花旗銀行 (C) 2002 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Citigroup's first quarter review, featuring Citigroup Chairman and CEO, Sandy Weill and Chief Financial Officer, Todd Thomson.

Today's call will be hosted by Sheri Ptashek, Director of Investor Relations.

We ask that you hold all questions until the completion of the formal remarks, at which time you will be given instructions for the question-and-answer session. Miss Ptashek, you may begin.

Thank you.

Thanks everyone for joining us this morning on what I know is a busy day for all of you.

We have Sandy Weill and Todd Thomson with us today and I believe that Sandy will make some opening remarks and Todd will take us through our presentation and then we'll be happy to take your questions.

So with that, I turn it over to Sandy.

Sheri, thank you very much and I would just like to say that

Argentina and the investment section we are very pleased with our results for the first quarter and we think that the company really delivered across most of our lines in a very difficult environment.

When we look at Argentina this quarter we took over 800 million of pre-tax charges of 519 million after taxes in increasing reserves and writing off loans in the country which cost us 10 cents a share. Had we not had the problems in Argentina I think we would have seen strong double-digit growth in our core earnings and that is more what we look at.

At the end of the quarter we will have written off or reserved approximately two thirds of our total corporate and consumer loans within Argentina. Something of that magnitude has never occurred in any of the emerging market countries that we have operated in.

As I mentioned also if you add what we took in Argentina in the first quarter this would make our total pre-tax losses in that country or bring them to something like a little more than 2.2 billion of which in excess of 1.4 billion has gone through pre-tax core income statement and 800 million was a charge directly to equity that related to the foreign exchange translation decline of new peso in Argentina after it started trading.

Also this quarter the market conditions for NASDAQ where we have some of our investments was not nearly as good as what we saw in the fourth quarter of last year when we had the recovery from September 11th so that we saw a decline quarter on quarter in our investment segment of $280 million to approximately seven million -- $70 million or another four cents a share. Exing that we think the quarter was really a very good one and we ended the quarter with a little bit in excess of $90 billion in total equity, very, very strong ratios in all of the areas that we look at.

After the charges, a return on that equity of 19.1 percent, not far from our 20 target, considering the fact that we did have over a $500 million charge to core income.

In the quarter, we bought back approximately 18 million shares of common stock and about $525 million of our preferred stock.

This quarter did witness one very good thing and that was the execution of the

IPO, which was very well received by the investment community. And the stock continues to act well, and we look forward to being able to, before the end of the year, spin the majority of our remaining stock off to our shareholders, as well as our keeping 9.9 percent of that stock.

But what we did do in the first quarter is sell 23.1 percent of our common stock position, which netted us about $4.1 billion -- billion dollars -- from the sale of a convertible. And we are due a billion dollars in a dividend at the time of the spin-off, so that we will enhance our cash position by approximately $6 billion from

, as well as keeping 10 percent and spinning off approximately two-thirds of the shares to our shareholders.

But the gain on

was a little bit over a billion dollars, which brought our earnings in the quarter to close to $5 billion, or 93 cents a share, up from 71 cents a share last year. And that 1.1 billion gain on

was after our taking a $550 million after-tax charge for strengthening and standing by their -- behind their reserves on asbestos to create the backup that made that deal, I think, go much better.

Our corporate business had -- well, let me just first say that in the quarter, I think we're happy to see that our total revenues were up five percent, while our expense control was really still very diligent and was six percent below the same period a year ago. And that's after taking into account the fact that we had some acquisitions this year that we didn't have a year ago.

I think what this shows is that the company does have a very strong characteristic of recurring and predictable income that we have probably the most diverse source of -- sources of income of any financial company. We have a very strong balance sheet and look to make good returns on that equity without over-leveraging our balance sheet and we have an incredibly strong brand.

Once again in this quarter our North American consumer business really lead the way as it has over the last year and a half to the point where its profits were up over 20 percent in the quarter while revenues were up a strong 14 percent.

There were really three parts of that North American consumer that did very well. The first is our Citibanking business, which was up 23 percent to $183 million after taxes and that was caused by a 23 percent increase in deposit growth in those branches as well as increasing the revenues 20 percent in the recently acquired EAB branches per branch and their income per branch by 36 percent.

Also our card business, it continued to increase and offset the losses with cost control and growth and that business was up 10 percent to $520 million in the quarter and Citifinance was up 45 percent to $320 million after tax in the quarter mainly continuing to benefit from the consolidation with associates.

These are really world-class businesses that this company can build upon as we look to grow our consumer businesses around the world and an example of that is in Japan where our consumer business grew 16 percent to 238 million after taxes despite the weak yen, which caused a conversion loss in that of some significance.

Also

started the year in very good shape. It earned $280 million in this quarter. They did have $65 million in cost saves that have come from the merger of Citibank into

which has been executed very well and they're off really to a very good start.

