Citigroup 3Q17 Earnings Call Notes

Michael Corbat – CEO

Macro environment remains positive

“The macro environment remains a largely positive one, growth while not as high as we would like remains consistent and we don’t see too many economies in distress. However, while geopolitical tensions don’t seem to have weighed on growth at least as of yet, I don’t know how long that can continue. And while tax reform remains a question mark we do like the direction the administration is going in terms of regulation which we see as just a course to accommodate higher growth rather than a full scale regulatory repeal agenda.”

Near term challenges from natural disasters

“We’ve obviously also had the near-term challenges of a lot of natural disasters. And whether that’s been hurricanes or earthquakes or flooding damages that it comes as a result of some of those things, those things will have a near-term impact in terms of what growth will look and feel like. But probably as we’ve seen historically in some ways those actually end up being a stimulus in the longer-term in terms of those monies that come back in the form of aid and investment and in rebuilding. And that’s our expectation that we would probably see that occur again.”

John Gerspach

Consumer health pretty good

“I would say it is not just in the U.S. but as we look around the world we would rate the health of the consumer right now is pretty good. And again so you touched on a number of the most important things, so when you look at a consumer what are the things you look at, does the consumer have a job. If they have a job are they going to keep it, if they don’t have a job how difficult is it to get one. And I think as you look across the world unemployment, slow employment is high. Probably the bigger challenge to the consumer or to the worker has been the lack of wage growth and again not just in the U.S. but in many places. And we’re beginning to see some of that and again that’s helping to the consumer.”

No sign of deterioration

“Obviously we are a long way or we’re a long way from the last credit cycle and so we’re always challenging ourselves in terms of where we are. But a lot of the signs we looked for in terms of the deterioration of the consumer I got to say right now, we just don’t see and if you go and look at our NCL rates and look at our delinquency rates around the globe from the document we’ve given you, again the numbers don’t point to it.”

Citigroup 2Q17 Earnings Call Notes

Mike Corbat – CEO

Asia and Mexico growth is reasonable

” sequential growth and positive operating story continuing in Asia and in Mexico. And I would say that those environments are reasonable environments. They’re growing well, we’d like them to grow from a macro perspective. No, we’ve had downgrades in terms of Mexico growth rates. but again, 8% growth – revenue growth coming out of Mexico in a country that’s growing sub 2, again, I think illustrating what we’ve talked about that we believe over the intermediate longer term we’ve got the ability to grow our international front franchises at or in many cases at multiples the pace of domestic growth rates. And the other piece if you look in there is that in Mexico, it’s the combination of our retail business in Asia, it is wealth management. And if you look at wealth management AUM throughout year over year and different metrics continuing to attract AUM into the business. So we feel good about the trajectory of those businesses and the ability to continue to get this type of growth. And as we’ve said, we expect that trend to continue in the near term in the second half of the year. Again, with growth and positive operating leverage.”

Assuming one rate hike each year for the next three years

“Well yeah, I mean again we’re not counting on that type of environment. So again in the projections that I’ve given you, we’re not looking at interest rates suddenly wildly increasing across the board. So it’s not rate – our outlook is not rate dependent. I mentioned in the – when I spoke – when I answered John McDonald’s question that we’ve got one more rate hike for the US built in and its December of this year. And quite frankly we’re assuming one more rate hike in ’18, one more rate hike in ’19 and one more rate hike in ’20. So again, we’re not looking as though this is all going to be rate influenced growth. We like the franchise that we built.”

We want more clarity around CCAR

“it’s likely that CCAR is going to stay the binding constraint and around anything that’s a binding constraint, you just need more transparency. So we’d like more granularity in terms of some of the numbers and have the ability to explore some of the approaches that the Fed has and because Secretary report came back, that’s one of the recommendations that they have. I would say things in there ranging from how do we think about, how do we bring together LCR and SLR and get some of the inconsistencies out.”

Citigroup at Morgan Stanley Conference Notes

John Gerspach CFO

Slow trading environment

“I guess I will call it a slower trading environment, we would expect revenues in our fixed income and equity markets to be down year-over-year in the, I guess I’d call it the low double-digit range maybe 12% to 13%. Yes. And so that would mean that we were down 12% to 13% this year. Of course, that also means we would be down sequentially and maybe just a little bit more than we otherwise would have anticipated given the environment. I’d also say though at the top of the house for the overall firm, expenses should also be down sequentially, probably not enough to completely offset the seasonality in revenues. So, you might see our efficiency ratio pop up to 59% this quarter. But again, it should decline in the second half of the year and then we are still very, very comfortable with our target of 58% for the full year.”

