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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q


o

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

For the quarterly period ended September 30, 2006

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

        Large accelerated filer ý                Accelerated filer o                Non-accelerated filer o

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

        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, 2006: 4,913,666,826

Available on the Web at www.citigroup.com





Citigroup Inc.

TABLE OF CONTENTS

 
   
  Page No.
Part I—Financial Information

Item 1.

 

Financial Statements:

 

 

 

 

Consolidated Statement of Income (Unaudited)—Three and Nine Months
Ended September 30, 2006 and 2005

 

86

 

 

Consolidated Balance Sheet—September 30, 2006 (Unaudited) and December 31,
2005

 

87

 

 

Consolidated Statement of Changes in Stockholders' Equity (Unaudited)—Nine Months Ended September 30, 2006 and 2005

 

88

 

 

Consolidated Statement of Cash Flows (Unaudited)—Nine Months Ended
September 30, 2006 and 2005

 

89

 

 

Consolidated Balance Sheet—Citibank, N.A. and Subsidiaries
September 30, 2006 (Unaudited) and December 31, 2005

 

90

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

91

Item 2.

 

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

 

4 - 82

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

59 - 60
        115 - 117

Item 4.

 

Controls and Procedures

 

83

Part II—Other Information

Item 1.

 

Legal Proceedings

 

131

Item 1A.

 

Risk Factors

 

131

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

132

Item 6.

 

Exhibits

 

133

Signatures

 

134

Exhibit Index

 

135

2


THE COMPANY

        Citigroup Inc. (Citigroup, or the Company) is a diversified global financial services holding company whose businesses provide a broad range of financial services to consumer and corporate clients. Citigroup has some 200 million client accounts and does business in more than 100 countries. Citigroup was incorporated in 1988 under the laws of the State of Delaware.

        The Company is a bank holding company within the meaning of the U.S. Bank Holding Company Act of 1956 registered with, and subject to examination by, the Board of Governors of the Federal Reserve System (FRB). Some 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 2005 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 Web site at www.citigroup.com. Citigroup's annual report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K, and all amendments to these reports are available free of charge through the Company's Web site by clicking on the "Investor Relations" page and selecting "SEC Filings." The Securities and Exchange Commission (SEC) Web site contains reports, proxy and information statements, and other information regarding the Company at www.sec.gov.

        Citigroup is managed along the following segment and product lines:

CHART

        The following are the six regions in which Citigroup operates. The regional results are fully reflected in the product results.

CHART


(1)
Disclosure includes Canada and Puerto Rico.

3


CITIGROUP INC. AND SUBSIDIARIES

SUMMARY OF SELECTED FINANCIAL DATA

 
  Three Months Ended
September 30,

   
  Nine Months Ended
September 30,

   
 
 
  %
Change

  %
Change

 
In millions of dollars,
except per share amounts


  2006
  2005(1)
  2006(1)
  2005(1)
 
Net interest revenue   $ 9,828   $ 9,695   1 % $ 29,449   $ 29,572    
Non-interest revenue     11,594     11,803   (2 )   36,338     33,291   9 %
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 21,422   $ 21,498     $ 65,787   $ 62,863   5 %
Operating expenses     11,936     11,413   5 %   38,063     33,789   13  
Provisions for credit losses and for benefits and claims     2,117     2,840   (25 )   5,607     6,902   (19 )
   
 
 
 
 
 
 
Income from continuing operations before taxes and minority interest   $ 7,369   $ 7,245   2 % $ 22,117   $ 22,172    
Income taxes     2,020     2,164   (7 )   5,860     6,827   (14 )%
Minority interest, net of taxes     46     93   (51 )   137     511   (73 )
   
 
 
 
 
 
 
Income from continuing operations   $ 5,303   $ 4,988   6 % $ 16,120   $ 14,834   9 %
Income from discontinued operations, net of taxes(2)     202     2,155   (91 )   289     2,823   (90 )
   
 
 
 
 
 
 
Net Income   $ 5,505   $ 7,143   (23 )% $ 16,409   $ 17,657   (7 )%
   
 
 
 
 
 
 
Earnings per share                                  
Basic earnings per share:                                  
Income from continuing operations   $ 1.08   $ 0.98   10 % $ 3.28   $ 2.90   13 %
Net income     1.13     1.41   (20 )   3.34     3.45   (3 )
Diluted earnings per share:                                  
Income from continuing operations     1.06     0.97   9     3.22     2.85   13  
Net income     1.10     1.38   (20 )   3.28     3.39   (3 )
Dividends declared per common share   $ 0.49   $ 0.44   11   $ 1.47   $ 1.32   11  
   
 
 
 
 
 
 
At September 30,                                  
Total assets   $ 1,746,248   $ 1,472,793   19 %                
Total deposits     669,278     580,436   15                  
Long-term debt     260,089     213,894   22                  
Common stockholders' equity     116,865     110,712   6                  
Total stockholders' equity     117,865     111,837   5                  
   
 
 
 
 
 
 
Ratios:                                  
Return on common stockholders' equity(3)     18.9 %   25.4 %       19.3 %   21.4 %    
Return on risk capital(4)     37 %   37 %       39 %   38 %    
Return on invested capital(4)     19 %   25 %       19 %   21 %    
   
 
 
 
 
 
 
Tier 1 capital     8.64 %   9.12 %       8.64 %   9.12 %    
Total capital     11.88 %   12.37 %       11.88 %   12.37 %    
Leverage(5)     5.24 %   5.53 %       5.24 %   5.53 %    
   
 
 
 
 
 
 
Common stockholders' equity to assets     6.69 %   7.52 %                    
Total stockholders' equity to assets     6.75 %   7.59 %                    
Dividends declared ratio(6)     44.5 %   31.9 %       44.8 %   38.9 %    
Ratio of earnings to fixed charges and preferred stock dividends     1.49x     1.74x         1.54x     1.84x      
   
 
 
 
 
 
 

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

(2)
Discontinued operations for the three months and nine months ended September 30, 2006 and 2005 includes the operations described in the Company's June 24, 2005 announced agreement for the sale of substantially all of its Asset Management business to Legg Mason. The majority of the transaction closed on December 1, 2005. Discontinued operations also includes the operations (and associated gain) described in the Company's January 31, 2005 announced agreement for the sale of its Travelers Life & Annuity business, substantially all of its international insurance business, and its Argentine pension business to MetLife, Inc. This transaction closed on July 1, 2005. See further discussion regarding discontinued operations in Note 3 to the Consolidated Financial Statements on page 94.

(3)
The return on average common stockholders' equity and return on average total stockholders' equity are calculated using net income after deducting preferred stock dividends.

(4)
Risk capital is a measure of risk levels and the trade off of risk and return. It 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 income from continuing operations divided by average risk capital. Invested capital is defined as risk capital plus goodwill and intangible assets excluding mortgage servicing rights (which are a component of risk capital). Return on invested capital is calculated using income adjusted to exclude a net internal charge Citigroup levies on the goodwill and intangible assets of each business offset by each business' 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; because they are measures of risk with no basis in GAAP, there is no comparable GAAP measure to which they can be reconciled. Management uses return on risk capital to assess businesses' operational performance and to allocate Citigroup's balance sheet and risk capital capacity. Return on invested capital is used to assess returns on potential acquisitions and to compare long-term performance of businesses with differing proportions of organic and acquired growth. See page 52 for a further discussion of Risk Capital.

(5)
Tier 1 capital divided by adjusted average assets.

(6)
Dividends declared per common share as a percentage of net income per diluted share.

4


MANAGEMENT'S DISCUSSION AND ANALYSIS

MANAGEMENT SUMMARY

        Income from continuing operations of $5.303 billion in the 2006 third quarter was up 6% from the 2005 third quarter. Diluted EPS from continuing operations was up 9%, with the increment in the growth rate reflecting the benefit from our share repurchase program. Net income, which includes discontinued operations, was $5.505 billion in the quarter, down 23% from the 2005 third quarter.

        During the 2006 third quarter, we continued to execute on our key strategic initiatives, including the opening of a record 277 new Citibank and CitiFinancial branches (176 in International and 101 in the U.S.).

        Customer volume growth was strong, with average loans up 15%, average deposits up 18% and average interest-earning assets up 16% from year-ago levels. U.S. Cards accounts were up 27% and purchase sales were up 9%. Citibank Direct, our Internet bank, has raised almost $8 billion in deposits.

CHART   CHART

CHART

*    Excludes Japan Automated Loan Machines (ALMs).

5


CHART

        Revenues were approximately even with the 2005 third quarter, at $21.4 billion. Our international operations recorded revenue growth of 11% in the quarter, with International Consumer up 9%, International CIB up 12% and International Global Wealth Management up 33%. U.S. Consumer revenues grew 1%, while CIB and Alternative Investments revenues declined 6% and 54%, respectively.

        Net interest revenue increased 1% from last year as higher deposit and loan balances were offset by pressure on net interest margins. Net interest margin in the 2006 third quarter was 2.62%, down 36 basis points from the 2005 third quarter and down 11 basis points from the 2006 second quarter. The largest driver of the decline from the 2006 second quarter was trading activities (see discussion of net interest margin on page 67).

        Operating expenses increased 5% from the 2005 third quarter; this was comprised of 3 percentage points from an increase in investment spending and 2 percentage points due to SFAS 123(R) accruals. Excluding investment spending and SFAS 123(R) accruals, expenses were flat with the prior year. Expenses were down $833 million from the 2006 second quarter.

        Income was diversified by segment and region, as shown in the charts below.

CHART   CHART
*    Excludes Corporate/Other.   *    Excludes Alternative Investments and Corporate/Other.

6


        The U.S. credit environment remained stable; this, as well as significantly lower consumer bankruptcy filings, the absence of the 2005 third quarter $490 million pretax charge related to the EMEA consumer write-off policy change, and an asset mix shift, drove a $782 million decrease in credit costs compared to year-ago levels. The Global Consumer loss rate was 1.49%, a 119 basis point decline from the 2006 third quarter, reflecting the absence of the 2005 third quarter $1.153 billion write-off related to the policy change in EMEA and significantly lower bankruptcy filings. Corporate cash-basis loans declined 13% from June 30, 2006 to $692 million.

        The effective income tax rate on continuing operations declined to 27.4%, primarily reflecting a $237 million tax reserve release related to the resolution of the New York Tax Audits. The effective tax rate for the 2006 third quarter would have been 30.6% without the tax reserve release.

        Our equity capital base and trust preferred securities grew to $125.9 billion at September 30, 2006. Stockholders' equity increased by $2.4 billion during the quarter to $117.9 billion. We distributed $2.5 billion in dividends to shareholders and repurchased $2.0 billion of common stock during the quarter.

        Return on common equity was 18.9% for the quarter. Citigroup maintained its "well-capitalized" position with a Tier 1 Capital Ratio of 8.64% at September 30, 2006. On September 26, 2006, Moody's upgraded Citibank, N.A.'s Credit Rating to "Aaa" from "Aa1."

        As we move into the fourth quarter, our priorities remain clear: to execute our strategic initiatives to drive organic revenue and net income growth, to make targeted acquisitions, to maintain expense discipline and to generate superior returns for our owners.

CHART   CHART

CHART

7


EVENTS IN 2006 and 2005

        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 84.

Acquisition of Grupo Financiero Uno

        On October 27, 2006, Citigroup announced that it had reached a definitive agreement to acquire Grupo Financiero Uno (GFU), the largest credit card issuer in Central America, and its affiliates. The acquisition of GFU, with $2.1 billion in assets, will expand the presence of Citigroup's Latin America consumer franchise, enhancing its credit card business in the region and establishing a platform for regional growth in consumer finance and retail banking.

        GFU is privately held and has more than one million retail clients, representing 1.1 million credit card accounts, $1.2 billion in credit card receivables and $1.3 billion in deposits in Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and Panama as of September 30, 2006. GFU operates a distribution network of 75 branches and more than 100 mini- branches and points of sale.

        The transaction, which is subject to regulatory approvals in the United States and each of the six countries, is anticipated to close in the 2007 first quarter.

Sale of Avantel

        On October 26, 2006, the Company agreed to sell Avantel, a leading telecom service provider in Mexico, to Axtel. The transaction is expected to result in an approximately $140 million after-tax gain ($310 million pretax). The transaction is expected to close in the 2006 fourth quarter, subject to Mexican regulatory and Axtel shareholder approvals. Avantel was acquired by Citigroup as part of its acquisition of Banamex in 2001.

Purchase of 20% Equity Interest in Akbank

        On October 17, 2006, the Company announced that it had signed a definitive agreement for the purchase of a 20% equity interest in Akbank for approximately $3.1 billion. Akbank, the second-largest privately-owned bank by assets in Turkey, is a premier, full-service retail, commercial, corporate and private bank.

        Sabanci Holding, a 34% owner of Akbank shares, and its subsidiaries have granted Citigroup a right of first refusal or first offer over the sale of any of their Akbank shares in the future. Subject to certain exceptions, Citigroup has agreed not to acquire additional shares in Akbank.

        The transaction, which is subject to shareholder and regulatory approvals, is expected to close during the 2006 fourth quarter or 2007 first quarter and will be accounted for under the equity method.

Final Payment from the Sale of the Asset Management Business

        In September 2006, the Company received the final closing adjustment payment related to the sale of its Asset Management business to Legg Mason, Inc. (Legg Mason). This payment resulted in an additional after-tax gain of $51 million ($83 million pretax), recorded in Discontinued Operations.

Final Settlement of the Travelers Life & Annuity Sale

        In July 2006, the Company received the final closing adjustment payment related to the sale of Citigroup's Travelers Life & Annuity and substantially all of its international insurance businesses to MetLife, Inc. (MetLife). This payment resulted in an after-tax gain of $75 million ($115 million pretax), recorded in Discontinued Operations.

Settlement of New York State and New York City Tax Audits

        In September 2006, Citigroup reached a settlement agreement with the New York State and New York City taxing authorities regarding various tax liabilities for the years 1998 - 2005 (referred to above and hereinafter as the "resolution of the New York Tax Audits").

        For the 2006 third quarter, the Company released $254 million from its tax contingency reserves, which resulted in increases of $237 million in after-tax income from continuing operations and $17 million in after-tax income from discontinued operations.

        The following table summarizes the 2006 third quarter tax benefit, by business, from the resolution of the New York Tax Audits:

In millions of dollars

  2006 Third Quarter
U.S. Cards   $ 39
U.S. Retail Distribution     4
U.S. Consumer Lending     10
U.S. Commercial Business     1
   

Total U.S. Consumer

 

$

54
International Cards     5
International Consumer Finance     1
International Retail Banking     18
   
Total International Consumer   $ 24
Consumer Other     1
   
Global Consumer   $ 79
Capital Markets and Banking     97
Transaction Services     19
   

Corporate & Investment Banking

 

$

116
Smith Barney     31
Private Bank     3
   

Global Wealth Management

 

$

34

Alternative Investments

 

 


Corporate/Other

 

 

8
   
Continuing Operations   $ 237
   
Discontinued Operations     17
   
Total   $ 254
   

8


MasterCard Initial Public Offering

        In June 2006, MasterCard conducted a series of transactions consisting of: (i) an IPO of new Class A stock, (ii) an exchange of its old Class A stock held by its member banks for shares of its new Class B and Class M stocks, and (iii) a partial redemption of the new Class B stock held by the member banks. Citigroup, as one of MasterCard's member banks, received 4,946,587 shares of Class B stock, 48 shares of Class M stock, and $123 million in cash as a result of these transactions. An after-tax gain of $78 million ($123 million pretax) was recognized in the 2006 second quarter related to the cash redemption of shares.

Sale of Upstate New York Branches

        On June 30, 2006, Citigroup sold the Upstate New York Financial Center Network consisting of 21 branches in Rochester, N.Y. and Buffalo, N.Y. to M&T Bank (referred to hereinafter as the "Sale of New York Branches"). Citigroup received a premium on deposit balances of approximately $1 billion. An after-tax gain of $92 million ($163 million pretax) was recognized in the 2006 second quarter.

Consolidation of Brazil's Credicard

        In April 2006, Citigroup and Banco Itau dissolved their joint venture in Credicard, a Brazil consumer credit card business. In accordance with the dissolution agreement, Banco Itau received half of Credicard's assets and customer accounts in exchange for its 50% ownership, leaving Citigroup as the sole owner of Credicard.

        Beginning April 30, 2006, Credicard's financial statements were consolidated with Citigroup. Previously, Citigroup reported its interest in Credicard using the equity method of consolidation. Accordingly, our net investment was included in Other assets.

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

        In June 2005, Citigroup announced a long-term agreement with Federated Department Stores, Inc. (Federated) under which the companies partner to manage approximately $6.2 billion of Federated's credit card receivables, including existing and new accounts, executed in three phases.

        For the first phase, which closed in October 2005, Citigroup acquired Federated's receivables under management, totaling approximately $3.3 billion. For the second phase, which closed in May 2006, additional Federated receivables totaling approximately $1.9 billion were transferred to Citigroup from the previous provider. For the final phase, in the 2006 third quarter, Citigroup acquired approximately $1.0 billion credit card receivable portfolio of The May Department Stores Company (May), which merged with Federated.

