(1) What are the main driver(s) of the bank’s profit? (loan growth, cost cutting or a release of loss reserves) * Short term driver
Slide 6: Firstly, i would like to talk with you about the main drivers of Citigroup’s profitability. Overall, Citigroup Q1 financial performance was an improved net income of $3.0 billion, which is a 4-quarter high. Citigroup revenues in the first quarter 2011 were $19.7 billion, up 7% sequentially, but down 22% from the first quarter 2010 due to lower securities, declining assets in Citi Holdings and the loss on the asset transfer. Citi-bank’s profitability appears to have fallen quite significantly in Q1/2011, such that ROE is 1.75% in the first quarter this year compared to 2.92% in the March 2010 quarter.
ROE was generated by ROA 0.154% and Equity Multiplier 11.4 (which is lower than in the previous period), where this ROA indicates that management are not utilising the company’s resources as well as it was at the same time in the previous year. | 31/3/2011 | 31/3/2010 | | Return on Equity | 1.75% | 2.92% | | Return on Assets | 0.154% | 0.219% | | Equity Multiplier | 11.384 | 13.325 | |

However, by executing appropriate strategy with discipline, Citi Group losses continued to decrease due to an increase in capital ( u can see that Citigroup Tier 1 Common ratio increased from 9.19% in Q1 2010 to 11.41% in Q1 2011 clearly showcasing the group’s growing capital strength). In addition, average deposits and loan increased 13% and 14% respectively from a year ago, and credit trends continue to get better.so,what are the drivers for such profitability of Citigroup?
Slide 7: We analyse that for short term, fluctuations in net interest margins could be an important driver of uncertainty in bank profitability – and could surely have adverse effects for particular institutions. Citigroup’s net interest margin fell from 3.34% in the first quarter of 2010, to 2.84%. Despite its large fee income in comparison to other banks in the industry, the low interest rate environment has compressed spreads and eroded profitability.
Besides, the main driver of bank profitability was not revenue growth but the release of loan loss reserves (released $3.3 billion of net loan loss reserves compared to a $53 million net release last year).

* About Long term Driver
As part of a cost-cutting strategy, Citigroup continued to divest non-core businesses i.e. its stake in Citi Holdings which has dragged down the bank's profitability in recent years. In the recent quarter, $22b in assets were sold off, leaving total assets yet to be divested at $337b, less than half its peak of $827b during the financial crisis. Also,the bank has also been cutting costs by cutting jobs with the 289000 employees as of April 18 being significantly less than the 371000 in 2007 prior to the instalment of the current CEO. (2) Next, i will discuss how change in provisions for loan losses is contributing to the change in revenue?
Slide 8: Provision for loan loss is released to guarantee a bank's solvency and capitalization if and when the defaults occur. The loan loss provision allocated each year increases with the riskiness of the loans a given bank makes. Citi bank tries to get a raise in earnings from lower quarterly loan loss provisions relative to preceding quarters, as credit quality continues to improve.
Slide 9: As you can see, the bank reported loan loss provisions of $2.9 billion, compared to $8.4 billion in the first quarter of 2010.
This decline in the provision for loan losses was caused mainly by a net release of $3.3 billion in reserves during the quarter as the bank felt more comfortable with its portfolio. Citigroup said that approximately $2 billion of this release was related to the bank's Consumer loan portfolio.
Slide 10: However, recently, in Q1/2010 and in Q1/2011, Citigroup’s management seem to underestimate the percentage of loans which would be uncollectable. For instance, in the quarter 1/2011, the bank created a provision of 0.44% but the percentage of loans which were actually written off on this period were 1.07%.. This is quite a negative indicator as it specified that more loans have become ‘bad’ than what the bank expected, indicating a declining performance of the bank. Since loans and leases have increasingly become a more major source of income of and growing source of the banks revenue, the bank should make significant concern when estimate its provision. | 31/3/2011 | 31/3/2010 | Provision (% Total Loans & Leases) | 0.435% | 1.114% | Net Charge Off (% Total Loans and Leases) | 1.07% | 1.21% |
Next, Long will talk about the trend of profitability with u guys