Drip Portfolio Report
Finishing Citicorp
by Dale Wettlaufer (DaleW@fool.com)

Alexandria, VA (June 29, 1998) --DRIP investors in Citicorp have less to worry about on the credit loss front than institutional money managers that are looking at quarter-by-quarter performance. This isn't to say that DRIP investors didn't need to worry about the company's bad credit moves in the early 1990s. The company was almost taken down by the damage done to the balance sheet by a crash in real estate values in the late 1980s and early 1990s. So, while the current crisis in Asia can be looked past to some extent by DRIP investors, you still should pay attention to what is going on with the value of the assets, and hence, the company's capital position in the short term.

The last 10-Q details Citicorp's loan loss experience and credit loss provisions over the last five quarters (AOL readers, please maximize this window):

Quarter, Fiscal Year���.Q198�..Q497�..Q397�..Q297�..Q197

(In Millions of Dollars)

BEGINNING OF PERIOD....5,916�..5,899�..5,882�..5,866�..5,503

Provision for Credit Losses�..507�..486�..486�..512�..423







OTHER-NET (A) �.. (13) �.. (8) �.. (8) �.. (9) �..338

CREDIT LOSSES AT END OF PERIOD (B) �..5,928�..5,916�..5,899�..5,882�..5,866

Reserves for Securitization Activities�..70�..85�..89�..91�..91
TOTAL CREDIT LOSS RESERVES�..5,998�..6,001�..5,988�..5,973�..5,957

The two most important things to pay attention to are "provision for credit losses" and "net credit losses." In almost any environment, and especially with Asian problems and Citicorp's exposure to Asia, you want to see credit loss provisions running ahead of net credit losses. Indeed, that is the case above. But we also want to look forward on where Citicorp's credit loss experienced may be heading.

Going into this year total credit loss reserves have increased less than 1% over the last five four quarters while average total loans on the balance sheet has increased from $168.4 billion to $182.5 since the first quarter of 1997. That's an increase of 8.4% while loan loss reserves have increased 7/10 of one percent. A major moving part of that is improved credit quality in credit cards as well as in the company's Citibanking portfolios. Year-over-year, delinquencies in the Citibanking portfolio have fallen by 33 basis points. A basis point is one one-hundredth of a percentage point. So, in a $2 billion portfolio, each basis point is worth $200,000.

In credit cards, U.S. credit quality has improved. In the "other" credit cards portfolio, which includes credit card balances outside the U.S., the Diner's Club portfolio, and private label credit cards (for retailers, for instance, where Citicorp lends money under the retailer's charge card), credit quality has also improved. That improvement has amounted to 12 basis points on a portfolio that has grown from $8.84 billion last year to $9.4 billion this year. Overall, consumer delinquencies across the globe have decreased to 2.37% of loans from 2.59% of loans last year. That's on a portfolio that has increased from $135.2 billion to $137.5 billion.

Some of that is off the balance sheet, courtesy of the securitization process, which turns on-balance sheet assets into asset-backed securities. Someone else buys the securities, Citicorp gets the cash, and Citicorp also services the portfolios for a fee. The on-balance sheet consumer loan exposure for Citicorp has actually fallen since last year's first quarter. 2.55% of on-balance sheet assets of $105.88 billion were delinquent as of the end of Q1 1998 while 2.76% of on-balance sheet assets of $106.88 billion were delinquent one year ago. So, the swing year to year has been $2.1 million in pre-tax credit costs possibly saved. After-tax, that's 15/100 of one cent of per-share earnings. Not a biggie.

The thing that's worrying analysts is a serious increase in international delinquencies. In Asia/Pacific (excluding Japan), delinquencies in the consumer portfolio have increased to 1.72% of loans from 1.06% last year. Meanwhile, the company's net charge-off activity has actually decreased by $1 million year-over-year. Given that delinquent loans have increased by $127 million in the Asia/Pacific portfolio, I find it hard to believe that there won't have to be a large increase in loan loss reserves coming up here. On a per-share basis, though, catching up with reserves wouldn't really be a big deal. Assuming a 25% recovery rate (25% of loans charged off eventually recovered), the after-tax cost of increasing loan loss reserves for Asia/Pacific consumer loans would be $0.13. Assuming even worse credit quality problems, Citicorp has the bulk to absorb this.

We'll move on to something new tomorrow. I am not sure if Citicorp will keep up its DRIP plan or not, but this is really should be on the radar of any financial services investors. It's one of the world's largest banks and financial services companies, especially if it closed the deal with Travelers Group. If they do keep up with their DRIP, you'll want to take a look at the company.

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6/29 Close

Stock Close Change CPB $53 9/16 - 15/16 INTC $75 13/16 - 9/16 JNJ $77 + 1/16
Day Month Year History Drip (0.45%) 5.45% 6.70% (9.13%) S&P 500 0.47% 4.37% 17.32% 19.67% Nasdaq 1.15% 6.31% 20.42% 18.65% Last Rec'd Total # Security In At Current 05/29/98 2.269 CPB $54.513 $53.563 06/01/98 9.384 INTC $80.482 $75.813 06/09/98 5.535 JNJ $69.365 $77.000 Last Rec'd Total# Security In At Value Change 05/29/98 2.269 CPB $123.69 $121.53 ($2.16) 06/01/98 9.384 INTC $755.21 $711.39 ($43.82) 06/09/98 5.535 JNJ $383.94 $426.20 $42.26 Base: $1600.00 Cash: $286.07** Total: $1545.19

The Drip Portfolio has been divided into 68.021 shares with an average purchase price of $23.522 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:

6/22/98: Sent $40 to buy more CPB, $35 to buy more JNJ, $25 to buy more INTC.