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FINANCIAL INFORMATION

THE COMPANY   2
  Global Consumer   2
  Global Corporate and Investment Bank   3
  Global Wealth Management   3
  Global Investment Management   3
  Proprietary Investment Activities   3
  Corporate/Other   3
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA   4
MANAGEMENT'S DISCUSSION & ANALYSIS   5
2004 IN SUMMARY   5
EVENTS IN 2004   8
2005 SUBSEQUENT EVENT   9
EVENTS IN 2003   10
EVENTS IN 2002   11
SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES   13
  Accounting Changes and Future Application of Accounting Standards   16
PENSION AND POSTRETIREMENT PLANS   17
BUSINESS FOCUS   19
  Citigroup Net Income—Product View   19
  Citigroup Net Income—Regional View   19
  Selected Revenue and Expense Items   20
GLOBAL CONSUMER   21
  Cards   22
  Consumer Finance   23
  Retail Banking   25
  Other Consumer   27
  Global Consumer Outlook   27
GLOBAL CORPORATE AND INVESTMENT BANK   28
  Capital Markets and Banking   29
  Transaction Services   30
  Other Corporate   31
  Global Corporate and Investment Bank Outlook   31
GLOBAL WEALTH MANAGEMENT   32
  Smith Barney   33
  Private Bank   33
  Global Wealth Management Outlook   34
GLOBAL INVESTMENT MANAGEMENT   35
  Life Insurance and Annuities   36
  Asset Management   39
  Global Investment Management Outlook   40
PROPRIETARY INVESTMENT ACTIVITIES   41
CORPORATE/OTHER   43
MANAGING GLOBAL RISK   44
  Risk Capital   44
  Credit Risk Management Process   45
  Loans Outstanding   46
  Other Real Estate Owned and Other Repossessed Assets   46
  Details of Credit Loss Experience   47
  Cash-Basis, Renegotiated, and Past Due Loans   48
  Foregone Interest Revenue on Loans   48
  Consumer Credit Risk   49
  Consumer Portfolio Review   49
  Corporate Credit Risk   51
  Global Corporate Portfolio Review   53
  Loan Maturities and Fixed/Variable Pricing   54
  Market Risk Management Process   55
  Operational Risk Management Process   57
  Country and Cross-Border Risk Management Process   58
BALANCE SHEET REVIEW   60
  Assets   60
  Liabilities   61
CAPITAL RESOURCES AND LIQUIDITY   62
  Capital Resources   62
  Liquidity   66
  Off-Balance Sheet Arrangements   70
CORPORATE GOVERNANCE AND CONTROLS AND PROCEDURES   73
FORWARD-LOOKING STATEMENTS   73
GLOSSARY   74
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING   76
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM—INTERNAL CONTROL OVER FINANCIAL REPORTING   77
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM—CONSOLIDATED FINANCIAL STATEMENTS   78
CONSOLIDATED FINANCIAL STATEMENTS   79
  Consolidated Statement of Income   79
  Consolidated Balance Sheet   80
  Consolidated Statement of Changes in Stockholders' Equity   81
  Consolidated Statement of Cash Flows   82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   83
FINANCIAL DATA SUPPLEMENT   133
  Average Balances and Interest Rates—Assets   133
  Average Balances and Interest Rates—Liabilities and Stockholders' Equity   134
  Analysis of Changes in Net Interest Revenue   135
  Ratios   137
  Average Deposit Liabilities in Offices Outside the U.S.   137
  Maturity Profile of Time Deposits ($100,000 or more) in U.S. Offices   137
  Short-Term and Other Borrowings   137
  Regulation and Supervision   138
  Legal Proceedings   141
10-K CROSS-REFERENCE INDEX   146
CORPORATE INFORMATION   147
Exhibits and Financial Statement Schedules   147
CITIGROUP BOARD OF DIRECTORS   150

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 more than 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), Global Wealth Management, Global Investment Management (GIM) and Proprietary Investment Activities business segments.

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

        The Company is a bank holding company within the meaning of the U.S. Bank Holding Company Act of 1956 registered with, and subject to examination by, the Board of Governors of the Federal Reserve System (FRB). Certain of the Company's subsidiaries are subject to supervision and examination by their respective federal and state authorities. Additional information on the Company's regulation and supervision can be found within the "Regulation and Supervision" section beginning on page 138.

        At December 31, 2004, the Company had approximately 141,000 full-time and 7,000 part-time employees in the United States and approximately 146,000 full-time employees outside the United States.

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

        The principal executive offices of the Company are located at 399 Park Avenue, New York, New York 10043, telephone number 212 559 1000. Additional information about Citigroup is available on the Company's Web site 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 Web site by clicking on the "Investor Relations" page and selecting "SEC Filings." The Securities and Exchange Commission (SEC) Web site contains reports, proxy and information statements, and other information regarding the Company at www.sec.gov.

GLOBAL CONSUMER

        Global Consumer delivers a wide array of banking, lending, insurance and investment services through a network of local branches, offices, and electronic delivery systems, including ATMs, Automated Lending Machines (ALMs), the Internet, 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, Diner's Club and private label credit and charge cards. North America Cards includes the operations of Citi Cards, the Company's primary brand in North America, and Mexico Cards. International Cards provides credit and charge cards to customers in Europe, the Middle East and Africa (EMEA), Japan, Asia and Latin America.

        Consumer Finance provides community-based lending services through branch networks, regional sales offices and cross-selling initiatives with other Citigroup businesses. The business of CitiFinancial is included in North America Consumer Finance. As of December 31, 2004, North America Consumer Finance maintained 2,642 offices, including 2,452 in the U.S., Canada, and Puerto Rico, and 190 offices in Mexico, while International Consumer Finance maintained 1,481 sales points, including 405 branches and 512 ALMs 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 Retail Distribution, the Commercial Business, Prime Home Finance, Student Loans, Primerica, and Mexico Retail Banking. Retail Distribution delivers banking, lending, investment and insurance services through 775 branches in the U.S. and Puerto Rico and through Citibank Online, an Internet bank. The Commercial Business provides equipment leasing and financing, and banking services to small- and middle-market businesses. The Prime Home Finance business originates and services mortgages for customers across the U.S. The Student Loan business is comprised of the origination and servicing of student loans in the U.S. 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 more than 100,000 independent representatives. Mexico Retail Banking consists of the branch banking operations of Banamex, which maintains 1,349 branches. International Retail Banking consists of 1,129 branches and provides full-service banking and investment services in EMEA, Japan, Asia, and Latin America. In addition to North America, the Commercial Business consists of the suite of products and services offered to small- and middle-market businesses in 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.

GLOBAL WEALTH MANAGEMENT

        Global Wealth Management is comprised of the Smith Barney Private Client and Global Equity Research businesses and the Citigroup Private Bank. Through its Smith Barney network of Financial Consultants and Private Bank offices, Global Wealth Management is one of the leading providers of wealth management services to high-net-worth and affluent clients in the world.

        Smith Barney provides investment advice, financial planning and brokerage services to affluent individuals, small and mid-size companies, non-profits and large corporations through a network of more than 12,000 Financial Consultants in more than 500 offices primarily in the U.S. In addition, Smith Barney provides independent client-focused research to individuals and institutions around the world.

        A significant portion of Smith Barney's 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, Smith Barney generates net interest revenue by financing customers' securities transactions and other borrowing needs through security-based lending. Smith Barney also receives commissions and other sales and service revenues through the sale of proprietary and third-party mutual funds. As part of Smith Barney, 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 Smith Barney businesses.

        Private Bank provides personalized wealth management services for high-net-worth clients in 33 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.

GLOBAL INVESTMENT MANAGEMENT

        Global Investment Management offers a broad range of life insurance, annuity and asset management products and services distributed to institutional and retail clients. Global Investment Management includes Life Insurance and Annuities 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. 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.

        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, Smith Barney and Private Bank businesses are reflected in the respective distributor's income statement through net revenues.

CORPORATE/OTHER

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

3


Citigroup Inc. and Subsidiaries

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

 
  2004
  2003
  2002
  2001
  2000
 
 
  In millions of dollars, except per share amounts

 
Revenues, net of interest expense(1)   $ 86,190   $ 77,442   $ 71,308   $ 67,367   $ 63,572  
Operating expenses     51,974     39,168     37,298     36,528     35,809  
Benefits, claims, and credit losses(1)     10,034     11,941     13,473     10,320     8,466  
   
 
 
 
 
 
Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes     24,182     26,333     20,537     20,519     19,297  
Income taxes     6,909     8,195     6,998     7,203     7,027  
Minority interest, after-tax     227     285     91     87     39  
   
 
 
 
 
 
Income from continuing operations     17,046     17,853     13,448     13,229     12,231  
Income from discontinued operations(2)             1,875     1,055     1,288  
Cumulative effect of accounting changes(3)             (47 )   (158 )    
   
 
 
 
 
 
Net Income   $ 17,046   $ 17,853   $ 15,276   $ 14,126   $ 13,519  
   
 
 
 
 
 
Earnings per share(4)                                
Basic earnings per share:                                
Income from continuing operations   $ 3.32   $ 3.49   $ 2.63   $ 2.61   $ 2.43  
Net income     3.32     3.49     2.99     2.79     2.69  
Diluted earnings per share:                                
Income from continuing operations     3.26     3.42     2.59     2.55     2.37  
Net income     3.26     3.42     2.94     2.72     2.62  
Dividends declared per common share(4)   $ 1.60   $ 1.10   $ 0.70   $ 0.60   $ 0.52  
   
 
 
 
 
 
At December 31                                
Total assets   $ 1,484,101   $ 1,264,032   $ 1,097,590   $ 1,051,850   $ 902,610  
Total deposits     562,081     474,015     430,895     374,525     300,586  
Long-term debt     207,910     162,702     126,927     121,631     111,778  
Mandatorily redeemable securities of subsidiary trusts(5)     6,209     6,057     6,152     7,125     4,920  
Common stockholders' equity     108,166     96,889     85,318     79,722     64,461  
Total stockholders' equity     109,291     98,014     86,718     81,247     66,206  
   
 
 
 
 
 
Ratio of earnings to fixed charges and preferred stock dividends     2.06 x   2.47 x   1.94 x   1.63 x   1.52 x
Return on average common stockholders' equity(6)     17.0 %   19.8 %   18.6 %   19.7 %   22.4 %
Return on risk capital(7)     34 %   39 %                  
Return on invested capital(7)     17 %   20 %                  
Common stockholders' equity to assets     7.29 %   7.67 %   7.77 %   7.58 %   7.14 %
Total stockholders' equity to assets     7.36 %   7.75 %   7.90 %   7.72 %   7.33 %
   
 
 
 
 
 

(1)
Revenues, net of interest expense, and benefits, claims, and credit losses, in the table above are disclosed on an owned basis (under Generally Accepted Accounting Principles (GAAP)). If this table were prepared on a managed basis, which includes certain effects of securitization activities, including receivables held for securitization and receivables sold with servicing retained, there would be no impact to net income, but revenues, net of interest expense, and benefits, claims, and credit losses, would each have been increased by $5.079 billion, $4.750 billion, $4.123 billion, $3.568 billion and $2.459 billion in 2004, 2003, 2002, 2001 and 2000, respectively. Although a managed basis presentation is not in conformity with GAAP, management 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 22.

(2)
On August 20, 2002, Citigroup completed the distribution to its stockholders of a majority portion of its remaining ownership interest in Travelers Property Casualty Corp. (TPC). Following the distribution, Citigroup began accounting for TPC as discontinued operations. See Note 3 to the Consolidated Financial Statements.

(3)
Accounting changes of ($47) million in 2002 resulted from the adoption of the remaining provisions of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). Accounting changes of ($42) million and ($116) million in 2001 resulted from the adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), and the adoption of Emerging Issues Task Force (EITF) Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" (EITF 99-20), respectively.

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

(5)
During 2004, the Company deconsolidated the subsidiary issuer trusts in accordance with FIN 46-R. For regulatory capital purposes these trust securities remain a component of Tier 1 Capital. See "Capital Resources and Liquidity" section on page 62.

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

(7)
Risk capital is defined as the amount of capital required to absorb potential unexpected economic losses resulting from extremely severe events over a one-year time period. Return on risk capital is calculated as net income divided by average risk capital. Invested capital is defined as risk capital plus Goodwill and Intangible assets excluding Mortgage Servicing Rights, which are a component of risk capital. Return on invested capital is calculated using income adjusted to exclude a net internal charge Citigroup levies on the goodwill and intangible assets of each business offset by each business's share of the rebate of the goodwill and intangible asset charge. Return on risk capital and return on invested capital are non-GAAP performance measures. Management uses return on risk capital to assess businesses' operating performance and to allocate Citigroup's balance sheet and risk capital capacity. Return on invested capital is used to assess returns on potential acquisitions and to compare long-term performance of businesses with differing proportions of organic and acquired growth. For a further discussion on risk capital, see page 44.

4


MANAGEMENT'S DISCUSSION AND ANALYSIS

2004 IN SUMMARY

        Citigroup's fundamental strengths are its global presence, distribution breadth, leading brand and broad customer relationships. These strengths combined to generate a net income of $17.05 billion in 2004. Income was well diversified by both product and region, as shown in the charts below. Return on common equity was 17% for 2004. Results in 2004 included a $4.95 billion after-tax charge related to the 2004 second quarter WorldCom and Litigation Reserve Charge. Results also reflect a $756 million after-tax gain on sale of the Company's equity investment in Samba. Excluding the impact of the charge and the gain, net income increased 19% and return on common equity was 20%.

INCOME FROM CONTINUING OPERATIONS

[EDGAR REPRESENTATION OF GRAPHIC DATA]

 
  In billions of dollars
2000   $ 12.2
2001   $ 13.2
2002   $ 13.4
2003   $ 17.9
2004   $ 17.0

2004 NET INCOME BY SEGMENT*

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Global Investment Management   8 %
Global Wealth Management   7 %
Global Corporate and Investment Bank   13 %
Global Consumer   72 %

*
Excludes Proprietary Investment Activities income of $743 million and Corporate/Other loss of $56 million.

2004 NET INCOME BY REGION*

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Asia   16 %
Japan   5 %
EMEA   14 %
Mexico   10 %
North America   47 %
Latin America   8 %

*
Excludes Proprietary Investment Activities income of $743 million and Corporate/Other loss of $56 million

DILUTED EARNINGS PER SHARE—INCOME FROM CONTINUING OPERATIONS

[EDGAR REPRESENTATION OF GRAPHIC DATA]

2000   $ 2.37
2001   $ 2.55
2002   $ 2.59
2003   $ 3.42
2004   $ 3.26

        We continued to strengthen our business franchises through strategic acquisitions in 2004. Acquisitions during the year included the KorAm Bank, the consumer finance business of Washington Mutual, Inc., and the announced purchase of First American Bank in Texas, which is pending regulatory approval. Additionally, we maintained our focus on disciplined capital allocation, which led to the announced or completed disposition of businesses that were not part of its long-term core strategy. These included the sale of the Company's equity investment in Samba, the sale of the Transportation Finance business of CitiCapital (resulting in an after-tax gain of approximately $100 million) and the sale of a portion of the electronic funds transfer business (resulting in an after-tax gain of $180 million).

        Revenues increased 11% from 2003, reaching $86.2 billion. North America and international revenues increased 10% and 18%, respectively. Revenue increases were driven by both organic growth and new acquisitions and were led by 15% growth in our global consumer businesses. Revenue growth reflected double-digit growth rates in Cards, Transaction Services, Smith Barney and Global Investment Management. Higher equity market valuations led to increased results in Proprietary Investment Activities.

        Revenue growth was driven by strong increases in customer balances. Retail Banking loans increased 25%, Consumer Finance loans increased 10%, and Cards receivables increased 19%. Corporate loans increased 16% and Transaction Services assets under custody increased 23%. Smith Barney client assets increased 8% and Private Bank client volumes increased 15%.

TOTAL DEPOSITS

[EDGAR REPRESENTATION OF GRAPHIC DATA]

 
  In billions of dollars
2000   $ 301
2001   $ 375
2002   $ 431
2003   $ 474
2004   $ 562

        Operating expenses increased 33% from the previous year. Included in expenses were a $7.915 billion ($4.95 billion after-tax) charge for the WorldCom and Litigation Reserve Charge, a $400 million ($244 million after-tax) charge related to closing the Japan Private Bank and reserves of $196 million ($151 million after-tax) related to the expected resolution of the previously disclosed SEC investigation of transfer agent matters. Excluding these legal and

5


regulatory charges, expenses increased 12% and reflected increased investment spending (3%), expenses from acquisitions and the impact of foreign exchange (6%), an increase in other legal expenses (2%) and higher operating expenses (1%). Investment spending included, among other things, the addition of 558 new consumer finance and retail banking branches globally, increased advertising and marketing and investments in technology.

NET REVENUE AND OPERATING EXPENSE

[EDGAR REPRESENTATION OF GRAPHIC DATA]

 
  In billions of dollars
 
  2000
  2001
  2002
  2003
  2004
Net revenue   $ 63.6   $ 67.4   $ 71.3   $ 77.4   $ 86.2
Operating expense   $ 35.8   $ 36.5   $ 37.3   $ 39.2   $ 52.0

        The favorable global credit environment had a significant impact on Citigroup's 2004 results as credit reserve releases of $2.0 billion led to a decrease in total credit costs of $1.8 billion.

        The effective tax rate decreased 255 basis points to 28.6% for the year, reflecting the release of valuation allowances related to the utilization of foreign tax credits and reserves related to tax settlements and changes in estimates, and the impact of indefinitely invested international earnings.

        Citigroup's equity capital base and trust-preferred securities grew to more than $115 billion at December 31, 2004. Stockholders' equity increased by $11.3 billion during 2004 to $109.3 billion. The Company distributed $8.3 billion in dividends to common shareholders.

RETURN ON COMMON EQUITY

[EDGAR REPRESENTATION OF GRAPHIC DATA]

2000   22.4 %
2001   19.7 %
2002   18.6 %
2003   19.8 %
2004   17.0 %

        The Company's Board of Directors increased the quarterly common dividend by 14% during 2004 and by an additional 10% in January 2005, bringing the current quarterly payout to 44 cents per share.

TOTAL CAPITAL (TIER 1 AND TIER 2)

[EDGAR REPRESENTATION OF GRAPHIC DATA]

 
  In billions of dollars
 
  2000
  2001
  2002
  2003
  2004
Tier 1 and Tier 2   $ 73.0   $ 75.8   $ 78.3   $ 90.3   $ 100.9
Tier 1   $ 54.5   $ 58.4   $ 59.0   $ 66.9   $ 74.4

        During 2004, we did not achieve our expectation of double-digit income growth. The WorldCom Litigation and Reserve Charge drove a decline in net income of 5% versus 2003.

        In the 2004 second quarter, the Company recorded a $4.95 billion after-tax charge for settlement of the WorldCom class action lawsuit and an increase in litigation reserves related to Enron and other pending lawsuits and legal proceedings. This charge was an important step in addressing the financial impact of resolving these matters.

        In the third quarter, the Financial Services Agency of Japan (FSA) issued an administrative order that required Citigroup's Private Bank to suspend all new transactions with customers and to discontinue operations by September 30, 2005. The administrative order was the result of an inspection by the FSA, which determined that there were fundamental problems in Citibank Japan's internal controls and governance structure, principally in its Private Bank operations. We have accepted the basis for the sanctions and have placed the utmost priority on complying with the FSA's directives. In the fourth quarter, the Company recorded a $244 million after-tax charge related to closing the Japan Private Bank.

        During the third and fourth quarters, the Company recorded reserves of $196 million ($151 million after-tax) related to the expected resolution of the previously disclosed SEC investigation of transfer agent matters. These reserves now fully cover the financial terms that the SEC staff has agreed to recommend to the Commission for resolution of this matter.

        In August, our European government bond trading desk executed a transaction in the European government bond market that involved large executions in various government bonds and futures contracts. We regret having executed this transaction as we failed to consider its potential impact on our clients and other stakeholders, including European regulators and treasuries, and because it did not meet our standards. The U.K.'s Financial Services Authority and other European regulators are investigating this transaction and we are fully cooperating.

        During 2004, the Company took numerous steps towards the goal of improving the way we do business, including the strengthening of the independence and capabilities of our internal control and compliance structure. In the third and fourth quarter, Chuck Prince, CEO of Citigroup, personally met with more than 35,000 employees to emphasize our goal of becoming the most respected global financial services company.

6


Outlook for 2005

        We enter 2005 with momentum and optimism. Our primary goals for 2005 include taking steps to become the most respected global financial institution; growing our Global Consumer franchise; growing our International businesses; and ensuring our Global Corporate and Investment Bank is best in class.

        Throughout 2005, we will implement many enhancements to our training, development and compensation processes designed to achieve our goal of becoming the most respected global financial institution. In 2004, we increased the independence of risk management functions, including internal control and compliance. We expect to continue to enhance our risk management, control and compliance functions in 2005.

        During the coming year, we expect to expand our global branch network, further develop our brand through advertising and marketing and invest in technology to increase our competitiveness. We also expect to continue to make strategically targeted acquisitions that will extend our geographic reach and enhance our product capabilities. We will renew our focus on expense discipline and building cost advantages, and we expect to continue to apply disciplined capital management to allocate capital to our highest growth and highest return opportunities.

        We anticipate that the credit environment globally will remain favorable; however, we do not expect the level of credit reserve releases in 2004 to repeat in 2005.

        We also do not expect the level of tax-reserve releases and tax benefits that occurred in 2004 to repeat in 2005. Accordingly, we anticipate a higher effective tax rate in 2005, which we estimate to be more in line with the 2003 effective tax rate.

        As we experienced during the second half of 2004, we expect that increasing interest rates will continue to have a negative impact on our Treasury results.

        In January 2005, we announced the sale of Traveler's Life & Annuity, including substantially all of our international insurance businesses, to MetLife for approximately $11.5 billion subject to closing adjustments. The businesses included in the sale transaction had earnings of $901 million in 2004. The transaction is expected to result in an after-tax gain of approximately $2.0 billion, subject to closing adjustments, and to make available approximately $6.0 billion of Tier I Capital. We expect the transaction to close in the summer of 2005. Proceeds from the sale will be redeployed in higher growth and higher return opportunities to maximize value for our shareholders.

        We plan to finalize our exit of the Japan Private Bank by the end of the 2005 third quarter, which will result in costs in connection with implementing the exit plan, and additional charges may be incurred. In addition, we will continue to work and cooperate with our regulators in Europe to seek a conclusion to investigations relating to the European Bond transaction.

        Limited staff reductions will be made in the Global Corporate and Investment Bank in early 2005. The reductions will affect an estimated 1,400 staff and will result in an approximately $275 million pre-tax charge during the 2005 first quarter.

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

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

        Certain of the statements above are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 73.

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Events in 2004

Settlement of 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 of class action litigation brought on behalf of purchasers of WorldCom securities and an increase in litigation reserves (WorldCom and Litigation Reserve Charge).

        Subject to the terms of the settlement and its eventual approval by the courts, Citigroup will make a payment of approximately $2.575 billion, or $1.59 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 will come out of the settlement amount.

        In connection with the settlement of the WorldCom class action, the Company reevaluated and increased its reserves for numerous other lawsuits and legal proceedings arising out of alleged misconduct in connection with:

        As of December 31, 2004, the Company's litigation reserve for these matters, net of the amount to be paid upon final approval of the WorldCom class action settlement, was $6.64 billion on a pretax basis.

        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, the novel issues presented, and the significant amounts involved, it is possible that the ultimate costs of these matters may exceed or be below the reserve. The Company 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. See "Legal Proceedings" on page 141.

Sale of Samba Financial Group

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

Credit Improvement Performance

        During the past two years, the world-wide credit environment has continuously improved, as evidenced by declining cash-basis loan balances and lower delinquency rates. Accordingly, the Company has reduced its Allowance for Credit Losses.

        During 2004, the Company released $2.004 billion of reserves, consisting of $900 million from GCIB's reserves and $1.104 billion from Global Consumer's reserves. The GCIB releases consisted of a $737 million release in Capital Markets and Banking and a $163 million release in Transaction Services. The Global Consumer releases consisted of a $691 million net release in the Cards portfolio, a $339 million net release in Retail Banking, and a $74 million net release in Consumer Finance. At December 31, 2004, the Company's total allowance for loans, leases and commitments was $11.869 billion.

        During 2003, the Company released $508 million of reserves, consisting of $300 million in GCIB and $208 million in Global Consumer. At December 31, 2003, the Company's total allowance for loans, leases and commitments was $13.243 billion.

        Management evaluates the adequacy of loan loss reserves by analyzing probable loss scenarios and economic and geopolitical factors that impact the portfolios. See pages 14 - 15 and pages 49 - 54 for an additional discussion of the reserve levels and credit process. See also Note 11 to Notes to Consolidated Financial Statements.

Divestiture of CitiCapital's Transportation Finance Business

        On November 22, 2004, the Company reached an agreement to sell CitiCapital's Transportation Finance Business based in Dallas and Toronto to GE Commercial Finance for total cash consideration of approximately $4.4 billion. The sale, which was completed on January 31, 2005, resulted in an after-tax gain of approximately $100 million.

        The Transportation Finance business is part of the Company's Global Consumer Retail Banking business and provides financing, leasing, and asset-based lending to the commercial trucking industry.

Reserve for the Securities and Exchange Commission's Transfer Agent Investigation

        During the 2004 fourth quarter, the Company recorded a $131 million after-tax reserve related to the expected resolution of the previously disclosed SEC investigation of transfer agent matters, which, combined with a $20 million after-tax reserve taken in the 2004 third quarter, fully covers the financial terms that the SEC staff has agreed to recommend to the Commission for resolution of this matter. See "Legal Proceedings" on page 141.

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

        The Financial Services Agency of Japan issued an administrative order against Citibank Japan in September 2004. This order requires Citigroup to exit all private banking operations in Japan by September 30, 2005. Accordingly, the Private Bank division of Citibank Japan suspended all new transactions with its customers beginning on September 29, 2004.

        In connection with the exiting of private banking operations in Japan, the Company is performing a comprehensive review of the Private Bank's customers and products to develop an appropriate exit plan. During the 2004 fourth quarter, the Company recorded a $400 million ($244 million after-tax) charge related to its anticipated exit plan implementation (Exit Plan Charge). Implementation of the plan may result in additional charges in future periods.

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

        On October 25, 2004, Citigroup announced that it has decided to wind down Cititrust and Banking Corporation, a licensed trust bank in Japan, after concluding that there were internal control, compliance and governance issues in that subsidiary.

Acquisition of First American Bank

        On August 24, 2004, Citigroup announced it will acquire First American Bank in Texas (FAB). The closing of the transaction is subject to and pending applicable regulatory approvals. The transaction will establish Citigroup's retail branch presence in Texas, giving Citigroup more than 100 branches, $3.5 billion in assets and approximately 120,000 new customers in the state.

