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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2005

OR

o

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

For the transition period from                             to                              

Commission file number 1-9924

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

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

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

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

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

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

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

Common stock outstanding as of September 30, 2005: 5,058,978,866

Available on the Web at www.citigroup.com





Citigroup Inc.


TABLE OF CONTENTS


Part I—Financial Information

 
 
  Page No.
Item 1. Financial Statements:    

 

Consolidated Statement of Income (Unaudited)—
Three and Nine Months Ended September 30, 2005 and 2004

 

69

 

Consolidated Balance Sheet—
September 30, 2005 (Unaudited) and December 31, 2004

 

70

 

Consolidated Statement of Changes in Stockholders' Equity (Unaudited)—
Nine Months Ended September 30, 2005 and 2004

 

71

 

Consolidated Statement of Cash Flows (Unaudited)—
Nine Months Ended September 30, 2005 and 2004

 

72

 

Consolidated Balance Sheet—Citibank, N.A. and Subsidiaries
September 30, 2005 (Unaudited) and December 31, 2004

 

73

 

Notes to Consolidated Financial Statements (Unaudited)

 

74

Item 2.

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

 

6—66

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

50—53, 84, 85

Item 4.

Controls and Procedures

 

67

 

Part II—Other Information

Item 1.

Legal Proceedings

 

104

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

106

Item 6.

Exhibits

 

107

Signatures

 

108

Exhibit Index

 

109

2


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, Corporate and Investment Banking (CIB), Global Wealth Management and Alternative Investments business segments.

        The Company is a bank holding company within the meaning of the U.S. Bank Holding Company Act of 1956 (BHC Act) registered with, and subject to examination by, the Board of Governors of the Federal Reserve System (FRB). Certain of the Company's subsidiaries are subject to supervision and examination by their respective federal and state authorities. This quarterly report on Form 10-Q should be read in conjunction with Citigroup's 2004 Annual Report on Form 10-K.

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

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

GLOBAL CONSUMER

        Global Consumer delivers a wide array of banking, lending, insurance and investment services through a network of local branches, offices, and electronic delivery systems, including ATMs, the Internet, and Automated Lending Machines (ALMs), 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 marketing initiatives with other Citigroup businesses. The business of CitiFinancial is included in North America Consumer Finance. As of September 30, 2005, North America Consumer Finance maintained 2,705 offices, including 2,450 in the U.S., Canada, and Puerto Rico, and 255 offices in Mexico, while International Consumer Finance maintained 1,759 sales points, including 392 branches and 654 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, Commercial Business, Prime Home Finance, Student Loans, Primerica, and Mexico Retail Banking. Retail Distribution delivers banking, lending, investment and insurance services through 884 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, Smith Barney mutual funds, CitiFinancial debt consolidation loans, Prime Home Finance, and variable annuities products. 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 1,335 branches, the Banamex insurance operations formerly reported in the Life Insurance and Annuities business, and the Banamex asset management and retirement services operations formerly reported in Asset Management (currently reflected as a discontinued operation). International Retail Banking consists of 1,201 branches and provides full-service banking, investment and insurance services in EMEA, Japan, Asia, and Latin America.

3


        Latin America also includes the Latin America Retirement Services operations formerly reported in Asset Management. In addition to North America, Commercial Business consists of the suite of products and services offered to small- and middle-market businesses in the international regions.

        During the 2005 third quarter, Citigroup announced a senior management realignment in its Global Consumer Group. This realignment will be organized along customer lines that will recognize the different opportunities in the North American and International retail consumer marketplaces. Ajay Banga, currently President of Retail Banking North America, and Steven J. Freiberg, currently Chairman and Chief Executive Officer of Citi Cards, will become co-heads of the Global Consumer Group, with Mr. Banga leading the International operations and Mr. Freiberg leading the North American business (U.S. and Canada). This reorganization was done with the view that it will enable the Company to better focus on customers' needs in an integrated fashion across all product lines and more effectively respond to the specific opportunities in markets at different stages of development. The presentation of the Company's 2005 fourth quarter disclosures will reflect this organizational and product structure.

CORPORATE AND INVESTMENT BANKING

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

        Capital Markets and Banking offers a wide array of investment banking and commercial banking services and products, including the underwriting and distribution of fixed income and equity securities for U.S. and multinational corporations and for state, local and other governmental and government-sponsored authorities. In addition, Capital Markets and Banking also provides capital raising, advisory, research and other brokerage services to its customers, acts as a market-maker and executes securities and commodities futures brokerage transactions on all major U.S. and international exchanges on behalf of customers and for its own account. Capital Markets and Banking is a major participant in foreign exchange markets and in the over-the-counter (OTC) market for derivative instruments involving a wide range of products, including interest rate, equity and currency swaps, caps and floors, options, warrants and other derivative products. It creates and sells various types of structured securities, as well as provides traditional bank lending products to its clientele.

        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 Smith Barney Private Client, Citigroup Investment Research, 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 third-party mutual funds. As part of Smith Barney, Citigroup Investment Research produces equity research to serve both institutional and individual investor clients. The majority of expenses for Citigroup Investment Research are allocated to the Global Equities business within CIB and Smith Barney businesses.

        Private Bank provides personalized wealth management services for high-net-worth clients through offices in 31 countries and territories. With a global network of Private Bankers and Product Specialists, Private Bank leverages its 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.

4


ALTERNATIVE INVESTMENTS

        Alternative Investments' products and services are provided through Citigroup Alternative Investments (CAI). CAI is an integrated alternative investment platform that manages a wide range of products across five asset classes, including private equity, hedge funds, real estate, structured products and managed futures. CAI manages capital on behalf of Citigroup, as well as third-party institutional and high-net-worth investors. CAI's business model is to enable its 12 investment centers to retain entrepreneurial qualities required to capitalize on evolving opportunities, while benefiting from the intellectual, operational and financial resources of Citigroup. Citigroup's proprietary portfolio also includes shares in public companies (the St. Paul Travelers Companies Inc. (St. Paul) and MetLife, Inc.) acquired as part of the disposition of certain Citigroup businesses.

CORPORATE/OTHER

        Corporate/Other includes net treasury results not reported in the other segments' results, corporate expenses, certain intersegment eliminations, the results of certain discontinued operations, and taxes not allocated to the individual businesses.

5


CITIGROUP INC. AND SUBSIDIARIES

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

Financial Summary

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars
except per share amounts

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
Revenues, net of interest expense(1)   $ 21,498   $ 18,738   15 % $ 62,863   $ 59,525   6 %
Operating expenses     11,413     10,179   12     33,789     38,527   (12 )
Benefits, claims, and credit losses(1)     2,840     1,235   NM     6,902     5,503   25  
   
 
 
 
 
 
 
Income from continuing operations before taxes and minority interest   $ 7,245   $ 7,324   (1 )% $ 22,172   $ 15,495   43 %
Income taxes     2,164     2,229   (3 )   6,827     4,417   55  
Minority interest, net of tax     93     69   35     511     172   NM  
   
 
 
 
 
 
 
Income from continuing operations   $ 4,988   $ 5,026   (1 )% $ 14,834   $ 10,906   36 %
Discontinued operations(2)(3)     2,155     282   NM     2,823     819   NM  
   
 
 
 
 
 
 
Net Income   $ 7,143   $ 5,308   35 % $ 17,657   $ 11,725   51 %
   
 
 
 
 
 
 
Earnings per share                                  
Basic earnings per share:                                  
Income from continuing operations   $ 0.98   $ 0.98     $ 2.90   $ 2.13   36 %
Net income     1.41     1.03   37 %   3.45     2.29   51 %
Diluted earnings per share:                                  
Income from continuing operations   $ 0.97   $ 0.96   1 % $ 2.85   $ 2.09   36 %
Net income     1.38     1.02   35 %   3.39     2.24   51 %
   
 
 
 
 
 
 
Return on Average Common Equity(4)     25.4 %   21.3 %       21.4 %   15.9 %    
Return on Risk Capital(5)     37.0     42.0         38.0     32.0      

Total Assets (in billions of dollars)

 

$

1,472.8

 

$

1,436.6

 

 

 

 

 

 

 

 

 

 

 
Total Equity (in billions of dollars)     111.8     103.4                      

Tier 1 Capital Ratio

 

 

9.12

%

 

8.37

%

 

 

 

 

 

 

 

 

 

 
Total Capital Ratio     12.37 %   11.49 %                    
   
 
 
 
 
 
 

(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)). Citigroup discloses certain revenues, net of interest expense, credit losses and receivables for its Cards business on a managed basis. These managed basis disclosures gross-up revenues and credit losses by the same amount to reflect credit losses that would be recorded if the receivables were not securitized. This managed basis reporting does not reverse out the gain that the Company recognizes on the securitization transaction and does not reinstate the net interest revenue that would have been accrued had the loans not been securitized. Under this managed basis reporting, revenues, net of interest expense, and benefits, claims, and credit losses would each have been increased by $1.267 billion and $1.250 billion in the 2005 and 2004 third quarters, respectively, and by $3.749 billion and $3.865 billion for the respective nine-month periods. 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)
Discontinued Operations includes the operations described in the Company's January 31, 2005, announced agreement for the sale of Citigroup's Travelers Life & Annuity, substantially all of Citigroup's international insurance business and Citigroup's Argentine pension business to MetLife, Inc. The transaction closed during the 2005 third quarter and resulted in a $3.4 billion ($2.1 billion after-tax) gain. See Note 4 to the Consolidated Financial Statements.
(3)
Discontinued Operations includes the operations described in the Company's June 24, 2005, announced agreement for the sale of substantially all of Citigroup's Asset Management Business to Legg Mason, Inc. 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 fourth quarter. See Note 4 to the Consolidated Financial Statements.
(4)
The return on average common stockholders' equity is calculated using annualized net income after deducting preferred stock dividends.
(5)
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 annualized 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 annualized 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 taking capacity. Return on invested capital 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. For a further discussion on risk capital, see page 42.
NM
Not meaningful

6


Business Focus

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

Citigroup Net Income—Product View

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars

  %
Change

  %
Change

 
  2005
  2004(1)
  2005(1)
  2004(1)
 
Global Consumer                                  
Cards   $ 1,182   $ 1,267   (7 )% $ 3,335   $ 3,259   2 %
Consumer Finance     495     643   (23 )   1,770     1,804   (2 )
Retail Banking     1,111     1,271   (13 )   3,661     3,631   1  
Other(2)     (65 )   (62 ) (5 )   (303 )   148   NM  
   
 
 
 
 
 
 
Total Global Consumer   $ 2,723   $ 3,119   (13 )% $ 8,463   $ 8,842   (4 )%
   
 
 
 
 
 
 
Corporate and Investment Banking                                  
Capital Markets and Banking   $ 1,424   $ 1,159   23 % $ 3,906   $ 4,138   (6 )%
Transaction Services     327     286   14     860     783   10  
Other(2) (3)     46     7   NM     82     (4,566 ) NM  
   
 
 
 
 
 
 
Total Corporate and Investment Banking   $ 1,797   $ 1,452   24 % $ 4,848   $ 355   NM  
   
 
 
 
 
 
 
Global Wealth Management                                  
Smith Barney   $ 227   $ 198   15 % $ 663   $ 661    
Private Bank     79     136   (42 )   284     447   (36 )%
   
 
 
 
 
 
 
Total Global Wealth Management   $ 306   $ 334   (8 )% $ 947   $ 1,108   (15 )%
   
 
 
 
 
 
 
Alternative Investments   $ 339   $ 117   NM   $ 1,086   $ 428   NM  

Corporate/Other

 

 

(177

)

 

4

 

NM

 

 

(510

)

 

173

 

NM

 
   
 
 
 
 
 
 
Income from Continuing Operations   $ 4,988   $ 5,026   (1 )% $ 14,834   $ 10,906   36 %

Discontinued Operations(4)

 

 

2,155

 

 

282

 

NM

 

 

2,823

 

 

819

 

NM

 
   
 
 
 
 
 
 
Net Income   $ 7,143   $ 5,308   35 % $ 17,657   $ 11,725   51 %
   
 
 
 
 
 
 

(1)
Reclassified to conform to the current period's presentation.
(2)
The 2004 second quarter includes a $756 million after-tax gain ($378 million in Consumer Other and $378 million in CIB Other) related to the sale of Samba.
(3)
The 2004 second quarter includes a $4.95 billion after-tax charge related to the WorldCom and Litigation Reserve Charge.
(4)
See Footnotes (2) and (3) to the table on page 6.
NM
Not meaningful

7


Citigroup Net Income—Regional View

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars

  %
Change

  %
Change

 
  2005
  2004(1)
  2005(1)
  2004(1)
 
North America (excluding Mexico)(2)                                  
  Global Consumer   $ 1,761   $ 2,123   (17 )% $ 5,464   $ 5,656   (3 )%
  Corporate and Investment Banking(3)     637     501   27     1,992     (2,997 ) NM  
  Global Wealth Management     288     272   6     876     869   1  
   
 
 
 
 
 
 
Total North America   $ 2,686   $ 2,896   (7 )% $ 8,332   $ 3,528   NM  
   
 
 
 
 
 
 
Mexico                                  
  Global Consumer   $ 511   $ 249   NM   $ 1,156   $ 712   62 %
  Corporate and Investment Banking     177     198   (11 )%   336     476   (29 )
  Global Wealth Management     12     13   (8 )   35     41   (15 )
   
 
 
 
 
 
 
Total Mexico   $ 700   $ 460   52 % $ 1,527   $ 1,229   24 %
   
 
 
 
 
 
 
Europe, Middle East and Africa (EMEA)                                  
  Global Consumer(4)   $ (154 ) $ 154   NM   $ 89   $ 958   (91 )%
  Corporate and Investment Banking(4)     358     124   NM     882     1,051   (16 )
  Global Wealth Management     8     4   100 %   10     17   (41 )
   
 
 
 
 
 
 
Total EMEA   $ 212   $ 282   (25 )% $ 981   $ 2,026   (52 )%
   
 
 
 
 
 
 
Japan                                  
  Global Consumer   $ 169   $ 164   3 % $ 532   $ 453   17 %
  Corporate and Investment Banking     58     91   (36 )   160     271   (41 )
  Global Wealth Management     (29 )   3   NM     (82 )   48   NM  
   
 
 
 
 
 
 
Total Japan   $ 198   $ 258   (23 )% $ 610   $ 772   (21 )%
   
 
 
 
 
 
 
Asia (excluding Japan)                                  
  Global Consumer   $ 375   $ 332   13 % $ 1,027   $ 859   20 %
  Corporate and Investment Banking     382     309   24     953     938   2  
  Global Wealth Management     26     33   (21 )   92     102   (10 )
   
 
 
 
 
 
 
Total Asia   $ 783   $ 674   16 % $ 2,072   $ 1,899   9 %
   
 
 
 
 
 
 
Latin America                                  
  Global Consumer   $ 61   $ 97   (37 )% $ 195   $ 204   (4 )%
  Corporate and Investment Banking     185     229   (19 )   525     616   (15 )
  Global Wealth Management     1     9   (89 )   16     31   (48 )
   
 
 
 
 
 
 
Total Latin America   $ 247   $ 335   (26 )% $ 736   $ 851   (14 )%
   
 
 
 
 
 
 
Alternative Investments   $ 339   $ 117   NM   $ 1,086   $ 428   NM  

Corporate /Other

 

 

(177

)

 

4

 

NM

 

 

(510

)

 

173

 

NM

 
   
 
 
 
 
 
 
Income from Continuing Operations   $ 4,988   $ 5,026   (1 )% $ 14,834   $ 10,906   36 %

Discontinued Operations(5)

 

 

2,155

 

 

282

 

NM

 

 

2,823

 

 

819

 

NM

 
   
 
 
 
 
 
 
Net Income   $ 7,143   $ 5,308   35 % $ 17,657   $ 11,725   51 %
   
 
 
 
 
 
 

(1)
Reclassified to conform to the current period's presentation.
(2)
Excludes Alternative Investments and Corporate/Other which are predominately related to North America.
(3)
The 2004 second quarter includes a $4.95 billion after-tax charge related to the WorldCom and Litigation Reserve Charge.
(4)
The 2004 second quarter includes a $756 million after-tax gain ($378 million in Consumer Other and $378 million in CIB Other) related to the sale of Samba.
(5)
See Footnotes (2) and (3) to the table on page 6.
NM
Not meaningful

8


Management Summary

        Net income for the 2005 third quarter was $7.143 billion or $1.38 per diluted share, both of which were up 35% from 2004, and included the gain ($2.120 billion after-tax) on the sale of the Life Insurance and Annuities Business, which was completed during the quarter. Income from continuing operations was $4.988 billion or $0.97 per diluted share in the 2005 third quarter.

        During the 2005 third quarter, Citigroup continued to demonstrate the benefits of our diverse business platform, as strength in our corporate and capital markets businesses offset certain weaknesses in our U.S. consumer businesses. The Company recorded revenue growth of 15% over the 2004 third quarter. Capital Markets and Banking revenues were up 39% over the prior year, and Transaction Services revenues increased 19% to record levels. Smith Barney had 13% revenue growth year-over-year.

        The 2005 third quarter results included a number of unusual charges and benefits. We had a year-over-year increase in credit costs of more than $1.6 billion. The negative impact of Hurricane Katrina, the accelerated pace of bankruptcies prior to the effective date of the change in the U.S. bankruptcy law, the compression of interest rate spreads and the higher payment rates in our North American Cards business all negatively impacted the quarter's results.

        Despite the increase in credit costs, the underlying credit environment was relatively stable in the quarter. Global Consumer loss rates in the quarter increased to 3.44% on a managed basis, excluding commercial business, primarily reflecting the standardization of the EMEA loan write-off policy. Corporate cash-basis loans declined 24% from June 30, 2005, to $1.2 billion.

        Our franchises continued to expand. We made progress in extending our global distribution network and strengthening our product capabilities. In the 2005 third quarter, we added 108 retail banking and consumer finance branches globally and 66 automated loan machines (ALMs) in Japan. Over the last 12 months, we have added 549 branches globally and 235 ALMs in Japan. We are continuing to work at expanding our distribution, especially in the fast-growing International Consumer market, where we see very attractive long-term growth rates.

        The Company's equity was $112 billion at September 30, 2005. During the quarter, we paid out $2.3 billion in dividends to our common shareholders (an increase of 10% from the year-ago quarter), repurchased $5.5 billion of common stock (124 million shares), and maintained a "well-capitalized" position with a Tier 1 Capital Ratio of 9.12% at the end of the quarter. The Company reported a return on common equity of 25.4% and a return on risk capital of 37%. We believe that repurchasing our stock is a good use of capital and anticipate continuing to repurchase our stock in the near-term while maintaining our strong capital position.

        The Company has made significant progress with the implementation of its Five Point Plan. The Five Point Plan strengthens a foundation of values, priorities and internal controls that are essential for sustained long-term growth.

        During the 2005 third quarter, we announced a senior management realignment in our Global Consumer Group. This realignment will be organized along customer lines with a goal to recognizing the different opportunities in the North American and International retail consumer marketplaces. The presentation of the Company's 2005 fourth quarter disclosures will reflect this organizational and product structure.

        Certain of the above statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 68.

9


EVENTS IN 2005 and 2004

        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 68.

Sale of Asset Management Business

        On June 24, 2005, the Company announced that it had signed a definitive agreement under which Citigroup will sell substantially all of its Asset Management Business in exchange for the broker-dealer business of Legg Mason, Inc. (Legg Mason), approximately $1.5 billion of Legg Mason's common and preferred shares (valued as of the announcement date), and approximately $550 million in the form of a five-year loan facility provided by Citigroup Corporate and Investment Banking. The transaction does not include Citigroup's asset management business in Mexico, its retirement services business in Latin America (both of which are now included in Retail Banking) or its interest in the CitiStreet joint venture (which is now included in Smith Barney). The total value of this transaction at the time of the announcement was approximately $3.7 billion, resulting in an after-tax gain to Citigroup upon closing of approximately $1.6 billion. The actual gain is contingent upon Legg Mason's stock price as of the closing date, as well as other closing adjustments. Using the high and the low stock prices since the announcement date, the approximate after-tax gain has fluctuated from $1.6 billion to $2.3 billion, ending at $2.1 billion as of September 30, 2005.

        As part of this transaction, Citigroup also announced in the 2005 third quarter the concurrent sale of Legg Mason's Capital Markets business to Stifel Financial Corp. The business being sold consists of areas in which Citigroup already has full capabilities, including investment banking, institutional equity sales and trading, taxable fixed income sales and trading, and research. No gain or loss will be recognized from this transaction. (The transactions described in these two paragraphs are referred to herein as the Sale of the Asset Management Business.)

        Citigroup and Legg Mason have entered into a three year agreement under which Citigroup will continue to offer its clients Asset Management's products, will become the primary retail distributor of the Legg Mason funds managed by Legg Mason Capital Management Inc., and may also distribute other Legg Mason products. These products will be offered primarily through Citigroup's Global Wealth Management businesses, Smith Barney and Private Bank, as well as through Primerica and Citibank. The distribution of these products will be subject to applicable requirements of law.

        Upon completion of the Sale of the Asset Management Business, Citigroup expects to add more than 1,300 financial advisors in more than 100 branch offices from Legg Mason's broker-dealer business to its Global Wealth Management business.

        The Sale of the Asset Management Business is expected to close during the 2005 fourth quarter and is subject to certain regulatory approvals and customary closing conditions. In connection with the transaction, Citigroup is seeking approval of Asset Management's mutual fund boards and shareholders.

        Also included in the sales agreement between Citigroup and Legg Mason are provisions related to transitional services that will be provided for a period of 24 to 30 months. These transitional service provisions may be terminated or extended. The costs associated with these provisions are not considered to be significant.

        The Asset Management Businesses being sold were the primary vehicles through which Citigroup engaged in the asset management business. The businesses generated total revenues of $324 million and $342 million and net income of $66 million and $37 million for the three months ended September 30, 2005 and 2004, respectively. For the nine months ended September 30, 2005 and 2004, Asset Management generated total revenues of $984 million and $1,032 million and net income of $181 million and $161 million, respectively. The businesses had total assets of $1.2 billion at September 30, 2005.

        Results for all of the businesses included in the Sale of the Asset Management Business are reported as Discontinued Operations for all periods presented. The assets and liabilities of the businesses being sold are included in Assets of Discontinued Operations Held for Sale and Liabilities of Discontinued Operations Held for Sale on the Consolidated Balance Sheet.

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

        On July 1, 2005, the Company completed the sale of Citigroup's Travelers Life & Annuity and substantially all of Citigroup's international insurance businesses to MetLife, Inc. (MetLife). The businesses sold were the primary vehicles through which Citigroup engaged in the Life Insurance and Annuities business.

        Citigroup received $1.0 billion in MetLife equity securities and $10.830 billion in cash, which resulted in an after-tax gain of approximately $2.120 billion. This gain remains subject to final closing adjustments.

        The transaction encompassed Travelers Life & Annuity's U.S. businesses and its international operations other than Citigroup's life insurance business in Mexico (which is now included within Retail Banking). International operations included wholly owned insurance companies in the United Kingdom, Belgium, Australia, Brazil, Argentina, and Poland; joint ventures in Japan and Hong

10


Kong; and offices in China. The transaction also included Citigroup's Argentine pension business. (The transaction described in the preceding three paragraphs is referred to herein as the Sale of the Life Insurance and Annuities Business).

        In connection with the Sale of the Life Insurance and Annuities Business, Citigroup and MetLife have entered into ten-year agreements under which Travelers Life & Annuity products will be made available through certain Citigroup distribution channels, subject to appropriate suitability and other standards. In addition, MetLife products will be added to these distribution channels.

        Also included in the sales agreement between Citigroup and MetLife are provisions related to transitional services that will be provided for a period of 24 to 30 months. These transitional service provisions may be terminated or extended. The costs associated with these provisions are not considered to be significant.

        Results for all of the businesses included in the Sale of the Life Insurance and Annuities Business, including the gain that was recorded this quarter, are reported as Discontinued Operations for all periods presented. The unrealized gain on the MetLife securities from July 1, 2005 to September 30, 2005, are included in the Consolidated Statement of Changes in Stockholders' Equity within "Accumulated other changes in equity from nonowner sources" (net change in unrealized gains and losses on investment securities, net of tax).

