花旗銀行 (C) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Citigroup second quarter review featuring Citigroup Chairman and CEO, Sandy Weill, 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. Ms. Ptashek, you may begin.

Thank you, good morning, everyone, and thank you for joining us. We know it is a busy day so we appreciate your time. Sandy is here and will make remarks and then Todd will walk us through [inaudible] the quarter and take your questions. With that, let me turn the call over to Sandy.

Sheri, thank you very much. I think that in these very troubled times, we feel especially good about the results that we are able to deliver this quarter.

Our revenues for the quarter were up 10% to $22 billion, and that was really led by the third year in a row of very strong growth in our global consumer business with revenues in that area up 17%, and profitability up 25% and in spite of losses in the consumer business of $2.7 billion in the quarter, we still made $2 billion after taxes, which is up 25% from the previous year, and that came really through our leadership positions on a global basis and very strong activity in the United States. In our card business, in our consumer finance business, and our ability to grow our deposits, and our profitability in our consumer banking business. As you know, we are in the process of preparing a tender offer for the purchase of the shares of Golden State Bank and that enabled or gave good reasons to the FCC to review our financials. As everybody is aware, they have said they want to review the 10Qs and 10Ks of the 960 largest companies and concentrate at the beginning of -- at the beginning on the 100 largest companies. We went to the top of that list because of the pending -- offering that we were going to make to the shareholders at Golden State.

I am happy to say that with the completion of their review of our 10K for the year ending 2001 and the Q for the first quarter of 2002, we will not have to restate anything in our numbers for those periods, and we feel very good about that. One of the things that we think has created a lot of confusion in the marketplace over the last period of time is various companies' differing opinions on how to report earnings and what they call earnings going all the way from EBITDA which personally I think in retrospect encourage too much leverage and too much investment for certain industries to what we had called core and other people called operating income or whatever. And starting this quarter and going forward, we are going to emphasize first what our GAAP earnings are which are the way that the FCC looks at the numbers and secondarily, in our quarterly releases, talk about what we call "core earnings." Really the only three differences between core and GAAP is restructuring across what would be considered in core earnings, changes in accounting policy, and one-time charges subject to that wouldn't be considered in those numbers, and the profits or losses that we would have in our insurance portfolio going forward wouldn't be part of core earnings so that our life and annuity business would be treated the same way most other insurance companies report their earnings.

When you look at our GAAP numbers this quarter, we earned a little over $4 billion in both GAAP and core, 78 cents in both GAAP and core, which was up 13% from a year ago in terms of GAAP and up 5% this year in terms of our core income, and that was after a charge or loss of $167 million dollars after taxes on the write-down of our bonds that we owned in our insurance companies and WorldCom. Plus, an additional loss in WorldCom securities and part of our bank position in our global, corporate and investment bank. So I think we feel great about the numbers that we continue to report. Over the last year and a half we have gone through the beginnings of global recession and then the terrorist attack in September, the largest bankruptcy which was Enron at the end of last year, and the continuing episodes of the restatement of numbers and further bankruptcies that have eroded confidence in the marketplace, and also the troubles in Argentina, and yet through this period, we have had record earnings. Last year, a record profits in the first quarter and second quarter of 2002. We built our equity base to a little over $92 billion, including trust preferred. Our return on equity for the first six months, a little over 20%. It was 19.5% in this quarter. We continue to be hurt by bad earnings in our consumer businesses in Latin America. As a matter of fact, we had a loss in that mainly related to what was going on in Argentina, and the decline in business activity ahead of the election in Brazil, but from a revenue point of view, all of that businesses had revenue increases in the second quarter led by our consumer business which was up 17%, corporate investment bank revenues were up 5% and global investment management business which puts private bank, life and annuity and the asset management business was up 15%.

The -- I have accelerated in this market our repurchase of our shares and in the second quarter we bought in 38 million shares which I think is about 20 million more than we bought in in the first quarter of $1.6 billion. Our directors at our board meeting yesterday decided to give us more authority to increase our stock buybacks so we added an additional $5 billion to that program, and as I speak now, we have $7.5 billion authorized, which will enable us to buy back shares that we issued last August in the Banamex transaction, about 125 billion shares, and the 80 million shares that we will offer issued in the purchase of Golden State.

Basically, I think that we feel good about what -- how we are doing so far. We have incredible consumer business really on a worldwide basis. With our management changes, we think we can better take advantage of the real strength and talent that we have in our businesses from going from our strength in investment banking, in our high-ranking positions number one, two, and three in most of the categories of investment banking and being able to utilize those services better in some of the emerging market countries, as well as the strength we have in consumer finance and banking and credit cards to really accelerate the development of our businesses on a global basis.

I think that also I think it is important when you look at our Company that what we've done and we've done that for the last 16 years is that our option programs and restricted stock programs have all been directed toward long-term and that's something to promote short-term market performance where the insiders are able to sell their stock and get out. We have an agreement with the top 140 officers of our company, as well as our Board of Directors that states that 75% of all incremental stock that come from stock options and that comes from the vesting of restricted stock has to be held by that person until they retire from the business, which is really a long-term -- long-term commitment, and that has led to the fact that today approximately 85 million shares of our stock are owned by those 140 people plus our Board of Directors, which is a major investment commitment. Also, we believe in going deep into the organization with stock options and more than two-thirds of the employees of our Company do own stock, and that gets a lot of them to really think like owners, and I think that's to a good extent responsible for the kinds of results that we have been able to show.

I think from talking from a philosophical point of view, this is a very important time for us to see leadership in the private sector that will hopefully give us a say in creating and building back confidence in the markets, but we think it is so important to the growth of our country and really the growth of the global economy, which is why we've come out with positions on long-term ownership. We support what -- the Sarbanes bill that has come out of the Senate. We applaud the President for coming down to Wall Street to address the issues that we all face.