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 99.8% of KorAm's outstanding shares for a total of KRW 3.14 trillion ($2.7 billion). The results of KorAm are included in the Consolidated Financial Statements from May 2004 forward.

        KorAm is a leading commercial bank in Korea, with 223 domestic branches and total assets at June 30, 2004 of $37 billion.

        During the 2004 fourth quarter, KorAm was merged with the Citibank Korea branch to form Citibank Korea Inc.

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) 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 included 427 WMF offices located in 26 states, primarily in the Southeastern and Southwestern United States, 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.

2005 Subsequent Event

Sale of Travelers Life & Annuity and Substantially All International Insurance Businesses

        On January 31, 2005, the Company announced an agreement for the sale of Citigroup's Travelers Life & Annuity and substantially all of Citigroup's international insurance businesses to MetLife, Inc. (MetLife) for $11.5 billion, subject to closing adjustments.

        The businesses being acquired by MetLife generated total revenues of $5.2 billion and net income of $901 million for the twelve months ended December 31, 2004. The businesses had total assets of $96 billion at December 31, 2004.

        The transaction has been approved by the Boards of Directors of both companies. Under the terms of the transaction, Citigroup will receive $1.0 billion to $3.0 billion in MetLife equity securities and the balance in cash, which will result in an after-tax gain of approximately $2.0 billion, subject to closing adjustments.

        The transaction sharpens the Company's focus on its long-term growth franchises. The sale proceeds will be deployed to higher return and higher growth opportunities and to maximize returns to shareholders.

        The transaction encompasses Travelers Life & Annuity's U.S. businesses and its international operations other than Citigroup's life business in Mexico. International operations include wholly owned insurance companies in the United Kingdom, Belgium, Australia, Brazil, Argentina, and Poland; joint ventures in Japan and Hong Kong; and offices in China.

        In connection with the transaction, Citigroup and MetLife have entered into ten-year agreements under which MetLife will make products available through certain Citigroup distribution channels.

        The transaction is subject to certain domestic and international regulatory approvals, as well as other customary conditions to closing, and is expected to close during the 2005 second or third quarter.

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Argentina

        The restructuring of customer annuity liabilities was approved by the Argentine Ministry of Insurance on July 3, 2003. During the 2003 fourth quarter, the Company contributed $55 million of new capital to its Argentine Global Investment Management companies, primarily to fund the voluntary annuity restructuring plan. During 2004, additional capital totaling $184 million was injected principally to meet local regulatory requirements.

        The insurance companies in Argentina are included in the announced sale of Travelers Life and Annuity disclosed above which was announced by the Company on January 31, 2005.

        The Argentine government launched its $100 billion debt exchange offer on January 14, 2005. The exchange offer is expected to close on February 25, 2005. The Global Investment Management business in Argentina tendered all of its original U.S. dollar bonds (approximately $1.6 billion of AUMs). The Company tendered the defaulted government bonds it held for its own account on February 18, 2005. At this time, any financial impact resulting from the tender is not expected to be significant to the Company.

        The Company believes it has a sound basis to bring a claim as a result of various actions of the Argentine government. A recovery on such a claim could serve to reduce the economic loss of the Company in Argentina. However, the amount of any recovery would be affected by the debt exchange described above and by events described on page 11.

        Certain of the above statements in this section are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 73.

Events in 2003

Acquisition of Sears' Credit Card and Financial Products Business

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

Acquisition of The Home Depot's Private-Label Portfolio

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

Common Stock Dividend Increase

        On July 14, 2003, the Company's Board of Directors approved a 75% increase in the quarterly dividend on the Company's common stock to 35 cents a share from 20 cents a share. On January 20, 2004, the Company increased its quarterly dividend by 14% by declaring a 40 cent dividend on its common stock.

Settlement of Certain Legal and Regulatory Matters

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

10


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

Impact from Argentina's Economic Changes

        As a result of an improving credit environment, the Global Consumer allowance for credit losses was reduced by $100 million in 2003 and $39 million in 2004 and the Global Corporate and Investment Bank reduced allowance for credit losses by approximately $164 million in 2004.

        In 2003, the Company wrote off $127 million of its government-issued compensation notes against previously established reserves. This write-off was triggered by, among other things, the government's disallowance of compensation for pesification of certain credit card and overdraft loans. While the notes were adjusted, the disallowance is still being negotiated. The initial payment of approximately $57 million due under the compensation notes was received in August 2003. Additional payments under the compensation notes totaling $119 million and $61 million were received when due in 2004 and February 2005, respectively. In 2003, the Company also recognized a $13 million impairment charge on its government Patriotic Bonds. Payments required under bank deposit Amparos (judicial orders requiring previously dollar-denominated deposits that had been re-denominated at government rates to be immediately repaid at market exchange rates) were down significantly from 2002; losses recorded in 2003, net of the $40 million reserve release, were $2 million; and losses recorded in 2004, net of a $6 million reserve release, were $25 million.

        The Global Investment Management businesses in Argentina recorded pretax charges of $208 million in 2003. These charges were comprised of: $124 million in write-downs resulting from the mandatory exchange of Argentine Government Promissory Notes (GPNs) for Argentine government bonds denominated in U.S. dollars; a $44 million write-off of impaired Deferred Acquisition Costs reflecting changes in underlying cash flow estimates for the business; $20 million of losses related to the restructuring of voluntary customer annuity liability balances; and $20 million of losses related to a premium deficiency in the death and disability insurance business. Additional write-offs of impaired Deferred Acquisition Costs of $11 million were taken in 2004.

Events in 2002

Impact from Argentina's Economic Changes

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

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

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

11


Discontinued Operations

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

        On August 20, 2002, Citigroup completed the distribution to its stockholders of a majority portion of its remaining ownership interest in TPC (the distribution). This non-cash distribution was tax-free to Citigroup, its stockholders and TPC. The distribution was treated as a dividend to stockholders for accounting purposes that reduced Citigroup's Additional Paid-In Capital by approximately $7.0 billion. Following the distribution and subsequent merger of TPC and the St. Paul Companies (St. Paul Travelers) on April 1, 2004, Citigroup remains a holder of approximately 6.0% of TPC's outstanding equity securities, which are carried at fair value in the Proprietary Investment Activities segment and classified as available-for-sale within Investments on the Consolidated Balance Sheet.

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

Charge for Regulatory and Legal Matters

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

Acquisition of Golden State Bancorp

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

Sale of 399 Park Avenue

        During 2002, the Company sold its 399 Park Avenue, New York City headquarters building. The Company is currently the lessee of approximately 40% of the building with terms averaging 15 years. The sale for $1.06 billion resulted in a pretax gain of $830 million, with $527 million ($323 million after-tax) recognized in 2002 representing the gain on the portion of the building the Company does not occupy, and the remainder to be recognized over the term of Citigroup's lease agreements. The Company recognized $20 million in both 2004 and 2003 of the deferred portion of the gain and $5 million in 2002.

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SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

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

        Certain of the statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 73.

Valuations of Financial Instruments

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

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

        For our available-for-sale and trading portfolios amounting to assets of $489.5 billion and $414.5 billion and liabilities of $135.5 billion and $121.9 billion at December 31, 2004 and 2003, respectively, fair values were determined in the following ways: externally verified via comparison to quoted market prices or third-party broker quotations; by using models that were validated by qualified personnel independent of the area that created the model and inputs that were verified by comparison to third-party broker quotations or other third-party sources; or by using alternative procedures such as comparison to comparable securities and/or subsequent liquidation prices. At December 31, 2004 and 2003, respectively, approximately 96.2% and 96.5% of the available-for-sale and trading portfolios' gross assets and liabilities (prior to netting positions pursuant to FIN 39) are considered verified and approximately 3.8% and 3.5% are considered unverified. Of the unverified assets, at December 31, 2004 and 2003, respectively, approximately 66.4% and 66.0% consist of cash products, where independent quotes were not available and/or alternative procedures were not feasible, and 33.6% and 34.0% consist of derivative products where either the model was not validated and/or the inputs were not verified due to the lack of appropriate market quotations. Such values are actively reviewed by management.

        In determining the fair values of our securities portfolios, management also reviews the length of time trading positions have been held to identify aged inventory. During 2004, the monthly average aged inventory designated as available-for-immediate-sale was approximately $7.6 billion compared with $5.4 billion in 2003. Inventory positions that are both aged and whose values are unverified amounted to $2.9 billion and less than $2.1 billion at December 31, 2004 and 2003, respectively. The fair value of aged-inventory is actively monitored and, where appropriate, is discounted to reflect the implied illiquidity for positions that have been available-for-immediate-sale for longer than 90 days. At December 31, 2004 and 2003, such valuation adjustments amounted to $83 million and $68 million, respectively.

        Citigroup's private equity subsidiaries include subsidiaries registered as Small Business Investment Companies and other subsidiaries that engage exclusively in venture capital activities. Investments held by private equity subsidiaries related to the Company's venture capital activities amounted to $3.8 billion and $4.4 billion at December 31, 2004 and 2003, respectively. For investments in publicly traded securities held by private equity subsidiaries amounting to five positions with a fair value of approximately $0.4 billion and five positions with a fair value of approximately $0.9 billion at December 31, 2004 and 2003, respectively, fair value is based upon quoted market prices. These publicly traded securities include thinly traded securities, large block holdings, restricted shares or other special situations, and the quoted market price is discounted to produce an estimate of the attainable fair value for the securities. To determine the amount of the discount, the Company uses a valuation methodology that is based on the British Venture Capital Association's guidelines. Such discounts ranged from 10% to 40% of the investments' quoted prices in 2004 and from 10% to 50% in 2003. For investments that are not publicly traded and are held by private equity subsidiaries amounting to approximately $3.5 billion for each of the years ended December 31, 2004 and 2003, estimates of fair value are made

13


periodically by management based upon relevant third-party arm's length transactions, current and subsequent financings and comparisons to similar companies for which quoted market prices are available. Independent consultants may be used to provide valuations periodically for certain investments that are not publicly traded, or the valuations may be done internally. Internal valuations are reviewed by personnel independent of the investing entity.

        See the discussion of trading account assets and liabilities and investments in Summary of Significant Accounting Policies in Note 1 to the Consolidated Financial Statements. For additional information regarding the sensitivity of these instruments, see "Market Risk Management Process" on page 55.

Allowance for Credit Losses

        The allowance for credit losses represents management's estimate of probable losses inherent in the lending portfolio. This evaluation process is subject to numerous estimates and judgments. The frequency of default, risk ratings, and the loss recovery rates, among other things, are considered in making this evaluation, as are the size and diversity of individual large credits. Changes in these estimates could have a direct impact on the credit costs in any quarter and could result in a change in the allowance. At December 31, 2004 and 2003, respectively, the total allowance for credit losses, which includes reserves for unfunded lending commitments and letters of credit, totaled $3.490 billion and $4.155 billion for the Corporate loan portfolio and $8.379 billion and $9.088 billion for the Consumer loan portfolio. Attribution of the allowance is made for analytic purposes only, and the entire allowance of $11.869 billion and $13.243 billion at December 31, 2004 and 2003, respectively, is available to absorb probable credit losses inherent in the portfolio, including letters of credit and unfunded commitments.

        During 2004, Corporate cash-basis loans decreased $1.513 billion from $3.419 billion in 2003 to $1.906 billion, and net credit losses decreased from $1.211 billion in 2003 to $130 million, reflecting overall improvement in the credit quality of the portfolio. The Company also completed the implementation of Citigroup's internal credit risk-rating standards for the Banamex loan portfolio. All of these factors resulted in a decline in the Corporate allowance, with the release during 2004 of $900 million in reserves. Although the 2004 credit environment led to benefits from loan loss releases and declines in cash-basis loans, it is unlikely these benefits will repeat in 2005.

        Consumer net credit losses increased from $7.555 billion in 2003 to $8.471 billion in 2004. This increase was due to the net credit losses related to the Sears and Home Depot portfolios, which were acquired during 2003. Excluding these two portfolios, the Consumer net credit losses declined from $7.176 billion in 2003 to $5.985 billion in 2004. In addition, Consumer loans on which accrual of interest has been suspended decreased from $6.085 billion to $5.463 billion. The improvement in the overall credit performance of the Consumer portfolio resulted in a decrease of the Consumer allowance, with the net release during 2004 of $1.104 billion in reserves.

        Consumer credit loss ratios for 2005 are expected to remain relatively constant to the fourth quarter 2004 levels, with some slight improvement in the North America Cards and Consumer Finance portfolios. Full-year loss ratios for 2005 are expected to improve against prior-year levels due to credit loss rates that declined during 2004.

        The allowance for credit losses attributed to the Corporate portfolio is established through a process that begins with statistical estimates of probable losses inherent in the portfolio for all performing loans plus certain de minimis non-performing loans less than $10 million. These estimates are based upon: (1) Citigroup's internal system of credit risk ratings, which are analogous to the risk ratings of the major rating agencies; (2) the Corporate portfolio database; and (3) historical default and loss data, including rating agency information regarding default rates from 1983 to 2003, and internal data, dating to the early 1970s, on severity of losses in the event of default. This statistical process generates an estimate for losses inherent in the portfolio as well as a one-standard-deviation confidence interval around the estimate.

        The statistical estimate for losses inherent in the portfolio is based on historical average default rates and historical average write-off rates. The one-standard-deviation confidence interval reflects the historical fluctuation of default rates over the credit cycle, the historical variability of loss severity among defaulted loans, and the degree to which there are large obligor concentrations in the global portfolio.

        Next, larger-balance, non-performing, non-homogeneous exposures representing significant individual credit exposures are evaluated based upon the borrower's overall financial condition, resources and payment record; the prospects for support from any financially responsible guarantors; and, if appropriate, the realizable value of any collateral. For these loans, which are deemed impaired, reserves are then calculated based upon an estimate of probable losses. Consideration is given to all available evidence, including, as appropriate, the present value of expected future cash flows discounted at the loan's contractual effective rate, the secondary market value of the loan, and the fair value of collateral less disposal costs.

        The sum of the estimated losses inherent in the total portfolio and the reserves for significant individual non-performing credit exposures are then adjusted by management after considering environmental factors and trends in portfolio indicators, including cash-basis loans, historical and forecasted write-offs, and portfolio concentrations. In addition, management considers the current business strategy and credit process, including credit limit setting and compliance, credit approvals, loan underwriting criteria and loan workout procedures.

        A similar approach is used for determining the credit loss reserve related to unfunded lending commitments and letters of credit.

        Based on this process, the allowance for credit losses attributable to the Corporate portfolio was set at $3.490 billion as of December 31, 2004, compared with $4.155 billion in 2003. These balances include the reserve for unfunded commitments and letters of credit of $600 million for both 2004 and 2003, which are included in other liabilities on the balance sheet.

        For the Consumer portfolios (excluding Commercial Business and KorAm), which consist of smaller-balance, homogeneous loans, including consumer mortgages, installment loans, and revolving credit cards, the loans within each portfolio are collectively evaluated for impairment in order to provide an allowance sufficient to cover all loans within that portfolio that have shown evidence of impairment as of the balance sheet date. The foundation for assessing the adequacy of the allowance for credit losses for Consumer loans is a methodology that estimates the losses inherent in the portfolio at the balance sheet date based on historical delinquency flow rates, charge-off statistics and loss severity. This methodology is applied separately for each individual product within each different geographic region in which the product is offered.

14


        Under this method, the portfolio of loans is aged and separated into groups based upon the aging of the loan balances (current, 1 to 29 days past due, 30 to 59 days past due, etc.). The result is a base calculation of inherent losses in the loan portfolio for each applicable business within the Global Consumer segment. Management then evaluates the adequacy of the allowance for credit losses for each business relative to its base calculation after adjusting this base for factors such as economic trends, competitive factors, seasonality, portfolio acquisitions, solicitation of new loans, changes in lending policies and procedures, geographical, product, and other environmental factors, changes in bankruptcy laws, and evolving regulatory standards.

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

        For the Commercial Business loan portfolio within Consumer, a statistical model, similar to the one used for the Corporate portfolio, was implemented in 2004 for evaluating the adequacy of the allowance for credit losses. Larger-balance, non-performing, non-homogeneous exposures deemed impaired are evaluated individually while the remaining Commercial Business loan portfolio is evaluated statistically by using internal credit risk ratings and historical default and loss data. Like the Corporate loan portfolio model, this estimate may be adjusted by management after considering other factors such as the portfolio trends and relevant economic indicators.

        Prior to 2004, the credit loss allowance for the Commercial Business portfolio was established based upon an estimate of probable losses inherent in the portfolio for individual loans and leases deemed impaired, and the application of annualized weighted average credit loss ratio to the remaining portfolio. The annualized weighted average credit loss ratio reflects both historical and projected losses. Additional reserves were established to provide for imprecision caused by the use of estimated loss data.

        Based on these methodologies, the allowance for credit losses related to the Consumer portfolios (including Commercial Business) was set at $8.379 billion and $9.088 billion as of December 31, 2004 and 2003, respectively.

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

        See the discussions of "Consumer Credit Risk" and "Corporate Credit Risk" on pages 49 and 51, respectively, for additional information.

Securitizations

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

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

        If the securitization entity's activities are sufficiently restricted to meet certain accounting requirements to be considered a qualifying special-purpose entity (QSPE), the securitization entity is not consolidated by the seller of the transferred assets. In January 2003, the Financial Accounting Standards Board (FASB) issued a new interpretation on consolidation accounting that was adopted by the Company on July 1, 2003. Under this interpretation, FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46), if securitization entities other than QSPEs meet the definition of a variable interest entity (VIE), the Company must evaluate whether it is the primary beneficiary of the entity and, if so, must consolidate it. The entity would be considered a VIE if it requires additional subordinated financial support or if the equity investors lack certain characteristics of a controlling financial interest. In December 2003, FASB issued a revised version of FIN 46 (FIN 46-R), which the Company implemented in January 2004. This revision included substantial changes from the original FIN 46, including changes in the calculation of the expected losses and expected residual returns. Its impact on the Company's Financial Statements was an increase to assets and liabilities of approximately $1.6 billion. However, most of the Company's securitization transactions continued to meet the criteria for sale accounting and non-consolidation.

        The Company participates in securitization transactions, structured investment vehicles, and other investment funds with its own and with clients' assets totaling $1,698.3 billion at December 31, 2004 and $1,158.7 billion at December 31, 2003.

        Global Consumer primarily uses QSPEs to conduct its securitization activities, including credit card receivables, mortgage loans, student loans and auto loans. Securitizations completed by Global Consumer are for the Company's own account. QSPEs are qualifying special-purpose entities established in accordance with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140). The Company is the transferor of assets to these QSPEs and, accordingly, does not consolidate these QSPEs. At December 31, 2004 and 2003,

15


respectively, Global Consumer was involved with special-purpose entities (SPEs) with assets of $399.0 billion and $251.3 billion, including QSPEs with assets of $377.7 billion and $226.4 billion.

        GCIB's securitization activities are conducted on behalf of the Company's clients and generate revenues for services provided to the SPEs. GCIB uses SPEs to securitize mortgage-backed securities and clients' trade receivables, to create investment opportunities for clients through collateralized debt obligations (CDOs), and to meet other client needs through structured financing and leasing transactions. Many of the mortgage-backed securities transactions use QSPEs, as do certain CDOs and structured financing transactions. At December 31, 2004 and 2003, respectively, GCIB was involved with SPEs with assets of $988.9 billion and $614.9 billion, including QSPEs with assets amounting to $594.3 billion and $427.5 billion.

        Global Investment Management uses SPEs to create investment opportunities for clients through mutual and money market funds, unit investment trusts, and hedge funds, substantially all of which were not consolidated by the Company at December 31, 2004 and 2003. At December 31, 2004 and 2003, respectively, Global Investment Management was involved with SPEs with assets of $252.5 billion and $231.6 billion.

        Global Wealth Management uses SPEs to structure investment vehicles in order to provide clients with investment alternatives and capital market solutions, substantially all of which were consolidated by the Company at December 31, 2004 and 2003. At December 31, 2004 and 2003, respectively, Global Wealth Management was involved with SPEs with assets of $3.5 billion and $4.5 billion.

        Proprietary Investment Activities invests in various funds as part of its activities on behalf of the Company and also uses SPEs in creating investment opportunities and alternative investment structures. At December 31, 2004 and 2003, respectively, Proprietary Investment Activities was involved with SPEs with assets of $54.4 billion and $56.4 billion.

        VIEs with total assets of approximately $35.6 billion and $36.9 billion were consolidated at December 31, 2004 and 2003, respectively. Additional information on the Company's securitization activities and VIEs can be found in "Off-Balance Sheet Arrangements" on page 70 and in Note 12 to the Consolidated Financial Statements.

Income Taxes

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

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

        The Company reviews these balances quarterly and as new information becomes available, the balances are adjusted, as appropriate.

        SFAS No. 109, "Accounting for Income Taxes" (SFAS 109), requires companies to make adjustments to their financial statements in the quarter that new tax legislation is enacted. In the 2004 fourth quarter, the U.S. Congress passed, and the President signed, into law a new tax bill, "The American Jobs Creation Act of 2004." The Homeland Investment Act (HIA) provision of the American Jobs Creation Act of 2004 is intended to provide companies with a one-time 85% reduction in the U.S. net tax liability on cash dividends paid by foreign subsidiaries in 2005, to the extent that they exceed a baseline level of dividends paid in prior years. The provisions of the Act are complicated, and companies, including Citigroup, are awaiting clarification of several provisions from the Treasury Department. The Company is still evaluating the provision and the effects it would have on the financing of the Company's foreign operations. In accordance with FASB Staff Position FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" (FSP FAS 109-2), the Company has not recognized any income tax effects of the repatriation provisions of the Act in its 2004 financial statements and will not do so until the above issues are resolved, sometime in 2005. The reasonably possible amounts that may be repatriated in 2005 that would be subject to the provision of the Act range from $0 to $3.2 billion. The related potential income tax effect range from a tax benefit of $0 to a tax benefit of $50 million, under current law. There is a Technical Corrections Bill pending in the U.S. Congress that would amend the computation of the HIA benefit. If this bill is enacted, the range of potential tax benefits would be from a benefit of $0 to a benefit of $150 million, net of the impact of remitting income earned in 2005 that would otherwise have been indefinitely invested overseas.

        See Note 18 to Notes to Consolidated Financial Statements for a further description of the Company's provision for Income Taxes and related income tax assets and liabilities.

Legal Reserves

        The Company is subject to legal, regulatory and other proceedings and claims arising from conduct in the ordinary course of business. These proceedings include actions brought against the Company in its various roles, including acting as a lender, underwriter, broker/dealer or investment advisor. Reserves are established for legal and regulatory claims based upon the probability and estimability of losses and to fairly present, in conjunction with the disclosures of these matters in the Company's financial statements and SEC filings, management's view of the Company's exposure. The Company reviews outstanding claims with internal as well as external counsel to assess probability and estimates of loss. The risk of loss is reassessed as new information becomes available and reserves are adjusted, as appropriate. The actual cost of resolving a claim may be substantially higher than the amount of the recorded reserve. See Note 28 to the Consolidated Financial Statements and the discussion of "Legal Proceedings" beginning on page 141.

ACCOUNTING CHANGES AND FUTURE APPLICATION OF ACCOUNTING STANDARDS

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

16


PENSION AND POSTRETIREMENT PLANS

        The Company has several non-contributory defined benefit pension plans covering substantially all U.S. employees and has various defined benefit pension and termination indemnity plans covering employees outside the United States. The U.S.-defined benefit plan provides benefits under a cash balance formula. Employees satisfying certain age and service requirements remain covered by a prior final pay formula. The Company also offers postretirement health care and life insurance benefits to certain eligible U.S. retired employees, as well as to certain eligible employees outside the United States.

        The following table shows the pension expense and contributions for Citigroup's U.S. and foreign plans:

 
  U.S. Plans
  Non-U.S. Plans
 
  2004
  2003
  2002
  2004
  2003
  2002
 
  In Millions of Dollars

Pension Expense   $ 196   $ 101   $ 24   $ 185   $ 158   $ 133
Company contributions(1)(2)     400     500     500     524     279     695

(1)
In 2002, the Company's contributions consisted of $500 million of Citigroup common stock and $695 million in cash.

(2)
In addition, the Company absorbed $18 million, $12 million and $41 million during 2004, 2003 and 2002, respectively, relating to certain investment management fees and administration costs, which are excluded from this table.

        Citigroup common stock comprised 1.2%, 6.45%, and 7.87% of the U.S. plan's assets at December 31, 2004, 2003, and 2002, respectively. The Citigroup U.S. Pension Plan sold approximately $500 million of Citigroup common stock in January of 2004.

        The following table shows the combined postretirement expense and contributions for Citigroup's U.S. and foreign plans:

 
  U.S. & Non-U.S. Plans
 
  2004
  2003
  2002
 
  In millions of dollars

Postretirement expense   $ 75   $ 97   $ 105
Company Contributions     216     166     226

        All U.S. qualified plans and the funded foreign plans are generally funded to the amounts of the accumulated benefit obligations. Net pension expense for the year ended December 31, 2005 for the U.S. plans is expected to increase by approximately $30 million primarily as a result of lower discount rates. Net pension expense for the years ended December 31, 2004 and 2003 for the U.S. plans increased by $95 million and $77 million, respectively, as a result of the amortization of unrecognized net actuarial losses, lower discount rates, a lower expected return on assets assumption beginning in 2003, and for 2004, an updated mortality table. As the foreign pension plans all use the fair value of plan assets, their pension expense will be directly affected by the actual performance of the plans' assets. This paragraph contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 73.

Expected Rate of Return

        Citigroup determines its assumptions for the expected rate of return on plan assets for its U.S. pension and postretirement plans using a "building block" approach, which focuses on ranges of anticipated rates of return for each asset class. A weighted range of nominal rates is then determined based on target allocations to each asset class. Citigroup considers the expected rate of return to be a longer-term assessment of return expectations and does not anticipate changing this assumption annually unless there are significant changes in economic conditions. This contrasts with the selection of the discount rate, future compensation increase rate, and certain other assumptions, which are reconsidered annually in accordance with generally accepted accounting principles. The expected rate of return was 8.0% at December 31, 2004 and 2003, reflecting the performance of the equity markets. The computation of pension expense for 2004 includes $750 million of expected returns, which represents the 8.0% expected return and is equivalent to 3% of pretax earnings. This expected amount is deducted from the service cost, interest and other components of pension expense to arrive at the net pension expense. Net pension expense for 2003 and 2002 reflects deductions of $700 million and $783 million of expected returns, respectively.

        The following table shows the expected versus actual rate of return on plan assets for the U.S. pension and postretirement plans:

 
  2004
  2003
  2002
 
Expected Rate of Return(1)   8.0 % 8.0 % 8.0 %
Actual Rate of Return   11.5 % 24.2 % (7.0 )%

(1)
The expected rate of return was changed from 9.5% to 8.0% in September 2002 when plan assets were revalued in connection with the TPC spin-off.