Change in EMEA Consumer Write-off Policy

        In the past, certain Western European consumer portfolios were granted an exception to Citigroup's global write-off policy. The exception extended the write-off period from the standard 120-day policy for personal installment loans, and was granted because of the higher recovery rates experienced in these portfolios. Citigroup recently observed lower actual recovery rates, stemming primarily from a change in bankruptcy and wage garnishment laws in Germany, and as a result, conformed the regional charge-off policy to its global standard. The net charge was $490 million resulting from the recording of $1.153 billion of write-offs and a corresponding utilization of $663 million of reserves, in the 2005 third quarter. These write-offs, along with the underlying portfolio performance, caused the 90-day delinquency rate for the Consumer EMEA portfolio to decline to 1.43% at September 30, 2005, compared to 4.43% at June 30, 2005.

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

        A slight upward movement in net charge-offs may occur in EMEA in the near-term due to the timing of the write-offs, now at 120 days, versus the longer period of time over which recoveries will be realized. The Company is in the process of adjusting its collection strategies in EMEA to reflect the revised write-off time frame.

Impact from Hurricane Katrina

        The Company recorded a $222 million ($357 million pretax) charge for the impact from Hurricane Katrina. This charge includes the Company's initial estimate of probable losses that have been incurred as of September 30, 2005. It consists primarily of additional credit reserve charges in Cards, Consumer Finance and Retail Banking businesses, based on total credit exposures of approximately $3.6 billion in the Federal Emergency Management Agency (FEMA) Individual Assistance designated areas. Given the limited access to customers and to properties in the affected areas, estimates have, in many cases, been based upon assumptions which include the identification of customers and properties impacted, type of damage inflicted upon collateral (i.e., flood or wind or both), existence of underlying insurance, and extent of damage. As the Company is able to gain better access to the affected areas and to customers in those areas, the loss estimates will be refined.

        This charge does not include $25 million (pretax) of waived fees and interest from customers during the quarter, which are likely to continue in the 2005 fourth quarter.

United States Bankruptcy Legislation

        Recent changes to the U.S. bankruptcy laws make it more difficult for certain individuals to have their debt canceled. The changes became effective on October 17, 2005. Prior to the law's changing, there was a significant acceleration in customers' bankruptcy filings. For the 2005 third quarter, Citigroup estimates that the incremental bankruptcy filings resulted in approximately $200 million of additional pretax losses, while the 2005 nine-month period includes approximately $400 million in additional pretax losses. Leading up to the October 17, 2005 effective date, the bankruptcy filing rates continued to increase at a significant pace. The adverse effects from these bankruptcy filings after September 30, 2005 until the October 17, 2005 effective date will be reflected in the Company's 2005 fourth quarter financial statements.

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Homeland Investment Act Benefit

        The Company's results from continuing operations include a $185 million tax benefit from the Homeland Investment Act provision of the American Jobs Creation Act of 2004, net of the impact of remitting income earned in 2005 and prior years that would otherwise have been indefinitely invested overseas. The amount of dividends that will be repatriated relating to this benefit is approximately $2.8 billion.

Copelco Litigation Settlement

        In 2000, Citigroup purchased Copelco Capital, Inc., a leasing business, from Itochu International Inc. and III Holding Inc. (formerly known as Copelco Financial Services Group, Inc.) (collectively referred to herein as "Itochu") for $666 million. During 2001, Citigroup filed a lawsuit asserting breach of representations and warranties, among other causes of action, under the Stock Purchase Agreement entered into between Citigroup and Itochu in March of 2000. During the 2005 third quarter, Citigroup and Itochu signed a settlement agreement that mutually released all claims, and under which Itochu agreed to pay Citigroup $185 million. The settlement proceeds were received in August.

Mexico Value Added Tax (VAT) Refund

        During the 2005 third quarter, Citigroup Mexico received a $182 million refund of VAT taxes from the Mexican Government related to the 2003 and 2004 tax years as a result of a Mexico Supreme Court ruling. The refund was recorded as a reduction of $140 million (pretax) in other operating expense and $42 million (pretax) in other revenue.

Legal Settlements and Charges for Enron and WorldCom Class Action
Litigations and for Other Regulatory and Legal Matters

        On June 10, 2005, Citigroup announced that it had agreed to a settlement in the Enron class action litigation Newby, et al. v. Enron Corp., et al., currently pending in the United States District Court for the Southern District of Texas, Houston Division. Under the terms of the settlement, Citigroup will make a pretax payment of $2.01 billion to the settlement class, which consists of all purchasers of all publicly traded equity and debt securities issued by Enron and Enron-related entities between September 9, 1997 and December 2, 2001. As noted below, this settlement, which is subject to court approval, is fully covered by Citigroup's existing litigation reserves.

        The Company is a defendant in numerous lawsuits and other legal proceedings arising out of alleged misconduct in connection with:

        During the 2004 second quarter, in connection with the settlement of the WorldCom class action, the Company reevaluated and increased its reserves for these matters. The Company recorded a charge of $7.915 billion ($4.95 billion after-tax) relating to (i) the settlement of class action litigation brought on behalf of purchasers of WorldCom securities, and (ii) an increase in litigation reserves for the other matters described above (WorldCom and Litigation Reserve Charge). Subject to the terms of the WorldCom class action settlement, and its eventual approval by the courts, the Company will make a payment of $2.575 billion, or $1.59 billion after-tax, to the WorldCom settlement class. Subject to the terms of the Enron class action settlement, and its eventual approval by the courts, the Company will make a payment of $2.01 billion (pretax) to the Enron settlement class. As of September 30, 2005, the Company's litigation reserve for these matters, net of the amounts to be paid upon final approval of the WorldCom and Enron class action settlements and other settlements arising out of the matters above not yet paid, was approximately $3.9 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 interests of the Company.

        The Company continues to evaluate its reserves on an ongoing basis.

12


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

        On June 2, 2005, Citigroup announced that it had agreed to enter into a long-term agreement with Federated Department Stores, Inc. under which the companies will partner to manage Federated's credit card business, including existing and new accounts.

        Under the agreement, Citigroup will acquire Federated's approximately $4.5 billion credit card receivables portfolio in two phases. For the first phase, which closed on October 24, 2005, Citigroup initially acquired Federated's receivables under management, totaling approximately $3.3 billion. For the second phase, additional Federated receivables, which total approximately $1.2 billion, are expected to be transferred to Citigroup in the 2006 second quarter from the current provider. In addition, Citigroup is expected to acquire, in the 2006 third quarter, the approximately $1.8 billion credit card receivables portfolio of The May Department Stores Company which recently merged with Federated.

        Citigroup is paying a premium of approximately 11.5% to acquire each of the portfolios. The multi-year agreement also provides Federated the ability to participate in the portfolio based on credit sales and certain other performance metrics of the portfolio after the receivable sale is completed.

        The Federated and May credit card portfolios comprise a total of approximately 17 million active accounts. The transaction is expected to be accretive to Citigroup earnings in the first year.

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

        On May 31, 2005, the Company completed the settlement with the Securities and Exchange Commission, disclosed by Citigroup in January 2005, resolving an investigation by the SEC into matters relating to arrangements between certain Smith Barney mutual funds (the Funds), an affiliated transfer agent, and an unaffiliated sub-transfer agent.

        Under the terms of the settlement, Citigroup paid a total of $208.1 million (pretax), consisting of $128 million in disgorgement and $80 million in penalties. These funds, less $24 million already credited to the Funds, have been paid to the U.S. Treasury and will be distributed pursuant to a distribution plan to be prepared by Citigroup and approved by the SEC. The terms of the settlement had been fully reserved by Citigroup in prior periods.

Resolution of the 2004 Eurozone Bond Trade

        As announced on June 28, 2005, Citigroup paid $7.29 million to the U.K. Financial Services Authority (FSA) during the 2005 third quarter relating to trading activity in the European government bond and bond derivative markets on August 2, 2004. As further agreed, the Company also relinquished to the FSA approximately $18.2 million in profits generated by the trade. In Italy, Citigroup was suspended from trading on the MTS domestic electronic bond trading platform for one month beginning November 1, 2005.

Merger of Bank Holding Companies

        On August 1, 2005, Citigroup merged its two intermediate bank holding companies, Citigroup Holdings Company and Citicorp, into Citigroup Inc. Coinciding with this merger, Citigroup assumed all existing indebtedness and outstanding guarantees of Citicorp.

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

        As part of the funding consolidation, Citigroup unconditionally guaranteed Citigroup Global Markets Holdings Inc.'s (CGMHI) outstanding SEC-registered indebtedness. CGMHI no longer files periodic reports with the SEC and continues to be rated on the basis of a guarantee of its financial obligations from Citigroup.

        This legal vehicle simplification is expected to result in more efficient management of capital and liquidity, unified access to the capital markets and a reduction in the number of the Company's credit-rated entities.

        See "Capital Resources and Liquidity" section beginning on page 56 and Note 17 to the Consolidated Financial Statements for further discussion.

13


Credit Reserves

        During the 2005 third quarter, Company recorded a net release/utilization to its credit reserves of $178 million, consisting of a net release/utilization of $342 million in Global Consumer and a net build of $164 million in CIB. The net release/utilization in Global Consumer included a utilization in EMEA of $663 million, related to write-offs of $1.153 billion in loans, and an unallocated reserve build of $260 million for credit concerns regarding Hurricane Katrina. The EMEA utilization and corresponding write-offs were the results of the standardization of the loan write-off policy in certain Western European consumer portfolios. The net build in CIB was primarily comprised of an unallocated build of $143 million in Capital Markets and Banking, which included a $100 million increase for unfunded lending commitments and letters of credit, and an unallocated build of $7 million in Transaction Services.

        During the 2004 third quarter, the Company recorded a net release/utilization of $885 million to its credit reserves, consisting of a net release/utilization of $504 million in Global Consumer and a net release/utilization of $381 million in CIB.

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
In millions of dollars

 
  2005
  2004
  2005
  2004
 
By Product:                          
Cards   $ 54   $ (246 ) $ 66   $ (315 )
Consumer Finance     171     (70 )   155     (74 )
Retail Banking     (596 )   (188 )   (605 )   (345 )
Smith Barney     6         10      
Private Bank     24         14      
Consumer Other     (1 )           1  
   
 
 
 
 
Total Global Consumer   $ (342 ) $ (504 ) $ (360 ) $ (733 )
   
 
 
 
 
Capital Markets and Banking   $ 155   $ (326 ) $ 122   $ (788 )
Transaction Services     9     (55 )   13     (156 )
   
 
 
 
 
Total Corporate and Investment Banking(1)   $ 164   $ (381 ) $ 135   $ (944 )
   
 
 
 
 
Total Citigroup   $ (178 ) $ (885 ) $ (225 ) $ (1,677 )
   
 
 
 
 
By Region:                          
North America (excluding Mexico)   $ 408   $ (447 ) $ 445   $ (685 )
Mexico     26     (152 )   (69 )   (400 )
EMEA     (621 )   10     (494 )   (22 )
Japan     22     (22 )   22     (39 )
Asia (excluding Japan)     3     (90 )   (42 )   (152 )
Latin America     (16 )   (184 )   (87 )   (379 )
   
 
 
 
 
Total Citigroup   $ (178 ) $ (885 ) $ (225 ) $ (1,677 )
   
 
 
 
 

(1)
The 2005 third quarter and nine months, respectively, include a $100 million and $200 million increase in reserves for unfunded lending commitments and letters of credit due to an increase in outstanding commitments.

Allowance for Credit Losses

In millions of dollars

  September 30,
2005

  June 30,
2005

  December 31,
2004

  September 30,
2004

Allowance for loan losses   $ 10,015   $ 10,418   $ 11,269   $ 12,034
Allowance for unfunded lending commitments     800     700     600     600
   
 
 
 
Total allowance for loans, leases and unfunded lending commitments   $ 10,815   $ 11,118   $ 11,869   $ 12,634
   
 
 
 

Repositioning Charges

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

14


Resolution of Glendale Litigation

        During the 2005 first quarter, the Company recorded a $72 million after-tax gain following the resolution of Glendale Federal Bank v. United States, an action brought by Glendale Federal Bank, a predecessor to Citibank (West), FSB, against the United States government.

Acquisition of First American Bank

        On March 31, 2005, Citigroup completed its acquisition of First American Bank in Texas (FAB). The transaction establishes Citigroup's retail branch presence in Texas, giving Citigroup 106 branches, $4.2 billion in assets and approximately 120,000 new customers in the state. The results of FAB are included in the Consolidated Financial Statements from March 2005 forward.

Divestiture of the Manufactured Housing Loan Portfolio

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

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 $4.6 billion. The sale, which was completed on January 31, 2005, resulted in an after-tax gain of $111 million.

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

        On September 29, 2005, the Company officially closed its Private Bank business in Japan.

        In September 2004, the Financial Services Agency of Japan (FSA) issued an administrative order against Citibank Japan. This order included a requirement that Citigroup exit all private banking operations in Japan by September 30, 2005. In connection with this required exit, the Company established a $400 million ($244 million after-tax) reserve (the Exit Plan Charge) during the 2004 fourth quarter. During the third quarter of 2005, the Company released $45 million (pretax) of this reserve. The Company believes that the remaining reserve is adequate to cover any future settlements with ex-Private Bank Japan customers.

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

        On October 25, 2004, Citigroup announced its decision to wind down Cititrust and Banking Corporation (Cititrust), a licensed trust bank in Japan, after concluding that there were internal control, compliance and governance issues in that subsidiary. On April 22, 2005, the FSA issued an administrative order requiring Cititrust to suspend from engaging in all new trust business beginning May 2, 2005. Cititrust is continuing to assure an orderly transition of its relationships with clients.

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 CIB.

Acquisition of KorAm Bank

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

        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 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

15


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 U.S., and total assets of $3.8 billion. Citigroup has guaranteed all outstanding unsecured indebtedness of WMF. The results of WMF are included in the Consolidated Financial Statements from January 2004 forward.

16


Results of Operations

Income and Earnings Per Share

        Net income in the 2005 third quarter was $7.143 billion or $1.38 per diluted share, up from $5.308 billion or $1.02 per diluted share in the 2004 third quarter. Net income for the 2005 nine-month period was $17.657 billion or $3.39 per diluted share, up 51% from the nine-month period of 2004. Net income for both the 2005 third quarter and nine-month period included the gain ($2.120 billion after-tax) on the sale of the Life Insurance and Annuities Business, which was completed during the 2005 third quarter.

        Citigroup reported income from continuing operations of $4.988 billion or $0.97 per diluted share, in the 2005 third quarter, down from $5.026 billion or $0.96 per diluted share in the 2004 third quarter. Income from continuing operations for the 2005 nine-month period of $14.834 billion or $2.85 per diluted share was up 36% from the nine-month period of 2004.

        Return on average common equity was 25.4% in the 2005 third quarter, compared to 21.3% in the same period of the previous year. Return on average common equity for the nine-month period of 2005 was 21.4% and 15.9% for the nine-month period of 2004.

        Global Consumer net income decreased $396 million, or 13%, from the third quarter of 2004 and decreased $379 million, or 4%, from the nine-month period of the previous year, while CIB increased $345 million, or 24%, from the third quarter of 2004 and $4.5 billion from the nine-month period of the previous year. Global Wealth Management decreased $28 million, or 8%, from the third quarter of 2004 and $161 million, or 15%, from the corresponding nine-month period in 2004. Alternative Investments increased $222 million from the 2004 third quarter and $658 million from the nine-month period of 2004.

        See individual segment and product discussions on pages 20 - 41 for additional discussion and analysis of the Company's results of operations.

Revenues, Net of Interest Expense

        Total revenues, net of interest expense, of $21.5 billion and $62.9 billion in the 2005 third quarter and nine months, respectively, were up $2.8 billion, or 15%, and up $3.3 billion, or 6%, from the respective 2004 periods. Global Consumer revenues were up $451 million, or 4%, in the 2005 third quarter to $12.3 billion, led by a $409 million, or 9%, increase in Retail Banking, reflecting growth in average customer deposits and loans. There was also an increase of $43 million, or 2%, in Consumer Finance due to growth in loans both domestically and internationally, partially offset by spread compression. Global Consumer increased $710 million, or 2%, from the nine-month period in 2004 to $36.4 billion.

        CIB revenues of $6.4 billion in the 2005 third quarter increased $1.7 billion, or 35%, from the 2004 third quarter. Capital Markets and Banking increased $1.5 billion, or 39%, from the 2004 third quarter, reflecting improvement across all products, including a strong performance in interest rate products, foreign exchange and commodities. Transaction Services increased $201 million, or 19%, from the third quarter of 2004 to $1.2 billion due to higher customer volume, reflecting increased liability balances held on behalf of customers, assets under custody and the positive impact of rising short-term interest rates. CIB reported a $1.3 billion, or 8%, increase from the nine-month period of 2004 to $17.6 billion.

        Global Wealth Management revenues of $2.2 billion increased $164 million, or 8%, from the prior-year quarter. Smith Barney increased $200 million, or 13%, from the 2004 third quarter due to increased fee-based and transactional revenue, while Private Bank decreased $36 million, or 7%, from the prior-year third quarter due to the continued wind-down of the Japan business. Global Wealth Management reported a $45 million, or 1%, increase in revenue to $6.4 billion from the nine-month period of 2004.

        Alternative Investments in the 2005 third quarter increased $423 million from the same three-month period of 2004 and $1.7 billion from the nine-month period of the previous year. The increase in this quarter is primarily due to private equity gains and earnings on proprietary hedge fund investments.

Selected Revenue Items

        Net interest revenue of $9.7 billion decreased $600 million, or 6%, from the 2004 third quarter, primarily reflecting rising short-term interest rates. Revenues in the 2005 nine-month period were $29.6 billion, down $1.8 billion, or 6%, from the corresponding nine-month period in 2004.

        Total commissions, asset management and administration fees, and other fee revenues of $6.3 billion increased by $1.7 billion, or 36%, compared to the 2004 third quarter, primarily attributable to higher servicing fees in the Consumer Assets portfolio, increased business volumes and overall product growth. Total commissions, asset management and administration fees, and other fee revenues of $17.5 billion increased $1.7 billion, or 11%, from the nine months of 2004.

17


        Principal transactions revenue of $2.0 billion was up $1.6 billion from the 2004 third quarter due to increases primarily in Global Fixed Income and Equity Markets. Principal transactions revenue of $5.0 billion increased $2.2 billion, or 81%, from the nine months of 2004. Realized gains from sales of investments were down $19 million, or 6%, to $284 million in the 2005 third quarter, primarily due to unfavorable market fluctuations during the quarter. The nine-month increase from 2004 was $332 million, or 51%. Other revenue of $2.4 billion increased $65 million, or 3%, from the 2004 third quarter and increased $512 million, or 7%, from the nine-month period in the previous year.

Operating Expenses

        Total operating expenses were $11.4 billion for the 2005 third quarter, up $1.2 billion, or 12%, from the comparable 2004 period. The increase was primarily due to increased incentive compensation expense in the CIB, Smith Barney and Alternative Investments.

        Global Consumer reported a 2% and 6% increase in total expense from the 2004 third quarter and nine-month period, respectively, which were primarily driven by continued investment spending, new branch expenses and volume growth. CIB expenses increased 26% from the 2004 third quarter, primarily due to an increase in compensation expense driven by business mix, and decreased 37% from the nine-month period due to the absence of the $7.9 billion WorldCom and Litigation Reserve Charge in the 2004 nine-month period. Global Wealth Management expenses increased 12% and 6% as compared to the prior year's three- and nine-month periods, primarily related to increased variable compensation driven by increased revenue. Alternative Investments expenses increased 49% from the 2004 three-month period and 34% from the nine-month period of 2004.

Benefits, Claims, and Credit Losses

        Benefits, claims, and credit losses were $2.8 billion in the 2005 third quarter and $6.9 billion for the nine-month period of 2005, up $1.6 billion, and up $1.4 billion, or 25%, from the 2004 third quarter and nine-month periods, respectively.

        Global Consumer provisions for benefits, claims, and credit losses of $2.8 billion in the 2005 third quarter and $6.9 billion for the 2005 nine-month period were up $1.1 billion, or 68%, and $602 million, or 10%, from the 2004 third quarter and year-to-date period, respectively, due to the $490 million charge to standardize the EMEA consumer loan write-off policies with the global write-off policy, a build of $260 million related to Hurricane Katrina and the absence of $436 million in net unallocated loan loss reserve releases recorded in the third quarter of 2004. Total net credit losses (excluding Commercial Business) were $2.919 billion, and the related loss ratio was 2.94% in the third quarter of 2005, as compared to $1.892 billion and 2.09% in the 2004 third quarter. The consumer loan delinquency ratio (90 days or more past due) decreased to 1.52% at September 30, 2005 from 2.06% at September 30, 2004. See page 47 for a reconciliation of total consumer credit information.

        Corporate and Investment Banking provision for credit losses of $43 million in the 2005 third quarter and $(27) million for the 2005 nine-month period were up $448 million and $785 million from the 2004 third quarter and year-to-date period, respectively. The Company increased CIB's reserve for credit losses by $150 million ($50 million for funded exposures and $100 million for unfunded lending commitments) in the 2005 third quarter due to an increase in exposures and credit risk in the portfolio.

        Corporate cash-basis loans at September 30, 2005 and 2004 were $1.2 billion and $2.2 billion, respectively, while the corporate Other Real Estate Owned (OREO) portfolio totaled $153 million and $95 million, respectively. The decrease in corporate cash-basis loans from September 30, 2004, was related to improvements in the overall credit environment and write-offs, as well as sales of loans and paydowns in the portfolio. Corporate cash-basis loans at September 30, 2005 decreased $386 million from June 30, 2005.

Income Taxes

        The Company's effective tax rate on continuing operations was 29.9% in the 2005 third quarter compared to 30.4% in the 2004 third quarter. The 2005 third quarter includes an HIA benefit of $185 million, net of the impact of remitting income earned in 2005 and prior years that would otherwise have been indefinitely invested overseas.

        The 2004 third quarter included a reserve release of $147 million due to the closing of a tax audit.

Regulatory Capital

        Total capital (Tier 1 and Tier 2) was $105.3 billion, or 12.37% of net risk-adjusted assets, and Tier 1 capital was $77.7 billion, or 9.12% of net risk-adjusted assets at September 30, 2005, compared to $100.9 billion, or 11.85%, and $74.4 billion, or 8.74%, respectively, at December 31, 2004.

18


Accounting Changes and Future Application of Accounting Standards

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

Significant Accounting Policies

        The Company's accounting policies are fundamental to understanding management's discussion and analysis of results of operations and financial condition. The Company has identified five policies as being significant because they require management to make subjective and/or complex judgments about matters that are inherently uncertain. These policies relate to Valuations of Financial Instruments, Allowance for Credit Losses, Securitizations, Income Taxes and Legal Reserves. The Company, in consultation with the Audit and Risk Management Committee of the Board of Directors, has reviewed and approved these significant accounting policies, which are further described in the Company's 2004 Annual Report on Form 10-K.


        The net income line in the following business segment and operating unit discussions excludes discontinued operations. Income from discontinued operations is disclosed within the Corporate/Other business segment. In addition, the Mexico insurance business, the Mexico Asset Management Business and the Latin America Retirement Services business are now reported within the Retail Banking business. See Notes 4 and 5 to the Consolidated Financial Statements.

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


19


GLOBAL CONSUMER

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
Revenues, net of interest expense   $ 12,321   $ 11,870   4%   $ 36,446   $ 35,736   2%  
Operating expenses     5,657     5,541   2     17,256     16,259   6  
Provisions for benefits, claims, and credit losses     2,770     1,645   68     6,919     6,317   10  
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 3,894   $ 4,684   (17 )% $ 12,271   $ 13,160   (7 )%
Income taxes     1,153     1,550   (26 )   3,762     4,272   (12 )
Minority interest, net of tax     18     15   20     46     46    
   
 
 
 
 
 
 
Net income   $ 2,723   $ 3,119   (13 )% $ 8,463   $ 8,842   (4 )%
   
 
 
 
 
 
 
Average Risk Capital(1)   $ 27,342   $ 22,811   20%   $ 27,012   $ 22,587   20%  
Return on Risk Capital(1)     40%     54%         42%     52%      
Return on Invested Capital(1)     18%     22%         19%     21%      
   
 
 
 
 
 
 

(1)
See Footnote (5) to the table on page 6 and discussion of Risk Capital on page 42.

