The following information was extracted from Citigroup, Inc.€™s 2009 annual report.
From letter to shareholders:
Financial Strength
While Citi started the year as a TARP institution receiving €œexceptional financial assistance,€ by the end of the year our capital and liquidity positions were among the strongest in the banking world. We repaid TARP and exited the loss-sharing agreement with the U.S. government. Tier 1 Common rose by nearly $82 billion to more than $104 billion, with a ratio of 9.6%, and we had a Tier 1 Capital Ratio36 of 11.7%€”one of the highest in the industry. Structural liquidity, at 73%, was in excellent shape. The allowance for loan loss reserves stood at $36 billion or 6.1% of loans. Worldwide, deposits grew by 8% to $836 billion. The other essential component of Citi€™s revived financial strength has been a large reduction in our risk exposure. By year end, we had reduced assets on our balance sheet by half a trillion dollars, or 21%, from peak levels in the third quarter of 2007. This includes a substantial decline in our riskiest assets over those years.
The actions we took restored Citi€™s financial strength and therefore were essential. I deeply regret that they also resulted in significant dilution for our shareholders. Citi remains committed to preserving our considerable financial strength and remaining one of the strongest banks in the world.
Selected details of Citigroup€™s credit loss experience follow:

Required:
1. Examine the selected details of Citigroup€™s credit loss experience.
a. How does the dollar amount of loans charged off in 2009 compare with that of 2008?
b. How much was added to the Provision for loan losses in 2009?
c. What is the trend in the allowance for loan losses as a percentage of total loans over the period 2005€“2009?
2. As a consequence of your findings in requirement 1, how (if at all) does this new information affect your expectation regarding the future performance of Citigroup€™s existing loans? To answer this question, it will be helpful to read Citigroup€™s Management Discussion and Analysis (available at www.citi.com/citi/fin/data/ar09c_en.pdf.), particularly pages 10 and 11.
3. What is the effect of having to comply with SFAS 166 and SFAS 167 on Citigroup€™s capital ratios? Briefly explain why this effect occurs. Refer to the Doyle National Bank discussion on pages439€“440.

Transcribed Image Text:

2009 2008 2007 2006 2005 S29,616 (32,784) 2,043 (30,741) (1,602) 38,760 S36,033 $16,177 (20,760) 1,749 (19,011) 1,164) 33,674 $29,616 8,940 (11,864) 1,938 (9,926) S11,269 (9,168) 2,352 (6,816) (1,525) 6,854 9,782 Allowance for loan losses at January 1 Loans charged off Recoveries on loans previously charged off Net loans charged off Other -Net Provision for loan losses Balance at December 31 $9,782 (8,640) 1,779 (6,861) (301) 6,320 $8,940 271 16,832 $16,117 Allowance for loan losses as a percentage o Net consumer credit losses as a percentage of average f total loans 6.09% 4.27% 3.34% 0.84% 2.07% 1.32% 1.68% consumer loans 5.44% 1.87% 1.52% 1.76% Net corporate credit losses as a percentage of average corporate loans 3.12% 0.30% 0.05% NM