        In calculating pension expense for the U.S. plan and in determining the expected rate of return, the Company uses the calculated market-related value of plan assets. The year-end allocations are within the plans' target ranges.

        The following table shows the asset allocations for the U.S. plan:

As of December 31

  2004
  2003
 
Equities   47 % 54 %
Fixed income   29 % 26 %
Real estate and other   24 % 20 %

        A similar approach has been taken in selecting the expected rates of return for Citigroup's foreign plans. The expected rate of return for each plan is based upon its expected asset allocation. Market performance over a number of earlier years is evaluated covering a wide range of economic conditions to determine whether there are sound reasons for projecting forward any past trends. The expected rates of return for the foreign plans ranged from 3.25% to 10% for 2004 compared with a range of 3.25% to 10.5% for 2003, and 3.0% to 12.0% in 2002. The wide variation in these rates is a result of differing asset allocations in the plans as well as varying local economic

17


conditions. For example, in certain countries, local law requires that all pension plan assets must be invested in fixed income investments, or in government funds, or in local country securities. Asset allocations for the foreign plans ranged from a combination of 97% fixed income to 3% equities and other investments to a combination of 78% equities and 12% fixed income and other investments at December 31, 2004, compared with an asset allocation range from 100% fixed income investments to a combination of 91% equities and 9% fixed income and other investments at December 31, 2003, and 100% fixed income to a combination of 75% equities and 25% fixed income and other investments at December 31, 2002. Pension expense for 2004 was reduced by $251 million due to the expected return, which impacted pretax earnings by 1%. Actual returns in 2004 were more than the expected returns. Pension expense for 2003 and 2002 was reduced by expected returns of $209 million and $188 million, respectively. Actual returns were higher in 2003 and were lower in 2002 than the expected returns in those years.

        A one percentage-point change in the expected rates of return would have the following effects on pension expense:

 
  One percentage-point increase
  One percentage-point decrease
 
  2004
  2003
  2002
  2004
  2003
  2002
 
  In millions of dollars

Effect on pension expense for U.S. plans   $ (94 ) $ (88 ) $ (85 ) $ 94   $ 88   $ 85
Effect on pension expense for foreign plans     (118 )   (24 )   (21 )   118     24     21

Discount Rate

        The discount rates for the U.S. pension and postretirement plans were selected by reference to the Moody's Aa Long-Term Corporate Bond Yield in conjunction with a Citigroup-specific analysis using each plans' specific cash flows to confirm that the Moody's Aa index provided a good basis for selection of the discount rates. Under the analysis, the resulting plan-specific discount rates for the pension and postretirement plans were 5.76% and 5.36%, respectively. Citigroup's policy is to round up to the nearest quarter percent. Accordingly, at December 31, 2004, the Moody's Aa Long-Term Corporate Bond Yield was 5.66% and the discount rate was set at 5.75% for the pension plan and 5.50% for the postretirement plan. At December 31, 2003, the Moody's Aa Long-Term Corporate Bond Yield was 6.01% and the discount rate was set at 6.25% for both the pension and postretirement plans. At December 31, 2002, the Moody's Aa Long-Term Corporate Bond Yield was 6.52% and the discount rate was set at 6.75% for both the pension and postretirement plans.

        The discount rates for the foreign pension and postretirement plans are selected by reference to high-quality corporate bond rates in countries that have developed corporate bond markets. However, where developed corporate bond markets do not exist, the discount rates are selected by reference to local government bond rates with a premium added to reflect the additional risk for corporate bonds. At December 31, 2004, the discount rates for the foreign plans ranged from 2.0% to 10.0% compared with a range of 2.0% to 10.0% at December 31, 2003, and 2.25% to 12.0% at December 31, 2002.

        A one percentage-point change in the discount rates would have the following effects on pension expense:

 
  One percentage-point increase
  One percentage-point decrease
 
  2004
  2003
  2002
  2004
  2003
  2002
 
  In millions of dollars

Effect on pension expense for U.S. plans   $ (140 ) $ (52 ) $ (5 ) $ 140   $ 120   $ 70
Effect on pension expense for foreign plans     (260 )   (43 )   (41 )   306     53     46

18


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

 
  2004
  2003(1)
  2002(1)
 
 
  In millions of dollars

 
Global Consumer                    
  Cards   $ 4,700   $ 3,590   $ 3,043  
  Consumer Finance     2,388     1,979     2,258  
  Retail Banking     4,628     4,046     2,897  
  Other(2)     95     (124 )   (154 )
   
 
 
 
  Total Global Consumer     11,811     9,491     8,044  
   
 
 
 
Global Corporate and Investment Bank                    
  Capital Markets and Banking     5,395     4,642     3,995  
  Transaction Services     1,041     745     569  
  Other(3)(4)     (4,398 )   (16 )   (1,392 )
   
 
 
 
  Total Global Corporate and Investment Bank     2,038     5,371     3,172  
   
 
 
 
Global Wealth Management                    
  Smith Barney     881     792     821  
  Private Bank(5)     318     551     461  
   
 
 
 
  Total Global Wealth Management     1,199     1,343     1,282  
   
 
 
 
Global Investment Management                    
  Life Insurance and Annuities     1,073     792     642  
  Asset Management     238     324     351  
   
 
 
 
  Total Global Investment Management     1,311     1,116     993  
   
 
 
 
Proprietary Investment Activities     743     366     (50 )
Corporate/Other     (56 )   166     7  
Income from Continuing Operations     17,046     17,853     13,448  
Income from Discontinued Operations(6)             1,875  
Cumulative Effect of Accounting Change(7)             (47 )
   
 
 
 
Total Net Income   $ 17,046   $ 17,853   $ 15,276  
   
 
 
 

(1)
Reclassified to conform to the 2004 presentation. See Note 4 to the Consolidated Financial Statements for assets by segment.

(2)
2004 includes a $378 million after-tax gain related to the sale of Samba.

(3)
2002 includes a $1.3 billion after-tax charge related to the establishment of reserves for regulatory settlements and related civil litigation.

(4)
2004 includes a $378 million after-tax gain related to the sale of Samba and a $4.95 billion after-tax charge related to the WorldCom and Litigation Reserve Charge.

(5)
2004 includes a $244 million after-tax charge related to the exit plan implementation for the Company's Private Bank operations in Japan.

(6)
On August 20, 2002, Citigroup completed the distribution to its stockholders of a majority portion of its remaining ownership interest in TPC. Following the distribution, Citigroup began accounting for TPC as discontinued operations. See Note 3 to the Consolidated Financial Statements.

(7)
Accounting change in 2002 of ($47) million includes the adoption of the remaining provisions of SFAS 142. See Note 1 to the Consolidated Financial Statements.

Citigroup Net Income—Regional View

 
  2004
  2003(1)
  2002(1)
 
 
  In millions of dollars

 
North America (excluding Mexico)(2)                    
  Consumer   $ 7,726   $ 6,605   $ 5,478  
  Corporate(3)(4)     (2,190 )   2,542     1,011  
  Wealth Management     1,169     1,073     1,071  
  Investment Management     1,015     1,052     849  
   
 
 
 
    Total North America     7,720     11,272     8,409  
   
 
 
 
Mexico                    
  Consumer     827     624     336  
  Corporate     659     407     423  
  Wealth Management     52     41     20  
  Investment Management     153     162     110  
   
 
 
 
    Total Mexico     1,691     1,234     889  
   
 
 
 
Europe, Middle East and Africa (EMEA)                    
  Consumer(5)     1,183     684     655  
  Corporate(5)     1,132     919     755  
  Wealth Management     15     (16 )   8  
  Investment Management     7     20     11  
   
 
 
 
    Total EMEA     2,337     1,607     1,429  
   
 
 
 
Japan                    
  Consumer     616     583     1,031  
  Corporate     334     162     124  
  Wealth Management(6)     (205 )   83     60  
  Investment Management     24     5     (4 )
   
 
 
 
    Total Japan     769     833     1,211  
   
 
 
 
Asia (excluding Japan)                    
  Consumer     1,187     811     690  
  Corporate     1,290     775     728  
  Wealth Management     125     118     92  
  Investment Management     37     50     21  
   
 
 
 
    Total Asia     2,639     1,754     1,531  
   
 
 
 
Latin America                    
  Consumer     272     184     (146 )
  Corporate     813     566     131  
  Wealth Management     43     44     31  
  Investment Management     75     (173 )   6  
   
 
 
 
    Total Latin America     1,203     621     22  
   
 
 
 
Proprietary Investment Activities     743     366     (50 )
Corporate /Other     (56 )   166     7  
Income from Continuing Operations     17,046     17,853     13,448  
Income from Discontinued Operations(7)             1,875  
Cumulative Effect of Accounting Change(8)             (47 )
   
 
 
 
Total Net Income   $ 17,046   $ 17,853   $ 15,276  
   
 
 
 

(1)
Reclassified to conform to the 2004 presentation.

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

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

(4)
2002 includes a $1.3 billion after-tax charge related to the establishment of reserves for regulatory settlements and related civil litigation.

(5)
2004 includes a $756 million after-tax gain ($378 million in Consumer and $378 million in Corporate) related to the sale of Samba.

(6)
2004 includes a $244 million after-tax charge related to the exit plan implementation for the Company's Private Bank operations in Japan.

(7)
See Note 3 to the Consolidated Financial Statements.

(8)
See Note 1 to the Consolidated Financial Statements.

19


Selected Revenue and Expense Items

Revenues

        Net interest revenue was $44.6 billion in 2004, up $4.8 billion or 12% from 2003, which was up $2.1 billion or 6% from 2002, reflecting the positive impact of a changing rate environment, business volume growth in most markets through organic growth combined with the impact of acquisitions during the year.

        Total commissions, asset management and administration fees, and other fee revenues of $23.6 billion were up $1.6 billion or 7% in 2004, primarily reflecting improved global equity markets, higher transactional volume and continued strong investment banking results. Insurance premiums of $4.0 billion in 2004 were up 7% from year-ago levels and up $339 million in 2003 compared to 2002. The 2004 increase primarily represents higher business volumes compared to the prior year.

        Principal transactions revenues of $3.8 billion decreased $1.4 billion or 27% from 2003, primarily reflecting decreases in Global Fixed Income related to fluctuation of interest rates and positioning and lower volatility in the market, partially offset by fluctuating foreign exchange rates. Realized gains/(losses) from sales of investments of $831 million in 2004 were up $321 million from 2003, which was up $995 million from 2002. The increase from 2003 is attributable to the absence of prior-year losses related to the write-down of Argentina government promissory notes and gains in Treasury and Fixed Income Management Account Portfolios. Other revenue of $9.4 billion in 2004 increased $3.1 billion from 2003, which was up $533 million from 2002. The 2004 increase primarily reflected the $1.2 billion gain on the sale of Samba, increased securitization gains and activities and improved investment results. The 2003 increase includes improved securitization gains and activities and stronger Private Equity results.

Operating Expenses

        Operating expenses grew $12.8 billion or 33% to $52.0 billion in 2004, and increased $1.9 billion or 5% from 2002 to 2003. Expense growth during 2004 was primarily related to the $7.9 billion pretax reserve for the WorldCom and Litigation Reserve Charge taken in the second quarter of 2004 and the $400 million Private Bank Japan Exit Plan Charge. Other increased expenses included investments made relating to the acquisitions of Sears, KorAm, WMF and Principal Residential Mortgage during the year, increased incentive compensation due to increased revenue, increased marketing and advertising expenses and higher pension and insurance expenses. The increase in 2003 included investments made relating to acquisitions during the year, increased spending on sales force, marketing and advertising and new business initiatives to support organic growth, higher pension and insurance costs, the cost of expensing options and higher deferred acquisition costs.

Benefits, Claims, and Credit Losses

        Benefits, claims, and credit losses were $10.0 billion, $11.9 billion and $13.5 billion in 2004, 2003 and 2002, respectively. The 2004 charge was down $1.9 billion from 2003, which was down $1.6 billion from 2002. Policyholder benefits and claims in 2004 decreased $94 million from 2003, primarily as a result of the absence of the pension close-out contract in Life Insurance and Annuities. The 2003 charge was up $417 million from 2002. The provision for credit losses decreased $1.8 billion or 23% from 2003 to $6.2 billion in 2004, reflecting continued improvement in credit quality in both consumer and corporate businesses, partially offset by the impact of acquisitions. There was a $1.9 billion decrease from 2003 to 2002 due to the improvement in the global credit environment.

        Global Consumer provisions for benefits, claims, and credit losses of $7.9 billion in 2004 were down $112 million or 1% from 2003, reflecting decreases in Retail Banking and Consumer Finance, partially offset by increases in Cards. Total net credit losses (excluding Commercial Business) were $8.257 billion and the related loss ratio was 2.31% in 2004, as compared to $7.093 billion and 2.38% in 2003 and $6.740 billion and 2.67% in 2002. The consumer loan delinquency ratio (90 days or more past due) decreased to 2.02% at December 31, 2004 from 2.42% at December 31, 2003 and 2.40% at December 31, 2002. See page 47 for a reconciliation of total consumer credit information.

        The GCIB provision for credit losses in 2004 decreased $1.7 billion from 2003, which decreased $1.5 billion from 2002. The decrease reflects this year's continually improving credit environment.

        Corporate cash-basis loans at December 31, 2004, 2003 and 2002 were $1.906 billion, $3.419 billion, and $3.995 billion, respectively. The decrease in cash-basis loans from 2003 reflects improved credit quality, write-offs against previously established reserves, as well as repayments. Corporate cash-basis loans at December 31, 2003 decreased $0.6 billion from December 31, 2002 primarily due to the improving credit environment.

Income Taxes

        The Company's effective tax rate of 28.6% in 2004 decreased 255 basis points from 2003, and included a $234 million benefit for the release of a valuation allowance relating to the utilization of foreign tax credits, the releases of $150 million and $147 million due to the closing of tax audits and a $47 million tax benefit due to an IRS tax ruling relating to Argentina. The 2004 effective tax rate was also reduced from 2003 because of the impact of indefinitely invested international earnings and other items on the lower level of pretax earnings due to the impact of the WorldCom and Litigation Reserve Charge. The Company's effective tax rate was 31.1% in 2003 and 34.1% in 2002. See additional discussion on page 16 and in Note 18 to the Consolidated Financial Statements.


The net income line in the following business segment and operating unit discussions excludes the cumulative effect of accounting change and income from discontinued operations. The cumulative effect of accounting change and income from discontinued operations is disclosed within the Corporate/Other business segment. See Notes 1 and 3 to the Consolidated Financial Statements.

        Certain amounts in prior years have been reclassified to conform to the current year's presentation. Business segment and product reclassifications include the implementation of the Company's Risk Capital Methodology and allocation across its products and segments.


20


GLOBAL CONSUMER

GLOBAL CONSUMER—2004 NET INCOME

[EDGAR REPRESENTATION OF GRAPHIC DATA]

 
  In billions of dollars
2002   $ 8.0
2003   $ 9.5
2004   $ 11.8

GLOBAL CONSUMER—2004 NET INCOME BY PRODUCT*

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Retail Banking   40 %
Consumer Finance   20 %
Cards   40 %

*
Excludes Other Consumer income of $95 million

GLOBAL CONSUMER—2004 NET INCOME BY REGION*

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Asia   11 %
Japan   5 %
EMEA   7 %
Mexico   7 %
North America   68 %
Latin America   2 %

*
Excludes $378 million after-tax gain related to the sale of Samba

 
  2004
  2003
  2002
 
  In millions of dollars

Revenues, net of interest expense   $ 47,267   $ 40,970   $ 37,659
Operating expenses     21,924     18,836     16,743
Provisions for benefits, claims, and credit losses     7,926     8,038     8,459
   
 
 
Income before taxes and minority interest     17,417     14,096     12,457
Income taxes     5,547     4,554     4,373
Minority interest, after-tax     59     51     40
   
 
 
Net income   $ 11,811   $ 9,491   $ 8,044
   
 
 

Average risk capital(1)

 

$

22,200

 

$

20,441

 

 

 
Return on risk capital(1)     53 %   46 %    
Return on invested capital(1)     22 %   21 %    
   
 
     

(1)
See Footnote (7) to the table on page 4.

        Global Consumer reported net income of $11.811 billion in 2004, up $2.320 billion or 24% from 2003, driven by double-digit growth across all products and a $378 million after-tax gain on the sale of Samba. Cards net income increased $1.110 billion or 31% in 2004 mainly reflecting improved credit costs, including the impact of credit reserve releases, the addition of the Sears, Home Depot and KorAm portfolios, growth in international receivables, and the benefit of certain one-time tax credits. Retail Banking net income increased $582 million or 14% in 2004 primarily due to the impact of improved credit costs, including the impact of credit reserve releases, led by the Commercial Business in North America, and strong international growth led by Asia. Consumer Finance net income increased $409 million or 21% in 2004 primarily due to a higher net interest margin in North America, lower credit costs, the impact of the Washington Mutual Finance (WMF) acquisition, and growth in Latin America and Asia, partially offset by weakness in Japan and EMEA.

        Net income in 2003 increased $1.447 billion or 18% from 2002, reflecting double-digit growth in Retail Banking and Cards that was primarily driven by the impact of acquisitions and strong growth in North America including Mexico, Asia and Latin America, and was partially offset by declines in Japan, driven by continued weakness in Consumer Finance.

        On July 1, 2004, Citigroup acquired Principal Residential Mortgage, Inc. (PRMI), a servicing portfolio of $115 billion. 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 one million accounts and $0.6 billion of receivables. In November 2002, Citigroup completed the acquisition of GSB, which added $25 billion in deposits and $35 billion in loans, including $33 billion in Retail Banking and $2 billion in Consumer Finance. In February and May 2002, CitiFinancial Japan acquired the consumer finance businesses of Taihei Co., Ltd. (Taihei) and Marufuku Co., Ltd. (Marufuku), adding $1.1 billion in loans. These business acquisitions were accounted for as purchases; therefore, their results are included in the Global Consumer results from the dates of acquisition.

        Global Consumer has divested several non-strategic businesses and portfolios as opportunities to exit became available. Certain divestitures include Global Consumer's share of Citigroup's 20% equity investment in Samba and a $900 million vendor finance leasing business in Europe in 2004, the sales of the $1.2 billion Fleet Services portfolio in the North American Commercial Business and of $1.7 billion of credit card portfolios in 2003, and the 2002 sale of the $2.0 billion mortgage portfolio in Japan Retail Banking.

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

Global Consumer Net Income—Regional View

 
  2004
  2003
  2002
 
 
  In millions of dollars

 
North America (excluding Mexico)   $ 7,726   $ 6,605   $ 5,478  
Mexico     827     624     336  
EMEA     1,183     684     655  
Japan     616     583     1,031  
Asia (excluding Japan)     1,187     811     690  
Latin America     272     184     (146 )
   
 
 
 
Net income   $ 11,811   $ 9,491   $ 8,044  
   
 
 
 

21


        The increase in Global Consumer net income in 2004 reflected growth in all regions. North America (excluding Mexico) net income grew $1.121 billion or 17%, primarily reflecting the impact of acquisitions and improved credit, including higher credit reserve releases. Net income in Mexico grew $203 million or 33%, driven by improved customer volumes in Cards and Retail Banking. Net income in EMEA increased $499 million or 73%, primarily reflecting the $378 million gain on the sale of Samba in Other Consumer and the benefit of foreign currency translation, partially offset by higher credit reserve builds. Income in Japan increased by $33 million or 6% reflecting a lower provision for credit losses, primarily driven by lower bankruptcies in Consumer Finance, partially offset by the absence of a $94 million prior-year tax reserve release. Growth in Asia of $376 million or 46% was mainly due to higher investment product sales in Retail Banking, growth in Cards, the impact of credit reserve releases and the addition of KorAm. The increase in Latin America of $88 million or 48% was mainly due to improvements in all products, with the increase in Retail Banking primarily driven by Argentina, including the absence of prior-year repositioning costs.

CARDS

 
  2004
  2003
  2002
 
 
  In millions of dollars

 
Revenues, net of interest expense   $ 18,321   $ 14,610   $ 13,637  
Operating expenses     8,089     6,227     5,535  
Provision for credit losses     3,396     2,935     3,410  
   
 
 
 
Income before taxes and minority interest     6,836     5,448     4,692  
Income taxes     2,133     1,854     1,647  
Minority interest, after-tax     3     4     2  
   
 
 
 
Net income   $ 4,700   $ 3,590   $ 3,043  
   
 
 
 
Average assets (in billions of dollars)   $ 95   $ 70   $ 63  
Return on assets     4.95 %   5.13 %   4.83 %
   
 
 
 
Average risk capital(1)   $ 5,364   $ 4,375        
Return on risk capital(1)     88 %   82 %      
Return on invested capital(1)     29 %   35 %      
   
 
       

(1)
See Footnote (7) to the table on page 4.

        Cards reported net income of $4.700 billion in 2004, up $1.110 billion or 31% from 2003. North America Cards reported net income of $3.939 billion, up 27% over 2003, reflecting improved credit costs, including the benefit of credit reserve releases, and the impact of the Sears and Home Depot acquisitions. International Cards income increased by 53% over 2003 to $761 million in 2004, reflecting higher revenues from receivables growth, improved credit costs, including the benefit of credit reserve releases, a lower effective tax rate, including the benefit of certain one-time tax credits, a gain on the sale of Orbitall (Credicard processing company in Brazil) and the addition of KorAm. Globally, 2003 net income of $3.590 billion was up $547 million or 18% from 2002, reflecting increased spreads, the impact of the Home Depot and Sears acquisitions, improved credit costs in North America, a lower provision for credit losses in Argentina and growth in Asia.

        As shown in the following table, average managed loans grew 19% in 2004, reflecting growth of 18% in North America and 26% in International Cards. In North America, the addition of the Home Depot and Sears portfolios was partially offset by the impact of higher payment rates seen throughout the industry. The increase in International Cards reflected the benefit of strengthening currencies and growth in both Asia and EMEA, and the addition of KorAm. Average managed loans grew 8% in 2003, driven by the acquisition of Home Depot and Sears in the 2003 third and fourth quarters, respectively, international growth led by Asia and EMEA, and the benefit of strengthening currencies. Sales in 2004 were $354.7 billion, up 22% from 2003. North America sales were up 20% to $301.9 billion in 2004, with the impact of acquisitions and improved purchase sales. International Cards sales grew 33%, reflecting growth in Asia, Latin America and Japan, the addition of KorAm, and the benefit of strengthening currencies. In 2003, sales were up 5% from 2002, reflecting the impact of acquisitions and growth in EMEA, Asia and Japan.

 
  2004
  2003
  2002
 
  In billions of dollars

Sales                  
  North America   $ 301.9   $ 251.5   $ 244.9
  International     52.8     39.6     33.4
   
 
 
Total sales   $ 354.7   $ 291.1   $ 278.3
   
 
 

Average managed loans

 

 

 

 

 

 

 

 

 
  North America   $ 139.6   $ 118.0   $ 110.2
  International     15.7     12.5     10.7
   
 
 
Total average managed loans   $ 155.3   $ 130.5   $ 120.9
   
 
 
Total on-balance sheet average loans   $ 74.3   $ 55.9   $ 49.2
   
 
 

        Revenues, net of interest expense, of $18.321 billion in 2004 increased $3.711 billion or 25% from 2003, reflecting growth in North America of $3.128 billion or 26% and in International Cards of $583 million or 22%. Revenue growth in North America reflected the impact of acquisitions, higher net interest margin and the benefit of increased purchase sales, partially offset by higher payment rates resulting from the overall improved economy, and lower securitization-related gains. In 2004 and 2003, revenues included net securitization gains of $234 million and $342 million, respectively, with the 2003 gains primarily resulting from changes in estimates related to the timing of revenue recognition on securitized portfolios. Revenue growth in International Cards reflected growth in all regions and includes the addition of KorAm and Diners Club Europe, the benefit of foreign currency translation, and the gain on the sale of Orbitall. In 2003, revenues increased $973 million or 7% from 2002, reflecting the impact of acquisitions, net interest margin expansion, increased purchase sales, gains from the sale of non-strategic portfolios, and the benefit of foreign currency translation, partially offset by increased credit losses on securitized receivables, which are recorded as a reduction to other revenue after receivables are securitized.

        Operating expenses of $8.089 billion in 2004 were up $1.862 billion or 30% from 2003, reflecting increases in North America of $1.456 billion or 30% and in International Cards of $406 million or 30%. Expense increases in North America primarily reflected the full year impact of the Home Depot and Sears acquisitions and increased advertising and marketing expenses. Expense growth in International Cards reflected increases in all regions and included the impact of the Diners Club Europe and KorAm acquisitions, the net effect of foreign currency translation and increased advertising and marketing expenses. In 2003, operating expenses were $692 million or 13% higher than 2002, reflecting the impact of acquisitions, foreign currency translation and increased investment spending, including higher advertising and marketing expenditures, costs associated with expansion into Russia and China, and repositioning costs, mainly in EMEA and Latin America.

22


        The provision for credit losses in 2004 was $3.396 billion, compared to $2.935 billion in 2003 and $3.410 billion in 2002. The increase in the provision for credit losses in 2004 reflects the full year impact of acquisitions and increased presence in the private label card market in North America, partially offset by lower net credit losses and higher credit reserve releases of $735 million, resulting from an improved credit environment, as well as the impact of increased levels of securitized receivables. The decrease in the provision for credit losses in 2003 was mainly due to an increase in the level of securitized receivables combined with credit improvements in North America and Latin America, including a $44 million reduction in the allowance for credit losses in Argentina due to improvement in credit experience and lower portfolio volumes. The decline in 2003 was partially offset by the impact of acquisitions. In 2002, the provision for credit losses included a $206 million addition to the allowance for credit losses established in accordance with the implementation of FFIEC guidance related to past-due interest and late fees on the on-balance sheet credit card receivables in Citi Cards and a $109 million net provision for credit losses resulting from deteriorating credit in Argentina.

        The securitization of credit card receivables is limited to the Citi Cards business within North America. At December 31, 2004, securitized credit card receivables were $85.3 billion compared to $76.1 billion at December 31, 2003 and $67.1 billion at December 31, 2002. There were $2.5 billion in credit card receivables held-for-sale at December 31, 2004, compared to zero credit card receivables held-for-sale at December 31, 2003, and $6.5 billion at December 31, 2002. Securitization changes Citigroup's role from that of a lender to that of a loan servicer, as receivables are removed from the balance sheet but continue to be serviced by Citigroup. As a result, securitization affects the amount of revenue and the manner in which revenue and the provision for credit losses are recorded with respect to securitized receivables.

