Get started. Thanks, everybody, for joining us. I do have a disclosure to read. For important disclosures, please see Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. The taking of photographs and the use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. Okay, well, with that out of the way, Mark, I'm so delighted that you were able to join us here this afternoon. Mark Mason, CFO of Citigroup.
Thank you, Betsy. Good to see you.
I think as everybody knows, Mark joined Citi in 2001, right? With prior responsibilities, including the CFO of ICG, responsibilities for CCAR, CEO of Citi Private Bank, Head of Strategy, M&A for Citi's Global Wealth Management. The list goes on and on.
22 years is a long time.
Ok, well, you know, every year is a new year.
That's right.
There's lots of opportunity to have impact. Appreciate your time with us today.
Happy to be here. Thank you.
I did want to kick off a bit on the strategy, and I think you're in phase I of the strategy that you and Jane outlined at Investor Day.
Yep. Yep.
It seems a period of executing and investing, and from your perspective as CFO, could you give us a breakdown of how you think Citi has fared as you've been going through phase one? What are you pleased with? What would you like to, you know, maybe move faster? What's not going as well as you would've liked?
Yeah. Well, I think I'd say, one, I feel very good about the progress that we've made. We always like to move faster, but I think we're making very good progress. If you think about just in March of 2022, where we talked about a vision, we talked about the strategy of these five interconnected businesses, and we talked about where we really wanted to focus between now and the medium term, you look at the performance that we've had in 2022 and in the Q1, we've largely delivered on those metrics and guidance that we gave at that point in time.
Top line growth in 2022, the expense growth that we targeted in the way of investments, the building of capital that we talked about in line with getting to 13% by the middle of this year. Many of those things we've made progress on, throughout the, throughout the course of the last 15 months or so. You know, what I'd, what I'd highlight specifically is some of the core businesses where we have competitive advantage, right? I think about our TTS business, which is part of services. I think about our Security Services businesses. Both of those businesses delivering significant top line growth, both in 2022, and in TTS, over 30% in the Q1 of 2023.
Some of it rate driven, yes, but a lot of it driven by deeper penetration of our multinational clients, starting to get some growth and momentum with our commercial and middle-market clients. Penetration in North America with our Security Services businesses, higher win rates across the board there. The cards portfolio, we talked last year about getting momentum out of that. We've seen good average interest earning balance growth coming through this year. Both services and cards, high growth, high returning businesses for us, delivering on that. I think important, Betsy, is the diversification of the business model, right? Obviously, the world's very different than what we talked about at Investor Day. Rates, you pick your. You know, the inflation, et cetera.
We have strength in services that has been able to offset some of the pressure we've seen in investment banking and that we've seen in wealth, with the investment banking wallet being down. We have a markets business that benefited from the volatility and uncertainty last year. That, again, was able to offset some of the other parts of the franchise. Very pleased with that. We're making, I think, very good progress on the investments. We'll talk more about that, I'm sure, but transformation in particular. Feel good that we're hitting our expense targets and the guidance that we've given, and feel good about the ability to bend the curve. We can talk more about that later. Then capital, as I mentioned.
We delivered on that 13% early, the end of last year versus the middle of this year, both through earnings generation, but also through optimization of use of the balance sheet. That revenue to RWA metric that we've talked about coming out of markets, a business where it's really important to make sure you're using the balance sheet wisely.
Everything's going great?
No. I mentioned investment banking.
Okay.
We see pressure from a wallet point of view. In the area of wealth, we aren't seeing the momentum that we'd like, in part because of the macro environment. Pressure in Asia last year played into that. I feel good about the KPIs underneath that. For example, in investment banking, technology, healthcare, the pipeline in that space, I think we're positioned well in terms of what's on the come as we do see the market rebound. We built out on the front end on wealth, so as that rebounds, I think we're well positioned. Everything hasn't gone as well as we'd like, but I think the diversification has helped to get me to a place of comfort. I would like to move faster. I always want to move faster.
Okay, great. That's a great opening to dig into and unpack as we go along.
Yeah.
The question list. I did want to bring up a question around what's going on just with the regulatory environment. Not, you know, for Citi specifically, but for the industry overall.
Yeah.
Just want to get your sense as to how you're thinking through the potential ramifications for Citi, of, you know, the regulatory environment that is likely to unfold.
