as unused loan commitments and letters of credit and reflects deductions for certain intangible assets and any excess allowance for credit losses.

        Common stockholders' equity increased $0.3 billion during the first six months of 2004 to $97.2 billion at June 30, 2004, representing 7.0% of assets, compared to $96.9 billion and 7.7% at year-end 2003. The increase in common stockholders' equity during the first six months of 2004 reflected net income of $6.4 billion and $1.9 billion related to the issuance of shares pursuant to employee benefit plans and other activity, offset by dividends declared on common and preferred stock of $4.2 billion, $2.5 billion related to the after-tax net change in equity from non-owner sources, $0.8 billion related to the net issuance of restricted and deferred stock, and treasury stock acquired of $0.5 billion including shares repurchased from the Citigroup Employee Pension Fund. The decrease in the common stockholders' equity ratio during the first six months of 2004 reflected the above items and the 10.5% increase in total assets.

        Total mandatorily redeemable securities of subsidiary trusts (trust preferred securities), which qualify as Tier 1 Capital, at June 30, 2004 and December 31, 2003 were $6.152 billion and $6.257 billion, respectively. The amount outstanding at December 31, 2003 included $5.217 billion of parent-obligated securities and $840 million of subsidiary-obligated securities. During the 2004 first quarter, the Company deconsolidated the subsidiary issuer trusts in accordance with FIN 46-R. The FRB has issued interim guidance that continues to recognize trust preferred securities as a component of Tier 1 capital. On May 6, 2004, the FRB issued a proposed rule that would retain trust preferred securities in Tier 1 capital of Bank Holding Companies (BHCs), subject to conditions. See "Regulatory Capital and Accounting Standards Developments" on page 53. If Tier 2 capital treatment had been required at June 30, 2004, Citigroup would have continued to be "well-capitalized."

        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 June 30, 2004, all of Citicorp's subsidiary depository institutions were "well-capitalized" under the federal regulatory agencies' definitions.

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

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Citicorp Ratios

 
  June 30, 2004
  March 31, 2004
  December 31, 2003
 
Tier 1 Capital   8.39 % 8.80 % 8.44 %
Total capital (Tier 1 and Tier 2)   12.55 % 13.00 % 12.68 %
Leverage(1)   6.45 % 6.69 % 6.70 %
Common stockholder's equity   9.72 % 10.08 % 9.97 %
   
 
 
 

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

Citicorp Components of Capital Under Regulatory Guidelines

 
  June 30, 2004
  March, 31, 2004
  December 31, 2003
In billions of dollars

   
   
   
Tier 1 Capital   $ 53.8   $ 53.5   $ 50.7
Total capital (Tier 1 and Tier 2)   $ 80.5   $ 79.1   $ 76.2
   
 
 

Other Subsidiary Capital Considerations

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

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

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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 share repurchases during 2004:

 
  Total Shares
Repurchased

  Average Price Paid
per Share

  Dollar Value
of Remaining
Authorized
Repurchase Program

In millions, except per share amounts

   
January 2004                
  Open market repurchases(1)         $ 2,732
  Employee transactions(2)   12.8   $ 49.72     N/A
  Private equity transactions(3)   10.0   $ 50.22   $ 2,230
February 2004                
  Open market repurchases   0.5   $ 48.89   $ 2,208
  Employee transactions   0.6   $ 49.36     N/A
March 2004                
  Employee transactions   8.6   $ 45.38     N/A
   
 
 
First quarter 2004                
  Open market repurchases   0.5   $ 48.89      
  Employee transactions   22.0   $ 48.02      
  Private equity transactions   10.0   $ 50.22      
   
 
 
Total first quarter 2004   32.5   $ 48.71   $ 2,208
   
 
 
April 2004                
  Employee transactions   0.9   $ 51.69     N/A
May 2004                
  Employee transactions   0.1   $ 47.29     N/A
June 2004                
  Employee transactions   0.2   $ 46.92     N/A
   
 
 
Second quarter 2004                
  Employee transactions   1.2   $ 50.57      
   
 
 