        A gain is recorded at the time receivables are securitized, representing the difference between the carrying value of the receivables removed from the balance sheet and the fair value of the proceeds received and interests retained. Interests retained from securitization transactions include interest-only strips, which represent the present value of estimated excess cash flows associated with securitized receivables (including estimated credit losses). Collections of these excess cash flows are recorded as commissions and fees revenue (for servicing fees) or other revenue. For loans not securitized these excess cash flows would otherwise be reported as gross amounts of net interest revenue, commissions and fees revenue and credit losses.

        In addition to interest-only strip assets, Citigroup may retain one or more tranches of certificates issued in securitization transactions, provide escrow cash accounts or subordinate certain principal receivables to collateralize the securitization interests sold to third parties. However, Citigroup's exposure to credit losses on securitized receivables is limited to the amount of the interests retained and collateral provided.

        Including securitized receivables and receivables held-for-sale, managed net credit losses were $9.219 billion in 2004 with a related loss ratio of 5.94% compared to $7.694 billion and 5.90% in 2003 and $7.169 billion and 5.93% in 2002. The increase in the ratio from the prior year was primarily driven by the impact of acquisitions and the related expansion of the private label portfolio, partially offset by the continued improvement in the credit environments in both the North America and international markets that began in 2003. The decline in the ratio in 2003 compared to 2002 was primarily driven by improvements in North America and the international markets, particularly in Hong Kong, Taiwan and Argentina, partially offset by the addition of the Sears portfolio. Loans delinquent 90 days or more were $2.944 billion or 1.78% at December 31, 2004, compared with $3.392 billion or 2.14% at December 31, 2003 and $2.397 billion or 1.84% at December 31, 2002. The decrease in delinquent loans in 2004 was primarily attributable to overall improved credit conditions in the Citi Cards business, offset slightly by the addition of the Sears portfolio. A summary of delinquency and net credit loss experience related to the on-balance sheet loan portfolio is included in the table on page 50.

CONSUMER FINANCE

 
  2004
  2003
  2002
 
 
  In millions of dollars

 
Revenues, net of interest expense   $ 10,761   $ 10,083   $ 9,899  
Operating expenses     3,600     3,488     3,114  
Provisions for benefits, claims, and credit losses     3,506     3,727     3,294  
   
 
 
 
Income before taxes     3,655     2,868     3,491  
Income taxes     1,267     889     1,233  
   
 
 
 
Net income   $ 2,388   $ 1,979   $ 2,258  
   
 
 
 

Average assets
(in billions of dollars)

 

$

113

 

$

105

 

$

96

 
Return on assets     2.11 %   1.88 %   2.35 %
   
 
 
 
Average risk capital(1)   $ 3,722   $ 3,183        
Return on risk capital(1)     64 %   62 %      
Return on invested capital(1)     22 %   21 %      
   
 
       

(1)
See Footnote (7) to the table on page 4.

        Consumer Finance reported net income of $2.388 billion in 2004, up $409 million or 21% from 2003, reflecting an increase in North America of $405 million or 28% and an increase in International Consumer Finance of $4 million or 1%. The increase in North America primarily resulted from a higher net interest margin due to higher loan volumes and a lower cost of funds, the benefit of lower credit costs due to an improved credit environment and the successful integration of WMF in 2004. The increase in International Consumer Finance primarily resulted from increases in Latin America and Asia, partially offset by declines in Japan and EMEA. Net income in 2003 of $1.979 billion decreased by $279 million or 12% from 2002, primarily reflecting continued weakness in Japan, partially offset by the acquisition of GSB in November 2002 and a $94 million release of a tax reserve in Japan, related to a settlement with tax authorities.

 
  2004
  2003
  2002
 
  In billions of dollars

Average loans                  
Real-estate-secured loans   $ 58.2   $ 52.1   $ 48.0
Personal     24.8     22.5     21.6
Auto     11.6     11.1     8.4
Sales finance and other     5.4     5.0     4.0
   
 
 
Total average loans   $ 100.0   $ 90.7   $ 82.0
   
 
 

        As shown in the preceding table, average loans grew $9.3 billion or 10% in 2004 compared to 2003, reflecting growth in North America of $8.5 billion or 12% and International Consumer Finance of $0.8 billion or 4%. North American growth reflected the addition of WMF, which contributed $3.6 billion in average loans, and growth in all

23


products driven by real-estate-secured and auto loans. Growth in real-estate-secured loans mainly reflected portfolio acquisitions, partially offset by a decline in cross selling of products through Primerica. Growth in the international markets was mainly driven by increases in the real-estate-secured and personal loan portfolios in both EMEA and Asia, and included the impact of strengthening currencies, partially offset by a decline in EMEA auto loans. In Japan, average loans declined by 6% from 2003 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. Average loans grew 11% in 2003, resulting from acquisitions, growth in real-estate-secured loans, the impact of funding auto loan volumes internally and strengthening currencies in the international markets.

        As shown in the following table, the average net interest margin ratio of 9.95% in 2004 declined 22 basis points from 2003, reflecting compression in both the North American and international markets. In North America, higher volumes and the benefit of lower cost of funds were more than offset by lower yields reflecting the lower interest rate environment and the repositioning of portfolios towards higher credit quality. The average net interest margin ratio for International Consumer Finance was 15.80% in 2004, declining 23 basis points from the prior year, primarily driven by a mix shift to lower yielding products in EMEA and lower receivables in Japan, partially offset by a change in recording adjustments and refunds of interest in Japan. From the 2003 second quarter to the 2004 second quarter, a portion of adjustments and refunds of interest charged to customer accounts were treated as reductions in net interest margin. For all other periods presented, such adjustments and refunds of interest were accounted for in net credit losses. If all adjustments and refunds of interest were accounted for in net credit losses, the average net interest margin ratio for International Consumer Finance would have been 16.07% in 2004 and 16.49% in 2003. The average net interest margin ratio of 10.17% in 2003 declined 55 basis points from 2002 primarily reflecting compression in the international markets, driven primarily by Japan and partially offset by margin expansion in Europe. The compression of net interest margin in Japan reflected a decline in higher-yielding personal loans combined with the change in treatment of adjustments and refunds of interest as discussed above.

 
  2004
  2003
  2002
 
Average net interest margin ratio              
North America   8.34 % 8.43 % 8.41 %
International   15.80 % 16.03 % 18.01 %
Total   9.95 % 10.17 % 10.72 %
   
 
 
 

        Revenues, net of interest expense, of $10.761 billion in 2004 increased $678 million or 7% from 2003. The increase in revenues, net of interest expense, reflected growth of $622 million or 9% in North America, and growth of $56 million or 2% in International Consumer Finance. Revenue growth in North America was primarily driven by the WMF acquisition, growth in receivables and a lower cost of funds, partially offset by the impact of lower yields and declines in insurance related revenues. The increase in revenue for International Consumer Finance was primarily due to the benefit of foreign exchange and higher volumes in all regions excluding Japan. A decline in Japan revenues was driven by lower personal and real estate loan volumes, as well as a decline in yields. Revenues of $10.083 billion in 2003 increased $184 million or 2% from 2002, reflecting higher revenues in North America of $519 million or 9%, primarily due to receivable growth, including the addition of the GSB auto portfolio, partially offset by lower insurance revenues. Declines in International Consumer Finance revenues of $335 million or 9% resulted from lower volumes and spreads in Japan, offset by the timing of acquisitions in 2002, the net effect of foreign currency translation and growth in Asia.

        Operating expenses of $3.600 billion in 2004 increased $112 million or 3% from 2003, reflecting increases of $91 million or 4% in North America and $21 million or 2% in International Consumer Finance. The increase in operating expenses in North America was due to the addition of the WMF portfolio, while the increase in International Consumer Finance reflected the impact of foreign currency translation in Japan and EMEA. Excluding foreign currency translation, a decline in expenses was driven by expense savings from branch closings and headcount reductions which occurred during 2003 in Japan, partially offset by higher 2004 investment expenses including branch expansion in Asia (primarily India) and EMEA. Operating expenses of $3.488 billion in 2003 increased $374 million or 12% from 2002, reflecting increases of $218 million or 12% in North America and $156 million or 13% in International Consumer Finance. The increase in North America resulted from increased volumes, the addition of the GSB auto portfolio and increased staffing, collection and compliance costs. The increase in International Consumer Finance resulted from the impact of foreign currency translation, additional costs in Japan attributable to actions taken to restructure the business and the timing of acquisitions in 2002, partially offset by expense savings from branch closings and headcount reductions in Japan.

        The provisions for benefits, claims, and credit losses were $3.506 billion in 2004, down from $3.727 billion in 2003, primarily reflecting lower net credit losses in North America and Japan, and higher credit reserve releases of $89 million, partially offset by the WMF acquisition. The decline in North American credit losses excluding the impact of WMF was driven by the overall improvement in the credit environment, while the decline in Japan was driven by lower bankruptcy losses. Net credit losses and the related loss ratio were $3.431 billion and 3.43% in 2004, compared to $3.517 billion and 3.88% in 2003, and $3.026 billion and 3.69% in 2002. In North America, net credit losses were $2.065 billion and the related loss ratio was 2.63% in 2004, compared to $2.059 billion and 2.94% in 2003 and $1.865 billion and 3.00% in 2002. The decrease in the net credit loss ratio in 2004 was driven by improvements in all products, the result of better overall credit conditions in the market and the shift to better credit quality portfolios, partially offset by the impact of WMF. The decrease in the net credit loss ratio in 2003 was mainly driven by improvements in the real-estate-secured and auto portfolios, which were partially offset by increased loss rates in the personal loan portfolio. Net credit losses in International Consumer Finance were $1.366 billion and the related loss ratio was 6.32% in 2004, compared to $1.458 billion and 7.02% in 2003 and $1.161 billion and 5.88% in 2002. The decrease in the net credit loss ratio in 2004 was driven by improved credit conditions, including lower bankruptcy losses in Japan, partially offset by higher personal loan losses in EMEA. Adjusting the net credit loss ratios for the change in treatment of adjustments and refunds of interest in Japan, as discussed above, would have resulted in International Consumer Finance net credit loss ratios of 6.60% and 7.48% in 2004 and 2003, respectively. The increase in the net credit loss ratio in 2003 was primarily due to increased bankruptcy and contractual losses in Japan.

        Loans delinquent 90 days or more were $2.014 billion or 1.90% of loans at December 31, 2004, compared to $2.221 billion or 2.36% at December 31, 2003 and $2.197 billion or 2.48% at December 31, 2002. The decrease in the delinquency ratio in 2004 was due to improvements in all regions.

24


RETAIL BANKING

 
  2004
  2003
  2002
 
 
  In millions of dollars

 
Revenues, net of interest expense   $ 17,669   $ 16,218   $ 13,981  
Operating expenses     9,883     8,865     7,702  
Provisions for benefits, claims, and credit losses     1,024     1,376     1,755  
   
 
 
 
Income before taxes and minority interest     6,762     5,977     4,524  
Income taxes     2,078     1,884     1,589  
Minority interest, after-tax     56     47     38  
   
 
 
 
Net income   $ 4,628   $ 4,046   $ 2,897  
   
 
 
 
Average assets (in billions of dollars)   $ 264   $ 232   $ 187  
Return on assets     1.75 %   1.74 %   1.55 %
   
 
 
 

Average risk capital(1)

 

$

13,114

 

$

12,883

 

 

 

 
Return on risk capital(1)     35 %   31 %      
Return on invested capital(1)     18 %   16 %      
   
 
       

(1)
See Footnote (7) to the table on page 4.

        Retail Banking reported net income of $4.628 billion in 2004, up $582 million or 14% from 2003. The increase in Retail Banking reflected growth in both North America and International Retail Banking net income of $229 million or 8% and $353 million or 29%, respectively. Growth in North America was driven by improved credit costs, including higher credit reserve releases, and higher revenues due to growth in customer volumes, partially offset by a decline in net servicing revenues in Prime Home Finance, higher expenses due to increased investment spending and the impact of the continued liquidation of non-core portfolios in the Commercial Business. The increase in International Retail Banking income primarily reflected growth in Asia, which included the impact of the KorAm acquisition, the benefit of strengthening currencies and a lower effective tax rate partially due to non-recurring tax benefits. Net income of $4.046 billion in 2003 grew $1.149 billion or 40% from 2002, reflecting growth in both North America and International Retail Banking net income of $829 million or 42% and $320 million or 36%, respectively. The growth in North America was driven by the GSB acquisition, strong growth in customer volumes including mortgage originations as well as loan and deposit balances and improved credit costs in Mexico and the Commercial Business. The growth in International Retail Banking net income reflected improvements in Argentina and growth in Asia and EMEA, which more than offset a 2002 gain on the sale of a mortgage portfolio in Japan.

 
  2004
  2003
  2002
 
  In billions of dollars


Average customer deposits

 

 

 

 

 

 

 

 

 
    North America   $ 115.7   $ 112.2   $ 90.9
    Bank Deposit Program balances(1)     41.6     41.2     38.0
   
 
 
      Total North America     157.3     153.4     128.9
      International     103.2     86.2     78.8
   
 
 
Total average customer deposits   $ 260.5   $ 239.6   $ 207.7
   
 
 

Average loans

 

 

 

 

 

 

 

 

 
  North America   $ 131.8   $ 114.0   $ 84.6
  North America—Liquidating     5.7     8.9     13.0
  International     47.1     36.0     34.3
   
 
 
Total average loans   $ 184.6   $ 158.9   $ 131.9
   
 
 

(1)
The Bank Deposit Program balances are generated from the Smith Barney channel (Global Wealth Management segment) and the funds are managed by Citibanking North America.

        As shown in the preceding table, Retail Banking grew average customer deposits and average loans in 2004. Average customer deposit growth of 3% in North America primarily reflected increases in higher-margin demand accounts in Retail Distribution, the Commercial Business and Mexico, and money market accounts in Retail Distribution, partially offset by declines in Retail Distribution time deposits, Prime Home Finance mortgage escrow deposits and the impact of a weakening peso in Mexico. Average loan growth of 12% in North America reflected increases in Prime Home Finance, Student Loans, Retail Distribution and Mexico, partially offset by a decline in the Commercial Business that was led by a continued reduction in the liquidating portfolios, including the sale of the $1.2 billion Fleet Services portfolio at the end of the 2003 third quarter. In the international markets, average customer deposits grew 20% from the prior year, primarily driven by growth in Asia and EMEA, which included the benefits of the KorAm acquisition and foreign currency translation. Average loans in International Retail Banking grew 31% primarily due to the impact of the KorAm acquisition and positive foreign currency translation. Retail Banking North America growth in average customer deposits and average loans in 2003 was largely driven by the acquisition of GSB, as well as organic growth. International Retail Banking average customer deposit growth in 2003 occurred in all regions except Latin America, and benefited from the impact of foreign currency translation, while average loan growth was driven by the impact of foreign currency translation and growth in installment loans, primarily in Germany.

        As shown in the following table, revenues, net of interest expense, of $17.669 billion in 2004 increased $1.451 billion or 9% from 2003. Revenues in North America grew $418 million or 4% in 2004, primarily due to the impact of loan and deposit growth and increased investment product sales, partially offset by a decline in net servicing revenues in Prime Home Finance, the impact of the liquidation of non-core portfolios in the Commercial Business and lower net funding spreads. Retail Distribution revenues grew $105 million or 4% due to the impact of higher loan and deposit volumes, partially offset by lower net funding spreads. The Commercial Business revenues grew $268 million or 13% due to the reclassification of operating leases from loans to other assets and the related operating lease depreciation expense from revenue to expense, and was partially offset by the impact of the liquidation of non-core portfolios, including the prior-year sale of the $1.2 billion Fleet Services portfolio. The reclassification increased both revenues and expenses by $403 million pretax in 2004. Prime Home Finance revenues decreased $366 million or 20% mainly due to lower net servicing revenues and lower securitization revenues. The decline in net servicing revenues was driven by lower hedge-related revenues, that were the result of higher hedging costs, and the impact of losses on mortgage servicing hedge ineffectiveness resulting from the volatile rate environment. The lower securitization revenues included a one-time decrease in revenues of $35 million from the adoption of SAB 105. These declines were partially offset by the impact of higher loan volumes and the impact of the PRMI acquisition. Student loan revenues grew $125 million or 26% due to the impact of higher net interest revenue, driven by growth in average loans and originations, higher securitization-related gains and the absence of a prior-year write-down of the purchase premium of certain student loans. Primerica revenues grew $53 million or 3% due to increased life insurance and investment fee revenues, partially offset by the impact of lower loan volumes and higher capital funding costs.

25


Revenues in Mexico increased $233 million or 13% driven by the impact of higher loans and deposits, and the gain on sale of a mortgage portfolio, partially offset by the negative impact of foreign currency translation. The comparison to the prior year was also impacted by the absence of an $85 million write-down in 2003 of the Fobaproa investment security and revised estimates of reserves related to certain investments. International Retail Banking revenues increased $1.033 billion or 21%, primarily reflecting the positive impact of foreign currency translation, the addition of KorAm and growth in Asia and EMEA. Excluding foreign currency translation and KorAm, growth in both Asia and EMEA was driven by increased investment product sales, and higher deposit and lending revenues. Revenues of $16.218 billion in 2003 grew $2.237 billion or 16% from 2002, reflecting the acquisition of GSB and growth in Prime Home Finance, Primerica and Mexico for North America, and growth in all international regions except Japan, which declined due to a $65 million gain on sale of the $2.0 billion mortgage portfolio in 2002.

 
  2004
  2003
  2002
 
  In millions of dollars

Revenues, net of interest expense                  
Retail Distribution   $ 3,066   $ 2,961   $ 2,611
Commercial Business     2,295     2,027     2,006
Prime Home Finance     1,507     1,873     935
Student Loans     612     487     417
Primerica Financial Services     2,141     2,088     2,017
Mexico     2,025     1,792     1,723
   
 
 
North America     11,646     11,228     9,709
   
 
 

EMEA

 

 

2,857

 

 

2,387

 

 

1,954
Japan     471     451     496
Asia     2,164     1,652     1,457
Latin America     531     500     365
   
 
 
International     6,023     4,990     4,272
   
 
 

Total revenues, net of interest expense

 

$

17,669

 

$

16,218

 

$

13,981
   
 
 

        Operating expenses of $9.883 billion in 2004 increased $1.018 billion or 11% from 2003, reflecting increases of $631 million or 10% in North America and $387 million or 14% in International Retail Banking. In North America, growth was mainly driven by the impact of the operating lease reclassification in the Commercial Business of $403 million, higher volume-related expenses and increased investment spending in Retail Distribution, higher staff-related and legal costs in Mexico and the impact of the PRMI acquisition. The increase in International Retail Banking expenses reflects the impact of foreign currency translation, the addition of KorAm in Asia, higher sales commissions and increased investment spending, including costs associated with branch and sales-force expansion. Operating expenses in 2003 were up $1.163 billion or 15% compared to 2002, primarily reflecting the impact of acquisitions, other volume-related increases, higher investment spending, as well as repositioning costs in Latin America and EMEA.

        The provisions for benefits, claims, and credit losses were $1.024 billion in 2004, down from $1.376 billion in 2003 and $1.755 billion in 2002, reflecting a lower provision for credit losses. The decrease in the provision for credit losses in 2003 reflected both releases in credit reserves and lower net credit losses. Higher credit reserve releases reflected improvement in credit experience in all regions except EMEA, which increased credit reserves, primarily driven by Germany. The decrease in net credit losses in 2004 was mainly due to lower credit costs in the North America Commercial Business excluding Mexico, which benefited from the liquidation of non-core portfolios; Latin America, which benefited from the absence of an $87 million write-down of an Argentine compensation note in the prior year (which was written down against previously established reserves); North America (excluding Mexico) and Asia. These declines were partially offset by higher credit losses in EMEA, primarily due to Germany, and the absence of a prior-year $64 million credit recovery in Mexico. The decrease in the provisions in 2003 compared to 2002 was mainly due to lower credit costs in Mexico and the Commercial Business, and a net $57 million reduction in the credit reserve in Argentina that was essentially offset by additions to the credit reserve in Germany. In 2002, the provision for credit losses included a $108 million provision related to Argentina. Net credit losses (excluding the Commercial Business) were $693 million and the related loss ratio was 0.48% in 2004, compared to $614 million and 0.52% in 2003 and $644 million and 0.71% in 2002. The improvement in the net credit loss ratio (excluding the Commercial Business) in 2004 was mainly due to an improved credit environment, which resulted in lower net credit losses in North America (excluding Mexico) and Asia and the absence of the $87 million write-down of the Argentina compensation note in 2003. An increase in EMEA was primarily due to Germany. Commercial Business net credit losses were $214 million and the related loss ratio was 0.53% in 2004, compared to $462 million and 1.09% in 2003 and $712 million and 1.76% in 2002. The decline in Commercial Business net credit losses was mainly due to improvements in North America (excluding Mexico) and, in the 2003 comparison, a recovery in Mexico.

        Loans delinquent 90 days or more (excluding the Commercial Business) were $4.094 billion or 2.47% of loans at December 31, 2004, compared to $3.802 billion or 3.07% at December 31, 2003 and $3.647 billion or 3.18% at December 31, 2002. The increase in delinquent loans in 2004 primarily resulted from increases in Prime Home Finance, reflecting the impact of a GNMA portfolio that was purchased in the PRMI acquisition, and increases in Germany including the impact of foreign currency translation. The decline in the 90 days delinquency ratio was driven by improved credit conditions across all markets except Japan. The increase in delinquent loans in 2003 was primarily due to the impact of foreign currency translation combined with increases in Germany and was partly offset by declines in Prime Home Finance, Asia and Argentina.

        Cash-basis loans in the Commercial Business were $735 million or 1.78% of loans at December 31, 2004, compared to $1.350 billion or 3.38% at December 31, 2003 and $1.299 billion or 2.90% at December 31, 2002. Cash-basis loans improved in 2004 primarily due to broad-based declines in all products and regions, led by North America (excluding Mexico), where the business continued to work through the liquidation of non-core portfolios. The increase in cash-basis loans in 2003 primarily reflected increases in the vehicle leasing and transportation portfolios in the North America (excluding Mexico) Commercial Business and was offset in part by improvements and foreign currency translation in Mexico.

        Average assets of $264 billion in 2004 increased $32 billion or 14% from 2003, which, in turn, increased $45 billion from 2002. The increase in 2004 primarily reflected growth in average loans in the Prime Home Finance and Student Loan businesses, the impact of the KorAm and PRMI acquisitions and the impact of foreign currency translation, partially offset by reductions in the Commercial Business due to continued liquidation and sales of non-core portfolios. The increase in 2003 primarily reflected the impact of acquisitions combined with growth in loans.

26


OTHER CONSUMER

 
  2004
  2003
  2002
 
 
  In millions of dollars

 
Revenues, net of interest expense   $ 516   $ 59   $ 142  
Operating expenses     352     256     392  
   
 
 
 
Income before tax benefits     164     (197 )   (250 )
Income tax benefits     69     (73 )   (96 )
   
 
 
 
Net income (loss)   $ 95   $ (124 ) $ (154 )
   
 
 
 

        Other Consumer—which includes certain treasury and other unallocated staff functions, global marketing and other programs—reported income of $95 million in 2004 and losses of $124 million and $154 million in 2003 and 2002, respectively. Included in the 2004 results were the gain on sale of Samba of $378 million after-tax and a $22 million after-tax release of reserves related to unused travelers checks in a non-core business, partially offset by a $14 million after-tax write-down of assets in a non-core business. Excluding these items, the increase in losses in 2004 was primarily due to lower treasury results, including the impact of higher capital funding costs, and higher staff-related, global marketing and legal costs. Included in the 2002 results was a $52 million after-tax gain resulting from the disposition of an equity investment in EMEA, a $25 million after-tax release of a reserve related to unused travelers checks in a non-core business, and gains from the sales of buildings in Asia. Excluding these items, the reduction in losses in 2003 was primarily due to prior-year legal costs in connection with settlements reached during 2002 and lower global marketing costs.

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

GLOBAL CONSUMER OUTLOOK

        Certain of the statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 73.

        During 2005, the Global Consumer businesses will continue to focus on tight expense control and productivity improvements. While the businesses will also focus on expanding the base of stable and recurring revenues and managing credit risk, revenue and credit performance will also be impacted by U.S. and global economic conditions, including the level of interest rates, bankruptcy filings and unemployment rates, as well as political policies and developments around the world. The Company remains diversified across a number of geographies, product groups, and customer segments and continues to monitor the economic situation in all of the countries in which it operates.

        Cards—In 2004, Cards reported record income of $4.7 billion, an increase of 31% over 2003, while benefiting from the 2003 acquisitions of the Home Depot and Sears and the 2004 acquisition of KorAm. In 2005, Cards expects to deliver strong earnings growth as managed receivables continue to grow and expenses remain controlled through improved productivity levels and scale opportunities. In 2005, Citi Cards expects continued income and managed receivables growth through continued brand development, private-label expansion, new product launches, and organic growth, despite the continuation of a challenging competitive environment. Consistent with changes in industry practice based on regulatory guidance, during 2005, Citi Cards will change the minimum payment calculation for its credit card accounts. This change is likely to result in an increase in delinquencies and credit loss experience. In Mexico, the Company will continue to leverage the expertise and experience of the global Cards franchise, with increased sales and loan volumes and productivity improvements. International Cards is also expecting strong earnings growth in 2005 with a focus on expanding the revenue base through growth in sales, receivables, and accounts while continuing to invest in both new and existing markets.

        Consumer Finance—In 2004, Consumer Finance reported record income of $2.4 billion, an improvement of 21% from 2003, largely reflecting organic growth, the 2004 acquisition of the Washington Mutual Finance Corporation portfolio, and strong international growth outside of Japan. In North America, CitiFinancial expects to deliver income growth through growth in receivables by expanding customer reach and a continued focus on expense management. In the international markets, growth in 2005 will continue to be impacted by the challenging operating environment in Japan. The Japan business regained stability in 2004, as loss rates improved, expenses were reduced through repositioning, and the pressure on loan volumes eased. In 2005, Japan is expected to continue to improve, as loss rates and expenses remain well controlled, and customer volumes show moderate growth. In other international markets, important growth opportunities are anticipated as we continue to focus on gaining market share through branch expansion and other organic activities in both new and established markets including India, Mexico, Poland, Brazil, South Korea, Indonesia, and Thailand.

        Retail Banking—In 2004, Retail Banking reported record income of $4.6 billion, an increase of 14% from 2003, reflecting strong customer volumes, improved loss rates, and the acquisition of KorAm, partially offset by reduced earnings in the North America Prime Home Finance business in line with market conditions. In 2005, Retail Banking expects to deliver growth in core businesses driven by the benefits of investment spending, continuing to expand our footprint through branch expansion, the 2005 acquisition of First American Bank, which is pending regulatory approval, and by penetration into select markets, such as the growing Hispanic banking market.

