Citigroup Inc.

Operating ExpensesCitigroup operating expenses were down 1% versus the prior year at$47.4 billion in 2010, as increased investment spending, FX translation, andinflation in Citicorp were more than offset by lower expenses in Citi Holdings.In Citicorp, expenses increased 10% year over year to $35.9 billion, mainlydue to higher investment spending across all Citicorp businesses as wellas FX translation and inflation. In Citi Holdings, operating expenses weredown 31% year over year to $9.6 billion, reflecting the continued reductionof assets.Capital and Loan Loss Reserve PositionsCiti increased its Tier 1 Common and Tier 1 Capital ratios during 2010. AtDecember 31, 2010, Citi’s Tier 1 Common ratio was 10.8% and its Tier 1Capital ratio was 12.9%, compared to 9.6% and 11.7% at December 31, 2009,respectively. Tier 1 Common was relatively flat year over year at $105 billion,even after absorbing a $14.2 billion reduction from the impact of SFAS166/167 in the first quarter, while total risk-weighted assets declined 10% to$978 billion.Citigroup ended the year with a total allowance for loan losses of$40.7 billion, up $4.6 billion, or 13%, from the prior year, reflecting theimpact of adopting SFAS 166/167 which added $13.4 billion on January1, 2010. The allowance represented 6.31% of total loans and 209% ofnon-accrual loans as of December 31, 2010, up from 6.09% and 114%,respectively, at the end of 2009. The consumer loan loss reserve was$35.4 billion at December 31, 2010, representing 7.77% of total loans, versus$28.4 billion, or 6.70%, at December 31, 2009.Liquidity and FundingCitigroup maintained a high level of liquidity, with aggregate liquidityresources (including cash at major central banks and unencumbered liquidsecurities) of $322 billion at year-end 2010, up from $316 billion at year-end2009. Citi also continued to grow its deposit base, closing 2010 with $845billion in deposits, up 1% from year-end 2009. Structural liquidity (defined asdeposits, long-term debt and equity as a percentage of total assets) remainedstrong at 73% as of December 31, 2010, flat compared to December 31, 2009,and up from 66% at December 31, 2008.Citigroup issued approximately $22 billion (excluding local country andsecuritizations) of long-term debt in 2010, representing just over half of its2010 long-term maturities, due to its strong liquidity position and proceedsreceived from asset reductions in Citi Holdings. For additional information,see “Capital Resources and Liquidity—Funding and Liquidity” below.2011 Business OutlookIn 2011, management will continue its focus on growing and investing inthe core Citicorp franchise, while economically rationalizing Citi Holdings.However, Citigroup’s results will continue to be affected by factors outsideof its control, such as the global economic and regulatory environmentin the regions in which Citi operates. In particular, the macroeconomicenvironment in the U.S. remains challenging, with unemployment levelsstill elevated and continued pressure and uncertainty in the housing market,including home prices. Additionally, the continued implementation ofthe Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010(Financial Reform Act), including the ongoing extensive rulemaking andinterpretive issues, as well as the new capital standards for bank holdingcompanies as adopted by the Basel Committee on Banking Supervision(Basel Committee) and U.S. regulators, will remain a significant sourceof uncertainty in 2011. Moreover, the implementation of the change inmethodology for calculating FDIC insurance premiums, to be effective inthe second quarter 2011, will have a negative impact on Citi’s earnings.(For additional information on these factors, see “Capital Resources andLiquidity” and “Risk Factors” below.)In Citicorp, Securities and Banking results for 2011 will depend on thelevel of client activity and on macroeconomic conditions, market valuationsand volatility, interest rates and other market factors. Transaction Servicesbusiness performance will also continue to be impacted by macroeconomicconditions as well as market factors, including interest rate levels, globaleconomic and trade activity, volatility in capital markets, foreign exchangeand market valuations.In Regional Consumer Banking, results during the year are likely tobe driven by different trends in North America versus the internationalregions. In North America, if economic recovery is sustained, revenues couldgrow modestly, particularly in the second half of the year, assuming loandemand begins to recover. However, net credit margin in North America willlikely continue to be driven primarily by improvement in net credit losses.Internationally, given continued economic expansion in these regions, netcredit margin is likely to be driven by revenue growth, particularly in thesecond half of the year, as investment spending should continue to generatevolume growth to outpace spread compression. International credit costs arelikely to increase in 2011, reflecting a growing loan portfolio.In Citi Holdings, revenues for Local Consumer Lending should continueto decline reflecting a shrinking loan balance resulting from paydowns andasset sales. Based on current delinquency trends and ongoing loss-mitigationactions, credit costs are expected to continue to improve. Overall, however,Local Consumer Lending will likely continue to drive results in Citi Holdings.Operating expenses are expected to show some variability across quartersas the Company continues to invest in Citicorp while rationalizing CitiHoldings and maintaining expense discipline. Although Citi currentlyexpects net interest margin (NIM) to remain under pressure during thefirst quarter of 2011, driven by continued low yields on investments and therun-off of higher yielding loan assets, NIM could begin to stabilize during theremainder of the year.27