Total second quarter 2004   1.2   $ 50.57   $ 2,208
   
 
 
Year-to-date 2004                
  Open market repurchases   0.5   $ 48.89      
  Employee transactions   23.2   $ 48.15      
  Private equity transactions   10.0   $ 50.22      
   
 
 
Total year-to-date 2004   33.7   $ 48.77   $ 2,208
   
 
 

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

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

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

Regulatory Capital and Accounting Standards Developments

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

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        In January 2003, FASB issued accounting guidance in FIN 46 (which was subsequently revised in December 2003) which requires the consolidation of certain types of special-purpose vehicles that previously were recorded as off-balance sheet exposures. Although FASB deferred the effective date of FIN 46 until periods ending after December 15, 2003, Citigroup elected to implement the provisions of FIN 46 as of July 1, 2003, with the exception of the deferral related to certain investment company subsidiaries. FIN 46-R was adopted in the 2004 first quarter. See Note 2 to the Consolidated Financial Statements. The impact of both these implementations was not material to the capital ratios of Citigroup. On September 12, 2003, the federal bank regulatory agencies issued an interim final rule and a notice of proposed rulemaking concerning how this new requirement will be incorporated into the risk-based capital framework. The interim final rule was effective for the reporting periods September 30, 2003 through June 30, 2004.

        On May 6, 2004, the FRB issued a proposed rule that would retain trust preferred securities in the Tier 1 Capital of BHCs, but with stricter quantitative limits and clearer qualitative standards. Under the proposal, after a three-year transition period, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25% of Tier 1 Capital elements, net of goodwill. Under these proposed rules Citigroup currently would have less than 9% against this limit. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 capital, subject to restrictions. Internationally-active BHCs would generally be expected to limit trust preferred securities and certain other capital elements to 15% of Tier 1 Capital elements, net of goodwill. Based on all limits set in the proposal, Citigroup would be able to retain the trust preferred securities within Tier 1 Capital.

        On July 20, 2004, the federal banking and thrift regulatory agencies issued the final rule on capital requirements for asset-backed commercial paper (ABCP) programs. The final rule, which becomes effective September 30, 2004, increases the capital requirement on most short-term liquidity facilities that provide support to ABCP by imposing a 10% conversion factor on such facilities. Additionally, the final rule permanently excludes ABCP program assets consolidated under FIN 46-R and any minority interests from the calculation of risk-weighted assets and Tier 1 Capital, respectively. The denominator of the Tier 1 leverage ratio calculation will remain unaffected by the final rule, as the risk-based capital treatment does not alter the reporting of the on-balance sheet assets under GAAP guidelines. Citigroup is assessing the impact of adopting the final rule.

        Additionally, from time to time, the FRB and the FFIEC propose amendments to, and issue interpretations of, risk-based capital guidelines and reporting instructions. Such proposals or interpretations could, if implemented in the future, affect reported capital ratios and net risk-adjusted assets. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 62.

LIQUIDITY

Management of Liquidity

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

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

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

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

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

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

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

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

Funding

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

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

        As of June 30, 2004, Citicorp's national and state-chartered bank subsidiaries can declare dividends to their respective parent companies, without regulatory approval, of approximately $9.3 billion. In determining whether and to what extent to pay dividends, each bank subsidiary must also consider the effect of dividend payments on applicable risk-based capital and leverage ratio requirements as well as policy statements of the federal regulatory agencies that indicate that banking organizations should generally pay dividends out of current operating earnings. Consistent with these considerations, Citicorp estimates that, as of June 30, 2004, its bank subsidiaries can directly or through their parent holding company distribute dividends to Citicorp of approximately $7.6 billion of the available $9.3 billion.

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

        As discussed in the "Capital Resources" section beginning on page 50, the ability of CGMHI to declare dividends could be restricted by capital considerations of its broker/dealer subsidiaries.