        In 2005, Retail Distribution will continue to enhance its franchise by emphasizing increased sales productivity in the financial centers, deeper customer relationships through cross-selling and wealth management initiatives, and further investments in technology that drive cost efficiencies and improve customer satisfaction. The Commercial Business will continue to expand in serving the needs of small businesses and professionals, through lending, banking, and leasing activities. Prime Home Finance is expected to achieve growth by continuing to leverage Citigroup distribution channels while aligning the cost structure of the business to reflect lower mortgage origination volumes. The Student Loans business will continue to benefit from the strong Citi brand and best-in-class sales platforms and technology. Primerica expects to sustain momentum in recruiting and production volumes through focused product offerings, sales and product training programs, and continued dedication to its cross-selling relationships, while further developing its international presence. The Retail Banking business in Mexico expects to drive growth through new loan, deposit, and investment products while continuing to improve operating margins. The international markets are expected to build upon the investments in both new and established markets and deliver strong results through a continued focus on distribution channels, product innovation, and customer support.

27


GLOBAL CORPORATE AND INVESTMENT BANK

GLOBAL CORPORATE AND INVESTMENT BANK—2004 NET INCOME

        [EDGAR REPRESENTATION OF GRAPHIC DATA]

 
  In billions of dollars
2002   $ 3.2
2003   $ 5.4
2004   $ 2.0

GLOBAL CORPORATE AND INVESTMENT BANK—2004 NET INCOME BY PRODUCT*

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Transaction Services   16 %
Capital Markets and Banking   84 %

*
Excludes Other Corporate loss of $4.4 billion

GLOBAL CORPORATE AND INVESTMENT BANK—2004 NET INCOME BY REGION*

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Latin America   12 %
Asia   20 %
Japan   5 %
EMEA   11 %
Mexico   10 %
North America   42 %

*
Excludes $378 million after-tax gain related to the sale of Samba and $4.95 billion after-tax charge related to the Worldcom and Litigation Reserve Charge

 
  2004
  2003
  2002
 
  In millions of dollars

Revenues, net of interest expense   $ 21,774   $ 20,021   $ 19,165
Operating expenses     20,525     11,455     12,093
Provision for credit losses     (975 )   732     2,255
   
 
 
Income before taxes and minority interest     2,224     7,834     4,817
Income taxes     93     2,426     1,620
Minority interest, after-tax     93     37     25
   
 
 
Net income   $ 2,038   $ 5,371   $ 3,172
   
 
 
Average risk capital(1)   $ 19,045   $ 16,264      
Return on risk capital(1)     11 %   33 %    
Return on invested capital(1)     8 %   25 %    
   
 
     

(1)
See Footnote (7) to the table on page 4.

        Global Corporate and Investment Bank (GCIB) reported net income of $2.038 billion, $5.371 billion, and $3.172 billion in 2004, 2003, and 2002, respectively. The 2004 period reflects a decrease of $4.382 billion in Other Corporate, primarily reflecting the $4.95 billion (after-tax) WorldCom and Litigation Reserve Charge, offset by an increase of $753 million or 16% in Capital Markets and Banking and $296 million or 40% in Transaction Services. The increase in 2003 net income reflects increases of $1.376 billion in Other Corporate, primarily reflecting the absence of a $1.3 billion after-tax charge in 2002 related to the establishment of reserves for regulatory settlements and related civil litigation, $647 million or 16% in Capital Markets and Banking, and $176 million or 31% 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 and the acquisition of KorAm.

        Capital Markets and Banking net income of $5.395 billion in 2004 increased $753 million or 16% compared to 2003, primarily due to a lower provision for credit losses as well as an increase in Lending, Fixed Income and Equity Markets revenues. The increase in expenses was driven by higher incentive compensation, the impact of recent acquisitions, higher legal reserves, and increased investment spending on strategic growth initiatives. Net income of $4.642 billion in 2003 increased $647 million or 16% compared to 2002, primarily reflecting a lower provision for credit losses, increases in Fixed Income Markets and the absence of prior-year redenomination losses in Argentina, partially offset by mark-to-market losses on credit derivatives (which serve as an economic hedge for the loan portfolio) as credit spreads tightened.

        Transaction Services net income of $1.041 billion in 2004 increased $296 million or 40% from 2003, primarily due to higher revenue reflecting growth in assets under custody and liability balances, improved spreads, a benefit from foreign currency translation and the impact of KorAm, and a lower provision for credit losses, partially offset by higher expenses. Transaction Services net income of $745 million in 2003 increased $176 million or 31% from 2002, primarily due to a lower provision for credit losses, the benefit of lower taxes due to the application of APB 23 indefinite investment criteria and business consolidation, as well as lower expenses resulting from expense control initiatives.

GCIB Net Income—Regional View

 
  2004
  2003
  2002
 
  In millions of dollars

North America (excluding Mexico)   $ (2,190 ) $ 2,542   $ 1,011
Mexico     659     407     423
EMEA     1,132     919     755
Japan     334     162     124
Asia (excluding Japan)     1,290     775     728
Latin America     813     566     131
   
 
 
Net income   $ 2,038   $ 5,371   $ 3,172
   
 
 

28


        GCIB net income decreased in 2004 primarily as a result of the WorldCom and Litigation Reserve Charge in North America (excluding Mexico), partially offset by increases in Asia (excluding Japan), Mexico, Latin America, EMEA and Japan. Asia (excluding Japan) net income increased $515 million in 2004 primarily due to increases in Fixed Income (mainly in global distressed debt trading and strong foreign exchange trading results), Transaction Services Cash Management revenues, loan loss reserve releases as a result of improving credit quality and the acquisition of KorAm. Mexico net income increased $252 million in 2004 primarily due to loan loss reserve releases resulting from improving credit quality. Latin America net income increased $247 million in 2004 primarily due to loan loss reserve releases resulting from improving credit quality, partially offset by strong prior-year trading gains in Brazil. EMEA net income increased $213 million in 2004 primarily due to the $378 million after-tax gain on the sale of Samba, a lower provision for credit losses reflecting the absence of prior-year credit losses related to exposure to Parmalat, strong revenue growth in Transaction Services and current period credit recoveries, partially offset by an increase in legal reserves. Japan net income increased $172 million in 2004, primarily driven by increases in Fixed Income and Investment Banking revenue, a gain on the partial sale of Nikko Cordial shares, and a lower provision for credit losses due to loan loss reserve releases.

CAPITAL MARKETS AND BANKING

 
  2004
  2003
  2002
 
  In millions of dollars

Revenues, net of interest expense   $ 17,106   $ 16,445   $ 15,744
Operating expenses     9,959     8,910     7,671
Provision for credit losses     (777 )   738     2,046
   
 
 
Income before taxes and minority interest     7,924     6,797     6,027
Income taxes     2,440     2,118     2,008
Minority interest, after-tax     89     37     24
   
 
 
Net income   $ 5,395   $ 4,642   $ 3,995
   
 
 
Average risk capital(1)   $ 17,666   $ 14,785      
Return on risk capital(1)     30 %   31 %    
Return on invested capital(1)     24 %   24 %    
   
 
     

(1)
See Footnote (7) to the table on page 4.

        Capital Markets and Banking reported net income of $5.395 billion in 2004, an increase of $753 million or 16% from 2003, primarily due to a lower provision for credit losses as well as an increase in Lending, Fixed Income and Equity Markets revenues. Net income of $4.642 billion in 2003 increased $647 million or 16% compared to 2002, primarily due to a lower provision for credit losses, increases in Fixed Income Markets and Investment Banking, partially offset by declines in Lending and Equity Markets.

        Revenues, net of interest expense, of $17.106 billion in 2004 increased $661 million or 4% from 2003. The increase in revenues in 2004 was primarily driven by increases in Lending, Fixed Income and Equity Markets. 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. Fixed Income Markets increased primarily due to higher commodities, distressed debt and mortgage trading, partially offset by declines in interest rate and foreign exchange trading. The Equity Markets increase primarily reflects increases in cash trading, including the impact of the Lava Trading acquisition and higher derivatives, partially offset by declines in convertibles. Investment Banking was flat reflecting lower debt underwriting, offset by growth in equity underwriting and advisory and other fees, primarily M&A.

        Revenues, net of interest expense, of $16.445 billion in 2003 increased $701 million or 4% from 2002. Revenue growth in 2003 was driven by increases in Fixed Income Markets and Investment Banking, partially offset by declines in Lending and Equity Markets. Fixed Income Markets increased primarily due to higher debt trading as companies took advantage of the low interest rate environment. Investment Banking increased primarily reflecting strong debt underwriting volumes, partially offset by lower Equity underwriting volumes and advisory and other fees, primarily lower M&A. Lending declined primarily reflecting mark-to-market losses on credit derivatives as credit spreads tightened, partially offset by the absence of 2002 redenomination losses and write-downs of sovereign securities in Argentina. Equity Markets declined primarily due to lower business volumes and declines in derivatives.

        Operating expenses of $9.959 billion in 2004 increased $1.049 billion or 12% from 2003, primarily due to higher compensation and benefits expense (primarily reflecting a higher incentive compensation accrual), increased legal reserves, increased investment spending on strategic growth initiatives and the acquisitions of KorAm and Lava Trading. Operating expenses increased $1.239 billion or 16% in 2003 compared to 2002, primarily due to increased compensation and benefits expense, which is impacted by the revenue and credit performance of the business. The increase in 2003 also reflects costs associated with the repositioning of the Company's business in Latin America (primarily severance-related) and higher legal fees.

29


        The provision for credit losses was ($777) million in 2004, down $1.515 billion from 2003, primarily due to lower credit losses in the power and energy industry, in Argentina and in Brazil, and due to prior-year losses on Parmalat, as well as loan loss reserve releases as a result of improving credit quality globally. The provision for credit losses decreased $1.308 billion in 2003, primarily due to the absence of prior-year provisions for Argentina and exposures in the energy and telecommunications industries, as well as reserve releases reflecting improved credit trends, partially offset by the provision of $338 million for credit losses related to exposure to Parmalat.

        Cash-basis loans were $1.794 billion, $3.263 billion, and $3.423 billion at December 31, 2004, 2003, and 2002, respectively. Cash-basis loans net of write-offs decreased $1.469 billion from December 31, 2003, primarily due to decreases related 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, Australia, Hong Kong, and New Zealand, partially offset by increases in Korea reflecting the acquisition of KorAm. The decrease in 2003 is primarily due to decreases to corporate borrowers in Argentina and New Zealand, as well as reductions in the telecommunications industry, partially offset by the reclassification of cash-basis loans ($248 million) in Mexico from Transaction Services to Capital Markets and Banking and increases in exposure to Parmalat and to the energy industry.

TRANSACTION SERVICES

 
  2004
  2003
  2002
 
  In millions of dollars

Revenues, net of interest expense   $ 4,066   $ 3,588   $ 3,638
Operating expenses     2,841     2,556     2,583
Provision for credit losses     (198 )   (6 )   209
   
 
 
Income before taxes and minority interest     1,423     1,038     846
Income taxes     378     293     276
Minority interest, after-tax     4         1
   
 
 
Net income   $ 1,041   $ 745   $ 569
   
 
 
Average risk capital(1)   $ 1,379   $ 1,479      
Return on risk capital(1)     75 %   50 %    
Return on invested capital(1)     46 %   34 %    
   
 
     

(1)
See Footnote (7) to the table on page 4.

        Transaction Services reported net income of $1.041 billion in 2004, up $296 million or 40% from 2003, primarily due to higher revenue reflecting growth in liability balances, assets under custody and fees, improved spreads, a benefit from foreign currency translation and the impact of KorAm, and a lower provision for credit losses, partially offset by higher expenses. Net income of $745 million in 2003 increased $176 million or 31% from 2002, primarily due to a lower provision for credit losses, the benefit of lower taxes due to the application of APB 23 indefinite investment criteria, business consolidation, and lower expenses resulting from expense control initiatives.

        As shown in the following table, average liability balances of $121 billion grew 21% compared to 2003, primarily due to increases in Asia and Europe reflecting positive flow and the impact of the KorAm acquisition. Assets under custody reached $7.9 trillion, an increase of $1.5 trillion or 23% compared to 2003, primarily reflecting market appreciation, a benefit from foreign currency translation, and incremental net sales.

 
  2004
  2003
  2002
Liability balances (average in billions)   $ 121   $ 100   $ 85
Assets under custody (EOP in trillions)   $ 7.9   $ 6.4   $ 5.1
   
 
 

        Revenues, net of interest expense, increased $478 million or 13% to $4.066 billion in 2004, reflecting growth in Cash and Global Securities Services, offset by declines in Trade. Revenue in Cash Management increased $309 million or 15% from 2003, mainly due to growth in liability balances, improved spreads, the impact of the KorAm acquisition and a benefit from foreign currency translation and increased fees. Revenue in Global Securities Services increased $186 million or 19% from 2003, primarily reflecting higher assets under custody and fees and the impact of acquisitions, partially offset by a prior-year gain on the sale of interest in a European market exchange. Trade revenue decreased $15 million or 3% from 2003, primarily due to lower spreads. Revenues, net of interest expense, were $3.588 billion in 2003, down $50 million or 1% from 2002, driven by declines in Trade and Global Securities Services, offset by increases in Cash Management. Revenue in Trade decreased $71 million or 11% from 2002 primarily due to lower spreads reflecting the low interest rate environment in 2003, price compression and decreased asset levels. Revenue in Global Securities Services decreased $10 million or 1%, mainly due to lower market capitalization and declines in depository receipt issuance activity. Cash Management revenue increased $31 million or 2% primarily due to increased business volumes reflecting higher liability balances, and a benefit from foreign exchange currency translation. The 2003 and 2004 periods included gains on the early termination of intracompany deposits (which were offset in Capital Markets and Banking).

        Operating expenses increased $285 million or 11% in 2004 to $2.841 billion, primarily due to the impact of foreign currency translation and higher business volumes, including the effect of acquisitions, as well as increased compensation and benefits costs. Operating expenses of $2.556 billion in 2003 decreased $27 million or 1% from $2.583 billion in 2002, primarily reflecting expense control initiatives. The decrease in operating expenses in 2003 was partially offset by costs associated with the repositioning of the Company's business in Latin America, investment spending related to higher business volumes and integration costs associated with new business relationships.

30


        The provision for credit losses was ($198) million, ($6) million, and $209 million in 2004, 2003, and 2002, respectively. The provision for credit losses decreased by $192 million from 2003, primarily due to loan loss reserve releases of $163 million in 2004 as a result of improving credit quality and current period net credit recoveries in Latin America. The provision for credit losses decreased by $215 million from 2002, primarily due to prior-year write-offs in Argentina and reserve releases reflecting improved credit trends. The reduction in credit costs was partially offset by 2003 provisions for selected borrowers in Brazil and Parmalat.

        Cash-basis loans, which in the Transaction Services business are primarily trade finance receivables, were $112 million, $156 million, and $572 million at December 31, 2004, 2003, and 2002, respectively. The decrease in cash-basis loans of $44 million in 2004 was primarily due to charge-offs in Argentina and Poland. Cash-basis loans decreased $416 million in 2003, primarily due to a reclassification of cash-basis loans ($248 million) in Mexico from Transaction Services to Capital Markets and Banking, along with charge-offs in Argentina and Poland.

OTHER CORPORATE

 
  2004
  2003
  2002
 
 
  In millions of dollars

 
Revenues, net of interest expense   $ 602   $ (12 ) $ (217 )
Operating expenses     7,725     (11 )   1,839  
   
 
 
 
Loss before income taxes (benefits)     (7,123 )   (1 )   (2,056 )
Income taxes (benefits)     (2,725 )   15     (664 )
   
 
 
 
Net income (loss)   $ (4,398 ) $ (16 ) $ (1,392 )
   
 
 
 

        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 $4.398 billion in 2004 compared to a net loss of $16 million in 2003, reflecting 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 and a $120 million after-tax insurance recovery related to WorldCom and Enron legal matters. The net loss of $1.392 billion in 2002 was primarily a result of a $1.3 billion after-tax charge related to the establishment of reserves for regulatory settlements and related civil litigation.

GLOBAL CORPORATE AND INVESTMENT BANK OUTLOOK

        Certain of the statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 73.

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

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

        Limited staff reductions will be made in the Global Corporate and Investment Bank in early 2005. The reductions will affect an estimated 1,400 staff and will result in an approximately $275 million pre-tax charge during the 2005 first quarter.

        Capital Markets and Banking in 2004 reported strong Lending and Fixed Income Markets results driven by improving credit trends and a favorable interest rate environment, while Equity Markets benefited from increased capital markets volumes. Additionally, our international business platform benefited from the acquisition of KorAm in Asia.

        In 2005, our Capital Markets and Banking initiatives will continue to focus on product offerings that target client segments with strong growth and profitability prospects. The Company's acquisitions of Lava Trading and Knight Trading's derivative markets business in the past year have been key steps in that direction, strengthening our capabilities in equities, derivatives, and principal trading. The business will continue to invest in distressed assets, where it can provide a valuable service to corporate clients, particularly in Asia, by helping them find solutions to their debt burdens. In banking, the business will continue to pursue profitable market share gains with a focus on M&A and equities and will also take steps to broaden its client base. It has not addressed a large number of potential customers in the U.S. in the $500 million to $2.5 billion revenue range or for small and medium enterprises (SME) in emerging markets. The GCIB has formed specific organizations with dedicated senior leadership, staff and funding to pursue these opportunities effectively.

        Transaction Services has demonstrated significant growth over the past year and will continue to invest in its Funds Services business. Deals such as Forum Financial and ABN Amro's custody business have increased Citigroup's ability to service its hedge fund and mutual fund clients and significantly broadened its Funds Services business. The Company has an initiative to launch its correspondent clearing in the North American market by leveraging its existing infrastructure to service client needs.

31


GLOBAL WEALTH MANAGEMENT

GLOBAL WEALTH MANAGEMENT—2004 NET INCOME

[EDGAR REPRESENTATION OF GRAPHIC DATA]

 
  In billions of dollars
2002   $ 1.3
2003   $ 1.3
2004   $ 1.2

GLOBAL WEALTH MANAGEMENT—2004 NET INCOME BY PRODUCT

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Private Bank   27 %
Smith Barney   73 %

GLOBAL WEALTH MANAGEMENT—2004 NET INCOME BY REGION*

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Asia   9 %
Japan   3 %
Mexico   3 %
North America   81 %
EMEA   1 %
Latin America   3 %

*
Excludes a $244 million after-tax charge related to the exit plan implementation for the Private Bank operations in Japan.

 
  2004
  2003
  2002
 
  In millions of dollars

Revenues, net of interest expense   $ 8,511   $ 7,840   $ 7,566
Operating expenses     6,665     5,750     5,562
Provision for credit losses     (5 )   12     24
   
 
 
Income before taxes     1,851     2,078     1,980
Income taxes     652     735     698
   
 
 
Net income   $ 1,199   $ 1,343   $ 1,282
   
 
 
Average risk capital(1)   $ 1,877   $ 1,866      
Return on risk capital(1)     64 %   72 %    
Return on invested capital(1)ul]     52 %   70 %    
   
 
     

(1)
See Footnote (7) to the table on page 4.

        Global Wealth Management reported net income of $1.199 billion in 2004, a decrease of $144 million or 11% from 2003, reflecting a decline in Private Bank, partially offset by double-digit growth in Smith Barney. Private Bank net income of $318 million in 2004 decreased $233 million or 42% compared to 2003, reflecting a $288 million decline in Japan mainly due to a $244 million after-tax charge associated with the closure of Private Bank operations in Japan, as well as a decline in transactional revenue. Excluding Japan, Private Bank income grew $55 million or 12%, driven by growth in recurring fee-based and net interest revenues, a lower effective tax rate and improved credit costs, which were partially offset by higher incentive compensation costs. Smith Barney net income of $881 million in 2004 increased $89 million or 11% compared to 2003, primarily driven by increases in asset-based revenue and transactional revenue, partially offset by increased marketing expenses, legal and compliance charges and continued investment in new client offerings.

        Net income of $1.343 billion in 2003 increased $61 million or 5% from 2002, reflecting double-digit growth in Private Bank, partially offset by a decline in Smith Barney. Private Bank net income of $551 million in 2003 increased $90 million or 20% from 2002, primarily due to increased investment management and capital markets activity combined with growth in lending revenues, partially offset by increased incentive compensation associated with the higher revenues. Smith Barney net income of $792 million in 2003 decreased $29 million or 4% from 2002, primarily due to lower earnings on capital, a higher effective tax rate and increased legal, advertising and marketing costs.

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

Global Wealth Management Net Income—Regional View

 
  2004
  2003
  2002
 
  In millions of dollars

North America (excluding Mexico)   $ 1,169   $ 1,073   $ 1,071
Mexico     52     41     20
EMEA     15     (16 )   8
Japan     (205 )   83     60
Asia (excluding Japan)     125     118     92
Latin America     43     44     31
   
 
 
Net income   $ 1,199   $ 1,343   $ 1,282
   
 
 

        Global Wealth Management net income decreased $144 million in 2004 from the prior year, primarily due to the decline in Japan, partially offset by growth in North America, EMEA, Mexico and Asia. The Japan net loss of $205 million in 2004 represented a $288 million decrease in income from 2003, due to the Private Bank closure. North America net income of $1.169 billion increased $96 million from 2003, reflecting higher Smith Barney results of $89 million, primarily driven by strong asset-based revenue growth, partially offset by higher operating expenses and higher Private Bank results of $7 million, which were primarily driven by strong banking and lending volumes, as well as a lower effective tax rate, and partially offset by higher employee-related costs and net interest margin compression. EMEA net income of $15 million in 2004 increased $31 million from 2003, primarily driven by growth in fee income as well as transactional revenues and improved credit costs. Mexico net income of $52 million in 2004 increased $11 million from 2003, resulting from higher transactional revenue and higher fee income. Asia net income of $125 million increased $7 million from 2003, primarily reflecting higher fee-based and net interest revenue, partially offset by higher employee-related costs driven by investments in bankers and product specialists.

32


SMITH BARNEY

 
  2004
  2003
  2002
 
  In millions of dollars

Revenues, net of interest expense   $ 6,467   $ 5,844   $ 5,865
Operating expenses     5,015     4,567     4,555
Provision for credit losses         1     6
   
 
 
Income before taxes     1,452     1,276     1,304
Income taxes     571     484     483
   
 
 
Net income   $ 881   $ 792   $ 821
   
 
 
Average risk capital(1)   $ 1,126   $ 1,239      
Return on risk capital(1)     78 %   64 %    
Return on invested capital(1)     58 %   48 %    
   
 
     

(1)
See Footnote (7) to the table on page 4.

        Smith Barney reported net income of $881 million in 2004 compared to $792 million in 2003 and $821 million in 2002. The $89 million or 11% increase during 2004, primarily due to increases in both asset-based revenue and transactional revenue, was partially offset by increased marketing, legal and compliance expenses and continued investment in new client offerings. Net income in 2003 declined $29 million or 4% compared to 2002, primarily due to lower earnings on capital, a higher effective tax rate and increased legal, advertising and marketing costs.

        Revenues, net of interest expense, increased $623 million in 2004 to $6.467 billion, primarily due to increases in both asset-based fee revenue, reflecting higher assets under fee-based management, and transactional revenue, reflecting equity market appreciation driving trading. Revenues, net of interest expense, decreased $21 million in 2003 to $5.844 billion, primarily due to lower earnings on capital and decreases in asset-based revenue, reflecting declines in fees from managed accounts and lower net interest revenue on security-based lending, partially offset by increased transactional revenue. The decrease in managed account revenue reflects a change in client asset mix during 2003.

        Total assets under fee-based management were $240 billion, $209 billion, and $158 billion as of December 31, 2004, 2003, and 2002, respectively. The increase in 2004 and 2003 was primarily due to positive net flows and higher equity market values. Total client assets, including assets under fee-based management, of $1.156 trillion in 2004, increased $88 billion or 8% from $1.068 trillion in 2003, which in turn increased $177 billion from 2002. The increase in 2004 and 2003 was primarily due to higher equity market values and positive net flows of $24 and $28 billion, respectively. Balances in Smith Barney's Bank Deposit Program totaled $43 billion in 2004, which increased slightly from 2003. Smith Barney had 12,138 financial consultants as of December 31, 2004, compared with 12,207 as of December 31, 2003, and 12,690 as of December 31, 2002. Annualized revenue per financial consultant of $534,000 in 2004 increased 13% from $472,000 in 2003, which in turn increased 3% from $459,000 in 2002.

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

 
  2004
  2003
  2002
 
  In billions of dollars

Consulting group and internally managed accounts   $ 156   $ 137   $ 106
Financial consultant managed accounts     84     72     52
   
 
 
Total assets under fee-based management(1)     240     209     158
   
 
 
Smith Barney assets     978     912     762
Other investor assets within Citigroup Global Markets     178     156     129
   
 
 
Total Smith Barney assets(1)   $ 1,156   $ 1,068   $ 891
   
 
 
Annualized revenue per financial consultant (in thousands of dollars)   $ 534   $ 472   $ 459
   
 
 

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

        Operating expenses increased $448 million in 2004 to $5.015 billion from $4.567 billion in 2003, which in turn increased $12 million from $4.555 billion in 2002. The increase in 2004 and 2003 primarily reflects higher legal and advertising and marketing costs as well as continued investment expenses.

PRIVATE BANK

 
  2004
  2003
  2002
 
  In millions of dollars

Revenues, net of interest expense   $ 2,044   $ 1,996   $ 1,701
Operating expenses     1,650     1,183     1,007
Provision for credit losses     (5 )   11     18
   
 
 
Income before taxes     399     802     676
Income taxes     81     251     215
   
 
 
Net income   $ 318   $ 551   $ 461
   
 
 
Client business volumes under management (in billions of dollars)   $ 224   $ 195   $ 170
   
 
 
Average risk capital(1)   $ 751   $ 627      
Return on risk capital(1)     42 %   88 %    
Return on invested capital(1)     40 %   85 %    
   
 
     

(1)
See Footnote (7) to the table on page 4.

        Private Bank reported net income of $318 million in 2004, down $233 million or 42% from 2003, reflecting a $288 million decline in Japan. The decline in Japan reflected a $244 million after-tax charge associated with the closure of the business, as well as a decline in transactional revenue (see page 9). Excluding Japan, income grew $55 million or 12% driven by growth in recurring fee-based and net interest revenues, a lower effective tax rate and improved credit costs which were partially offset by higher incentive compensation costs. Net income of $551 million in 2003 was up $90 million or 20% from 2002, primarily reflecting increased investment management and capital markets activity, lending activity, and a lower provision for credit losses, partially offset by higher expenses, reflecting incentive

33


compensation expense associated with higher revenues and higher other employee-related costs, and the impact of narrowing interest rate spreads.

