Citigroup (C)

Q1 2012 Fixed Income Call

April 25, 2012 10:00 am ET


Ilene Fiszel Bieler -

John C. Gerspach - Chief Financial Officer

Eric W. Aboaf - Treasurer


Ryan O'Connell

Robert Smalley

David Knutson

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

David Havens

Unknown Analyst

David Jiang

Michael Rogers



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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, Afterwards, we'll 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 conditions 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 Factors section of our 2011 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 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 Monday's earnings call, and there are some key points from that call that I would like to highlight to start us off here on Slide 1.

This quarter, we reported net income of $2.9 billion for the first quarter of 2012. x CVA and excluding the net gain from minority investments, we earned $3.4 billion in net income or $1.11 per share. This is a significant increase both from the first and fourth quarters of 2011. While our businesses operated in an improved environment in the first quarter, we also saw the benefit of our investments. We generated revenue growth and had positive operating leverage across Citi's core businesses: Global Consumer Banking, Transaction Services and Securities & Banking. Key drivers such as loans in Citicorp grew by 12% from the prior year, while we deepened client relationships and improved market share in several businesses.

Global Consumer Banking generated $10 billion in revenues in the quarter, up 5% from the previous year. Securities & Banking revenues rebounded, driven by particularly strong performances in Fixed Income.

In Transaction Services, revenues were a record $2.7 billion, reflecting strong growth, particularly in trade finance, where our unique global footprint gives us a meaningful competitive advantage.

Overall, net income x CVA for our institutional businesses increased 12% compared to the first quarter of 2011, and was 4.5x larger when compared to the fourth quarter of 2011.

We reduced our legacy assets in Citi Holdings by 7% during the quarter, and Citi Holdings assets are now at $209 billion or just 11% of our total assets. While the operating environment improved in the first quarter, there is still much macro uncertainty, and we'll continue to manage risks carefully.

Now, let me turn to capital and liquidity. First, let me share with you some numbers since we further added to our capital base during the first quarter. We ended the quarter with $122 billion of Tier 1 common capital, and a ratio of 12.4% under Basel I, up from 11.8% at the end of the fourth quarter. And for the first time, we shared our Tier 1 common ratio on a Basel III basis, which stood at an estimated 7.2% at the end of the quarter.

Now keep in mind that Basel III requires the deductions of certain minority holdings on a dollar-for-dollar basis from an institution's capital base, and the 7.2% figure reflects that.

In aggregate, our minority investments in unconsolidated financial institutions such as Akbank and Morgan Stanley Smith Barney amount to 120 basis points of deduction. As you know, we expect to reduce certain of these stakes over time. While we're at 7.2% now, we still expect to exceed 8% by the end of this year and have various paths to do so. In fact, based on current analyst consensus estimates of our earnings for the remainder of 2012 and our anticipated actions, including the reduction of our stake in Akbank, we expect to be above 8% even if Morgan Stanley doesn't exercise its option to buy 14% of the MSSB joint venture this year.

On liquidity, more than 1/4 of our balance sheet is in cash or liquid securities, and even though the Basel III liquidity coverage ratio doesn't come into effect until 2015, we are an estimated LCR ratio in excess of 125% at quarter end. As a result, we have already exceeded the proposed requirement. As you can see, our capital and liquidity numbers are amongst the strongest in our industry globally.

Turning to Slide 2. I'd like to reemphasize some of our key earnings results from the first quarter. There are a few significant items I'd like to mention that affected our results. First on the revenue side, CVA and DVA were negative $1.3 billion in the first quarter as Citi's credit spreads tightened. And we also benefited from a pretax gain of nearly $500 million related to minority investments. And on the expense side, legal and related expenses remained elevated at over $500 million. However, repositioning charges declined to $66 million from over $400 million in the prior quarter.

Citigroup reported net income of $2.9 billion or $0.95 per diluted share. Excluding CVA/DVA and the minority investment gain, earnings were $3.4 billion or $1.11 per diluted share. Revenues of $19.4 billion were down 2% versus the prior year on a reported basis. However, excluding CVA/DVA and the minority investment gain, revenues were up 1% from last year, as revenue growth in Citicorp outpaced the decline in Citi Holdings.

Expenses of $12.3 billion were roughly flat year-over-year on a reported basis. Excluding the impact of foreign exchange translation and the significant expense items I just mentioned, operating expenses were up less than 1%. Incremental investment spending was more than offset by efficiency savings.

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