        The Travelers Insurance Company (TIC) is subject to various regulatory restrictions that limit the maximum amount of dividends available to its parent without prior approval of the Connecticut Insurance Department. A maximum of $845 million of statutory surplus is available by the end of the year 2004 for such dividends without the prior approval of the Connecticut Insurance Department, of which $620 million was paid during the first six months of 2004.

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        During 2004, it is not anticipated that any restrictions on the subsidiaries' dividending capability will restrict Citigroup's ability to meet its obligations as and when they become due. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 62.

        Primary sources of liquidity for Citigroup and its principal subsidiaries include deposits, collateralized financing transactions, senior and subordinated debt, issuance of commercial paper, proceeds from issuance of trust preferred securities, and purchased/wholesale funds. Citigroup and its principal subsidiaries also generate funds through securitizing financial assets including credit card receivables and single-family or multi-family residences. Finally, Citigroup's net earnings provide a significant source of funding to the corporation.

        Citigroup's funding sources are well-diversified across funding types and geography, a benefit of the strength of the global franchise. Funding for the Parent and its major operating subsidiaries includes a large geographically diverse retail and corporate deposit base of $524.4 billion at June 30, 2004. A significant portion of these deposits have been, and are expected to be, long-term and stable and are considered core.

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

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

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

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

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

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

Citicorp

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

        On a combined basis, at the Holding Company level, Citigroup and Citicorp maintain sufficient liquidity to meet all maturing unsecured debt obligations due within a one-year time horizon without incremental access to the unsecured markets. In aggregate, bank subsidiaries maintain cash capital.

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

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        A diversity of funding sources, currencies, and maturities is used to gain a broad access to the investor base. Citicorp's deposits, which represent 59% and 58% of total funding at June 30, 2004 and December 31, 2003, respectively, are broadly diversified by both geography and customer segments.

        Asset securitization programs remain an important source of liquidity. As credit card securitization transactions amortize, newly originated receivables are recorded on Citicorp's balance sheet and become available for asset securitization. See Note 12 to the Consolidated Financial Statements for additional information about off-balance sheet arrangements.

        Citigroup Finance Canada Inc., a wholly owned subsidiary of Associates, has an unutilized credit facility of Canadian $1.0 billion as of June 30, 2004 that matures in 2004. The facility is guaranteed by Citicorp. In connection therewith, Citicorp is required to maintain a certain level of consolidated stockholder's equity (as defined in the credit facility's agreements). At June 30, 2004, this requirement was exceeded by approximately $66.4 billion.

CGMHI

        CGMHI's total assets were $404 billion at June 30, 2004, an increase from $351 billion at year-end 2003. Due to the nature of the CGMHI's trading activities, it is not uncommon for CGMHI's asset levels to fluctuate significantly from period to period.

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

        CGMHI funds its operations through the use of collateralized and uncollateralized short-term borrowings, long-term borrowings, and its equity. Collateralized short-term financing, including repurchase agreements, and secured loans is CGMHI's principal funding source. Such borrowings are reported net by counterparty, when applicable, pursuant to the provisions of Financial Accounting Standards Board Interpretation No. 41, "Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements" (FIN 41). Excluding the impact of FIN 41, short-term collateralized borrowings totaled $256.6 billion at June 30, 2004. Uncollateralized short-term borrowings provide CGMHI with a source of short-term liquidity and are also utilized as an alternative to secured financing when they represent a less expensive funding source. Sources of short-term uncollateralized borrowings include commercial paper, unsecured bank borrowings, promissory notes and corporate loans. Short-term uncollateralized borrowings totaled $25.7 billion at June 30, 2004.