        Global Consumer reported net income of $2.723 billion and $8.463 billion in the 2005 third quarter and nine months, respectively, down $396 million, or 13%, from the 2004 third quarter and down $379 million, or 4%, from the 2004 nine-month period. The decline in the 2005 third quarter was driven by the standardization of the loan write-off policy within certain countries of the EMEA Retail Banking and Consumer Finance businesses, which resulted in an increase to the provision for credit losses of $490 million pretax ($332 million after-tax), the impact of Hurricane Katrina, which resulted in lower revenues of $115 million pretax, including the impact of waived interest and fees, and a net increase to the provision for credit losses of $260 million pretax (total Hurricane Katrina after-tax impact of $234 million), an increase in credit costs in U.S. Cards due to the recent bankruptcy legislation of approximately $200 million pretax, and the absence of prior-year unallocated credit reserve releases. Partially offsetting these decreases were a legal settlement related to the purchase of Copelco in the Commercial Business, tax benefits from the Homeland Investment Act, a refund of value added taxes in Mexico, lower credit losses in the U.S. from general improvement in the credit environment, and the impact from business volume growth. The 2005 nine-month decrease was also impacted by the absence of the prior-year $378 million gain on the sale of Samba, repositioning costs taken in the 2005 first quarter, a $111 million after-tax gain on the sale of the CitiCapital Transportation Finance business, a $72 million after-tax gain relating to the resolution of the Glendale litigation, and a 2005 first quarter $109 million after-tax loss on the sale of a Manufactured Housing Loan portfolio in Other Consumer.

        Cards net income decreased $85 million, or 7%, in the 2005 third quarter, but increased $76 million, or 2%, in the 2005 nine-month period. The 2005 third quarter decrease was driven by the increased bankruptcy losses, the absence of prior-year unallocated credit reserve releases, the impact in the U.S. of spread compression, and the impact of Hurricane Katrina, partially offset by lower contractual credit losses due to an improved credit environment, the impact of higher securitization gains in North America, and volume growth in International Cards. The increase in the nine-month period primarily resulted from lower credit losses due to the improved credit environment. Consumer Finance net income decreased $148 million, or 23%, in the 2005 third quarter and $34 million, or 2%, in the nine-month period, primarily due the impact of a credit reserve build related to the impact of Hurricane Katrina of $180 million pretax, the absence of prior-year unallocated credit reserve releases, and the impact of spread compression in North America, partially offset by lower net credit losses in North America related to the improved credit environment, the impact of higher volumes, and lower net credit losses and expenses in Japan. The nine-month period also included repositioning costs taken in the 2005 first quarter in EMEA and Latin America. Retail Banking net income decreased $160 million, or 13%, in the 2005 third quarter and increased $30 million, or 1%, in the 2005 nine-month period. The decline in the 2005 third quarter reflected the standardization of the loan write-off policy in EMEA, the impact of Hurricane Katrina on U.S. businesses, and the absence of prior-year unallocated credit reserve releases, partially offset by the Copelco legal settlement in the Commercial Business, a refund of value added taxes in Mexico, tax benefits related to the Homeland Investment Act, as well as business growth in Mexico, Asia, EMEA, and Latin America. The nine-month comparison was also impacted by a 2005 second quarter increase of $127 million ($81 million after-tax) in the Germany credit reserve to reflect increased experience with the effects of bankruptcy law liberalization, and in the 2005 first quarter, a $111 million after-tax gain on the sale of the CitiCapital Transportation Finance business, a $72 million after-tax gain relating to the resolution of the Glendale litigation, improved results in Prime Home Finance, and repositioning costs.

        On March 31, 2005, Citigroup acquired First American Bank in Texas (FAB), which included 106 branches, $4.2 billion in assets and approximately 120,000 customers in the state of Texas. 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 Washington Mutual Finance (WMF), which added $3.8 billion in average loans and 427 loan offices. The results from these acquisitions are included from the dates of acquisition.

20


        Global Consumer has divested itself of several non-strategic businesses and portfolios. These divestitures include a $1.4 billion Manufactured Housing Loan portfolio and the CitiCapital Transportation Finance business, consisting of $4.3 billion of assets, in the 2005 first quarter; Global Consumer's share of Citigroup's 20% stake in Samba in the 2004 second quarter; and a $900 million vendor finance leasing business in Europe in the 2004 fourth quarter.

Global Consumer Net Income—Regional View

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
North America (excluding Mexico)   $ 1,761   $ 2,123   (17 )% $ 5,464   $ 5,656   (3 )%
Mexico     511     249   NM     1,156     712   62  
EMEA     (154 )   154   NM     89     958   (91 )
Japan     169     164   3     532     453   17  
Asia (excluding Japan)     375     332   13     1,027     859   20  
Latin America     61     97   (37 )   195     204   (4 )
   
 
 
 
 
 
 
Total Net Income   $ 2,723   $ 3,119   (13 )% $ 8,463   $ 8,842   (4 )%
   
 
 
 
 
 
 

        The decline in Global Consumer net income in the 2005 third quarter reflected declines in North America (excluding Mexico), EMEA, and Latin America, partially offset by growth in all other regions. North America (excluding Mexico) declined $362 million, or 17%, and $192 million, or 3%, in the 2005 third quarter and nine months, respectively, driven by the impact of Hurricane Katrina, increased credit costs due to the recent bankruptcy legislation, and the absence of prior-year unallocated credit reserve releases, partially offset by the Copelco legal settlement in the Commercial Business, increased business volumes, and improved non-bankruptcy related credit losses. The nine-month period was additionally impacted by the sale of the CitiCapital Transportation Finance business and the resolution of the Glendale litigation in Retail Banking, partially offset by the loss on the sale of a Manufactured Housing Loan portfolio in Other Consumer. Net income in EMEA declined $308 million and $869 million in the 2005 third quarter and nine months, respectively, driven by an increase in the provision for credit losses due to the standardization of the loan write-off policy, higher investment expenses due to branch expansion, tax charges from the Homeland Investment Act of $23 million, and higher credit losses, primarily in the U.K. The nine-month period was additionally impacted by the prior-year gain on the sale of Samba, 2005 first quarter repositioning expenses of $66 million after-tax ($104 million pretax), and the impact of the 2005 second quarter Germany credit reserve build.

        Net income in Latin America declined $36 million, or 37%, and $9 million, or 4%, in the 2005 third quarter and nine months, respectively, reflecting the absence of prior-year unallocated credit reserve releases and higher investment expenses in Retail Banking, partially offset by an Argentina Compensation bond recovery of $24 million pretax and business volume growth. The nine-month period benefited from a 2005 second quarter Argentina Compensation bond recovery of $24 million pretax in Retail Banking, partially offset by 2005 first quarter repositioning costs of $8 million after-tax ($12 million pretax). Net income in Mexico grew $262 million and $444 million in the 2005 third quarter and nine months, respectively, driven by the refund of value added taxes worth $164 million pretax ($106 million after tax), tax benefits related to the Homeland Investment Act of $107 million, higher deposit and lending revenues in Retail Banking, and improved customer volumes in Cards. The nine-month period was additionally impacted by a $50 million favorable impact related to a restructuring of Mexican government notes and a reserve release related to an investment in Avantel worth $30 million. Growth in Asia of $43 million, or 13%, and $168 million, or 20%, in the 2005 third quarter and nine months, respectively, was mainly due to higher deposit and branch lending revenues in Retail Banking, increased loans and sales in Cards, Homeland Investment Act tax benefits of $12 million, and the benefit of strengthening currencies, partially offset by the absence of prior-year unallocated credit reserve releases. Income in Japan increased by $5 million, or 3%, and $79 million, or 17%, in the 2005 third quarter and nine months, respectively, primarily driven by Consumer Finance, which experienced lower credit costs from fewer bankruptcy filings, and lower expenses resulting from the 2004 fourth quarter branch closings and related headcount reductions.

21


Cards

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
Revenues, net of interest expense   $ 4,603   $ 4,602     $ 13,630   $ 13,667    
Operating expenses     2,026     2,053   (1 )%   6,192     5,955   4 %
Provision for credit losses     871     646   35     2,596     2,889   (10 )
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 1,706   $ 1,903   (10 )% $ 4,842   $ 4,823    
Income taxes     523     635   (18 )   1,504     1,561   (4 )%
Minority interest, net of tax     1     1       3     3    
   
 
 
 
 
 
 
Net income   $ 1,182   $ 1,267   (7 )% $ 3,335   $ 3,259   2 %
   
 
 
 
 
 
 
Average assets (in billions of dollars)   $ 90   $ 96   (6 )% $ 92   $ 95   (3 )%
Return on assets     5.21 %   5.25 %       4.85 %   4.58 %    
   
 
 
 
 
 
 

Average Risk Capital(1)

 

$

7,703

 

$

5,205

 

48

%

$

7,516

 

$

5,386

 

40

%
Return on Risk Capital(1)     61 %   97 %       59 %   81 %    
Return on Invested Capital(1)     26 %   31 %       25 %   27 %    
   
 
 
 
 
 
 

(1)
See Footnote (5) to the table on page 6 and discussion of Risk Capital on page 42.

        Cards reported net income of $1.182 billion and $3.335 billion in the 2005 third quarter and nine months, respectively, down $85 million, or 7%, and up $76 million, or 2%, from the 2004 periods. North America Cards reported net income of $1.003 billion and $2.775 billion in the 2005 third quarter and nine months, respectively, down $64 million, or 6%, and up $26 million, or 1%, from the 2004 periods. The 2005 third quarter decline primarily reflects spread compression driven by higher short-term interest rates, increased payment rates, the absence of a prior-year credit reserve release, an increase in bankruptcy losses associated with recent U.S. bankruptcy legislation, and revenue and credit impacts related to Hurricane Katrina, partially offset by lower contractual write-offs as a result of the improved credit environment, higher tax credits including a $41 million benefit in Mexico from the Homeland Investment Act, lower expenses including a Value Added Tax refund in Mexico, purchase sales growth, and the impact of higher securitization gains. The nine-month increase in income of $26 million primarily reflects lower net credit losses as a result of the improved credit environment, purchase sales growth, and the impact of higher securitization gains, partially offset by spread compression and the absence of prior-year credit reserve releases. International Cards net income of $179 million and $560 million in the 2005 third quarter and nine months, respectively, decreased $21 million, or 11%, and increased $50 million, or 10%, from the 2004 periods. The 2005 third quarter decline primarily reflects higher expenses from volumes and investments, and the absence of prior-year credit reserve releases, partially offset by increased revenues from purchase sales and volumes, as well as the benefit of foreign currency translation. The nine-month variance primarily reflects higher purchase sales and volumes, as well as the benefit of foreign currency translation, partially offset by prior-year credit reserve releases.

        As shown in the following table, average managed loans grew 2% in the 2005 third quarter and 3% in the 2005 nine months. The growth in the 2005 third quarter primarily reflected 15% growth in International Cards, driven by EMEA, Asia and the benefit of strengthening currencies. The growth in the 2005 nine-month period was driven by increases in all regions in International Cards, but primarily Asia, EMEA and Latin America, and the benefit of strengthening currencies. Growth in North America in the nine-month period was primarily the result of increased Mexico accounts and higher purchase sales, partially offset by higher payment rates. Purchase sales, which include cash advances, were $88.2 billion and $252.9 billion in the 2005 third quarter and nine months, respectively, up 11% and 10% from the 2004 periods. North America purchase sales were up 10% and 9% over the prior-year quarter and nine months to $73.7 billion and $209.8 billion, respectively, reflecting the improved economy, growth in accounts in Mexico, and the launch and promotion of new products in U.S. Cards. International Cards purchase sales grew 11% and 17% over the prior-year quarter and nine months to $14.5 billion and $43.1 billion, respectively, reflecting broad-based growth led by Asia and the benefit of strengthening currencies.

22


 
  Three Months Ended September 30,
   
  Nine Months Ended
September 30,

   
 
In billions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
Purchase sales(1)                                  
  North America   $ 73.7   $ 66.7   10 % $ 209.8   $ 193.0   9 %
  International     14.5     13.1   11     43.1     36.7   17  
   
 
 
 
 
 
 
Total purchase sales   $ 88.2   $ 79.8   11 % $ 252.9   $ 229.7   10 %
Average managed loans                                  
  North America   $ 139.1   $ 139.1     $ 140.6   $ 138.3   2 %
  International     18.1     15.7   15 %   18.0     15.2   18  
   
 
 
 
 
 
 
Total average managed loans   $ 157.2   $ 154.8   2 % $ 158.6   $ 153.5   3 %
Average securitized receivables   $ (89.8 ) $ (76.2 ) 18   $ (88.0 ) $ (75.9 ) 16  
Average loans held for sale         (7.4 ) (100 )   (0.3 )   (3.2 ) (91 )
   
 
 
 
 
 
 
Total on-balance sheet average loans   $ 67.4   $ 71.2   (5 )% $ 70.3   $ 74.4   (5 )%
   
 
 
 
 
 
 

(1)
Purchase sales represents customers' purchased sales plus cash advances.

        Revenues, net of interest expense, of $4.603 billion and $13.630 billion in the 2005 third quarter and nine months, respectively, were essentially unchanged from the 2004 periods, reflecting increases in International Cards in both periods, offset by declines in North America in both periods. International Cards revenues, net of interest expense, of $857 million and $2.563 billion in the 2005 third quarter and nine months increased $70 million, or 9%, and $256 million, or 11%, respectively, over the 2004 periods, primarily reflecting the benefit of increased purchase sales and loans in all regions, as well as the benefit of foreign currency translation. Excluding the benefit of foreign currency translation, growth was led in the 2005 third quarter by Asia and EMEA, and in the nine-month comparison, by Asia and Latin America. The increase in the nine-month period was additionally impacted by the KorAm acquisition.

        Revenues, net of interest expense, in North America, of $3.746 billion and $11.067 billion in the 2005 third quarter and nine months declined $69 million, or 2%, and $293 million, or 3%, respectively, from the prior-year periods, mainly reflecting the impact of higher cost of funds, increased payment rates resulting from the overall improved economy and a mix shift of customers, a mix shift in the private label business to lower-rate products, and the impact of Hurricane Katrina, partially offset by higher securitization-related gains, higher purchase sales, and increased loans in Mexico. Securitization gains included in revenues, net of interest expense, were $278 million and $773 million in the 2005 third quarter and nine-month period, respectively, compared to $146 million in both the prior-year third quarter and nine-month periods. Citigroup recognizes a gain on sale upon the securitization of credit card receivables. Prior to 2005, this gain was allocated between other revenue and the provision for loan losses, which reflected the portion of the Allowance for Credit Losses related to the receivables sold. Commencing in 2005, the entire gain on sale upon securitization is recorded in Other Revenue. Of the 2005 securitization gains recorded, $137 million and $368 million in the three- and nine-month periods, respectively, correspond to the allowance for credit losses for the receivables sold. Included in the 2005 third quarter were lower revenues related to Hurricane Katrina of $96 million, which included an impairment of certain interest-only strips related to securitized receivables of $70 million, higher reserves related to credit insurance of $10 million, and waived interest/fees of $16 million.

        Operating expenses in the 2005 third quarter and nine months of $2.026 billion and $6.192 billion, respectively, were $27 million, or 1%, lower than the 2004 third quarter, and $237 million, or 4%, higher than the 2004 nine-month period. The improvement over the prior-year quarter was primarily driven by the absence of prior-year advertising and marketing costs related to launches of new products in U.S. Cards and a refund of Value Added Taxes (VAT) in Mexico, partially offset by the impact of foreign currency translation, as well as volume-related increases. The nine-month variance reflects higher expenses resulting from volume growth, the impact of foreign currency translation, the KorAm acquisition and repositioning expenses taken in the 2005 first quarter of $32 million pretax ($19 million in North America and $13 million in International), partially offset by lower advertising and marketing costs and the VAT refund in Mexico.

        The provision for credit losses in the 2005 third quarter and nine months of $871 million and $2.596 billion, respectively, was up $225 million, or 35%, and down $293 million, or 10%, from the comparable 2004 periods. The increase in the third quarter was driven by North America, where the U.S. Cards business experienced approximately $200 million of additional credit losses resulting from cardholders filing for bankruptcy prior to the new legislation which went into effect on October 17, 2005. Other increases in the provision resulted from the absence of a prior-year unallocated credit reserve release of $160 million, a 2005 third quarter credit-reserve build of $30 million for anticipated losses due to Hurricane Katrina, a credit reserve build in Mexico, and higher credit losses in Mexico due to higher volumes. Offsetting these increases were lower credit losses due to the improved credit environment and higher levels of securitizations. The nine-month decrease reflects the improved credit environment and higher levels of securitizations, partially offset by the absence of prior-year credit reserve releases and the impact of the higher bankruptcy losses in 2005.

23


        The securitization of credit card receivables is limited to the Citi Cards business within North America. At September 30, 2005, securitized credit card receivables were $92.6 billon, compared to $80.0 billion at September 30, 2004. There were no credit card receivables held for sale at September 30, 2005, compared to $7.5 billion at September 30, 2004. 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 in the 2005 third quarter were $2.084 billion, with a related loss ratio of 5.26%, compared to $2.113 billion and 5.38% in the 2005 second quarter, and $2.142 billion and 5.50% in the 2004 third quarter. In North America, the 2005 third quarter net credit loss ratio of 5.58% decreased from 5.71% in the 2005 second quarter and 5.66% in the 2004 third quarter. In International Cards, the 2005 third quarter net credit loss ratio of 2.79% declined from 2.84% in the 2005 second quarter and 4.09% in the 2004 third quarter. The decline in these ratios from the prior year was primarily due to the improved credit environment in most regions, and is partially offset by the impact of recent bankruptcy legislation changes in the U.S.

        Loans delinquent 90 days or more on a managed basis were $2.691 billion, or 1.70%, of loans at September 30, 2005, compared to $2.634 billion, or 1.67%, at June 30, 2005 and $2.842 billion, or 1.81%, at September 30, 2004. The increase in the delinquency ratio from the prior quarter is due to slight increases in delinquent loans across all regions, with the exception of Japan. The decline in delinquent loans from the prior year was primarily attributable to the improved economic environment in the U.S. and a decline in delinquent accounts in EMEA. A summary of delinquency and net credit loss experience related to the on-balance sheet loan portfolio is included in the table on page 47.

Consumer Finance

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
Revenues, net of interest expense   $ 2,674   $ 2,631   2 % $ 8,137   $ 7,996   2 %
Operating expenses     917     853   8     2,763     2,649   4  
Provisions for benefits, claims, and credit losses     986     786   25     2,627     2,596   1  
   
 
 
 
 
 
 
Income before taxes   $ 771   $ 992   (22 )% $ 2,747   $ 2,751    
Income taxes     276     349   (21 )   977     947   3 %
   
 
 
 
 
 
 
Net income   $ 495   $ 643   (23 )% $ 1,770   $ 1,804   (2 )%
   
 
 
 
 
 
 
Average assets (in billions of dollars)   $ 118   $ 113   4 % $ 118   $ 111   6 %
Return on assets     1.66 %   2.26 %       2.01 %   2.17 %    
   
 
 
 
 
 
 
Average Risk Capital(1)   $ 3,734   $ 3,675   2 % $ 3,822   $ 3,728   3 %
Return on Risk Capital(1)     53 %   70 %       62 %   65 %    
Return on Invested Capital(1)     18 %   23 %       22 %   22 %    
   
 
 
 
 
 
 

(1)
See Footnote (5) to the table on page 6 and discussion of Risk Capital on page 42.

        Consumer Finance reported net income of $495 million and $1.770 billion in the 2005 third quarter and nine months, respectively, down $148 million, or 23%, and $34 million, or 2%, from the comparable 2004 periods. North America reported a decrease in income of $142 million, or 29%, and $66 million, or 5%, from the comparable 2004 periods, respectively, and was driven by increased credit costs, including a credit reserve build related to Hurricane Katrina of $180 million pretax, and the absence of prior-year credit reserve releases, partially offset by lower credit losses due to the improved credit environment. The 2005 third quarter and nine-month periods were additionally impacted by higher net interest margin due to higher volumes offset by spread compression, and higher expenses. International Consumer Finance reported an income decline of $6 million, or 4%, and growth of $32 million, or 8%, from the comparable 2004 periods, respectively. The decline in 2005 third quarter net income reflects the absence of prior-year

24


unallocated credit reserve releases, declines in EMEA from continued high levels of credit losses in the U.K. and the impact of higher credit losses due to a write-off policy standardization in Italy and Spain, and increased expenses related to branch expansion, partially offset by a net income increase in Japan, and the impact of loan growth in all regions except Japan. The increase in Japan was due to lower credit losses resulting from lower bankruptcy filings and lower expenses resulting from the 2004 fourth quarter branch closings and related reduction in headcount. The nine-month increase in net income primarily reflects increases in Japan from lower credit losses due to the lower bankruptcy filings and lower expenses, as well as the impact of loan growth in all regions except Japan, partially offset by declines in EMEA from lower revenues and higher credit losses. The nine-month period was also impacted by repositioning costs taken in the 2005 first quarter in EMEA and Latin America.

 
  Three Months Ended September 30,
   
  Nine Months Ended
September 30,

   
 
In billions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
Average loans                                  
Real estate-secured loans   $ 60.0   $ 58.6   2 % $ 61.0   $ 57.2   7 %
Personal     25.9     24.6   5     25.7     24.5   5  
Auto     12.4     11.6   7     12.1     11.5   5  
Sales finance and other     5.3     5.1   4     5.3     5.4   (2 )
   
 
 
 
 
 
 
Total average loans   $ 103.6   $ 99.9   4 % $ 104.1   $ 98.6   6 %
   
 
 
 
 
 
 

        As shown in the preceding table, average loans grew $3.7 billion, or 4%, compared to the 2004 third quarter, reflecting growth in North America of $3.0 billion, or 4%, and in International Consumer Finance of $0.7 billion, or 3%. In the 2005 nine-month period, average loans grew $5.5 billion, or 6%, compared to the prior-year period, reflecting growth in North America of $4.5 billion, or 6%, and in International Consumer Finance of $1.0 billion, or 5%. Growth in North America resulted from an increase in all products, driven by auto loans, personal loans, and real estate-secured loans. Growth in the international markets excluding Japan was mainly driven by an increase in personal loans in EMEA, Asia, and Latin America, and real estate-secured loans in EMEA (primarily the U.K.) and Asia, partially offset by a continued decline in EMEA auto loans. In Japan, average loans declined 7% and 8% from the 2004 third quarter and nine months, respectively, primarily due to higher pay-downs in personal loans.

        As shown in the following table, the average net interest margin ratio of 9.48% in the 2005 third quarter decreased 20 basis points from 2004, reflecting decreases in both North America and International Consumer Finance. In North America the average net interest margin was 7.82%, a decline of 17 basis points from the prior-year quarter, resulting from lower yields in auto, personal and real estate-secured loans, which continue to reflect the shift towards higher-quality credits, competitive pressures, and the impact from a higher cost of funds. The average net interest margin for International Consumer Finance was 15.74% in the 2005 third quarter, a decrease of 28 basis points from the prior-year quarter, due mainly to lower yields in personal loans in EMEA and Latin America, and real estate-secured loans in Asia and Japan, as well as a higher cost of funds.

 
  Three Months Ended
September 30,

   
 
  2005
  2004
  Change
Average Net Interest Margin Ratio            
North America   7.82 % 7.99 % (17)bps
International   15.74 % 16.02 % (28)bps
Total   9.48 % 9.68 % (20)bps
   
 
 

        Revenues, net of interest expense, of $2.674 billion and $8.137 billion in the 2005 third quarter and nine months, respectively, increased $43 million, or 2%, and $141 million, or 2%, from the prior-year periods. Revenues, net of interest expense, in North America, increased $18 million, or 1%, from the 2004 third quarter and were flat to the nine-month period. Higher loan volumes in all products were partially offset by lower yields against the prior-year quarter and nine months, as product mix shifted to lower yielding, higher credit-quality loans, and the impact of a higher cost of funds. Revenues in International Consumer Finance increased $25 million, or 3%, and $124 million, or 5%, from the prior-year periods, mainly due to growth in Asia, EMEA (excluding a decline in the U.K.) and Latin America. The nine-month period increase was additionally due to the impact of foreign currency translation, partially offset by the impact of lower volumes in Japan.

        Operating expenses of $917 million and $2.763 billion in the 2005 third quarter and nine months, respectively, increased $64 million, or 8%, and $114 million, or 4%, from the prior-year periods. Expenses in North America increased $36 million, or 7%, from the 2004 third quarter, and were flat to the nine-month period. The increase in the 2005 third quarter reflects the absence of a prior-year change in estimate relating to the Washington Mutual portfolio worth $22 million and increased expenses in Mexico related to branch expansion. Expenses in International Consumer Finance increased $28 million, or 8%, and $122 million, or 12%, from the 2004 periods, respectively, primarily due to investment spending associated with branch expansions in Asia, EMEA and Latin America, and the impact of foreign currency translation, partially offset by expense savings from branch closings and headcount reductions in Japan. The 2005 nine-month period was additionally impacted by the 2005 first quarter repositioning costs in EMEA of $38 million.