Yeah, you know, the first thing I'd say is we should take a step back, you know, the banking industry as a whole, I think, is in a very different place than we were in at the financial crisis. A lot has changed. The capital positions of these banks, the liquidity positions of the banks, the balance sheet, just more broadly, is a lot stronger than it was back then, and Citi specifically as well. We've been very focused on that and feel very good about that. We obviously, just over a couple of months ago, have seen a lot of pressure, particularly on the regional banks. Whenever something like that impacts players in the industry, it's bad for the industry as a whole.
I'm happy that we were in a position of financial strength to be able to step in and help stabilize. As you sit here and ask the question in terms of the regulatory environment, it does put pressure on the regulatory environment for our industry. What does that pressure potentially look like? It comes in a number of different forms. The most recent we've heard about, which is the higher FDIC cost.
Mm.
Right? That banks across the industry will have to bear on the heels of the failures that have taken place. It's likely to come in more significant regulatory oversight from examiners, more intense oversight from examiners. It's likely to play out there. It's likely to play out in more stress tests that all the banks have to run, and likely some regulatory changes, perhaps targeted towards the regionals and some of the smaller mid-sized banks. It potentially has an impact on capital, which we've all read and heard about. That capital can come in the form of what the stress capital buffer looks like coming out of the recent DFAST CCAR exams. We're waiting on those results now. It could come in the form of what the Basel III endgame results ultimately look like.
The implications are likely to come in many different forms. We'll see what happens at the end of the month with some of the proposals that come out. We'll go through those, we'll understand those, we'll prepare our organization to be responsive to them and think about the implications it has on our strategy, and we'll figure it out and move forward. We were talking before we got on stage here, we all faced SA-CCR some number of quarters ago. We don't talk much about it now. It required an increase in capital. We had to be thoughtful about that approach. We figured it out and managed through it.
I do worry about, Betsy, the idea or the possibility of whatever increased capital requirements might mean for a credit crunch and might mean for implications around shadow banking. Those are things that I think we should all be thoughtful about and mindful of, and I hope our regulators consider all of those things as they work through some of the proposals that are outstanding.
Well, that's a great segue into the next question, which is really trying to understand, what are your corporate clients looking for? What are you hearing from them? What are you seeing from the consumer side? Is there an interest in leaning into risk and loans at this stage or?
You know, Our corporate clients, I think, are concerned about all the things that we've been talking about. I'm certainly hearing concern around inflation. I'm hearing concern around the direction that rates are likely to go in, and we got clarity on that, it sounds like this afternoon. People have been very focused on that. What does a recession look like and the severity of that? CFOs that I talk to all over the world are focused on, "How do I tighten the belt?," so to speak, as it relates to expenses, to prepare for an environment where there may be slower growth.
Broadly speaking, balance sheets are pretty strong, but people are still looking to shore those up in order to have flexibility as valuations perhaps stabilize and there are opportunities to capture growth on the other side. Those are the types of things that the corporate segment is focused on. We're very engaged, and we'll talk more about, you know, the banking environment, but there's still discussion around supply chains and how those things morph, but a lot of expense management, you know, how do we ensure we're efficient, is where I've seen a lot of the focused dialogue. On the consumer side, consumers have continued to be quite resilient. We are seeing, you know, savings rates, you know, come down.
Mm.
We are seeing movement as it relates to delinquencies and payment rates, but largely on the lower FICO score-type customers. You know, the uncertainty is important to play through, and we've seen a lot of that. It's good we've got the debt ceiling behind us, but all of those things have impacted sentiment.
Okay. Just bringing it to Citi and the results, performance, et cetera, maybe we could just flex to second quarter, and if you could give us a sense as to what you're seeing in terms of the markets and investment banking performance.
Sure. I started to allude to it a little bit earlier. You know, we had a really strong second quarter last year in markets, particularly in our, in our fixed income business. As we've gone through the second quarter here, continue to have very good corporate engagement, corporate dialogue. The debt ceiling concerns certainly did weigh on the investor client base, in particular, in April and May. We haven't seen volatility or activity pick up in the early days of June here, so to speak, we'll have to see how that plays out.