        Citigroup paid a premium of approximately 11.5% to acquire these portfolios. The multi-year agreement also provides Federated the ability to participate in the portfolio performance, based on credit sales and certain other performance metrics.

        The Federated and May credit card portfolios comprise a total of approximately 17 million active accounts.

Adoption of the Accounting for Share-Based Payments

        On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) 123 (revised 2004), "Share-Based Payment" (SFAS 123(R)), which replaces the existing SFAS 123 and supersedes Accounting Principles Board (APB) 25. SFAS 123(R) requires companies to measure and record compensation expense for stock options and other share-based payments based on the instruments' fair value, reduced by expected forfeitures.

        In adopting this standard, the Company conformed to recent accounting guidance that restricted stock awards issued to retirement-eligible employees who meet certain age and service requirements must be either expensed on the grant date or accrued over a service period prior to the grant date. This charge consisted of $398 million after-tax ($648 million pretax) for the immediate expensing of awards granted to retirement-eligible employees in January 2006.

        The following table summarizes the SFAS 123(R) impact, by segment, on the 2006 first quarter pretax compensation expense for stock awards granted to retirement-eligible employees in January 2006:

In millions of dollars

  2006 First Quarter
Global Consumer   $ 121

Corporate and Investment Banking

 

 

354

Global Wealth Management

 

 

145

Alternative Investments

 

 

7

Corporate/Other

 

 

21
   
Total   $ 648
   

        The following table summarizes the quarterly SFAS 123(R) impact on 2006 pretax compensation expense (and after-tax impact) for the quarterly accrual of the estimated awards that will be granted in January 2007:

In millions of dollars

  Pretax
  After-tax
First quarter 2006   $ 198   $ 122
Second quarter 2006     168     104
Third quarter 2006     195     127
   
 
Year-to-date 2006   $ 561   $ 353
   
 

        The Company changed the plan's retirement eligibility for the January 2007 management awards, which affected the amount of the accrual in the 2006 second and third quarters.

        Additional information can be found in Notes 1 and 8 to the Consolidated Financial Statements on pages 91 and 100, respectively. The Company will continue to accrue for the estimated awards that will be granted in January 2007 in the 2006 fourth quarter.

9


Settlement of IRS Tax Audit

        In March 2006, the Company received a notice from the Internal Revenue Service (IRS) that they had concluded the tax audit for the years 1999 through 2002 (referred to hereinafter as the "resolution of the Federal Tax Audit"). For the 2006 first quarter, the Company released a total of $657 million from its tax contingency reserves related to the resolution of the Federal Tax Audit.

        The following table summarizes the 2006 first quarter tax benefit by segment of the resolution of the Federal Tax Audit:

In millions of dollars

  2006 First Quarter
Global Consumer   $ 290

Corporate and Investment Banking

 

 

176

Global Wealth Management

 

 

13

Alternative Investments

 

 

58

Corporate/Other

 

 

61
   
Continuing Operations   $ 598

Discontinued Operations

 

 

59
   
Total   $ 657
   

Sale of Asset Management Business

        On December 1, 2005, the Company completed the sale of substantially all of its Asset Management Business to Legg Mason in exchange for Legg Mason's broker-dealer business, $2.298 billion of Legg Mason's common and preferred shares (valued as of the closing date), and $500 million in cash. This cash was obtained via a lending facility provided by Citigroup CIB. The transaction did not include Citigroup's asset management business in Mexico, its retirement services business in Latin America (both of which are now included in International Retail Banking) or its interest in the CitiStreet joint venture (which is now included in Smith Barney). The total value of the transaction at the time of closing was approximately $4.369 billion, resulting in an after-tax gain to Citigroup of approximately $2.082 billion ($3.404 billion pretax).

        Concurrently, Citigroup sold Legg Mason's Capital Markets business to Stifel Financial Corp. (The transactions described in these two paragraphs are referred to as the "Sale of the Asset Management Business.")

        Upon completion of the Sale of the Asset Management Business, Citigroup added 1,226 financial advisors in 124 branch offices from Legg Mason to its Global Wealth Management business.

        During March 2006, Citigroup sold 10.3 million shares of Legg Mason stock through an underwritten public offering. The net sale proceeds of $1.258 billion resulted in a pretax gain of $24 million.

        Additional information can be found in Note 3 to the Consolidated Financial Statements on page 94.

Sale of Travelers Life & Annuity

        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. 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 ($3.386 billion pretax), which is included in discontinued operations.

        In July 2006, Citigroup recognized an $85 million after-tax gain from the sale of MetLife shares. This gain was reported within Income from continuing operations in the Alternative Investments business.

        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 International Retail Banking). (The transaction described in the preceding three paragraphs is referred to as the "Sale of the Life Insurance and Annuities Business").

        Additional information can be found in Note 3 to the Consolidated Financial Statements on page 94.

10


Credit Reserves

        During the three months ended September 30, 2006, the Company recorded a net build of its credit reserves of $37 million, consisting of a net release/utilization of $79 million in Global Consumer and a net build of $116 million in CIB.

        The net release/utilization in Global Consumer was primarily due to lower bankruptcy filings and a continued overall improvement in the U.S. consumer portfolio. Partially offsetting the net releases was a build of $112 million in Japan relating to the consumer lending industry (see discussion on page 33).

        The net build of $116 million in CIB was primarily comprised of $109 million in Capital Markets and Banking,which included a $48 million reserve increase for unfunded lending commitments. The net build reflected growth in loans and unfunded commitments and a change in credit rating of certain counterparties.

        For the nine months ended September 30, 2006, the Company recorded a net release/utilization of $327 million, consisting of a net release/utilization of $594 million in Global Consumer and a net build of $267 million in CIB.

Credit Reserve Builds (Releases/Utilization)(1)

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
In millions of dollars

  2006
  2005
  2006
  2005
 
By Product:                          

U.S. Cards

 

$

(122

)

$

30

 

$

(354

)

$

30

 
U.S. Retail Distribution     (29 )   275     (115 )   258  
U.S. Consumer Lending     (8 )   (56 )   (114 )   (56 )
U.S. Commercial Business     (38 )   13     (84 )   (5 )

International Cards

 

 

59

 

 

24

 

 

179

 

 

37

 
International Consumer Finance     135     (10 )   136     (9 )
International Retail Banking     (93 )   (649 )   (275 )   (639 )

Smith Barney

 

 

(1

)

 

7

 

 

(1

)

 

11

 
Private Bank     17     24     34     14  
Consumer Other     1             (1 )
   
 
 
 
 
Total Consumer   $ (79 ) $ (342 ) $ (594 ) $ (360 )
   
 
 
 
 
Capital Markets and Banking     109     158     258     125  
Transaction Services     7     9     9     13  
Other CIB         (3 )       (3 )
   
 
 
 
 
Total CIB   $ 116   $ 164   $ 267   $ 135  
   
 
 
 
 
Total Citigroup   $ 37   $ (178 ) $ (327 ) $ (225 )
   
 
 
 
 
By Region:                          

U.S.

 

$

(134

)

$

407

 

$

(447

)

$

443

 
Mexico     6     26     51     (69 )
EMEA     83     (620 )   41     (493 )
Japan     115     22     91     22  
Asia     (70 )   3     (120 )   (43 )
Latin America     37     (16 )   57     (85 )
   
 
 
 
 
Total Citigroup   $ 37   $ (178 ) $ (327 ) $ (225 )
   
 
 
 
 

(1)
Releases include SFAS 114 releases and utilizations.

Allowance for Credit Losses

In millions of dollars

  Sept. 30,
2006

  Dec. 31,
2005

  Sept. 30,
2005

Allowance for loan losses   $ 8,979   $ 9,782   $ 10,015
Allowance for unfunded lending commitments     1,100     850     800
   
 
 
Total allowance for loan losses and unfunded lending commitments   $ 10,079   $ 10,632   $ 10,815
   
 
 

11


Hurricane Katrina

        In the 2005 third quarter, the Company recorded a $222 million after-tax charge $(357 million pretax) for the estimated probable losses incurred from Hurricane Katrina. This charge consisted primarily of additional credit costs in U.S. Cards, U.S. Commercial Business, U.S. Consumer Lending and U.S. Retail Distribution businesses, based on total credit exposures of approximately $3.6 billion in the Federal Emergency Management Agency (FEMA) Individual Assistance designated areas. This charge did not include an after-tax estimate of $75 million $(109 million pretax) for fees and interest due from related customers that were waived during 2005.

Change in EMEA Consumer Write-off Policy

        Prior to the third quarter of 2005, 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. During 2005, Citigroup observed lower actual recovery rates, stemming primarily from a change in bankruptcy and wage garnishment laws in Germany and, as a result, rescinded the exception to the global standard. The net charge was $332 million $(490 million pretax) 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 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.

United States Bankruptcy Legislation

        On October 17, 2005, the Bankruptcy Reform Act (or the Act) became effective. The Act imposes a means test to determine if people who file for Chapter 7 bankruptcy earn more than the median income in their state and could repay at least $6,000 of unsecured debt over five years. Bankruptcy filers who meet this test are required to enter into a repayment plan under Chapter 13, instead of canceling their debt entirely under Chapter 7. As a result of these more stringent guidelines, bankruptcy claims accelerated prior to the effective date. The incremental bankruptcy losses over the Company's estimated baseline in 2005 that was attributable to the Act in U.S. Cards business was approximately $970 million on a managed basis $(550 million in the Company's on-balance portfolio and $420 million in the securitized portfolio). In addition, the U.S. Retail Distribution business incurred incremental bankruptcy losses of approximately $90 million during 2005.

Homeland Investment Act Benefit

        The Company's 2005 third quarter results from continuing operations include a $185 million $(198 million for the 2005 full year) 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 were repatriated relating to this benefit is approximately $3.2 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 paid Citigroup $185 million.

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.

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 $(157 million pretax) in the 2005 first quarter related to the divestiture.

Repositioning Charges

        The Company recorded a $272 million after-tax $(435 million pretax) charge 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 were consistent with the Company's objectives of controlling expenses while continuing to invest in growth opportunities.

Resolution of Glendale Litigation

        During the 2005 first quarter, the Company recorded a $72 million after-tax gain $(114 million pretax) 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.

12


Acquisition of First American Bank

        On March 31, 2005, Citigroup completed its acquisition of First American Bank in Texas (FAB). The transaction established 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 at the time of the transaction's closing. The results of FAB are included in the Consolidated Financial Statements from March 2005 forward.

Divestiture of CitiCapital's Transportation Finance Business

        On January 31, 2005, the Company completed the sale of 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 resulted in an after-tax gain of $111 million $(161 million pretax).

13


SEGMENT, PRODUCT AND REGIONAL NET INCOME

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

Citigroup Net Income—Segment and Product View

 
  Three Months Ended
September 30,

  %
  Nine Months Ended
September 30,

  %
 
In millions of dollars

  2006
  2005(1)
  Change
  2006
  2005(1)
  Change
 
Global Consumer                                  
  U.S. Cards   $ 1,085   $ 797   36 % $ 2,889   $ 2,310   25 %
  U.S. Retail Distribution     481     319   51     1,564     1,361   15  
  U.S. Consumer Lending     521     487   7     1,428     1,480   (4 )
  U.S. Commercial Business     151     222   (32 )   415     608   (32 )
   
 
 
 
 
 
 
    Total U.S. Consumer(2)   $ 2,238   $ 1,825   23 % $ 6,296   $ 5,759   9 %
   
 
 
 
 
 
 
 
International Cards

 

$

287

 

$

383

 

(25

)%

$

906

 

$

1,016

 

(11

)%
  International Consumer Finance     50     152   (67 )   391     468   (16 )
  International Retail Banking     701     427   64     2,092     1,518   38  
   
 
 
 
 
 
 
    Total International Consumer   $ 1,038   $ 962   8 % $ 3,389   $ 3,002   13 %
   
 
 
 
 
 
 
 
Other

 

$

(81

)

$

(64

)

(27

)%

$

(240

)

$

(298

)

19

%
   
 
 
 
 
 
 
    Total Global Consumer   $ 3,195   $ 2,723   17 % $ 9,445   $ 8,463   12 %
   
 
 
 
 
 
 

Corporate and Investment Banking

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Capital Markets and Banking   $ 1,344   $ 1,424   (6 )% $ 4,374   $ 3,906   12 %
  Transaction Services     385     327   18     1,048     860   22  
  Other     (8 )   46   NM     (49 )   82   NM  
   
 
 
 
 
 
 
    Total Corporate and Investment Banking   $ 1,721   $ 1,797   (4 )% $ 5,373   $ 4,848   11 %
   
 
 
 
 
 
 

Global Wealth Management

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Smith Barney   $ 294   $ 227   30 % $ 700   $ 663   6 %
  Private Bank     105     79   33     333     284   17  
   
 
 
 
 
 
 
    Total Global Wealth Management   $ 399   $ 306   30 % $ 1,033   $ 947   9 %
   
 
 
 
 
 
 

Alternative Investments

 

$

117

 

$

339

 

(65

)%

$

727

 

$

1,086

 

(33

)%

Corporate/Other

 

 

(129

)

 

(177

)

27

 

 

(458

)

 

(510

)

10

 
   
 
 
 
 
 
 
Income from Continuing Operations   $ 5,303   $ 4,988   6 % $ 16,120   $ 14,834   9 %
Income from Discontinued Operations(3)     202     2,155   (91 )   289     2,823   (90 )
   
 
 
 
 
 
 
Total Net Income   $ 5,505   $ 7,143   (23 )% $ 16,409   $ 17,657   (7 )%
   
 
 
 
 
 
 

(1)
Reclassified to conform to the current period's presentation. See Note 4 to the Consolidated Financial Statements on page 97 for assets by segment.

(2)
U.S. disclosure includes Canada and Puerto Rico.

(3)
See Note 3 to the Consolidated Financial Statements on page 94.

NM    Not meaningful

14


Citigroup Net Income—Regional View

 
  Three Months Ended
September 30,

  %
  Nine Months Ended
September 30,

  %
 
In millions of dollars

  2006
  2005(1)
  Change
  2006
  2005(1)
  Change
 
U.S.(2)                                  
  Global Consumer   $ 2,157   $ 1,761   22 % $ 6,056   $ 5,461   11 %
  Corporate and Investment Banking     540     637   (15 )   1,802     1,992   (10 )
  Global Wealth Management     342     288   19     860     876   (2 )
   
 
 
 
 
 
 
    Total U.S.   $ 3,039   $ 2,686   13 % $ 8,718   $ 8,329   5 %
   
 
 
 
 
 
 

Mexico

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Global Consumer   $ 395   $ 511   (23 )% $ 1,128   $ 1,156   (2 )%
  Corporate and Investment Banking     95     177   (46 )   261     336   (22 )
  Global Wealth Management     9     12   (25 )   27     35   (23 )
   
 
 
 
 
 
 
    Total Mexico   $ 499   $ 700   (29 )% $ 1,416   $ 1,527   (7 )%
   
 
 
 
 
 
 

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Global Consumer   $ 23   $ 61   (62 )% $ 169   $ 195   (13 )%
  Corporate and Investment Banking     168     185   (9 )   508     525   (3 )
  Global Wealth Management     3     1   NM     8     16   (50 )
   
 
 
 
 
 
 
    Total Latin America   $ 194   $ 247   (21 )% $ 685   $ 736   (7 )%
   
 
 
 
 
 
 

EMEA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Global Consumer   $ 213   $ (154 ) NM   $ 613   $ 92   NM  
  Corporate and Investment Banking     489     358   37 %   1,466     882   66 %
  Global Wealth Management     7     8   (13 )   15     10   50  
   
 
 
 
 
 
 
    Total EMEA   $ 709   $ 212   NM   $ 2,094   $ 984   NM  
   
 
 
 
 
 
 

Japan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Global Consumer   $ 79   $ 169   (53 )% $ 445   $ 532   (16 )%
  Corporate and Investment Banking     38     58   (34 )   195     160   22  
  Global Wealth Management         (29 ) 100         (82 ) 100  
   
 
 
 
 
 
 
    Total Japan   $ 117   $ 198   (41 )% $ 640   $ 610   5 %
   
 
 
 
 
 
 

Asia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Global Consumer   $ 328   $ 375   (13 )% $ 1,034   $ 1,027   1 %
  Corporate and Investment Banking     391     382   2     1,141     953   20  
  Global Wealth Management     38     26   46     123     92   34  
   
 
 
 
 
 
 
    Total Asia   $ 757   $ 783   (3 )% $ 2,298   $ 2,072   11 %
   
 
 
 
 
 
 

Alternative Investments

 

$

117

 

$

339

 

(65

)%

$

727

 

$

1,086

 

(33

)%

Corporate/Other

 

 

(129

)

 

(177

)

27

 

 

(458

)

 

(510

)

10

 
   
 
 
 
 
 
 

Income from Continuing Operations

 

$

5,303

 

$

4,988

 

6

%

$

16,120

 

$

14,834

 

9

%

Income from Discontinued Operations(3)

 

 

202

 

 

2,155

 

(91

)

 

289

 

 

2,823

 

(90

)
   
 
 
 
 
 
 

Total Net Income

 

$

5,505

 

$

7,143

 

(23

)%

$

16,409

 

$

17,657

 

(7

)%
   
 
 
 
 
 
 

Total International

 

$

2,276

 

$

2,140

 

6

%

$

7,133

 

$

5,929

 

20

%
   
 
 
 
 
 
 

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

(2)
Excludes Alternative Investments and Corporate/Other, which are predominantly related to the U.S. The U.S. regional disclosure includes Canada and Puerto Rico. Global Consumer for the U.S. includes Other Consumer.