25


        The provision for benefits, claims, and credit losses was $986 million in the 2005 third quarter, up from $824 million in the 2005 second quarter, and $786 million in the 2004 third quarter. The increase of $162 million from the 2005 second quarter and $200 million from the 2004 third quarter was primarily driven by a credit reserve build of $180 million related to Hurricane Katrina in the U.S, higher credit losses of $25 million due to a write-off policy standardization in Italy and Spain, and higher credit losses in the U.K., partially offset by continued improvement in general credit conditions in the U.S. and lower bankruptcies in Japan. The increase over the prior year also reflects the absence of net unallocated credit reserve releases of $70 million in the 2004 third quarter and $74 million in the 2004 nine-month period. Net credit losses and the related loss ratio were $789 million and 3.02% in the 2005 third quarter, compared to $784 million and 3.03% in the 2005 second quarter, and $832 million and 3.31% in the 2004 third quarter. In North America, the 2005 third quarter net credit loss ratio of 2.23% was down from 2.30% in the 2005 second quarter and 2.46% in the 2004 third quarter, reflecting better overall credit conditions in the market, an improved credit collection process, and the shift to better credit quality portfolios. The net credit loss ratio for International Consumer Finance was 6.01% in the 2005 third quarter, up from 5.73% in the 2005 second quarter and down from 6.52% in the 2004 third quarter. The increase from the 2005 second quarter is due to the higher credit losses associated with the write-off policy standardization in Italy and Spain. The decrease from the 2004 third quarter was primarily driven by lower bankruptcy losses in Japan and was partially offset by the impact of higher credit losses in the U.K. and the impact from the write-off standardization.

        Loans delinquent 90 days or more were $1.858 billion, or 1.77% of loans, at September 30, 2005, compared to $1.726 billion, or 1.70%, at June 30, 2005 and $1.938 billion, or 1.91%, at September 30, 2004. The increase in the delinquency ratio over the prior quarter was driven by increases in North America where loans delinquent 90 days or more increased from $1.254 billion, or 1.57%, of loans at June 30, 2005, to $1.395 billion, or 1.68%, at September 30, 2005. The decrease in the delinquency ratio versus the prior year was mainly due to improvements in North America and Japan, and was partially offset by an increase in EMEA, primarily due to the U.K.

Retail Banking

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
Revenues, net of interest expense   $ 5,070   $ 4,661   9 % $ 14,954   $ 13,556   10 %
Operating expenses     2,635     2,558   3     8,079     7,387   9  
Provisions for benefits, claims, and credit losses     913     213   NM     1,696     832   NM  
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 1,522   $ 1,890   (19 )% $ 5,179   $ 5,337   (3 )%
Income taxes     394     605   (35 )   1,475     1,663   (11 )
Minority interest, net of tax     17     14   21     43     43    
   
 
 
 
 
 
 
Net income   $ 1,111   $ 1,271   (13 )% $ 3,661   $ 3,631   1 %
   
 
 
 
 
 
 
Average assets (in billions of dollars)   $ 318   $ 279   14 % $ 309   $ 262   18 %
Return on assets     1.39 %   1.81 %       1.58 %   1.85 %    
   
 
 
 
 
 
 
Average Risk Capital(1)   $ 15,905   $ 13,931   14 % $ 15,674   $ 13,473   16 %
Return on Risk Capital(1)     28 %   36 %       31 %   36 %    
Return on Invested Capital(1)     14 %   18 %       16 %   17 %    
   
 
 
 
 
 
 

(1)
See Footnote (5) to the table on page 6 and discussion of Risk Capital on page 42.

        Retail Banking reported net income of $1.111 billion and $3.661 billion in the 2005 third quarter and nine months, respectively, down $160 million, or 13%, and up $30 million, or 1%, from the 2004 periods. North America Retail Banking increased net income by $109 million, or 12%, and $367 million, or 15%, in the 2005 third quarter and nine months, respectively. The increase in the 2005 third quarter included a legal settlement related to the purchase of Copelco in the Commercial Business in 2000 for $185 million pretax ($108 million after-tax), a refund of value added taxes in Mexico of $122 million pretax ($79 million after-tax), net tax benefits of $57 million related to the Homeland Investment Act, and increased customer volumes in Prime Home Finance, Retail Distribution, Student Loans, Mexico, and the Commercial Business, partially offset by the absence of prior-year unallocated credit reserve releases, broad-based spread compression, lower treasury earnings, the continued impact of liquidating portfolios in the Commercial Business, including the absence of earnings from the CitiCapital Transportation Finance business, and the impact of Hurricane Katrina of $60 million pretax ($36 million after-tax). The nine-month comparison was additionally impacted by the increase in Mexico earnings resulting from a $50 million favorable impact related to a restructuring of Mexican government notes in the 2005 second quarter, a $111 million after-tax gain on the sale of the CitiCapital Transportation Finance business, and the $72 million after-tax gain relating to the resolution of the Glendale litigation in the 2005 first quarter.

        International Retail Banking net income declined $269 million, or 68%, and $337 million, or 29%, in the 2005 third quarter and nine months, respectively, driven by the impact of standardizing the loan write-off policy in Germany and Belgium, which increased the provision for credit losses by $476 million pretax ($323 million after-tax), as well as increased investment spending associated with

26


branch expansion in EMEA, Asia, and Latin America, partially offset by broad-based revenue growth in Asia, EMEA, and Latin America. The nine-month period was also impacted by a Germany credit reserve build to reflect increased experience with the effects of bankruptcy law liberalization of $81 million after-tax in the 2005 second quarter and the 2005 first quarter repositioning expenses of $70 million pretax ($44 million after-tax).

 
  Three Months Ended September 30,
   
  Nine Months Ended
September 30,

   
 
In billions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
Average customer deposits                                  
  North America   $ 127.9   $ 116.9   9 % $ 124.8   $ 115.0   9 %
  Bank Deposit Program balances(1)     41.3     41.4       41.7     41.6    
   
 
 
 
 
 
 
    Total North America   $ 169.2   $ 158.3   7 % $ 166.5   $ 156.6   6 %
    International     112.6     104.9   7     112.0     101.1   11  
   
 
 
 
 
 
 
Total average customer deposits   $ 281.8   $ 263.2   7 % $ 278.5   $ 257.7   8 %
   
 
 
 
 
 
 
Average loans                                  
  North America   $ 167.1   $ 134.1   25 % $ 159.1   $ 127.9   24 %
  North America—Liquidating     0.6     5.4   (89 )   1.3     5.9   (78 )
   
 
 
 
 
 
 
    Total North America   $ 167.7   $ 139.5   20 % $ 160.4   $ 133.8   20 %
    International     54.5     50.5   8     54.5     44.8   22  
   
 
 
 
 
 
 
Total average loans   $ 222.2   $ 190.0   17 % $ 214.9   $ 178.6   20 %
   
 
 
 
 
 
 

(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 compared to 2004. Average customer deposit growth primarily reflects increases in demand balances and rate-sensitive money market balances in Retail Distribution and the Commercial Business, including $2.9 billion in the 2005 third quarter relating to the FAB acquisition, and strong growth in Mexico, partially offset by declines in certain higher-margin non-rate or partly rate-sensitive money market balances in Retail Distribution. Average loan growth in North America reflected increases in Prime Home Finance and Student Loans due to higher loan originations, and increased balances in the Commercial Business core loan portfolio, Mexico, and Retail Distribution, partially offset by declines in the Commercial Business liquidating portfolio, primarily due to the 2005 first quarter sale of the CitiCapital Transportation Finance business. In the international markets, average customer deposits in the 2005 third quarter and nine months grew 7% and 11%, respectively, from the prior-year periods, driven by growth in Asia and EMEA, which included the benefits of foreign currency translation, and was partially offset by declines in Japan. The nine-month comparison also benefited from the KorAm acquisition in Asia. International Retail Banking average loans growth primarily reflects strong growth in Asia and the impact of foreign currency translation in EMEA and Latin America. The nine-month comparison also benefited from the KorAm acquisition in Asia. Loan growth was primarily in mortgages and personal loans.

        As shown in the following table, revenues, net of interest expense, of $5.070 billion and $14.954 billion in the 2005 third quarter and nine months, respectively, increased $409 million, or 9%, and $1.398 billion, or 10%, from the 2004 periods. Revenues in North America of $3.335 billion and $9.870 billion in the 2005 third quarter and nine months, respectively, increased $197 million, or 6%, and $785 million, or 9%, from the 2004 periods. Retail Distribution revenues declined $31 million, or 4%, and increased $61 million, or 3%, respectively, from the prior-year periods. The decline compared to the prior-year quarter was primarily driven by lower treasury earnings, partially offset by higher spreads and volumes. The increase in the nine-month period was additionally impacted by the resolution of the Glendale litigation in the 2005 first quarter of $110 million ($72 million after-tax). Commercial Business revenues increased $29 million, or 5%, and $105 million, or 6%, respectively, from the prior-year periods. The increase compared to the prior-year quarter was mainly due to the legal settlement related to the purchase of Copelco of $162 million pretax, the impacts of increased volumes in the non-liquidating portfolio, and the FAB acquisition, and was partially offset by lower revenues from the absence of the sold transportation finance businesses, lower treasury earnings, and spread compression. The nine-month comparison was additionally impacted by the gain on the sale of the CitiCapital Transportation Finance business in the 2005 first quarter of $161 million ($111 million after-tax) and the reclass of operating leases from loans to other assets and the related operating lease depreciation expense from revenue to expense. The reclassification of operating leases, which began in the 2004 second quarter, increased both revenues and expenses by $123 million in the 2005 nine-month period. Prime Home Finance revenues grew $56 million, or 14%, and $297 million, or 25%, respectively, from the prior-year periods. The increases were driven by higher net servicing revenues in the mortgage business, the impact of higher volumes in the home equity business, and the absence of prior-year servicing hedge ineffectiveness resulting from the volatile rate environment, partially offset by the effect of spread compression on net interest margin and securitization revenues, and a $10 million pretax impairment of the Mortgage Service Right (MSR) asset related to Hurricane Katrina. The nine-month comparison also includes the benefit of the PRMI acquisition. Student loan revenues increased $22 million, or 15%, and $32 million, or 7%, from the prior-year periods, respectively, primarily due to higher securitization gains and higher origination volumes, partially offset by lower net interest margin due to spread compression. Primerica revenues grew $18 million, or 3%, and $49 million, or 3%, from the prior-year periods, respectively, primarily due to increased life insurance premium revenues from higher volumes and higher realized investment gains. Mexico revenues increased $103 million, or 16%, and $241

27


million, or 13%, from the prior-year periods, respectively, primarily due to the impact of higher deposit and loan volumes, the benefit of foreign currency translation, and a revenue benefit from the refund of value added taxes of $29 million pretax ($19 million after-tax), partially offset by lower treasury earnings. The nine-month comparison was also impacted by 2005 second quarter items including a $78 million pretax ($50 million after-tax) favorable impact relating to a restructuring of Mexican government notes, and a $30 million reserve release related to an investment in Avantel, partially offset by an adjustment related to a mortgage portfolio, that resulted in a reclass of reserves, decreasing both revenues and the provision for benefits, claims and credit losses by $80 million. International Retail Banking revenues increased $212 million, or 14%, and $613 million, or 14%, in the 2005 third quarter and nine months, respectively, primarily reflecting improvements in EMEA, Asia, and Latin America, and included the impact of strengthening currencies, and for the nine-month comparison, the KorAm acquisition. Excluding the impact of foreign currency translation and KorAm, growth in EMEA, Asia, and Latin America was driven by higher deposit, branch lending and investment revenues.

 
  Three Months Ended September 30,
   
  Nine Months Ended
September 30,

   
 
In billions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
Revenues, net of interest expense                                  
Retail Distribution   $ 755   $ 786   (4 )% $ 2,375   $ 2,314   3 %
Commercial Business     649     620   5     1,818     1,713   6  
Prime Home Finance     470     414   14     1,465     1,168   25  
Student Loans     173     151   15     481     449   7  
Primerica Financial Services     550     532   3     1,641     1,592   3  
Mexico     738     635   16     2,090     1,849   13  
   
 
 
 
 
 
 
North America   $ 3,335   $ 3,138   6 % $ 9,870   $ 9,085   9 %
   
 
 
 
 
 
 
EMEA     784     687   14 %   2,336     2,094   12 %
Japan     119     113   5     356     357    
Asia     648     574   13     1,881     1,581   19  
Latin America     184     149   23     511     439   16  
   
 
 
 
 
 
 
International     1,735     1,523   14 %   5,084     4,471   14 %
   
 
 
 
 
 
 
Total revenues, net of interest expense   $ 5,070   $ 4,661   9 % $ 14,954   $ 13,556   10 %
   
 
 
 
 
 
 

        Operating expenses in the 2005 third quarter and nine months increased $77 million, or 3%, and $692 million, or 9%, respectively, from the comparable 2004 periods. In North America, operating expenses decreased by $70 million, or 4%, and increased by $140 million, or 3%, from the 2004 third quarter and nine months, respectively. The 2005 third quarter expense decrease from the prior year was driven by lower expenses in Mexico related to the value added tax refund of $93 million pretax ($60 million after-tax) partially offset by the impact of foreign currency translation, and lower expenses in the Commercial Business due to the expense component of the Copelco settlement of $23 million pretax, and lower expenses from the absence of the sold transportation finance businesses, partially offset by volume-driven cost increases in Prime Home Finance, Student Loans, and Primerica. The expense increase in the nine-month period additionally reflects the impacts of the operating lease reclassification in the Commercial Business of $123 million, the PRMI acquisition, and the 2005 first quarter repositioning expenses of $10 million pretax ($6 million after-tax). International Retail Banking operating expenses increased $147 million, or 18%, and $552 million, or 24%, respectively, from the comparable 2004 periods. The 2005 third quarter increase from the prior year reflects the impacts of increased investment spending primarily related to branch expansion in EMEA, Asia, and Latin America, and foreign currency translation. Comparisons to the nine-month period also include the KorAm acquisition, a write-off of deferred acquisition costs in Latin America Retirement Services of $17 million in the 2005 second quarter, and the 2005 first quarter repositioning expenses in EMEA of $58 million pretax ($36 million after-tax) and Latin America of $12 million pretax ($8 million after-tax).

        The provisions for benefits, claims and credit losses were $913 million and $1.696 billion in the 2005 third quarter and nine months, respectively, up $700 million from the 2004 third quarter and $864 million from the nine-month period. The 2005 third quarter increase was primarily driven by the impact of standardizing the loan write-off policy in Germany and Belgium with global policies, which increased the net provision for credit losses by $476 million pretax, a $50 million pretax charge related to the estimated impact of Hurricane Katrina on U.S. businesses, and the absence of prior-year unallocated net credit reserve releases of $165 million pretax. The nine-month comparisons also reflects the impact of a 2005 second quarter $127 million increase in the Germany credit reserve to reflect increased experience with the effects of bankruptcy law liberalization, and an increase relating to the absence of a 2004 second quarter net unallocated credit reserve release of $118 million pretax, partially offset by the 2005 second quarter Mexico reserve adjustment of $80 million, which is offset in revenues, and a 2005 second quarter recovery in Argentina of $24 million. Net credit losses (excluding the Commercial Business) were $1.313 billion and the related loss ratio was 2.86% in the 2005 third quarter, compared to $170 million and 0.39% in the 2005 second quarter and $176 million and 0.47% in the 2004 third quarter. The increase in the net credit loss ratio (excluding the Commercial Business) from the 2005 second quarter and the 2004 third quarter was mainly due to the impact of standardizing the loan write-off policy in Germany and Belgium with global policies, which increased net credit losses by $1.128 billion pretax. Commercial Business net credit losses were $7 million and the related loss ratio was 0.07% in the 2005 third quarter, compared to $51 million and 0.52% in the 2005 second quarter and $43 million and 0.43% in the 2004 third quarter. The decrease in the Commercial Business net credit loss ratio from the 2005 second quarter reflects the absence of a 2005 second quarter write-off in Mexico, which was offset by a release of a specific credit reserve. The decrease from the 2004 third quarter was mainly due to declines in North America, reflecting the continued liquidation of non-core portfolios.

28


        Loans delinquent 90 days or more (excluding the Commercial Business) were $2.650 billion, or 1.43% of loans, at September 30, 2005, compared to $3.818 billion, or 2.13%, at June 30, 2005, and $3.907 billion, or 2.53%, a year ago. The improvement is primarily related to the impact of standardizing the loan write-off policy in Germany and Belgium and a continued positive credit environment, partially offset by an increase in Student Loans.

        Cash-basis loans in the Commercial Business were $566 million, or 1.40% of loans, at September 30, 2005, compared to $495 million, or 1.29%, at June 30, 2005 and $1.000 billion, or 2.55%, a year ago. The increase in cash-basis loans from the 2005 second quarter is primarily related to increases in North America (excluding Mexico), and included an increase related to the impact of Hurricane Katrina. The decrease in cash-basis loans from the prior year was mainly due to declines in North America (excluding Mexico), where the business continued to work through the liquidation of non-core portfolios, including the sale of the CitiCapital Transportation Finance Business in the 2005 first quarter, and declines in Mexico and EMEA.

        Average assets of $318 billion and $309 billion in the 2005 third quarter and nine months, respectively, increased $39 billion, or 14%, and $47 billion, or 18%, from the comparable 2004 periods. The increases primarily reflect growth in average loans in Prime Home Finance and the impact of foreign currency translation, partially offset by reductions in the Commercial Business due to continued liquidation of non-core portfolios, including the sale of the CitiCapital Transportation Finance business. The nine-month comparisons are impacted by additions from the KorAm, PRMI and FAB acquisitions.

Other Consumer

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

In millions of dollars

  2005
  2004
  2005
  2004
Revenues, net of interest expense   $ (26 ) $ (24 ) $ (275 ) $ 517
Operating expenses     79     77     222     268
   
 
 
 
Income before tax benefits   $ (105 ) $ (101 ) $ (497 ) $ 249
Income tax benefits     (40 )   (39 )   (194 )   101
   
 
 
 
Net income (loss)   $ (65 ) $ (62 ) $ (303 ) $ 148
   
 
 
 

Other Consumer—which includes certain treasury and other unallocated staff functions, global marketing and other programs—reported losses of $65 million and $303 million in the 2005 third quarter and nine months, respectively, compared to a loss of $62 million and income of $148 million in the comparable 2004 periods. The decline of $451 million in the nine-month comparison was primarily due to the absence of a $378 million after-tax gain related to the sale of Samba in the 2004 second quarter, the 2005 first quarter loss on the sale of a Manufactured Housing Loan portfolio of $109 million after-tax, and higher global marketing and staff-related costs, partially offset by the absence of prior-year provisions for litigation reserves and lower legal expenses in 2005.

        Revenues, net of interest expense, and expenses reflect offsets to certain line-item reclassifications reported in other Global Consumer products.

29


CORPORATE AND INVESTMENT BANKING

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
Revenues, net of interest expense   $ 6,434   $ 4,780   35 % $ 17,627   $ 16,321   8 %
Operating expenses     3,856     3,055   26     10,892     17,224   (37 )
Provision for credit losses     43     (405 ) NM     (27 )   (812 ) 97  
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 2,535   $ 2,130   19 % $ 6,792   $ (91 ) NM  
Income taxes     704     634   11     1,859     (526 ) NM  
Minority interest, net of tax     34     44   (23 )   55     80   (31 )
   
 
 
 
 
 
 
Net income   $ 1,797   $ 1,452   24 % $ 4,848   $ 355   NM  
   
 
 
 
 
 
 
Average Risk Capital(1)   $ 21,383   $ 20,543   4 % $ 21,087   $ 18,546   14 %
Return on Risk Capital(1)     33 %   28 %       31 %   3 %    
Return on Invested Capital(1)     25 %   21 %       23 %   2 %    
   
 
 
 
 
 
 

(1)
See Footnote (5) to the table on page 6 and discussion of Risk Capital on page 42.
NM
Not meaningful

        CIB reported net income of $1.797 billion and $4.848 billion in the 2005 third quarter and nine months, an increase of $345 million and $4.493 billion from the 2004 third quarter and nine months, respectively. Other Corporate in the 2004 nine months reflects the $4.95 billion after-tax WorldCom and Litigation Reserve Charge, partially offset by a $378 million after-tax gain on the sale of Samba. Capital Markets and Banking increased $265 million in the 2005 third quarter and decreased $232 million in the 2005 nine months. Transaction Services increased $41 million in the 2005 third quarter and increased $77 million in the 2005 nine months.

        Capital Markets and Banking net income of $1.424 billion in the 2005 third quarter increased $265 million, or 23%, from the 2004 third quarter, while net income of $3.906 billion in the 2005 nine months decreased $232 million, or 6%, from the 2004 nine months. Fixed Income Markets revenues in the 2005 periods increased, driven by strong performance in interest rate products, foreign exchange and commodities. Equity Markets revenues increased in the 2005 periods, driven by improved performance and growth in cash trading, alternative execution and derivatives products. Investment Banking revenues increased in the 2005 periods, driven by an increase in advisory fees, which reflected strong growth in completed M&A transactions, and growth in equity underwriting. Capital Markets and Banking net income in the 2005 periods was reduced by an increased provision for credit losses in the 2005 third quarter and nine months, versus loan loss reserve releases in the 2004 periods.

        Transaction Services net income of $327 million and $860 million in the 2005 third quarter and nine months increased $41 million, or 14%, from the 2004 third quarter and $77 million, or 10%, from the 2004 nine months, respectively. The increases in net income in 2005 were primarily due to higher revenues reflecting growth in assets under custody and liability balances, and the positive impact of rising short-term interest rates, partially offset by higher expenses. Results also include a $26 million tax benefit from provisions of the Homeland Investment Act.

        The businesses of CIB are significantly affected by the levels of activity in the global capital markets which, in turn, are influenced by macroeconomic and political policies and developments, among other factors, in approximately 100 countries in which the businesses operate. Global economic and market events can have both positive and negative effects on the revenue performance of the businesses and can affect credit performance. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 68.

CIB Net Income—Regional View

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
North America (excluding Mexico)   $ 637   $ 501   27 % $ 1,992   $ (2,997 ) NM  
Mexico     177     198   (11 )   336     476   (29 )%
EMEA     358     124   NM     882     1,051   (16 )
Japan     58     91   (36 )   160     271   (41 )
Asia (excluding Japan)     382     309   24     953     938   2  
Latin America     185     229   (19 )   525     616   (15 )
   
 
 
 
 
 
 
Total Net Income   $ 1,797   $ 1,452   24 % $ 4,848   $ 355   NM  
   
 
 
 
 
 
 

NM
Not meaningful

30


        CIB net income increased in the 2005 third quarter compared to the 2004 third quarter primarily due to increases in EMEA, North America, and Asia (excluding Japan), partially offset by declines in Latin America, Japan and Mexico. CIB net income increased in the 2005 nine months primarily due to the absence of the 2004 second quarter WorldCom and Litigation Reserve Charge in North America, partially offset by decreases in EMEA, Mexico, Japan, and Latin America. North America (excluding Mexico) net income increased $136 million in the 2005 third quarter due to higher Fixed Income Markets, Equity Markets and Investment Banking revenues. EMEA net income increased $234 million in the 2005 third quarter primarily due to strong Fixed Income Markets revenues and the absences of prior-year legal reserves. EMEA net income decreased $169 million in the 2005 nine months primarily due to the $378 million after-tax gain on the sale of Samba recorded in the prior-year period. Excluding the impact of the gain on Samba, EMEA net income increased $209 million in the 2005 nine months, reflecting strong increases in Fixed Income Markets and Transaction Services. Mexico net income decreased $21 million and $140 million in the 2005 third quarter and nine months, respectively, as increased corporate customer activity was offset by loan loss reserve releases recorded in the prior-year periods as a result of improving credit quality. Mexico net income results in the 2005 third quarter also reflect the positive impact of a Value Added Tax refund in the amount of $11 million after-tax. Asia (excluding Japan) net income increased $73 million and $15 million in the 2005 third quarter and nine months, respectively, primarily due to increased Equities Markets revenues from derivative products and cash trading, as well as an increase in Fixed Income Markets revenues in the 2005 third quarter. Japan net income decreased $33 million and $111 million in the 2005 third quarter and nine months, respectively, due to decreases in Fixed Income and Equities Markets revenues and the absences of prior-year third quarter gain on the partial sales of Nikko Cordial shares. Latin America net income decreased $44 million and $91 million in the 2005 third quarter and nine months, respectively, primarily due to loan loss reserve releases recorded in the prior periods as a result of improving credit quality in Argentina and Brazil, as well as a decline in corporate finance deals completed.