 
  2004
  2003
  2002
 
  In billions of dollars
at year-end

Client Business Volumes:                  
   
 
 
Proprietary Managed Assets   $ 44   $ 35   $ 32
Other Assets under Fee-Based Management     8     7     8
Banking and Fiduciary Deposits     49     45     38
Investment Finance     42     37     33
Other, principally Custody Accounts     81     71     59
   
 
 
Total   $ 224   $ 195   $ 170
   
 
 

        Client business volumes were $224 billion at the end of the year, up $29 billion or 15% from $195 billion at the end of 2003. Double-digit growth in client business volumes was led by an increase in custody assets, which were higher in all regions except Japan. Proprietary managed assets increased $9 billion or 26% predominantly in the U.S., reflecting the impact of positive net flows. Investment finance volumes, which include loans, letters of credit, and commitments, increased $5 billion or 14%, reflecting growth in real-estate-secured loans in the U.S. and increased margin lending in the international business, excluding Japan. Banking and fiduciary deposits grew $4 billion or 9%, with double-digit growth in the U.S. and EMEA, partially offset by a $1 billion or 19% decline in Japan. Client business volumes were $195 billion at the end of 2003, up 15% from $170 billion in 2002, reflecting increases in other (principally custody) accounts of $12 billion, banking and fiduciary deposits of $7 billion, investment finance volumes of $4 billion and assets under fee-based management of $2 billion.

        Revenues, net of interest expense, were $2.044 billion in 2004, up $48 million or 2% from 2003 as combined growth of $112 million or 6% in Asia, North America (including Mexico), EMEA and Latin America was partially offset by a $64 million or 24% decline in Japan. In Asia, revenue increased $34 million or 9%, reflecting broad-based increases in recurring fee-based and net interest revenue that were partially offset by a decline in client transactional activity and lower performance fees. Revenue in North America increased $32 million or 4%, primarily driven by strong growth in banking and lending volumes in the U.S. and increased client transaction activity in Mexico, combined with growth in fee income from discretionary, custody and trust assets in both the U.S. and Mexico. Growth in North America was negatively impacted by net interest margin compression as increased funding costs, including lower revenue from treasury activities, was partially offset by the benefit of changes in the mix of deposits and liabilities. In EMEA, revenue grew $31 million or 12%, primarily driven by growth in fee income from discretionary and trust assets as well as increased transactional revenue.

        Revenue growth of $15 million or 7% in Latin America primarily reflected growth in banking and lending volumes. In Japan, revenue declined $64 million or 24% mainly due to lower transactional revenues. Revenues, net of interest expense, were $1.996 billion in 2003, up $295 million or 17% from 2002, primarily driven by revenue increases from investment management and capital markets activity, as well as lending and banking activities, partially offset by the impact of a narrowing of interest rate spreads.

        Operating expenses of $1.650 billion in 2004 were up $467 million or 39% from 2003. Operating expenses in 2004 included the $400 million exit plan charge in Japan. Excluding the exit plan charge, expenses increased $67 million or 6%, primarily reflecting increases in incentive compensation resulting from corresponding increases in revenue, as well as higher staff costs that were driven by investments in bankers and product specialists. Offsetting the growth in expenses was the absence of prior-year repositioning costs in Europe. Operating expenses were $1.183 billion in 2003, up $176 million or 17% from 2002, primarily reflecting increased incentive compensation associated with higher revenues, incremental repositioning costs in EMEA, and increased salary and benefits costs due to a change in employee mix of front-end sales staff.

        The provision for credit losses reflected net recoveries of $5 million in 2004 compared to net provisions of $11 million in 2003 and $18 million in 2002. The improvement in 2004 reflected net recoveries in Japan, Asia, the U.S., and Europe. The improvement in 2003 primarily reflected an improvement in credit experience in North America and Asia, partially offset by higher net write-offs in Japan. Net credit write-offs / (recoveries) in 2004 were (0.02%) of average loans outstanding compared with 0.05% in both 2003 and 2002. Loans 90 days or more past due at year-end 2004 were $127 million or 0.33% of total loans outstanding, compared with $121 million or 0.35% at the end of 2003.

        The decline in the effective tax rate in 2004 as compared to the prior year was primarily driven by the impact of the $400 million pretax ($244 million after-tax) Japan exit plan implementation charge.

GLOBAL WEALTH MANAGEMENT OUTLOOK

        Certain of the statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 73.

        Smith Barney—In 2004, Smith Barney delivered industry-leading profit margins primarily due to increased revenues reflecting higher client assets and trading volumes and a continued emphasis on expense management. In 2005, the focus for Smith Barney will be on franchise growth through customer acquisition, selected recruiting and training of experienced Financial Consultants and continued investment in its wealth management platform, including financial planning, liability management and fee-based services. In Global Equity Research, major initiatives include strategically expanding research coverage in targeted sectors, continuing expense management, as well as refining the scope and management structure of our global research platform.

        Private Bank—The strategy of Private Bank consists of four major components: integrated client solutions, innovative product capabilities, a focus on key markets worldwide, and a leveraging of the global reach of Citigroup. These components have enabled Private Bank to offer top-tier capabilities and investment solutions to the wealthiest families around the world by drawing upon the vast resources of Citigroup's businesses. During uncertain and complex economic and geopolitical times, the stability, globality, balance sheet strength and broad product capabilities of Citigroup provide the Private Bank with a competitive and sustainable advantage over its peer group.

        Exiting the private banking operations in Japan will impact the operating and financial performance of the Private Bank in 2005. Costs will continue to be incurred in connection with implementing the exit plan and additional charges may be taken. The Private Bank will continue to focus on expansion in geographic markets including India, South Korea and select cities in North America; build-out new product capabilities; maintain and expand successful partnerships with other Citigroup entities worldwide; and develop and attract a talented sales force that will focus on expanding our client base and strengthening relationships with existing clients. Private Bank expects its market-leading regions to continue their strong performance in 2005.

34


GLOBAL INVESTMENT MANAGEMENT

GLOBAL INVESTMENT MANAGEMENT—2004 NET INCOME

[EDGAR REPRESENTATION OF GRAPHIC DATA]

 
  In billions of dollars
2002   $ 1.0
2003   $ 1.1
2004   $ 1.3

GLOBAL INVESTMENT MANAGEMENT—2004 NET INCOME BY PRODUCT

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Asset Management   18 %
Life Insurance and Annuities   82 %

GLOBAL INVESTMENT MANAGEMENT—2004 NET INCOME BY REGION

[EDGAR REPRESENTATION OF GRAPHIC DATA]

Asia   3 %
Japan   2 %
Mexico   12 %
North America   78 %
Latin America   5 %
 
  2004
  2003
  2002
 
  In millions of dollars

Revenues, net of interest expense   $ 7,422   $ 6,645   $ 5,813
Operating expenses     2,459     1,936     1,690
Provisions for benefits, claims, and credit losses     3,089     3,162     2,726
   
 
 
Income before taxes and minority interest     1,874     1,547     1,397
Income taxes     553     419     403
Minority interest, after-tax     10     12     1
   
 
 
Net income   $ 1,311   $ 1,116   $ 993
   
 
 

Average risk capital(1)

 

$

4,697

 

$

4,480

 

 

 
Return on risk capital(1)     28 %   25 %    
Return on invested capital(1)     16 %   22 %    
   
 
     

(1)
See Footnote (7) to the table on page 4.

        Global Investment Management reported net income of $1.311 billion in 2004, which was up $195 million or 17% from 2003. Life Insurance and Annuities net income of $1.073 billion in 2004 increased $281 million compared to 2003, reflecting a $184 million increase in International Insurance Manufacturing (IIM) to $163 million, and a $97 million or 12% increase in Travelers Life and Annuity (TLA) to $910 million. The increase in IIM's income was driven by the absence of realized investment losses and other actions in Argentina in the 2003 third quarter and a tax ruling confirming the deductibility of those losses in the 2004 third quarter, as well as earnings from higher business volumes. The increase in TLA's income reflects earnings from higher business volumes, improved retained investment margins and after-tax reserve releases from the settlement of litigation, partially offset by higher operating expenses driven by the increased business volumes and greater amortization of deferred acquisition costs (DAC) as well as lower tax benefits from the separate account dividends received deduction (DRD). Asset Management net income of $238 million in 2004 was down $86 million or 27% from 2003, primarily reflecting increased legal expenses and the establishment of a reserve related to the expected resolution of the previously-disclosed SEC investigation into transfer agent matters and the termination of the contract to manage assets for St. Paul Travelers, partially offset by the absence of impairments of a DAC asset relating to the retirement services business in Argentina of $42 million and of Argentina Government Promissory Notes (GPNs) of $9 million, the absence of a loss on the sale of an El Salvador retirement services business of $10 million, and the impact of positive market action and the cumulative impact of positive net flows.

        Global Investment Management net income of $1.116 billion in 2003 increased $123 million or 12% from 2002. Life Insurance and Annuities net income of $792 million in 2003 increased $150 million compared to 2002, reflecting a $232 million or 40% increase in TLA to $813 million, partially offset by a decrease of $82 million in IIM. The increase in TLA's income was primarily driven by higher net realized insurance investment portfolio gains of $236 million, earnings from higher business volumes, and lower taxes, partially offset by higher DAC amortization and reduced investment yields. The IIM net loss of $21 million in 2003 represented a decrease in income of $82 million from 2002, driven by impairments of Argentina GPNs of $114 million and the impact of certain liability restructuring actions taken in the Argentina voluntary annuity business of $20 million, partially offset by increases in Asia of $24 million and Mexico of $24 million. Asset Management net income of $324 million in 2003 was down $27 million or 8% from 2002, primarily reflecting the impact of impairments in Argentina and reduced fee revenues, partially offset by the cumulative impact of positive net flows, lower expenses and lower capital funding costs in Mexico.

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

Global Investment Management Net Income—Regional View

 
  2004
  2003
  2002
 
 
  In millions of dollars

 
North America (excluding Mexico)   $ 1,015   $ 1,052   $ 849  
Mexico     153     162     110  
EMEA     7     20     11  
Japan     24     5     (4 )
Asia (excluding Japan)     37     50     21  
Latin America     75     (173 )   6  
   
 
 
 
Net income   $ 1,311   $ 1,116   $ 993  
   
 
 
 

35


        Global Investment Management net income increased $195 million in 2004 from the prior year, with increases in Latin America and Japan being partially offset by declines in all other regions. Latin America net income of $75 million in 2004 increased $248 million from 2003, resulting from higher Life Insurance and Annuities results of $184 million (primarily driven by the absence of realized investment losses and other actions from Argentina in 2003 of $134 million and a tax ruling confirming the deductibility of those losses in the 2004 third quarter of $47 million) and higher Asset Management results of $64 million (mainly reflecting the absence of impairments of a DAC asset in Argentina of $42 million and of Argentina GPNs of $9 million, and the absence of a loss on the sale of an El Salvador retirement services business of $10 million). Japan net income of $24 million in 2004 increased $19 million from 2003, primarily reflecting an increase of $16 million in Life Insurance and Annuities from higher business volumes. North America (excluding Mexico) net income of $1.015 billion in 2004 decreased $37 million from 2003, primarily driven by increased legal expenses in Asset Management, partially offset by the increase in income reported by TLA. Asia net income in 2004 of $37 million decreased $13 million from 2003, primarily related to the absence of an $18 million tax benefit arising from the application of APB 23 indefinite investment criteria in Life Insurance and Annuities. EMEA net income of $7 million in 2004 represented a decrease in income of $13 million from 2003, primarily related to the transfer of CAI Institutional performance fees to North America beginning in 2004 and higher expenses in Asset Management. Mexico net income of $153 million in 2004 decreased $9 million from 2003, primarily due to lower results in Asset Management (the impact of higher tax rates, partially offset by lower capital funding costs and higher business volumes).

LIFE INSURANCE AND ANNUITIES

 
  2004
  2003
  2002
 
  In millions of dollars

Revenues, net of interest expense   $ 5,598   $ 5,012   $ 4,115
Provision for benefits and claims     3,089     3,162     2,726
Operating expenses     1,043     788     501
   
 
 
Income before taxes     1,466     1,062     888
Income taxes     393     270     246
   
 
 
Net income   $ 1,073   $ 792   $ 642
   
 
 

Average risk capital(1)

 

$

3,999

 

$

3,743

 

 

 
Return on risk capital(1)     27 %   21 %    
Return on invested capital(1)     21 %   16 %    
   
 
     

(1)
See Footnote (7) to the table on page 4.

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

        Life Insurance and Annuities reported net income of $1.073 billion in 2004, a $281 million or 35% increase from $792 million in 2003. The $281 million increase consisted of higher earnings of $184 million in IIM and $97 million in TLA. The $281 million increase reflects the absence of certain asset impairments and other actions taken in Argentina in the 2003 third quarter and a tax ruling confirming the deductibility of those losses in the 2004 third quarter, as well as earnings from higher business volumes and fees in both businesses and higher retained investment margins in TLA. These increases were partially offset by higher operating expenses driven by the increased business volumes and greater amortization of DAC, including a $21 million after-tax adjustment to universal life DAC amortization and deferred revenue, as well as lower tax benefits related to the separate account dividends received deduction (DRD). Net income was $792 million in 2003, a $150 million or 23% increase from $642 million in 2002. The $150 million increase was driven by a $232 million increase in TLA, partially offset by an $82 million decrease in IIM. The $150 million increase reflects lower net realized insurance investment portfolio losses of $187 million, earnings from higher business volumes, and the impact of lower taxes. These increases were partially offset by certain asset impairments and other actions taken in Argentina, an increase in benefits and claims related to business volume growth, an increase in operating expenses driven by higher DAC amortization, and the impact of lower retained investment margins.

        TLA's net income was $910 million in 2004 versus $813 million in 2003. This $97 million or 12% increase was driven by earnings from business volume growth, improved retained investment margins and $17 million after-tax reserve releases from the settlement of litigation. These increases were partially offset by higher operating expenses driven by an $87 million after-tax increase in DAC amortization, which included a $25 million after-tax adjustment to universal life DAC amortization related to a change in the pattern of estimated gross profits and a $30 million DRD tax benefit relating to prior periods in 2004 versus a $51 million DRD tax benefit relating to prior periods in 2003. TLA's net income was $813 million in 2003 as compared to $581 million in 2002, an increase of $232 million. The $232 million increase primarily resulted from higher net realized insurance investment portfolio gains of $236 million, largely resulting from the absence of prior-year impairments relating to investments in WorldCom Inc. and the energy sector. The 2003 results included a decline of $17 million, which resulted from increased DAC amortization and reduced investment yields, partially offset by higher business volumes and fee revenues and higher tax benefits related to adjustments to the separate account DRD of $51 million.

36


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

 
  2004
  2003
  2002
 
 
  In millions of dollars

 
Fixed maturities   $ 47,272   $ 41,976   $ 37,569  
Equity investments     1,645     1,678     1,487  
Real estate     2,390     2,308     2,411  
Trading Securities     1,407     1,750     1,531  
   
 
 
 
Total invested assets   $ 52,714   $ 47,712   $ 42,998  

Net investment income (NII)

 

$

2,913

 

$

2,637

 

$

2,570

 
   
 
 
 
Investment yield     6.52 %   6.48 %   7.02 %

        TLA's NII of $2.913 billion in 2004 increased $276 million or 10% over 2003 including a $259 million increase driven by higher business volumes and the $5.002 billion growth in invested assets. The balance of the increase was attributed to favorable equity and real estate returns, partially offset by lower fixed income rates and lower risk arbitrage returns. Real estate is primarily comprised of mortgage loan investments and real estate joint ventures. TLA's NII of $2.637 billion in 2003 increased $67 million or 3% over 2002 despite overall rate deterioration, and was driven by increased volumes resulting from the $4.714 billion increase in the invested asset base, as well as risk arbitrage activity. The rate deterioration was driven by lower fixed income yields, which suffered from the lower interest rate environment and prior-year credit issues.

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

        The following is a roll forward of capitalized DAC by type:

 
  Deferred
and payout
annuities

  UL and
COLI

  Other
  Total
 
 
  In millions of dollars

 
Balance Dec. 31, 2002   $ 1,391   $ 592   $ 112   $ 2,095  
   
 
 
 
 
Deferred expenses and other     343     222     23     588  
Amortization expense     (220 )   (35 )   (20 )   (275 )
   
 
 
 
 

Balance Dec. 31, 2003

 

 

1,514

 

 

779

 

 

115

 

 

2,408

 
   
 
 
 
 
Deferred expenses and other     449     349     20     818  
Amortization expense     (279 )   (54 )   (21 )   (354 )
Pattern of estimated gross profit adjustment         (39 )       (39 )
Underlying lapse and expense adjustment     (17 )           (17 )
   
 
 
 
 
Balance Dec. 31, 2004   $ 1,667   $ 1,035   $ 114   $ 2,816  
   
 
 
 
 

        DAC capitalization increased $230 million or 39% in 2004 over 2003 driven by the $127 million or 57% increase in UL and COLI, and the $106 million or 31% increase in deferred and payout annuities, which is consistent with the increase in premiums and deposits for those lines of business. The increase in amortization expense in 2004 was primarily driven by business volume growth in deferred annuities and UL, and also included an adjustment for a change in the pattern of the estimated gross profits in the UL business and an increase in deferred annuities DAC amortization due to changes in underlying lapse and expense assumptions.

        IIM's net income of $163 million in 2004 represented an increase in income of $184 million, primarily resulting from the absence of realized investment losses and other actions from Argentina in 2003 of $134 million and a tax ruling confirming the deductibility of those losses in the 2004 third quarter of $47 million. Earnings from higher business volumes in IIM operations in Japan and Asia were partially offset by the absence of an $18 million tax benefit arising from the application of APB 23 indefinite investment criteria in Asia as well as a $13 million dividend from a non-strategic equity investment in the prior year. IIM's net income included earnings from operations in Mexico of $54 million in both 2004 and 2003.

        IIM's net loss of $21 million in 2003 represented a decrease in income of $82 million from net income of $61 million in 2002, primarily resulting from a decrease in Latin America of $140 million, partially offset by increases in Asia of $24 million and in Mexico of $24 million. The $140 million decrease in Latin America was primarily driven by impairments of GPNs of $114 million and the impact of certain liability restructuring actions taken in the Argentina voluntary annuity business of $20 million. The GPN impairment was the result of an Argentine government decree, which required the mandatory exchange (the Exchange) of existing GPNs to Argentine government bonds denominated in U.S. dollars. Upon the Exchange, the assets were considered impaired and written down to fair market value based on prevailing market prices on the decree date. Certain GPNs, which were held in general accounts, were considered impaired through recognition as an insurance investment portfolio loss ($56 million). The impact of these items on the 2003 decline in income was partially offset by an Amparos charge recorded by the Company in 2002 relating to Siembra's voluntary annuity business in the amount of $21 million. See "Impact from Argentina's Economic Changes" on page 11 and "Argentina" on page 10 for a further discussion of these actions. The $24 million increase in Asia was driven by the benefit of lower taxes due to the application of APB 23 indefinite investment criteria, while the $24 million increase in Mexico was the result of higher business volumes and the impact of a lower tax rate.

37


Travelers Life and Annuity

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

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

 
  2004
  2003
  2002
 
 
  In millions of dollars

 
Retail annuities                    
Fixed   $ 583   $ 544   $ 1,294  
Variable     4,980     4,002     4,081  
Individual payout     106     56     58  
   
 
 
 
Total retail annuities(1)     5,669     4,602     5,433  

Institutional annuities(2)

 

 

8,005

 

 

7,402

 

 

6,292

 

Individual life insurance

 

 

 

 

 

 

 

 

 

 
Direct periodic premiums and deposits     1,001     826     771  
Single premium deposits     745     405     285  
Reinsurance     (163 )   (139 )   (113 )
   
 
 
 
Total individual life insurance(3)     1,583     1,092     943  
   
 
 
 
Total   $ 15,257   $ 13,096   $ 12,668  
   
 
 
 

(1)
Includes $5.6 billion, $4.6 billion and $5.4 billion of deposits in 2004, 2003, and 2002, respectively.

(2)
Includes $7.3 billion, $6.5 billion and $5.7 billion of deposits in 2004, 2003, and 2002, respectively.

(3)
Includes $1.5 billion, $1.0 billion and $0.8 billion of deposits in 2004, 2003, and 2002, respectively.

        Retail annuities net written premiums and deposits increased $1.067 billion or 23% to $5.669 billion in 2004. These increases were primarily driven by strong variable annuity sales due to improved equity market conditions in 2004 versus 2003, and sales of a guaranteed minimum withdrawal benefit feature product. Net written premiums and deposits decreased 15% to $4.602 billion in 2003 from $5.433 billion in 2002, primarily driven by a 58% decline in fixed annuity sales due to competitive pressures and market perception of fixed rate policies. Variable annuity sales declined slightly in 2003, primarily driven by the continuation in the first half of 2003 of the weak equity market conditions from 2002. The sales decline in the first half of the year was partially offset by an increase in sales in the second half of the year as equity market conditions improved.

        Retail annuity account balances and benefit reserves were $37.945 billion at December 31, 2004, up from $33.828 billion at December 31, 2003, and $28.448 billion at December 31, 2002. The $4.117 billion or 12% increase in account balances and benefit reserves reflects $2.304 billion of market appreciation and $1.994 billion in net sales from the increased variable annuity sales and good in-force retention. The $5.380 billion or 19% increase from 2002 to 2003 was driven by $4.142 billion in market appreciation of variable annuity investments and $1.321 billion of net sales from good in-force policy retention.

        Institutional annuities net written premiums and deposits of $8.005 billion (excluding the Company's employee pension plan deposits) grew $603 million or 8% over 2003 reflecting $6.740 of variable and fixed guaranteed investment contract (GIC) sales in 2004 versus $6.072 billion in 2003. The prior year sales included a total of $1.0 billion in two separate transactions to one customer. This $1.0 billion sale in 2003 drove the 18% or $1.110 billion increase to $7.402 billion over the $6.292 billion of 2002 sales. Institutional annuities account balances and benefit reserves were $27.880 billion, $25.170 billion and $22.301 billion at December 31, 2004, 2003, and 2002, respectively, reflecting the continued strong GIC sales.

        Net written premiums and deposits for the individual life insurance business were $1.583 billion in 2004, representing a 45% increase over $1.092 billion in 2003. This increase was driven by an 84% increase in single premium deposits primarily from new universal life sales by the independent agent and high-end estate planning channels and a 21% increase in direct periodic premiums and deposits. Net written premiums and deposits for the individual life insurance business were $1.092 billion in 2003, a 16% increase over 2002. This increase was driven by a 42% increase in single premium sales and a 7% increase in direct periodic premiums and deposits. Life insurance in force was $101.019 billion as of December 31, 2004, a 13% increase from $89.294 billion at December 31, 2003, which in turn increased 9% from $81.983 billion at December 31, 2002.

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.

        IIM net written premiums and deposits (which include 100% of net written premiums and deposits for the Company's joint ventures in Japan and Hong Kong) were $6.671 billion in 2004 (including $5.870 billion of deposits), an increase of $2.672 billion from $3.999 billion in 2003 (including $3.505 billion of deposits). The $2.672 billion increase consisted of annuity products net written premiums and deposits up $1.982 billion from $3.378 billion in 2003 and life products net written premiums and deposits up $690 million from $621 million in 2003. The annuity products increase reflects substantial sales growth in Japan through the company's joint venture with Mitsui Sumitomo Insurance and strong sales in Australia driven by the timing of a tax law change. The life products increase reflects strong Variable Universal Life sales in Mexico, increased sales of Endowment and Unit Linked products in Hong Kong and higher credit insurance sales in the United Kingdom.

38


ASSET MANAGEMENT

 
  2004
  2003
  2002
 
  In millions of dollars

Revenues, net of interest expense   $ 1,824   $ 1,633   $ 1,698
Operating expenses     1,416     1,148     1,189
   
 
 
Income before taxes and minority interest     408     485     509
Income taxes     160     149     157
Minority interest, after-tax     10     12     1
   
 
 
Net income   $ 238   $ 324   $ 351
   
 
 
Assets under management (in billions of dollars)(1)(2)   $ 514   $ 521   $ 463
   
 
 
Average risk capital(3)   $ 698   $ 737      
Return on risk capital(3)     34 %   44 %    
Return on invested capital(3)     9 %   11 %    
   
 
     

(1)
Includes $34 billion, $33 billion and $31 billion in 2004, 2003 and 2002, respectively, for Private Bank clients.

(2)
Includes $3 billion, $39 billion and $35 billion in 2004, 2003 and 2002, respectively, 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 (7) to the table on page 4.

        Asset Management reported net income of $238 million in 2004, a decline of $86 million or 27% compared to 2003. The decrease is primarily a result of increased legal expenses and the establishment of a reserve related to the expected resolution of the previously disclosed SEC investigation of transfer agent matters, as well as the termination of the contract to manage assets for St. Paul Travelers, partially offset by the absence of impairments of a DAC asset relating to the retirement services business in Argentina of $42 million and of Argentina GPNs of $9 million, the absence of a loss on the sale of an El Salvador retirement services business of $10 million, the impact of positive market action and the cumulative impact of positive net flows. Net income of $324 million in 2003 was down $27 million or 8% compared to 2002, primarily reflecting impairments of the DAC asset relating to the retirement services business in Argentina of $42 million and of Argentina GPNs of $9 million, a loss on the sale of an El Salvador retirement services business of $10 million, reduced fee revenues in CAM due to changes in product mix and revenue sharing agreements with internal Citigroup distributors, and the cumulative impact of outflows of U.S. Retail Money Market Funds. Partially offsetting these declines were the cumulative impact of positive net flows, lower expenses and lower capital funding costs in Mexico.

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

Assets Under Management

 
  2004
  2003
 
 
  In billions of dollars

 
Retail and Private Bank              
Balance, beginning of year   $ 231   $ 205  
Net flows excluding U.S. retail money market funds     4     5  
U.S. retail money market fund flows     (4 )   (4 )
Market action/other     8     25  
   
 
 
Balance, end of year     239     231  

Institutional

 

 

 

 

 

 

 
Balance, beginning of year     185     164  
Long-term product flows     (2 )   9  
Liquidity flows     8     (2 )
   
 
 
Net flows     6     7  
Market action/other     11     14  
   
 
 
Balance, end of year     202     185  

Retirement Services

 

 

14

 

 

12

 
Other(1)     59     93  
   
 
 
Total assets under management(2)   $ 514   $ 521  
   
 
 

(1)
Includes CAI Institutional alternative investments, St. Paul, and TAMIC AUMs.

(2)
Assets under management are reported on a levered basis that reflects assets purchased with borrowed funds. Assets owned by clients totaled $468 billion and $478 billion at December 31, 2004 and 2003, respectively.

        Assets under management (AUMs) fell to $514 billion as of December 31, 2004, down $7 billion or 1% from $521 billion in 2003, primarily reflecting the termination of the contract to manage $36 billion of assets for St. Paul Travelers, and the net outflows of U.S. Retail Money Market Funds of $4 billion. The decline in assets was partially offset by the positive market action/other of $19 billion (which includes the impact of FX and the addition of $3 billion in assets from the acquisition of KorAm) and net flows, excluding U.S. Retail Money Market funds, of $10 billion. Retail and Private Bank client assets were $239 billion as of December 31, 2004, up $8 billion or 3% from $231 billion in 2003. Institutional client assets of $202 billion as of December 31, 2004 were up $17 billion or 9% compared to a year ago. Retirement Services assets of $14 billion as of December 31, 2004, increased $2 billion or 17% from 2003. The decline in Other assets of $34 billion reflects the termination of the St. Paul Travelers contract.