I think that we are looking to cooperate with really all of the regulatory bodies, the FCC, Congress, the self-regulatory bodies like the New York Stock Exchange and Nasdaq, the Attorney General, Eliot Spitzer in coming up with things that will bring back the confidence as I said before. And in that light, Mike Carpenter and I have come up with a suggestion as to how to appropriately separate what we do in our research area from what we do in investment banking. We think that our suggestions are good ones and hopefully will advance the state of the thought process so that we can get to a position where people have confidence in what comes out of the research effort in the securities industry. We support a body that would oversee what the accounting industry is doing so that people can have more confidence in that, and we think that as Alan Greenspan said yesterday, the economy is looking better.

We think that this quarter will see the peak of our losses in the consumer business, and the write-offs that we will have in the third and fourth quarter will be trending down from the level that you've seen in the second quarter. I think that we have that feeling from what we have been able to see in the direction of 30 and 90-day delinquencies over the past six months, and we feel good about how our corporate investment bank has been able to manage risk through this period while still building an enviable position that when things turn around that we would think that we would benefit greatly from the increased revenues that will come as we continue to seek consolidation in business around the world and the revival of the global economy, hopefully led by the U.S.

With that, I would like to turn it over to my partner, Todd, who is, I think, doing an absolutely fantastic job as the Chief Financial Officer of this Company, and I am proud to work with you. Todd.

Sandy, thank you very much. I should probably stop there then. [ LAUGHTER ] Sandy covered the landscape pretty well. You should have the presentation we sent to you by fax or that you have on the web site. What I'm going to do is, I will walk you through that and then I'll take some questions at the end.

We saw in the second quarter a continued challenging environment. We see economic growth continue to be slow around the world. Credit costs continue to increase around the world. Some international uncertainty in places like Argentina beginning to pick up, that uncertainty in Brazil, middle east is tough. India, Pakistan issues you are all aware of. Japan continues to be in a bit of a recession there. Continued equity market weakness. And, of course, the telecom troubles, things like Adelphia, Telglobe and, of course, WorldCom. Then, finally all of these concerns about integrity and accounting and corporate governance I think has contributed significantly to the weakness in the equity markets, especially in the U.S. I think with all that background for the quarter, we are actually very proud of how our business has powered through this environment. I think once again it shows the advantage of having the leading franchises in financial services today that we have.

To go to the numbers, record core income of $4.059 billion dollars, that was up 7% from core income a year ago. As Sandy mentioned, we plan on highlighting and spending a little more time talking about net income going forward, just to make sure we're disclosing as clearly as we can to our investor base the income numbers that we think are appropriate. On a GAAP net EPS basis, earnings per share was up 13% which includes any of nonrecurring items. Let me highlight again what the nonrecurring items are that we use. And always have used historically as Citigroup. It's restructuring charges, it's cumulative effects of accounting changes that are required by the accounting regulatory bodies, and then another item which is the sale of stock of one of our subsidiaries. In other words, the gain from the IPO of Tap last quarter was also a below-core income line, a one-time event.

Going forward, not for this quarter, not for this quarter, but going forward, we will be putting realized gains and losses from the insurance portfolios also below core income as an adjustment before you get to net income and that will bring us in line with the way the rest of the insurance industry reports their earnings. And, again, all of that will be clearly disclosed both as net income and then the changes to get to core income. On a core basis, also 78 cents per share of 5%. The only difference between core and net this quarter was actually a release or a reversal of a prior restructuring reserve that we took. Primarily having to do with Associates reserve that, in fact, we didn't need, as well as some reserves that we put up for severance and turned out that the severance cost were actually lower than what we had anticipated. So we reversed some of that reserve as well. So there was a positive $25 million difference between core and net. On an EPS basis, the number was the same, 78 cents.

Revenues up 10% for the quarter. Versus last year. Expense is up 6. So continuing to see, I think, very good operating leverage in the business, and that overcame credit and insurance costs that are up 22% from a year ago. So, once again, decent revenue growth. A very tough management of expenses overcoming what is -- what is -- has been a very tough credit environment and I will talk more about the credit environment a little later on.

We are on track for the -- for the Golden State Bank acquisition. We had originally had that planned for the fourth quarter. There is some chance we'll get that done this quarter and we will keep you up to date on that and then we'ere also on track for the Travelers Casuality spin-off. We are waiting for the IRS ruling that that's a tax free event and as soon as we get that, and then [inaudible] we hope to be able to accomplish that this quarter, third quarter. We delivered almost 19.5% return on our [inaudible] of $83.5 billion this quarter. So a very strong return on our common equity as well in the quarter.

Let me now spend a minute on the next page, on WorldCom. On June 26, we announced that in our $70 billion insurance investment portfolio we owned $335 million in WorldCom bonds. And that at that point, we were evaluating the level of impairment we would need to take for those bonds. We did mark those bonds to the level of the market which ranged depending on the tenor of the bonds from $15-$17 up to $20 or so for the short-dated maturities. And you can see on this slide, the impairment that we actually took on a pretaxed basis and then on an after-tax basis for life insurance and annuities companies which includes TL & A and Primerica Financial Services, Life portfolios. We took $132 million after tax there. We have remaining exposure, again marked at 15 to 20 cents on the dollar or $45 million. And then in Tap, our 77% exposure was $69 million. Or the amount we took in pretax was $69 million, $34 million after tax with remaining exposure of our 77% of $15 million. So the total there was $167 million that we took through the P & L this quarter.

The life insurance and annuities for this quarter shows up in the investment activities line as it has always historically, again on a going-forward basis, that will be moved down to below core income line. And the Travelers Property Casuality impairment here goes up on the [inaudible] line. In addition to the impact that our insurance [inaudible] portfolios, we did have some additional losses that we took in the corporate investment bank and in treasuries for trading positions from our role as market maker a little bit from -- a little bit of net exposure we had in loans.