As far as our corporate and investment banking business, even though they had poor market conditions that lead to an 11 percent decline in revenue, strong cost controls that were initiated the beginning of last year kept the profits within four percent of last year's very strong first quarter lead by our number one position in the marketplace, as well as winning the honors again as the best foreign exchange bank in the world.

The emerging markets, as we talked about in the beginning, were hurt substantially by the problems in Argentina, so that even though other parts of the world continued to perform, we saw that our consumer business was down 64 percent to 84 million -- down from 233, mainly caused by Argentina.

And our corporate profitability in the emerging markets declined from 421 million to 198 million, also because of the problems in Argentina, although the rest of the world was in pretty good shape.

Our private bank and asset management continued to improve and perform well and grow assets in a very, very difficult environment. I think as a result of all of these results from last year and continuing through the first quarter, I think we're proud of a lot of things.

And first and foremost is that in the middle of the fourth quarter last year, Moody's raised our ratings to AA-1, which is just one shot away from AAA -- and one of the very few companies that was raised last year by both S&P and by Moody's.

Second, as far as looking at how our company has performed over the last three years, five years and 10 years, as one of the 30 companies in the Dow, for the last three years we were the best-performing stock in the Dow -- that's ending December 31st, 2001.

Over the five-year period ending in that time, we were the third best performing stock in the Dow. And over a 10-year period, we were the second best performing stock in that average, so that, really, over a decade's time, we've been either on, two or three out of the 30 companies in that measure, which I think shows the long-term results. And that's really what creates, we think, shareholder value.

Also, if one were to look at the S&P 500 -- and Business Week started measuring the companies in the S&P 500 about six years ago -- we've been in the top 10 four out of the six years. And I think that only seven companies of the S&P 500 have made the top 10 in as many as four years. So that also is another long-term measure looked at another way and a broader way of how we perform for our shareholders.

You know, and finally, you know we feel very good about Fortune naming us one of the 10 most admired companies in America. We think that that is very good for our brand and how we deal with customers and with shareholders. And as we look to the future, I think we feel good about our future. I think that we are in the process of witnessing the peak in delinquencies and write offs in both our consumer portfolio as well as our corporate portfolio and we're hopeful

we'll see these indices declining by the end of the year and we continue to look for double digit earnings increases in the year 2002 and with that get through our formal presentation.

Thanks Sandy. Good morning everybody. What I'll do is walk you through the presentation we've today and then we'll turn it over to Q&A.

The first page of the presentation we printed $3.9 billion of after tax core income for the quarter up five percent so 74 cents earnings per share on a core basis. We took our

in Argentina. We wrote off $816 million pre-tax into core income, which was $519 million after tax, and I'm going to later on in this presentation go into more detail about exactly what happened in Argentina so you can see all the pieces there.

On the positive side of the ledger for the quarter we got $1.1 billion in gain for the

IPO and that was after the $800 million pre-tax or about $550 million after tax back stop for

for the air asbestos coverage.

And so with the effect of our core businesses, with the effect of Argentina and with the effect of the

IPO net income was up 37 percent to $4.8 billion after tax for the quarter.

Revenues overall up five percent to 22 billion. Operating expenses actually declined again despite including a couple acquisitions we didn't have last year at this time, EAB and

so with quite good focus on cost

over the past year and very good operating leverage overall. The underlying business performance is quite strong and I want to talk a little bit about that as well.

Nineteen percent return on our average $90 billion by the end of the quarter and our capital ratios are extremely strong as of the end of the quarter.

We move into a little bit more of the detail on page three. The global consumer business had strong revenue growth, up 21 -- up 20 percent for the quarter, which drove income for that segment up 26 percent. That was despite some of the Argentina

happening in the consumer business. In the corporate business you see some more impact of the Argentina write-downs and provisioning. So that was down 18 percent.

management private banking -- strong performance, up six.

, as we show it here -- down four. Investment activity's down from last year and corporate other, less expense, driven primarily by lower funding costs.

So the core income numbers that we talked about -- you can see the

gain. We also had a small restructuring charge in Argentina, as we are looking at re-sizing that business a little bit. And then for FAS 141, 142, we had a small accounting change to have a cumulative effect of writing off some of our intangibles in a couple of the businesses of $47 million.

So, again, net income of $4.84 billion -- up 37 percent.

I want to actually now move to Argentina. You can see on page four some of the detail of what we're taking in the quarter, as well as what we took fourth quarter in Argentina. And let me start by sort of recapping where we were at the end of the fourth quarter.

At the time we release our earning there, the situation in Argentina, as we said at the time, had very little clarity. There was a lot of movement down there. Things were in flux.

The government had stated at that time that certain loans were being pesofied at an official rate of one peso to dollar -- hadn't mentioned what was going to happen to deposits -- hadn't mentioned what was going to happen to other loans or other assets and liabilities.

The peso wasn't trading. In fact, the whole banking system was basically shut down in the country for several weeks.