(3)
See Note 3 to the Consolidated Financial Statements on page 94.

NM
Not meaningful.

15


SELECTED REVENUE AND EXPENSE ITEMS

Selected Revenue Items

        Net interest revenue of $9.8 billion for the 2006 third quarter increased $133 million, or 1%, from the 2005 third quarter, as higher customer deposit and loan balances were offset by spread compression.

        Total commissions and fees and administration and other fiduciary fees for the third quarter of 2006 of $5.7 million decreased by $670 billion, or 11%, compared to the 2005 third quarter. This was attributable to the mark-to-market of the Consumer Lending's mortgage servicing assets, offset by increased bank card fees in U.S. Cards and International Cards and increased investment banking fees, volumes, and assets under custody in CIB.

        Principal transactions revenue of $1.9 billion decreased $23 million, or 1%, from the third quarter of 2005. Realized gains from sales of investments were up $20 million, or 7%, to $304 million in the 2006 third quarter. During the 2006 third quarter, Consumer Lending sold $11 billion of mortgage-backed securities resulting in a $133 million realized gain. This was offset by the absence of a $134 million realized gain in Alternative Investments on the sale of the St. Paul Travelers shares in the third quarter of 2005.

        Other revenue of $2.9 billion increased $388 million, or 16%, from the 2005 third quarter. The increase was primarily driven by higher net replenishment gains on previously securitized receivables in U.S. Cards and gains on derivative contracts on Consumer Lending's mortgage servicing assets, offset by the absence of the Copelco Litigation Settlement of $185 million in the 2005 third quarter and a decrease in Alternative Investments driven by lower investment performance.

Operating Expenses

        Total operating expenses were $11.9 billion for the 2006 third quarter, up $523 million, or 5%, from the comparable 2005 period. The increase was primarily due to investment spending, SFAS 123(R) accruals, and acquisitions.

        Global Consumer reported a 12% increase in total expenses from the 2005 third quarter. U.S. Consumer increased $136 million, or 4%, on increased business volumes and investments in new branches. International Consumer expenses increased $489 million, or 21%, versus the third quarter of 2005, primarily due to investment in branch expansion, the integration of Credicard, and the absence of a value added tax refund in Mexico in the prior-year period.

        CIB expenses decreased 6% from the 2005 third quarter, primarily due to a decline in incentive compensation accruals.

        Global Wealth Management expenses increased 13% compared to the prior-year quarter, primarily related to costs associated with the integration of the financial consultants from Legg Mason and SFAS 123(R) costs. Alternative Investments expenses declined 18% from the 2005 third quarter.

Provisions for Credit Losses and for Benefits and Claims

        The provision for credit losses declined $782 million, or 30%, from the 2005 third quarter to $1.8 billion. Policyholder benefits and claims in the 2006 third quarter increased $59 million, or 27%, from the 2005 third quarter.

        Global Consumer provisions for loan losses and for benefits and claims of $2.0 billion in the 2006 third quarter were down $776 million, or 28%, from the 2005 third quarter. The declines were mainly due to lower bankruptcy filings, a continued favorable credit environment that drove lower net credit loss ratios and the absence of a $490 million charge to standardize the EMEA consumer loan write-off policies with the global write-off policy in the prior-year period. Total net credit losses were $1.815 billion, and the related loss ratio was 1.49%, in the 2006 third quarter, as compared to $2.926 billion and 2.68% in the 2005 third quarter. The consumer loan delinquency ratio (90 days or more past due) declined to 1.29% at September 30, 2006 from 1.45% at September 30, 2005. See page 57 for a reconciliation of total consumer credit information.

        The CIB provision for credit losses in the 2006 third quarter was up $64 million from the 2005 third quarter. CIB's reserve for credit losses was increased by $50 million for unfunded lending commitments in the 2006 third quarter due to higher exposures.

        Corporate cash-basis loans at September 30, 2006 and 2005 were $692 million and $1.2 billion, respectively, while the corporate Other Real Estate Owned (OREO) portfolio totaled $193 million and $153 million, respectively. The decline in corporate cash-basis loans from September 30, 2005, was related to improvements in the overall credit environment.

Income Taxes

        The Company's effective income tax rate on continuing operations was 27.4% in the 2006 third quarter, compared to 29.9% in the 2005 third quarter. The 2006 third quarter included a $237 million tax benefit related to the resolution of the New York Tax Audits. The 2005 third quarter included a Homeland Investment Act tax 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.

Regulatory Capital

        Total capital (Tier 1 and Tier 2) was $117.8 billion and $106.4 billion, or 11.88% and 12.02% of net risk-adjusted assets at September 30, 2006 and December 31, 2005, respectively. Tier 1 capital was $85.7 billion, or 8.64% of net risk-adjusted assets, at September 30, 2006, compared to $77.8 billion, or 8.79%, at December 31, 2005.

16


ACCOUNTING CHANGES AND FUTURE APPLICATION OF ACCOUNTING STANDARDS

        See Note 1 to the Consolidated Financial Statements on page 91 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 2005 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 included within the Corporate/Other business segment. See Notes 3 and 4 to the Consolidated Financial Statements on pages 94 and 97, respectively.

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


17


GLOBAL CONSUMER

GRAPHIC
    *Excludes Other Consumer loss of $81 million.   *Excludes Other Consumer loss of $81 million.

        Citigroup's Global Consumer Group provides a wide array of banking, lending, insurance and investment services through a network of 7,933 branches, approximately 18,000 ATMs, approximately 800 Automated Lending Machines (ALMs), the Internet, telephone and mail, and the Primerica Financial Services salesforce. Global Consumer serves more than 250 million customer accounts, providing products and services to meet the financial needs of both individuals and small businesses.

 
  Three Months Ended September 30,
  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Net interest revenue   $ 7,523   $ 7,369   2 % $ 22,228   $ 22,212    
Non-interest revenue     5,311     4,952   7     15,189     14,234   7 %
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 12,834   $ 12,321   4 % $ 37,417   $ 36,446   3 %
Operating expenses     6,316     5,657   12     19,052     17,256   10  
Provisions for loan losses and for benefits and claims     1,994     2,770   (28 )   5,311     6,919   (23 )
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 4,524   $ 3,894   16 % $ 13,054   $ 12,271   6 %
Income taxes     1,312     1,153   14     3,559     3,762   (5 )
Minority interest, net of taxes     17     18   (6 )   50     46   9  
   
 
 
 
 
 
 
Net income   $ 3,195   $ 2,723   17 % $ 9,445   $ 8,463   12 %
   
 
 
 
 
 
 
Average assets (in billions of dollars)   $ 620   $ 534   16 % $ 586   $ 529   11 %
Return on assets     2.04 %   2.02 %       2.15 %   2.14 %    
Average risk capital(1)   $ 27,938   $ 27,343   2 % $ 27,724   $ 27,012   3 %
Return on risk capital(1)     45 %   40 %       46 %   42 %    
Return on invested capital(1)     21 %   18 %       21 %   19 %    
   
 
 
 
 
 
 

(1)
See footnote 4 to the table on page 4.

18


U.S. CONSUMER

GRAPHIC

U.S. Consumer is comprised of four businesses: Cards, Retail Distribution, Consumer Lending and Commercial Business.

 
  Three Months Ended September 30,
  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Net interest revenue   $ 4,141   $ 4,422   (6 )% $ 12,468   $ 13,209   (6 )%
Non-interest revenue     3,663     3,279   12     10,169     9,945   2  
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 7,804   $ 7,701   1 % $ 22,637   $ 23,154   (2 )%
Operating expenses     3,426     3,290   4     10,546     9,985   6  
Provisions for loan losses and for benefits and claims     962     1,573   (39 )   2,690     4,319   (38 )
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 3,416   $ 2,838   20 % $ 9,401   $ 8,850   6 %
Income taxes     1,162     996   17     3,060     3,045    
Minority interest, net of taxes     16     17   (6 )   45     46   (2 )
   
 
 
 
 
 
 
Net income   $ 2,238   $ 1,825   23 % $ 6,296   $ 5,759   9 %
   
 
 
 
 
 
 
Average assets (in billions of dollars)   $ 422   $ 359   18 % $ 398   $ 353   13 %
Return on assets     2.10 %   2.02 %       2.12 %   2.18 %    
Average risk capital(1)   $ 15,312   $ 13,767   11   $ 15,059   $ 13,869   9 %
Return on risk capital(1)     58 %   53 %       56 %   56 %    
Return on invested capital(1)     26 %   22 %       25 %   23 %    
   
 
 
 
 
 
 

(1)
See footnote 4 to the table on page 4.

19


U.S. Cards

GRAPHIC

        U.S. Cards is one of the largest providers of credit cards in North America, with more than 150 million customer accounts in the United States, Canada and Puerto Rico. In addition to MasterCard (including Diners), Visa, and American Express, U.S. Cards is the largest provider of credit card services to the oil and gas industry and the leading provider of consumer private-label credit cards and commercial accounts on behalf of merchants such as The Home Depot, Federated, Sears, Dell Computer, Radio Shack, Staples and Zales Corporation.

        Revenues are primarily generated from net interest revenue on receivables, interchange fees on purchase sales and other delinquency and servicing fees.

 
  Three Months Ended September 30,
  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Net interest revenue   $ 1,140   $ 1,353   (16 )% $ 3,500   $ 4,004   (13 )%
Non-interest revenue     2,312     2,028   14     6,437     6,095   6  
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 3,452   $ 3,381   2 % $ 9,937   $ 10,099   (2 )%
Operating expenses     1,447     1,458   (1 )   4,533     4,461   2  
Provision for loan losses and for benefits and claims     360     679   (47 )   1,067     2,075   (49 )
   
 
 
 
 
 
 
Income before taxes   $ 1,645   $ 1,244   32 % $ 4,337   $ 3,563   22 %
Income taxes     560     447   25     1,448     1,253   16 %
   
 
 
 
 
 
 
Net income   $ 1,085   $ 797   36 % $ 2,889   $ 2,310   25 %
   
 
 
 
 
 
 
Average assets (in billions of dollars)   $ 64   $ 63   2 % $ 63   $ 66   (5 )%
Return on assets     6.73 %   5.02 %       6.13 %   4.68 %    
Average risk capital(1)   $ 5,628   $ 5,848   (4 )% $ 5,594   $ 5,780   (3 )%
Return on risk capital(1)     76 %   54 %       69 %   53 %    
Return on invested capital(1)     32 %   22 %       29 %   22 %    
   
 
 
 
 
 
 
Key indicators—on a managed basis: (in billions of dollars)                                  
Return on managed assets     2.91 %   2.20 %                    
Purchase sales   $ 77.0   $ 70.9   9 %                
Managed average yield(2)     14.00 %   13.98 %                    
Managed net interest margin(2)     10.28 %   11.03 %                    
   
 
 
 
 
 
 

(1)
See footnote 4 to the table on page 4.

(2)
As a percentage of average managed loans.

20


U.S. Cards (Continued)

3Q06 vs. 3Q05

        Net Interest Revenue decreased, reflecting a combination of increased payment rates, higher cost of funds, and the mix of receivable balances. Non-Interest Revenue increased, as the positive impact of 9% growth in purchase sales, increased revenues from previously securitized receivables, which includes excess servicing, and the addition of the Federated portfolio in the 2005 fourth quarter more than offset higher rewards program costs and lower asset sales of $37 million. Included in revenues in the 2005 third quarter were the negative impact of Hurricane Katrina and the effect of the new bankruptcy legislation.

        Operating expenses improved, primarily due to a decline in advertising and marketing expenses, largely reflecting the timing of advertising campaigns, partially offset by the addition of the Federated portfolio.

        Provision for loan losses and for benefits and claims declined, primarily reflecting a decline in net credit losses and a loan loss reserve release of $122 million, due to lower bankruptcies and the favorable credit environment.

        Net income also reflected a $39 million tax benefit in the 2006 third quarter resulting from the resolution of the New York Tax Audits.

2006 YTD vs. 2005 YTD

        Net Interest Revenue decreased, reflecting a combination of increased payment rates, higher cost of funds, and the mix of receivable balances. Non-Interest Revenue increased as the positive impact of growth in purchase sales, increased revenues from previously securitized receivables, and the addition of the Federated portfolio more than offset higher rewards program costs. Included in revenues in the 2006 period were asset sales of $105 million, including the 2006 second quarter gain from the MasterCard initial public offering of $59 million. In the 2005 period, revenues included gains from asset sales of $185 million.

        Operating expenses increased, primarily reflecting the addition of the Federated portfolio and the adoption of SFAS 123(R) in the 2006 first quarter; this was partially offset by a decline in advertising and marketing expenses, largely reflecting the timing of advertising campaigns.

        Provision for loan losses and for benefits and claims declined, primarily reflecting a decline in net credit losses and a loan loss reserve release of $354 million, due to lower bankruptcies and the favorable credit environment.

        Net Income also reflected an $89 million tax benefit resulting from the resolution of the Federal Tax Audit in the 2006 first quarter, along with a $39 million tax benefit resulting from the resolution of the New York Tax Audits in the 2006 third quarter.

21


U.S. Retail Distribution

GRAPHIC
         
 
  Three Months Ended September 30,
  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Net interest revenue   $ 1,521   $ 1,488   2 % $ 4,469   $ 4,473    
Non-interest revenue     861     851   1     2,708     2,683   1 %
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 2,382   $ 2,339   2 % $ 7,177   $ 7,156    
Operating expenses     1,201     1,099   9     3,622     3,291   10 %
Provisions for loan losses and for benefits and claims     446     759   (41 )   1,258     1,773   (29 )
   
 
 
 
 
 
 
Income before taxes   $ 735   $ 481   53 % $ 2,297   $ 2,092   10 %
Income taxes     254     162   57     733     731    
   
 
 
 
 
 
 
Net income   $ 481   $ 319   51 % $ 1,564   $ 1,361   15 %
   
 
 
 
 
 
 
Revenues, net of interest expense, by business:                                  
  Citibank branches   $ 765   $ 754   1 % $ 2,406   $ 2,373   1 %
  CitiFinancial branches     1,052     1,035   2     3,097     3,142   (1 )
  Primerica Financial Services     565     550   3     1,674     1,641   2  
   
 
 
 
 
 
 
Total revenues   $ 2,382   $ 2,339   2 % $ 7,177   $ 7,156    
   
 
 
 
 
 
 
Net income by business:                                  
  Citibank branches   $ 79   $ 111   (29 )% $ 344   $ 410   (16 )%
  CitiFinancial branches     270     72   NM     799     545   47  
  Primerica Financial Services     132     136   (3 )   421     406   4  
   
 
 
 
 
 
 
Total net income   $ 481   $ 319   51 % $ 1,564   $ 1,361   15 %
   
 
 
 
 
 
 
Average assets (in billions of dollars)   $ 70   $ 65   8 % $ 68   $ 64   6 %
Return on assets     2.73 %   1.95 %       3.08 %   2.84 %    
Average risk capital(1)   $ 3,591   $ 3,003   20 % $ 3,523   $ 2,975   18 %
Return on risk capital(1)     53 %   42 %       59 %   61 %    
Return on invested capital(1)     21 %   13 %       23 %   17 %    
   
 
 
 
 
 
 
Key indicators: (in billions of dollars)                                  
Average loans   $ 45.2   $ 40.7   11 %                
Average deposits     134.7     119.6   13                  
EOP Investment Assets under Management (AUMs)     76.1     70.9   7                  
   
 
 
 
 
 
 

(1)
See footnote 4 to the table on page 4.

NM
Not meaningful

22


U.S. Retail Distribution (Continued)

        U.S. Retail Distribution provides banking, lending, investment and insurance products and services to customers through 931 Citibank branches, 2,422 CitiFinancial branches, the Primerica Financial Services (PFS) salesforce, the Internet, direct mail and telesales. Revenues are primarily derived from net interest revenue on loans and deposits and from fees on banking, insurance and investment products.


3Q06 vs. 3Q05

        Net Interest Revenue increased 2%, as growth in deposits of 13% and growth in loans of 11% were largely offset by net interest margin compression. This was mainly due to a shift in customer liabilities from savings and other demand deposits to certificates of deposit and e-Savings accounts. Non-Interest Revenue increased slightly for the quarter due to increased investment product sales in Citibank branches and strong securities sales in Primerica Financial Services.

        Operating expense growth was primarily due to higher volume-related expenses, increased investment spending, driven by 101 new branch openings in the quarter (and 195 additional net branches since the 2005 third quarter), and advertising costs associated with the launch of e-Savings.

        Provisions for loan losses and for benefits and claims declined 41% primarily due to the absence of a $165 million pretax loan loss reserve build in the prior year related to the reorganization of the former Consumer Finance business, a prior-year reserve build related to Hurricane Katrina of $110 million pretax in CitiFinancial branches, and lower overall bankruptcy filings in the current period. The net credit loss ratio declined 58 basis points to 2.48% reflecting the continuing favorable credit environment.