Let me also as a bit of a housekeeping item talk, about the exchange organization structure we have during the quarter. Sand and the management team announced a new management structure. And obviously we adjusted our reporting to follow that new structure. The objective of the structure was to clarify and simplify some of our reporting lines, to better leverage what we think is real world-class product expertise in the U.S., to accelerate growth around the rest of the world, to maintain, however, the close to the customer regional management that we have internationally, and then finally, to make our strategy and our performance easier for our investor base to understand. What that did was we ended up with nine global products that we now manage to and will now report. They fit into three segments: global consumer, global corporate investment bank, and global investment management. And then there is a regional matrix overview -- overlay on that. And separate from that, we have our propriety investment activities which don't fit into the matrix. What I did was just lay out on this chart here the old way that we ran the business and reported, versus the new way, and at least the feedback we have gotten so far from our -- from you, from our investor base, has been this is a big improvement to be able to understand how we run the business and what our strategy, and what our performance is.

So let me move to the numbers. Global consumer, $2 billion of income for the quarter, up 25%. Spectacular continued performance in that business. Revenues up 17%. Expenses only up 11. NCLs up 37%. So, again, -- so, [inaudible] again, that operating leverage overcoming increased credit losses to drive 25% income growth. And I will get into the products here in a minute.

Corporate investment bank, 4%, which, again, I think is spectacular performance given the markets in which they are operating and the difficult times we are seeing out there. Continue to have very good share and share gain performance in that business. Investment management up 23%. In that business revenues were up 15%. Expenses only up 3%. Strong operating leverage in that business. We will talk more about the detail in a minute.

Propriety investment activities was obviously a disappointment for us for the quarter. In there, you see the $134 million realized losses from the life and annuity portfolios -- sorry, insurance portfolios. In addition to that, although we sold $425 million of securities for gains during the quarter, pretax gains of about $60 billion in that, that was offset by market-to-market losses in that public portfolio as indexes continues to decline, as well as some impairments in our private investments. So, the net of all that was a negative $190 after tax for the quarter.

In corporate other, we actually had a positive $34 million for the quarter. As we continue to get the benefits of low funding costs. We also had the advantage of the ash or the reduced debt from the Tap IPO that happened last quarter so that also reduced our funding expenses, as well as, I think, some intelligent positioning of our treasury, taking advantage of the current steep yield curve which net-net helped to offset some of our propriety investment declines. So core income of 4059, diluted and that EPS of 78 cents a share and you can see the differences between core and net in structuring items. This year, the release I spoke about. Last year, the $133 million was mostly severance restructuring and reserve and corporate investment bank and we had, also, last year's second quarter, the cumulative effect of EITF 9920 which was impairment of retained interest and securitized assets, in our case it was manufacturing that we got from Associates. So that was a cumulative effect there of 116. On net income basis, earnings up 15%, diluted EPS of -- up 13%. And, again, record core earnings over $4 billion.

Next page in the first half, just want to highlight a couple of things for the year so far, again, it is a tough environment out there. For the year so far, our core income is just shy of $8 billion after tax. Again, driven by spectacular performance in the first half, again by the global consumer segment. On a net income basis, we are just shy of $9 billion after tax and obviously the big difference there is the gain on the sale of the tax shares. The diluted net EPS up 25% from a year ago. In terms of the regional contribution, you can see North America continues to be about 65% of our earnings, and then Japan and Mexico are now very significant parts of our businesses, much higher than they were a year or two ago with the acquisitions of the Associate businesses in Japan and obviously Banamex in Mexico, so very nice geographic spread as we look at -- at how the business is performing.

Let me go into the product performance a bit. Again, we elected to operate in -- in the areas of finance which we think have good growth trends on a global basis that have high returns where they are fragmented and we can take advantage of our expertise in consolidation, where we can attain an unique competitive position, and where it helps drive diversified income for us. We have chosen these nine. In most of them we are the global leader. Cards, consumer finance and retail banking in the global consumer segment, capital markets transaction services and private client in the corporate investment bank. And then life insurance and annuities, private banking and asset management in the global investment management segment.

Let me spend a minute on how these global products performed. The next page, we talk about consumer segment. Cards, consumer finance and retail banking. You can see really terrific performance across the board in these consumer businesses. Global cards up 34%. And that was very strong performance in North America, both U.S. as well as the addition of the Banamex business here. Revenues were up 18%. Expenses only up 6. Receivables, decent growth of 6% given the environment. International basis, we saw reasonably strong performance, but offset by the economic weakness that we are seeing in Latin America, so the growth there was 14%. In consumer finance, again very strong performance in North America. Revenue in North America was up 11. Expenses declined 9%. In North America, getting a continued benefit from a very good integration of the Associate businesses there.

International basis, growth was up -- income was up 7%. We've seen some slow down of the growth in Japan as credit costs have gone up there. We see a continued weak economy. NCLs in Japan are now up over 7%. That business as bankruptcies have increased substantially. A weak economy continues. We don't expect an improvement in that in the second half of the year. We expect unlike the rest of the -- the consumer businesses, we expect the consumer business in Japan, the consumer finance business in Japan, to have worsened credit losses up to the rest of the year, probably slightly above 8%.

Global retail banking, very strong performance in North America as Citibanks of North America have performed very well. We talked a lot about that [inaudible] in the acquisition. And internationally, we're seeing there the very strong performance in western Europe really offset by weak performance in Latin America, especially in Argentina.

The next page just gives you a little bit of detail about retail banking. You can see that 73% of the income is North America, the rest is western Europe, Japan and Asia, [inaudible] and Latin America. Latin America does not show up on the page because it was a negative in terms of income for the quarter. And very strong performance in growth of accounts and growth of deposits. 26% in growth of deposits. 38% in growth of accounts and with the acquisition of GSB [ph] we hope to be able to leverage what I think is a terrific management team running global retail banking and drive continued growth out of this business.