So what we did, using the best information we had, tried to make a prudent guess of what types of write-offs we might see. And we wrote off 193 million in the corporate bank, 42 million in the consumer bank, and then we had our estimation of the effect of this re-denomination of 235 million. So 470 million total pre-tax charge in the fourth quarter.

Subsequent to our release in the fourth quarter, we have significantly more clarity about what the government is planning to do. On February 3rd, the government decreed that deposits -

not just some loans, but all loans -- would be pesofied at one to one, and certain other balances, including the annuity liabilities in our Siembra business, would be pesofied at 1.4 to one.

On February 12th, they began to operate a free exchange market, but with restrictions to capital movements. On March 12th, the government announced and committed to the terms of notes to compensate the banks for what was this asymmetric devaluation of deposits and loans and so that now has been sorted out. In addition, the government offered depositors the ability to take some of these notes in compensation for deposits. So that also clarified what could be done there.

Also on March 12th the government decreed that additional assets including the promissory notes for

would be pesofied at 1.4 to one and in March

concluded there should be a mandated write off of some of the cross boarder risks.

So in February and March was when most of the clarity came into play for Argentina. As a result of that, as you can see on this page, from the first quarter we've taken in addition to our loan

provisions $475 million. We've written down in credit $169 million and $100 million in addition in an investment that we had in Argentina for a -- we've had for a few years in a cable TV company down there.

We also had the -- a re-denomination charge which was basically the charge of this asymmetric devaluation of assets and liabilities that the government has mandated net of the compensation bond and so the total pre-tax core income impact of 816 million that we talked about.

We also took $42 million in a restructuring charge to right size the business down there for a total pre-tax net income impact of 858 million and in addition to that, we had the effect of the currency translation from the beginning of the quarter to the end of the quarter so from 1.4 down to where it was at the end of the quarter of three to one and that was a $512 million reduction to our -- to our equity.

So those are the pieces for Argentina and I think we've obviously tried to be as conservative and as prudent as we could be to get this behind us.

Let me talk now about something that we were a little happy about which was on page five, this travelers' property and casualty IPO which we feel very good about. I think it was a spectacular job lead by SSB and

and the team. I think we think we'll do a terrific job running this business. This was the largest insurance IPO in history. It was the fifth largest IPO in history and again very well executed.

For Citigroup based on the initial IPO valuation of 18 and a half billion we had proceeds of 4.1 million against a book value of

. We took the asbestos reserve against this as you can see. That was about 500 million after tax.

We also had some other expenses and taxes that came

. And that gave us a net gain to our net income of $1.1 billion.

also issued a convertible note, so the total proceeds to us in the first quarter were $5 billion of cash.

On the right-hand side of that page, we talk about the accounting treatment for

. I think it's worthwhile -- just making sure everyone's aware of how this is going to be treated.

It was 100 percent consolidated this quarter and except for a couple of dates at the end of the quarter after the close of the deal. Going forward, it'll be consolidated with 23.1 percent minority interest. So 23.1 percent of

income will come out of Citigroup's income until the spin-off. The spin-off is expected to be consummated before the end of the year.

We'll be spinning off about 67 percent. We're going to retain 9.9 percent in our investment activity segment. And once that spin-off is completed,

will be treated as discontinued operation, which means, historically, the numbers will drop down below the -- below the line as well. So we'll have easier comparisons year-on-year and more accurate comparisons year-on-year.

So those are the, sort of, big one-time events for the quarter with Argentina and

. Let me sort of move to the core business performance on the next page.

And as you can see, we had double-digit growth in two thirds of our businesses -- so very strong underlying performance for the company here.

And let me just talk through a little bit of the details on some of them.

consumer growth of 54 percent in income was driven by strong performance out of

. We have them in this quarter -- didn't have them in last quarter.

As was mentioned earlier, I think that integration is going extremely well. The income results are actually coming in a little bit better than planned. Head count is now down 5,400 since August, so very good integration performance there.

Also good performance in

in

consumer. And, obviously, we had the losses that we already talked about for Argentina.

CitiFinancial continues to extraordinary performance, up 45 percent. Revenues were up 11. We had six percent receivables growth. And that offset what was a hundred --

deterioration of about 47 basis points, although we are seeing some firming up of the earlier delinquency buckets in CitiFinancial.

Western Europe had strong performance -- revenue up nine. And that was driven by growth in consumer finance in Europe, as well as growth in bank bards. Expenses were flat, and so you saw income growth of 38 percent.

Mortgage banking, strong performance of Citibanking. Revenue up 25 percent and obviously very successful integration there going on of EAB driving some of that performance, asset management strong, income performance driven by some good flows as well as cost reduction, private bank up 18 percent. Revenue was up eight, strong client trading up 23 percent and expenses were held to only six percent growth. So very strong performance there.

