Citibank 2012 Annual Report Download - page 7

5
Yet our company — and our industry — still face significant
economic, political and regulatory headwinds. Growth likely
will be uneven. There is reason for optimism that the U.S.
recovery will pick up steam and that the emerging markets
will regain some of their strong, pre-crisis momentum. But
prospects for Europe remain mixed.
Politically, we’ve just lived through a year of elections and
transitions around the globe. Public pressures — intense during
the crisis — remain, showing that as an industry we still have a
long way to go toward regaining public trust.
The regulatory challenges alone are enormous. Our bank is
well-capitalized, even under the stricter Basel III criteria. But
beyond capitalization, the sheer scope of regulation we now
face is vast. One thing is certain: there’s no appetite among
regulators for us — or any large bank — to grow inorganically.
That dynamic, however, can work to our advantage. We need
to be less concerned by mergers and acquisitions among
our peers trying to replicate our footprint — but we must
be especially focused on getting the best out of the mix of
businesses that we have.
These and other changes are redefining every relationship
this company has: with our clients and customers, with our
regulators, with our employees and with the communities we
serve — and above all with you, our investors.
In addition, two legacy issues are not yet behind our company
and will take us time to resolve.
Citi Holdings creates a disproportionate drag on net income
and ties up a significant amount of capital. We’ve made good
progress here. In 2012, we reduced the size of Holdings by a
further 31%; at the end of the fourth quarter, it made up only
8% of our balance sheet, down from a peak of about 40%. Yet
it still represents a disproportionate 23% of our risk-weighted
assets under Basel III. A quick, economically viable resolution
of the remaining portfolio does not exist. I have considered
and understand the issue in detail — it does not make sense to
destroy capital simply for the sake of speed. We will continue
to manage these assets and our associated expenses in
an economically rational way while taking advantage of all
reasonable opportunities to reduce them more expeditiously.
Our deferred tax assets (DTA) also tie up a significant amount
of book capital that doesn’t earn any returns — indeed,
moving this off our books requires that we generate earnings,
specifically in the U.S. In 2012, our DTA went in the wrong
direction and rose by nearly $4 billion. One of my top areas of
focus will be to begin to turn that trend around, but utilizing
a substantial portion of our DTA will likely take longer than
resolving Holdings.
What this means for us in practice is that about one-third of
our capital is not available to us to generate the returns you
expect and deserve. Thus, with the remainder, we have to be
better than good and better even than our peers. There is no
margin for error. My management team understands what’s
at stake.
I’m often asked how I would judge my tenure as CEO a success
— what do I want the company to look like down the road?
First, I want Citi to generate consistent, quality earnings. We’ll
accomplish this by driving client relationships and building
revenues organically in our core businesses. The future of our
franchise depends on consistently generating quality earnings
from our core business activities. Specifically, I want to see us
generate risk-adjusted returns above our cost of capital.
Michael L. Corbat
Chief Executive Officer