        Deposit growth reflected balance increases in certificates of deposit; e-Savings accounts, which generated $6.2 billion in average deposits; and premium checking and rate-sensitive money market products, as well as the impact of the transfer of approximately $1.8 billion in deposits for certain customer segments, from the U.S. Commercial Business Group, to better serve those customers. Excluding the transfer of $1.8 billion from the U.S. Commercial Business Group, deposits grew 11% from the prior-year quarter. Loan growth reflected improvements in all channels and products. Investment product sales in Citibank branches increased 16%, driven by increased volumes.

2006 YTD vs. 2005 YTD

        Net Interest Revenue was flat to the prior-year period as growth in deposits and loans, up 9% and 10%, respectively, were more than offset by net interest margin compression. This was primarily due to a shift in customer liabilities from savings and other demand deposits to certificates of deposit and e-Savings accounts. Non Interest Revenue increased slightly due to the $132 million pretax gain on the Sale of New York Branches, partially offset by the absence of a $110 million gain related to the resolution of the Glendale litigation in the 2005 first quarter and other revenue declines.

        Operating expense growth was primarily due to higher volume-related expenses, increased investment spending primarily driven by new branch openings, the impact of SFAS 123(R), and advertising costs associated with the launch of e-Savings. The impact of the FAB acquisition also contributed to higher expenses.

        Provisions for loan losses and for benefits and claims declined 29% primarily due to the absence of a $165 million pretax loan loss reserve build in the prior year related to the reorganization of the former Consumer Finance business, a prior-year reserve build related to Hurricane Katrina of $110 million and lower overall bankruptcy filings in the current year. The credit environment was favorable during the first three quarters of 2006.

        Deposit growth reflected balance increases in certificates of deposit; e-Savings accounts, which generated $7.8 billion in end-of-period deposits; premium checking; and partly rate-sensitive money market products. Loan growth reflected improvements in all channels and products. Investment product sales increased 26%, driven by increased volumes.

        Net income in 2006 also reflected a $51 million tax reserve release resulting from the resolution of the Federal Tax Audit.

23


U.S. Consumer Lending

GRAPHIC

 
  Three Months Ended
September 30,

  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Net interest revenue   $ 1,185   $ 1,209   (2 )% $ 3,606   $ 3,709   (3 )%
Non-interest revenue     296     123   NM     442     372   19  
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 1,481   $ 1,332   11 % $ 4,048   $ 4,081   (1 )%
Operating expenses     450     425   6     1,347     1,249   8  
Provisions for loan losses and for benefits and claims     186     114   63     415     444   (7 )
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 845   $ 793   7 % $ 2,286   $ 2,388   (4 )%
Income taxes     308     289   7     813     862   (6 )
Minority interest, net of taxes     16     17   (6 )   45     46   (2 )
   
 
 
 
 
 
 
Net income   $ 521   $ 487   7 % $ 1,428   $ 1,480   (4 )%
   
 
 
 
 
 
 
Revenues, net of interest expense, by business:                                  
  Real Estate Lending   $ 1,000   $ 836   20 % $ 2,636   $ 2,648    
  Student Loans     163     173   (6 )   482     481    
  Auto     318     323   (2 )   930     952   (2 )%
   
 
 
 
 
 
 
Total revenues   $ 1,481   $ 1,332   11 % $ 4,048   $ 4,081   (1 )%
   
 
 
 
 
 
 
Net income by business:                                  
  Real Estate Lending   $ 389   $ 318   22 % $ 1,014   $ 1,037   (2 )%
  Student Loans     58     62   (6 )   171     176   (3 )
  Auto     74     107   (31 )   243     267   (9 )
   
 
 
 
 
 
 
Total net income   $ 521   $ 487   7 % $ 1,428   $ 1,480   (4 )%
   
 
 
 
 
 
 
Average assets (in billions of dollars)   $ 244   $ 192   27 % $ 225   $ 185   22 %
Return on assets     0.85 %   1.01 %       0.85 %   1.07 %    
Average risk capital(1)   $ 3,770   $ 3,218   17 % $ 3,651   $ 3,283   11 %
Return on risk capital(1)     55 %   60 %       52 %   60 %    
Return on invested capital(1)     31 %   31 %       28 %   34 %    
   
 
 
 
 
 
 

(1)
See footnote 4 to the table on page 4.

(2)
As a percentage of average loans.

NM
Not meaningful

24


U.S. Consumer Lending (Continued)

 
  Three Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

 
Key indicators: (in billions of dollars)                  
Net interest margin:(2)                  
  Real Estate Lending     1.91 %   2.32 %    
  Student Loans     1.50     1.90      
  Auto     8.57     10.47      
Originations:                  
  Real Estate Lending   $ 35.8   $ 37.0   (3 )%
  Student Loans     4.1     3.8   8 %
  Auto     2.4     1.9   26 %
   
 
 
 

(1)
See footnote 4 to the table on page 4.

(2)
As a percentage of average loans.

NM
Not meaningful

        U.S. Consumer Lending provides home mortgages and home equity loans to prime and non-prime customers, auto financing to non-prime consumers and educational loans to students. Loans are originated throughout the United States and Canada through the Citibank, CitiFinancial and Smith Barney branch networks, Primerica Financial Services agents, third-party brokers, direct mail, the Internet and telesales. Loans are also purchased in the wholesale markets. U.S. Consumer Lendingalso provides mortgage servicing to a portfolio of mortgage loans owned by third parties. Revenues are comprised of loan fees, net interest revenue and mortgage servicing fees.


3Q06 vs. 3Q05

        Net Interest Revenue decreased 2%, reflecting net interest margin compression that was partially offset by a 19% increase in average loan balances. Non-Interest Revenue increased due to higher gains on sales of real estate, student loans and mortgage-backed securities, and higher net mortgage servicing revenues. Average loan growth reflected a strong increase in originations over the past year, with 26% growth in Auto originations and 8% growth in Student Loans originations in the 2006 third quarter.

        During the 2006 third quarter, the U.S. Consumer Lending business initiated a Mortgage-Backed Securities Program.

        Operating expenses increased primarily due to higher loan origination volumes and investment spending.

        Provisions for loan losses and for benefits and claims increased primarily due to lower loan loss reserve releases of $48 million and higher credit losses in the Real Estate Lending business. The lower loan loss reserve releases reflected the absence of a prior-year loan loss reserve release of $165 million related to the reorganization of the U.S. Consumer Finance businesses and a prior-year loan loss reserve build of $110 million related to the estimated impact of Hurricane Katrina. The 90 days-past-due ratio declined in Real Estate Lending business.

2006 YTD vs. 2005 YTD

        Net Interest Revenue declined 3%, reflecting net interest margin compression somewhat offset by a 19% increase in average loan balances. Non-Interest Revenue increased due to higher gains on securitization of real estate and student loans, and gains on the sale of securities, somewhat offset by lower servicing revenues. Average loan growth reflected a strong increase in originations across all businesses, driven by an 11% increase in real estate lending.

        Operating expenses increased primarily due to higher loan origination volumes, investment spending and the impact of SFAS 123(R).

        Provisions for loan losses and for benefits and claims declined due to a favorable credit environment, which led to an increase in loan loss reserve releases of $58 million, driven by the Real Estate Lending business.

25


U.S. Commercial Business

GRAPHIC

        U.S. Commercial Business provides equipment leasing, financing, and banking services to small- and middle-market businesses ($5 million to $500 million in annual revenues) and financing for investor-owned multifamily and commercial properties. Revenues are comprised of net interest revenue and fees on loans and leases.

 
  Three Months Ended September 30,
  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Net interest revenue   $ 295   $ 372   (21 )% $ 893   $ 1,023   (13 )%
Non-interest revenue     194     277   (30 )   582     795   (27 )
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 489   $ 649   (25 )% $ 1,475   $ 1,818   (19 )%
Operating expenses     328     308   6     1,044     984   6  
Provision for loan losses     (30 )   21   NM     (50 )   27   NM  
   
 
 
 
 
 
 
Income before taxes   $ 191   $ 320   (40 )% $ 481   $ 807   (40 )%
Income taxes     40     98   (59 )   66     199   (67 )
   
 
 
 
 
 
 
Net income   $ 151   $ 222   (32 )% $ 415   $ 608   (32 )%
   
 
 
 
 
 
 
Average assets (in billions of dollars)   $ 44   $ 39   13 % $ 42   $ 38   11 %
Return on assets     1.36 %   2.26 %       1.32 %   2.14 %    
Average risk capital(1)   $ 2,323   $ 1,698   37 % $ 2,291   $ 1,831   25 %
Return on risk capital(1)     26 %   52 %       24 %   44 %    
Return on invested capital(1)     13 %   31 %       12 %   29 %    
   
 
 
 
 
 
 
Key indicators: (in billions of dollars):                                  
Average earning assets   $ 36.8   $ 33.1   11 % $ 36.3   $ 32.5   12 %
   
 
 
 
 
 
 

(1)
See footnote 4 to the table on page 4.

NM
Not meaningful

26


U.S. Commercial Business (Continued)

3Q06 vs. 3Q05

        Net Interest Revenue declined on continued net interest margin compression, partially offset by the benefit of higher volumes. Average loans (excluding the liquidating portfolio) increased 13%, and average deposits, while down 2%, were affected by the transfer of $1.8 billion in deposits for certain customer segments to the U.S. Retail Distribution business to better service those customers. Excluding this transfer, deposits were up 8%. Non-Interest Revenue declined primarily due to the absence of the prior-year $162 million legal settlement benefit related to the purchase of Copelco.

        Operating expense growth was mainly due to the absence of a $23 million expense benefit due to the Copelco settlement recorded in the prior year.

        Provision for loan losses declined primarily due to higher loan loss reserve releases resulting from the favorable credit environment and the continued liquidation of non-core portfolios.

        Core loan growth reflected strong transaction volumes and growth in loan balances across all business units.

2006 YTD vs. 2005 YTD

        Net Interest Revenue declined primarily due to the continuing impact of net interest margin compression, partially offset by strong growth in core loan and deposit balances, up 16% and 10%, respectively, over the prior year. Non-Interest Revenue declined primarily due to the absence of the $162 million legal settlement benefit in the 2005 third quarter related to the purchase of Copelco and the $161 million gain on the sale of the CitiCapital Transportation Finance business in the 2005 first quarter, partly offset by the $31 million pretax gain on the Sale of New York Branches in the 2006 second quarter.

        Operating expense growth was primarily due to higher volume-related expenses, the absence of a $23 million expense benefit due to the Copelco settlement recorded in the prior-year period, and the impact of the FAB acquisition and SFAS 123(R), partially offset by lower expenses from the absence of the transportation finance business and severance costs in the prior year.

        Provision for loan losses declined primarily due to loan loss reserve releases of $84 million due to a favorable credit environment, and the continued liquidation of non-core portfolios.

        Deposit and core loan growth reflected strong transaction volumes and balances across all business units and the impact of the FAB acquisition, partially offset by declines in the liquidating portfolio.

27


(This page has been left blank intentionally.)

28


INTERNATIONAL CONSUMER

CHART

International Consumer is comprised of three businesses: Cards, Consumer Finance and Retail Banking.

 
  Three Months Ended
September 30,

  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Net interest revenue   $ 3,445   $ 2,995   15 % $ 9,921   $ 9,116   9 %
Non-interest revenue     1,622     1,638   (1 )   4,929     4,410   12  
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 5,067   $ 4,633   9 % $ 14,850   $ 13,526   10 %
Operating expenses     2,769     2,280   21     8,091     7,022   15  
Provisions for loan losses and for benefits and claims     1,032     1,197   (14 )   2,621     2,600   1  
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 1,266   $ 1,156   10   $ 4,138   $ 3,904   6 %
Income taxes     227     193   18     744     902   (18 )
Minority interest, net of taxes     1     1       5       NM  
   
 
 
 
 
 
 
Net income   $ 1,038   $ 962   8 % $ 3,389   $ 3,002   13 %
   
 
 
 
 
 
 
Revenues, net of interest expense, by region:                                  
  Mexico   $ 1,238   $ 1,139   9 % $ 3,579   $ 3,154   13 %
  Latin America     485     279   74     1,282     817   57  
  EMEA     1,353     1,271   6     3,983     3,775   6  
  Japan     782     803   (3 )   2,364     2,451   (4 )
  Asia     1,209     1,141   6     3,642     3,329   9  
   
 
 
 
 
 
 
Total revenues   $ 5,067   $ 4,633   9 % $ 14,850   $ 13,526   10 %
   
 
 
 
 
 
 
Net income by region                                  
  Mexico   $ 395   $ 511   (23 )% $ 1,128   $ 1,156   (2 )%
  Latin America     23     61   (62 )   169     195   (13 )
  EMEA     213     (154 ) NM     613     92   NM  
  Japan     79     169   (53 )   445     532   (16 )
  Asia     328     375   (13 )   1,034     1,027   1  
   
 
 
 
 
 
 
Total net income   $ 1,038   $ 962   8 % $ 3,389   $ 3,002   13 %
   
 
 
 
 
 
 
Average assets (in billions of dollars)   $ 187   $ 166   13 % $ 179   $ 166   8 %
Return on assets     2.20 %   2.30 %       2.53 %   2.42 %    
Average risk capital(1)   $ 12,626   $ 13,576   (7 )% $ 12,665   $ 13,143   (4 )%
Return on risk capital(1)     33 %   28 %       36 %   31 %    
Return on invested capital(1)     16 %   14 %       17 %   15 %    
   
 
 
 
 
 
 

(1)
See footnote 4 to the table on page 4.

NM    Not meaningful

29


International Cards

CHART

International Consumer is comprised of three businesses: Cards, Consumer Finance and Retail Banking.

 
  Three Months Ended
September 30,

  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Net interest revenue   $ 964   $ 710   36 % $ 2,649   $ 2,030   30 %
Non-interest revenue     555     499   11     1,660     1,460   14  
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 1,519   $ 1,209   26 % $ 4,309   $ 3,490   23 %
Operating expenses     740     561   32     2,071     1,706   21  
Provision for loan losses     406     192   NM     1,077     522   NM  
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 373   $ 456   (18 )% $ 1,161   $ 1,262   (8 )%
Income taxes     85     72   18     253     243   4  
Minority interest, net of taxes     1     1       2     3   (33 )
   
 
 
 
 
 
 
Net income   $ 287   $ 383   (25 )% $ 906   $ 1,016   (11 )%
   
 
 
 
 
 
 
Revenues, net of interest expense, by region:                                  
  Mexico   $ 465   $ 353   32 % $ 1,313   $ 929   41 %
  Latin America     252     64   NM     586     217   NM  
  EMEA     328     302   9     949     881   8  
  Japan     72     76   (5 )   216     225   (4 )
  Asia     402     414   (3 )   1,245     1,238   1  
   
 
 
 
 
 
 
Total revenues   $ 1,519   $ 1,209   26 % $ 4,309   $ 3,490   23 %
   
 
 
 
 
 
 
Net income by region:                                  
  Mexico   $ 133   $ 204   (35 )% $ 429   $ 456   (6 )%
  Latin America     13     21   (38 )   117     84   39  
  EMEA     55     34   62     130     100   30  
  Japan     13     17   (24 )   47     51   (8 )
  Asia     73     107   (32 )   183     325   (44 )
   
 
 
 
 
 
 
Total net income   $ 287   $ 383   (25 )% $ 906   $ 1,016   (11 )%
   
 
 
 
 
 
 
Average assets (in billions of dollars)   $ 32   $ 26   23 % $ 30   $ 26   15 %
Return on assets     3.56 %   5.84 %       4.04 %   5.22 %    
Average risk capital(1)   $ 2,185   $ 1,855   18 % $ 2,153   $ 1,736   24 %
Return on risk capital(1)     52 %   82 %       56 %   78 %    
Return on invested capital(1)     24 %   37 %       27 %   34 %    
   
 
 
 
 
 
 
Key indicators:(in billions of dollars):                                  
Purchase sales   $ 20.5   $ 17.3   18 %                
Average yield(2)     19.20 %   18.08 %                    
Net interest margin(2)     13.91 %   12.41 %                    
   
 
 
 
 
 
 

(1)
See footnote 4 to the table on page 4.

(2)
As a percentage of average loans.

NM    Not meaningful

30


International Cards (Continued)

        International Cards provides MasterCard, Visa and Diners branded credit and charge cards, as well as private label cards and co-branded cards, to more than 30 million customer accounts in 43 countries outside of the U.S. and Canada. Revenues are primarily generated from net interest revenue on receivables, interchange fees on purchase sales and other delinquency or service fees.


3Q06 vs. 3Q05

        Net Interest Revenue increased, driven by 21% growth in average receivables across the region and the integration of the Credicard portfolio in Latin America. Non-Interest Revenue also increased, reflecting an 18% increase in purchase sales and the integration of the Credicard portfolio.

        Operating expenses increased, reflecting the integration of the Credicard portfolio, the absence of the prior-year refund of Value Added Taxes in Mexico, continued investments in organic growth, and volume growth across the regions.

        Provision for loan losses increased, driven by portfolio growth and target market expansion in Mexico, credit losses relating to the Credicard portfolio in Latin America, the industry-wide credit deterioration in Taiwan, and volume growth in all regions.