We move down to the ones that were below -- they were below the Citigroup number, below zero, corporate finance. I'm going to talk about that in a little while but again very strong performance comparative to the industry and so very tough capital markets this past quarter. Personal transactions down 41 percent. That's driven primarily by equity trading due to the decimalization and some lower derivative volumes. Expenses were actually down 18 percent as we've seen the continued benefits of management's focus on non-comp expenses. Non-comp ratio, I want to point out, was 13.2 percent this quarter versus 18 percent in the first quarter of '01 and 17 percent last quarter. So again that really seemed to pay with that focus.

And then you see commercial lines and personal line in

which is primarily driven by lower net investment income as the interest rate environment has moved down so much over the past year and then emerging markets corporate and global transaction services down primarily because of Argentina.

I think one of the highlights for the quarter for us is this continued increase in operating leverage for the company and on page seven you can see revenue's up five, expense is down six so continued strong revenue growth and year on year expenses actually down $600 million despite the acquisition of

and EAB. So what you're seeing there is

cost base aggressively in the corporate investment bank I think ahead of the market and ahead of our competition. We've seen the benefits of the Associate's integration. You're seeing the benefits of combining that $600 million decrease was for this year the absence of good will amortization, which was -- which benefited us by 140 million.

I think you're going to see continued focus on expenses this year in a number of areas. We talked about achieving $1 billion pre-tax expense save run rate by the end of this year and that goal was definitely on track.

During the quarter, we had the merger between our corporate investment bank and Citicorp technology infrastructures and that's been completed. We've got a single management team in place and we're already seeing savings ahead of plan there.

We're seeing continued benefit from the emerging markets consumer and corporate

consolidations, which is proceeding on schedule. And we saw the implementation of our global

system, which we believe is going to save us about $400 million on a run rate basis.

So you'll see continued focus on those issues and continued ability to get costs out of the business.

What that leads to, as you can see on the right-hand side of the page, is a revenue expense ratio that's been continually improving over the past year. And I think this operating leverage story is one that, again, we're quite proud of in demonstrating that we can both drive revenues and manage costs at the same time.

Let me turn to credit for a minute on page eight of your package -- left-hand side is consumer, the right-hand side is corporate.

In consumer

consumer basis, net credit losses moved up again, although not as sharply this quarter as they did last quarter. We do expect them to trend higher next quarter and then begin to -- delinquencies, 90 days past due -- again, you saw some worsening there.

But also in the cards business, we're beginning to see the early delinquency buckets improving. So, again, we expect a better write-off situation for cards in the back half of the year, but probably continuing a little bit worse for second quarter.

Around the world, you saw write-offs increase in Japan as they've got a record level of bankruptcies there and record level unemployment. So, as expected, delinquencies and write-offs are increased in Japan, although profitability and the profit growth of the business still look very strong there.

In Western Europe, you're seeing flat performance, so no real consumer credit issues in Western Europe that we see.

And in the emerging markets, you see a lot of noise in the numbers

for Argentina. Ex-Argentina,

are actually pretty solid.

On the corporate side,

came down from last quarter. Last quarter obviously had some big numbers in it from Enron and some other things.

What we're seeing now in the

is our loan portfolio's staying flat. We continue to have high underwriting standards. We're aggressively writing down loans and selling loan out and putting credit derivatives in place to manage exposure concentrations. And so we feel good about how aggressively we've addressed any credit situations -- the corporate side.

Cash basis loans continued to move up but in the corporate investment bank they were flat. Almost all that increase was Argentina so again the early signs are that we're beginning to see a topping out of the credit

on the corporate side as well.

Our total reserve is now up $430 million from fourth quarter, up to $10.52 billion

.

Let me talk about the underlying business performance now a bit. As we've said before, we're trying to focus on five major segments where we believe there are strong growth trends, great returns. They are fragmented so we can consolidate them and we can have a unique competitive position as well as a low cost deposit base.

On page 10, you can see how we performed in each one of those. Global cards, $664 million of income, up 11 percent. Revenue was up 15 percent on a global basis and operating expense actually down two percent so that was offsetting what was a pretty substantial increase in net credit losses.

On an international basis we had 32 percent account growth

percent loan growth so very strong performance internationally. We're up to 108 million accounts globally and managed receivables up six percent to $119 billion. Global

emerging markets we've spoken about, strong performance out of

offset by large write downs in Argentina.

Capital markets and wealth management, net volumes were up slightly but equity and equity related were down 10 percent. IPOs were down 21 percent. Announced M&A was down 45 percent and completed M&A down 65 percent.

So what you saw were debt and equity disclosed underwriting fees down 10 percent. Our disclosed underwriting fees were actually up three percent from last year so very strong performance there and we now move to being almost twice the disclosed fees of the next highest competitor. So terrific relative performance for the business and you can see that what it was in global debt and equity or investment grade debt or equity. We were number one across the board there and a strong performance in M&A as well.

Wealth management quickly again strong performance for asset management private bank.

the management platform filled out as complete, so you're seeing some cost takeouts there.

But strong flows from both institutional and retail.

up three percent to $455 billion.

