Citigroup (C)

Q3 2011 Earnings Call

October 17, 2011 11:00 am ET


John Andrews - Director, Investor Relations

John C. Gerspach - Chief Financial Officer

Vikram S. Pandit - Chief Executive Officer and Director


Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Vivek Juneja - JP Morgan Chase & Co, Research Division

Matthew O'Connor - Deutsche Bank AG, Research Division

Ron Mandle - GIC

Jason M. Goldberg - Barclays Capital, Research Division

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division

Michael Holton - Merrill Lynch

James F. Mitchell - Buckingham Research Group, Inc.

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Betsy Graseck - Morgan Stanley, Research Division

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Adam G. Hurwich - Ulysses Management LLC

Ed Najarian - ISI Group Inc., Research Division



Hello, and welcome to Citi's Third Quarter 2011 Earnings Review with Chief Executive Officer, Vikram Pandit; and Chief Financial Officer, John Gerspach. The call will be hosted by John Andrews, Head of Citi Investor Relations. [Operator Instructions] Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Mr. Andrews, you may begin.

John Andrews

Rachel, thank you. And good morning to everybody, and thank you for joining us today. On the call today our CEO, Vikram Pandit, will speak first. Then, John Gerspach, our CFO, will take you through the earnings presentation, which is available for download on our website, After which, we'll be happy to take your 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 Factors section of our form -- 2010 Form 10-K. With that out of the way, let me turn it over to Vikram.

Vikram S. Pandit

John, thank you, and good morning, everybody. Thank you for joining us today.

Earlier today, we announced net income of $3.8 billion or $1.23 per share for the third quarter. When you exclude CVA and focus on our operating results, we earned $2.6 billion or $0.84 per share. These are solid results, particularly in a macro environment in which economic and political uncertainty created a lot of [indiscernible] .

As always, we're managing through short-term challenges while steadily executing our long-term strategy. Over the past few years, we have methodically positioned Citi for the trends and opportunities we see in the world. We've built substantial financial strength, de-risked our balance sheet and reoriented our business back to what we do best and what's in Citi's DNA, being a uniquely global bank focused on capital flows and global trade, with a particular focus on the emerging markets.

I want to start by focusing on 4 areas: first, our risk as it pertains to Europe, the emerging markets and the U.S. mortgages; second, our decision to move retail partner cards out of Citi Holdings and into Citicorp; third, our financial strength; fourth, I want to provide you some detail on our ongoing efforts to manage expenses; and I will close with a few comments on the economic environment.

I believe that Citi's performance during this quarter shows the significant progress we have made in improving our risk management, one of my top priorities when I became CEO. We've completely revamped our risk profile, risk approach and most importantly, our risk culture. We've put in place robust practices in the businesses and regions to integrate risk analysis into decision-making.

Today, you have another example of this improved risk management in the update on our European exposure. More than 18 months ago, we recognized the potential for Greece's sovereign debt issues to impact other countries in the Eurozone. Since then, we have reduced our exposures where needed, while continuing to serve our clients diligently. As you will see, we have continued to closely manage our trading and ASF portfolios in the GIIPS, France and Belgium and currently, have no material net exposure to sovereign debt securities.

In terms of funded exposures, we have net lending exposures to the GIIPS sovereign entities of $1.5 billion, and we currently don't have any France and Belgium net sovereign lending exposure. Our GIIPS financial institution net lending exposure is $2.1 billion, and our France and Belgium financial institution net lending exposure is $2.3 billion. Our exposures include lending to foreign subsidiaries where applicable. Margin may be held against some exposures, reducing our net exposure, while other exposures are collateralized. We are providing that margin and collateral information as well. Lastly, our exposures to corporates are partly driven by global banking, and a large amount of these exposures are to large multinationals that participate in global trade [ph] and capital flows.

Today, we are also including a good amount of information regarding our consumer banking businesses in the emerging markets. Our deep roots on these markets give us sufficient advantages in growing and managing these businesses and managing our credit risk. These businesses continue to produce strong growth in revenues, loans and deposits.

Our credit portfolio in the emerging markets is diversified by country and by product. The credit quality in these portfolios is not only good. In fact, in most of the countries where we do business, it's even better than the U.S. And the credit margins we earn in these markets are substantially better than the margins the industry earns in the U.S.

One sign of our success on these markets is that our investment spending in Asia is paying off. We achieved positive operating leverage in our Asian consumer business this quarter, one quarter ahead of when we expected it. We expect our Latin American consumer business to follow next quarter.

I did say last year that it was unlikely for the emerging markets to continue at their current pace. That said, we still expect them to grow faster than the developed markets. And also, the individual markets are not monolithic, each country faces its own opportunities and trends.

We continue to be very transparent about our U.S. mortgage exposure. We have a smaller own mortgage portfolio than any peer. Because of our aggressive risk mitigation efforts, which includes selling mortgages, our portfolio has shrunk faster than any peer.

And in a period of uncertainty, we believe that we hold the largest reserves against that portfolio. We have the smallest servicing portfolio and the smallest securitization portfolio of any peer. While we continue to focus on the risk of mortgage portfolio, particularly if the economy were to weaken, I feel very good about all the steps we have taken and how we are positioned today.

Regarding Citi Holdings, we've decided to move the vast majority of our retail partner cards business to Citicorp. We have made a lot of progress in strengthening this portfolio, including shedding some assets and re-underwriting the portfolio to much higher credit standards.

The portfolio is now 2/3 of its size at its peak, with an average balance weighted FICO of more than 700. In addition, so far this year, this business has earned a $2.2 billion profit before taxes and is a powerful source of ongoing profits.

As importantly, the credit card business and the availability of credit have changed since the enactment of the CARD Act. Consumer behavior has also changed, as branded cards carry smaller open lines and consumers would rather use retail cards to preserve and protect their open lines of credit with banks.

With this transfer, pro forma holdings assets will total about $250 billion or 13% of Citi's balance sheet. Although we continue to analyze the holdings portfolio, we don't expect any other transfers of this magnitude, and our goal is to get holdings below 10% of the balance sheet in the near future.

Next, Citi has built unquestionable financial strength over the past several years. At the end of the third quarter, our Tier 1 common ratio was 11.7%, and we had approximately $145 billion in tangible common equity. Almost 25% of our balance sheet is cash or liquid securities. We have enough liquidity that we could operate without issuing long-term debt for a couple of years, although we still plan to participate in the debt markets.

We still expect to end 2012 with the 8% to 9% Basel III Tier 1 common ratio and to meet the Basel III capital requirements ahead of schedule. Subject to regulatory approval, we still plan to begin returning capital to shareholders next year, and we believe the pace of return can increase in 2013 and beyond, as economic conditions improve and we continue to reduce holdings assets and monetize our deferred tax assets.

Let me spend a minute on expenses. Third quarter expenses were $12.5 billion in total, down 4% from the second quarter. After the big reductions in headcount and cost over the last couple of years, we continued to actively manage our expense base. We are constantly assessing our performance and will continue to resize our businesses when necessary.

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