        Revenues, net of interest expense, increased $191 million or 12% to $1.824 billion in 2004. This compared to $1.633 billion in 2003, which was down $65 million or 4% from 2002. The increase in 2004 primarily reflects the impact of positive market action, including the impact of FX, the cumulative impact of positive net flows and the absence of impairments of Argentina GPNs of $9 million. These increases were partially offset by the termination of the contract to manage assets for St. Paul Travelers, a change in the presentation of certain revenue sharing arrangements which decreased both revenue and expense by $16 million, and the impact of outflows of U.S. Retail

39


Money Market funds. The decrease in 2003 was primarily due to the impact of reduced fee revenues in CAM, the impact of increased insurance costs on fees earned in a retirement services business in Argentina, the loss on sale of the El Salvador retirement services business, outflows of U.S. Retail Money Market funds, and the impairment of the Argentina GPNs. Partially offsetting these declines were the cumulative impact of positive net flows, lower capital funding costs in Mexico, higher performance fees in CAI Institutional, the absence of a prior-year pesification loss in Argentina, and an increase related to certain assets consolidated under FIN 46-R. These consolidated assets incurred FX movements on the euro, creating $17 million in gains in 2003 (offset in minority interest).

        Operating expenses of $1.416 billion in 2004 increased $268 million or 23% from 2003 primarily driven by higher expenses related to legal matters and the reserve established related to the expected resolution of the previously disclosed SEC investigation of transfer agent matters, as well as higher employee compensation expenses, partially offset by the absence of the DAC impairment in Argentina of $42 million and the impact of a change in the presentation of certain fee-sharing arrangements which decreased both revenue and expense by $16 million. Operating expenses of $1.148 billion in 2003 decreased $41 million or 3% from 2002. The decrease in 2003 primarily reflected expense management, the change in presentation of certain fee-sharing arrangements, and the absence of 2002 first quarter restructuring charges in Argentina (LARS), for which the remaining reserve was released in 2003, partially offset by the DAC impairment in Argentina of $42 million and the impact of higher expenses related to legal matters of $24 million.

        Minority interest, after-tax, of $10 million in 2004 decreased $2 million from 2003. The $11 million increase from 2002 to 2003 is primarily due to the impact of consolidating certain assets under FIN 46-R.

GLOBAL INVESTMENT MANAGEMENT OUTLOOK

        Certain of the statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 73.

        Life Insurance and Annuities—See discussion on the announced sale of substantially all of the Life Insurance and Annuities business on page 9.

        Asset Management—The Asset Management business experienced a decline in net income in 2004. Revenues were strong due to positive market action and positive net flows; however, expenses increased, reflecting a reserve related to the expected resolution of the previously disclosed SEC investigation of transfer agent matters. The assets under management declined reflecting the termination of the contract to manage assets for St. Paul Travelers.

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

        For 2005, the business will focus on leveraging the full breadth of its global investment capabilities, continuing to capture the economic value of Citigroup's global distribution network, the expansion of third-party distribution in key geographies, and an emphasis on penetration of the institutional pension segment.

        Federal and state regulators have focused on, and continue to devote substantial attention to, the mutual fund and variable insurance product industries. As a result of publicity relating to widespread perceptions of industry abuses, there have been numerous proposals for legislative and regulatory reforms, including mutual fund governance, new disclosure requirements concerning mutual fund share classes, commission breakpoints, revenue sharing, advisory fees, market timing, late trading, portfolio pricing, annuity products, hedge funds, and other issues. It is difficult to predict at this time whether changes resulting from new laws and regulations will affect the industries or our investment management businesses, and, if so, to what degree.

40


PROPRIETARY INVESTMENT ACTIVITIES

 
  2004
  2003
  2002
 
 
  In millions of dollars

 
Revenues, net of interest expense   $ 1,663   $ 1,222   $ 247  
Operating expenses     462     393     238  
Provision for credit losses             31  
   
 
 
 
Income (loss) before taxes and minority interest     1,201     829     (22 )
Income taxes     383     288     5  
Minority interest, after-tax     75     175     23  
   
 
 
 
Net income (loss)   $ 743   $ 366   ($ 50 )
   
 
 
 

Average risk capital(1)

 

$

3,669

 

$

3,945

 

 

 

 
Return on risk capital(1)     20 %   9 %      
Return on invested capital(1)     18 %   7 %      
   
 
       

(1)
See Footnote (7) to the table on page 4.

        Proprietary Investment Activities reported revenues, net of interest expense, of $1.663 billion in 2004, which increased $441 million or 36% from 2003, reflecting higher Private Equity results of $418 million and higher Other Investment Activities revenues of $23 million. The higher Private Equity results were primarily due to net unrealized gains on investments in Citigroup Venture Capital (CVC) Equity Partners Fund, and investments in Europe, as compared to net unrealized losses in 2003, as well as higher net realized gains, partially offset by lower mark-to-market gains on public securities. Revenues, net of interest expense, of $1.222 billion in 2003, increased $975 million from 2002 reflecting higher Private Equity results of $1.362 billion, primarily from higher mark-to-market gains on public securities, lower net unrealized losses, higher fee revenues and lower capital funding costs, partially offset by lower Other Investment Activities revenues of $387 million. The decline in Other Investment Activities was driven by the absence of the 2002 gain on the sale of 399 Park Avenue of $527 million, partially offset by higher fee revenues in CAI and dividends from Travelers Property Casualty Corp. (TPC) shares.

        Operating expenses of $462 million in 2004 increased $69 million or 18% from 2003, primarily reflecting higher formulaic incentive compensation within Emerging Markets and CAI. Operating expenses of $393 million in 2003 increased $155 million or 65% from the prior year, primarily reflecting increased expenses in CAI of $96 million and in Private Equity of $65 million. The increase in CAI expenses resulted from the full-year impact of CAI's contract with TPC, whereby CAI managed TPC's investments following the August 20, 2002 distribution, as well as from client business growth and higher levels of performance-driven incentive compensation. The $65 million increase in Private Equity expenses resulted from higher performance-based compensation and business growth. The decrease in the provision for credit losses of $31 million in 2003 from 2002 primarily relates to the absence of Private Equity loan write-offs that occurred in 2002.

        Minority interest, after-tax, of $75 million in 2004 decreased $100 million from 2003, primarily due to the absence of prior-year dividends and a mark-to-market valuation on the recapitalization of an investment held within the CVC Equity Partners Fund. Minority interest, after-tax, of $175 million in 2003 increased $152 million from 2002, primarily due to the impact of dividends and a mark-to-market valuation on the recapitalization of an investment held within the CVC Equity Partners Fund in 2003.

        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 investing 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.

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

        As of December 31, 2004 and 2003, Private Equity included assets of $5.858 billion and $5.610 billion, respectively, with the portfolio primarily invested in industrial, consumer goods, communication, and technology companies. The increase in the portfolio of $248 million from 2003 relates primarily to the impact of net unrealized gains in 2004. On a regional basis as of December 31, 2004, Private Equity included assets of $2.664 billion in North America (including Mexico), $2.010 billion in EMEA, $892 million in Latin America, $287 million in Asia, and $5 million in Japan. As of December 31, 2003, Private Equity included assets of $2.535 billion in North America (including Mexico), $1.790 billion in EMEA, $961 million in Latin America, $317 million in Asia, and $7 million in Japan.

41


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

 
  2004
  2003
  2002
 
 
  In millions of dollars

 
Net realized gains(1)   $ 452   $ 388   $ 180  
Public mark-to-market     (44 )   258     (209 )
Net unrealized gains (losses)(2)     517     (240 )   (670 )
Other(3)     399     500     243  
   
 
 
 
Revenues, net of interest expense   $ 1,324   $ 906   $ (456 )
   
 
 
 

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

(2)
Includes valuation adjustments and other than temporary impairments on private equity investments.

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

        Revenues, net of interest expense, of $1.324 billion in 2004 increased $418 million from 2003, primarily reflecting higher net unrealized gains of $757 million and higher net realized gains of $64 million, partially offset by lower public mark-to-market results of $302 million and lower other revenues of $101 million resulting from decreased dividends and fees. The higher net unrealized gains were driven by lower net impairments in emerging market investments and higher net valuations in CVC Equity Partners Fund, Emerging Markets and Europe. The increase in the CVC Equity Partners Fund was due to a valuation adjustment in an underlying German investment. The Emerging Markets improvements were primarily from the Opportunity Fund investment, driven by the absence of prior year losses, and improvements in an Asian private equity fund. The Europe results reflect improved performance in many of the underlying investments, an improving European private equity market, and the impact of foreign exchange. The lower public mark-to-market results were primarily due to an investment in an Indian software company, reflecting a general decline in public market values in the Indian software sector. The lower Other revenues were primarily driven by lower dividends and fees in the CVC Equity Partners Fund.

        Revenues, net of interest expense, of $906 million in 2003 increased $1.362 billion from 2002, primarily relating to higher net mark-to-market gains on public securities of $467 million, lower net unrealized losses of $430 million, higher other revenues of $257 million, and higher net realized gains on sales of investments of $208 million. The higher net mark-to-market gains on public securities primarily resulted from the improved equity market conditions that existed in 2003. The lower net unrealized losses were driven by valuation adjustments on Emerging Market investments, lower impairments on other Private Equity investments, and higher valuation revenues in 2003 from the recapitalization of certain Private Equity investments held within the CVC Equity Partners Fund. The lower net unrealized losses in Emerging Markets included $264 million in lower impairments in Argentina and lower other Latin America impairments, partially offset by lower revenues on the Opportunity fund investment of $210 million. Other revenues increased $257 million due to higher dividends and fees, largely the result of the recapitalization of certain Private Equity investments and from an investment that had an initial public offering, all of which are held within the CVC Equity Partners Fund, as well as the impact of lower capital funding costs. The increase in net realized gains on sales of investments of $208 million was driven by higher sales of venture capital and emerging market investments, including the liquidation of the remaining Banamex holdings.

        Other Investment Activities includes CAI, various proprietary investments, including Citigroup's ownership interest in The St. Paul Travelers Companies' (formerly 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 December 31, 2004, the Company held approximately 39.8 million shares or approximately 6.0% of St. Paul's outstanding equity securities. The St. Paul common stock position is classified as available-for-sale. As of December 31, 2004, Other Investment Activities included assets of $3.009 billion, including $1.482 billion in St. Paul shares, $1.135 billion in hedge funds, $163 million in the LDC Debt/Refinancing portfolios, and $229 million in other assets. As of December 31, 2003, total assets of Other Investment Activities were $2.909 billion, including $1.693 billion in St. Paul shares, $692 million in hedge funds, the majority of which represented money managed for TPC, $365 million in the LDC Debt/Refinancing portfolios, and $159 million in other assets.

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

 
  2004
  2003
  2002
 
  In millions of dollars

LDC Debt/Refinancing portfolios   $ 1   $ 7   $ 11
Hedge fund investments     12     80     70
Other(1)     326     229     622
   
 
 
Revenues, net of interest expense   $ 339   $ 316   $ 703
   
 
 

(1)
Consists primarily of revenues earned by CAI as well as realized gains and other revenue earned relating to Citigroup's ownership interest in St. Paul. The pretax profit (revenues less operating expenses) of the CAI business are reflected in the respective Citigroup distributor's (Asset Management, Smith Barney, and Private Bank) income statement as revenues.

        Revenues, net of interest expense, of $339 million in 2004 increased $23 million from 2003, primarily relating to higher other revenues of $97 million, partially offset by lower hedge fund results of $68 million. The higher other revenues reflected higher revenues of $47 million from investment activity relating to Citigroup's ownership interest in St. Paul, a $33 million increase in CAI revenues and higher revenues of $17 million from real estate investments. Revenues, net of interest expense, of $316 million in 2003 decreased $387 million from the prior year due to the absence of a $527 million gain in 2002 from the sale of 399 Park Avenue, partially offset by a $96 million increase in CAI revenues due to improved investment performance and business growth and a $50 million increase in revenue from TPC shares, including dividends and net realized gains.

        Proprietary Investment Activities results may fluctuate in the future as a result of market and asset-specific factors.

42


CORPORATE/OTHER

 
  2004
  2003
  2002
 
 
  In millions of dollars

 
Revenues, net of interest expense   $ (447 ) $ 744   $ 858  
Operating expenses     (61 )   798     972  
Provisions for benefits, claims, and credit losses     (1 )   (3 )   (22 )
   
 
 
 
Loss from continuing operations before taxes, minority interest, and cumulative effect of accounting change     (385 )   (51 )   (92 )
Income tax benefits     (319 )   (227 )   (101 )
Minority interest, after-tax     (10 )   10     2  
   
 
 
 
Income (loss) from continuing operations     (56 )   166     7  
Income from discontinued operations             1,875  
Cumulative effect of accounting change             (47 )
   
 
 
 
Net income (loss)   $ (56 ) $ 166   $ 1,835  
   
 
 
 

        Corporate/Other reported a net loss of $56 million in 2004, a decrease in income of $222 million, which was primarily due to lower net treasury results, partially offset by the gain on the sale of EFS, which resulted in an after-tax gain of $180 million in the 2004 first quarter. Net income of $166 million in 2003 was down $1.669 billion from 2002, primarily due to the absence of income from discontinued operations of $1.875 billion, partially offset by increased tax benefits of $126 million and the absence of the impact from the cumulative effect of accounting change of $47 million in the prior year.

        Revenues, net of interest expense, of ($447) million in 2004, decreased $1.191 billion from 2003, primarily due to lower net treasury results, lower intersegment eliminations and the absence of the prior-year revenues earned in the EFS business, partially offset by the gain on the sale of EFS. The treasury decrease resulted from increased funding costs, due to both higher interest rates as well as higher debt levels, and the absence of the prior-year gain on the sale of a convertible bond. Revenues, net of interest expense, of $744 million in 2003 decreased $114 million from 2002, primarily due to lower intersegment eliminations, partially offset by higher net treasury results. The treasury increase resulted from a gain on the sale of a convertible bond and favorable interest rate positioning, partially offset by lower realized gains on fixed income investments.

        Operating expenses of ($61) million in 2004 decreased $859 million from 2003, primarily due to lower intersegment eliminations, the absence of prior-year operating expenses in EFS and lower employee-related costs. Operating expenses of $798 million in 2003 decreased $174 million from 2002, primarily due to lower intersegment eliminations, partially offset by higher unallocated corporate costs and a $50 million pretax expense for the contribution of appreciated venture capital securities to the Citigroup Foundation. The increase in unallocated corporate costs included higher insurance, employee-related, and legal costs. The Citigroup Foundation contributions had minimal impact on Citigroup's earnings after related tax benefits.

        Income tax benefits of $319 million in 2004 included the impact of a $147 million tax reserve release due to the closing of a tax audit. Income tax benefits of $227 million in 2003 included the impact of a tax reserve release of $200 million that had been held at the legacy Associates' businesses and was deemed to be in excess of expected tax liabilities. Income tax benefits of $101 million in 2002 included the tax benefit resulting from the loss incurred on the sale of the Associates property and casualty operations to TPC, which was spun-off in the 2002 third quarter.

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

        The 2002 cumulative effect of accounting change of $47 million reflected the 2002 impact of adopting SFAS 142 relating to goodwill and indefinite-lived intangible assets. See Note 1 to the Consolidated Financial Statements for further details of the cumulative effect of accounting change.

43


MANAGING GLOBAL RISK

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

        The risk management framework is grounded on the following six 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

        In 2004, the Company implemented methodologies to quantify risk capital requirements within and across Citigroup businesses.

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

        Risk capital facilitates both the quantification of risk levels and the tradeoff of risk and return. The risk capital calculated for each business approximates the amount of tangible equity that would typically be ascribed. Risk capital is used in the calculation of return on risk capital (RORC) and return on invested capital (ROIC) measures that are used in assessing business performance and allocating Citigroup's balance sheet and risk taking capacity.

        RORC, calculated as net income divided by average risk capital, compares business income with the capital required to absorb the risks. This is similar to a return on tangible equity calculation. It is used to assess businesses' operating performance and to determine incremental allocation of capital for organic growth.

        ROIC is calculated using income adjusted to exclude a net internal funding cost Citigroup levies on the intangible assets of each business. This adjusted income is divided by the sum of each business's average risk capital and intangible assets (excluding mortgage servicing rights, which are captured in risk capital). ROIC thus compares business income with the total invested capital—risk capital and intangible assets created through acquisitions—used to generate that income. ROIC is used to assess returns on potential acquisitions and divestitures, and to compare long-term performance of businesses with differing proportions of organic and acquired growth.

        Methodologies to measure risk capital are jointly developed by risk management, the financial division and Citigroup businesses, and approved by the Citigroup Senior Risk Officer and Citigroup Chief Financial Officer. It is expected, due to the evolving nature of risk capital, that these methodologies will continue to be refined.

44


        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.

        At December 31, 2004 and 2003, risk capital for Citigroup was comprised of the following risk types:

 
  2004
  2003
 
 
  In billions of dollars

 
Credit risk   $ 33.2   $ 28.7  
Market risk     16.0     16.8  
Operational risk     8.1     6.1  
Insurance risk     0.2     0.3  
Intersector diversification(1)     (5.3 )   (5.2 )
   
 
 
Total Citigroup   $ 52.2   $ 46.7  
   
 
 
Return on risk capital     34 %   39 %
Return on invested capital     17 %   20 %
   
 
 

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

        The increase in Citigroup's risk capital during 2004 was primarily driven by an increase in operational and credit risk, partially offset by lower market risk as defined above. Operational risk capital increased primarily as a result of the WorldCom and Litigation Reserve Charge. Credit risk capital rose primarily due to the acquisition of KorAm and increased volumes in the credit portfolio.

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.

45


LOANS OUTSTANDING

 
  2004
  2003
  2002
  2001
  2000
 
 
  In millions of dollars at year end

 
Consumer loans                                
In U.S. offices:                                
  Mortgage and real estate   $ 161,832   $ 129,507   $ 121,178   $ 80,099   $ 73,166  
  Installment, revolving credit, and other     134,784     136,725     113,620     100,801     95,643  
  Lease financing     6,030     8,523     12,027     13,206     12,993  
   
 
 
 
 
 
      302,646     274,755     246,825     194,106     181,802  
   
 
 
 
 
 
In offices outside the U.S.:                                
  Mortgage and real estate     39,601     28,743     26,564     28,688     24,988  
  Installment, revolving credit, and other     93,523     76,718     65,343     57,681     56,557  
  Lease financing     1,619     2,216     2,123     2,143     2,092  
   
 
 
 
 
 
      134,743     107,677     94,030     88,512     83,637  
   
 
 
 
 
 
      437,389     382,432     340,855     282,618     265,439  
Unearned income     (2,163 )   (2,500 )   (3,174 )   (4,644 )   (5,390 )
   
 
 
 
 
 
Consumer loans—net     435,226     379,932     337,681     277,974     260,049  
   
 
 
 
 
 
Corporate loans                                
In U.S. offices:                                
  Commercial and industrial     14,437     15,207     22,041     15,997     19,594  
  Lease financing     1,879     2,010     2,017     4,473     812  
  Mortgage and real estate(1)     100     95     2,573     2,784     3,490  
   
 
 
 
 
 
      16,416     17,312     26,631     23,254     23,896  
   
 
 
 
 
 
In offices outside the U.S.:                                
  Commercial and industrial     77,052     62,884     67,456     72,515     68,069  
  Mortgage and real estate     3,928     1,751     1,885     1,874     1,720  
  Loans to financial institutions     12,921     12,063     8,583     10,163     9,559  
  Lease financing     2,485     2,859     2,784     2,036     2,024  
  Governments and official institutions     1,100     1,496     3,081     4,033     1,952  
   
 
 
 
 
 
      97,486     81,053     83,789     90,621     83,324  
   
 
 
 
 
 
      113,902     98,365     110,420     113,875     107,220  
Unearned income     (299 )   (291 )   (296 )   (455 )   (247 )
   
 
 
 
 
 
Corporate loans—net     113,603     98,074     110,124     113,420     106,973  
   
 
 
 
 
 
Total loans—net of unearned income     548,829     478,006     447,805     391,394     367,022  
Allowance for credit losses—on drawn exposures     (11,269 )   (12,643 )   (11,101 )   (9,688 )   (8,561 )
   
 
 
 
 
 
Total loans—net of unearned income and allowance for credit losses   $ 537,560   $ 465,363   $ 436,704   $ 381,706   $ 358,461  
   
 
 
 
 
 

(1)
Excludes loans held by the insurance subsidiaries which are included within Other Assets on the Consolidated Balance Sheet in 2004 and 2003.

OTHER REAL ESTATE OWNED
AND OTHER REPOSSESSED ASSETS

 
  2004
  2003
  2002
  2001
  2000
 
  In millions of dollars at year end

Other real estate owned(1)                              
Consumer   $ 320   $ 437   $ 495   $ 393   $ 366
Corporate(2)     126     105     75     147     189
Corporate/Other                 8     8
   
 
 
 
 
Total other real estate owned   $ 446   $ 542   $ 570   $ 548   $ 563
   
 
 
 
 
Other repossessed assets(3)   $ 93   $ 151   $ 230   $ 439   $ 292
   
 
 
 
 

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

(2)
Excludes Other Real Estate Owned for the insurance subsidiaries businesses in the amount of $36 million, $118 million and $102 million for 2002, 2001 and 2000, respectively, which are included in Other Assets on the Consolidated Balance Sheet in 2004 and 2003.

(3)
Primarily commercial transportation equipment and manufactured housing, carried at lower of cost or fair value, less costs to sell.

46


DETAILS OF CREDIT LOSS EXPERIENCE

 
  2004
  2003
  2002
  2001
  2000
 
 
  In millions of dollars

 
Allowance for credit losses at beginning of year   $ 12,643   $ 11,101   $ 9,688   $ 8,561   $ 8,453  
   
 
 
 
 
 
Provision for credit losses                                
Consumer     7,205     7,316     7,714     5,947     4,997  
Corporate     (972 )   730     2,281     853     342  
   
 
 
 
 
 
      6,233     8,046     9,995     6,800     5,339  
   
 
 
 
 
 
Gross credit losses                                
Consumer(1)                                
  In U.S. offices     6,937     5,783     5,826     4,991     3,827  
  In offices outside the U.S.     3,304     3,270     2,865     2,132     1,973  
Corporate                                
Mortgage and real estate                                
  In U.S. offices             5     13     10  
  In offices outside the U.S.     6     27     23     3     22  
Governments and official institutions outside the U.S.         111              
Loans to financial institutions                                
  In U.S. offices                 10      
  In offices outside the U.S.     3     13     4          
Commercial and industrial                                
  In U.S. offices     52     383     825     572     149  
  In offices outside the U.S.     571     939     1,018     567     277  
   
 
 
 
 
 
      10,873     10,526     10,566     8,288     6,258  
   
 
 
 
 
 
Credit recoveries                                
Consumer(1)                                
  In U.S. offices     1,079     763     729     543     544  
  In offices outside the U.S.     691     735     510     423     404  
Corporate(2)                                
Mortgage and real estate                                
  In U.S. offices             1     1     9  
  In offices outside the U.S.     3     1         1     1  
Governments and official institutions outside the U.S.     1         2         1  
Loans to financial institutions                                
  In U.S. offices     6                  
  In offices outside the U.S.     35     12     6     9     9  
Commercial and industrial                                
  In U.S. offices     100     34     147     154     27  
  In offices outside the U.S.     357     215     168     129     69  
   
 
 
 
 
 
      2,272     1,760     1,563     1,260     1,064  
   
 
 
 
 
 
Net credit losses                                
  In U.S. offices     5,804     5,369     5,779     4,888     3,406  
  In offices outside the U.S.     2,797     3,397     3,224     2,140     1,788  
   
 
 
 
 
 
      8,601     8,766     9,003     7,028     5,194  
   
 
 
 
 
 
Other—net(3)     994     2,262     421     1,355     (37 )
   
 
 
 
 
 
Allowance for credit losses at end of year   $ 11,269   $ 12,643   $ 11,101   $ 9,688   $ 8,561  
   
 
 
 
 
 
Allowance for unfunded lending commitments(4)     600     600     567     450     450  
   
 
 
 
 
 
Total allowance for loans, leases, and unfunded lending commitments   $ 11,869   $ 13,243   $ 11,668   $ 10,138   $ 9,011  
   
 
 
 
 
 
Net consumer credit losses   $ 8,471   $ 7,555   $ 7,452   $ 6,157   $ 4,852  
As a percentage of average consumer loans     2.13 %   2.22 %   2.55 %   2.33 %   2.03 %
   
 
 
 
 
 
Net corporate credit losses   $ 130   $ 1,211   $ 1,551   $ 871   $ 342  
As a percentage of average corporate loans     0.11 %   1.17 %   1.44 %   0.76 %   0.35 %
   
 
 
 
 
 

(1)
Consumer credit losses and recoveries primarily relate to revolving credit and installment loans.

(2)
Amounts in 2003, 2002 and 2001 include $12 million (through the 2003 third quarter), $114 million and $52 million, respectively, of collections from credit default swaps purchased from third parties. From the 2003 fourth quarter forward, collections from credit default swaps are included within Principal Transactions on the Consolidated Statement of Income.

(3)
2004 primarily includes the addition of $715 million of credit loss reserves related to the acquisition of KorAm and the addition of $148 million of credit loss reserves related to the acquisition of WMF. 2003 primarily includes the addition of $2.1 billion of credit loss reserves related to the acquisition of the Sears credit card business. 2002 primarily includes the addition of $452 million of credit loss reserves related to the acquisition of GSB. 2001 primarily includes the addition of credit loss reserves related to the acquisitions of Banamex and EAB. 2000 includes the addition of credit loss reserves related to other acquisitions. All periods also include the impact of foreign currency translation.

(4)
Represents additional credit loss reserves for unfunded corporate lending commitments and letters of credit recorded within Other Liabilities on the Consolidated Balance Sheet.