        Net Income was also impacted by the absence of prior-year tax credits from the Homeland Investment Act of $37 million.

Regional Net Income

        Mexico income declined, primarily reflecting the absence of a $41 million prior-year tax benefit associated with the Homeland Investment Act and the prior-year refund of Value Added Taxes. Latin America income declined, primarily due to higher credit costs associated with the Credicard portfolio. EMEA income increased on higher purchase sales, volume growth, and higher tax credits, partially offset by higher expenses and higher credit costs. Asia income declined on lower revenues and an increase in credit costs from the continued impact of industry-wide credit conditions in Taiwan.

2006 YTD vs. 2005 YTD

        Net Interest Revenue increased, driven by 17% growth in average receivables across all regions and the integration of the Credicard portfolio in Latin America. Non-Interest Revenue also increased, reflecting an increase in purchase sales, the integration of the Credicard portfolio, and a gain on the MasterCard IPO of $35 million in the 2006 second quarter.

        Operating expenses increased, reflecting the integration of the Credicard portfolio, continued investment in organic growth, volume growth across the regions, and the adoption of SFAS 123(R). This was partially offset by the absence of 2005 first quarter repositioning expenses of $13 million.

        Provision for loan losses increased, driven by portfolio growth and target market expansion in Mexico, the industry-wide credit deterioration in Taiwan, credit losses relating to the Credicard portfolio in Latin America, and volume growth in all regions.

Regional Net Income

        Mexico income declined primarily due to lower levels of tax benefits and higher expenses, partially offset by higher sales volumes and average loans, and a gain from the MasterCard IPO of $9 million in the 2006 second quarter. Latin America income increased, primarily due to volume and purchase sales growth. EMEA income increased on higher purchase sales, volume growth, and higher tax benefits, partially offset by higher net credit losses. Asia income declined due to an increase in credit costs related to credit conditions in Taiwan and costs associated with a Korea labor settlement, partially offset by higher purchase sales and loan growth and a gain from the MasterCard IPO of $7 million in the 2006 second quarter.

31


International Consumer Finance

CHART
    *    Excludes EMEA loss of $13 million and Latin
      America loss of $1 million
   
 
  Three Months Ended September 30,
  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Net interest revenue   $ 962   $ 910   6 % $ 2,854   $ 2,760   3 %
Non-interest revenue     36     40   (10 )   115     101   14  
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 998   $ 950   5 % $ 2,969   $ 2,861   4 %
Operating expenses     406     397   2     1,252     1,214   3  
Provision for loan losses     523     324   61     1,167     961   21  
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 69   $ 229   (70 )% $ 550   $ 686   (20 )%
Income taxes     19     77   (75 )   159     218   (27 )
   
 
 
 
 
 
 
Net income   $ 50   $ 152   (67 )% $ 391   $ 468   (16 )%
   
 
 
 
 
 
 
Revenues, net of interest expense, by region:                                  
  Mexico   $ 62   $ 47   32 % $ 170   $ 134   27 %
  Latin America     38     31   23     112     89   26  
  EMEA     191     185   3     568     559   2  
  Japan     587     609   (4 )   1,793     1,871   (4 )
  Asia     120     78   54     326     208   57  
   
 
 
 
 
 
 
Total revenues   $ 998   $ 950   5 % $ 2,969   $ 2,861   4 %
   
 
 
 
 
 
 
Net income by region:                                  
  Mexico   $ 12   $ 9   33 % $ 33   $ 26   27 %
  Latin America     (1 )   2   NM         8   (100 )
  EMEA     (13 )   3   NM     9     15   (40 )
  Japan     37     122   (70 )   306     381   (20 )
  Asia     15     16   (6 )   43     38   13  
   
 
 
 
 
 
 
Total net income   $ 50   $ 152   (67 )% $ 391   $ 468   (16 )%
   
 
 
 
 
 
 
Average assets (in billions of dollars)   $ 28   $ 25   12 % $ 27   $ 26   4 %
Return on assets     0.71 %   2.41 %       1.94 %   2.41 %    
Average risk capital(1)   $ 1,093   $ 919   19 % $ 1,100   $ 924   19 %
Return on risk capital(1)     18 %   66 %       48 %   68 %    
Return on invested capital(1)     6 %   18 %       15 %   18 %    
   
 
 
 
 
 
 
Key indicators:                                  
Average yield(2)     18.49 %   18.87 %                    
Net interest margin(2)     15.77 %   16.49 %                    
Number of sales points:                                  
  Other branches     1,483     968                      
  Japan branches     324     392                      
  Japan Automated Loan Machines     809     654                      
   
 
 
 
 
 
 
Total     2,616     2,014                      
   
 
 
 
 
 
 

(1)
See footnote 4 to the table on page 4.
(2)
As a percentage of average loans.
NM
Not meaningful

32


International Consumer Finance (Continued)

        International Consumer Finance provides community-based lending services through its branch network, regional sales offices and cross-selling initiatives with International Cards and International Retail Banking. As of September 30, 2006, International Consumer Finance maintained 2,616 sales points comprising 1,807 branches in more than 25 countries and 809 ALMs in Japan. International Consumer Finance offers real-estate-secured loans, unsecured or partially secured personal loans, auto loans, and loans to finance consumer-goods purchases. Revenues are primarily derived from net interest revenue and fees on loan products.


3Q06 vs. 3Q05

        Net Interest Revenue increased, driven mainly by higher personal and real estate secured loan volumes. This was partly offset by lower average yields and a decline in Japan, primarily due to the impact of foreign currency translation and lower average loans. Non-Interest Revenue declined slightly for the quarter.

        Operating expense growth was primarily due to higher volume-related expenses and increased investment spending. There were 110 new branch openings in the quarter (and 447 net new branches over the last 12 months). These increases were partially offset by lower expenses in Japan.

        Provision for loan losses increased, primarily due to approximately $160 million in credit costs associated with ongoing legislative and other actions affecting the consumer finance industry in Japan, a loan loss reserve build in EMEA, and higher net credit losses in Asia. The net credit loss ratio increased 35 basis points to 6.38%.

        The increase in average loans outside of Japan was mainly driven by growth in the personal-loan and real-estate-secured portfolios. In Japan, average loans declined by 3% due to the impact of foreign currency translation, and were essentially flat excluding the impact of FX.

        The current legislative proposals to reform consumer lending laws in Japan, if enacted, will change various aspects of the consumer finance industry. At this point, there is uncertainty with respect to the final outcome of these proposals, including, but not limited to, the level of interest rate caps and the timing for implementation of the new rules and the rules during the transition period.

        The uncertainty surrounding the ongoing legislative proposals and certain other actions affecting the consumer finance industry in Japan are negatively affecting the financial performance of the business. The Company continues to evaluate the potential impact of these developments, which may further negatively impact the revenues, expenses and credit costs in the consumer finance lending business.*

2006 YTD vs. 2005 YTD

        Net Interest Revenue increased, driven primarily by higher average loan volumes, partially offset by slightly lower net interest margins. A revenue decline in Japan was primarily due to the impact of foreign currency translation and lower average loans. Non-Interest Revenue increased 14% during the period.

        Operating expense growth was primarily due to higher volume-related expenses and increased investment spending, driven by 351 new branch openings and the addition of 146 ALMs in Japan in the first nine months of 2006. The growth was partially offset by the absence of the 2005 first quarter repositioning charge in EMEA of $38 million, the absence of the impact resulting from the standardization of write-off policy in Spain and Italy, and declines in Japan due to the closing of branches.

        Provision for loan losses was higher than the prior-year period primarily due to the ongoing legislative and other actions affecting the consumer finance industry in Japan and higher net credit losses in Asia and EMEA.

        The increase in average loans outside of Japan was mainly driven by growth in the personal-loan and real-estate-secured portfolios. In Japan, loans declined by 7% due to the impact of foreign currency translation and reduced loan demand.


*
This is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 84.

33


International Retail Banking

CHART

 
  Three Months Ended September 30,
  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Net interest revenue   $ 1,519   $ 1,375   10 % $ 4,418   $ 4,326   2 %
Non-interest revenue     1,031     1,099   (6 )   3,154     2,849   11  
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 2,550   $ 2,474   3 % $ 7,572   $ 7,175   6 %
Operating expenses     1,623     1,322   23     4,768     4,102   16  
Provisions for loan losses and for benefits and claims     103     681   (85 )   377     1,117   (66 )
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 824   $ 471   75 % $ 2,427   $ 1,956   24 %
Income taxes     123     44   NM     332     441   (25 )
Minority interest, net of taxes               3     (3 ) NM  
   
 
 
 
 
 
 
Net income   $ 701   $ 427   64 % $ 2,092   $ 1,518   38 %
   
 
 
 
 
 
 
Revenues, net of interest expense, by region:                                  
  Mexico   $ 711     739   (4 )% $ 2,096   $ 2,091    
  Latin America     195     184   6     584     511   14 %
  EMEA     834     784   6     2,466     2,335   6  
  Japan     123     118   4     355     355    
  Asia     687     649   6     2,071     1,883   10  
   
 
 
 
 
 
 
Total revenues   $ 2,550   $ 2,474   3 % $ 7,572   $ 7,175   6 %
   
 
 
 
 
 
 
Net income by region:                                  
  Mexico   $ 250   $ 298   (16 )% $ 666   $ 674   (1 )%
  Latin America     11     38   (71 )   52     103   (50 )
  EMEA     171     (191 ) NM     474     (23 ) NM  
  Japan     29     30   (3 )   92     100   (8 )
  Asia     240     252   (5 )   808     664   22  
   
 
 
 
 
 
 
Total net income   $ 701   $ 427   64 % $ 2,092   $ 1,518   38 %
   
 
 
 
 
 
 
Average assets (in billions of dollars)   $ 127   $ 115   10 % $ 122   $ 114   7 %
Return on assets     2.19 %   1.47 %       2.29 %   1.78 %    
Average risk capital(1)   $ 9,348   $ 10,802   (13 )% $ 9,412   $ 10,483   (10 )%
Average return on risk capital(1)     30 %   16 %       30 %   19 %    
Return on invested capital(1)     15 %   9 %       15 %   10 %    
   
 
 
 
 
 
 
Key indicators:(in billions of dollars):                                  
Average deposits   $ 148.4   $ 136.1   9 %                
Assets under Management (AUMs) (EOP)     133.8     116.3   15 %                
Average loans     64.4     62.3   3 %                
   
 
 
 
 
 
 

(1)
See footnote 4 to the table on page 4.
NM
Not meaningful

34


International Retail Banking (Continued)

        International Retail Banking delivers a wide array of banking, lending, insurance and investment services through a network of local branches and electronic delivery systems, including ATMs, call centers and the Internet. International Retail Bankingserves 49 million customer accounts for individuals and small businesses. Revenues are primarily derived from net interest revenue on deposits and loans, and fees on mortgage, banking, and investment products.


3Q06 vs. 3Q05

        Net Interest Revenue increased in all regions except EMEA. Loan balances increased 3% over the 2005 third quarter, as a decline in Japan was more than offset by gains across other regions. Deposits grew 9% reflecting an increase in all regions except Japan. Non-Interest Revenue declined primarily due to a decrease in Mexico that was affected by the absence of the 2005 third quarter value added tax refund. Investment product sales increased 18% while assets under management increased 15%, led by growth in Asia and EMEA.

        Operating expenses increased on higher investment spending (including 66 new branch openings during the quarter), the absence of a 2005 third quarter $93 million value added tax refund in Mexico, increases in business volumes, and higher advertising and marketing expenses.

        Provisions for loan losses and for benefits and claims declined primarily due to the absence of the 2005 third quarter $476 million pretax charge to standardize the loan write-off policy in Germany and Belgium with global policies. Additionally, the decline was due to the 2006 third quarter impact of a $68 million pretax gain from the sale of charged-off assets in Germany, a $46 million pretax loan loss reserve release related to improvements in the credit environment in Mexico, and loan loss reserve releases in Australia and Korea.

        Net income also reflected increased APB 23 tax benefits in Mexico and EMEA and tax benefits of $18 million related to the resolution of the New York Tax Audits, partially offset by the absence of a 2005 third quarter Homeland Investment Act tax benefit of $61 million.

Regional Net Income

        Mexico income declined primarily due to the absence of a 2005 third quarter $79 million value added tax refund, the absence of a 2005 third quarter Homeland Investment Act tax benefit of $66 million, and increased investment spending associated with 19 branch openings in the 2006 third quarter and 117 net new branches opened since the 2005 third quarter. Partly offsetting these declines were higher deposit volumes, a $30 million loan loss reserve release related to improvements in the credit environment in Mexico, and APB 23 tax benefits of $70 million. Latin America income declined primarily due to increased expenses associated with 19 new branches opened in Brazil in the 2006 third quarter and higher credit costs, partially offset by growth in lending and deposit revenues. EMEA income increased, driven by the absence of the 2005 third quarter $476 million pretax ($323 million after-tax) policy change related to standardizing the loan write-off policies in Germany and Belgium with global policies, a 22% increase in deposits, a 34% increase in investment product sales, and higher loan balances. Japan income declined on higher expenses, mainly due to the consolidation and compliance activities resulting from the shutdown of the Japan Private Bank. Asia income declined, primarily due to increased investment spending, partly offset by loan loss reserve releases in Australia and Korea, a 7% increase in deposits, higher loan balances, and higher investment product sales.

2006 YTD vs. 2005 YTD

        Net Interest Revenue increased 2%, reflecting increases in all regions except EMEA. Loan balances were flat over the prior-year period on declines in EMEA from write-offs in Germany in the third quarter of 2005. Deposits grew 9% reflecting an increase in all regions except Japan. Non-Interest Revenue increased 11%, primarily due to improvements in EMEA, Latin America, and Asia, partially offset by a decrease in Mexico which was affected by the absence of the 2005 third quarter value added tax refund. Investment product sales increased 18% while assets under management increased 19%, led by growth in Mexico and Asia.

        Operating expenses increased due to the impact of the 2005 third quarter value added tax refund effect on expenses in Mexico, SFAS 123(R) charges and an increase in compensation costs in Mexico. Additionally, the increase was due to higher marketing and advertising spending, higher business volumes, costs associated with a labor settlement in Korea, and continued investments, which included 223 new branch additions in the 2006 nine-month period.

        Provisions for loan losses and for benefits and claims declined due to the absence of the 2005 third quarter $476 million pretax credit policy change to standardize the loan write-off policy in Germany and Belgium and the 2005 second quarter increase in the Germany credit reserve to reflect increased experience with the effects of bankruptcy law liberalization of $127 million pretax. Additionally, the decrease was due to a $68 million gain from the sale of charged-off assets in Germany, a $53 million pretax loan loss reserve release related to improvements in the credit environment in Mexico, and loan loss reserve releases in Korea and Australia as a result of an improving credit environment. Partially offsetting the decline was the absence of a 2005 second quarter Mexico reserve release of $80 million, which was offset in revenues.

        Net income also reflected higher tax benefits in Mexico and Asia related to increased APB 23 benefits, a 2006 first quarter $55 million benefit from the resolution of the Federal Tax Audit, and an $18 million benefit related to the resolution of the New York Tax Audits.

35


International Retail Banking (Continued)

Regional Net Income

        Mexico income declined slightly, primarily due to the absence of a $79 million 2005 third quarter value added tax refund, higher expenses from increased investment spending associated with new branch openings, and the absence of a $50 million 2005 second quarter gain from the favorable impact relating to a restructuring of Mexican government notes. Latin America income declined primarily due to increased expenses associated with new branches in Brazil, partly offset by growth in loan, deposit and investment revenues. EMEA income increased, driven primarily by the absence of the 2005 third quarter policy change of standardizing the loan write-off policy, the absence of an $81 million loan loss reserve build from the 2005 second quarter, stronger investment product sales, and higher Germany asset sales; these were partly offset by higher expenses from branch expansion. Japan income declined due to lower deposits, higher expenses (mainly due to the consolidation and compliance activities related to the shutdown of the Japan Private Bank) and the impact of foreign currency translation. Asia income increased, benefiting from higher deposit revenues and investment product sales and loan loss reserve releases in Korea and Australia, partially offset by increased investment spending tied to retail bank branch expansion and costs associated with the labor settlement.

Other Consumer

        Other Consumer includes certain treasury and other unallocated staff functions and global marketing.

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
In millions of dollars

  2006
  2005
  2006
  2005
 
Revenues, net of interest expense   $ (37 ) $ (13 ) $ (70 ) $ (234 )
Operating expenses     121     87     415     249  
   
 
 
 
 
Income (loss) before tax benefits   $ (158 ) $ (100 )   (485 )   (483 )
Income taxes (benefits)     (77 )   (36 )   (245 )   (185 )
   
 
 
 
 
Net income (loss)   $ (81 ) $ (64 ) $ (240 ) $ (298 )
   
 
 
 
 

3Q06 vs. 3Q05

        Revenues and expenses reflect certain unallocated items that are not reported in the Global Consumer operating segments.

        The net loss increase was primarily due to higher staff payments, higher legal costs, and lower revenues, partially offset by lower advertising and marketing expenses.