        CGMHI has a $2.5 billion 364-day committed uncollateralized revolving line of credit with unaffiliated banks. This facility has a two-year term-out provision with any borrowings maturing in May 2007. CGMHI also has a $1.0 billion three-year facility with unaffiliated banks with any borrowings maturing in May 2007 and $2.1 billion in committed uncollateralized 364-day facilities with unaffiliated banks that extend through various dates in 2004 and 2005. CGMHI may borrow under these revolving credit facilities at various interest rate options (LIBOR or base rate) and compensates the banks for these facilities through facility fees. At June 30, 2004, there were no outstanding borrowings under these facilities. CGMHI also has committed long-term financing facilities with unaffiliated banks. At June 30, 2004, CGMHI had drawn down the full $1.7 billion then available under these facilities. A bank can terminate these facilities by giving CGMHI prior notice (generally one year). CGMHI compensates the banks for these facilities through facility fees.    Under all of these facilities, CGMHI is required to maintain a certain level of consolidated adjusted net worth (as defined in the agreements). At June 30, 2004, this requirement was exceeded by approximately $6.6 billion. CGMHI also has substantial borrowing arrangements consisting of facilities that CGMHI has been advised are available, but where no contractual lending obligation exists. These arrangements are reviewed on an ongoing basis to ensure flexibility in meeting CGMHI's short-term requirements.

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

        CGMHI monitors liquidity by tracking asset levels, collateral and funding availability to maintain flexibility to meet its financial commitments. As a policy, CGMHI attempts to maintain sufficient capital and funding sources in order to have the capacity to finance itself on a fully collateralized basis in the event that CGMHI's access to uncollateralized financing is temporarily impaired. This is documented in CGMHI's contingency funding plan. This plan is reviewed periodically to keep the funding options current and in line with market conditions. The management of this plan includes an analysis used to determine CGMHI's ability to

57


withstand varying levels of stress, including ratings downgrades, which could impact its liquidation horizons and required margins. CGMHI maintains a loan value of unencumbered securities in excess of its outstanding short-term unsecured liabilities. This is monitored on a daily basis. CGMHI also ensures that long-term illiquid assets are funded with long-term liabilities.

The Travelers Insurance Company (TIC)

        At June 30, 2004, TIC had $45.7 billion of life and annuity product deposit funds and reserves. Of that total, $26.1 billion is not subject to discretionary withdrawal based on contract terms. The remaining $19.6 billion is for life and annuity products that are subject to discretionary withdrawal by the contractholder. Included in the amount that is subject to discretionary withdrawal is $7.2 billion of liabilities that is surrenderable with market value adjustments. Also included is an additional $6.4 billion of the life insurance and individual annuity liabilities which is subject to discretionary withdrawals at an average surrender charge of 5.2%. In the payout phase, these funds are credited at significantly reduced interest rates. The remaining $6.0 billion of liabilities is surrenderable without charge. Approximately 10% of this relates to individual life products. These risks would have to be underwritten again if transferred to another carrier, which is considered a significant deterrent against withdrawal by long-term policyholders. Insurance liabilities that are surrendered or withdrawn are reduced by outstanding policy loans and related accrued interest prior to payout.

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

OFF-BALANCE SHEET ARRANGEMENTS

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

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

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

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

Securitization of Citigroup's Assets

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

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Credit Card Receivables

        Credit card receivables are securitized through trusts, which are established to purchase the receivables. Citigroup sells receivables into the trusts on a non-recourse basis. After securitization of credit card receivables, the Company continues to maintain credit card customer account relationships and provides servicing for receivables transferred to the SPE trusts. As a result, the Company considers both the securitized and unsecuritized credit card receivables to be part of the business it manages. The documents establishing the trusts generally require the Company to maintain an ownership interest in the trusts. The Company also arranges for third parties to provide credit enhancement to the trusts, including cash collateral accounts, subordinated securities, and letters of credit. As specified in certain of the sale agreements, the net revenue with respect to the investors' interest collected by the trusts each month is accumulated up to a predetermined maximum amount and is available over the remaining term of that transaction to make payments of interest to trust investors, fees, and transaction costs in the event that net cash flows from the receivables are not sufficient. If the net cash flows are insufficient, Citigroup's loss is limited to its retained interest, consisting of seller's interest and an interest-only strip that arises from the calculation of gain or loss at the time receivables are sold to the SPE. When the predetermined amount is reached, net revenue with respect to the investors' interest is passed directly to the Citigroup subsidiary that sold the receivables. Credit card securitizations are revolving securitizations; that is, as customers pay their credit card balances, the cash proceeds are used to purchase new receivables and replenish the receivables in the trust. CGMI is one of several underwriters that distribute securities issued by the trusts to investors. The Company relies on securitizations to fund approximately 60% of its Citi Cards business.