As we sit here kind of quarter to date, we're looking at markets revenues down, you know, 20%, and we'll have to see how year-over-year, and we'll have to see how the balance of the quarter, next couple of weeks kind of play out. On the investment banking side, it's been tough to call exactly when the wallet will rebound. We've seen, you know, some green shoots in terms of debt capital markets activity, and that's been good. We continue to have very good dialogue. I think we're well-positioned, as I mentioned earlier, having invested in certain sectors.
The wallet is down about 25%, you know, year-over-year, and we're likely to be, you know, in line with the wallet, but again, we'll see how it kind of plays out over the next couple of weeks. As I take a step back and think about the full year, our guidance. I'm not changing our guidance regarding the full year. Despite some of that movement, I still feel good about $78 billion-$79 billion of total revenues, ex the impact of divestitures. Feel good about that. I would say that the mix of revenues in the quarter, in particular, is such that I'm likely to see a tax rate in the quarter that's probably 200 basis points or so higher than the full year guidance I gave.
I gave further guidance of 23%-24%. In light of that mix in the quarter, it'll probably be a little bit higher.
Okay. Full year tax rate stays the same.
I believe so.
With an expectation that the rev mix will be a little bit different as we go through three and four? Okay. just on trading, just to ask the follow-up question there. Any color around impact equity, fixed income, or both, you know, roughly in that same range on a year-on-year basis?
Look, I mean, obviously, fixed income, we're very strong in fixed income. Have a strong presence with our corporate clients that help to add stability to the revenue stream there. Well-positioned from a rates and currency point of view as the macro continues to evolve. Generally speaking, likely to do better there relative to equities. We're trying to continue to grow our equities business and grow the prime balance activity in particular. Likely to skew more favorably to the fixed income.
Got it. Okay. I wanted to move over to interest rate sensitivity.
Yeah.
We did get the news just before you came on stage, that, the Fed is pausing.
Yeah.
That's exciting. We'd love to get your reaction to what you think about that. Really, the question here is, How do you expect your rate sensitivity to evolve over time, and how are you positioning for the potential of a rate decline in the future?
Yeah.
You know, the potential for a continuation of a rate rise, depending on what happens over the next few quarters.
Yeah. Well, let's see. The color around the rate move that was just announced is probably being discussed right now, right? We're probably missing out on some of the color kind of commentary, but from what I read, I actually thought the way it was positioned and the way I read it was quite smart. It wasn't just a pause or a skip, but there was reference to the potential for further hikes later in the year. And so to me, that was a messaging around, "We're going to see what the impact has been thus far, but we're prepared to lean in on the idea of tempering inflation if it doesn't continue to go down to levels that we've talked about." It felt like a smart way, you know, to handle it.
We'll see what the color commentary provides. To get to your question around NII, we obviously look at this, you know, all the time and manage it, you know, I think quite effectively from an asset liability management point of view. We want to be flexible, particularly in light of kind of how the view on rates has continued to evolve. We provide a fair amount of disclosure in the Qs and the Ks that show sensitivities around large rate moves on our entire book of exposure, right? If you look back, what we've tried to do, and if you look at 2022, and you look at that data that we provide, it will show that we have maintained an asset sensitivity position, such that we could benefit from rising rates.
Mm.
Right? We've been very deliberate around that. When you look at kind of the Q1, you'll see that we started to reduce that position of asset sensitivity, particularly in the US, around the anticipation that at some point, rates are likely to come down early next year, end of the year, something like that. You see that if you look at. Again, when we do this IRE analysis, it assumes a 100-basis point move across the curve, across currencies, against a static balance sheet, right? What that analysis in the Q1 showed was that if that were to happen, we'd see about a $1.7 billion of NII full-year impact. Positive, $1.7 billion. The skew, in terms of the mix there, was about 80-20, with about 20% of that coming from US.
Dollar, the other 80 coming from all other currencies, right? That trend, if you look at that trend line, has skewed towards the all other currencies in light of what, in light of what I said, but also the mix of our portfolio. So we are actively managing towards the view of where we think rates are likely to go so that we can obviously manage that through an NII point of view. Your other question, with regard to, well, what if there were a rate reduction or a rate shock in the other direction? We provide that analysis, too. What, again, same analysis in terms of a 100-basis point static balance sheet, cross currencies, across the curve, and that would yield about a $1.8 billion of a reduction.