Golden State, Bancorp acquisition on the next page, again, we talked about that a bit before. I'm not going to spend a lot time on it now, but very excited about the additional customers that brings us and our ability to leverage that franchise for continued growth and what is a very attractive market for retail banking and a very attractive market for us to leverage our [inaudible] capability through those customer touch points that we are getting with these retail stores. We do hope to close this in the third quarter as opposed to our original plan of the 4th quarter which is terrific.

Corporate investment banking on the next page, page 11. For those of you following along. Capital markets in banking, private client transaction services make up that segment. Capital markets in banking, 4% growth, revenue up 9. Expense up 8. Just absolutely terrific relative performance in that business as I think we will find in that business continues to outperform its competition and drive earnings growth here. Private client business, very difficult, difficult market in that in outperforming their peers in that market place. Revenue performance was up very slightly which again, given the environment, is good performance. Very strong net flows of [inaudible] billion dollars. Client assets now just shy of $940 billion which is down just 4% year on year. Which, again, given the -- with the equity market is headed is pretty good performance.

Transaction of services, I'll spend a little more time on this in a couple of slides, but that's the business that consists of what we call e-business, which is our serving of corporate clients in their cash management and FX needs, as well as our global security services business, our custody business. In that business, it is I really [inaudible] really clearly not a growth market. We have to be taking share in both of those things. But the market has been tough with spreads down and with the equity market down; however, we have had a very tough view of expenses in that business, as well as an ability now to transition some of the business over to the Internet, which is saving us a lot of money. So you are seeing expenses actually down substantially from previous years. So very good -- very good revenue -- income growth in that business.

Page 12, take away from that, is simply that, once again, we are executing on our plan to have leadership in the capital markets. Year to date, number one in global debt and equity underwriting, number one investment grade debt, one in equity, number one in disclosed fees. Moving up in M&A. So executing extremely well and outcompeting others in those industries. Obviously the volumes for M&A down substantially, equity down substantially, and that's for the overall performance. But our piece of that continues to increase.

Services on the next page. Just if you get a chance to look at the business a little bit you will see how we have been managing down the expenses in the bottom left, quarter on quarter on quarter. At the same time, outcompeting the competition as liability balances have grown substantially in the e-business part of this -- of this business. And assets under custody up 20% from the previous year. This is a business in which we are the global leader, cash management, treasury e-commerce services to large companies around the world. And in the security services business, we are number one in agency and trust, number one in depository receipts, number one in clearing and number 4 in custody. Again, another business here that we are truly the global leader in.

Move on to global investment management. Life insurance annuity is up 8, you can see what's going on there a little bit. Private banking, very strong performance continues to drive revenue to develop their customer base more extensively. Again, given what's going on in the marketplace, this performance is extraordinary. I think they are doing a terrific job. Client business volume is actually up 8% despite what's going on in the marketplace. Terrific performance there. Asset management, up very strongly from a year ago. That's driven partly by the addition of the Banamex retirement services business, which a terrific business in Mexico as well as their asset management business, as well as strong expense management and net flows in the rest of our asset management business. Very strong performance there.

From a regional perspective on the next page, you can see that Semia [ph] really outperformed, very strong sales in trading, corporate revenues there and also strong performance in retail banking. Performance up 28%. North America up 24%. [Inaudible] was up 11. Western Europe up 15. Overall up 7. You can see the real weakness was in Latin America as one might expect, down 16%.

Revenue and expense growth on the next page, first and second quarter, revenue -- this excludes the propriety investment activity and this is why these numbers are a little different than what you saw on the first page. But we thought that was a more -- better way to show how the real operating businesses are performing on -- on operating leverage. And on that basis, revenue was up 13 and expense up 6. First-quarter revenue up 5 and expense down 6. Continuing to see very good operating performance, for business as a whole, as well as the individual pieces.

If we spend a minute on credit on the next page. Obviously an issue we have focused on for about a year and a half now. On the consumer side as expected and as we talked about last quarter, net credit losses on a managed basis moved up very slightly. Essentially flat to the previous quarter. We actually had thought it might be up a bit more than that this quarter, but as you can see, it is flattening out. And 90 days past dues for our North America businesses and on a global basis have improved substantially. I put the cards one in here. North America cards down substantially from the previous [inaudible]. We are seeing the same type of improvements in 30-day and 60-day delinquencies and so it does look like we are seeing a turn on credit losses on the consumer side and we would expect if that continues that third and fourth-quarter credit loss rates would be down from this quarter.

On the corporate side, a little different story. Again flat NCLs but cash basis loans continue to move up. That's a little misleading because a substantial part of that increase in cash basis loans is really Argentina and Argentina, we would expect to do that. We have already put up a reserve for that in the first quarter so that increase in cash basis loans does not require any additional reserve in [inaudible] as that's something we put up last quarter. The real increase in cash-basis loans is much smaller than what you see there; however, it has increased and is mostly as you might expect in telecom names. And a little bit of the international names as well. So what that indicates is a continued challenging credit environment we think on the corporate side over the second half of the year.

Page 18, just wanted to indicate to folks the expected impact of the Travelers Property Casualty spinoff that we do expect to happen during the third quarter. As you can see, we expect based on end-of-quarter numbers assets to go down just under $60 billion. Liabilities go down just over $50 billion. Stockholders equity and trust preferred will go down about $7 billion. So we will still be over a trillion in assets. Total [inaudible] capital ratios will decline by 50 basis points and 30 basis points but obviously we will still have very substantial capital ratios.

Finally, on capital discipline, total stockholders' equity up to $92.5 billion. Return on equity of 19.4 for the quarter. Tier 1 ratio and total capital ratio of 92 and 11. Services, very strong capital position as we sit. GAAP assets just over a trillion. And we did repurchase 38 million shares this quarter for $1.6 billion. So we substantially increased our buy back as we felt that this is one of the best buys -- one of the best investments we can be making out there is in Citigroup stock. And to help actually buy back shares at a lower price than we issued for Banamex and for the GSB acquisitions.