Capital Markets and Banking

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
Revenues, net of interest expense   $ 5,187   $ 3,733   39 % $ 14,051   $ 12,759   10 %
Operating expenses     3,134     2,344   34     8,578     7,235   19  
Provision for credit losses     40     (335 ) NM     (26 )   (637 ) 96  
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 2,013   $ 1,724   17 % $ 5,499   $ 6,161   (11 )%
Income taxes     555     522   6     1,539     1,946   (21 )
Minority interest, net of tax     34     43   (21 )   54     77   (30 )
   
 
 
 
 
 
 
Net income   $ 1,424   $ 1,159   23 % $ 3,906   $ 4,138   (6 )%
   
 
 
 
 
 
 
Average Risk Capital(1)   $ 20,143   $ 19,081   6 % $ 19,727   $ 17,190   15 %
Return on Risk Capital(1)     28 %   24 %       26 %   32 %    
Return on Invested Capital(1)     21 %   19 %       20 %   25 %    
   
 
 
 
 
 
 

(1)
See Footnote (5) to the table on page 6 and discussion of Risk Capital on page 42.

Capital Markets and Banking net income of $1.424 billion in the 2005 third quarter increased $265 million, or 23%, from the 2004 third quarter, while net income of $3.906 billion in the 2005 nine months decreased $232 million, or 6%, from the 2004 nine months. Fixed Income Markets revenues in the 2005 periods increased, driven by strong performance in interest rate products, foreign exchange and commodities. Equity Markets revenues increased in the 2005 periods, driven by improved performance and growth in cash trading, alternative execution and derivatives products. Investment Banking revenues increased in the 2005 periods, driven by an increase in advisory fees, which reflected strong growth in completed M&A transactions, and growth in equity underwriting. Capital Markets and Banking net income in the 2005 periods was reduced by an increased provision for credit losses in the 2005 third quarter and nine months, versus loan loss reserve releases in the 2004 periods. Results also include a third quarter $70 million tax benefit from provisions of the Homeland Investment Act.

        Revenues, net of interest expense, of $5.187 billion and $14.051 billion in the 2005 third quarter and nine months increased $1.454 billion, or 39%, and $1.292 billion, or 10%, from the 2004 third quarter and nine months, respectively. Fixed Income Markets revenues increased in the 2005 periods, reflecting favorable performances in interest rate products increased commodity derivatives driven by strong energy markets and increased foreign exchange revenues driven by higher volatility in currency markets, and increased securitized markets resulting from strong deal activity in North America and EMEA. Equity Markets revenues increased in the 2005 periods, driven by improved performance and growth in cash trading, alternative execution and derivatives products. Investment Banking revenues increased in the 2005 periods, driven by an increase in advisory fees, which reflected strong growth in completed M&A transactions, and growth in equity underwriting.

        Operating expenses of $3.134 billion in the 2005 third quarter increased $790 million from the 2004 third quarter, primarily due to higher incentive compensation, partially offset by decreased legal expenses. Operating expenses of $8.578 billion in the 2005 nine months increased $1.343 billion from the 2004 nine months, primarily due to higher incentive compensation, higher compensation and

31


benefits expense (primarily reflecting repositioning costs of $212 million pretax in the first quarter of 2005), increased investment spending on strategic growth initiatives, and the impact of acquisitions of Knight and Lava Trading.

        The provision for credit losses was $40 million in the 2005 third quarter and $(26) million in the 2005 nine months, up $375 million and $611 million, respectively, from the 2004 periods. Credit costs were up, reflecting an increase to loan loss reserves in the 2005 periods, and the absence of loan loss reserve releases recorded in the prior periods. The provision for credit losses in the 2005 third quarter and nine-month period includes pretax charges of $143 million and $239 million, respectively, to increase loan loss reserves. These charges are due to increases in off-balance sheet exposure, a slight decline in credit quality, and downgrades in certain names and sectors.

        Cash-basis loans were $1.145 billion at September 30, 2005, compared to $1.493 billion at June 30, 2005, $1.794 billion at December 31, 2005 and $2.149 billion at September 30, 2004. Cash-basis loans net of write-offs decreased $1.004 billion from September 30, 2004, primarily due to charge-offs against reserves as well as paydowns from corporate borrowers in North America, Argentina, Brazil, and Asia. Cash-basis loans decreased $348 million from June 30, 2005, primarily due to asset sales and paydowns in North America and Latin America.

Transaction Services

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
Revenues, net of interest expense   $ 1,246   $ 1,045   19 % $ 3,574   $ 2,974   20 %
Operating expenses     809     712   14     2,392     2,064   16  
Provision for credit losses     6     (70 ) NM     (1 )   (175 ) 99  
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 431   $ 403   7 % $ 1,183   $ 1,085   9 %
Income taxes and minority interest, after-tax     104     117   (11 )   323     302   7  
   
 
 
 
 
 
 
Net income   $ 327   $ 286   14 % $ 860   $ 783   10 %
   
 
 
 
 
 
 
Average Risk Capital(1)   $ 1,240   $ 1,462   (15 )% $ 1,359   $ 1,355    
Return on Risk Capital(1)     105 %   78 %       85 %   77 %    
Return on Invested Capital(1)     56 %   47 %       47 %   47 %    
   
 
 
 
 
 
 

(1)
See Footnote (5) to the table on page 6 and discussion of Risk Capital on page 42.
NM
Not meaningful

Transaction Services reported net income of $327 million in the 2005 third quarter, up $41 million, or 14%, from the prior year, primarily due to record revenue, reflecting growth in liability balances, assets under custody and fees, a benefit from foreign currency translation, rising interest rates, and the impact of the ABN Amro acquisition, partially offset by higher expenses. Results also include a $26 million tax benefit from provisions of the Homeland Investment Act. The 2005 nine months increased $77 million, or 10%, from the 2004 nine months primarily due to increased revenue reflecting growth in liability balances, assets under custody and fees and improved spreads.

        As shown in the following table, average liability balances of $147 billion grew 21% compared to third quarter 2004, primarily due to increases in Asia and Europe, reflecting positive flow. Assets under custody reached $8.4 trillion, an increase of $1.1 trillion, or 15%, compared to the 2004 third quarter, primarily reflecting market appreciation, a benefit from foreign currency translation, and implemented deals from net new sales.

 
  September 30,
2005

  September 30,
2004

  %
Change

 
Liability balances (average in billions)   $ 147   $ 121   21 %
Assets under custody (EOP in trillions)   $ 8.4   $ 7.3   15 %
   
 
 
 

        Revenues, net of interest expense, increased $201 million, or 19%, to $1.246 billion in the 2005 third quarter, reflecting growth in all business units. Revenue in Cash Management increased $111 million, or 18%, from the prior year, mainly due to growth in liability balances, the rising interest rate environment, a benefit from foreign currency translation and increased fees. Revenue in Securities Services increased $86 million, or 31%, from the prior year, primarily reflecting higher assets under custody and fees and the impact of the acquisition of ABN Amro's client custody business. Trade revenue increased $4 million, or 3%, from the prior year, primarily due to higher trade assets and new product offerings. Revenues, net of interest expense, increased $600 million, or 20%, for the 2005 nine months primarily due to growth in liability balances, improved spreads and the impact of ABN Amro's client custody business.

        Operating expenses of $809 million and $2.392 billion in the 2005 third quarter and nine months increased $97 million, or 14%, from the 2004 third quarter and $328 million, or 16%, from the 2004 nine months, primarily due to the impact of foreign currency

32


translation and higher business volumes, as well as increased compensation and benefits costs. The increase in the 2005 nine months also includes $31 million pretax of repositioning costs in the first quarter of 2005.

        The provision for credit losses of $6 million in the third quarter of 2005 increased $76 million, primarily due to loan loss reserve releases of $48 million in the third quarter of 2004, compared to the $7 million charge to increase loan loss reserves in the third quarter of 2005. The increase in the provision of $174 million, or 99%, for the 2005 nine months is primarily attributable to loan loss reserve releases of $144 million in the 2004 nine months, compared to the $12 million charge in the 2005 nine months.

        Cash-basis loans, which in the Transaction Services business are primarily trade finance receivables, were $65 million, $103 million, $112 million and $51 million at September 30, 2005, June 30, 2005, December 31, 2004 and September 30, 2004, respectively. The increase in cash-basis loans of $14 million from Sept 30, 2004 was primarily due to increases in cash-basis loans in Mexico and Poland.

Other Corporate

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
In millions of dollars

 
  2005
  2004
  2005
  2004
 
Revenues, net of interest expense   $ 1   $ 2   $ 2   $ 588  
Operating expenses     (87 )   (1 )   (78 )   7,925  
Provision for credit losses     (3 )            
   
 
 
 
 
Income (loss) before taxes   $ 91   $ 3   $ 80   $ (7,337 )
Income taxes (benefits)     45     (4 )   (2 )   (2,771 )
   
 
 
 
 
Net income (loss)   $ 46   $ 7   $ 82   $ (4,566 )
   
 
 
 
 

Other Corporate—which includes intra-CIB segment eliminations, certain one-time non-recurring items and tax amounts not allocated to CIB products—reported net income of $46 million and $82 million for the 2005 third quarter and nine months, respectively, compared to net income of $7 million in the 2004 third quarter and net loss of $4.566 billion in the 2004 nine months. Other Corporate net income in the 2005 third quarter increased $39 million from the 2004 third quarter, primarily reflecting a $54 million after-tax insurance recovery related to Global Crossing and other litigation matters. The increase in Other Corporate net income in 2005 was a result of the $4.95 billion after-tax WorldCom and Litigation Reserve Charge in 2004, partially offset by a $378 million after-tax gain on the sale of Samba in 2004.

33


GLOBAL WEALTH MANAGEMENT

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
Revenues, net of interest expense   $ 2,174   $ 2,010   8 % $ 6,447   $ 6,402   1 %
Operating expenses     1,673     1,496   12     4,949     4,676   6  
Provision for credit losses     30     (7 ) NM     14     (4 ) NM  
   
 
 
 
 
 
 
Income before taxes   $ 471   $ 521   (10 )% $ 1,484   $ 1,730   (14 )%
Income taxes     165     187   (12 )   537     622   (14 )
   
 
 
 
 
 
 
Net income   $ 306   $ 334   (8 )% $ 947   $ 1,108   (15 )%
   
 
 
 
 
 
 

Average Risk Capital(1)

 

$

2,153

 

$

1,871

 

15

%

$

2,079

 

$

1,955

 

6

%
Return on Risk Capital(1)     56 %   71 %       61 %   76 %    
Return on Invested Capital(1)     46 %   58 %       50 %   62 %    
   
 
 
 
 
 
 

(1)
See Footnote (5) to the table on page 6 and discussion of Risk Capital on page 42.
NM
Not meaningful

        Global Wealth Management (GWM) reported net income of $306 million in the third quarter of 2005 and $947 million for the first nine months of 2005, decreases of $28 million, or 8%, and $161 million, or 15%, respectively, compared to the related 2004 periods. Smith Barney net income of $227 million in the 2005 third quarter increased $29 million, or 15%, from 2004, primarily due to higher asset-based fee revenue and higher transactional revenue, partially offset by higher variable compensation and increased legal expenses. Smith Barney net income of $663 million in the 2005 nine months increased $2 million from 2004, primarily due to an increase in asset-based revenue, partially offset by lower transactional revenue and higher staff related costs. Private Bank net income of $79 million in the third quarter of 2005 and $284 million for the first nine months of 2005 decreased $57 million, or 42%, and $163 million, or 36%, respectively compared to the related 2004 periods. The decrease in income in both the quarter and nine-month comparisons was mainly driven by the wind-down of the business in Japan and additions to the loan loss reserve, as well as the impact of investment spending on front office sales and support. These items were partially offset by volume-driven growth in recurring fee-based and net interest revenues outside of Japan that was partially offset by the impact of spread compression.

Global Wealth Management Net Income—Regional View

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
North America (excluding Mexico)   $ 288   $ 272   6 % $ 876   $ 869   1 %
Mexico     12     13   (8 )   35     41   (15 )
EMEA     8     4   100     10     17   (41 )
Japan     (29 )   3   NM     (82 )   48   NM  
Asia (excluding Japan)     26     33   (21 )   92     102   (10 )
Latin America     1     9   (89 )   16     31   (48 )
   
 
 
 
 
 
 
Total Net Income   $ 306   $ 334   (8 )% $ 947   $ 1,108   (15 )%
   
 
 
 
 
 
 

NM
Not meaningful

        Global Wealth Management net income was $306 million in the 2005 third quarter and $947 million in the first nine months of 2005. In Japan, the wind-down of the Private Bank business resulted in losses of $29 million and $82 million in the 2005 third quarter and nine months, respectively, compared to income of $3 million and $48 million in the prior-year quarter and first nine months of 2004. Lower transactional revenue was the primary driver of results in Latin America, where income was down $8 million and $15 million from the prior-year quarter and nine months; and in Mexico, where net income declined $1 million and $6 million, respectively. In Asia, net income decreased $7 million and $10 million, respectively, from the 2004 third quarter and nine-month comparisons, primarily due to investment spending on front office sales and support. In EMEA, volume-driven growth in recurring fee-based and net interest revenues, as well as higher transactional revenue, led to the $4 million net income increase in the 2005 third quarter, while investment spending on front office sales and support was the primary driver of $7 million net income decrease in the nine month comparison. Income in North America (excluding Mexico) of $288 million in the 2005 third quarter was up $16 million, or 6%, from the 2004 quarter, reflecting increased Smith Barney net income of $29 million driven by increased revenue, partially offset by decreased Private Bank net income of $13 million, primarily due to investment spending on front office sales and support, as well as increased credit costs. North America (excluding Mexico) net income of $876 million in the nine-month period increased $7 million, or 1%, from the 2004 nine-month period, reflecting increased Private Bank net income of $5 million, reflecting volume-driven growth in recurring fee-based and net interest revenues, partially offset by investment spending on front office sales and support, while Smith Barney net income increased $2 million.

34


Smith Barney

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
Revenues, net of interest expense   $ 1,728   $ 1,528   13 % $ 5,044   $ 4,842   4 %
Operating expenses     1,366     1,204   13     3,969     3,759   6  
Provision for credit losses     7           11        
   
 
 
 
 
 
 
Income before taxes   $ 355   $ 324   10 % $ 1,064   $ 1,083   (2 )%
Income taxes     128     126   2     401     422   (5 )
   
 
 
 
 
 
 
Net income   $ 227   $ 198   15 % $ 663   $ 661    
   
 
 
 
 
 
 

Average Risk Capital(1)

 

$

958

 

$

1,110

 

(14

)%

$

920

 

$

1,229

 

(25

)%
Return on Risk Capital(1)     94 %   71 %       96 %   72 %    
Return on Invested Capital(1)     67 %   52 %       68 %   54 %    
   
 
 
 
 
 
 

(1)
See Footnote (5) to the table on page 6 and discussion of Risk Capital on page 42.

        Smith Barney net income of $227 million in the 2005 third quarter increased $29 million, or 15%, from 2004, primarily due to higher asset-based fee revenue and higher transactional revenue, partially offset by increased variable compensation and legal costs. Net income of $663 million in the 2005 nine months increased $2 million from 2004, primarily due to an increase in asset-based revenue, partially offset by lower transactional revenue and higher staff related costs.

        Revenues, net of interest expense, of $1.728 billion in the 2005 third quarter increased $200 million, or 13%, from the prior-year period, primarily due to increases in asset-based fee revenue, reflecting higher assets under fee-based management and increases in transactional revenue reflecting higher customer trading volumes. Revenues, net of interest expense, of $5.044 billion in the 2005 nine-month period, increased $202 million, or 4%, from 2004, reflecting increases in asset-based fee revenue. Fee-based revenue increased $294 million, or 11%, resulting from growth in assets under fee-based management. Transactional revenue decreased $92 million, or 4%, primarily due to lower customer trading volumes.

        Total assets under fee-based management were $258 billion as of September 30, 2005, up $37 billion, or 17%, from the prior-year period. Total client assets, including assets under fee-based management, of $1,015 billion in the 2005 third quarter increased $95 billion, or 10%, compared to the prior-year quarter, principally due to market appreciation. Net inflows were $5 billion in the 2005 third quarter compared to $3 billion in the prior-year quarter. Smith Barney had 12,111 financial consultants as of September 30, 2005, compared with 12,096 as of September 30, 2004. Annualized revenue per financial consultant of $565,000 increased 13% from the prior-year quarter.

        Operating expenses of $1.366 billion in the 2005 third quarter and $3.969 billion in the 2005 nine months increased $162 million, or 13%, and $210 million, or 6%, respectively, from the comparable 2004 periods. The increases were mainly due to higher production-related compensation, reflecting increased revenue, higher legal costs and the 2005 nine months also included repositioning charges of $28 million pretax in the first quarter of 2005. In the 2005 third quarter Smith Barney's credit provision increased $7 million to build loan loss reserves, reflecting the impact of growth in tailored loans.

In billions of dollars

  September 30,
2005

  September 30,
2004

  %
Change

 
Consulting Group and Internally Managed Accounts   $ 168   $ 145   16 %
Financial Consultant Managed Accounts     90     76   18  
   
 
 
 
Total Assets under Fee-Based Management   $ 258   $ 221   17 %
   
 
 
 
Total Client Assets   $ 1,015   $ 920   10 %
   
 
 
 
Annualized Revenue per Financial Consultant (in thousands of dollars)   $ 565   $ 501   13 %
   
 
 
 

35


Private Bank

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
Revenues, net of interest expense   $ 446   $ 482   (7 )% $ 1,403   $ 1,560   (10 )%
Operating expenses     307     292   5     980     917   7  
Provision for credit losses (recoveries)     23     (7 ) NM     3     (4 ) NM  
   
 
 
 
 
 
 
Income before taxes   $ 116   $ 197   (41 )% $ 420   $ 647   (35 )%
Income taxes     37     61   (39 )   136     200   (32 )
   
 
 
 
 
 
 
Net income   $ 79   $ 136   (42 )% $ 284   $ 447   (36 )%
   
 
 
 
 
 
 
Client business volumes under management (in billions of dollars)   $ 218   $ 212   3 % $ 218   $ 212   3 %
   
 
 
 
 
 
 

Average Risk Capital(1)

 

$

1,195

 

$

761

 

57

%

$

1,159

 

$

725

 

60

%
Return on Risk Capital(1)     26 %   71 %       33 %   82 %    
Return on Invested Capital(1)     24 %   69 %       31 %   80 %    
   
 
 
 
 
 
 

(1)
See Footnote (5) to the table on page 6 and discussion of Risk Capital on page 42.
NM
Not meaningful

        Private Bank reported net income of $79 million in the third quarter of 2005, a decrease of $57 million, or 42%, from the 2004 third quarter. Net income for the first nine months of 2005 was $284 million, a decrease of $163 million, or 36%, from the first nine months of 2004. The decrease in income in both the quarter and nine-month comparisons was mainly driven by the wind-down of the business in Japan, additions to the loan loss reserve, the impact of investment spending on front office sales and support, and spread compression. These items were partially offset by growth in recurring fee-based and net interest revenues from increased balances outside of Japan. Japan recorded losses of $29 million in the 2005 third quarter and $82 million in the 2005 nine months, a decrease in income of $32 million and $130 million, respectively, compared to the related 2004 periods.

 
  September 30,
   
 
In billions of dollars

  %
Change

 
  2005
  2004
 
Client Business Volumes:                  
  Client Assets Under Fee-Based Management   $ 52   $ 49   6 %
  Banking and Fiduciary Deposits     46     47   (2 )
  Investment Finance     40     41   (2 )
  Other, Principally Custody Accounts     80     75   7  
   
 
 
 
Total   $ 218   $ 212   3 %
   
 
 
 

        Client business volumes were $218 billion at the end of the 2005 third quarter, up $6 billion, or 3%, from $212 billion at the end of the 2004 third quarter. Growth in client business volumes was driven by an increase in Custody assets of $5 billion, or 7%, with growth in the U.S., Mexico, and Latin America partially offset by a decline in Japan. Client assets under fee-based management grew $3 billion, or 6%, mainly reflecting positive net flows in the United States. Banking and fiduciary deposits decreased $1 billion, or 2%, as a $4 billion decline in Japan was partially offset by growth in Europe and Asia. Investment finance volumes, which include loans, letters of credit, and commitments, decreased $1 billion, or 2%, as growth in structured and real estate lending in the United States was offset by a $4 billion decline in Japan.

        Revenues, net of interest expense, were $446 million in the third quarter of 2005 and $1.403 billion in the 2005 nine months, down $36 million, or 7%, from the prior-year quarter and down $157 million, or 10%, from the first nine months of 2004. Revenue in Japan was down $46 million in the 2005 third quarter and $180 million in the 2005 nine months, and included losses of $22 million and $56 million, respectively, resulting from foreign exchange and interest rate hedges on the client settlement reserve that was established in the fourth quarter of 2004. In North America, revenue was flat compared to the 2004 quarter and grew $32 million, or 5%, compared to the 2004 nine-month period, mainly driven by growth in banking and lending volumes and fee-based assets that was partially offset by lower client transactional activity in Mexico. Revenue growth in North America was also negatively impacted by net interest margin compression resulting from rising interest rates and lower treasury earnings. Revenue in EMEA was up $11 million, or 16%, and up $1 million, compared to the 2004 third quarter and nine months, respectively. In Asia, revenue was up $5 million, or 5%, in the quarterly comparison and up $2 million, or 1%, in the nine-month comparison. Revenue growth in the quarter in EMEA and Asia, collectively, was driven by increased transactional revenue as well as growth in banking volumes, and in the nine-month growth comparison was partially offset by strong transactional revenue in the first quarter of 2004. Revenue in Latin America was down $6 million, or 11%, and $12 million, or 7%, compared to the 2004 third quarter and nine months, respectively. Revenue declines in Latin America reflect declines in client transactional activity and margin lending, and were partially offset by increased banking-related revenue.

        Operating expenses were $307 million in the third quarter of 2005 and $980 million in the first nine months of 2005, up $15 million, or 5%, and $63 million, or 7%, respectively. The 2005 third quarter expenses included a $45 million reserve release of the Japan

36


client settlement reserve that was established in the fourth quarter of 2004, and was partially offset by costs associated with exiting the business. The Company believes that the remaining reserve is adequate to cover any future settlements with ex-Private Bank Japan Customers. Increased expenses in other regions reflect higher employee-related costs, including investments in front office sales and support. The nine-month period of 2005 includes a $7 million charge associated with limited staff reductions, mainly in middle and back-office functions.

        Net recoveries in the provision for loan losses were $1 million and $11 million in the third quarter and nine months of 2005, respectively, compared to net recoveries of $8 million in the third quarter of 2004 and $4 million in the first nine months of 2004. The provision for loan losses includes a $24 million increase to the reserve in the third quarter reflecting increases in Japan, changes in the application of environmental factors and a SFAS 114 specific loan loss reserve increase. The provision for loan losses for the first nine months of 2005 was $14 million, as third quarter activity was partially offset by reductions in SFAS 114 specific loan loss reserves earlier in the year. Loans 90 days or more past due were $58 million in the 2005 third quarter, down from $113 million in the 2005 second quarter and $150 million in the 2004 third quarter, which was driven by both favorable credit trends and the wind-down of the operations in Japan.