Remember, with that reduction in rates, there's also an impact to AOCI as you pull back to par, but that would be about $1.8 billion with a skew of, call it, 30/70 in terms of US dollar versus non-US dollar.
Fairly equally balanced to, you know, each of those outcomes.
Yes, with assuming static balancing.
Right.
All of those other caveats.
Right.
that I mentioned.
You do have an active balance sheet.
Yeah.
One of the assets, that comes with a relatively higher level of interest, right, is the credit card book.
Yeah.
Did want to just dig in there a little bit. You're clearly a large US card issuer, and I wanted to see what you're seeing with regard to customer engagement trends.
Yeah.
Account acquisition, consumer demand for credit. Are we at a point where you feel consumers appropriately levered, or do you feel, based on the behaviors you're seeing in spend and borrow, that there's room for them to lean into leverage?
Yeah. It's a great question, and I guess I'd Let me come at it from a couple of different angles. One, the point I started to mention earlier, which is just overall liquidity. We've seen kind of deposit levels in the industry come down. When you look at kind of the personal saving rate for April was about, I think, 4.5%, which is well below the 7.2% or so average. Savings rates are coming down. People are dipping into those saving pools that they had coming out of COVID, you know, in a meaningful way. There's kind of the liquidity lens, so to speak, that you're seeing play out. I think the second component that I'd speak to is around purchase, sale activity or spend.
When I look at spend is still growing year-over-year, but at a decelerating rate from what we've seen in prior quarters. The areas continue to be travel, entertainment, areas such as that. Some of that is going to be driven by inflation, but some of that actually is actual spend that's kind of continuing to grow. I would imagine that we start to see some continued pressure on that, but still have growth as we sit here now. What's happening with balances? Here we're actually seeing payment rates start to temper, particularly in the lower FICO score customers. They're coming down across the board.
More so in the lower FICO scores. We're seeing delinquencies start to pick up. The second quarter is a little bit tricky because you've got some seasonality there. When you look through again on the lower FICO scores, you're seeing a pickup in delinquencies. We're seeing loss rates start to pick up. If you again, lower FICO scores. I've talked about historically, average FICO scores across both our average loss rates across both our portfolios. Last quarter, I talked about us running close to 70% of those levels. We're seeing that start to tick up, but nothing abnormal there. More in line with expectations and some of that on the heels of the acquisitions or new clients that we've been bringing in.
I think importantly, you know, look, savings rates coming down, but purchase sale activity continuing to show some momentum. Average interest earning balance growth, which obviously contributes to NII and losses and delinquencies increasing, but manageable.
What about credit in other sleeves that you're exposed to, say, in the commercial real estate sleeve or in C&I corporate credit?
Again, remember, in both these portfolios, we tend to skew towards the higher quality risk, right? 80% on the consumer side, greater than 680 FICO score. 85% on the corporate side, investment-grade names, 90% when you look internationally, are either investment-grade multinational or their subsidiaries. We skew towards the higher quality. We're not seeing anything abnormal as it relates to corporate, you know, NPLs or corporate losses. Our commercial real estate exposure is very small, you know, in the scheme of our total balance sheet and relative.
Right.
I think to others. Office within that is small as well, no particular areas of concern. We're well reserved across both of these at, you know, we've got a 2.7%, you know, reserve to loan ratio. Feel very good about the $20 billion or so that we have in reserves against the portfolios.
I wanted to flip into expenses and operating leverage and that discussion. Going back to what we talked about earlier, since you are executing along the plan that you've put out there, one of the questions I had was just around the investments that you've been making. The expense efficiencies are coming through. There's still investments to make, and I guess the question here is, How far along are you? Is there a ramp, an acceleration from here, or do you feel you're at pace? The other question is, How do you think your investments might change in terms of what you're focused on going forward?
Well, one, I'm glad you referred to them as investments. That's exactly the way we think about it, the spend that is. The investments kind of comes across a couple of different buckets, but not the least of which is kind of business-led investments. Think about some of the build-out we're doing on the front end for our commercial banking business. That covers that middle market segment, where we can offer our TTS services. Building out front, and they're building out on the front end of wealth have been areas that we've been investing in. In a minute, I'm going to talk a little bit about the importance of repacing that investment in light of the environment that we're in.