        At June 30, 2004 and December 31, 2003, total assets in the off-balance sheet credit card trusts were $83 billion and $89 billion, respectively. Of those amounts at June 30, 2004 and December 31, 2003, $75 billion and $76 billion, respectively, has been sold to investors via trust-issued securities, and the remaining seller's interest of $8 billion and $13 billion, respectively, is recorded in Citigroup's Consolidated Balance Sheet as Consumer Loans. Included in the $75 billion and $76 billion are retained securities issued by the trust totaling $1.2 billion and $1.1 billion at June 30, 2004 and December 31, 2003, respectively. Citigroup retains credit risk on its seller's interests and reserves for expected credit losses. Amounts receivable from the trusts were $1.1 billion and $1.4 billion, respectively, and amounts due to the trusts were $1.1 billion and $1.1 billion, respectively, at June 30, 2004 and December 31, 2003. The Company also recognized an interest-only strip of $836 million at both June 30, 2004 and December 31, 2003, that arose from the calculation of gain or loss at the time assets were sold to the QSPE. In the three months ended June 30, 2004 and June 30, 2003, the Company recorded net gains of $1 million and $69 million, respectively, and $1 million and $215 million for the six months of 2004 and 2003, respectively, primarily related to the securitization of credit card receivables as a result of changes in estimates in the timing of revenue recognition on securitizations.

Mortgages and Other Assets

        The Company provides a wide range of mortgage and other loan products to a diverse customer base. In addition to providing a source of liquidity and less expensive funding, securitizing these assets also reduces the Company's credit exposure to the borrowers. In connection with the securitization of these loans, the Company may retain servicing rights that entitle the Company to a future stream of cash flows based on the outstanding principal balances of the loans and the contractual servicing fee. Failure to service the loans in accordance with contractual servicing obligations may lead to a termination of the servicing contracts and the loss of future servicing fees. In non-recourse servicing, the principal credit risk to the servicer arises from temporary advances of funds. In recourse servicing, the servicer agrees to share credit risk with the owner of the mortgage loans, such as FNMA, FHLMC, GNMA, or with a private investor, insurer or guarantor. The Company's mortgage loan securitizations are primarily non-recourse, thereby effectively transferring the risk of future credit losses to the purchasers of the securities issued by the trust. In addition to servicing rights, the Company also retains a residual interest in its auto loan, student loan and other assets securitizations, consisting of securities and interest-only strips that arise from the calculation of gain or loss at the time assets are sold to the SPE. At June 30, 2004 and December 31, 2003, the total amount of mortgage and other loan products securitized and outstanding was $132.6 billion and $141.1 billion, respectively. Servicing rights and other retained interests amounted to $6.0 billion and $6.3 billion at June 30, 2004 and December 31, 2003, respectively. The Company recognized gains related to the securitization of mortgages and other assets of $30 million and $187 million during the three months ended June 30, 2004 and 2003, respectively, and $123 million and $324 million during the first six months of 2004 and 2003, respectively.

Securitizations of Client Assets

        The Company acts as an intermediary or agent for its corporate clients, assisting them in obtaining sources of liquidity by selling the clients' trade receivables or other financial assets to an SPE.

        The Company administers several third-party owned, special purpose, multi-seller finance companies that purchase pools of trade receivables, credit cards, and other financial assets from third-party clients of the Company. As administrator, the Company provides accounting, funding, and operations services to these conduits. The Company has no ownership interest in the conduits. Generally, the clients continue to service the transferred assets. The conduits' asset purchases are funded by issuing commercial paper and medium-term notes. Clients absorb the first losses of the conduits by providing collateral in the form of excess assets or residual interest. The Company along with other financial institutions provides liquidity facilities, such as commercial paper backstop lines