37


ALTERNATIVE INVESTMENTS

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
Revenues, net of interest expense   $ 720   $ 297   NM   $ 2,698   $ 1,033   NM  
Operating expenses     167     112   49 %   431     322   34 %
Provision for credit losses     (2 )         (2 )      
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 555   $ 185   NM   $ 2,269   $ 711   NM  
Income taxes     181     58   NM     782     230   NM  
Minority interest, net of tax     35     10   NM     401     53   NM  
   
 
 
 
 
 
 
Net income   $ 339   $ 117   NM   $ 1,086   $ 428   NM  
   
 
 
 
 
 
 

Average Risk Capital(1)

 

$

4.3

 

$

3.6

 

19

%

$

4.2

 

$

3.6

 

17

%
Return on Risk Capital(1)     31 %   13 %       35 %   16 %    
Return on Invested Capital(1)     29 %   11 %       32 %   14 %    
   
 
 
 
 
 
 

(1)
See Footnote (5) to the table on page 6 and discussion of Risk Capital on page 42.
NM
Not meaningful

        Alternative Investments reported revenues, net of interest expense, of $720 million in the 2005 third quarter, an increase of $423 million over the 2004 third quarter. For the 2005 nine months Alternative Investments reported revenues, net of interest expense, of $2.698 billion, which increased $1.665 billion from the 2004 nine-month period. Revenues, net of interest expense, consisted of the following:

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
In millions of dollars

  %
Change

  %
Change

 
  2005
  2004
  2005
  2004
 
Proprietary Investment Activities:                                  
Net realized gains (losses)(1)   $ 1,573   $ 63   NM   $ 2,025   $ 514   NM  
Net unrealized gains (losses):                                  
  Publicly traded investments     105     22   NM     168     (106 ) NM  
  Private equity and other investments(2)     (1,236 )   63   NM     (102 )   164   NM  
   
 
 
 
 
 
 
Net change in unrealized gains (losses)   $ (1,131 ) $ 85   NM   $ 66   $ 58   NM  
   
 
 
 
 
 
 
Net realized and unrealized gains   $ 442   $ 148   NM   $ 2,091   $ 572   NM  
Fees, dividends and interest     194     50   NM     361     180   NM  
Other(3)     3     31   (90 )%   20     95   (79 )%
   
 
 
 
 
 
 
Proprietary Investment Activities revenues   $ 639   $ 229   NM   $ 2,472   $ 847   NM  
Client Revenues(4)     81     68   19 %   226     186   22 %
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 720   $ 297   NM   $ 2,698   $ 1,033   NM  
   
 
 
 
 
 
 

(1)
Represents net proceeds received from the sale of investments, less purchase cost.
(2)
Includes changes in unrealized gains (losses) resulting from current period sales activity (i.e., the reversal of previous unrealized gains (losses) realized in the current period), as well as valuation adjustments and "other than temporary" impairments on private equity investments.
(3)
Includes other investment income, management fees, and funding costs.
(4)
Includes fee income. Prior to 2005, revenue was reported net of profit sharing (profit sharing was reflected in the internal Citigroup distributor's revenues).
NM
Not meaningful

Proprietary Investment Activities Revenues

        The proprietary investment portfolio of Alternative Investments consists of private equity, single- and multi-manager hedge funds, real estate, and St. Paul Travelers Companies Inc. (St. Paul) and MetLife, Inc. (MetLife) common shares. Private equity, which constitutes the majority of proprietary investments, on both a direct and indirect basis, is in the form of equity and mezzanine debt financing in companies across a broad range of industries worldwide, including investments in companies located in developing economies. Such investments include Citigroup Venture Capital International Brazil, LP (CVC/Brazil, formerly CVC/Opportunity Equity Partners, LP), which has invested primarily in companies privatized by the government of Brazil in the mid-1990s.

        Investments held by investment company subsidiaries (including CVC/Brazil) are carried at fair value with the net change in unrealized gains and losses recorded in income. Certain private equity investments in companies located in developing economies not held in investment company subsidiaries are either carried at cost or accounted for by the equity method with impairments recognized in income for "other than temporary" declines in value. Investments classified as available-for-sale are carried at fair value with the net change in unrealized gains and losses recorded in equity as other comprehensive income. All other investment activities are primarily carried at fair value, with the net change in unrealized gains and losses recorded in income.

38


        The ownership of St. Paul shares was a result of the April 1, 2004 merger of Travelers Property Casualty Corp. (TPC) with The St. Paul Companies, whereby existing shares of TPC common stock were converted to 0.4334 shares of St. Paul common stock. The investment in MetLife resulted from the sale of Citigroup's Life Insurance and Annuities business to MetLife, Inc. on July 1, 2005 in which the sale proceeds included $1.0 billion in MetLife equity securities. The MetLife and St. Paul shares are classified on Citigroup's Balance Sheet as Investments (available-for-sale).

Company

  Type of
Ownership

  Shares owned on
September 30, 2005

  Sale Restriction
  Market Value as of
September 30, 2005
(in millions of
dollars)

  Pretax Unrealized
Gain as of
September 30, 2005
(in millions of dollars)

St. Paul Travelers Companies, Inc.   Common stock
representing
3.6% ownership
  24.4 million   To comply with the terms of
an IRS private letter ruling
on the spin-off of TPC,
Citigroup must sell all
shares by August 20, 2007.
  $ 1,095   $ 491

MetLife, Inc.

 

Common stock
representing
approximately 3.0%
ownership

 

22.4 million

 

May be sold in private
offerings after December 29,
2005 and may be sold
publicly after July 1, 2006

 

 

1,118

 

 

118
               
 
Total               $ 2,213   $ 609
               
 

        For the 2005 third quarter, total proprietary revenues, net of interest expense, of $639 million were comprised of revenues from private equity of $449 million, other investment activity of $99 million and hedge funds of $91 million. Total proprietary revenue, net of interest expenses, in the 2005 third quarter increased $410 million over the third quarter of 2004. The growth in proprietary revenues was driven primarily by higher revenue from private equity investments of $224 million, higher revenue from hedge funds of $106 million as a result of increased proprietary capital invested, and other investment activity, which increased $80 million, primarily driven by the sale of St. Paul shares. The private equity revenue for the third quarter of 2005 was driven by investment activity managed by the United States and International investment teams. The International results include the valuation changes related to the expected sale of a public investment in an Indian software company. The Company's investment in CVC/Brazil is subject to a variety of controversies involving some if its portfolio companies, which could affect future valuation of these companies. This is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 68.

        The investment activity for the third quarter of 2005 includes the closing of a number of private equity investment transactions that were in a sale process, primarily held in a consolidated investment subsidiary, which includes revenue due to minority interest shareholders. As a result, significant realized gains were recorded in the quarter, which were substantially recognized in earnings in prior periods through the net change in unrealized gains (losses). As such, the net change in unrealized gains (losses) in the three months ended September 30, 2005 includes a reversal of the previous valuation adjustments recorded since inception on those investments.

        For the 2005 nine months, total proprietary revenues, net of interest expense, of $2.472 billion are comprised of revenues from private equity of $2.183 billion, other investment activity of $215 million, and hedge funds of $74 million. For the 2005 nine months, total proprietary revenues, net of interest expense, of $2.472 billion increased $1.625 billion from the 2004 nine-month period. The growth in proprietary revenues were driven primarily by higher revenue from private equity investments of $1.422 billion, higher revenue from other investment activity of $134 million primarily driven by the sale of St. Paul shares, and higher hedge funds revenue of $69 million as a result of increased proprietary capital invested.

        Proprietary capital under management of $10.7 billion as of September 30, 2005, increased $3.1 billion from September 30, 2004, primarily driven by funding of investments into hedge funds, real estate and the receipt of MetLife shares resulting from the sale of the Life Insurance and Annuities business.

39


Client revenues

        CAI's client portfolio is comprised of single- and multi-manager hedge funds, real estate, managed futures, private equity, and a variety of leveraged fixed income products (credit structures). Clients include both institutions and high-net-worth individuals. Products are distributed directly to investors and through Citigroup's Private Bank and Smith Barney businesses. Prior to 2005, the pretax profits of CAI were recorded in the respective Citigroup distributor's income statement as a component of revenues.

        Total client revenues, net of interest expense, of $81 million in the 2005 third quarter increased $13 million over the third quarter of 2004. For the 2005 nine months, total client revenues, net of interest expense, of $226 million increased $40 million from the 2004 nine-month period. Higher performance fees drove the higher client revenues.

        CAI managed $24.8 billion in unlevered client capital as of September 30, 2005, an increase of $4.6 billion from September 30, 2004, driven by inflows from institutional and high-net-worth clients, as well as $1.4 billion in assets for the former Travelers Life & Annuities business, which have been reflected as client capital following the July 1, 2005 sale to MetLife.

        Operating expenses of $167 million in the third quarter of 2005 increased $55 million from the third quarter of 2004. For the 2005 nine months, operating expenses of $431 million in the third quarter 2005 increased $109 million from the 2004 nine-month period. The higher operating expenses were due primarily to higher investment spending in hedge funds and real estate, and increased performance-driven compensation.

        Minority interest, net of tax, of $35 million in the third quarter 2005 increased $25 million from the third quarter of 2004. For the 2005 nine months, minority interest, net of tax, of $401 million increased $348 million from the 2004 nine-month period. The increase in minority interest was primarily due to private equity gains related to underlying investments held by consolidated legal entities. The impact of minority interest is reflected in both net realized and net changes in unrealized gains and losses consistent with cash proceeds received by minority interest.

40


CORPORATE/OTHER

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
In millions of dollars

 
  2005
  2004
  2005
  2004
 
Revenues, net of interest expense   $ (151 ) $ (219 ) $ (355 ) $ 33  
Operating expenses     60     (25 )   261     46  
Provisions for benefits, claims and credit losses     (1 )   2     (2 )   2  
   
 
 
 
 
Loss before taxes and minority interest   $ (210 ) $ (196 ) $ (614 ) $ (15 )
Income tax benefits     (39 )   (200 )   (113 )   (181 )
Minority interest, after-tax     6         9     (7 )
   
 
 
 
 
Income (loss) from continuing operations   $ (177 ) $ 4   $ (510 ) $ 173  
Income from discontinued operations     2,155     282     2,823     819  
   
 
 
 
 
Net income   $ 1,978   $ 286   $ 2,313   $ 992  
   
 
 
 
 

        Corporate/Other reported a net loss from continuing operations of $177 million in the 2005 third quarter and a net loss of $510 million in the 2005 nine-month period, a decrease in income of $181 million and $683 million from the corresponding 2004 periods. The decrease in the three-month period was primarily due to the absence of a $147 million tax reserve release in the prior year due to the closing of a tax audit, as well as higher unallocated employee-related costs, partially offset by increased treasury results. The decrease in the nine-month period was primarily attributable to the sale of EFS, which resulted in an after-tax gain of $180 million in the 2004 first quarter; the absence of the prior-year tax reserve release; decreased treasury results; and higher unallocated employee-related costs.

        Revenues, net of interest expense, were $(151) million in the 2005 third quarter and $(355) in the first nine months of 2005, an increase of $68 million from the 2004 third quarter and a decrease of $388 million from the first nine months of 2004. The third quarter increase of $68 million was primarily due to increased intersegment eliminations and improved treasury results, partially offset by lower dividend income from an equity investment. The improvement in net treasury results was primarily the result of a benefit from lower net funding requirements, partially offset by the impact of higher short-term interest rates. The $388 million decrease in the nine-month period reflects the absence of the gain on sale of EFS and decreased treasury results, partially offset by increased intersegment eliminations. The decline in net treasury results in the nine-month period was primarily driven by higher funding costs.

        Operating expenses of $60 million and $261 million in the 2005 third quarter and nine months increased $85 million and $215 million, respectively, from the corresponding 2004 periods. The third quarter and nine-month increases were primarily due to increased intersegment eliminations and higher unallocated employee-related costs.

        Income tax benefits of $200 million and $181 million in the third quarter and nine-months ended September 30, 2004 reflect the impact of a $147 million tax reserve release due to the closing of a tax audit.

        Income from discontinued operations of $2.155 billion and $2.823 billion in the third quarter and nine-months ended September 30, 2005 reflects a $2.120 billion gain on the sale of the Life Insurance and Annuities business. Discontinued Operations includes the operations of the Life Insurance and Annuities Business and the Asset Management Business. The Life Insurance and Annuities Business sale to MetLife closed on July 1, 2005. See Note 4 to the Consolidated Financial Statements.

41


MANAGING GLOBAL RISK

        The Citigroup risk management framework recognizes the diversity of Citigroup's global business activities by balancing strong corporate oversight with well-defined independent risk management functions within each business. The Citigroup risk management framework is described in Citigroup's 2004 Annual Report on Form 10-K.

        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 reviewed regularly 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

        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 annualized 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 annualized 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.

42


        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.

        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 September 30, 2005, June 30, 2005, December 31, 2004 and September 30, 2004, risk capital for Citigroup was composed of the following risk types:

In billions of dollars

  September 30,
2005

  June 30,
2005

  December 31,
2004

  September 30,
2004

 
Credit risk   $ 35.9     36.0   $ 33.2   $ 31.6  
Market risk     13.5     15.0     16.0     15.1  
Operational risk     8.3     7.8     8.1     8.6  
Insurance risk     0.2     0.2     0.2     0.2  
Intersector diversification(1)     (4.8 )   (4.9 )   (5.3 )   (5.5 )
   
 
 
 
 
Total Citigroup   $ 53.1   $ 54.1   $ 52.2   $ 50.0  
   
 
 
 
 
Return on average risk capital (quarter)     37 %   36 %   43 %   42 %
Return on average invested capital (quarter)     25 %   18 %   20 %   21 %
Return on risk capital (year-to-date)     38 %   38 %   34 %   32 %
Return on invested capital (year-to-date)     21 %   19 %   17 %   16 %
   
 
 
 
 

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

        The decrease in total risk capital from June 30, 2005 to September 30, 2005 was primarily related to a decrease in market risk of $1.5 billion, mostly due to decreases in VAR and Interest Rate Exposure (IRE). This was partially offset by an increase in operational risk of $0.5 billion.

        Average risk capital, return on risk capital and return on invested capital are provided for each segment and product and are disclosed on pages 20 to 40 of this Management's Discussion and Analysis.

        The increase in average risk capital versus June 30, 2004 was primarily driven by increases in Global Consumer, Corporate and Investment Banking, and Alternative Investments. Average risk capital of $27.3 billion in Global Consumer increased $4.5 billion, or 20%, as a result of a $2.5 billion, or 48%, increase in Cards, a $2.0 billion, or 14%, increase in Retail Banking, and a $59 million, or 2%, increase in Consumer Finance. The $2.5 billion increase in Cards was driven by refinements in risk capital methodologies, increase in the ownership share of the Brazilian CrediCard business and portfolio growth outside North America, while the $2.0 billion increase in Retail Banking was primarily due to the PRMI and FAB acquisitions and higher credit risk. CIB average risk capital increased $840 million, or 4%, driven by an increase in Capital Markets and Banking of $1.1 billion, or 6%, which was largely due to higher credit risk, partially offset by a decline in market risk. Global Wealth Management average risk capital increased $282 million, or 15%, as a $434 million increase in Private Bank average risk capital (due to increases in operational risk capital) was partially offset by a $152 million decrease in Smith Barney average risk capital (due to lower operational risk). Alternative Investments average risk capital of $4.3 billion increased $707 million, or 19%, resulting from higher market risk related to positive revaluations of certain of the Company's investment positions as well as increases in proprietary capital under management.

43


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 costs arise in many of the Company's business activities, including lending 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. Credit losses on derivatives and trading activities are recorded in Principal transactions on the Consolidated Statement of Income. Credit losses in the Company's loan portfolio are recorded as a reduction to the Allowance for credit losses on the Consolidated Balance Sheet. The following table presents the details of credit losses from the Company's loan portfolio.

Details of Credit Loss Experience

In millions of dollars

  3rd Qtr.
2005

  2nd Qtr.
2005

  1st Qtr.
2005

  4th Qtr.
2004

  3rd Qtr.
2004

 
Allowance for loan losses at beginning of period   $ 10,418   $ 10,894   $ 11,269   $ 12,034   $ 12,715  
   
 
 
 
 
 
Provision for loan losses                                
Consumer   $ 2,584   $ 1,835   $ 1,869   $ 1,549   $ 1,431  
Corporate     (59 )   (115 )   (56 )   (163 )   (402 )
   
 
 
 
 
 
    $ 2,525   $ 1,720   $ 1,813   $ 1,386   $ 1,029  
   
 
 
 
 
 
Gross loan losses:                                

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
In U.S. offices   $ 1,380   $ 1,472   $ 1,539   $ 1,674   $ 1,542  
In offices outside the U.S.     2,000     869     840     859     848  
Corporate                                
In U.S. offices   $ 4   $ 32   $ 23   $ 7   $ 27  
In offices outside the U.S.     60     79     49     87     157  
   
 
 
 
 
 
    $ 3,444   $ 2,452   $ 2,451   $ 2,627   $ 2,574  
   
 
 
 
 
 
Loan recoveries:                                
Consumer                                
In U.S. offices   $ 242   $ 333   $ 261   $ 261   $ 283  
In offices outside the U.S.     212     211     193     190     172  
Corporate                                
In U.S. offices   $ 39   $ 7   $ 13   $ 32   $ 27  
In offices outside the U.S.     148     123     82     67     178  
   
 
 
 
 
 
    $ 641   $ 674   $ 549   $ 550   $ 660  
   
 
 
 
 
 
Net loan losses                                
In U.S. offices   $ 1,103   $ 1,164   $ 1,288   $ 1,388   $ 1,259  
In offices outside the U.S.     1,700     614     614     689     655  
   
 
 
 
 
 
    $ 2,803   $ 1,778   $ 1,902   $ 2,077   $ 1,914  
   
 
 
 
 
 
Other—net(1) (2) (3)   $ (125 ) $ (418 ) $ (286 ) $ (74 ) $ 204  
   
 
 
 
 
 
Allowance for loan losses at end of period   $ 10,015   $ 10,418   $ 10,894   $ 11,269   $ 12,034  
   
 
 
 
 
 
Allowance for unfunded lending commitments(4)     800     700     600     600     600  
   
 
 
 
 
 
Total allowance for loans, leases, and unfunded lending commitments   $ 10,815   $ 11,118   $ 11,494   $ 11,869   $ 12,634  
   
 
 
 
 
 
Net consumer loan losses   $ 2,926   $ 1,797   $ 1,925   $ 2,082   $ 1,935  
As a percentage of average consumer loans     2.68 %   1.68 %   1.83 %   1.97 %   1.93 %
   
 
 
 
 
 
Net corporate loan losses   $ (123 ) $ (19 ) $ (23 ) $ (5 ) $ (21 )
As a percentage of average corporate loans     NM     NM     NM     NM     NM  
   
 
 
 
 
 

(1)
The 2005 third quarter includes the reduction to the allowance for credit losses of $137 million related to securitizations offset by the $23 million of credit loss reserves related to the purchased distressed loans reclassified from Other Assets.
(2)
The 2005 second quarter includes reductions to the allowance for credit losses of $132 million related to securitizations and portfolio sales, $139 million of purchase accounting adjustments related to the KorAm acquisition, and a $79 million reclassification to a non-credit related reserve.
(3)
The 2005 first quarter includes reductions to the allowance for credit losses of $129 million related to credit cards securitizations and $90 million from the sale of CitiCapital's Transportation Finance business.
(4)
Represents additional credit loss reserves for unfunded corporate lending commitments and letters of credit recorded within Other Liabilities on the Consolidated Balance Sheet.

NM Not meaningful

44


Cash-Basis, Renegotiated, and Past Due Loans

In millions of dollars

  Sept. 30,
2005

  June 30,
2005

  Mar. 31,
2005

  Dec. 31,
2004

  Sept. 30,
2004

Corporate cash-basis loans(1)                              
Collateral dependent (at lower of cost or collateral value)(2)   $ 6   $ 8   $ 8   $ 7   $ 15
Other     1,204     1,588     1,724     1,899     2,185
   
 
 
 
 
Total   $ 1,210   $ 1,596   $ 1,732   $ 1,906   $ 2,200
   
 
 
 
 
Corporate cash-basis loans(1)                              
In U.S. offices   $ 74   $ 181   $ 238   $ 254   $ 334
In offices outside the U.S.     1,136     1,415     1,494     1,652     1,866
   
 
 
 
 
Total   $ 1,210   $ 1,596   $ 1,732   $ 1,906   $ 2,200
   
 
 
 
 
Renegotiated loans (includes Corporate and Commercial Business Loans)                              
In U.S. offices   $ 17   $ 18   $ 21   $ 63   $ 69
In offices outside the U.S.     12     13     15     20     26
   
 
 
 
 
Total   $ 29   $ 31   $ 36   $ 83   $ 95
   
 
 
 
 
Consumer loans on which accrual of interest had been suspended                              
In U.S. offices   $ 2,224   $ 1,908   $ 2,180   $ 2,485   $ 2,622
In offices outside the U.S.     1,597     2,791     2,890     2,978     2,830
   
 
 
 
 
Total   $ 3,821   $ 4,699   $ 5,070   $ 5,463   $ 5,452
   
 
 
 
 
Accruing loans 90 or more days delinquent(3)                              
In U.S. offices   $ 2,823   $ 2,789   $ 2,962   $ 3,153   $ 3,298
In offices outside the U.S.     457     407     390     401     358
   
 
 
 
 
Total   $ 3,280   $ 3,196   $ 3,352   $ 3,554   $ 3,656
   
 
 
 
 

(1)
Excludes purchased distressed loans that are accreting interest. The carrying value of these loans was: $1,064 million, $1,148 million, $1,295 million, $1,213 million and $1,150 million at September 30, 2005, June 30, 2005, March 31, 2005, December 31, 2004 and September 30, 2004, respectively.
(2)
A cash-basis loan is defined as collateral dependent when repayment is expected to be provided solely by the liquidation of underlying collateral and there are no other available and reliable sources of repayment, in which case the loans are written down to the lower of cost or collateral value.
(3)
Substantially all consumer loans, of which $1,690, $1,744 million, $1,829 million, $1,867 million and $1,874 million are government-guaranteed student loans and Federal Housing Authority mortgages at September 30, 2005, June 30, 2005, March 31, 2005, December 31, 2004, and September 30, 2004, respectively.

Other Real Estate Owned and Other Repossessed Assets

In millions of dollars

  Sept. 30,
2005

  June 30,
2005

  Mar. 31,
2005

  Dec. 31,
2004

  Sept. 30,
2004

Other real estate owned(1)                              
Consumer   $ 283   $ 248   $ 286   $ 320   $ 373
Corporate     153     133     127     126     95
   
 
 
 
 
Total other real estate owned   $ 436   $ 381   $ 413   $ 446   $ 468
   
 
 
 
 
Other repossessed assets(2)   $ 57   $ 49   $ 74   $ 93   $ 100
   
 
 
 
 

(1)
Represents repossessed real estate, carried at lower of cost or fair value, less costs to sell.
(2)
Primarily transportation equipment, carried at lower of cost or fair value, less costs to sell.

45


CONSUMER PORTFOLIO REVIEW

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

        Commercial Business, which is included within Retail Banking, includes loans and leases made principally to small- and middle-market businesses. Commercial Business loans are placed on a non-accrual basis when it is determined that the payment of interest or principal is doubtful of collection or when interest or principal is past due for 90 days or more, except when the loan is well secured and in the process of collection. Commercial 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 Cardsbusiness considers both on-balance sheet and securitized balances (together, their managed portfolio) when determining capital allocation and general management decisions and compensation. 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 13 to the Consolidated Financial Statements.