With that, why don't we turn it over to questions.

Thank you, we are ready to begin the question-and-answer session. To ask a question, press star 1 please. To withdraw your question, press star 2. You will be announced prior to asking your question. Again press star 1 on your touch-tone phone, please. Our first question comes from Andy Collins. You may state your company name, your line is open.

Yeah, US Bancorp Piper Jaffrey.

Hi Andy, how are you?

Good. Congratulations. Solid quarter in difficult times, that's for sure.

Thank you.

Just a question for Sandy if he's still there if he could kind of crystal ball things in terms of demand for loans, capital markets, as well as credit quality. I mean, you guys have been right on the economy and capital markets, appropriately conservative if I might say.

Well, Andy. Sandy is not here.

Okay.

Do you want to save that for him or --

I mean, I can ask the same thing of you.

Well, you know, let me take the capital markets piece of it. We see at this point, you know, a continued pretty slow capital markets environment. Backlogs don't seem to be building as fast as I think the industry has hoped, going into the year. We had hoped and the industry had hoped that the back half of the year would be much improved over what was expected to be, you know, a tough first half of the year. We don't see obviously with the equity markets where they are, we don't see a big backlog of IPOs and secondaries happening. Trading has been down a bit. On the fixed income side, we saw a very strong first half of the year as rates stayed low. And we will have to see what happens, I think, with rates in the second half of the year, but obviously if they start moving up, that will be relatively weaker. And typically is relatively weaker in the second half of the year as well.

M&A, there's been some, you know, noises this year of some improvement, improvement obviously off of an extremely low base last year. But, again, we don't see any numbers in M&A that are headed back to the days of 2000, 1999 any time soon. So, I would expect we'll see continued relative softness in the capital market businesses in the second half of the year, and I would expect us to continue I think to outperform the industry performance as our share has been quite strong and continues to strengthen nicely there.

In terms of the consumer, I think we're beginning to see the consumer who I think has carried us through these past 18 months very nicely is probably slowing down for breather a little bit here. I don't expect year-on-year increases in sales and loans to be -- to be huge; however, we feel better about the credit now. And so what we are likely to do is to be a bit more aggressive on the marketing side and begin building balances a bit in our consumer businesses more so than we were over the past 18 months when we were tightening underwriting standards and filing back on the marketing a bit because we felt it wasn't a time to put on balances last year, but we are feeling better about that now, so we should see some growth in that. Again, not necessarily because there is big industry growth, but because, you know, as -- as a big player, we will be a bit more aggressive in building those balances.

Okay. One other kind of follow-up question. I wonder if you will talk about transaction services. What percentage right now is coming from overseas versus U.S. if you can give us a ballpark on that?

Andy, just one second. I don't have the exact number for you. If you want to give me a call later this afternoon, I will get that to you. Over half is international. It is a business, especially in the e-business piece where we have a tremendous position overseas versus the competition because we are in 100 different countries. We can give services to the large global players that nobody else can do. So we have a very good income in that business overseas. Over half.

Great. Thank you very much.

Yep.

Next question is from Henry McVeigh. State your company name and your line open.

Henry McVeigh from Morgan Stanley. Good morning.

Hi, Henry.

Good morning. Just a couple of questions, one on the global corporate and investment bank, it looked like the noncomp expenses have been coming down fairly aggressively and actually ticked back up in the quarter. Are you done cutting there? That's the first question. Second, I am a little bit -- within that area, the principal transactions were stronger and particularly equities than what I would have thought given that you had some mark downs on WorldCom.

Yeah, I mean, --

They were actually up. The equities were up, but you were saying you had mark downs.

Yeah, it wouldn't necessarily have showed up in the equity piece. We didn't have that much of the equity in WorldCom. Most of the trading stuff was more in the fixed incomes that show up, not in the equities. I think in terms of your first question, I think, you know, the business is continually looking at its size and how it is staffed and how it is spending money given the environment, and I think it has been trimming a little bit selectively over the past six months. I think, you know, they will continue to do that. I think they have a terrific track record as you can see over the past year or so of being ahead of the curve on making sure that they are sized appropriately for the business. So I think you will see -- depending on what happens with revenues, you will see more of that perhaps.

And then just two other kind of more bigger-picture questions. One is have you guys thought of actually expensing options and then two, can you give us color given what Capital One reported last night on how -- in their AK filing?

Yeah, in terms of expensing options, I think there's a -- we have a few issues with it. The issues are, first of all, there's no real standard way of determining what the cost of the option is. So, you know, until the accounting bodies decide we are going to do this, you know, in a similar way in an apples to apples way across the plain, I think there is a problem expensing it. I mean, as you know, Henry, there is -- you can tell the cost, if you will, because we always talk about diluted earnings per share and that includes the cost as it shows up to an investor. Because you do see diluted earnings per share. The 10K, everybody can see that last year we had $560 million of cost. If you had counted the cost of our options, as they are disclosed, the Bank One disclosure I think is --

The Capital One.

The Capital One. I thought you were talking about Banc One's option [inaudible]

I was talking more about the sub prime.

I think on options -- Sandy has made a proposal we expense the options of the top five earners in the Company so that you eliminate some of the apparent abuses that have been going on in the leaders of a company getting options and then selling stocks. He's made that recommendation, but as a quid pro quo, we'd would want to be able to put options for the little people, you know, options for the two-thirds of the whole Company that we give options to into their 401-Ks so they can use that advantage on a tax-deferred basis of having options in their 401-K. We've made that proposal --we will see where it goes. It has gotten a little bit of traction. In terms of Cap One, we haven't had any issues like that. We have a relatively small part of our portfolio which is affected by the Cap One issue, the sub prime piece, so we don't anticipate that to be a problem for us.

