Citigroup 2Q14 Earnings Call Notes

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This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

RMBS litigation is now behind us

“We also have now resolved substantially all of our legacy RMBS and CDO litigation. We believe that this settlement is in the best interest of our shareholders and allows us to move forward and to focus on the future in serving our clients.”

Mortgage business and Korea have stabilized

“In consumer banking, year-over-year comparisons continue to be affected by lower mortgage refinancing activity and our repositioning efforts in Korea. But we believe these businesses have now stabilized and we’re better positioned for growth in the second half of the year”

8% core bank loan growth

“Citigroup end-of-period loans grew 4% year-over-year to $668 billion as 8% growth in Citicorp was partially offset by the continued decline in Citi Holdings and deposits grew 3% to $966 billion.”

Excluding the settlement, Citi Holdings was actually profitable

“Excluding the settlement announced today, Citi Holdings turned to profit for the first time since its formation”

111 B left in assets at Citi Holdings

“On slide 15 shows Citi Holdings’ assets which totalled $111 billion at quarter-end, with roughly 60% in North America mortgages. Total assets declined $3 billion during the quarter mostly driven by net pay downs.”

Still elevated legal expenses

“I’d say that with the legacy mortgage settlement behind us, we wouldn’t expect holdings to have any significant level of legal charges in the second half of 2014. Now as I said, legal expenses in Citicorp that they are going to remain somewhat elevated and episodic in nature.”

Half of the legal settlement was not tax deductible

“The lion’s share of the cost, if you take a look, we talked about taking a pre-tax charge of 3.8 billion and an after tax charge of 3.7 billion, so to your point not much of the settlement cost was tax deductible”

Have to manage deposit growth at the subsidiary level

“you can’t just manage deposit growth at the top of the house, you need to manage it in each country and frankly in each legal vehicle, and so as we look at the liquidity needs for each of our — each of the countries in which we operate we’re very focused on the level of deposits that we have and importantly the quality of those deposits. So you’re going to see — you’ll see some regions where we have targeted higher deposit growth than others and it’s really based upon the liquidity needs in each of those regions.”

Wonky discussion of why Citi Holdings can shrink but produce revenue growth. Cost of funding declines

“Well it’s the type of funding that you have and the level and certainly the amount of funding that you have in each business as well and you know as the cost of that funding then goes down, you’re going to get a benefit, I don’t know how else to describe it, you know clearly some of the characteristics that you mentioned are driving characteristics, highly illiquid assets have a higher cost of fund — cost more to fund than liquid assets, so as a book shifts from illiquid to more liquid you’re going to see that we can therefore change the funding problem.”

Took a big loss on a hedge in case the Ukraine situation got worse, which it did not

“In the second quarter we had hedged our equities book in EMEA in anticipation of — kind of a significant negative market reaction to the Russia, Ukraine situation. Now ultimately that did not materialize to the extent that we have planned for. And so as a consequence, our actions to de-risk the book actually resulted in realized losses during the quarter. So the realized losses that we took in lifting those hedges, equal to about 40% of the revenue decline in that product year-on-year. So we had a — equities markets were down 26% year-over-year. And so that the de-risking activities actually contribute about 10 full percentage points to that decline.”

Don’t think that a deposit drain is going to affect them

“I’d say that, when you think about the potential impact of the FED’s actions on deposits, one we’re probably less exposed than others on this, don’t forget, we’ve got of our $968 billion of deposits, it’s just a little over $400 billion are domestic deposits. So it’s not the biggest part of our book. And we, as I mentioned in response to one other question, we’ve really been managing our deposit base very carefully over the last few years. And so I think the other thing you need to consider is the quality of an institutions deposit base. And I think that what we’ve been able to achieve is an improvement in our quality of deposits, both internationally but specifically domestically, over the course of the last several years.”

Get ready for something we’ve never seen before

“it’s going to be real interesting to see how the FED goes about the next level of managing as far as increasing rates because when you take a look at how monetary policy is going to interact with regulatory policy I think we’re going to end up in a new world that none of us have lived through before nor has the FED.”

Revenues should be growing in Korea

“revenues should be now growing sequentially in Korea. Excluding the repositioning charge, for the first time in several quarters, Korea actually turned a pre-tax profit. So again we’re encouraged as to the future direction of our consumer franchise in Korea.”

Felt it was better to move on than to fight on CDOs

“And when you go back and you look at our participation and CDOs, you look at 2005, ’06, ’07, we were somewhere at or near the top of the lead tables year in and year out in CDOs, and so this was very important to get behind us and I think meaningful. And again as I think, we went through the negotiation, we felt to get this behind us that this was something that was in our shareholders’ best interest to move on from.”

Did have a slight uptick in loan spreads

“We actually saw a slight rise in loan spreads in trade loans this quarter. And we had good uptick from a corporate lending point of view in both Europe and North America.”

Impossible to know whether trading activity is secular or cyclical decline

“it’s really hard to come up with an actual number as to what is cyclical versus secular. We continue to evaluate how we view the various offering that we have in those markets businesses and we constantly adjust our capacity to where we think the new secular trend is, so again it’s somewhat product by product as opposed to just say, its markets in general and again its things move based upon market conditions.”

The macro environment has made things very difficult

“I think candidly the most challenging part of it has really been the revenue side of things, it’s been the environment. I think a combination of the economic, the regulatory and the political nature of things around the world has probably made things more challenging than we certainly would have liked”

Still anticipating healthy loan growth

“Our expectation is that loans will continue to grow. I mean we still have loan growth in, again focused on the Citicorp business. Citicorp loans grew 8% year-over-year and we anticipate again still getting good healthy loan growth in our Citicorp businesses. Those loan growth, even if spreads comedown a little bit on loans that still gives you a nice healthy contribution to your near and your NIM. ”

Still have some opportunity to lower cost of funds by rolling LT debt

“we still have the ability to lower our overall cost of funds as we continue to issue, rollover the long-term debt at more favorable spreads than what we were issuing several years ago.”

There are some legitimate questions on the markets business

“I think that there are some legitimate questions going forward as far as markets but the rest of the business I’d say we feel pretty good about the revenue prospects.”

Don’t look at peers quarters

“I got to tell you, I have not spent any time looking at what our peer institution put out there, so I apologize.”