Citigroup (C) has $2 trillion of “assets.” Of this, about one-quarter, or $543 billion, is consumer loans–mortgages, credit cards, car loans, student loans. Consumers, as we all know, are getting crushed. Delinquency and write-off trends are increasing fast.
Credit market investors also just stopped buying credit-card-backed securities, on account of how frightening this sort of debt is these days. Citi is exposed to at least $122 billion of this debt. At the very least, Citi will now be forced to stop securitizing credit-card receivables (selling the risk to someone else) and keep it on its own balance sheet instead.
$543 billion of consumer debt is a lot. When Citi’s exposure to “off-balance sheet vehicles” is factored in, moreover, the company’s total exposure to consumer debt is $716 billion. That’s more than a lot.
Citi’s CFO Gary Crittenden was kind enough to release some charts showing peak delinquencies for the 1990s recession. Both credit cards and mortgage delinquencies rose for 10 quarters and peaked well after the recession ended. We’d like to think that the current recession will only be as bad as the 1990s one. We doubt it.
Citi’s balance sheet is extraordinarily complex, and we’re not going to form any detailed judgments yet (we’d be grateful if you would pass along some smart research reports as you encounter them: [email protected]). At this point, however, our assessment can be summarized as follows:
Citi’s balance sheet scares the bejezus out of us.
Some exhibits below:
Recent credit delinquency and write-off trends:
CFO Crittenden explains what happened in the last recession…and why the current recession already looks worse:
If you look at the left-hand box [in the chart below] you will notice two things. First, it took 10 quarters for the Card losses to reach their peak rate of 6.4%. Mortgage losses, while growing at a slower rate, peaked a few quarters after the peak of card losses.
Second, losses for both Cards and First Mortgages did not return to their pre-recession levels for several quarters after the unemployment rate returned to those levels. This is particularly so with First Mortgages, where losses remained elevated well into the mid-1990s. Based on our data points, one could conclude that Card losses rise and fall in concert with unemployment rates. Mortgage losses, on the other hand, generally have a more protracted cycle of increases and then declines.
Looking at the chart on the right, you can see that the NCLs in both categories are increasing more rapidly than they did in the early 1990s, while the increase in unemployment rate continues to lag the increase in Card losses.
$718 billion in total consumer exposure:
More encouraging commentary from the October conference call:
Card purchase sales in North American, however, have declined as we have seen higher spending on consumer necessities such as gas and food offset by a decline in discretionary spending…
In North American Cards, net credit losses were up by $311.0 million, reflecting the deterioration of flow rates, higher bankruptcies, rising unemployment, and lower recoveries during the quarter. Net credit losses in the Personal and Audit Loan portfolios increased by $279.0 million in the aggregate.
When Citi can’t securitize the debt, it moves it back onto the balance sheet. As it does so, up go the loan loss reserves.
In North American Cards we added $481.0 million net to our loan loss reserves. More than half of this build relates to balances coming back onto the balance sheet as we chose to retain these balances instead of renewing the securitizations at significantly higher funding costs. The remainder was, in part, due to a weakening of lending credit indicators, including rising unemployment, higher bankruptcy filings, and the continued decline the housing market.
The rate at which customers became delinquent has increased significantly, as has the rate at which delinquent customers are written off. These trends and other portfolio indicators led to a build in reserves for the North American Cards business in the quarter.
Citi currently projecting 7%-9% unemployment. Let’s hope it doesn’t go higher.
Our assumptions have been stress-tested with unemployment rates ranging between 7% and 9% into 2009. Obviously such unemployment levels could result in significantly higher credit costs well into 2009. We have obviously carefully planned both our capital and our costs with a focus on this range of outcomes.
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