And just when you think about kind of going forward on just the bigger picture on the revenues versus the expenses. I mean, the consumer business has continued to generate huge operating leverage, and you also are kind of ahead of schedule on Banoxey, what are kind of the other levers on the cost side where you guys feel like you've got a pretty substantial opportunity?

Well, I think -- I mean, obviously with the acquisition of GOC [ph] that gives us another business to apply our [inaudible] to, there'll be some advantages as we get get more scale and take costs out of that. I think if you look at, internationally, we've got a big focus right now on Japan, that's a business that grew up from a number of acquisitions made by associates and some by Citigroup in the past few years. Now, in the environment that you see in Japan is the right time to go in and make sure we have rationalized and taken costs out of the business as appropriate. I think we have seen actually some significant cost takeouts in Japan. But I think, you know, the way -- as you know, Henry, the way we run this business is every day people wake up and try to figure out how to take costs out of their operations. So I don't think it will be as much the big chunky things other than what I just mentioned. But it will be every day figuring out how, you know, we buy one less plant for the offices or we figure out how to do what we do on a cheaper basis and take pride in that.

Okay. All righty. Thank you.

Thanks, Henry.

Operator: Thank you. The next question comes from Joan Solitar. State your company name and your line is open.

Thank you, CS Huxby [ph]. Good morning.

Hi, Joan. You are options analysis was pretty good.

Thank you, thank you. Couple of questions. Actually on your last question on share buyback. Should we expect to see actual share shrinkage? In the past -- okay.

Yes. You have seen share shrinkage if you adjust for the shares that we gave out for acquisition of Banamex [ph]. You have seen share shrinkage in the past year, obviously a lot more this quarter. You will see more -- look at common shares outstanding in the -- in the press release here down from 5165 at the end of the first quarter to 5188. That's down pretty substantially. Now obviously we are going to issue additional shares for the GSB acquisition. That will bump up shares in the third quarter. But, again, if you normalize for that, you will see fairly substantial reductions.

Okay. And is part of that just that you haven't seen as much exercising of options?

Part of that is you'll obviously you are seeing less exercise of options, but, you know, a reasonable piece this quarter and part of that actually started at the end of last quarter where we felt that with the stock where it was -- look, we feel that the business is vastly outperforming the stock.

Okay.

-- in that environment. We felt it was, like, the right thing to do to buy in shares.

Okay. And then on Latin America, just a little more specifically, what's -- if you can highlight at all, what's left in Argentina from a balance sheet perspective and even, I guess, more importantly, business-wise, what the thought is on a go-forward basis. And then in Brazil, there weren't really reserve additions for Brazil and what you are thinking there about conditions?

Let me take Argentina first. The Argentina exposure that's left at this point is pretty small, relatively small. You know, we felt pretty good about the reserves we put up and still feel good about the reserves we put up for that business. You know, there are issues in Argentina. They still haven't sorted out their problems, as you know. They haven't yet been dealing wholly constructively with the IMF and the Treasury to solve their problems. They really need to get their act together. So I don't want -- I don't want to say we don't have any exposure down there, because we do, but we feel good on the credit side in the reserves we put up. There is an issue down there with depositors coming in and against the law, against the decree of the government and the President coming in and taking deposits out on a one-to-one basis rather than as the -- as the peso have declined in value. That is an issue that all the banks are facing and the government has assured us that they will deal with that problem and solve it. If they do, that won't be an issue for us.

And was that the biggest cause then for the very sharp drop even sequentially? In the consumer business?

Yes. In addition -- and this goes to your Brazil point, you know, I think we're cautious on the rest of Latin America. We've been cautious for Venezuela for a while for political issues there. Cautious on Brazil. Obviously the markets have been foiled a bit by the success of Lula in the poll so far. We have a profitable business in Brazil and we are cautious about that. We want to make sure we are in the right risk position down there as well. And so, you know, as we have less exposure in Brazil, that also reduces the income that we make.

Okay. And then going back to the capital markets or I should say the global investment bank, as you think about your outlook and, yes, you have had quite a bit in cost cutting, but should we see more head-count reduction? Are you planning more on the basis that we are not going to see a recovery next year? Or what is the thought from a budgeting standpoint? And then, second, the margins actually look quite good in that business, and I am curious what is driving that, if it's from the bank and transaction services side or is it trading capital markets? I imagine it is not necessarily retail or investment banking.

I think actually the retail profitability is -- the margins in our retail business are, as you probably know, much higher than our big competitors.

Right, I was assuming they were probably high teens which is still lower than the overall.

Yeah, a little bit higher than that. Okay. A little over 20. So that continues to be pretty good. I think, actually, we have had a big focus on the investment bank to make sure that we get the cost in line with the revenues there, and so the turnaround -- actually in the boom times, I think it looked a little worse in terms of margins. So I think those guys have done a terrific job managing that business. And I think the other thing that you are seeing is in, as you know in the business, the advantage of being number one in this business is huge. You end up with essentially a similar cost base whether you are number one, number two, number three, number four, or number five. And as we've built market share substantially, we are able to leverage [inaudible] space around bigger revenues. That gives us better margins. That has worked out well.

Great. Thank you.

Thank you, our next question comes from Judah Kruchauer. State your company name and your line is open Hi Todd, how are you?

Hi Judah, are you still without beard?

Still without beard and thanks for that buyback. A couple of questions, first of all, you took your reserve down a little over $100 million this quarter both on the commercial and on the consumer side. I don't want to get a little behind on the thought process there. Seems like -- maybe I can understand what's happening, delinquencies on the consumer side, but it seems like on the commercial side, you still have some fairly large potential of chunky losses here and I was curious what made you move in that direction? And I have a follow-up question on that.