2006 YTD vs. 2005 YTD

        The net loss decrease was primarily due to the absence of the 2005 first quarter loss on the sale of a Manufactured Housing loan portfolio of $109 million after-tax and the 2006 first quarter tax benefit of $40 million, reflecting the resolution of the Federal Tax Audit, partially offset by SFAS 123(R) charges of $22 million after-tax and higher staff payments and legal costs.

36


CORPORATE AND INVESTMENT BANKING

CHART
    *    Excludes Other Corporate and Investment
      Banking loss of $8 million.
  *    Excludes Other Corporate and Investment
      Banking loss of $8 million.

        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 CIB.

 
  Three Months Ended
September 30,

  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Net interest revenue   $ 1,913   $ 1,916     $ 6,294   $ 6,087   3 %
Non-interest revenue     4,154     4,518   (8 )%   13,813     11,540   20  
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 6,067   $ 6,434   (6 )% $ 20,107   $ 17,627   14 %
Operating expenses     3,622     3,856   (6 )   12,537     10,892   15  
Provision for credit losses     107     43   NM     280     (27 ) NM  
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 2,338   $ 2,535   (8 )% $ 7,290   $ 6,762   8 %
Income taxes     598     704   (15 )   1,874     1,859   1  
Minority interest, net of taxes     19     34   (44 )   43     55   (22 )
   
 
 
 
 
 
 
Net income   $ 1,721   $ 1,797   (4 )% $ 5,373   $ 4,848   11 %
   
 
 
 
 
 
 
Revenues, net of interest expense, by region:                                  
  U.S.   $ 2,007   $ 2,810   (29 )% $ 7,733   $ 7,537   3 %
  Mexico     197     236   (17 )   582     565   3  
  Latin America     440     372   18     1,271     1,064   19  
  EMEA     2,166     1,801   20     6,505     5,203   25  
  Japan     177     211   (16 )   742     578   28  
  Asia     1,080     1,004   8     3,274     2,680   22  
   
 
 
 
 
 
 
Total revenues   $ 6,067   $ 6,434   (6 )% $ 20,107   $ 17,627   14 %
   
 
 
 
 
 
 
Net income by region:                                  
  U.S.   $ 540   $ 637   (15 )% $ 1,802   $ 1,992   (10 )%
  Mexico     95     177   (46 )   261     336   (22 )
  Latin America     168     185   (9 )   508     525   (3 )
  EMEA     489     358   37     1,466     882   66  
  Japan     38     58   (34 )   195     160   22  
  Asia     391     382   2     1,141     953   20  
   
 
 
 
 
 
 
Total net income   $ 1,721   $ 1,797   (4 )% $ 5,373   $ 4,848   11 %
   
 
 
 
 
 
 
Average risk capital(1)   $ 21,967   $ 21,383   3 % $ 21,438   $ 21,086   2 %
Return on risk capital(1)     31 %   33 %       34 %   31 %    
Return on invested capital(1)     23 %   25 %       25 %   23 %    
   
 
 
 
 
 
 

(1)
See footnote 4 to the table on page 4.
NM
Not meaningful

37


Capital Markets and Banking

CHART

 
  Three Months Ended September 30,
  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Net interest revenue   $ 1,139   $ 1,317   (14 )% $ 4,118   $ 4,435   (7 )%
Non-interest revenue     3,428     3,870   (11 )   11,614     9,616   21  
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 4,567   $ 5,187   (12 )% $ 15,732   $ 14,051   12 %
Operating expenses     2,655     3,134   (15 )   9,612     8,578   12  
Provision for credit losses     98     40   NM     250     (26 ) NM  
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 1,814   $ 2,013   (10 )% $ 5,870   $ 5,499   7 %
Income taxes     452     555   (19 )   1,454     1,539   (6 )
Minority interest, net of taxes     18     34   (47 )   42     54   (22 )
   
 
 
 
 
 
 
Net income   $ 1,344   $ 1,424   (6 )% $ 4,374   $ 3,906   12 %
   
 
 
 
 
 
 
Revenues, net of interest expense, by region:                                  
  U.S.   $ 1,689   $ 2,550   (34 )% $ 6,776   $ 6,807    
  Mexico     143     188   (24 )   432     420   3 %
  Latin America     284     236   20     808     682   18  
  EMEA     1,630     1,363   20     4,945     3,897   27  
  Japan     150     190   (21 )   662     518   28  
  Asia     671     660   2     2,109     1,727   22  
   
 
 
 
 
 
 
Total revenues   $ 4,567   $ 5,187   (12 )% $ 15,732   $ 14,051   12 %
   
 
 
 
 
 
 
Net income by region:                                  
  U.S.   $ 508   $ 571   (11 )% $ 1,774   $ 1,846   (4 )%
  Mexico     75     151   (50 )   213     275   (23 )
  Latin America     120     142   (15 )   356     403   (12 )
  EMEA     375     262   43     1,141     634   80  
  Japan     33     56   (41 )   179     152   18  
  Asia     233     242   (4 )   711     596   19  
   
 
 
 
 
 
 
Total net income   $ 1,344   $ 1,424   (6 )% $ 4,374   $ 3,906   12 %
   
 
 
 
 
 
 
Average risk capital(1)   $ 20,450   $ 20,143   2 % $ 19,915   $ 19,727   1 %
Return on risk capital(1)     26 %   28 %       29 %   26 %    
Return on invested capital(1)     19 %   21 %       22 %   20 %    
   
 
 
 
 
 
 

(1)
See footnote 4 to the table on page 4.
NM
Not meaningful

38


Capital Markets and Banking (Continued)

        Capital Markets and Banking offers a wide array of investment and commercial banking services and products, including investment banking and advisory services, debt and equity trading, institutional brokerage, foreign exchange, structured products, derivatives, and lending. Capital Markets and Banking revenue is generated primarily from fees for investment banking and advisory services, fees and spread on structured products, foreign exchange and derivatives, fees and interest on loans, and income earned on principal transactions.


3Q06 vs. 3Q05

        Revenues, net of interest expense, declined on weaker Fixed Income Markets revenues, primarily driven by lower results in commodities, interest rate products and foreign exchange. Equity Markets revenues were approximately even with the prior-year period, as improved performance in derivatives and equity finance was offset by lower results in convertibles and cash trading. Investment Banking revenues were approximately even with the prior-year period, as growth in debt underwriting revenues and increased advisory fees were offset by a decline in equity underwriting.

        Operating Expenses were down, reflecting lower production-based incentive compensation accruals, as well as a reversal of payroll tax accruals previously recorded.

        The provision for credit losses increased, driven by a $118 million pretax charge to increase loan loss reserves, reflecting portfolio growth and a change in credit rating of certain counterparties.

Regional Net Income

        Net income in the U.S. declined, primarily due to lower Fixed Income Markets and Equity Markets revenues, as well as lower Lending Revenues, partially offset by a decrease in compensation expenses (lower production-driven incentive compensation).

        Mexico net income was down due to lower Equity Underwriting and Lending revenues. Lower net income also reflected the absence of a $39 million tax benefit from provisions of the Homeland Investment Act as well as a $9 million VAT refund recorded in the prior-year period.

        Latin America net income declined on higher investment spending and increased credit costs from lower net recoveries and a loan loss reserve release recorded in the prior-year period. The increased expenses were partially offset by revenue growth in Fixed Income and Equity Markets and Investment Banking.

        EMEA net income increased, driven by double-digit revenue growth across several products, including Fixed Income and Equity Markets and Investment Banking.

        Net income in Japan declined on lower results in Fixed Income and Equity Markets.

        Net income in Asia decreased due to lower results in Equity Markets.

2006 YTD vs. 2005 YTD

        Revenues, net of interest expense, increased, driven by broad-based performance across products and regions. Fixed Income Markets revenue increases reflected growth in emerging markets trading, municipals, foreign exchange and credit products. Equity Markets revenues increased, driven by strong growth globally, including cash trading, derivatives products and convertibles. Investment Banking revenue growth was driven by higher debt underwriting revenues and increased advisory fees. Lending revenue declined, as improved credit conditions led to lower hedging results.

        Operating expenses were impacted by $589 million of SFAS 123(R) charges and higher production-related incentive compensation, as well as a growth in headcount.

        The provision for credit losses increased, driven by a $372 million pretax charge to increase loan loss reserves, reflecting growth in loans and unfunded loan commitments and an update to historical data used for certain loss estimates.

Regional Net Income

        Net income in the U.S. declined, primarily due to higher compensation expenses (the impact from SFAS 123(R) charges), as well as lower revenues in Commodities and Lending, partially offset by higher Fixed Income and Equity Markets revenues and tax benefits from the resolution of the Federal Tax Audit.

        Mexico net income was down, as growth in Fixed Income Markets revenues was partially offset by lower equity underwriting and lending revenues. Lower net income also reflected the absence of a $39 million tax benefit from provisions of the Homeland Investment Act, as well as a $9 million VAT refund, higher compensation expense and the absence of loan loss recoveries recorded in the prior-year period.

        Latin America net income declined on higher investment spending, an increase in credit costs (in comparison to the loan loss recoveries recorded in the prior-year period) and the impact of SFAS 123(R) charges. These decreases were partially offset by strong revenue growth in Equity and Fixed Income Markets in Brazil Investment Banking and by the tax benefits from the resolution of the Federal Tax Audit.

        EMEA net income increased on double-digit growth across all major product lines and geographies from higher volumes and growth in customer activity and tax benefits from the resolution of the Federal Tax Audit. The increase in net income was partially offset by higher compensation expense due to staff additions and the impact from SFAS 123(R) charges, and higher credit costs on growth in loans and unfunded loan commitments.

        Net income in Japan increased due to strong growth in Fixed Income, partially offset by a decrease in equities, and higher expenses.

        Net income in Asia increased, driven by broad-based double-digit growth across several products, including Fixed Income and Equity Markets and Advisory. The tax benefits from the resolution of the Federal Tax Audit were partially offset by the impact from SFAS 123(R) charges.

39


Transaction Services

CHART

 
  Three Months Ended September 30,
  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Net interest revenue   $ 774   $ 599   29 % $ 2,176   $ 1,652   32 %
Non-interest revenue     726     647   12     2,201     1,922   15  
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 1,500   $ 1,246   20 % $ 4,377   $ 3,574   22 %
Operating expenses     954     809   18     2,892     2,392   21  
Provision for credit losses     9     6   50     30     (1 ) NM  
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 537   $ 431   25 % $ 1,455   $ 1,183   23 %
Income taxes     151     104   45     406     322   26  
Minority interest, net of taxes     1           1     1    
   
 
 
 
 
 
 
Net income   $ 385   $ 327   18 % $ 1,048   $ 860   22 %
   
 
 
 
 
 
 
Revenues, net of interest expense, by region:                                  
  U.S.   $ 317   $ 258   23 % $ 954   $ 729   31 %
  Mexico     54     48   13     150     145   3  
  Latin America     156     137   14     463     381   22  
  EMEA     537     438   23     1,560     1,306   19  
  Japan     27     21   29     80     60   33  
  Asia     409     344   19     1,170     953   23  
   
 
 
 
 
 
 
Total revenues   $ 1,500   $ 1,246   20 % $ 4,377   $ 3,574   22 %
   
 
 
 
 
 
 
Net income by region:                                  
  U.S.   $ 38   $ 22   73 % $ 71   $ 63   13 %
  Mexico     20     26   (23 )   52     60   (13 )
  Latin America     48     39   23     148     121   22  
  EMEA     115     97   19     327     250   31  
  Japan     6     3   100     17     9   89  
  Asia     158     140   13     433     357   21  
   
 
 
 
 
 
 
Total net income   $ 385   $ 327   18 % $ 1,048   $ 860   22 %
   
 
 
 
 
 
 
Average risk capital(1)   $ 1,517   $ 1,240   22 % $ 1,523   $ 1,359   12 %
Return on risk capital(1)     101 %   105 %       92 %   85 %    
Return on invested capital(1)     57 %   56 %       52 %   47 %    
   
 
 
 
 
 
 
Key indicators:                                  
Liability balances (average in billions of dollars)   $ 180   $ 147   22 %                
Assets under custody at period end (in trillions of dollars)     9.6     8.4   14 %                
   
 
 
                 

(1)
See footnote 4 to the table on page 4.
NM
Not meaningful

40


Transaction Services (Continued)

        Transaction Services comprises Cash Management, Trade Services & Finance (Trade) and Securities & Funds Services (SFS). Cash Management and Trade provide comprehensive cash management and trade finance for corporations and financial institutions worldwide. SFS 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. Revenue is generated from fees for transaction processing, net interest revenue on Trade, loans and deposits in Cash Management and SFS, and fees on assets under custody in SFS.


3Q06 vs. 3Q05

        Revenues, net of interest expense, increased, reflecting growth in liability balances, growth in assets under custody, and higher volumes and interest rates. Average liability balances grew 22% to $180 billion in the third quarter primarily on increases in EMEA and Asia, reflecting higher volumes from new and existing customers.

        Cash Management revenue increased, reflecting growth across all regions except Mexico. The growth was attributable to higher liability balances, increased volumes, rising interest rates, and new sales.

        Securities & Funds Services revenue increased, reflecting growth across all regions except Mexico. The increase was driven by higher assets under custody, increased volumes, higher interest rates, new sales, and the impact of acquisitions. Assets under custody reached $9.6 trillion, an increase of $1.2 trillion, or 14%, on strong momentum from new sales, equity markets, and the inclusion of UNISEN assets under custody.

        Trade revenues increased, reflecting growth in EMEA. This was partially offset by a decline in Latin America.

        The change in the provision for credit losses was $3 million.

        Operating expenses increased due to increased volumes, organic business growth, investment spending, and acquisitions.

        Cash-basis loans, which are primarily trade finance receivables, were $34 million and $65 million at Sep 30, 2006 and 2005, respectively. The decrease of $31 million was primarily due to declines in Mexico.

Regional Net Income

        Net income in the U.S. increased, primarily due to revenue growth, partially offset by higher expenses from continued investment spending and acquisitions.

        Mexico net income declined, primarily due to the impact of taxes, partially offset by rising interest rates and growth in liability balances and assets under custody.

        Latin America net income increased primarily due to growth in liability balances and assets under custody, rising interest rates, and increased revenue from new sales.

        EMEA net income increased primarily from increases in liability balances and assets under custody, higher interest rates, increased revenue from new sales, and strong volumes, which drove growth in Cash Management, SFS, and Trade.

        Asia net income increased primarily due to growth in liability balances and assets under custody, rising interest rates, higher customer volumes, and increased revenue from new sales.

        Japan net income increased on growth in liability balances and assets under custody, increased revenue from new sales, and rising interest rates.

2006 YTD vs. 2005 YTD

        Revenues, net of interest expense, increased, reflecting continued growth in customer liabilities and assets under custody. In addition, higher interest rates, increased volumes, and higher sales contributed to the growth.

        Cash Management's revenue reflected growth across all regions except Mexico. The growth was a result of higher liability balances, volumes and new sales. Higher interest rates also contributed to the revenue increase.

        Securities & Funds Services experienced growth in revenues across all regions except Mexico. This was attributable to higher assets under custody, higher volumes, higher interest rates, and the impact of acquisitions. Assets under custody reached $9.6 trillion, an increase of $1.2 trillion, or 14%, on strong momentum from record sales, equity markets, and the inclusion of ABN Amro and UNISEN assets under custody.

        Trade revenues increased, principally driven by growth in EMEA and the U.S. This was partially offset by the Latin America region.

        The change in the provision for credit losses of $31 million was primarily attributable to a reserve build of $28 million in 2006.

        Operating expenses increased on organic business growth, acquisitions and investment spending.

Regional Net Income

        Net income in the U.S. increased, primarily due to revenue growth, growth in liability balances, rising interest rates, resolution of the Federal Tax Audit and the absence of a severance charge in the prior year, partially offset by continued investment spending.

        Mexico net income declined primarily on higher taxes and expenses, partially offset by growth in liability balances and rising interest rates.

        Latin America net income increased primarily on increased revenues from new sales, growth in liability balances, rising interest rates and the resolution of the Federal Tax Audit.

        EMEA net income increased primarily due to increased revenue from new sales, growth in liability balances and assets under custody, rising interest rates and strong volumes, which drove growth in Cash Management, SFS, and Trade. The resolution of the Federal Tax Audit also contributed positively to the region's results.

        Asia net income increased primarily on higher revenue from new sales, higher customer volumes, growth in liability balances and assets under custody, rising interest rates, and the resolution of the Federal Tax Audit.

        Japan net income increased primarily due to increased revenue from new sales, growth in liability balances and assets under custody, and rising interest rates.

41


Other CIB

        Other CIB includes offsets to certain line items reported in other CIB segments, certain non-recurring items and tax amounts not allocated to CIB products.

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
In millions of dollars

  2006
  2005
  2006
  2005
 
Revenues, net of interest expense   $   $ 1   $ (2 ) $ 2  
Operating expenses     13     (87 )   33     (78 )
Provision for credit losses         (3 )        
   
 
 
 
 
Income (loss) before income taxes (benefits)   $ (13 ) $ 91   $ (35 ) $ 80  
Income taxes (benefits)     (5 )   45     14     (2 )
   
 
 
 
 
Net income (loss)   $ (8 ) $ 46   $ (49 ) $ 82  
   
 
 
 
 

3Q06 vs. 3Q05

        Net income decreased, primarily reflecting the absence of a $54 million after-tax insurance recovery related to Global Crossing and other litigation matters in 2005.