Private bank -- also strong performance. I spoke about that. Consumer investment product performance going strong. Private client assets on a fee-based management up $4 billion from the fourth quarter to $210 billion. That's now up to 21 percent of total client assets. So terrific performance there. And revenue per

up to $473,000.

Let me go to the next page and talk a little bit about our funding strategy and the funding strength we have.

Over the past year, we've focused on trying to increase our deposit base and reduce, somewhat, our exposure to the capital markets. And so our total deposits are up 22 percent from 313 billion last year to 382 billion this year.

And you can see on this page some of the places where we're able to get that increase in deposits. Citibank in North America had very strong performance -- deposits up $11 billion, part of which was the

, but strong growth outside of that.

We had checking account sales in March up 50 percent versus last year. So we're seeing the benefit of a lot of our sales programs there.

In Mexico, Banamex actually had increased their share of deposits in that country from last year -- from 31 percent to 32 percent. So you can see there's now $30 billion of deposits -- or $27 billion. An increase there. Increase in Japan of two billion.

And then in the Salomon Smith Barney money market account customers, we have offered them the opportunity to -- instead of having the money in money markets, to be able to get the same kind of rate and put it in a bank deposit. And we've seen $26 billion of deposits coming into the system ...

Thirty-seven.

Sorry -- $26 billion more, so 37 in total. So a big increase there.

And that's allowed us to, despite growing our loan base and growing our assets, bring down our

outstanding at Citigroup by $22 billion to only 13 billion outstanding.

Long-term debt we've been able to keep flat.

Sandy had mentioned earlier the upgrades we got from the rating agencies. And I think you're seeing that the debt markets react to this pretty well. And you've seen, in fact

offer

for Citigroup come down 42 basis points over this year period. So extremely good reaction from the -- from the debt markets

assets remaining over a trillion. We spent $1.5 billion for acquisitions during the quarter primarily for the

insurance company in Mexico as well as the -- a small portfolio of consumer finance in Japan called

.

We continued to repurchase shares in the quarter, 17.9 million shares of common for $828 million as well as 525 million of preferred.

So the story for the quarter, a very strong underlying performance of the businesses, good revenue growth, very good expense control driven by what is the premier brand of financial services, our leading market position and financial strength and that offset what continues to be a credit deterioration as well as the extraordinary situation in Argentina.

And with that let me open it up to Q&A.

Thank you. At this time if you would like to ask a question you may press, star one on your touch-tone phone. One moment please.

, you may ask your question with Goldman Sachs.

OK. Thank you. Good morning.

Hi Richard.

Hi. Sandy -- just and Todd as well here, just a question on Sandy, I think you mentioned double digit earnings growth for the remainder of the 2002 and I mean

10 cents is the -- is Argentina. Basically that gets us to about 84 cents. Is your cents that that is approximately what a base number is and you know I know you're factoring more expense saves to get to that billion dollars. You're saying credit quality is peaking. What about interest rates? I mean can, you know, the bond activity be sustained there?

OK. Well you've asked, you know, a lot of questions and you know we don't want to make specific forecasts that double digit gives us, you know, plenty of room. In the first quarter we had a very strong performance in investment banking and I think that one has to look and see how that plays out over the next three quarters.

I think as Todd mentioned that he thinks that and we think that we will continue to see losses but probably peak in the second quarter and then begin to get better in the latter half of the year and you know depending upon the level of business, at some point in time and I think later rather than sooner you'll begin to see some increase in short term rates and if you factor all of those things in I think we expect to have a pretty good year this year.

OK. And then let me just ask you specifically about Argentina because Todd actually mentioned that you were looking to resize that a bit. I guess my first question would be what size? It looks like you now have about a half billion dollars in equity allocated to Argentina.

And then, you know, what specifically -- you know, what reforms would you specifically point to for you to say, "I want to begin resizing this business right now?"

I think what we're doing and then what -- I think that that charge is something like 40 or $42 million pre-tax, so it's not a very major restructuring charge. But it's really in there to downsize, somewhat our branches -- to have less branch penetration than what we have, which we think is quite a lot for the level of the economy today.

And the cost of severing people down there is not the cheapest place in the world to do that.

But, you know, we're still paying a lot of attention. And Argentina still is work in process as they, you know, work on completing, you know, all the terms and issuance of these compensation bonds.

And what there're going to allow customers to do with dollar deposits and how they get pacified. And I think that the government -- I think, most importantly, what we do in Argentina will be based on, you know, how the government begins to behave down there. And will they act in a way that will begin to, again, get the backing of the world community?

And will they be able to have access to funds from the IMF and others, which, right, now, they do not have because of all these activities that they've had, which have been very unusual, to say the least.

So you will re-size to the degree that they meet those hurdles then.

That is correct.

OK. Great. Well, OK, thank you.

Thank you

, you may ask your question for Merrill Lynch.

Hi, Sandy. Hi Todd.

Hi,

.

Good to see you're on.

Although we could've used a half hour later start for the call. I have three questions -- or issues.