59


of credit to the conduits. The Company also provides loss protection in the form of letters of credit and other guarantees. All fees are charged on a market basis. During 2003, to comply with FIN 46, all but two of the conduits issued "first loss" subordinated notes, such that one third-party investor in each conduit would be deemed the primary beneficiary and would consolidate that conduit. These non-consolidation conclusions were not changed upon the adoption of FIN 46 (revised December 2003) (FIN 46-R) in the first quarter of 2004. At June 30, 2004 and December 31, 2003, total assets in the unconsolidated conduits were $41 billion and $44 billion, respectively, and liabilities were $41 billion and $44 billion, respectively. One conduit with assets of $409 million at June 30, 2004 and $823 million at December 31, 2003 is consolidated.

Creation of Other Investment and Financing Products

        The Company packages and securitizes assets purchased in the financial markets in order to create new security offerings, including hedge funds, mutual funds, unit investment trusts, and other investment funds, for institutional and private bank clients as well as retail customers, that match the clients' investment needs and preferences. The SPEs may be credit-enhanced by excess assets in the investment pool or by third-party insurers assuming the risks of the underlying assets, thus reducing the credit risk assumed by the investors and diversifying investors' risk to a pool of assets as compared with investments in individual assets. The Company typically manages the SPEs for market-rate fees. In addition, the Company may be one of several liquidity providers to the SPEs and may place the securities with investors.

        The Company packages and securitizes assets purchased in the financial markets in order to create new security offerings, including arbitrage collateralized debt obligations (CDOs) and synthetic CDOs for institutional clients and retail customers, that match the clients' investment needs and preferences. Typically these instruments diversify investors' risk to a pool of assets as compared with investments in an individual asset. The variable interest entities (VIEs), which are issuers of CDO securities, are generally organized as limited liability corporations. The Company typically receives fees for structuring and/or distributing the securities sold to investors. In some cases, the Company may repackage the investment with higher-rated debt CDO securities or U.S. Treasury securities to provide a greater or a very high degree of certainty of the return of invested principal. A third-party manager is typically retained by the VIE to select collateral for inclusion in the pool and then actively manage it or, in other cases, only to manage work-out credits. The Company may also provide other financial services and/or products to the VIEs for market-rate fees. These may include: the provision of liquidity or contingent liquidity facilities, interest rate or foreign exchange hedges and credit derivative instruments, as well as the purchasing and warehousing of securities until they are sold to the SPE. The Company is not the primary beneficiary of these VIEs under FIN 46 due to our limited continuing involvement and, as a result, we do not consolidate their assets and liabilities in our financial statements.

        See Note 12 to the Consolidated Financial Statements for additional information about off-balance sheet arrangements.

Credit Commitments and Lines of Credit

        The table below summarizes Citigroup's credit commitment as of June 30, 2004 and December 31, 2003. Further details are included in the footnotes.

 
  June 30, 2004
  December 31, 2003
In millions of dollars            
Financial standby letters of credit and foreign office guarantees   $ 38,280   $ 36,402
Performance standby letters of credit and foreign office guarantees     8,794     8,101
Commercial and similar letters of credit     6,550     4,411
One- to four-family residential mortgages     5,033     3,599
Revolving open-end loans secured by one- to four-family residential properties     13,096     14,007
Commercial real estate, construction and land development     1,748     1,382
Credit card lines(1)     749,294     739,162
Commercial and other consumer loan commitments(2)     229,859     210,751
   
 
Total   $ 1,052,654   $ 1,017,815
   
 

(1)
Credit card lines are unconditionally cancelable by the issuer.

(2)
Includes commercial commitments to make or purchase loans, to purchase third-party receivables, and to provide note issuance or revolving underwriting facilities. Amounts include $121 billion and $119 billion with original maturity of less than one year at June 30, 2004 and December 31, 2003, respectively.

See Note 14 to the Consolidated Financial Statements for additional information on credit commitments and lines of credit.