46


Consumer Loan Delinquency Amounts, Net Credit Losses, and Ratios

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

  Total
Loans

  90 Days or More
Past Due(1)

  Average
Loans

  Net Credit Losses(1)
 
Product View:

  Sep. 30,
2005

  Sep. 30,
2005

  Jun. 30,
2005

  Sep. 30,
2004

  3rd Qtr.
2005

  3rd Qtr.
2005

  2nd Qtr.
2005

  3rd Qtr.
2004

 
Cards   $ 157.9   $ 2,691   $ 2,634   $ 2,842   $ 157.2   $ 2,084   $ 2,113   $ 2,142  
  Ratio           1.70 %   1.67 %   1.81 %         5.26 %   5.38 %   5.50 %
North America     139.8     2,415     2,370     2,593     139.1     1,957     1,985     1,981  
  Ratio           1.73 %   1.70 %   1.84 %         5.58 %   5.71 %   5.66 %
International     18.1     276     264     249     18.1     127     128     161  
  Ratio           1.52 %   1.45 %   1.55 %         2.79 %   2.84 %   4.09 %
Consumer Finance     104.9     1,858     1,726     1,938     103.6     789     784     832  
  Ratio           1.77 %   1.70 %   1.91 %         3.02 %   3.03 %   3.31 %
North America     83.3     1,395     1,254     1,479     81.9     461     467     487  
  Ratio           1.68 %   1.57 %   1.84 %         2.23 %   2.30 %   2.46 %
International     21.6     463     472     459     21.7     328     317     345  
  Ratio           2.14 %   2.17 %   2.17 %         6.01 %   5.73 %   6.52 %
Retail Banking     185.3     2,650     3,818     3,907     182.4     1,313     170     176  
  Ratio           1.43 %   2.13 %   2.53 %         2.86 %   0.39 %   0.47 %
North America     136.4     2,333     2,377     2,473     132.2     49     45     25  
  Ratio           1.71 %   1.83 %   2.29 %         0.15 %   0.14 %   0.09 %
International(2)     48.9     317     1,441     1,434     50.2     1,264     125     151  
  Ratio           0.65 %   2.92 %   3.08 %         9.99 %   1.01 %   1.33 %
Private Bank(3)     37.7     58     113     150     38.4     (1 )   (5 )   (8 )
  Ratio           0.15 %   0.28 %   0.39 %         (0.01 )%   (0.05 )%   (0.08 )%
Other Consumer     2.5     50             1.8     1          
   
 
 
 
 
 
 
 
 
Managed loans
    (excluding Commercial Business)(4)
  $ 488.3   $ 7,307   $ 8,291   $ 8,837   $ 483.4   $ 4,186   $ 3,062   $ 3,142  
  Ratio           1.50 %   1.73 %   1.95 %         3.44 %   2.57 %   2.82 %
   
 
 
 
 
 
 
 
 
Securitized receivables (all in North America Cards)     (92.6 )   (1,299 )   (1,231 )   (1,142 )   (89.8 )   (1,267 )   (1,307 )   (1,122 )
Credit card receivables held for sale(5)                 (176 )           (9 )   (128 )
   
 
 
 
 
 
 
 
 
On-balance sheet loans
    (excluding Commercial Business)
  $ 395.7   $ 6,008   $ 7,060   $ 7,519   $ 393.6   $ 2,919   $ 1,746   $ 1,892  
  Ratio           1.52 %   1.81 %   2.06 %         2.94 %   1.80 %   2.09 %
   
 
 
 
 
 
 
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 
   
  Cash-Basis Loans(1)
   
  Net Credit Losses(1)
 
Commercial Business Groups(6)   $ 40.5   $ 566   $ 495   $ 1,000   $ 39.8   $ 7   $ 51   $ 43  
  Ratio           1.40 %   1.29 %   2.55 %         0.07 %   0.52 %   0.43 %
   
 
 
 
 
 
 
 
 
Total Consumer Loans(7)   $ 436.2                     $ 433.4   $ 2,926   $ 1,797   $ 1,935  
   
 
 
 
 
 
 
 
 
Regional View:                                                  
North America (excluding Mexico)   $ 376.6   $ 5,733   $ 5,542   $ 6,241   $ 369.1   $ 2,398   $ 2,441   $ 2,466  
  Ratio           1.52 %   1.51 %   1.81 %         2.58 %   2.71 %   2.91 %
Mexico     10.2     492     482     386     10.2     70     52     23  
  Ratio           4.83 %   4.93 %   4.85 %         2.74 %   2.16 %   1.13 %
EMEA(2)     36.2     514     1,647     1,656     37.3     1,388     235     209  
  Ratio           1.43 %   4.43 %   4.68 %         14.77 %   2.49 %   2.40 %
Japan     11.8     194     273     290     13.2     254     261     304  
  Ratio           1.64 %   1.99 %   1.81 %         7.65 %   7.24 %   7.40 %
Asia (excluding Japan)     49.9     343     318     234     50.0     85     93     139  
  Ratio           0.69 %   0.63 %   0.51 %         0.68 %   0.75 %   1.24 %
Latin America     3.6     31     29     30     3.6     (9 )   (20 )   1  
  Ratio           0.84 %   0.84 %   0.90 %         (0.93 )%   (2.33 )%   0.06 %
   
 
 
 
 
 
 
 
 
Managed loans
    (excluding Commercial Business)(4)
  $ 488.3   $ 7,307   $ 8,291   $ 8,837   $ 483.4   $ 4,186   $ 3,062   $ 3,142  
  Ratio           1.50 %   1.73 %   1.95 %         3.44 %   2.57 %   2.82 %
   
 
 
 
 
 
 
 
 

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

(2)
Includes the impact of standardizing the loan write-off policies in certain countries in EMEA.

(3)
Private Bank results are reported as part of the Global Wealth Management segment.

(4)
This table presents credit information on a managed basis (a non-GAAP measure) and shows the impact of securitizations to reconcile to a held basis, the comparable GAAP measure. Only North America Cards from a product view, and North America from a regional view, are impacted. See a discussion of managed basis reporting on page 46.

(5)
Included within Other Assets on the Consolidated Balance Sheet.

(6)
Includes CitiCapital collateral-dependent loans.

(7)
Total loans and total average loans exclude certain interest and fees on credit cards of approximately $4 billion and $4 billion, respectively, for the third quarter of 2005, which are included in Consumer Loans on the Consolidated Balance Sheet.

47


Consumer Loan Balances, Net of Unearned Income

 
  End of Period
  Average
 
In billions of dollars

  Sept. 30,
2005

  June 30,
2005

  Sept. 30,
2004

  3rd Qtr.
2005

  2nd Qtr.
2005

  3rd Qtr.
2004

 
Total managed(1) (Including Commercial Business)   $ 528.8   $ 518.7   $ 492.3   $ 523.2   $ 516.8   $ 483.3  
Securitized receivables (all in North America Cards)     (92.6 )   (89.6 )   (79.9 )   (89.8 )   (87.7 )   (76.2 )
Credit card receivables held for sale(2)             (7.5 )       (0.6 )   (7.4 )
   
 
 
 
 
 
 
On-balance sheet(3) (Including Commercial Business)   $ 436.2   $ 429.1   $ 404.9   $ 433.4   $ 428.5   $ 399.7  
   
 
 
 
 
 
 

(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 46.

(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 each of the 2005 third quarter, the 2005 second quarter, and the 2004 third quarter, 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 $7.307 billion, or 1.50%, of loans at September 30, 2005, compared to $8.291 billion, or 1.73%, at June 30, 2005 and $8.837 billion, or 1.95%, at September 30, 2004. Total cash-basis loans in the Commercial Business were $566 million, or 1.40%, of loans at September 30, 2005, compared to $495 million, or 1.29%, at June 30, 2005 and $1.0 billion, or 2.55%, at September 30, 2004. Total managed net credit losses (excluding the Commercial Business) in the 2005 third quarter were $4.186 billion, and the related loss ratio was 3.44%, compared to $3.062 billion and 2.57% in the 2005 second quarter and $3.142 billion and 2.82% in the 2004 third quarter. In the Commercial Business, total net credit losses were $7 million, and the related loss ratio was 0.07% in the 2005 third quarter, compared to $51 million and 0.52% in the 2005 second quarter and $43 million and 0.43% in the 2004 third quarter. For a discussion of trends by business, see business discussions on pages 20 to 29 and pages 34 to 37.

        Citigroup's total allowance for loans, leases and unfunded lending commitments of $10.815 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 $7.226 billion at September 30, 2005, $7.714 billion at June 30, 2005 and $8.894 billion at September 30, 2004. The decrease in the allowance for credit losses from September 30, 2004 of $1.668 billion included: (i) $288 million of reserve releases which occurred subsequent to September 30, 2004, primarily related to continued improved credit conditions in North America, (ii)  $663 million of utilizations as a result of standardizing the Consumer loan write-off policies in certain EMEA countries, (iii) $628 million of reductions related to securitizations in the Cards business, (iv) $348 million of purchase accounting adjustments related to the KorAm and Sears acquisitions, (v) $90 million reduction from the sale of the transportation portfolio, and (vi) $79 million re-class to a non-credit related reserve within other assets. Offsetting these reductions in the allowance for credit losses was the impact of reserve builds of $448 million, primarily related to the estimated credit losses incurred with Hurricane Katrina.

        On-balance sheet consumer loans of $436.2 billion increased $31.3 billion, or 8%, from September 30, 2004, primarily driven by growth in mortgage and other real-estate-secured loans in the Prime Home Finance, Consumer Finance and Private Bank businesses, the impact of strengthening currencies, and growth in student loans in North America. Credit card receivables declined, primarily due to the impact of securitization activities and higher payment rates by customers. In the North America excluding Mexico Commercial Business, loans declined reflecting the continued liquidation and sale of non-core portfolios, including a decline of approximately $4.3 billion resulting from the 2005 first quarter sale of CitiCapital's transportation portfolio, partially offset by an increase of $2.4 billion from the FAB acquisition. Loans in Japan also declined mainly reflecting continued contraction in the Consumer Finance portfolio.

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

48


CORPORATE CREDIT RISK

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

Ultimate business accountability for managing credit risks;

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

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

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

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

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

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

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

CORPORATE PORTFOLIO REVIEW

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

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

In millions of dollars

  Sept. 30, 2005
  June 30, 2005
  Dec. 31, 2004
  Sept. 30, 2004
 
Corporate Cash-Basis Loans                          
Capital Markets and Banking   $ 1,145   $ 1,493   $ 1,794   $ 2,149  
Transaction Services     65     103     112     51  
   
 
 
 
 
Total Corporate Cash-Basis Loans(1)   $ 1,210   $ 1,596   $ 1,906   $ 2,200  
   
 
 
 
 
Net Credit Losses                          
Capital Markets and Banking   $ (118 ) $ (16 ) $ (7 ) $ (6 )
Transaction Services     (3 )   1     2     (15 )
Other     (2 )   (4 )        
   
 
 
 
 
Total Net Credit Losses   $ (123 ) $ (19 ) $ (5 ) $ (21 )
   
 
 
 
 

Corporate Allowance for Credit Losses

 

$

2,789

 

$

2,704

 

$

2,890

 

$

3,140

 
Corporate Allowance for Credit Losses on Unfunded Lending Commitments(2)     800     700     600     600  
   
 
 
 
 
Total Corporate Allowance for Loans, Leases, and Unfunded Lending Commitments   $ 3,589   $ 3,404   $ 3,490   $ 3,740  
   
 
 
 
 
Corporate Allowance As a Percentage of Total Corporate Loans(3)     2.84 %   2.18 %   2.54 %   2.80 %
   
 
 
 
 

(1)
Excludes purchased distressed loans that are accreting interest. The carrying value of these loans was $1,064 million at September 30, 2005, $1,148 million at June 30, 2005, $1,213 million at December 31, 2004, and $1,150 million at September 30, 2004.

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

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

        As noted in the table above, compared with September 30, 2005, cash-basis loans decreased $990 million from September 30, 2004 due to a $1.004 billion decrease in Capital Markets and Banking. Capital Markets and Banking decreased primarily due to charge-offs against reserves as well as paydowns on corporate borrowers in North America, Argentina, Brazil and Asia.

        Cash-basis loans decreased $386 million from June 30, 2005, primarily due to decreases in Capital Markets and Banking. Capital Markets and Banking decreased primarily due to asset sales and paydowns from borrowers in North America, and Latin America.

49


        Total corporate Other Real Estate Owned (OREO) was $153 million, $133 million, $126 million and $95 million at September 30, 2005, June 30, 2005, December 31, 2004 and September 30, 2004, respectively.

        Total corporate loans outstanding at September 30, 2005, were $126 billion, as compared to $124 billion, $114 billion and $112 billion at June 30, 2005, December 31, 2004 and September 30, 2004, respectively.

        The total corporate portfolio for direct outstandings and its unfunded commitments subject to the loan loss reserve was $440 billion as of September 30, 2005, compared to $428 billion, $377 billion and $366 billion as of June 30, 2005, December 31, 2004, and September 30, 2004, respectively.

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

        Citigroup's allowance for credit losses for loans, leases and lending commitments of $10.815 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 $3.589 billion at September 30, 2005, compared to $3.404 billion at June 30, 2005, $3.490 billion and $3.740 billion at December 31, 2004 and September 30, 2004, respectively. The allowance attributed to corporate loans, leases and unfunded lending commitments as a percentage of corporate loans was 2.84% at September 30, 2005, as compared to 2.75%, 3.07% and 3.33% at June 30, 2005, December 31, 2004 and September 30, 2004, respectively. The $151 million decrease in the total allowance at September 30, 2005 from September 30, 2004 primarily reflects net reserve releases for funded exposures of $100 million due to continued improvement in the portfolio, net specific reserve releases/utilization of $136 million and purchase accounting adjustments related to the acquisition of KorAm. These decreases are partially offset by a $200 million increase in the reserve for unfunded lending commitments, due to an increase in outstanding commitments. 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.

MARKET RISK MANAGEMENT PROCESS

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

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

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

Non-Trading Portfolios

        Interest rate risk in non-trading portfolios is inherent in many client-related activities, primarily lending and deposit taking, to both corporations and individuals. Interest rate risk arises from a number of factors, including the timing of rate resetting or maturity between assets and liabilities, changes in the maturity of those assets and liabilities in response to changes in market interest rates, changes in the shape of the yield curve, changes in the spread between various market rate indices and changes in customer behavior, among other factors.

        The interest rate exposure generated by client-related activities is actively managed by treasury units throughout Citigroup. The treasury units manage interest rate risk within limits approved by independent risk management, primarily by altering the repricing characteristics of the portfolio either directly through on-balance sheet instruments or through the use of off-balance sheet instruments, including derivatives, or by modifying product pricing strategies.

50


        To ensure consistency across businesses, Citigroup's non-trading portfolios are managed using a set of standards that define, measure, limit and report market risk. While business risk management is directly responsible for employing risk management techniques for each specific portfolio, there are Citigroup-wide reporting metrics, both earnings-based and valuation-based, that are common to all business units.

        Net Interest Income (NII) is a function of the balances and interest rates on the assets and liabilities in the portfolio. In a given period, NII will reflect actions taken in prior and current periods and prevailing market conditions. Citigroup's principal measure of NII exposure is Interest Rate Exposure (IRE), which reflects a change to expected NII that results from an unanticipated change in the implied forward interest rates. IRE is calculated for non-trading portfolios for all currencies in which Citigroup does business, both on an instantaneous, parallel, movement, as well as more gradual, increases or decreases in the yield curve. In order to stress test the portfolios, IRE is calculated for multiple rate shocks for each currency. IRE is a measure of interest rate exposure as measured by the impact on NII that results from an unanticipated change in rates, i.e. changes not forecast by the implied forward rates, not a simulation of income or forecasted income. IRE assumes no additional changes in pricing or balances, although in practice, businesses may react to a change or expected change in rates by altering their portfolio mix, repricing characteristics, hedge positions and customer pricing, which could significantly impact reported NII. IRE is supplemented with additional measurements, including the estimated impact of gradual parallel changes in rates, stress testing the impact of non-linear interest rate movements, and analysis of portfolio duration, basis risk, spread risk, volatility risk, and cost-to-close.

Citigroup Interest Rate Exposure (Impact on Pretax Earnings)

        The exposures in the table below represent the approximate change in NII for the next 12 months based on current balances and pricing that would result from unanticipated rate change scenarios of an instantaneous 100bp change and a gradual 100bp (25bp per quarter) change in interest rates.

 
  September 30, 2005
  June 30, 2005
  September 30, 2004
 
In millions of dollars

  100 bps Increase
  100 bps
Decrease

  100 bps
Increase

  100 bps
Decrease

  100 bps
Increase

  100 bps
Decrease

 
U.S. dollar                                      
  100 bp instantaneous change   $ (262 ) $ 305   $ (413 ) $ 325   $ (369 ) $ 131  
  100 bp gradual change   $ (138 ) $ 115   $ (189 ) $ 150     NA     NA  
   
 
 
 
 
 
 
Mexican peso                                      
  100 bp instantaneous change   $ 74   $ (75 ) $ 74   $ (74 ) $ 41   $ (41 )
  100 bp gradual change   $ 45   $ (45 ) $ 43   $ (43 )   NA     NA  
   
 
 
 
 
 
 
Euro                                      
  100 bp instantaneous change   $ (27 ) $ 27   $ (83 ) $ 83   $ (67 ) $ 67  
  100 bp gradual change   $ (9 ) $ 9   $ (42 ) $ 42     NA     NA  
   
 
 
 
 
 
 
Japanese yen                                      
  100 bp instantaneous change   $ 29     NM   $ 46     NM   $ 47     NM  
  100 bp gradual change   $ 16     NM   $ 18     NM     NA     NM  
   
 
 
 
 
 
 
Pound sterling                                      
  100 bp instantaneous change   $ 25   $ (26 ) $ 20   $ (21 ) $ 33   $ (34 )
  100 bp gradual change   $ 19   $ (19 ) $ 20   $ (20 )   NA     NA  
   
 
 
 
 
 
 

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

NA
Not available

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

51


Trading Portfolios

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

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

        Value-at-Risk estimates the potential decline in the value of a position or a portfolio, under normal market conditions, over a one-day holding period, at a 99% confidence level. The Value-at-Risk method incorporates the factor sensitivities of the trading portfolio with the volatilities and correlations of those factors. Citigroup's Value-at-Risk is based on the volatilities of, and correlations between, approximately 250,000 market risk factors, including factors that track the specific issuer risk in debt and equity securities.

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

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

        Citigroup periodically performs extensive back-testing of many hypothetical test portfolios as one check on the accuracy of its Value-at-Risk (VAR). Back-testing is the process in which the daily Value-at-Risk of a test portfolio is compared to the ex-post daily change in the market value of its transactions. Back-testing is conducted to ascertain if in fact we are measuring potential market loss at the 99% confidence level. A daily market value loss in excess of a 99% confidence level Value-at-Risk should occur, on average, only 1% of the time. The VAR calculation for the hypothetical test portfolios, with different degrees of risk concentration, meets this statistical criteria.

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

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

        For Citigroup's major trading centers, the aggregate pretax Value-at-Risk in the trading portfolios was $93 million, $113 million, and $119 million at September 30, 2005, June 30, 2005, and September 30, 2004, respectively. Daily exposures averaged $92 million during the 2005 third quarter and ranged from $78 million to $118 million, respectively.

        The following table summarizes Value-at-Risk in the trading portfolios as of September 30, 2005, June 30, 2005, and September 30, 2004, along with the averages:

In millions of dollars

  September 30,
2005

  Third
Quarter
2005
Average

  June 30,
2005

  Second
Quarter
2005
Average

  September 30,
2004

  Third
Quarter
2004
Average

 
Interest rate   $ 69   $ 78   $ 109   $ 129   $ 118   $ 99  
Foreign exchange     13     14     16     12     15     17  
Equity     54     44     37     33     24     21  
Commodity     13     15     15     17     13     15  
Covariance adjustment     (56 )   (59 )   (64 )   (61 )   (51 )   (53 )
   
 
 
 
 
 
 
Total—All market risk factors, including general and specific risk   $ 93   $ 92   $ 113   $ 130   $ 119   $ 99  
   
 
 
 
 
 
 
Specific risk component   $ 8   $ 6   $ 7   $ 6   $ 22   $ 10  
   
 
 
 
 
 
 
Total—General market factors only   $ 85   $ 86   $ 106   $ 124   $ 97   $ 89  
   
 
 
 
 
 
 

52


        The specific risk component represents the level of issuer-specific risk embedded in the Value-at-Risk, arising from both debt and equity securities. Citigroup's specific risk model conforms with the 4x multiplier treatment approved by the Federal Reserve and is subject to extensive hypothetical back testing (performed on an annual basis), including many portfolios with position concentrations.

        The table below provides the range of Value-at-Risk in the trading portfolios that was experienced during the third and second quarters of 2005 and the third quarter of 2004:

 
  Third Quarter
2005

  Second Quarter
2005

  Third Quarter
2004

In millions of dollars

  Low
  High
  Low
  High
  Low
  High
Interest rate   $ 62   $ 112   $ 93   $ 155   $ 86   $ 126
Foreign exchange     9     20     9     19     10     24
Equity     32     60     28     41     15     28
Commodity     13     17     15     21     8     22
   
 
 
 
 
 

OPERATIONAL RISK MANAGEMENT PROCESS

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

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

Risk and Control Self-Assessment

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

Information Security and Continuity of Business

        In the fall of 2004, Citigroup created the function of Chief Information Technology Risk Officer to enhance risk management practices between information security and continuity of business. This is an important step in Citigroup's strategy to better manage and aggregate risk on an enterprise-wide basis.

        The Information Security Program complies with the Gramm-Leach-Bliley Act and other regulatory guidance. During 2004, the Citigroup Information Security Office conducted an end-to-end review of Company-wide risk management processes for mitigating, monitoring, and responding to information security risk.

        Citigroup continued to mitigate business continuity risks by reviewing and testing recovery procedures. The Corporate Office of Business Continuity with the support of the Global Senior Continuity of Business Committee monitors compliance with all internal and external regulatory standards to enhance Citigroup's resilience in the financial markets.

53


COUNTRY AND CROSS-BORDER RISK

MANAGEMENT PROCESS

Country Risk

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

Cross-Border Risk

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

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

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

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

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

54


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

September 30, 2005
  December 31, 2004
 
  Cross-Border Claims on Third Parties
   
   
   
   
   
In billions of dollars

  Trading and
Short-Term
Claims(1)

  Resale
Agree-
ments

  All
Other

  Total
  Net
Investments
in and
Funding of
Local
Franchises(2)

  Total
Cross-
Border
Out-
standings

  Commit-
ments(3)

  Total
Cross-
Border
Out-
standings

  Commit-
ments(3)

United Kingdom   $ 7.1   $ 18.8   $ 0.5   $ 26.4   $   $ 26.4   $ 99.8   $ 32.9   $ 82.2
Germany     12.6     3.4     3.6     19.6     0.8     20.4     22.8     25.0     19.7
South Korea     2.5     1.6     0.1     4.2     11.8     16.0     5.0     14.9     2.2
Netherlands     12.3     1.0     0.9     14.2         14.2     8.0     12.9     4.9
France     7.0     5.8     1.1     13.9         13.9     31.8     17.3     19.4
Canada     3.7     0.8     0.3     4.8     5.3     10.1     2.8     12.0     2.6
Italy     8.5     1.4     0.3     10.2     1.1     11.3     2.7     10.5     2.7
   
 
 
 
 
 
 
 
 

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

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

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

        Total cross-border outstandings for September 30, 2005 under FFIEC guidelines, including cross-border resale agreements based on the domicile of the issuer of the securities that are held as collateral, and long securities positions reported on a gross basis amounted to $14.5 billion for the United Kingdom, $35.7 billion for Germany, $14.8 billion for South Korea, $16.7 billion for the Netherlands, $15.5 billion for France, $11.1 billion for Canada, and $21.4 billion for Italy.

        Total cross-border outstandings for December 31, 2004 under FFIEC guidelines, including cross-border resale agreements based on the domicile of the issuer of the securities that are held as collateral, and long securities positions reported on a gross basis amounted to $13.2 billion for the United Kingdom, $39.1 billion for Germany, $15.1 billion for South Korea, $14.9 billion for the Netherlands, $16.2 billion for France, $13.0 billion for Canada, and $14.0 billion for Italy.

55


CAPITAL RESOURCES AND LIQUIDITY

CAPITAL RESOURCES

Overview

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

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

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

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

        As noted in the table below, Citigroup maintained its "well-capitalized" position during the first nine months of 2005 and the full year of 2004.

Citigroup Regulatory Capital Ratios

 
  September 30,
2005

  June 30,
2005

  December 31,
2004

 
Tier 1 Capital   9.12 % 8.71 % 8.74 %
Total Capital (Tier 1 and Tier 2)   12.37 % 11.87 % 11.85 %
Leverage(1)   5.53 % 5.19 % 5.20 %
Common stockholders' equity   7.52 % 7.23 % 7.29 %
   
 
 
 

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

56


Components of Capital Under Regulatory Guidelines

In millions of dollars

  September 30,
2005

  June 30,
2005

  December 31,
2004

 
Tier 1 Capital                    
Common stockholders' equity   $ 110,712   $ 111,912   $ 108,166  
Qualifying perpetual preferred stock     1,125     1,125     1,125  
Qualifying mandatorily redeemable securities of subsidiary trusts     6,325     6,445     6,209  
Minority interest     839     856     937  
Less: Net unrealized gains on securities available-for-sale(1)     (1,030 )   (2,750 )   (2,633 )
Accumulated net gains on cash flow hedges, net of tax     (470 )   (180 )   (173 )
Intangible assets:(2)                    
Goodwill     (32,240 )   (32,529 )   (31,992 )
Other disallowed intangible assets     (7,088 )   (7,270 )   (6,794 )
50% investment in certain subsidiaries(3)         (37 )   (68 )
Other     (486 )   (537 )   (362 )
   
 
 
 
Total Tier 1 Capital     77,687     77,035     74,415  
   
 
 
 

Tier 2 Capital

 

 

 

 

 

 

 

 

 

 
Allowance for credit losses(4)     10,782     11,085     10,785  
Qualifying debt(5)     16,319     16,503     15,383  
Unrealized marketable equity securities gains(1)     537     325     384  
Less: 50% investment in certain subsidiaries(3)         (36 )   (68 )
   
 
 
 
Total Tier 2 Capital     27,638     27,877     26,484  
   
 
 
 
Total Capital (Tier 1 and Tier 2)   $ 105,325   $ 104,912   $ 100,899  
   
 
 
 
Risk-adjusted assets(6)   $ 851,441   $ 883,939   $ 851,563  
   
 
 
 

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

(2)
The increase in intangible assets during 2005 was primarily due to the acquisition of First American Bank.

(3)
Represents unconsolidated banking and finance subsidiaries.

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

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

(6)
Includes risk-weighted credit equivalent amounts, net of applicable bilateral netting agreements, of $52.7 billion for interest rate, commodity and equity derivative contracts and foreign exchange contracts as of September 30, 2005, compared to $46.9 billion as of June 30, 2005 and $47.6 billion as of December 31, 2004. Market risk-equivalent assets included in risk-adjusted assets amounted to $42.1 billion, $44.6 billion and $39.4 billion at September 30, 2005, June 30, 2005, and December 31, 2004, respectively. Risk-adjusted assets also include the effect of other off-balance sheet exposures, such as unused loan commitments and letters of credit, and reflects deductions for certain intangible assets and any excess allowance for credit losses.