One was I just want to gauge the basis of your confidence in credit costs, you know, potentially flattening out here.

And I wonder, first, whether you talk about what's behind of, kind of, the credit card confidence -- it maybe improving by the second half of the year. I think you've alluded a couple time to the buckets of delinquencies.

And on the corporate side, I wonder if you can talk a little bit about your

exposure and go -- you know could that -- how big a risk factor do you see that in your forecast?

Why don't I try the consumer, Todd, and you can do the corporate and correct what I said about Argentina at the same time I

.

All right. As long you correct my corporate

.

Yeah, I think that really going back to October, we've begun to see, you know, a steadying in the early buckets -- the 30s and the 60s in delinquencies and you know in our credit card

that trend continued and improved a little bit as we progressed through the first quarter, January, February, March. I think we're seeing the same things with a little bit of a lag in our consumer finance business where the early buckets there, the 30 day, you know, delinquencies are beginning to decline. We've seen a decline in bankruptcies.

So all of those things together as they begin to work their way through the factors that make up -- that get us to the point where we charge off a loan are looking better. The things that create problems are less than what they were five months ago and that leads us to believe that as we look out into the second quarter we'll see some improvement.

I agree with that.

You had a question on the corporate side. I think especially due to, as I remember it, related to

I think -- let me talk about the general environment a little bit. It does feel like the general business environment is improving. You know we can feel that a bit with the customer base. I think we've worked through a lot of the excesses and the real big problems although you know certainly there'll be a few more to come and there may be in fact some to come in the

area. However I would say that I don't feel concerned that we have outside exposure at all to the

industry. I think that's -- it's pretty controlled and where we've seen problems I think we've been pretty good about writing them down and reserving against them.

Just to give you an idea of how good Todd was as an investor in this, I think at one point in time we had something like 25 or 30 million shares of global crossing the 30s that you got out of at one and a half.

Todd was more focused on credit than your investment portfolio.

The second issue I just wanted to ask you about is on your capital position kind of a couple specific issues in here. One is if you did a pro forma for the

spin out where would that nine percent tier one ratio be today and what are you thinking in terms of how to deploy that? Is your thought process on -- I guess what I'm really asking is sort of what's your thought process on large acquisitions versus three to six months ago and one

I'm just curious with the preferred buy back what should we expect for preferred dividends in the second quarter?

The answer to the first part is about eight seven.

That's eight seven once the

spin off is completed.

Right.

... it's not added into the capital ratios. I thought maybe ...

When they spin out?

No, it said subtraction.

Subtraction.

Because I think you said that we were at nine, one in the first quarter.

Nine, one. And we get the benefit of

interest in the capital calculations. So when there's spinout, that goes away. And that's really the difference.

, you asked a couple other questions.

I just wondered how you were going to deploy that, and then the preferred dividend

...

Well, preferred dividend should go down a little bit, because the cost of those -- of those 500 million of preferreds must have been something like, you know, 40-some odd million dollars a year I would guess.

So it's $10 million a quarter, not ...

Yeah, preferred dividends go down. You can see that -- you'll actually see that in the supplement.

That was done late in the quarter, right?

And what we're going to do about acquisitions -- we're going to have to speak to you.

next week?

Looking for suggestions.

Has anything changed just in terms of your sense of seller appetites, or your own -- your own sort of refocusing or focusing of what you want to do?

I don't think anything's really changed -- no.

Could you comment specifically on your interest in domestic banks?

You know, I think that we continue to see, and this quarter, I think, proved that we can put together an acquisition, albeit

it's a small or large, I think it's still to early to tell.

And lastly, I don't want to

. I'm just curious on corporate investment banking business. You mentioned the 13 percent non-comp expense ratio. And I guess I'm just curious. In terms of your confidence, in terms of positioning for a snapback in earnings in that business, assuming the environment improves. How -- I mean, is that ...

I think we're in great shape for that.

Is that number a sustainable number?

sort of what your exposure is to, sort of, fixed income in the mix, and whether the NASDAQ re-pricing is a big benefit.

just a general question. I'm just kind of curious, sort of, how optimistic you are and sort of snapback potential in

.

I think that overall, and obviously there was a very good, you know, first quarter in fixed income. I think that you're going to see the fixed income market be better than it might have been for quite a time into the future as more and more companies look to do their funding on a fixed-rate basis rather than being at the whim of the commercial paper market.

And as banks become a little more difficult in what they're going to charge for, you know, backup lines and what kinds of covenants they're going to put into those agreements.

So I think those things say that the fixed income market will continue to be active but I think that if you -- if you asked us as we looked at our business and we look at our positioning in Japan and in Asia improving in Europe and in the U.S. that what you saw in the first quarter is not a fluke and I think that it's good that a lot of our competitors keep on thinking it's a fluke because that gives us an opportunity to do even better.

So we think on our recovery in the market we will participate in a pretty big way with costs down substantially from the levels that they were at a year ago this time.