42


GLOBAL WEALTH MANAGEMENT

GRAPHIC

Global Wealth Management is comprised of the Smith Barney Private Client businesses (branded Citigroup Wealth Advisors outside the U.S.), Citigroup Private Bank, and Citigroup Investment Research.

 
  Three Months Ended
September 30,

  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Net interest revenue   $ 480   $ 417   15 % $ 1,384   $ 1,269   9 %
Non-interest revenue     2,006     1,757   14     6,077     5,178   17  
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 2,486   $ 2,174   14 % $ 7,461   $ 6,447   16 %
Operating expenses     1,894     1,673   13     5,910     4,949   19  
Provision for loan losses     16     30   (47 )   29     14   NM  
   
 
 
 
 
 
 
Income before taxes   $ 576   $ 471   22 % $ 1,522   $ 1,484   3 %
Income taxes     177     165   7     489     537   (9 )
   
 
 
 
 
 
 
Net income   $ 399   $ 306   30 % $ 1,033   $ 947   9 %
   
 
 
 
 
 
 
Revenues, net of interest expense by region:                                  
  U.S.   $ 2,153   $ 1,923   12 % $ 6,456   $ 5,647   14 %
  Mexico     32     30   7     96     92   4  
  Latin America     47     48   (2 )   136     156   (13 )
  EMEA     83     79   5     241     221   9  
  Japan         (13 ) 100         (6 ) 100  
  Asia     171     107   60     532     337   58  
   
 
 
 
 
 
 
Total revenues   $ 2,486   $ 2,174   14 % $ 7,461   $ 6,447   16 %
   
 
 
 
 
 
 
Net income (loss) by region:                                  
  U.S.   $ 342   $ 288   19 % $ 860   $ 876   (2 )%
  Mexico     9     12   (25 )   27     35   (23 )
  Latin America     3     1   NM     8     16   (50 )
  EMEA     7     8   (13 )   15     10   50  
  Japan         (29 ) 100         (82 ) 100  
  Asia     38     26   46     123     92   34  
   
 
 
 
 
 
 
Total net income   $ 399   $ 306   30 % $ 1,033   $ 947   9 %
   
 
 
 
 
 
 
Average risk capital(1)   $ 2,364   $ 2,153   10 % $ 2,423   $ 2,079   17 %
Return on risk capital(1)     67 %   56 %       57 %   61 %    
Return on invested capital(1)     41 %   46 %       35 %   50 %    
   
 
 
 
 
 
 

(1)
See footnote 4 to the table on page 4.

NM
Not meaningful

43


Smith Barney

GRAPHIC

        Smith Barney provides investment advice, financial planning and brokerage services to affluent individuals, companies and non-profits through a network of more than 13,000 Financial Advisors in more than 600 offices primarily in the U.S. Smith Barney generates revenue from managing client assets, acting as a broker for clients in the purchase and sale of securities, financing customers' securities transactions and other borrowing needs through lending and through the sale of mutual funds.

 
  Three Months Ended
September 30,

  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Net interest revenue   $ 247   $ 158   56 % $ 659   $ 456   45 %
Non-interest revenue     1,747     1,570   11     5,312     4,588   16  
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 1,994   $ 1,728   15 % $ 5,971   $ 5,044   18 %
Operating expenses     1,565     1,366   15     4,909     3,969   24  
Provision for loan losses     (1 )   7   NM     (1 )   11   NM  
   
 
 
 
 
 
 
Income before taxes   $ 430   $ 355   21 % $ 1,063   $ 1,064    
Income taxes     136     128   6     363     401   (9 )%
   
 
 
 
 
 
 
Net income   $ 294   $ 227   30 % $ 700   $ 663   6 %
   
 
 
 
 
 
 
Average risk capital(1)   $ 1,436   $ 958   50 % $ 1,438   $ 920   56 %
Return on risk capital(1)     81 %   94 %       65 %   96 %    
Return on invested capital(1)     41 %   67 %       33 %   68 %    
   
 
 
 
 
 
 
Key indicators: (in billions of dollars)                                  
Total assets under fee-based management   $ 322   $ 258   25 %                
Total Smith Barney client assets   $ 1,173   $ 1,015   16 %                

Financial advisors (#)

 

 

13,076

 

 

12,111

 

8

%

 

 

 

 

 

 

 

 
Annualized revenue per financial advisor (in thousands of dollars)   $ 606   $ 565   7 %                
   
 
 
                 

(1)
The increase in average risk capital from the 2005 second quarter was primarily attributed to methodology changes implemented during the 2006 first quarter. See footnote 4 to the table on page 4.

NM
Not meaningful

44


Smith Barney (Continued)

3Q06 vs. 3Q05

        Revenues, net of interest expense, increased primarily due to a 32% increase in fee-based and net interest revenues and a 7% decrease in transactional revenues, reflecting increased customer volumes and the acquisition of the Legg Mason retail brokerage business. The recurring revenue increase can be attributed to the BDP Tiering program, which was launched in September. It was also due to an increase in business volume in Managed Accounts, Mutual Fund and Annuity.

        Operating expenses were up mainly due to higher compensation expense, including $59 million of SFAS 123(R) accruals, integration costs of the Legg Mason retail brokerage business and higher legal costs.

        Total assets under fee-based management were up from the prior-year period. Assets that increased were both in the Consulting Group and Advisory Accounts and Financial Advisor Managed Accounts aligned with Smith Barney's strategic direction towards advisory business. Total client assets, including assets under fee-based management increased compared to the prior-year quarter. This reflected organic growth and the addition of Legg Mason client assets. Net flows were down compared to the prior-year quarter due to the attrition of financial advisors and market action.

2006 YTD vs. 2005 YTD

        Revenues, net of interest expense, increased primarily due to a 31% increase in fee-based revenues and a 2% increase in transactional revenues, reflecting increased customer volumes and the acquisition of the Legg Mason retail brokerage business. The launch of the BDP Tiering program in September caused a large portion of the revenue increase, along with increased in business volume in products such as Managed Accounts, Mutual Fund and Annuity.

        Operating expenses increased mainly due to higher compensation expense, including $286 million of SFAS 123(R) charges, integration costs of the Legg Mason retail brokerage business, and higher legal costs.

        Net flows were down compared to the prior nine months due to attrition and market action.

45


Private Bank

GRAPHIC

 
  Three Months Ended
September 30,

  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Net interest revenue   $ 233   $ 259   (10 )% $ 725   $ 813   (11 )%
Non-interest revenue     259     187   39     765     590   30  
   
 
 
 
 
 
 
Revenues, net of interest expense   $ 492   $ 446   10 % $ 1,490   $ 1,403   6 %
Operating expenses     329     307   7     1,001     980   2  
Provision for loan losses     17     23   (26 )   30     3   NM  
   
 
 
 
 
 
 
Income before taxes   $ 146   $ 116   26 % $ 459   $ 420   9 %
Income taxes     41     37   11     126     136   (7 )
   
 
 
 
 
 
 
Net income   $ 105   $ 79   33 % $ 333   $ 284   17 %
   
 
 
 
 
 
 
Revenues, net of interest expense, by region:                                  
  U.S.   $ 204   $ 195   5 % $ 624   $ 603   3 %
  Mexico     32     30   7     97     92   5  
  Latin America     47     48   (2 )   137     156   (12 )
  EMEA     76     79   (4 )   220     221    
  Japan         (13 ) 100         (6 ) 100  
  Asia     133     107   24     412     337   22  
   
 
 
 
 
 
 
Total Revenues   $ 492   $ 446   10 % $ 1,490   $ 1,403   6 %
   
 
 
 
 
 
 
Net income (loss) by region:                                  
  U.S.   $ 54   $ 61   (11 )% $ 180   $ 213   (15 )%
  Mexico     9     12   (25 )   27     35   (23 )
  Latin America     3     1   NM     8     16   (50 )
  EMEA     5     8   (38 )   10     10    
  Japan         (29 ) 100         (82 ) 100  
  Asia     34     26   31     108     92   17  
   
 
 
 
 
 
 
Total net income   $ 105   $ 79   33 % $ 333   $ 284   17 %
   
 
 
 
 
 
 
Average risk capital(1)   $ 928   $ 1,195   (22 )% $ 985   $ 1,159   (15 )%
Return on risk capital(1)     45 %   26 %       45 %   33 %    
Return on invested capital(1)     41 %   24 %       42 %   31 %    
   
 
 
 
 
 
 
Key indicators: (in billions of dollars)                                  
Client assets under fee-based mgt   $ 52   $ 49   6 %                
Other client activity     181     166   9 %                
   
 
 
                 
Total client business volumes   $ 233   $ 215   8 %                
   
 
 
                 

(1)
See footnote 4 to the table on page 4.

NM
Not meaningful

46


Private Bank (Continued)

        Private Bank provides personalized wealth management services for high-net-worth clients in 33 countries and territories. These services include comprehensive investment management (investment funds management, capital markets solutions, trust, fiduciary and custody services), investment finance (credit services including real estate financing, commitments and letters of credit) and banking services (deposit, checking and savings accounts, as well as cash management and other traditional banking services).


3Q06 vs. 3Q05

        Revenues, net of interest expense, increased on strong growth in Asia and the absence of prior-year losses related to the closing of the Japan Private Bank.

        U.S. revenue increased, primarily driven by an increase in banking spreads and lending volumes, partially offset by lending spread compression.

        Mexico revenue increased, mainly due to an increase in banking and investment revenue, partially offset by lower lending and trust revenue.

        Latin America revenue decreased, primarily driven by lower revenue in banking and lending products, partially offset by an increase in investment revenue.

        EMEA revenue decreased, driven by higher investments revenue, partially offset by the transfer of the Citigroup Wealth Advisors (CWA) business to Smith Barney.

        Asia revenue increased, reflecting strong capital markets activity.

        Operating expenses increased on higher professional staffing, investment spending to expand in on-shore markets and SFAS 123(R) charges of $3 million, partially offset by the absence of Japan expenses in the 2006 third quarter.

        Provision for loan losses includes $14 million from portfolio growth and $3 million on the establishment of a SFAS 114 reserve. The 2005 third quarter includes a $24 million increase to the reserve reflecting increases in Japan, changes in the application of environmental factors and a SFAS 114 specific loan loss reserve increase.

        Client business volumes increased $18 billion, or 8%. Growth was led by $8 billion in banking and fiduciary assets growth, primarily driven by EMEA and Asia. Investment Finance volumes increased $4 billion mainly driven by growth in the U.S. region. Custody assets grew by $3 billion primarily driven by U.S., Asia and EMEA. Managed assets increased by $3 billion due to increases in Latin America and the U.S.

2006 YTD vs. 2005 YTD

        Revenues, net of interest expense, increased on strong growth in Asia.

        U.S. revenue increased, primarily driven by an increase in banking spreads and lending volumes, partially offset by lending spread compression.

        Mexico revenue increased, mainly due to an increase in banking and investment revenue, partially offset by lower lending and trust revenue.

        Latin America revenue decreased, primarily driven by lower spreads in discretionary and lending portfolios, lower lending volumes and lower banking revenue.

        EMEA revenue decreased slightly, driven by higher capital markets revenue, offset by the transfer of the CWA business to Smith Barney.

        Asia revenue increased, reflecting strong capital markets activity.

        Operating expenses increased by $21 million as the absence of Japan expenses was offset by SFAS 123(R) charges, higher expenses due to increased professional staffing and investment spending to expand in on-shore markets in the first nine months of 2006. The first nine months of 2006 include SFAS 123(R) charges of $25 million.

        Provision for loan losses was $30 million in the first nine months of 2006 compared to $3 million in the first nine months of 2005. The provision in 2006 is primarily due to reserve builds of $34 million, partially offset by a $4 million recovery in Asia. 2005 includes net credit reserve releases and recoveries of $11 million in Asia, EMEA and the U.S offset by a build of $24 million for increased exposure in Japan.

47


ALTERNATIVE INVESTMENTS

GRAPHIC

        Alternative Investments (AI) manages capital on behalf of Citigroup, as well as for third-party institutional and high-net-worth investors. AI 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. AI's business model is to enable its 14 investment centers to retain the entrepreneurial qualities required to capitalize on evolving opportunities, while benefiting from the intellectual, operational and financial resources of Citigroup.

 
  Three Months Ended
September 30,

  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Net interest revenue   $ 5   $ 83   (94 )% $ 1   $ 217   (100 )%
Non-interest revenue     329     637   (48 )   1,592     2,481   (36 )
   
 
 
 
 
 
 
Total revenues, net of interest expense   $ 334   $ 720   (54 )% $ 1,593   $ 2,698   (41 )%
   
 
 
 
 
 
 
Net realized and net change in unrealized gains   $ 200   $ 442   (55 )% $ 1,238   $ 2,091   (41 )%
Fees, dividends and interest     58     194   (70 )   156     361   (57 )
Other     (21 )   3   NM     (86 )   20   NM  
   
 
 
 
 
 
 
Total proprietary investment activities revenues   $ 237   $ 639   (63 )% $ 1,308   $ 2,472   (47 )%
Client revenues(1)     97     81   20     285     226   26  
   
 
 
 
 
 
 
Total revenues, net of interest expense   $ 334   $ 720   (54 )% $ 1,593   $ 2,698   (41 )%
Operating expenses     137     167   (18 )   517     431   20  
Provision for loan losses         (2 ) 100     (13 )   (2 ) NM  
   
 
 
 
 
 
 
Income before taxes and minority interest   $ 197   $ 555   (65 )% $ 1,089   $ 2,269   (52 )%
   
 
 
 
 
 
 
Income taxes   $ 70   $ 181   (61 )% $ 319   $ 782   (59 )%
Minority interest, net of taxes     10     35   (71 )   43     401   (89 )
   
 
 
 
 
 
 
Net income   $ 117   $ 339   (65 )% $ 727   $ 1,086   (33 )%
   
 
 
 
 
 
 

(1)
Includes fee income.

NM
Not meaningful

48


ALTERNATIVE INVESTMENTS (Continued)

 
  Three Months Ended
September 30,

  %
Change

  Nine Months Ended
September 30,

  %
Change

 
In millions of dollars

  2006
  2005
  3Q06 vs.
3Q05

  2006
  2005
  YTD06 vs.
YTD05

 
Revenue by product:                                  
Client(1)   $ 97   $ 81   20 % $ 285   $ 226   26 %
   
 
 
 
 
 
 
  Private equity     56     449   (88 )   785     2,183   (64 )
  Hedge funds     1     91   (99 )   65     74   (12 )
  Other     180     99   82     458     215   NM  
   
 
 
 
 
 
 
Proprietary     237     639   (63 )   1,308     2,472   (47 )
   
 
 
 
 
 
 
Total   $ 334   $ 720   (54 ) $ 1,593   $ 2,698   (41 )
   
 
 
 
 
 
 
Average risk capital(1)   $ 4.0   $ 4.3   (7 )% $ 4.2   $ 4.2    
Return on risk capital(1)     12 %   31 %       23 %   35 %    
Return on invested capital(1)     8 %   29 %       20 %   32 %    
   
 
 
 
 
 
 
Key indicators: (in billions of dollars)                                  
Capital under management:                                  
  Client   $ 33.5   $ 24.8   35 %                
  Proprietary     10.2     10.7   (5 )%                
   
 
 
 
 
 
 
Total   $ 43.7   $ 35.5   23 %                
   
 
 
 
 
 
 

(1)
See footnote 4 to the table on page 4.

NM
Not meaningful

3Q06 vs. 3Q05

        Total proprietary revenues, net of interest expense, for the third quarter of 2006 were made up of revenues from other investment activity of $180 million, private equity of $56 million and hedge funds of $1 million. Private equity revenue declined $393 million from the 2005 third quarter, primarily driven by the absence of prior-year gains from the sale of portfolio assets. Other investment activities revenue increased $81 million from the 2005 third quarter, largely due to realized gains from sales of MetLife shares. Hedge fund revenue declined by $90 million on lower investment performance. Client revenues increased, reflecting increased management fees from a 35% growth in client capital under management.

        Operating expenses in the third quarter of 2006 declined, primarily due to decreased performance-driven compensation in private equity portfolios.

        Minority interest, net of tax, declined, primarily on lower private equity gains related to underlying investments held by consolidated majority-owned legal entities. The impact of minority interest is reflected in fees, dividends, and interest, and net realized and net change in unrealized gains.

        Proprietary capital under management decreased from the third quarter of 2005, primarily driven by the sale of MetLife and St. Paul Travelers (STA) shares. This decline was partially offset by the funding of proprietary investments in private equity, hedge funds and real estate.

        Client capital under management increased on inflows from institutional and high-net-worth clients.

