The following information was extracted from Citigroup, Inc.s 2009 annual report. From letter to shareholders: Financial Strength
Question:
From letter to shareholders:
Financial Strength
While Citi started the year as a TARP institution receiving exceptional 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 Citis 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 Citis 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 Citigroups credit loss experience follow:
Required:
1. Examine the selected details of Citigroups 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 20052009?
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 Citigroups existing loans? To answer this question, it will be helpful to read Citigroups 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 Citigroups capital ratios? Briefly explain why this effect occurs. Refer to the Doyle National Bank discussion on pages439440.
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
Step by Step Answer:
Financial Reporting and Analysis
ISBN: 978-0078025679
6th edition
Authors: Flawrence Revsine, Daniel Collins, Bruce, Mittelstaedt, Leon