I don’t think the Fed is really going to impact our LCR

“I don’t think the Fed shrinking the balance sheet is really going to impact our LCR. When we look at the constraining factors on LCR right now, it’s really more driven by resolution requirements as we need to preposition liquidity throughout the firm in order to make sure that we have got a very good resolution plan”

Citigroup 1Q17 Earnings Call Notes

Mike Corbat – Chief Executive Officer

Positive about growth in the US economy

“We also continue to be positive about growth in general and the U.S. economy. While the details of potential policy changes in area such as tax code and infrastructure spending have yet to be worked out and will take a little longer than originally projected, we continue to believe that it’s a matter of when and not if these changes will occur. As that process unfolds and outcomes become clear, I expect business will react accordingly as sentiment shifts from optimism to confidence.”

Yet to have anyone tell me why it would be helpful to bring back Glass Steagall

“anytime I hear this term 21th century glassed eagle, I ask what it is and I have yet to have anybody really tell me what’s there. And as you can imagine that not just myself but I’m sure others have been involved in those conversations. And I would say that the administration is focused around trying to harmonize regulations, focus around trying to take things away that are either duplicative or don’t really add value. And I have yet to have anybody really explain to me what value there is in terms of either a reinstatement of glassed eagle, which in itself is strange or what 21th glassed eagle is. So we continue to ask about it but not necessarily be that focused on it. We think our business model is the right model.”

John Gerspach

Consumer confidence in Mexico appears to have come back

“Well, I do think that the Mexico economy, at the beginning part of the year, I’d say that there was somewhat of a decline in consumer confidence that did occur. I was in Mexico three weeks ago. My sense was that that had changed, it was beginning to come back. But there was definitely a drop in consumer confidence at the beginning of the year”

Citigroup at RBC Conference Notes

John Gerspach

1Q business performing in line with expectations

“Sure, sure, sure. So first thing I’d say is that the businesses are largely performing in line with our expectations.”

Largest driver of FICC is the macro environment

“when you talk about what is the single largest driver on FICC, it’s the macro environment. And last year there was a lot of things going on in the macro environment that caused corporations and investors to look back and say, well, gee, I need to position my balance sheet this way, I think this is going to happen. And that gave us a good opportunity. I think the other thing that still holds true with FICC is that it’s a scale game.”

Make our equities business appropriate in size for our client base

“Equities, for us what we’re trying to do is we want to size our equities business appropriate with our client base. And, again, it means that you need to be able to put balance sheet to work. You need to be able to make the technology investments that you need to make. But we’re not looking in equities to be number one, two or three. That’s just not going to fit, because we don’t want to go for the same broad market that you need to have in order to get into that one, two or three level.”

Now running budgeting process from CCAR process

“I mean, I think the biggest change that we made would have been two years ago, when we really decided that rather than trying to have a separate CCAR process completely divorced from the way we would operate on a business as usual point of view. And we just decided that what we really needed to address was the fact that we needed to have a continuous capital planning cycle. And I think that that served as well, because it means that as we get into those discussions in the fall and we give the businesses, here the assumptions that we see in the environment for the next three years, let’s go out and build the budgets. Businesses used that information, those assumptions in the models that they used every day. ”

Asia is ahead of the US in digital banking

“I would say that we’re most advanced in digital right now in Asia as you might suspect. And Asia kind of leads the U.S. and the U.S. certainly leads Mexico. So we’ve got a lot of investments going on right now in enhancing our digital capabilities, both through our abilities to acquire customers digitally, but also our ability to service those customers digitally. And that serves a couple of purposes. One is it’s the way most of our clients want to do business right now. In Asia, if you didn’t have a great digital offering you would be dead. And clearly, the way the U.S. is going that’s the same way it is.”

People in Mexico like to bank at branches

“Certainly, the smartphone penetration is making – it’s growing, it’s definitely growing. But in Mexico it’s more of a cultural thing, people still like to do business in the branches. And we think though that if we offer them attractive easy-to-use digital channels, there is no reason to think that they won’t move onto those channels.”