There's also the transformation and risk and control investments that we've been making, that you've heard us talk about, that are geared towards improving our operations and addressing some of the consent order items that we need to address. Technology spans, in some instances, both of those things, and in and of itself, has its own bucket. Think about the importance of investing in cyber and what have you. Investments, Betsy, I know you know this, is not something that you do and then stop, right? I can't sit here and tell you that we're going to stop making investments at some point in time. We do expect that investments will start to pay off, which is really important. I want to talk just specifically a little bit about the middle bucket.
The transformation spend and how that's evolving to your question. Think about the early days of the transformation spend and improving our operations, where the spend is largely around designing the plan, developing the plan, ensuring that we're addressing all of the operational issues in that design. You're bringing on people, you're hiring a lot of people, you're hiring consultants, you're hiring third-party vendors to help with the crafting of that. We've moved squarely into the execution. All right, as we move through execution, that spend is going to move from consultants and has moved from consultants and third-party spend. Still going to be people-intensive, but going to lean into the technology aspects of that spend book. Right?
Over time, that technology, as we implement those platforms, we'll no longer need the same level of people that we have at this particular phase. We are in that phase where it's shifting towards technology and people and working towards that phase where we're reducing people even further as we realize the benefits.
Mm.
From that technology, as we use that technology to automate a bunch of activities that we have to do manually today, right? We talked at the earnings call, Jane has talked about examples of our wholesale credit risk platforms that we have, and the ability to move that to a common underwriting process. That common underwriting process means that you don't need thousands of people.
Mm.
over time because it's standardized in the approach that we're able to use. We talked about a SMaRT platform that we've implemented across our Markets business that helps with the actual reduction of operational risk of fat-fingering entries across the different platforms that we have. Implementing things like that, again, reduces operational risk, reduces operational cost. We talked about legacy platforms and equities and eliminating those. Often with a legacy platform, you actually have to run the new platform, right? While you run the old platforms to ensure your new one is ready and doesn't miss anything before you can start to reduce those.
Those are examples of where we're investing and how it's morphing, and both of those things play into the bending of the expense curve that I've talked about a lot, that will start to come next year.
Okay. Into phase II and then III.
Right.
As well. Okay. How does pursuing the IPO in Mexico impact this at all, if any?
Let me approach it this way. Let's break down the expense trajectory, if you will. Right? We talked about 2023. I gave expense guidance of roughly $54 billion, excluding the impact from divestitures and excluding the FDIC charge.
Right.
That we're likely to experience, right? The target for 2023 is to deliver on that. 2024, I talked about bending the curve. This is all with an eye towards getting to the return targets that I have in 2025, 2026, medium term. Bending the curve means bringing down our absolute spend in dollars between Q3 and Q4 of 2024. All right? How does that happen? That happens from a couple of ways. One, we've got seven of these consumer countries that we've now exited, right? With those exits, the costs go away, and we've been working very hard and successfully at driving out the potential stranded cost associated with those exits. That's going to help to bring down our expense base as we continue to make progress, you know, against that.
The other is the investments that we've been making the last couple of years will start to help reduce the operating cost, the structural cost of the place. We'll start to realize some of the early benefits of that in 2024. The third is around organizational simplification that both Jane and I have talked about. Think about it. When we exit 14 countries, that creates an opportunity, not just in the country, not just in the region, but globally as well. Right? I've got to ask myself, how can I rethink the way I run my finance organization since I no longer have those 14 consumer countries?
How might I reorganize to do that? We've started to do that work. That's the third contributing factor, you know, to bringing that cost down. The exiting of Mexico carries about half the total cost associated with these exits. Three and a half billion dollars or so. That cost won't go away in 2024 because we've now moved squarely to an IPO. Despite that, I still expect to have my cost curve bend in the third to Q4. All right? Important to point out, while that cost won't go away from a Mexico point of view, neither will the revenues associated with Mexico, and Mexico is accretive to us. I just want to.
Right.