        Common stockholders' equity increased approximately $2.5 billion during the first nine months of 2005 to $110.7 billion at September 30, 2005, representing 7.5% of assets, compared to $108.2 billion and 7.3% at year-end 2004. The increase reflected net income of $17.7 billion and $3.0 billion related to the net issuance of shares pursuant to employee benefit plans and other activity, offset by treasury stock acquired of $8.4 billion, dividends declared on common and preferred stock of $6.9 billion, $2.3 billion related to the after-tax net change in equity from non-owner sources and $0.6 billion related to the net issuance of restricted and deferred stock. The increase in the common stockholders' equity ratio during the first nine months of 2005 reflected the above items and the 0.8% decrease in total assets.

        On April 14, 2005, the Board of Directors authorized up to an additional $15 billion of capital for share repurchases. As of September 30, 2005, $8.8 billion remains under authorized repurchase programs, after the repurchase of $8.4 billion in shares during the first nine months of 2005. For further details see Part II, Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds," on page 106.

        The table below summarizes the Company's repurchases activity during 2005:

In millions, except per share amounts

  Total Shares
Repurchased

  Dollar Value
of Shares
Repurchased

  Average Price Paid
per Share

  Dollar Value
of Remaining
Authorized
Repurchase
Program

First quarter 2005   19.0   $ 906   $ 47.65   $ 1,300
Second quarter 2005   41.8   $ 1,965   $ 47.06   $ 14,335
Third quarter 2005   124.2   $ 5,500   $ 44.27   $ 8,835
   
 
 
 
Total year-to-date   185.0   $ 8,371   $ 45.25   $ 8,835
   
 
 
 

57


        Total mandatorily redeemable securities of subsidiary trusts (trust preferred securities), which qualify as Tier 1 Capital, at September 30, 2005 and December 31, 2004 were $6.325 billion and $6.209 billion, respectively. On March 1, 2005, the FRB issued the final rule that allows for the continued limited inclusion of trust preferred securities in the Tier 1 Capital of Bank Holding Companies (BHCs). Under the final rule, trust preferred securities and other restricted core capital elements will be subject to stricter quantitative limits. The final rule provides a transition period, ending March 31, 2009, for application of the quantitative limits. See "Regulatory Capital and Accounting Standards Developments" below.

        Citigroup's subsidiary depository institutions in the U.S. are subject to risk-based capital guidelines issued by their respective primary federal bank regulatory agencies, which are similar to the FRB's guidelines. To be "well capitalized" under federal bank regulatory agency definitions, Citigroup's depository institutions must have a Tier 1 Capital Ratio of at least 6%, a combined Tier 1 and Tier 2 Capital Ratio of at least 10%, and a leverage ratio of at least 5%, and not be subject to a directive, order, or written agreement to meet and maintain specific capital levels. At September 30, 2005, all of Citigroup's subsidiary depository institutions were "well capitalized" under the federal regulatory agencies' definitions.

Citibank, N.A. Ratios

 
  September 30,
2005

  June 30,
2005

  December 31,
2004

 
Tier 1 Capital   8.45 % 8.48 % 8.42 %
Total Capital (Tier 1 and Tier 2)   12.65 % 12.72 % 12.51 %
Leverage(1)   6.25 % 6.32 % 6.28 %
Common stockholder's equity   7.60 % 7.57 % 7.51 %
   
 
 
 

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

Citibank, N.A. Components of Capital Under Regulatory Guidelines

In billions of dollars

  September 30,
2005

  June 30,
2005

  December 31, 2004
Tier 1 Capital   $ 43.4   $ 42.8   $ 41.7
Total Capital (Tier 1 and Tier 2)   $ 65.0   $ 64.3   $ 62.0
   
 
 

        Citibank's net income for the third quarter of 2005 and for the nine months ended September 30, 2005 amounted to $2.4 billion and $6.8 billion, respectively. During the third quarter of 2005 and the nine months ended September 30, 2005, Citibank paid dividends of $1.8 billion and $4.0 billion, respectively.

        During the first nine months of 2005 and the full year 2004, Citibank issued an additional $1.1 billion and $1.6 billion, respectively, of subordinated notes to Citigroup that qualify for inclusion in Citibank's Tier 2 capital. Total subordinated notes issued to Citigroup that were outstanding at September 30, 2005 and December 31, 2004 and included in Citibank's Tier 2 capital amounted to $15.0 billion and $13.9 billion, respectively. Following the merger of Citicorp into Citigroup on August 1, 2005, all of Citibank's subordinated debt was assigned to Citigroup. See "Funding" on page 61 for further details of the merger.

Other Subsidiary Capital Considerations

        Certain of the Company's U.S. and non-U.S. broker/dealer subsidiaries, including Citigroup Global Markets Inc., an indirect wholly owned subsidiary of Citigroup Global Markets Holdings Inc. (CGMHI), are subject to various securities and commodities regulations and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. The Company's U.S. registered broker/dealer subsidiaries are subject to the Securities and Exchange Commission's Net Capital Rule, Rule 15c3-1 (the Net Capital Rule), promulgated under the Exchange Act. The Net Capital Rule requires the maintenance of minimum net capital, as defined. The Net Capital Rule also limits the ability of broker/dealers to transfer large amounts of capital to parent companies and other affiliates. Compliance with the Net Capital Rule could limit those operations of the Company that require the intensive use of capital, such as underwriting and trading activities and the financing of customer account balances, and also could restrict CGMHI's ability to withdraw capital from its broker/dealer subsidiaries, which in turn could limit CGMHI's ability to pay dividends and make payments on its debt. CGMHI monitors its leverage and capital ratios on a daily basis. Certain of the Company's broker/dealer subsidiaries are also subject to regulation in the countries outside of the U.S. in which they do business. Such regulations may include requirements to maintain specified levels of net capital or its equivalent. The Company's U.S. and non-U.S. broker/dealer subsidiaries were in compliance with their respective capital requirements at September 30, 2005.

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Regulatory Capital Developments

        The Basel Committee on Banking Supervision (the Basel Committee), consisting of central banks and bank supervisors from 13 countries, has developed a new set of risk-based capital standards (the New Accord or Basel II), on which it has received significant input from Citigroup and other major banking organizations. The Basel Committee published the text of the New Accord on June 26, 2004, specified that parallel testing will be necessary, and designated a new implementation date of year-end 2007. Additionally, in July 2005 the Basel Committee issued a paper, which clarifies certain rules and provides further guidance, entitled "The Application of Basel II to Trading Activities and the Treatment of Double Default Effects." The U.S. banking regulators issued an advance notice of proposed rulemaking in August 2003, and subsequently issued additional guidance in October 2004, relating to the new Basel standards. On September 30, 2005, the U.S. banking regulators issued a press release announcing a one year delay, to January 1, 2009, in the U.S. implementation timetable for Basel II, to be followed by a period of transition from the current capital regime through year-end 2011 or possibly later, reserving the right to make changes in the application of Basel II for U.S. purposes, and retaining the existing Prompt Corrective Action and leverage capital requirements applicable to U.S. banking organizations. The new timetable and other proposals will be set forth in a notice of proposed rulemaking (NPR), which the U.S. banking regulators expect to issue during 2006. Citigroup, along with other major banking organizations and associations, will continue to provide significant input into these proposed rules. In addition, Citigroup has participated in certain quantitative studies of these proposed rules and has developed implementation plans. The final version of these new capital rules will apply to Citigroup, as well as to other large U.S. banks and BHCs. Citigroup continues to assess the impact, proceed with its implementation plans, and participate in efforts to refine these future capital standards.

        On March 1, 2005, the FRB issued the final rule, with an effective date of April 11, 2005, which retains trust preferred securities in Tier 1 Capital of BHCs, but with stricter quantitative limits and clearer qualitative standards. Under the rule, after a five-year transition period, the aggregate amount of trust preferred securities and certain other capital elements included in Tier 1 Capital would be limited to 25% of Tier 1 Capital elements, net of goodwill less any associated deferred tax liability. Under this rule, Citigroup currently would have less than 10% against the limit. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 Capital, subject to restrictions. Internationally active BHCs (such as Citigroup) would generally be expected to limit trust preferred securities and certain other capital elements to 15% of Tier 1 Capital elements, net of goodwill, less any deferred tax liability. Under this 15% limit, Citigroup would be able to retain the full amount of its trust preferred securities within Tier 1 Capital.

        Additionally, from time to time, the FRB and the FFIEC propose amendments to, and issue interpretations of, risk-based capital guidelines and reporting instructions. Such proposals or interpretations could, if implemented in the future, affect reported capital ratios and net risk-adjusted assets. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 68.

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LIQUIDITY

Management of Liquidity

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

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

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

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

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

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

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

        At the Holding Company level, Citigroup maintains sufficient liquidity to meet all maturing unsecured debt obligations due within a one-year time horizon without accessing the unsecured markets.

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Funding

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

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

        As of September 30, 2005, Citigroup's national and state-chartered bank subsidiaries can declare dividends to their respective parent companies, without regulatory approval, of approximately $11.9 billion. In determining whether and to what extent to pay dividends, each bank subsidiary must also consider the effect of dividend payments on applicable risk-based capital and leverage ratio requirements, as well as policy statements of the federal regulatory agencies that indicate that banking organizations should generally pay dividends out of current operating earnings. Consistent with these considerations, Citigroup estimates that, as of September 30, 2005, its bank subsidiaries can directly or through their parent holding company distribute dividends to Citigroup of approximately $10.1 billion of the available $11.9 billion.

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

        As discussed in the "Capital Resources" section beginning on page 56, the ability of CGMHI to declare dividends could be restricted by capital considerations of its broker/dealer subsidiaries.

        During 2005, it is not anticipated that any restrictions on the subsidiaries' dividending capability will restrict Citigroup's ability to meet its obligations as and when they become due. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 68.

        Primary sources of liquidity for Citigroup and its principal subsidiaries include deposits, collateralized financing transactions, senior and subordinated debt, issuance of commercial paper, proceeds from issuance of trust preferred securities, and purchased/wholesale funds. Citigroup and its principal subsidiaries also generate funds through securitizing financial assets, including credit card receivables and single-family or multi-family residences. See Note 13 to the Consolidated Financial Statements for additional information about securitization activities. Finally, Citigroup's net earnings provide a significant source of funding to the corporation.

        Citigroup's funding sources are well diversified across funding types and geography, a benefit of the strength of the global franchise. Funding for the Parent and its major operating subsidiaries includes a large geographically diverse retail and corporate deposit base of $581.1 billion. A significant portion of these deposits have been, and are expected to be, long-term and stable and are considered core.

        Citigroup and its subsidiaries have a significant presence in the global capital markets. During the 2005 second quarter, Citigroup consolidated its capital markets funding activities into two legal entities: (i) Citigroup Inc., which issues long-term debt, trust preferred securities, preferred and common stock, and (ii) Citigroup Funding Inc. (CFI) a newly formed, fully guaranteed, first-tier subsidiary of Citigroup, which issues commercial paper and medium-term notes. Publicly-underwritten debt was also formerly issued by CGMHI, Citicorp, Associates First Capital Corporation (Associates) and CitiFinancial Credit Company, which includes the underwritten debt previously issued by WMF. As part of the funding consolidation during the 2005 second quarter, Citigroup unconditionally guaranteed CGMHI's outstanding SEC-registered indebtedness. CGMHI will no longer file periodic reports with the SEC and will continue to be rated on the basis of a guarantee of its financial obligations from Citigroup. On August 1, 2005, Citigroup merged its two intermediate bank holding companies, Citigroup Holdings Company and Citicorp, into Citigroup Inc. Coinciding with this merger, Citigroup assumed all existing indebtedness and outstanding guarantees of Citicorp. As a result, Citigroup has also guaranteed various debt obligations of Associates and of CitiFinancial Credit Company, each an indirect subsidiary of Citigroup. See Note 17 to the Consolidated Financial Statements for further discussions. Other significant elements of long-term debt in the Consolidated Balance Sheet include advances from the Federal Home Loan Bank system, asset-backed outstandings related to the purchase of Sears, and debt of foreign subsidiaries.

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

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

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

        Each of Citigroup's major operating subsidiaries finances its operations on a basis consistent with its capitalization, regulatory structure and the environment in which it operates. Particular attention is paid to those businesses that for tax, sovereign risk or regulatory reasons cannot be freely and readily funded in the international markets.

CGMHI

        As noted on page 61, during the 2005 second quarter, Citigroup consolidated its capital markets funding activities into two legal entities: Citigroup Inc. and CFI. As part of the funding consolidation, during the 2005 second quarter Citigroup unconditionally guaranteed CGMHI's outstanding SEC-registered indebtedness.

        CGMHI's total assets were $500.4 billion at September 30, 2005, an increase from $440.6 billion at year-end 2004. Due to the nature of CGMHI's trading activities, it is not uncommon for CGMHI's asset levels to fluctuate significantly from period to period.

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

        CGMHI funds its operations through the use of collateralized and uncollateralized short-term borrowings, long-term borrowings, and its equity. Collateralized short-term financing, including repurchase agreements and secured loans, is CGMHI's principal funding source. Such borrowings are reported net by counterparty, when applicable, pursuant to the provisions of Financial Accounting Standards Board Interpretation No. 41, "Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements" (FIN 41). Excluding the impact of FIN 41, short-term collateralized borrowings totaled $315.7 billion at September 30, 2005. Uncollateralized short-term borrowings provide CGMHI with a source of short-term liquidity and are also utilized as an alternative to secured financing when they represent a less expensive source. Sources of short-term borrowings include commercial paper, intercompany borrowings from CFI, unsecured bank borrowings, promissory notes and corporate loans. Short-term uncollateralized borrowings totaled $44.7 billion at September 30, 2005.

        CGMHI has a five-year committed uncollateralized revolving line of credit facility with unaffiliated banks totaling $2.5 billion. This facility is guaranteed by Citigroup. CGMHI also has three-and-five-year facilities totaling $575 million with unaffiliated banks with any borrowings maturing on various dates in 2007, 2008 and 2010. CGMHI may borrow under these revolving credit facilities at various interest rate options (LIBOR, Fed Funds or base rate) and compensates the banks for these facilities through facility fees. At September 30, 2005, there were no outstanding borrowings under these facilities. CGMHI also has committed long-term financing facilities with unaffiliated banks. At September 30, 2005, CGMHI had drawn down the full $1.65 billion then available under these facilities. A bank can terminate these facilities by giving CGMHI prior notice (generally one year). CGMHI compensates the banks for these facilities through facility fees. Under all of these facilities, CGMHI is required to maintain a certain level of consolidated adjusted net worth (as defined in the agreements). At September 30, 2005, this requirement was exceeded by approximately $8.9 billion. CGMHI also has substantial borrowing arrangements consisting of facilities that CGMHI has been advised are available, but where no contractual lending obligation exists. These arrangements are reviewed on an ongoing basis to ensure flexibility in meeting CGMHI's short-term requirements.

        Unsecured term debt is a significant component of CGMHI's long-term capital. Long-term debt totaled $55.8 billion at September 30, 2005 and $59.3 billion at December 31, 2004. CGMHI utilizes interest rate swaps to convert the majority of its fixed-rate long-term debt used to fund inventory-related working capital requirements into variable rate obligations. Long-term debt issuances denominated in currencies other than the U.S. dollar that are not used to finance assets in the same currency are effectively converted to U.S. dollar obligations through the use of cross-currency swaps and forward currency contracts.

        CGMHI's borrowing relationships are with a broad range of banks, financial institutions and other firms, including affiliates, from which it draws funds. The volume of CGMHI's borrowings generally fluctuates in response to changes in the level of CGMHI's financial instruments, commodities and contractual commitments, customer balances, the amount of securities purchased under agreements to resell, and securities borrowed transactions. As CGMHI's activities increase, borrowings generally increase to fund the

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additional activities. Availability of financing to CGMHI can vary depending upon market conditions, credit ratings and the overall availability of credit to the securities industry. CGMHI seeks to expand and diversify its funding mix as well as its creditor sources. Concentration levels for these sources, particularly for short-term lenders, are closely monitored both in terms of single investor limits and daily maturities.

        CGMHI monitors liquidity by tracking asset levels, collateral and funding availability to maintain flexibility to meet its financial commitments. As a policy, CGMHI attempts to maintain sufficient capital and funding sources in order to have the capacity to finance itself on a fully collateralized basis in the event that CGMHI's access to uncollateralized financing is temporarily impaired. This is documented in CGMHI's contingency funding plan. This plan is reviewed periodically to keep the funding options current and in line with market conditions. The management of this plan includes an analysis used to determine CGMHI's ability to withstand varying levels of stress, including ratings downgrades, which could impact its liquidation horizons and required margins. CGMHI maintains liquidity reserves of cash and a loan value of unencumbered securities in excess of its outstanding short-term unsecured liabilities. This is monitored on a daily basis. CGMHI also ensures that long-term illiquid assets are funded with long-term liabilities.

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OFF-BALANCE SHEET ARRANGEMENTS

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

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

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

        Our credit card receivable and mortgage loan securitizations are organized as Qualifying SPEs (QSPEs). A QSPE is an entity whose activities are extremely limited and circumscribed by the documents that establish the entity. It is considered to be distinct from the transferor and holds only passive financial instruments and certain other instruments that are directly related to the assets transferred. In addition, QSPEs can sell their assets only in response to certain specified events and circumstances. QSPEs may not engage in activities that require decision-making. They are, therefore, not variable interest entities (VIEs) subject to FASB Interpretation No. 46, "Consolidation of Variable Interest Entities (revised December 2003)," (FIN 46-R). An entity is subject to FIN 46-R and is called a VIE if it has (1) equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) equity investors that cannot make significant decisions about the entity's operations, or that do not absorb the expected losses or receive the expected returns of the entity. The forms of involvement in these entities are called variable interests, such as contracts that expose the holder of the interest to gains, losses, or both, depending on the performance of the VIE. A variable interest holder that absorbs a majority of the entity's expected residual returns and/or expected losses is the primary beneficiary and must consolidate the VIE. SPEs may be QSPEs or VIEs or neither. When an entity is deemed a variable interest entity (VIE) under FIN 46-R, the entity in question must be consolidated by the primary beneficiary; however, we are not the primary beneficiary of most of these entities and as such do not consolidate most of them.

Securitization of Citigroup's Assets

        In certain of these off-balance sheet arrangements, including credit card receivable and mortgage loan securitizations, Citigroup is securitizing assets that were previously recorded in its Consolidated Balance Sheet. A summary of certain cash flows received from and paid to securitization trusts is included in Note 13 to the Consolidated Financial Statements.

Credit Card Receivables

        Credit card receivables are securitized through trusts, which are established to purchase the receivables. Citigroup sells receivables into the trusts on a non-recourse basis. After securitization of credit card receivables, the Company continues to maintain credit card customer account relationships and provides servicing for receivables transferred to the QSPE trusts. As a result, the Company considers both the securitized and unsecuritized credit card receivables to be part of the business it manages. The documents establishing the trusts generally require the Company to maintain an ownership interest in the trusts. The Company also arranges for third parties to provide credit enhancement to the trusts, including cash collateral accounts, subordinated securities, and letters of credit. As specified in certain of the sale agreements, the net revenue with respect to the investors' interest collected by the trusts each month is accumulated up to a predetermined maximum amount and is available over the remaining term of that transaction to make payments of interest to trust investors, fees, and transaction costs in the event that net cash flows from the receivables are not sufficient. If the net cash flows are insufficient, Citigroup's loss is limited to its seller's interest, retained securities, and an interest-

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only strip that arises from the calculation of gain or loss at the time receivables are sold to the QSPE. When the predetermined amount is reached, net revenue with respect to the investors' interest is passed directly to the Citigroup subsidiary that sold the receivables. Credit card securitizations are revolving securitizations; that is, as customers pay their credit card balances, the cash proceeds are used to purchase new receivables and replenish the receivables in the trust. CGMHI is one of several underwriters that distribute securities issued by the trusts to investors. The Company relies on securitizations to fund approximately 60% of its Citi Cards business.

        At September 30, 2005 and December 31, 2004, total assets in the credit card trusts were $102 billion and $101 billion, respectively. Of those amounts at September 30, 2005 and December 31, 2004, $89 billion and $82 billion, respectively, has been sold to investors via trust-issued securities, and of the remaining seller's interest, $9.7 billion and $15.8 billion, respectively, is recorded in Citigroup's Consolidated Balance Sheet as Consumer Loans. Additional retained securities issued by the trusts totaling $3.5 billion and $2.9 billion at September 30, 2005 and December 31, 2004, respectively, are included in Citigroup's Consolidated Balance Sheet as available-for-sale securities. Citigroup retains credit risk on its seller's interest, retained securities, and reserves for expected credit losses. Amounts receivable from the trusts were $1.5 billion and $1.4 billion, respectively, and amounts due to the trusts were $1.5 billion and $1.3 billion, respectively, at September 30, 2005 and December 31, 2004. The Company also recognized an interest-only strip of $1.6 billion and $1.1 billion at September 30, 2005 and December 31, 2004, respectively, that arose from the calculation of gain or loss at the time assets were sold to the QSPE. In the three months ended September 30, 2005 and September 30, 2004, the Company recorded net securitization gains of $278 million and $146 million, respectively, and $773 million and $147 million for the first nine months of 2005 and 2004, respectively.

Mortgages and Other Assets

        The Company provides a wide range of mortgage and other loan products to a diverse customer base. In addition to providing a source of liquidity and less expensive funding, securitizing these assets also reduces the Company's credit exposure to the borrowers. In connection with the securitization of these loans, the Company may retain servicing rights that entitle the Company to a future stream of cash flows based on the outstanding principal balances of the loans and the contractual servicing fee. Failure to service the loans in accordance with contractual servicing obligations may lead to a termination of the servicing contracts and the loss of future servicing fees. In non-recourse servicing, the principal credit risk to the servicer arises from temporary advances of funds. In recourse servicing, the servicer agrees to share credit risk with the owner of the mortgage loans, such as FNMA, FHLMC, GNMA, or with a private investor, insurer or guarantor. The Company's mortgage loan securitizations are primarily non-recourse, thereby effectively transferring the risk of future credit losses to the purchasers of the securities issued by the trust. In addition to servicing rights, the Company also retains a residual interest in its auto loan, student loan and other asset securitizations, consisting of securities and interest-only strips that arise from the calculation of gain or loss at the time assets are sold to the SPE. The Company recognized gains related to the securitization of mortgages and other assets of $71 million and $186 million during the three months ended September 30, 2005 and 2004, respectively, and $214 million and $334 million during the first nine months of 2005 and 2004, respectively.

Securitizations of Client Assets

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

        The Company administers several third-party owned, special purpose, multi-seller finance companies that purchase pools of trade receivables, credit cards, and other financial assets from third-party clients of the Company. As administrator, the Company provides accounting, funding, and operations services to these conduits. The Company has no ownership interest in the conduits. Generally, the clients continue to service the transferred assets. The conduits' asset purchases are funded by issuing commercial paper and medium-term notes. Clients absorb the first losses of the conduits by providing collateral in the form of excess assets or residual interest. The Company, along with other financial institutions, provides liquidity facilities, such as commercial paper backstop lines of credit to the conduits. The Company also provides loss enhancement in the form of letters of credit and other guarantees. All fees are charged on a market basis. During 2003, to comply with FIN 46-R, all but two of the conduits issued "first loss" subordinated notes, such that one third-party investor in each conduit would be deemed the primary beneficiary and would consolidate that conduit. At September 30, 2005 and December 31, 2004, total assets and liabilities in the unconsolidated conduits were $54 billion and $54 billion, respectively. One conduit with assets of $656 million is consolidated at December 31, 2004.

Creation of Other Investment and Financing Products

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

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

        See Note 13 to the Consolidated Financial Statements for additional information about off-balance sheet arrangements.

Credit Commitments and Lines of Credit

        The table below summarizes Citigroup's credit commitments as of September 30, 2005 and December 31, 2004.

In millions of dollars

  September 30,
2005

  December 31,
2004(1)

Financial standby letters of credit and foreign office guarantees   $ 48,486   $ 45,796
Performance standby letters of credit and foreign office guarantees     12,745     9,145
Commercial and similar letters of credit     5,746     5,811
One- to four-family residential mortgages     5,977     4,559
Revolving open-end loans secured by one- to four-family residential properties     22,570     15,705
Commercial real estate, construction and land development     2,332</