47


CASH-BASIS, RENEGOTIATED, AND PAST DUE LOANS

 
  2004
  2003
  2002
  2001
  2000
 
  In millions of dollars at year end

Corporate cash-basis loans                              
Collateral dependent (at lower of cost or collateral value)(1)   $ 7   $ 8   $ 64   $ 365   $ 108
Other(2)     1,899     3,411     3,931     2,522     1,436
   
 
 
 
 
Total   $ 1,906   $ 3,419   $ 3,995   $ 2,887   $ 1,544
   
 
 
 
 
Corporate cash-basis loans(2)(3)                              
In U.S. offices   $ 254   $ 640   $ 887   $ 678   $ 293
In offices outside the U.S.     1,652     2,779     3,108     2,209     1,251
   
 
 
 
 
Total   $ 1,906   $ 3,419   $ 3,995   $ 2,887   $ 1,544
   
 
 
 
 
Corporate renegotiated loans(4)                              
In U.S. offices   $ 63   $ 107   $ 115   $ 263   $ 305
In offices outside the U.S.     20     33     55     74     94
   
 
 
 
 
Total   $ 83   $ 140   $ 170   $ 337   $ 399
   
 
 
 
 
Consumer loans on which accrual of interest had been suspended(2)                              
In U.S. offices   $ 2,485   $ 3,127   $ 3,114   $ 3,101   $ 2,158
In offices outside the U.S.     2,978     2,958     2,792     2,266     1,626
   
 
 
 
 
Total   $ 5,463   $ 6,085   $ 5,906   $ 5,367   $ 3,784
   
 
 
 
 
Accruing loans 90 or more days delinquent(5)(6)                              
In U.S. offices   $ 3,153   $ 3,298   $ 2,639   $ 1,822   $ 1,247
In offices outside the U.S.     401     576     447     776     385
   
 
 
 
 
Total   $ 3,554   $ 3,874   $ 3,086   $ 2,598   $ 1,632
   
 
 
 
 

(1)
A cash-basis loan is defined as collateral dependent when repayment is expected to be provided solely by the liquidation of the underlying collateral and there are no other available and reliable sources of repayment, in which case the loans are written down to the lower of cost or collateral value.

(2)
The December 31, 2002 balance includes GSB data. The December 31, 2001 balance includes Banamex data.

(3)
Cash-basis loans for the insurance subsidiaries and Proprietary Investment Activities businesses were $62 million, $21 million and $46 million for 2002, 2001 and 2000, respectively, which are included in Other Assets on the Consolidated Balance Sheet in 2003 and 2004.

(4)
Includes corporate and Commercial Business loans.

(5)
The December 31, 2004 balance includes the PRMI data. The December 31, 2003 balance includes the Sears and Home Depot data. The December 31, 2002 balance includes GSB data. The December 31, 2001 balance includes Banamex data.

(6)
Substantially comprised of consumer loans of which $1,867 million, $1,643 million, $1,764 million, $920 million, and $503 million are government-guaranteed student loans and Federal Housing Authority mortgages at December 31, 2004, 2003, 2002, 2001, and 2000, respectively.

FOREGONE INTEREST REVENUE ON LOANS(1)

 
  In U.S.
offices

  In
non-U.S.
offices

  2004
Total

 
  In millions of dollars

Interest revenue that would have been accrued at original contractual rates(2)   $ 423   $ 577   $ 1,000
Amount recognized as interest revenue(2)     60     210     270
   
 
 
Foregone interest revenue   $ 363   $ 367   $ 730
   
 
 

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

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

48


CONSUMER CREDIT RISK

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


CONSUMER PORTFOLIO REVIEW

        Citigroup's consumer loan portfolio is well diversified by both customer and product. Consumer loans comprise 79% of the total loan portfolio. These loans represent thousands of borrowers with relatively small individual balances. The loans are diversified with respect to the location of the borrower, with 70% originated in the United States and 30% originated from offices outside the United States. Mortgage and real estate loans constitute 46% of the total consumer loan portfolio; and installment, revolving credit and other consumer loans and leases constitute 54% of the portfolio.

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

        Commercial Business, which is included within Retail Banking, includes loans and leases made principally to small- and middle-market businesses. Commercial Business loans, which comprise 9% of the total consumer loan portfolio, are placed on a non-accrual basis when it is determined that the payment of interest or principal is doubtful of collection or when interest or principal is past due for 90 days or more, except when the loan is well secured and in the process of collection. Commercial Business 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 Business 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. For example, the Cards business considers both on-balance sheet and securitized cards (together, their managed portfolio), when determining compensation, capital allocation and general management decisions. 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 22 and Note 12 to the Consolidated Financial Statements.

49


Consumer Loan Delinquency Amounts, Net Credit Losses, and Ratios

 
  Total
loans

  90 Days or More Past Due(1)
  Average
loans

  Net Credit Losses(1)
 
 
  2004
  2004
  2003
  2002
  2004
  2004
  2003
  2002
 
 
  In millions of dollars, except total and average loan amounts in billions

 
Product View:                                                  
Cards   $ 165.7   $ 2,944   $ 3,392   $ 2,397   $ 155.3   $ 9,219   $ 7,694   $ 7,169  
  Ratio           1.78 %   2.14 %   1.84 %         5.94 %   5.90 %   5.93 %
    North America Cards     147.8   $ 2,667     3,133     2,185     139.6   $ 8,658     7,171     6,669  
      Ratio           1.80 %   2.18 %   1.85 %         6.20 %   6.08 %   6.05 %
    International Cards     17.9   $ 277     259     212     15.7   $ 561     523     500  
      Ratio           1.55 %   1.76 %   1.78 %         3.57 %   4.19 %   4.68 %
Consumer Finance     105.8   $ 2,014     2,221     2,197     100.0   $ 3,431     3,517     3,026  
  Ratio           1.90 %   2.36 %   2.48 %         3.43 %   3.88 %   3.69 %
    North America Consumer Finance     82.8   $ 1,525     1,683     1,786     78.4   $ 2,065     2,059     1,865  
      Ratio           1.84 %   2.32 %   2.64 %         2.63 %   2.94 %   3.00 %
    International Consumer Finance     23.0   $ 489     538     411     21.6   $ 1,366     1,458     1,161  
      Ratio           2.13 %   2.50 %   1.98 %         6.32 %   7.02 %   5.88 %
Retail Banking     165.5   $ 4,094     3,802     3,647     144.5   $ 693     614     644  
  Ratio           2.47 %   3.07 %   3.18 %         0.48 %   0.52 %   0.71 %
    North America Retail Banking     115.4   $ 2,515     2,299     2,419     101.9   $ 131     139     268  
      Ratio           2.18 %   2.60 %   2.90 %         0.13 %   0.17 %   0.45 %
    International Retail Banking     50.1   $ 1,579     1,503     1,228     42.6   $ 562     475     376  
      Ratio           3.15 %   4.24 %   3.91 %         1.32 %   1.42 %   1.20 %
Private Bank(2)     39.0   $ 127     121     174     36.9   $ (5 )   18     14  
  Ratio           0.33 %   0.35 %   0.56 %         (0.02 )%   0.05 %   0.05 %
Other Consumer     1.3             1     1.1     (2 )       10  
   
 
 
 
 
 
 
 
 
Managed loans (excluding Commercial Business)(3)   $ 477.3   $ 9,179   $ 9,536   $ 8,416   $ 437.8   $ 13,336   $ 11,843   $ 10,863  
  Ratio           1.92 %   2.31 %   2.30 %         3.05 %   3.18 %   3.36 %
Securitized receivables (all in North America Cards)     (85.3 )   (1,296 )   (1,421 )   (1,285 )   (77.9 )   (4,865 )   (4,529 )   (3,760 )
Credit card receivables held-for-sale(4)     (2.5 )   (32 )       (121 )   (3.1 )   (214 )   (221 )   (363 )
On-balance sheet loans (excluding Commercial Business)   $ 389.5   $ 7,851   $ 8,115   $ 7,010   $ 356.8   $ 8,257   $ 7,093   $ 6,740  
  Ratio           2.02 %   2.42 %   2.40 %         2.31 %   2.38 %   2.67 %

 
 
   
  Cash-Basis Loans
   
  Net Credit Losses
 
Commercial Business Groups(5)   $ 41.2   $ 735   $ 1,350   $ 1,299   $ 40.1   $ 214   $ 462   $ 712  
  Ratio           1.78 %   3.38 %   2.90 %         0.53 %   1.09 %   1.76 %
   
                   
 
 
 
 
Total Consumer Loans(6)   $ 430.7                     $ 396.9     8,471     7,555     7,452  
   
                   
 
 
 
 
Regional View:                                                  
North America (excluding Mexico)   $ 360.7   $ 6,327   $ 6,794   $ 6,135   $ 333.3   $ 10,735   $ 9,322   $ 8,623  
  Ratio           1.75 %   2.14 %   2.18 %         3.22 %   3.27 %   3.55 %
Mexico     8.8   $ 433     388     355     7.9   $ 118     55     195  
  Ratio           4.93 %   5.65 %   5.43 %         1.49 %   0.82 %   2.85 %
EMEA     39.3   $ 1,781     1,669     1,253     35.2   $ 850     617     440  
  Ratio           4.53 %   4.90 %   4.47 %         2.41 %   2.04 %   1.77 %
Japan     16.1   $ 308     355     258     16.8   $ 1,210     1,331     1,035  
  Ratio           1.91 %   2.04 %   1.46 %         7.22 %   7.91 %   5.71 %
Asia (excluding Japan)     49.1   $ 299     286     340     41.6   $ 413     398     393  
  Ratio           0.61 %   0.86 %   1.19 %         0.99 %   1.30 %   1.42 %
Latin America     3.3   $ 31     44     75     3.0   $ 10     120     177  
  Ratio           0.93 %   1.50 %   2.48 %         0.34 %   4.10 %   5.08 %
   
 
 
 
 
 
 
 
 
Managed loans (excluding Commercial Business(3)   $ 477.3   $ 9,179   $ 9,536   $ 8,416   $ 437.8   $ 13,336   $ 11,843   $ 10,863  
  Ratio           1.92 %   2.31 %   2.30 %         3.05 %   3.18 %   3.36 %
   
 
 
 
 
 
 
 
 

(1)
The ratios of 90 days or more past due and net credit losses are calculated based on end-of-period and average loans, respectively, both net of unearned income.
(2)
Private Bank results are reported as part of the Global Wealth 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 49.
(4)
Included within Other Assets on the Consolidated Balance Sheet.
(5)
Includes CitiCapital collateral-dependent loans.
(6)
Total loans and total average loans exclude certain interest and fees on credit cards of approximately $4 billion and $4 billion, respectively, which are included in Consumer Loans on the Consolidated Balance Sheet.

50


Consumer Loan Balances, Net of Unearned Income

 
  End of Period
  Average
 
 
  2004
  2003
  2002
  2004
  2003
  2002
 
 
  In billions of dollars

 
Total managed(1) (including the Commercial Business)   $ 518.5   $ 452.0   $ 410.3   $ 477.9   $ 414.2   $ 364.1  
Securitized receivables (all in North America Cards)     (85.3 )   (76.1 )   (67.1 )   (77.9 )   (71.4 )   (65.2 )
Credit card receivables held-for-sale(2)     (2.5 )       (6.5 )   (3.1 )   (3.2 )   (6.5 )
   
 
 
 
 
 
 
On-balance sheet(3) (including Commercial Business)   $ 430.7   $ 375.9   $ 336.7   $ 396.9   $ 339.6   $ 292.4  
   
 
 
 
 
 
 

(1)
This table presents loan information on a managed basis (a non-GAAP measure) and shows the impact of securitizations to reconcile to a held basis, the comparable GAAP measure. See a discussion of managed basis reporting on page 49.

(2)
Included within Other Assets on the Consolidated Balance Sheet.

(3)
Total loans and total average loans exclude certain interest and fees on credit cards of approximately $4 billion and $4 billion, respectively, for 2004, $4 billion and $2 billion, respectively, for 2003 and approximately $1 billion and $1 billion, respectively, for 2002, which are included in Consumer Loans on the Consolidated Balance Sheet.

        Total delinquencies 90 days or more past due (excluding the Commercial Business) in the managed portfolio were $9.179 billion or 1.92% of loans at December 31, 2004, compared to $9.536 billion or 2.31% at December 31, 2003 and $8.416 billion or 2.30% at December 31, 2002. Total cash-basis loans in the Commercial Business were $735 million or 1.78% of loans at December 31, 2004, compared to $1.350 billion or 3.38% at December 31, 2003 and $1.299 billion or 2.90% at December 31, 2002. Total managed net credit losses (excluding the Commercial Business) in 2004 were $13.336 billion and the related loss ratio was 3.05%, compared to $11.843 billion and 3.18% in 2003 and $10.863 billion and 3.36% in 2002. In the Commercial Business, total net credit losses were $214 million and the related loss ratio was 0.53% in 2004, compared to $462 million and 1.09% in 2003 and $712 million and 1.76% in 2002. For a discussion of trends by business, see business discussions on pages 21 to 27 and pages 33 to 34.

        Citigroup's total allowance for loans, leases and unfunded lending commitments of $11.869 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 $8.379 billion at December 31, 2004, $9.088 billion at December 31, 2003 and $7.021 billion at December 31, 2002. The decrease in the allowance for credit losses from 2003 was primarily due to the impact of reserve releases of $1.182 billion in 2004 related to improving credit conditions in North America, Latin America, Asia and Japan. Offsetting this decrease in the allowance for credit losses were additions of $274 million and $148 million associated with the acquisitions of KorAm and WMF, respectively, the impact of reserve builds of $78 million, primarily related to Germany and the impact of foreign currency translation. The increase in the allowance for credit losses in 2003 was primarily due to an addition of $2.1 billion associated with the acquisition of Sears and the impact of foreign currency translation, partially offset by the write-off of Argentine compensation notes in the 2003 third quarter.

        On-balance sheet consumer loans of $430.7 billion increased $54.8 billion or 15% from December 31, 2003, primarily driven by growth in mortgage and other real-estate-secured loans in Prime Home Finance, Consumer Finance and Private Bank, the addition of the KorAm and WMF portfolios, 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. Credit card receivables declined, primarily due to the impact of higher securitization levels and higher payment rates by customers. In the North America Commercial Business (excluding Mexico), loans continued to decline in both 2004 and 2003, reflecting the continued liquidation of non-core portfolios, a $2.0 billion reclassification of operating leases from loans to other assets in 2004 and a decline of approximately $1.2 billion resulting from the 2003 sale of the Fleet Services portfolio. Loans in Japan also declined mainly reflecting continued contraction in the Consumer Finance portfolio. The increase in 2003 was primarily driven by the addition of the Sears and Home Depot portfolios, combined with the impact of strengthening currencies and growth in mortgage and other real-estate-secured loans.

        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.

        Consumer credit loss ratios for 2005 are expected to remain relatively constant to the fourth quarter 2004 levels. Full-year loss ratios for 2005 are expected to improve against prior-year levels due to credit loss rates that declined during 2004. This paragraph contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 73.

CORPORATE CREDIT RISK

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

51


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

        The following table presents the corporate credit portfolio, before consideration of collateral, by maturity at December 31, 2004. The Corporate portfolio is broken out by direct outstandings, which include drawn loans, overdrafts, interbank placements, banker's acceptances, certain investment securities and leases, and unfunded commitments which include unused commitments to lend, letters of credit and financial guarantees.

 
  Within 1 Year
  Greater than 1 Year but Within 5
  Greater than 5 Years
  Total Exposure
 
  In billions of dollars

Direct outstandings   $ 131   $ 41   $ 13   $ 185
Unfunded commitments     148     99     13     260
   
 
 
 
Total   $ 279   $ 140   $ 26   $ 445
   
 
 
 

Credit Exposure Arising from Derivatives and Foreign Exchange

        The following table summarizes the components of derivatives receivables, representing the fair value of the derivative contracts before taking into account the effects of legally enforceable master netting agreements at December 31, 2004 and 2003. The fair value represents the cost to replace the contracts at current market rates should the counterparty default.

Type of Derivative

 
  2004
  2003
 
  In millions of dollars

Interest rate   $ 190,655   $ 163,446
Foreign exchange     83,040     72,239
Credit derivatives     4,722     2,101
Equity     11,150     7,564
Commodity and other     7,047     4,945
   
 
Total   $ 296,614   $ 250,295
   
 

        Legally enforceable master netting agreements are in place which permit the Company to net receivables and payables with the same counterparty across different underlying derivative contracts. The amount of netting under these agreements at December 31, 2004 and 2003 was $232.9 billion and $186.1 billion, respectively. In addition, the Company obtained cash collateral from counterparties that further served to reduce exposure. After taking into account the benefit of netting and collateral, derivatives receivables recorded on the balance sheet as Trading Account Assets at December 31, 2004 and 2003 were $57.5 billion and $55.3 billion, respectively.

        The Company's credit exposure on derivatives and foreign exchange contracts is primarily to professional counterparties in the financial sector, with 78% arising from transactions with banks, investment banks, governments and central banks, and other financial institutions.

        For purposes of managing credit exposure on derivative and foreign exchange contracts, particularly when looking at exposure to a single counterparty, the Company measures and monitors credit exposure taking into account the current mark-to-market value of each contract plus a prudent estimate of its potential change in value over its life. This measurement of the potential future exposure for each credit facility is based on a stressed simulation of market rates and generally takes into account legally enforceable risk-mitigating agreements for each obligor such as netting and margining. The following table presents the global derivatives portfolio by internal obligor credit rating at December 31, 2004 and 2003, as a percentage of credit exposure:

 
  2004
  2003
 
AAA/AA/A   79 % 78 %
BBB   12 % 12 %
BB/B   8 % 8 %
Unrated   1 % 2 %

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

 
  2004
  2003
 
Financial institutions   70 % 70 %
Governments   8 % 9 %
Corporations   22 % 21 %
   
 
 

Portfolio Mix

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

 
  Dec. 31, 2004
  Dec. 31, 2003
 
North America   42 % 41 %
EMEA   29 % 30 %
Japan   3 % 3 %
Asia   15 % 14 %
Latin America   4 % 5 %
Mexico   7 % 7 %
   
 
 
Total   100 % 100 %
   
 
 

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

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

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

52


        The following table presents the corporate credit portfolio by facility risk rating at December 31, 2004 and 2003, as a percentage of the total portfolio:

 
  Direct Outstandings and Unfunded Commitments
 
 
  2004
  2003
 
AAA/AA/A   54 % 54 %
BBB   29 % 27 %
BB/B   15 % 16 %
CCC or below   1 % 2 %
Unrated   1 % 1 %
   
 
 
    100 % 100 %
   
 
 

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

 
  Direct Outstandings and Unfunded Commitments
 
 
  2004
  2003
 
Government and central banks   10 % 14 %
Other financial institutions   8 % 9 %
Banks   7 % 6 %
Investment banks   6 % 5 %
Utilities   5 % 5 %
Insurance   4 % 5 %
Agricultural and food preparation   4 % 4 %
Telephone and cable   4 % 4 %
Petroleum   4 % 3 %
Industrial machinery and equipment   3 % 3 %
Autos   2 % 3 %
Freight transportation   2 % 2 %
Global information technology   2 % 2 %
Chemicals   2 % 2 %
Retail   2 % 2 %
Metals   2 % 2 %
Other industries(1)   33 % 29 %
   
 
 
Total   100 % 100 %
   
 
 

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

Credit Risk Mitigation

        As part of its overall risk management activities, the Company makes use of credit derivatives and other risk mitigants to hedge portions of the credit risk in its portfolio, in addition to outright asset sales. The effect of these transactions is to transfer credit risk to creditworthy, independent third parties. Beginning in the fourth quarter of 2003, the results of the mark-to-market and any realized gains or losses on credit derivatives are reflected in the Principal Transactions line on the Consolidated Statement of Income. At December 31, 2004 and 2003, $27.3 billion and $11.1 billion, respectively, of credit risk exposure was economically hedged. The reported amounts of direct outstandings and unfunded commitments in this report do not reflect the impact of these hedging transactions. At December 31, 2004 and 2003, the credit protection was economically hedging underlying credit exposure with the following risk rating distribution:

Rating of Hedged Exposure

 
  2004
  2003
 
AAA/AA/A   48 % 32 %
BBB   43 % 57 %
BB/B   8 % 10 %
CCC or below   1 % 1 %
   
 
 
    100 % 100 %
   
 
 

        At December 31, 2004 and 2003, the credit protection was economically hedging underlying credit exposure with the following industry distribution:

Industry of Hedged Exposure

 
  2004
  2003
 
Utilities   11 % 14 %
Agriculture and food preparation   7 % 8 %
Industrial machinery and equipment   7 % 5 %
Other financial institutions   7 % 11 %
Telephone and cable   7 % 9 %
Autos   6 % 7 %
Airlines   5 % 3 %
Chemicals   4 % 3 %
Global information technology   4 % 5 %
Natural gas distribution   4 % 3 %
Pharmaceuticals   4 % 1 %
Retail   4 % 3 %
Business services   3 % 4 %
Banks   3 % 4 %
Petroleum   3 % 4 %
Forest products   3 % 2 %
Freight transportation   3 % 2 %
Metals   3 % 1 %
Entertainment   2 % 2 %
Insurance   2 % 2 %
Investment banks   2 % 3 %
Other(1)   6 % 4 %
   
 
 
    100 % 100 %
   
 
 

(1)
Includes all other industries none of which is greater than 2% of the total hedged amount.

GLOBAL CORPORATE PORTFOLIO REVIEW

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

53


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

 
  2004
  2003
  2002
 
 
  In millions of dollars

 
Corporate cash-basis loans(1)                    
  Capital Markets and Banking   $ 1,794   $ 3,263   $ 3,423  
  Transaction Services     112     156     572  
   
 
 
 
Total corporate cash-basis loans   $ 1,906   $ 3,419   $ 3,995  
   
 
 
 
Net credit losses                    
  Capital Markets and Banking   $ 148   $ 1,191   $ 1,349  
  Transaction Services     (18 )   23     165  
  Smith Barney(2)             6  
  Investment Activities(3)         (3 )   31  
   
 
 
 
Total net credit losses   $ 130   $ 1,211   $ 1,551  
   
 
 
 
Corporate allowance for credit losses   $ 2,890   $ 3,555   $ 4,080  
Corporate allowance for credit losses on unfunded lending commitments(4)     600     600     567  
   
 
 
 
Total corporate allowance for loans, leases and unfunded lending commitments   $ 3,490   $ 4,155   $ 4,647  
   
 
 
 
As a percentage of total corporate loans(5)     2.54 %   3.62 %   3.70 %
   
 
 
 

(1)
Cash-basis loans for the insurance subsidiaries and Proprietary Investment Activities businesses were $62 million for 2002, which are included in Other Assets on the Consolidated Balance Sheet in 2003 and 2004.

(2)
Smith Barney is included within the Global Wealth Management segment.

(3)
Investment Activities results are reported in the Proprietary Investment Activities segment.

(4)
Represents additional reserves recorded within Other Liabilities on the Consolidated Balance Sheet.

(5)
Does not include the allowance for unfunded lending commitments.

        Corporate cash-basis loans were $1.906 billion, $3.419 billion and $3.995 billion at December 31, 2004, 2003 and 2002, respectively. Cash-basis loans decreased $1.513 billion from December 31, 2003 due to a $1.469 billion decrease in Capital Markets and Banking and a $44 million decrease in Transaction Services. Capital Markets and Banking decreased primarily due to charge-offs in North America, Argentina and Mexico, partially offset by the addition of KorAm. Transaction Services decreased primarily due to decreases in corporate borrowers in Poland and Argentina.

        Cash-basis loans decreased $576 million in 2003 due to decreases in Capital Markets and Banking and Transaction Services. Capital Markets and Banking primarily reflects decreases to corporate borrowers in Argentina and New Zealand, as well as reductions in the telecommunications industry, partially offset by a reclassification of cash-basis loans ($248 million) in Mexico from Transaction Services and increases related to Parmalat and the energy industry. Transaction Services decreased primarily due to the reclassification of cash-basis loans ($248 million) in Mexico to Capital Markets and Banking and charge-offs in Argentina and Poland.

        Total corporate Other Real Estate Owned (OREO) was $126 million, $105 million and $75 million at December 31, 2004, 2003 and 2002, respectively. The $21 million increase in 2004 from 2003 reflects net foreclosures in the North America real estate portfolio.

        Total corporate loans outstanding at December 31, 2004 were $114 billion as compared to $98 billion and $110 billion at December 31, 2003 and 2002, respectively.

        Total corporate net credit losses of $130 million in 2004 decreased $1.081 billion compared to 2003, primarily due to improvements in the overall credit environment, and the absence of exposure to Parmalat. Total corporate net credit losses of $1.211 billion in 2003 decreased $340 million compared to 2002 primarily due to the absence of prior-year net credit losses in Argentina and exposures in the energy and telecommunications industries, reflecting improvements in the overall credit environment, partially offset by $345 million of credit losses related to Parmalat and credit losses to corporate borrowers in Poland.

        Citigroup's allowance for credit losses for loans, leases and lending commitments of $11.869 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 $3.490 billion at December 31, 2004, compared to $4.155 billion at December 31, 2003 and $4.647 billion at December 31, 2002. The allowance attributed to corporate loans and leases as a percentage of corporate loans was 2.54% at December 31, 2004, as compared to 3.62% and 3.70% at December 31, 2003 and 2002, respectively. The $665 million decrease in the total allowance at December 31, 2004 from December 31, 2003 primarily reflects reserve releases of $900 million due to continued improvement in the portfolio, partially offset by the addition of KorAm. The $492 million decrease in the total allowance at December 31, 2003 from December 31, 2002 primarily reflects reserve releases of $300 million due to continued improvement in the portfolio. 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. Although the 2004 credit environment led to benefits from loan loss releases and declines in cash-basis loans, it is unlikely these benefits will repeat in 2005. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 73.

LOAN MATURITIES AND FIXED/VARIABLE PRICING

 
  Due Within 1 Year
  Over 1 Year but Within 5 Years
  Over 5 Years
  Total
 
  In millions of dollars at year-end

Corporate Maturities of the corporate loan portfolio                        
In U.S. offices                        
  Commercial and Industrial loans   $ 4,647   $ 7,113   $ 2,677   $ 14,437
  Mortgage and real estate     32     49     19     100
  Lease financing     604     924     348     1,876
In offices outside the U.S.     62,861     27,830     6,798     97,489
   
 
 
 
Total corporate loans   $ 68,144   $ 35,916   $ 9,842   $ 113,902
   
 
 
 
Fixed/variable pricing of corporate loans with maturities due after one year with maturities(1)                        
Loans at fixed interest rates         $ 11,086   $ 4,098      
Loans at floating or adjustable interest rates           24,830     5,744      
         
 
     
Total         $ 35,916   $ 9,842      
         
 
     

(1)
Based on contractual terms. Repricing characteristics may effectively be modified from time to time using derivative contracts. See Note 24 to the Consolidated Financial Statements.

54


MARKET RISK MANAGEMENT PROCESS

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

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

        Market risk encompasses liquidity risk and price risk, both of which arise in the normal course of business of a global financial intermediary. Liquidity risk is the risk that some entity, in some location and in some currency, may be unable to meet a financial commitment to a customer, creditor, or investor when due. Liquidity risk is discussed in the "Capital Resources and Liquidity" section on page 62. Price risk is the risk to earnings that arises from changes in interest rates, foreign exc