Citigroup (C) Presents at Goldman Sachs Conference

John Gerspach – Chief Financial Officer

Few answers on what the Trump administration will do

“I have very few answers… Almost none”

 

Which is why the plan is to assume a similar environment to 2016 and be poised to react to changes

“we can’t build a plan on hope. So, our base plan going into next year is really looking very similar to an environment that looks like ‘16. We don’t know what the new administration is going to do. I think during the campaign trail, both candidates said a lot of things. And now exactly what gets rolled into policy and new laws and what gets repealed, we don’t know. We don’t know the timeframe in which they are going to handle things. We don’t know the priority in which they are going to handle things. So for us, it’s you build the plan based upon what you see and then you make sure that you are poised to take advantage of the opportunities…”

 

The reason behind interest rate increases is important  

“100% certain, 95% certain that we are going to get a rate increase next week. Fine, we had already assumed that. The key then becomes what happens after that and I think, even more importantly, why. If you are just getting rate increases for the sake of getting rate increases, that’s kind of nice. If those rate increases are because the economy really is growing at a faster rate, you do get stimulus as far as whether it’s tax reform or its infrastructure spending that would all be a big positive for us.”

 

No particular emerging market is an area of special concern

“we are no longer overly concerned about what’s going on with Brazil and Russia. When I look at the world, there really isn’t a spot in the emerging markets that really stands out as something that says, well, watch here. You watch everything, but there is no special area of concern right now.”

 

Europe deserves extra attention though

“I was going to say the one area that we actually are spending more time looking at right now is Europe… we are just not sure as to how that Brexit is going to be negotiated. So a lot of that is going to be determined over the course of the next several months and perhaps even years and therefore, it’s a little uncertain as to what the impact will be on the UK and uncertain as to what the impact is going to be on the remaining countries in the EU.”

 

1 million new accounts in the Costco portfolio

“Little bit of a rough patch in the beginning, but the Costco portfolio is performing extraordinarily well. Just this past weekend, we got to our 1 millionth new account since we have taken on the portfolio. So, we have added 1 million accounts in less than 6 months. Don’t take that as a run-rate, but it’s a great way to start. That’s pretty good. You take a look at how we are growing revolving balances with Costco. All of that is good. We have secured extensions on most of our key co-brand partnerships now.”

 

Yet, reserve build required for Costco rewards and rebates was high

“When you bring on a portfolio like that, it’s going to take you a good year before it really becomes accretive and there is probably 6 months after that before it normalizes… We had $150 million reserve build on Costco in the third quarter. That should be the highest reserve build that we ever have on Costco, so it should decline from here, but it’s still going to take until the second half of ‘17 before it’s really accretive to earnings.”

 

70% of Costco card spending is outside of Costco

“On the reward component for Costco is baked in there. There is nothing – there is no front end on that. So everything with the Costco portfolio as far as that value proposition that we put out in partnership with Costco is operating at or better than what we expected. We mentioned in the third quarter earnings that 70% of the spend on the Costco card is occurring outside of the Costco stores and that’s better than what we had planned.”

 

Compliance with the Volcker rule and regulations in general requires 29,000 workers

“When you take a look at our entire workforce of 220,000 people and you think about 29,000 people being involved in risk, compliance, audit, yes.”

Citi 3Q16 Earnings Call Notes

Citigroup’s (C) CEO Mike Corbat on Q3 2016 Results

Sold operations in Argentina and Brazil but making investments in Mexico

“ this month, we announced agreements to sell our retail banking operations in Argentina and Brazil and plans for significant investment in Mexico. As a sign of our commitment to Mexico, a market where we have real scale and confidence in its growth prospects, we’re integrating the local brand with Citi’s, and the franchise will be known as Citibanamex.”

Taking actions to improve standings in equity business but tough to take share in a challenged environment

“Steven, it’s Mike. The numbers, I would say, as we look at kind of where we are, which is in 8, 9 position going, as John described, to 5 6 is, it varies a bit by quarter and will vary a bit based on some of the volumes. We’re at about $250 million of revenue per quarter, so theoretically, about $1 billion of revenue a year. We feel that the investments that we’ve talked about in the investment — in the equities business are largely done and primarily focused on really two key areas, one is an investment in terms of technology, which is critical, certainly to the future of the equities business and second, it’s coming out of a resizing, rescaling that we’ve gone through in our equities business of making sure we’ve got the right people in the right positions and being out there and getting talent, both internally and externally, into the right seats. And I would describe that as largely done. So really, from here, it’s up to us and up to our team to execute. I would say, and I don’t put this out there as an excuse, but I think it is a reality that in a very challenged volume market, it’s tough to take share“

Right now credit feels pretty good

“Right now, credit feels pretty good, I have to admit. We don’t see — again, we think that rates may inch up a little bit next year, but again, we’re not seeing anything that would suggest some change in the cycle at this point in time. Part of that is, again, we’re focused on a very specific target client, and so we don’t exactly have this broad mass-market approach in most of our businesses, which might insulate us a little bit. But at this point in time, with the underwriting practices we have in place, we feel really good about credit in North America, in Latin America, in Asia.”