        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. The Company's investment in CVC Brazil is subject to a variety of unresolved matters, including pending litigation involving some of its portfolio companies, which could affect future valuations of these companies. *

        The sale of Citigroup's Life Insurance and Annuities business to MetLife, Inc. on July 1, 2005, included $1.0 billion, or 22.4 million shares, in MetLife equity securities in the sale proceeds. On July 3, 2006, the company completed the sale of all 22.4 million shares related to a forward sale agreement previously executed. The Company recorded a gain of $133 million pretax in the third quarter of 2006. The investment in Legg Mason resulted from the sale of Citigroup's Asset Management business to Legg Mason, Inc. on December 1, 2005, which included a combination of Legg Mason common and convertible preferred equity securities valued at $2.298 billion in the sale proceeds. Total equivalent number of common shares was 18.7 million, of which 10.3 million were sold in March 2006. The Legg Mason equity securities are classified on Citigroup's Consolidated Balance Sheet as Investments (available-for-sale).


*
This is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 84.

49


Alternative Investments (Continued)

2006 YTD vs. 2005 YTD

        Total proprietary revenues, net of interest expense, for the nine months of 2006 of $1,308 million, were comprised of revenues from private equity of $785 million, other investment activity of $458 million and hedge funds of $65 million. Private equity revenue declined $1,398 million from the first nine months of 2005, primarily driven by the absence of prior-year gains from the sale of portfolio assets. Other investment activities revenue increased $243 million from the first nine months of 2005, largely due to realized gains from the liquidation of Citigroup's investment in St. Paul shares and MetLife shares. Hedge fund revenue decreased $9 million as lower investment performance was partially offset by an increase in average capital invested. Client revenues increased $59 million, reflecting increased management and performance fees from a 35% growth in average client capital under management.

        Operating expenses in the first nine months of 2006 increased from the first nine months of 2005, primarily due to higher employee-related expenses and the impact of SFAS 123(R) charges.

        Minority interest, net of tax, declined on absence of prior-year private equity gains related to underlying investments held by consolidated majority-owned legal entities. The impact of minority interest is reflected in fees, dividends, and interest, and net realized gains/(losses) consistent with proceeds received by minority interests.

        Net Income reflects higher tax benefits including $58 million resulting from the resolution of the Federal Tax Audit in the first quarter of 2006.

Legg Mason Equity Securities

Company

  Type of
Ownership

  Shares
owned on
September 30,
2006

  Sale Restriction
  Market Value as
of September 30,
2006

  Pretax
Unrealized
Gains (Losses)
as of
September 30,
2006

 
 
   
   
   
  ($ millions)

  ($ millions)

 
Legg Mason, Inc.   Non-voting convertible preferred stock representing approximately 5.9% ownership   8.4 shares (convertible into 8.4 million shares of common stock upon sale to non-affiliate)   2.2 million shares may be sold publicly at any time and the remaining 6.2 million shares may be sold after December 1, 2006   $ 846   $ (183 )(1)
   
 
 
 
 
 
Total               $ 846   $ (183 )
   
 
 
 
 
 

(1)
On October 11, 2006, Legg Mason issued a press release in which it warned that its earnings for the quarter ended September 30, 2006 would be weaker than expected. As a result, Legg Mason shares declined 17% from the prior-day close, and Citigroup's pretax unrealized loss was ($298) million at the close of trading on October 11, 2006. Citigroup's pretax unrealized loss was ($271) million at the close of trading on November 2, 2006.

50


CORPORATE/OTHER

        Corporate/Other includes treasury results, unallocated corporate expenses, offsets to certain line-item reclassifications reported in the business segments (inter-segment eliminations), the results of discontinued operations and unallocated taxes.

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
In millions of dollars

  2006
  2005
  2006
  2005
 
Net interest revenue   $ (93 ) $ (90 ) $ (458 ) $ (213 )
Non-interest revenue     (206 )   (61 )   (333 )   (142 )
   
 
 
 
 
Revenues, net of interest expense   $ (299 ) $ (151 ) $ (791 ) $ (355 )
Operating expenses     (33 )   60     47     261  
Provisions for benefits, claims and credit losses         (1 )       (2 )
   
 
 
 
 
Income (loss) from continuing operations before taxes and minority interest   $ (266 ) $ (210 ) $ (838 ) $ (614 )
Income tax benefits     (137 )   (39 )   (381 )   (113 )
Minority interest, net of taxes         6     1     9  
   
 
 
 
 
Income (loss) from continuing operations   $ (129 ) $ (177 ) $ (458 ) $ (510 )
Income from discontinued operations     202     2,155     289     2,823  
   
 
 
 
 
Net income (loss)   $ 73   $ 1,978   $ (169 ) $ 2,313  
   
 
 
 
 

3Q06 vs. 3Q05

        Revenues, net of interest expense, declined, primarily on lower treasury results and lower intersegment eliminations. Lower treasury results were primarily driven by higher funding costs and lower results from risk management activities.

        Operating expenses declined, due to lower intersegment eliminations and an amendment to the Company's retirement benefit plans. These declines were partially offset by increased staffing and technology costs.

        Income tax benefits increased on lower pretax income, lower taxes held at the corporate level and a tax release of $8 million in the 2006 third quarter relating to the resolution of the New York Tax Audits.

2006 YTD vs. 2005 YTD

        Revenues, net of interest expense, declined on lower intersegment eliminations and lower treasury results. Higher interest rates and an extension of the debt maturity profile, partially offset by lower funding balances, drove a decline in treasury results.

        Operating expenses declined due to lower intersegment eliminations, and an amendment to the Company's retirement benefit plans, partially offset by increased staffing and technology costs.

        Income tax benefits increased due to a higher pretax loss in the current year, a tax reserve release of $61 million relating to the resolution of the Federal Tax Audit and a release of $8 million relating to the resolution of the New York Tax Audits.

Discontinued Operations

        Discontinued operations represent the operations in the Company's Sale of the Asset Management Business and the Sale of the Life Insurance and Annuities Business. For 2006, income from discontinued operations included gains and tax benefits relating to the final settlement of the Life Insurance and Annuities and Asset Management Sale Transactions and a gain from the Sale of the Asset Management business in Poland. Tax benefits included a tax reserve release of $59 million relating to the resolution of the Federal Tax Audit and a tax benefit of $17 million related to the resolution of the New York Tax Audits. See Note 3 to the Consolidated Financial Statements on page 94.

51


MANAGING GLOBAL RISK

        Citigroup's risk management framework balances strong corporate oversight with well-defined independent risk management functions within each business. The Citigroup risk management framework is described in Citigroup's 2005 Annual Report on Form 10-K.

        The Citigroup Senior Risk Officer is responsible for:

        The independent risk managers at the business level are responsible for establishing and implementing risk management policies and practices within their business, for overseeing the risk in their business, and for responding to the needs and issues of their business.

RISK CAPITAL

        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.

        Risk Capital is used in the calculation of return on risk capital (RORC) and return on invested capital (ROIC).

        RORC, calculated as annualized income from continuing operations divided by average risk capital, compares business income with the capital required to absorb the risks. This is analogous 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 goodwill and intangible assets of each business. This adjusted annualized income is divided by the sum of each business' average risk capital, goodwill 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, goodwill and intangible assets—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.

        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.

        At September 30, 2006, June 30, 2006, and September 30, 2005, risk capital for Citigroup was comprised of the following risk types:

In billions of dollars

  Sept. 30,
2006

  June 30,
2006

  Sept. 30,
2005

 
Credit risk   $ 36.1   $ 35.7   $ 35.9  
Market risk     18.8     17.6     13.5  
Operational risk     8.3     8.1     8.3  
Insurance risk     0.2     0.2     0.2  
Intersector diversification(1)     (6.3 )   (5.9 )   (4.8 )
   
 
 
 
Total Citigroup   $ 57.1   $ 55.7   $ 53.1  
   
 
 
 
Return on risk capital (quarter)     37 %   38 %   37 %
Return on invested capital (quarter)     19 %   19 %   25 %
   
 
 
 
Return on risk capital (nine months)     39 %         38 %
Return on invested capital (nine months)     19 %         21 %
   
 
 
 

(1)
Reduction in risk from diversification between sectors.

        The increase in Citigroup's risk capital versus September 30, 2005 was primarily related to the year-end methodology update for market risk for non-trading positions, offset by an increase in the diversification benefit.

        It is expected, due to the evolving nature of risk capital, that these methodologies will continue to be refined.

        The increase in Citigroup's risk capital versus June 30, 2006 was primarily related to increases in interest rate exposure in consumer businesses and in credit risk due to higher exposures, offset by an increase in the diversification benefit. It is expected, due to the evolving nature of risk capital, that these methodologies will continue to be refined.

        Pages 18 to 49 of this Management's Discussion and Analysis provide disclosures, for each segment and product, of average risk capital, return on risk capital and return on invested capital.

52


        Average year-over-year risk capital increased $2.8 billion, from $53.6 billion to $56.4 billion. Average risk capital of $15.3 billion in U.S. Consumer increased $1.5 billion or 11%, driven mostly by the year-end methodology update for market risk for non-trading positions. Average risk capital of $12.6 billion in International Consumer decreased $950 million or 7%, driven mostly by lower exposure. Average risk capital of $22 billion in Corporate and Investment Banking increased $584 million or 3%, primarily driven by portfolio growth. Average risk capital of $2.4 billion in Global Wealth Management increased $211 million or 10%, primarily driven by the new operational risk methodology. Corporate/Other average risk capital increased $1.8 billion, from ($1.6) billion to $143 million, due to the methodological change in market risk, partially offset by intersector diversification.

CREDIT RISK MANAGEMENT PROCESS

        Credit risk is the potential for financial loss resulting from the failure of a borrower or counterparty to honor its financial or contractual obligations. Credit risk arises in many of the Company's business activities, including:


GRAPHIC

53


DETAILS OF CREDIT LOSS EXPERIENCE

In millions of dollars

  3rd Qtr.
2006

  2nd Qtr.
2006

  1st Qtr.
2006

  4th Qtr.
2005

  3rd Qtr.
2005

 
Allowance for loan losses at beginning of period   $ 9,144   $ 9,505   $ 9,782   $ 10,015   $ 10,418  
   
 
 
 
 
 
Provision for loan losses                                
  Consumer   $ 1,736   $ 1,426   $ 1,446   $ 1,936   $ 2,584  
  Corporate     57     10     (50 )   (65 )   (59 )
   
 
 
 
 
 
    $ 1,793   $ 1,436   $ 1,396   $ 1,871   $ 2,525  
   
 
 
 
 
 
Gross credit losses                                
Consumer                                
  In U.S. offices   $ 1,091   $ 1,090   $ 1,105   $ 1,531   $ 1,380  
  In offices outside the U.S.     1,227     1,145     1,037     955     2,000  
Corporate                                
  In U.S. offices     6     44     15     68   $ 4  
  In offices outside the U.S.     38     75     26     60     60  
   
 
 
 
 
 
    $ 2,362   $ 2,354   $ 2,183   $ 2,614   $ 3,444  
   
 
 
 
 
 
Credit recoveries                                
Consumer                                
  In U.S. offices   $ 153   $ 183   $ 190   $ 224   $ 242  
  In offices outside the U.S.     350     298     319     227     212  
Corporate                                
  In U.S. offices     5     12     2     94     39  
  In offices outside the U.S.     48     65     72     146     148  
   
 
 
 
 
 
    $ 556   $ 558   $ 583   $ 691   $ 641  
   
 
 
 
 
 
Net credit losses                                
  In U.S. offices   $ 939   $ 939   $ 928   $ 1,281   $ 1,103  
  In offices outside the U.S.     867     857     672     642     1,700  
   
 
 
 
 
 
Total   $ 1,806   $ 1,796   $ 1,600   $ 1,923   $ 2,803  
   
 
 
 
 
 
Other—net(1)(2)(3)(4)(5)   $ (152 ) $ (1 ) $ (73 ) $ (181 ) $ (125 )
   
 
 
 
 
 
Allowance for loan losses at end of period   $ 8,979   $ 9,144   $ 9,505   $ 9,782   $ 10,015  
   
 
 
 
 
 
Allowance for unfunded lending commitments(6)   $ 1,100   $ 1,050   $ 900   $ 850   $ 800  
   
 
 
 
 
 
Total allowance for loans and unfunded lending commitments   $ 10,079   $ 10,194   $ 10,405   $ 10,632   $ 10,815  
   
 
 
 
 
 
Net consumer credit losses   $ 1,815   $ 1,754   $ 1,633   $ 2,035   $ 2,926  
As a percentage of average consumer loans     1.49 %   1.48 %   1.46 %   1.82 %   2.68 %
   
 
 
 
 
 
Net corporate credit losses/(recoveries)   $ (9 ) $ 42   $ (33 ) $ (112 ) $ (123 )
As a percentage of average corporate loans     NM         NM     NM     NM  
   
 
 
 
 
 

(1)
The 2006 third quarter includes reductions to the loan loss reserve of $140 million related to securitizations and portfolio sales.

(2)
The 2006 second quarter includes reductions to the loan loss reserve of $125 million related to securitizations, offset by $84 million of additions related to the Credicard acquisition.

(3)
The 2006 first quarter includes reductions to the loan loss reserve of $90 million related to securitizations.

(4)
The 2005 fourth quarter includes reductions to the loan loss reserve of $186 million related to securitizations.

(5)
The 2005 third quarter includes reductions to the loan loss reserve of $137 million related to securitizations, offset by the $23 million of loan loss reserves related to the purchased distressed loans reclassified from Other Assets.

(6)
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

54


CASH-BASIS, RENEGOTIATED, AND PAST DUE LOANS

In millions of dollars

  September 30,
2006

  June 30,
2006

  March 31,
2006

  December 31,
2005

  September 30,
2005

Corporate cash-basis loans(1)                              
Collateral dependent (at lower of cost or collateral value)(2)   $ 15   $   $   $ 6   $ 6
Other     677     799     821     998     1,204
   
 
 
 
 
Total   $ 692   $ 799   $ 821   $ 1,004   $ 1,210
   
 
 
 
 
Corporate cash-basis loans(1)                              
In U.S. offices   $ 23   $ 24   $ 65   $ 81   $ 74
In offices outside the U.S.     669     775     756     923     1,136
   
 
 
 
 
Total   $ 692   $ 799   $ 821   $ 1,004   $ 1,210
   
 
 
 
 
Renegotiated loans (includes Corporate and Commercial Business Loans)   $ 23   $ 23   $ 30   $ 32   $ 29
   
 
 
 
 
Consumer loans on which accrual of interest had been suspended                              
In U.S. offices   $ 2,231   $ 1,985   $ 2,088   $ 2,307   $ 2,224
In offices outside the U.S.     1,958     1,872     1,664     1,713     1,597
   
 
 
 
 
Total   $ 4,189   $ 3,857   $ 3,752   $ 4,020   $ 3,821
   
 
 
 
 
Accruing loans 90 or more days delinquent(3)                              
In U.S. offices   $ 2,576   $ 2,403   $ 2,531   $ 2,886   $ 2,823
In offices outside the U.S.     448     431     410     391     457
   
 
 
 
 
Total   $ 3,024   $ 2,834   $ 2,941   $ 3,277   $ 3,280
   
 
 
 
 

(1)
Excludes purchased distressed loans accounted for in accordance with Statement of Position 03-3, "Accounting for Certain Loans on Debt Securities Acquired in a Transfer" (SOP 03-3). This pronouncement was adopted in the 2005 third quarter.

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

(3)
Substantially comprised of consumer loans of which $1,450 million, $1,437 million, $1,465 million, $1,591 million, and $1,690 million are government-guaranteed student loans and Federal Housing Authority mortgages at September 30, 2006, June 30, 2006, March 31, 2006, December 31, 2005, and September 30, 2005, respectively.

Other Real Estate Owned and Other Repossessed Assets

In millions of dollars

  September 30,
2006

  June 30,
2006

  March 31,
2006

  December 31,
2005

  September 30,
2005

Other real estate owned(1)                              
Consumer   $ 356   $ 324   $ 322   $ 279   $ 283
Corporate     193     171     144     150     153
   
 
 
 
 
Total other real estate owned   $ 549   $ 495   $ 466   $ 429   $ 436
   
 
 
 
 
Other repossessed assets   $ 62   $ 53   $ 52   $ 62   $ 57
   
 
 
 
 

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

55


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. 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.

        Commercial Business includes loans and leases made principally to small- and middle-market businesses. These are placed on a non-accrual basis when it is determined that the payment of interest or principal is past due for 90 days or more, except when the loan is well secured and in the process of collection.

        The following table summarizes delinquency and net credit loss experience in both the managed and on-balance sheet consumer loan portfolios. The managed loan portfolio includes held-for-sale and securitized credit card receivables.    Only U.S. Cards from a product view and U.S. from a regional view are impacted. Although a managed basis presentation is not in conformity with GAAP, the Company believes managed credit statistics provide 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 U.S. Cards business considers both on-balance sheet and securitized balances (together, its managed portfolio) when determining capital allocation and general management decisions and compensation. Furthermore, investors use information about the credit quality of the entire managed portfolio, as the results of both the on-balance sheet and securitized portfolios impact the overall performance of the U.S. Cards business. For a further discussion of managed-basis reporting, see Note 14 to the Consolidated Financial Statements on page 109.

56


Consumer Loan Delinquency Amounts, Net Credit Losses, and Ratios

 
  Total
Loans

  90 Days or More Past Due(1)
  Average
Loans

  Net Credit Losses(1)
 
Product View:

  Sept. 30,
2006

  Sept. 30,
2006

  June 30,
2006

  Sept. 30,
2005

  3rd Qtr.
2