Want to highlight that. That's kind of the expense story. I'd highlight one more thing that I think is important on this topic, which is, I'm keenly focused on delivering on that guidance and those targets and getting to our medium-term returns. What that means is that the investments that we've made in this environment, we've got to repay some of those, and that's what we've been doing. I talked last quarter, about severance costs that we had incurred in the Q1. As I sit here in the second quarter, we have, at this stage, year to date, but between the Q1 and now, we have incurred cost, severance costs associated with about 5,000 headcount that we will be reducing.
Across the firm, largely in banking, markets, and functions. Front-end related resources that we're going to bring down. In the quarter, there are probably about 1,600 of those heads were funded in the second quarter here. That's going to result in my expenses for the second quarter being about $300 million-$400 million higher than the Q1. Not all attributed to that, but largely attributed to those restructuring or repositioning charges that I had to incur. Still going to deliver on my guidance for the full year, $54 ex-divestitures, ex-FDIC. Important that we remain expense disciplined around driving cost out and capturing efficiencies, and sometimes that means reducing headcount.
Just to make sure on one point, the stranded costs associated with some of the consumer businesses that you've exited will start to come out over the next 12-18 months?
Yes.
Okay.
Yes.
Um, and then.
You know, there are three, you know, it's going to take some time.
Right.
The answer is yes to your question, right?
Yeah. No, that's great.
We have three wind-down businesses.
Yep.
You know, Korea, you know, China, Russia. There's costs associated with those. Obviously, there's stranded costs, a little bit associated with Mexico. There's still going to be some in the cost base longer term. We will start to get the benefits of that, yes.
Yeah. Well, I realize investors have been, you know, looking for that of when the stranded costs would start to come out. Right. That's helpful. The, you know, in the last couple of minutes here, I guess just wrapping up, a question around the CET1 targets that you've got.
Yes.
You've got this CET1 target of 13%. You're already above it, right?
Yes.
You know, the question is, when you've got the medium-term target of 11%-12% on ROTCE.
Yes.
Can you just give us a sense as to how you triangulate between your CET1, your ROTCE, the capital, and the expense improvements that you've got in bending the cost curve, and how you, how you see the next year or two years as you move into phase two and three evolving?
Okay. There's a lot there, let's take it in pieces real quick. We ended the quarter at a 13.40 CET1 ratio. That included capacity that I've built, that we built in order to absorb the potential impact of a sale of the Mexico business and the currency translation adjustment that would be associated with that if it were a sale, right? We built up that capital position in order to do that. The sale, obviously, we've moved towards an IPO. In moving towards that IPO, you know, as we said, we would look at buybacks on a quarterly basis. We looked at capital, we looked at buybacks, and, you know, it was late in the quarter, but we did resume buybacks this quarter.
We'll get probably about $1 billion or so done, given when we started. We'll look at that on a quarter-by-quarter basis. As I think about the medium term of returns, delivering on those medium-term returns comes from a number of different drivers. You've got, obviously, revenue, momentum, and I'd point to, again, those strong businesses that we have, TTS, Security Services, et cetera, et cetera, contributing to a 4%-5% top-line growth. We've got that expense base and bending the curve associated with that. I talked about a less than 60% operating efficiency as we get into the medium term, that dynamic is going to be really important.
The normalization of credit, which I, again, I think we're starting to see that play out, well reserved for how that plays out. The exits, as well as some of the other things like earnings accretion, and what that means for SCB, GSIB, et cetera, will contribute, should contribute to how we think about our requirements going forward, including our management buffer, which we carry about 100 basis points of a management buffer. Obviously, the regulatory environment's changing. We'll have to see what that means, both for the near term and the medium term, but those are the important levers that we're managing as we get to that 11% to 12% return.
Bringing it all together, any main points that you want investors to take away about Citi's current positioning and where it's headed over the next few years?
Sure. What I'd say is, I think our vision's clear, our strategy is clear. It's proven resilient, I think, in some very uncertain times over the past 12, 15 months or so. We're focused on execution. For us, it's really about building, rebuilding credibility. That means the proof points that we can put on the board that are consistent with what we've told you we're going to do is what we're focused on. Transparency is really important for us to provide to you all, and we're committed to getting to these return targets. We think there's a lot more value, you know, in the firm, in the stock, and we believe that as we deliver on those proof points, that that'll show up in where we're trading in our multiples.
Super. Mark, thanks so much for joining us this afternoon.
Thank you.
Appreciate your time.