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CORPORATE GOVERNANCE AND CONTROLS AND PROCEDURES

        Citigroup has had a long-standing process whereby business and financial officers throughout the Company attest to the accuracy of financial information reported in corporate systems as well as the effectiveness of internal controls over financial reporting and disclosure processes. The Sarbanes-Oxley Act of 2002 requires CEOs and CFOs to make certain certifications with respect to this report and to the Company's disclosure controls and procedures and internal control over financial reporting.

        The Company's Disclosure Committee has responsibility for ensuring that there is an adequate and effective process for establishing, maintaining, and evaluating disclosure controls and procedures for the Company in connection with its external disclosures. Citigroup has a Code of Conduct that expresses the values that drive employee behavior and maintains the Company's commitment to the highest standards of conduct. The Company has established an ethics hotline for employees. In addition, the Company adopted a Code of Ethics for Financial Professionals which applies to all finance, accounting, treasury, tax and investor relations professionals worldwide and which supplements the Company-wide Code of Conduct.

Disclosure Controls and Procedures

        The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

Internal Control Over Financial Reporting

        There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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FORWARD-LOOKING STATEMENTS

        Certain of the statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The Company's actual results may differ materially from those included in the forward-looking statements. Forward-looking statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "intend," "estimate," "may increase," "may fluctuate," and similar expressions or future or conditional verbs such as "will," "should," "would," and "could." These forward-looking statements involve risks and uncertainties including, but not limited to: the continued improvement in global economic conditions; sovereign or regulatory actions, including actions taken by the Argentine government associated with its anticipated debt restructuring; macro-economic factors and political policies and developments in the countries in which the Company's businesses operate; the level of interest rates, bankruptcy filings and unemployment rates around the world; the credit performance of the portfolios; portfolio growth and seasonal factors; subsidiaries' dividending capabilities; the effect of banking and financial services reforms; possible amendments to, and interpretations of, risk-based capital guidelines and reporting instructions; the effect of acquisitions; and the resolution of legal proceedings and related matters.

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CONSOLIDATED FINANCIAL STATEMENTS


CITIGROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

 
  Three Months Ended June 30,
  Six Months Ended June 30,
 
 
  2004
  2003
  2004
  2003
 
In millions of dollars, except per share amounts

   
   
   
   
 
Revenues                          
Loan interest, including fees   $ 10,858   $ 9,312   $ 21,670   $ 18,782  
Other interest and dividends     5,313     4,776     10,323     9,651  
Insurance premiums     896     839     1,775     1,664  
Commissions and fees     4,488     4,049     8,818     7,749  
Principal transactions     1,042     1,311     2,392     2,913  
Asset management and administration fees     1,652     1,354     3,369     2,605  
Realized gains (losses) from sales of investments     204     188     342     350  
Other revenue     2,834     2,011     4,574     3,325  
   
 
 
 
 
Total revenues     27,287     23,840     53,263     47,039  
Interest expense     4,985     4,486     9,473     9,149  
   
 
 
 
 
Total revenues, net of interest expense     22,302     19,354     43,790     37,890  
   
 
 
 
 

Benefits, claims, and credit losses

 

 

 

 

 

 

 

 

 

 

 

 

 
Policyholder benefits and claims     850     901     1,726     1,772  
Provision for credit losses     1,588     2,186     3,818     4,239  
   
 
 
 
 
Total benefits, claims, and credit losses     2,438     3,087     5,544     6,011  
   
 
 
 
 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 
Non-insurance compensation and benefits     5,893     5,544     11,785     10,850  
Net occupancy expense     1,230     1,064     2,298     2,105  
Technology/communications expense     903     793     1,770     1,591  
Insurance underwriting, acquisition, and operating     282     265     578     529  
Restructuring-related items         (1 )   (3 )   (14 )
Other operating expenses     10,325     2,306     12,847     4,462  
   
 
 
 
 
Total operating expenses     18,633     9,971     29,275     19,523  
   
 
 
 
 

Income before income taxes and minority interest

 

 

1,231

 

 

6,296

 

 

8,971

 

 

12,356

 
Provision for income taxes     49     1,956     2,447     3,875  
Minority interest, after-tax     38     41     107