Loan demand is reasonable considering that clients are growing around the world

“ loan demand is reasonable. But again, as we think about the extension of loans, we’re facilitating a client relationship with the extension of that loan. And so as our clients need to expand and grow around the world, we’re there to support them. And so as you look at a business model that supports largely Fortune 500, Fortune 5000 types of companies, and you look at global growth rates in the world, I think that the growth rates we’re posting there make sense. And I think within the scheme of the environments are prudent and reasonable. And I would expect to continue to see, all things considered, similar types of growth rates into next year. If you look at the world next year, growth rates globally coming up a bit with probably parts of the emerging markets rebounding better or faster than parts of the developed economies. And I would expect loan growth to largely mimic that.”

Still a little unclear what we’re going to do w/r/t Brexit

“Matt, it’s Mike. From — we don’t have a lot of answers right now. And as the Prime Minister came out, I guess, it was last week or 1.5 weeks ago, Article 50 won’t be invoked until March of next year. That then starts to clock on a 2-year window. And I think it’s our own belief, based on a series of elections in Europe, the combination of France and Germany, that information is probably going to be more back-end loaded than front-end loaded. And so what we’ve been working for is making sure, as that information comes out, we’re in a position to continue to service our clients really no matter what. And when you think about our franchise, we not only have a sizable franchise in U.K., we also operate in 20 of the 27 EU countries.
And so we’ve got flexibility. We’ve got our passport bank already established in Ireland. We’ve got the pipes connected, to, certainly, the larger countries within the EU. So we’ve got flexibility around that. And what we’ve said in the meetings that I’ve had with both U.K. and other European officials, we’re going to watch and see this unfold, but our primary goal here is to make sure that in an undisrupted way, we can continue to serve our clients. And we think our structure today gives us time and flexibility. And when the time is right, we’ll make a decision of ultimately what we’re going to do. But we’d like to benefit as much information as possible before we make that decision, and we just don’t have it today.”

Yes some more opportunities in the energy space as oil prices have stabilized

“Clearly, as oil has stabilized and stabilized somewhere around the $50 area, we’ve seen the combination of M&A conversations to combination of financing, refinancing conversations and overall activity and people starting to engage coming back. Again, as we’ve described, our customer or client base remains consistent to. We are largely a multinational, global-type client energy player throughout the vertical. And we’re going to remain consistent to that.”

Citigroup at Barclays Conference Notes

John Gerspach – Chief Financial Officer

No longer breaking out Citi Holdings

“As we mentioned at the start of the year, we will no longer report Citi Holdings as a separate segment after 2016. So Citi Holdings and Corporate/Other are shown here on a combine basis. Our goal is to operate Citi Holdings at or around breakeven going forward.”

Markets business better, banking weaker than expected

“, I would like to make a few comments on the current outlook for the third quarter. On the institutional side, market revenues are performing above our expectations for the third quarter, still down sequentially, but up around mid single-digits from last year, with continued strength in our rates and currency franchise. However, investment banking is a little lighter than we had estimated, as M&A revenues should continue to recover sequentially, but not enough to offset the comparison to a very strong second quarter in debt capital markets.”

Encouraged by what we’re seeing in consumer

“Turning to consumer, we remain very encouraged by the progress we are seeing in both North America cards and the international franchise. In North America, the Costco portfolio continues to exceed our expectations for customer engagement and new account acquisitions, and revenue trends are above our expectations on an organic basis, driven by strong volumes on our existing U.S. card portfolios.”

Hoping to return 100% of capital generated

“However, we have continued to increase that level of capital return each year and so our goal would be to continue that trend. I can’t tell you that we are going to be able to get from 65% to 100% in one step or two steps, but again, our goals in the fairly near-term to get to that 100% as quickly as possible.”