OK. Thank you.

Thank you.

with Credit Suisse First Boston, you may ask your question.

Good morning.

Hi

.

Hi. Starting with the investment bank, it looked like the cost controls, you know, not just on the comp side but also actually particularly on the non-comp were very strong. Can you just give us a sense for what you see if you do have the capital markets pick up as we move through second half of the year what we should expect to see in expenses?

I think you'll see in our business continued business continued discipline on the non-comp expense side. You know I think everyone would agree that you probably got to a few excesses in general as you -- as you got through sort of 2000 and I think we've rung a lot of that out. I think in addition we have had historically I think it was very good technology infrastructure and I think you're beginning to see the benefit of that come into play in the expense side as well.

On the comp side, I think you'll expect -- you would expect to see the same kind of ratio that you've seen historically. So that'll go up more in line with revenues.

OK. And then I have a couple of detail questions. Originally you had said that you would use the highest base of stock on

to have the lowest gain and so I just wanted to circle back and see if that in fact was the case.

We didn't use any basis stock on

. What we did -- what it turned out to be the most efficient was for

to sell new shares which is what it did and pay us a dividend and the tax and we allocated some tax money to offset that dividend so like a dividend tax.

OK. And then also in the $1 billion cost assumption I had not assumed the good will amortization.

It's not in the billion.

It's not at all. OK. Good. And then finally can you at all address the Attorney General investigation in terms of the retail business and confidence and, you know, what you expect could happen.

I think,

, that the industry has put together a task force of -several companies, including ours, are working and have been working on this for months with the SEC in developing, really, best practices, you know, going forward, as far as having the credibility of what a research person is saying without completely splitting up the companies and being -- yet being cognizant of how an individual investor or a financial consultant would react to those recommendations.

And I think that we are working with others to change some of the procedures in that process to gain more credibility, which is very, very important with the investing public.

OK. Great. And I just have one final question, which is Enron.

mentioned this quarter -- can you just update us there in terms of the reserves you've already taken and where your exposure is currently?

We -- I think that we said at the end

that our number is below that. And I think that we do not feel that there's any really significant exposure to Enron. I think you would see, you know, going forward in our income statements.

OK. Can you give us a sense for where that is now? From 50 percent to where?

It'd be half of that.

OK. Thank you very much.

Thank you.

with Morgan Stanley, you may ask your question.

Good morning.

Good morning,

.

Just a couple questions. One -- on the -- just on the cost program. If you kind of look through the disclosures, it looks like the consumer finance pre-tax margins went from about 26 and a half a year ago to 34. You know, how much room do you have left in terms of the integration? That's the first thing.

And then, second, when you look on the cost side on Salomon Smith Barney -- we've been talking about the non-comp. It looked like, for the first time, you really started scaling back on

and branches. And can you just help us understand what the additional leverage you have in those two different divisions?

OK. Go ahead.

I think on the consumer finance side, I think you've seen most of the big jumps in margin but I think we think there's still a little bit of room to go.

75 percent of the way through?

Yeah. That's probably about right, probably about right. I think it was

percent is a decent amount

on an ongoing basis I think

take our continued good operating leverage in that business we'll grow the revenues much faster than we expected.

Yeah. And in the Salomon Smith Barney area we have continued to -- we had cut back on helpers and the amount of back up people per salesperson in the Salomon Smith Barney branches although we continued to add to the FC count. We still -- we have cut back on some of our expenses and there's more to go as it relates to leases that we have in different places around the

and I think that we're very cognoscente of where our expense ratio should be relative to our current level of revenues and continue to ...

... business was off a lot more than the -- than the domestic business and I guess are you -- you know can you just address whether we're seeing slowing growth there in Japan?

I don't think that's right. I don't think -- last year I think the yen was something like 108 and this year, you know, our average in the

maybe 125 so that cut back the -- our profitability that you'd see coming out of our businesses in Japan significantly.

Go ahead

.

No I think that's right. There's -- clearly the credit losses are up there a little bit but the difference there really versus having what we've seen before which is the, you know, twenties and thirties growth rate with the FX change, we're partly hedged there but not 100 percent hedged in Japan on income.

OK. That's very helpful. And then one final, on the -- on the credit card you talked about, you know, losses probably another quarter or two. What's interesting is for the first time in the credit card your net interest margin actually started to decline so you know do we run the risk where we get the net interest coming in faster than the losses start to abate or is that -- is that not the way you see it?

I think it's going to stay reasonably stable. I think what we're going to see is by the time you see cost of funds start to move up and that get reflected in pricing, I think you'll see losses start to come down.

And then let me just say one thing as it related to, you know, that in the first quarter. I think it relates to that in that the beginning of the quarter -- the first two months of the quarter -- saw a very, very low revenue growth. And growth in charge volumes really began to increase somewhat as we went into March, and confidence improved. And that continues into April.

