Citigroup Inc. (C)

January 24, 2012 10:00 am ET

Executives

Ilene Fiszel Bieler -

Eric W. Aboaf - Treasurer

John C. Gerspach - Chief Financial Officer

Analysts

Peter Ganucheau

Ryan O'Connell

Michael Rogers

Peter Frank Ganucheau - Carlson Capital, L.P.

Christopher Kawasaki

Unknown Analyst

David Jiang

David Knutson

Mark Kehoe

Robert Smalley

Presentation

Operator

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Hello, and welcome to Citi's Fixed Income Investor Review with Chief Financial Officer, John Gerspach; and Treasurer, Eric Aboaf. Today's call will be hosted by Ilene Fiszel Bieler, Head of Fixed Income, Investor Relations. [Operator Instructions] Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Ms. Fiszel Bieler, you may begin.

Ilene Fiszel Bieler

Thank you, operator. Good morning, and thank you all for joining us. On our call today, our CFO, John Gerspach, will speak first. Then Eric Aboaf, our Treasurer, will take you through the fixed income investor presentation, which is available for download on our website, citigroup.com. Afterwards, we will be happy to take questions.

Before we get started, I would like to remind you that today's presentation may contain forward-looking statements which are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results and capital and other financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our discussion today and those included in our SEC filings, including without limitation, the Risk Factor section of our 2010 Form 10-K.

With that said, let me turn it over to John.

John C. Gerspach

Thank you, Ilene, and good morning, everyone. We're very pleased to be hosting our Fixed Income Investor Review this quarter. Today, we're going to update you on our continued execution and progress in several areas, including our liquidity and balance sheet management. Eric Aboaf, our Treasurer, is going to take you through some specifics on our credit and balance sheet progress, our liquidity profile and our capital position, as well as review our recent issuance activity and current funding plans for the coming year.

Many of you may have joined us for last Tuesday's earnings call, and there are some key points from that call that I would like to reemphasize to start us off here on Slide 1. The fourth quarter was dominated by the macro environment, and our earnings clearly suffered as a result. Market activity was down significantly, and our clients reduced their risk. Any of our businesses geared to the capital markets such as sales and trading, Securities and Fund Services and GTS, and even investment sales and consumer banking, were impacted.

Investor activity was particularly weak in December as reflected in the volumes we experienced. However, our consumer and non-markets-related businesses continued to perform well as we executed our strategy. Throughout Citicorp, we grew our loans by 14% from 2010, including a 24% increase in our corporate loans, and GTS continued to show positive momentum, with full year revenue up 5% from 2010.

Excluding the impact of foreign exchange, revenue from International Consumer Banking grew by 6% year-over-year as we opened 3 million new accounts while increasing average loans and deposits by $15 billion and $9 billion, respectively.

During the quarter, we achieved positive operating leverage in Latin America and again in Asia. In the U.S., consumer accounts, deposits, loans and revenue each grew from the previous quarter. We continue to make progress in winding down Citi Holdings, and we reduced Citi Holdings' assets by $90 billion during the year. And after considering the impact of the transfer of Retail Partner Cards into Citicorp, which will be effective this quarter, Holdings comprised only 12% of Citigroup's balance sheet.

In 2011, our expenses were impacted by several factors. Full year expenses of $50.7 billion were up nearly 7% from 2010. Most significantly, a weakened dollar and the resulting impact of FX translation added $800 million to our expense base, while legal and related expenses were $1.3 billion higher than in 2010.

Excluding these and other episodic items, our core operating expenses rose by 2.1%. And this includes $3.9 billion in incremental investments, $1.9 billion of which were funded through our ongoing expense reduction initiatives. The $3.9 billion in investments included approximately $1 billion to meet regulatory requirements.

We also upgraded talent in both our Institutional and Consumer businesses. Other investments, from modernizing our branches to increasing marketing, were necessary to attract and serve our clients better.

A few years ago, the company substantially reduced its spending on consumer marketing. And in 2011, we increased that spending to competitive levels. These are longer-cycle investments, but they are starting to pay off through increases in our new account acquisitions in the U.S. and the attainment of positive operating leverage in key consumer emerging markets. That being said, we believe these increases in expense levels are behind us. We have a robust re-engineering program, and our goal is to self-fund new investments going forward.

As a result of this and other actions, as we stated last week, we currently expect to reduce our expenses by $2.5 billion to $3 billion in 2012. That's compared to the full -- reported full year 2011 level and, of course, excluding changes in foreign exchange or unanticipated legal costs or significant one-timers.

We also continue to rightsize our businesses for the opportunities that we see, particularly in Securities and Banking. So we're prepared whether the current environment proves to be a result of cyclical or secular trends.

And let me make a few additional comments about Securities and Banking. As our results in 2011 demonstrated, the operating environment for the markets business has been difficult, with a series of macro headwinds pressuring revenues for Citi and the industry. As you know, we dramatically slashed our Securities and Banking business in late 2008 and into 2009 in response to the crises. Once we stabilized Citi and began to turn our attention back to growth, we identified businesses in Securities and Banking that we believe were strategically important to our long-term success but where we lacked scale relative to the opportunity. So in 2010, we started investing in those businesses.

While our investments in Securities and Banking were more substantial in 2010, they continued into 2011. As I noted in last week's earnings call, of the approximately $3.9 billion we invested in Citi in 2011, a little less than $1 billion was in Securities and Banking.

Now to put this all into some historic perspective, despite more than 2 years of investment into Securities and Banking, we still had an expense base in 2011 that is 7% below our 2008 level. Nonetheless, while we believe investing in Securities and Banking has been the right strategic decision, and we have invested in a prudent manner, the results in equities and banking to date have been disappointing to us. We've added a couple of slides in the appendix of today's deck that should give you some details on our holdings and our Securities and Banking expenses in 2011.

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