Yeah, let me -- that's -- you can see that on page 30 of our -- of our supplement. The consumer allowance for credit losses went up from 5732 to 5756. So essentially flat. The corporate allowance went down from 4788 to 4681, so down about $100 million. Let me try to explain what that was.

We had in the previous two quarters put up reserves for Argentina for the losses that we expected to see in Argentina. So partly what you saw was, using those reserves to pay for losses in Argentina, as we expected. That's a piece of it. Another piece of it was we released a small amount of reserves in City Capital for the transportation segment there. What we've seen more recently is much better recoveries on used trucks. There is a legislative reason for that we don't need to get into. But much better recoveries there and so the incidents in the rate of losses come down substantially so we have had a small release in City Capital, the reserves. And then we had actually a reclassification of about $60 million out of this allowance for loan losses onto the balance sheet as a liability. So it still actually shows up as a reserve and this is for off-balance sheet lines of credit that we have. And this is, you know, the accounting rule that came in, and this is how we should be accounting for it and we simply did that this quarter, move $60 million over. It does still sit on our balance sheet as a reserve but is a liability as opposed to a contra asset which is what these allowances are here.

And so, in addition to that, we actually put up reserves for some of the corporate investment banking customers and telecom customers, the net of all that was $100 million out. But you can think about it as sort of the Argentina release, about equaling the additional reserves put up for telecom names and then the $100 million is simply this reclassification and slight release in the capital.

Okay. Good. Next question, I suspect -- I know how you are going to react, but I am curious to try it out on you anyway. [ LAUGHTER ] Seems like the stock price reflects all kinds of worries, including significant worries on exposure of Latin America, telecom and so forth. At the same time, you have the huge capital position and I think solid reserve position. Following the fact that in the last quarter you decided to do a special action on Argentina which is not something you've typically done in the past. Have you thought at all about doing a large one-time provision to try to really neutralize these types of credit issues going forward? You certainly have the wherewithal to do it and have you thought whether the sort of reduction in market uncertainty may actually lead to a more positive view of the stock going forward?

Yeah, it is an interesting concept from an investment perspective. I love to get your perspective and others on whether that would actually be viewed positively. I feel very comfortable with the reserve levels we have. We have a very -- a very good, very analytic name-by-name analysis to determine what kind of reserves we think we need and when I look at that, and I look at it literally every month and every quarter, you know, we're in a very good position and I'm speaking about corporate reserve, that's what's done name by name, which is a bit more mechanical. I feel very good about the reserves we have. As you said, obviously a lot of fear and uncertainty out there. And, you know, clearly that's driving equity values and I think to some extent is driving ours as well. I agree with you on that.

The problem we have is that -- the other problem that we have is, you know, GAAP would not allow us to do that. If we do not actually see losses out there, we are not allowed to put up reserves of simply to get investors comfortable that we are in a good position.

But I agree with your first point which is it's hard for me to believe that investors are concerned about this Company from either a reserve or a capital point of view at $10 billion in reserves, we've got $92.5 million of equity which is two times that of any of the other players out there. The difference with GAAP though for Argentina was that you were able to sort of assert there'd be tangible losses in short period of time?

Exactly.

Three very [inaudible] type questions. If you could just take a moment to respond. Transaction services earnings rose from $87 million to $204 million on [inaudible] basis. Huge jump, What's going on there?

As you can so in the slide that I showed, a little piece of an Argentina write-down that we took last quarter. So, that's a piece of the [inaudible] -- and the other part of what's going on is really an expense story. And a little bit of, you know, one of the advantages we have in being in the number of businesses that we have is that volatility is sometimes good and the volume that we saw in Latin America, although bad for some of our basic, you know, retail and wholesale businesses was actually good for transactional services because it increased the spread we were able to charge there.

Okay. The other -- one other area. International credit card losses, provision dropped precipitously. I assume that was Argentina as well?

Sorry. One second, let me just find that.

Just looking at these -- big deltas in one quarter.

That's Argentina. That's right, yet, you got it.

And lastly, the 17% drop in fixed income trading this quarter, is it fair to assume that that change is distorted somewhat or influenced by your fairly large emerging market, trading or what's going on in Latin America. I am curious what fixed income trade would look like if you backed out of the emerging markets piece.

It had some impact on it, but a big piece of that as well is -- what they are doing in that business which is -- you know, we have an agency -- [inaudible ] -- it worked out well for us so you're seeing a big positive interest in --

You are kind of fading out.

A negative there and also there was some WorldCom impact there.

I just didn't hear the first part before WorldCom.

You see some advantage that shows up in the interest income that's offset by that trading because of the -- the hedge position that we have on -- so you see some offset there and then WorldCom as well.

Okay. Thanks, John.

Thanks, Judah.

Thank you. Our next question comes from Robert Albertson. State your company name and your line is open.

Thank you, Sandler O'Neill. Two questions. One, I notice in the corporate and investment bank, on the emerging market side, you have the highest quarter net income ever. I wonder if you can address why that is, considering everything that seems to be going wrong. It is quite impressive. And then, secondly, a bit more flavor please on the GCIB [ph] trading weakness, the flow, the volatility issues and any outright losses to better understand why that's weak.

Your first question again?

My first question is, in the corporate and investment bank under your new regional breakdown, on emerging market the core income line looks very, very strong. It would seem to me it is probably the strongest quarter ever, which kind of stands in contrast to everything we are hearing.

Right. I think what's happening there is a couple of things. First of all, it is actually not the strongest ever. I think the first quarter of 2000 which isn't on your page there, was actually the record quarter. We had to go back and check that, because I was kind of hoping it was a record.