And just one final. On the investment gains, when people are modeling out for the year -- I mean, is this more a normalized environment given where we are -- just with the NASDAQ and some of the other pieces of -- in the portfolio?

I think there is no such thing as normal.

All right. Thank you, guys.

Thanks,

.

Thank you.

with Sanford Bernstein, you may ask your question.

Hi, folks. Sandy, I want to get back to the question of the attorney general's -- of New York's investigation. And I guess it's more on the potential liability-side that, you know -- obviously at the moment he's looking at Merrill lynch, but possibly he might look at other companies.

And also a number of the big financial companies, including yours, have been named in the expanded Enron suit. So I was wondering if you could talk about how you all were thinking about the potential legal liability there. And if you've started to build reserves for potential settlements -- or if you will be -- and those types of things.

Yeah,

, I think we feel comfortable with our reserves. And, you know, I think that most importantly, we want to do, you know, what's right to have people have confidence going forward in our industry and the credibility of what we report.

I think that it would be completely inappropriate for me to speculate while the attorney general is looking into this matter, as to any potential this or that. And we just have to see how that's -- that plays out. But, you know, it's -- I just don't want to say anything more.

OK. And if I could ask a question on a separate topic, you know, related to the consumer businesses. I guess especially in the credit card business, you know, the growth is still pretty good in terms of bottom line, but the growth in receivables and in spending, you know, has really moderated quite a bit

And that's also the case with Citifinancial

you know with receivables

it just seems like there's a mismatch between you know the -- at least one of the major key drivers versus the earnings growth that you're reporting and you know how ...

going forward we'll probably, you know, begin to be more interested in growing the managed receivables a bit more and probably a little bit more aggressive in the marketing spend we have so I think that was a conscious decision on our part to, you know, to be careful about what we were putting on the books over the past year.

I think on the -- but you know we still have six percent growth so that's not bad.

Right.

I think on the consumer finance side, we've obviously had a lot of effort getting cost out of the Associate's business and also a redoing a bit how that business is done and which of those businesses we want to be in and which ones to focus on. I think now we'll turn towards more receivables growth over the next year as well but again, seven percent receivable growth in the environment we saw in the past year I would argue is not bad and we ought to be able to get pretty good income growth from that type of receivables growth.

Right.

going back to your previous question ...

Yeah.

Let me just add that I think we feel -- we feel comfortable about what we have done in our research effort and how we make decisions and how we compensate people and I think we feel very good about the direction that the industry is thinking about going for the future and so you know we're not embarrassed by what we've done.

Good. Thanks.

Thank you.

Thank you.

with UBS Warburg, you may ask your question.

Good morning guys.

Hi

.

How are you doing? Could you be a bit more specific on the mandated charge off required by

and then Sandy perhaps you could address the question of

what might you have done if you look across your franchises or even protect against that type of thing from happening again

as you plan for the future?.

Why don't I take the first part of that

? I think what

decided was to write down by 50 percent the cross border exposure, certain cross border loans that existed so we worked with them on that and our current provisions include whatever was required by

.

OK.

And I think in answer to your question, we could have been faster and earlier and tougher on how we evaluated the, you know, sovereign risk as it related to Argentine. I think that as we get to see the countries having problems in the future, I think that we will be faster as we related to some of those issues. But I don't think that what happened in Argentina will become that prevalent that it would get us to change our minds at all as far as the growth potential that we think that we have ahead of us in the emerging market businesses.

Great, thanks.

Sam, let me just add to on

. They actually haven't issued their thing yet, but we work pretty closely with them, and we think we've got a pretty good handle on what the requirements will be.

OK.

All right.

Thank you.

weill Thank you.

Thank you.

with

is the last question. Go ahead, sir.

Hi.

weill Hi, Dale.

Just a follow-up on the

question. You said you've written off or reserved for two-thirds of the loans. I thought you had more loans than that. Maybe you can just say -- you know, what you think you have left in terms of total exposure -- whether it's assets, loans, or whatever. Is it just a third of what we've seen so far in the write-offs?

I think that the number that I gave you of having reserves of two-thirds of that corporate and consumer loans in Argentine is "X" loans that are from t he global relationship customers outside of Argentina that are the big

global companies, you know, that have corporate guarantees or other things.

OK. OK. OK. So it's just -- it's just locally -- the local exposure.

Local exposure.

You didn't talk at all about what -- I guess it's too early to talk about what's going to happen down there, but do you have any sense as to what the paper could -- what paper could be worth that you will get? You will presumably get some kind of a paper to repay you at least partially or at least nominally for your loss so far. Any sense of what that's going to be?

Right now, they're talking about a piece of paper that can be exchanged for all kinds of different taxes that would be due I the country that -- if paper turns out to be -- to have the ability to be used they way they talk about it, that could be where it goes tomorrow.

OK.

But we would value it more conservatively than that.

Fair enough.

But it could be worth -- it probably will be worth par if they do what they were talking about doing.

OK. OK, thanks.

Thank you.

Thanks everyone for joining us today.