Constructive about Mexico

“So what was the second one, where do we see the growth coming? Okay. So which countries have got the largest growth potential and again I will stay on the international side of things. But clearly, we are very constructive about Mexico. We shed all of our consumer businesses, we are in the process of shedding our consumer businesses in every other Latin America country, but we are very constructive about Mexico. We still think that that has got tremendous untapped potential our franchise in Mexico.”

Mexico has a lot going for it

“When you look at all the advantages that Mexico has being with approximate to the U.S., the chance to really participate with the U.S. economy. The workforce in Mexico, there is just a lot of growth that can yet coming from Mexico. They are in the process of making I think the right forms, you haven’t seen the full benefit of those reforms as yet. But there is a lot of potential yet in Mexico and they should benefit then as the U.S. continues to recover. It’s got a good workforce, it’s got a good wage setup. So we just think that it’s a country that is still on to come.”

Citigroup 2Q16 Earnings Call Notes

Citigroup’s (C) CEO Michael Corbat on Q2 2016 Results

Going to return 10B in capital to shsareholders over the next four quarters

“we were pleased to learn that Federal Reserve did not object to the capital plan we submitted. And as a result, we’ll return $10.4 billion in capital to our shareholders over the next four quarters. The plan includes more than tripling our dividend to $0.16 per share and repurchasing $8.6 billion in common stock. This result combined with the feedback we received from the Fed and the FDIC on our resolution plan shows the progress we continue to make to becoming a safer and stronger institution.”

The environment remains challenging>

“Looking forward, the environment remains challenging. We’re continuing to navigate the consequences of the UK referendum on the EU from its economic impact to how exactly it will structure our legal vehicles to continue to best serve our clients. And while the UK has a new leader, the U.S. is still in the midst of a unique presidential campaign and such geopolitical and economic uncertainty doesn’t create a clear picture for potential interest rate increases.”

John Gerspach

We noted improved momentum in Mexico

” we saw improved momentum in Mexico in the retail bank during the month of June. We noted that overall consumer revenues in Mexico grew 4% year-over-year that was higher than what we had thought that was going to be when Mike spoke. So we had momentum building in Mexico. We had good engagement with clients throughout the whole UK referendum. And then we benefited from the lower cost of credit again because of the high-quality of our book.”

Very very early in the quarter but volumes look fine so far in July

“it’s still very, very, very early in the third quarter. So it’s a little hard to comment on activity for an entire quarter after just eight, nine trading days. But the activity levels are fine that I think it’s good. And we’ll have to see how everything holds up into the month of August, but again the beginning part of July looks fine.”

M&A Pipeline remains pretty strong post brexit

” I think the pipeline remains pretty strong. And actually on the heels of Brexit, we saw actually quite good deal flow. You saw debt capital markets, you saw equity capital markets, you saw M&A getting executed getting announced. So I would say the pipeline for the third quarter remains pretty strong and provided we get reasonable markets. We’ve got an environment in which we can continue to get these things done. So it feels pretty good.”

Citigroup at Deutsche Bank Conference Notes

Jud Linville – CEO, Citi Cards

Returns on capital strong in cards

“And then third, the returns are very attractive. I think first quarter we talked about a target somewhere between 2% and 2.5% return on assets, so I think 2% in a quarter, that’s on assets, on capital you can appreciate a kind of similar phenomenon. So we’re roughly at least 2x of what the target is for the Company. So, from a contribution standpoint, financially, I also think about this business as — this is the sharp edge of the wedge that can help restore the brand.”

This business has been big data for decades

” people talk about Big Data now and so this has been a business that’s been Big Data for decades, I can give you plenty of stories. To me the lack of analytic rigor around risk and discussion science, we’ve built up that I also feel very good about, that’s something that can transport globally”

Machine learning to help understand the massive amount of “information exhaust”

” whether it’s acquiring new customers, the cost of service existing, the embedded cost of fraud and the like, so this is one and having earlier life on customer service operations. I look at these as massive transaction processing businesses, the first and foremost customer service businesses that generate immense amount of information exhaust and if you know how to use that information exhaust, which we may get into the ability to use machine learning this business is just massive. Banks don’t talk about that a lot, a lot of folks in Silicon Valley talk about it more. I think there is more that needs to be done there.”

Digital is bringing costs down

” I get a benefit there as well, not just on a rate, that only gained on hey my costs are coming down mostly both rates and volume because as we move to digital servicing, it’s faster better cheaper, it’s not just about cost arbitration, I know, and this is where I think FinTech has done a great job of challenging the model of how bank serve. “