Citibank 2008 Annual Report Download - page 28

The Company prepares formal three-year Strategic Plans for its businesses
and presents the plans to the Board of Directors. The Company used the 2008
Strategic Plan as a basis for its annual goodwill impairment test performed
as of July 1, 2008. These projections incorporated certain external economic
projections developed at the point in time the Strategic Plan was developed.
The financial forecasts were updated for the interim impairment tests as of
October 31, 2008 and December 31, 2008 (as discussed below) to reflect
current economic conditions. For those interim impairment tests, the
Company utilized revised economic projections incorporating the rapidly
deteriorating market outlook.
As discussed above, management tests goodwill for impairment annually
as of July 1. The Company is also required to test goodwill for impairment
whenever events or circumstances make it more likely than not that
impairment may have occurred, such as a significant adverse change in the
business climate, a decision to sell or dispose of all or a significant portion of
a reporting unit or a significant decline in the Company’s stock price. The
results of the July 1, 2008 test validated that the fair values exceeded the
carrying values for all reporting units. Based on negative macro-economic
and Citigroup-specific events, Citigroup performed two goodwill impairment
tests during the fourth quarter of 2008. The first test, performed as of
October 31, 2008, validated that the fair value of all reporting units was in
excess of the associated carrying values and, therefore, that there was no
indication of goodwill impairment. In mid-January, management
determined that another goodwill impairment test was needed using data as
of December 31, 2008, due to the rapid deterioration in the financial markets
as well as in the global economic outlook particularly during the period
beginning mid-November and through year end December 2008.
Based on the updated goodwill impairment test performed using data as
of December 31, 2008, there was an indication of impairment principally
due to the decline in fair value of the Company’s North America Consumer
Banking,Latin America Consumer Banking and EMEA Consumer
Banking reporting units. The primary cause for the decline in the fair values
in the above reporting units was the rapid deterioration in the financial
markets as well as in the global economic outlook particularly during the
period beginning mid-November through year end 2008. Accordingly, the
second step of testing was performed for those reporting units. Based on the
results of the second step, the Company recorded a $9.6 billion pretax ($8.7
billion after tax) goodwill impairment charge in the fourth quarter of 2008.
This charge resulted in the write-off of the entire amount of goodwill
allocated to those reporting units.
The testing for goodwill impairment is conducted at a reporting unit
level. Since none of the Company’s reporting units are publicly traded,
individual reporting unit fair value determinations cannot be directly
correlated to the Company’s stock price. The sum of the fair values of the
reporting units significantly exceeds the overall market capitalization of the
Company. However, the Company believes that it is not meaningful to
reconcile the sum of the fair values of the Company’s reporting units to its
market capitalization due to several factors. These factors, which do not
directly impact the individual reporting unit fair values, include the
increased possibility of further government intervention, unprecedented
levels of volatility in stock price and short-selling. In addition, the market
capitalization of Citigroup reflects the execution risk in a transaction
involving Citigroup due to its size. However, the individual reporting unit’s
fair values are not subject to the same level of execution risk or a business
model which is perceived to be complex.
While no impairment was noted in step one of our Securities and
Banking reporting unit impairment test at October 31, 2008 and
December 31, 2008, goodwill present in that reporting unit may be
particularly sensitive to further deterioration in economic conditions. Under
the market approach for valuing this reporting unit, the earnings multiples
and transaction multiples were selected from multiples obtained using data
from guideline companies and acquisitions. The selection of the actual
multiple considers operating performance and financial condition such as
return on equity and net income growth of Securities and Banking as
compared to the guideline companies and acquisitions. For the valuation
under the income approach, the Company utilized a discount rate which it
believes reflects the risk and uncertainty related to the projected cash flows,
and selected 2013 as the terminal year. In 2013, the value was derived
assuming a return to historical levels of core-business profitability for the
reporting unit, despite the significant losses experienced in 2008. This
assumption is based on management’s view that this recovery will occur
based upon various macro-economic factors such as the recent U.S.
government stimulus actions, restoring marketplace confidence and
improved risk-management practices on an industry-wide basis.
Furthermore, Company-specific actions such as its recently announced
realignment of its businesses to optimize its global businesses for future
profitable growth, will also be a factor in returning the Company’s core
Securities and Banking business to historical levels.
Small deterioration in the assumptions used in the valuations, in
particular the discount rate and growth rate assumptions used in the net
income projections, could significantly affect the Company’s impairment
evaluation and, hence, results. If the future were to differ adversely from
management’s best estimate of key economic assumptions and associated
cash flows were to decrease by a small margin, the Company could
potentially experience future material impairment charges with respect to
the goodwill remaining in our Securities and Banking reporting unit. Any
such charges by themselves would not negatively affect the Company’s Tier 1
and Total Regulatory Capital Ratios, Tangible Capital or the Company’s
liquidity position.
The goodwill allocated to this reporting unit was approximately $9.8
billion as of December 31, 2008.
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