Right. [ LAUGHTER ]

But it was a very strong quarter and continues to be a strong quarter and obviously not driven because the markets are strong. I think it is driven because, first of all, the business has increased its market shares substantially. So that's helping the revenue line. I think it has had a very -- done an extremely good job of managing both comp and noncomp expenses so of managing both people and as well as the other parts of the expenses. So the expense line, expense growth has improved in some places depending upon which comparison you're using that actually declined which is helping the income as well. So I think the short summary is, its market share gain, it's running the business very intelligently, keeping an eye on expenses and then there's some advantage that that business that it is getting as well for the acquisition of Banamex in Mexico so there's a little bit of benefit happening there. We acquired Shroeders [ph] a couple of years ago and [inaudible] JV. And so creating this global platform and then running it well has so far paid off. And I think more importantly, I think we are -- we are positioned appropriately as the markets do recover at some point to really drive income growth in the business.

Okay. On the trading side? Todd?

Oh, I'm sorry. On the trading side for corporate investment bank, you know, that -- it has been moving around up and down. Part of what's going on is pretty strong affects in that business.

Todd, you are breaking up again, I'm sorry.

I -- apologize. Let me get closer to the mike here. Part of what's going on as the FX rates have moved around substantially around the world in this quarter, we saw, you know, big moves in Japan, big moves in the euro, obviously big in Latin America and some of the other emerging markets. So, FX has improved substantial over the prior year. Sales of trading in the emerging markets, part of which shows up in the fixed income area, there performed very well. Now, again, it's strong versus a year ago, but less strong than what you saw first quarter. Which, again, I think is reasonable. For that business.

On the equity side, you know, it's kind of bumping along. I wouldn't say it was a particularly strong quarter in trading and equity. A bit higher than last quarter, but, you know, basically flatter down a bit from last year. So I think the answer is fixed income is -- did have a good quarter. Sales and trading. Especially in emerging markets performed well. Some of their trading positions working out well in fixed income. And then, you know, the big star was really FX for the quarter.

Thanks, Todd, great quarter.

thank you.

Operator: Thank you. Our next question comes from Richard Strauss. State your company name and your line open.

Goldman. Hey, Todd, just a couple of quick questions.

Hey, Richard.

Hey. One, Citifinancial costs were down 6%. Looking at the branch head counted, it was actually flattish. It wasn't down. We haven't seen that dynamic. It would indicate perhaps that the integration is now complete, would you say? And would you say we are in a growth mode there and this is the proper run rate?

Yeah, I think you are seeing, as you saw a huge amount of expense reduction quarter in quarter in quarter in quarter in that business. I think you are beginning to see the end of the big expense reductions and then they'll just be trying to run the business better and better and I think as you said, begin to focus a little more on the growth, especially in the U.S., right, where we are seeing the credit turn happening.

What did you end up getting out of that you estimate, $600, $700 million?

From associates, you mean?

Yeah.

In total from associates, it would be in excess of $800 million.

Okay. And then also, just looking at your balance sheet here. I see your trading assets were up pretty meaningfully, up about $20 billion. And, you know, the trading on the liability side we did not see that kind of, anything even close to that, and if you could just give us a sense as to the book -- the breakout of that book and what it is that you are exactly investing in. Give us some color there.

I don't have a breakdown of the book there for you Richard, but I --.

Is it safe to say that your risk profile, though, is exactly what it was, or pretty constant, that these are generally risk-free assets.

Yeah, I think that's absolutely right. We saw very little increase actually in our risk-based assets. So, sort of a net risk position that we took, corporate investment bank. So this is mostly, as you said, matched book and things like that.

Okay, great, thank you.

Thank you, our next question comes from Adam Hurrick. State your company name and your line is open.

Good morning. Ulysses Management Quick question regarding North American credit cards. Do you know what percentage of that portfolio has a FICA score below 660?

We actually don't give out that specific information on the portfolio, but I will tell you that the portfolio mostly consists of a prime and super prime customer base. The biggest single piece of that portfolio is the advantage card which is all prime and super prime. We have a small sub prime portfolio in the bank card business, some of which came with the acquisition of Associates. All of which we've for the past, at least six months and I would say at least 12 months, have actually been managing down the receivables there. We also have a private label business, which is quite a good business that tends to have more like sub prime scores but tends to have higher yields as well. So we actually think that business is terrific and that one is working out very well for us. But the sub prime piece of our portfolio is actually quite small.

And your definition on the cut-off for prime is what?

Not something that we disclose.

Thank you.

Our last question is Glen Shore. State your company name and the line is open.

Thanks, Deutsche Bank.

Hi Glen

Hello there. Just finishing up the thought on the volatility in the currency markets. Obviously good for trading but across the rest of the franchise, you look at something like say western Europe which had huge sequential increases in revenue and core income. Is there a way to really quantify the impact on the dollar weakness across the franchise in terms of -- its effect, impact on revenue growth and any impact, lesser effect on core income?

Yeah, it had some -- as you said, it had some impact on revenue. Core income was not real significant at all because obviously it affects both expenses and revenue. It did help a little bit in western Europe. I wouldn't say hugely. Maybe a couple of points in Western Europe, strengthening there. I wouldn't say it did much in Japan. We had historically been -- been relatively well hedged in, so not much impact there. And, you know, there wasn't really that much movement in terms of weakening the emerging markets. In fact, places like Mexico actually didn't strengthen, they weakened. So -- and Brazil riyal and the Argentinian peso, etc. So it was really a euro, yen move. It didn't have much of an [inaudible] impact on income.

Outside the natural hedge of sourcing expenses in the same region. You mentioned that you hedged Japan. Are the rest, for lack of a better term, "free floating?".

We have a policy of our financing capital area of hedging capitals and not hedging income subject to exceptions. We made an exception for the yen which we thought made sense, and that has actually worked out very well for us in the past couple of years. We have made an exception -- we make exceptions on occasion in other areas where we think for whatever reason we think it is the intelligent thing to do and there may be different reasons that we make that decision. The policy is to let it -- let it flow.

Okay. Thanks very much, Todd.

Thank you.

Thanks everyone for joining us today.

Thanks, everybody.