花旗銀行 (C) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to Citigroup's third quarter review featuring Chairman and CEO, Sandy Weill and CFO Todd Thompson.

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

We ask that you hold all questions until the completion of formal remarks.

Miss Ptashek you may begin.

Thank you.

Good morning everybody.

Thank you for joining us at in somewhat early hour.

A little bit earlier for us here but we are glad that you could be here.

We have Sandy with us this morning, who will make comments about the first quarter's results and then Todd will walk us through a presentation and then we will take your questions.

With that let me turn the call over to Sandy.

Sheri, thank you very much.

My first reaction before I go into thoughts on this quarter is having read the papers for the last three months, I could hardly believe that the company that we are about to talk about is the same company that you all have been reading about for this period of time, but we did have, I think, an incredible quarter in very difficult times and I would like to go over some of the numbers, what we see as the environment, a little bit about corporate governance and a little bit about Mexico, which is where we all are down here in Mexico City are having our board meeting and spending time with the people and customers from Banamex.

In the quarter, revenues were up 10%, to 18.8 billion and our expenses in the same period were down 2% to 8.5 billion.

So I think it demonstrates (a) good top line growth but also maintaining good expense controls.

For the nine months, revenues also were up 10% to 56.8 billion and expenses in that period were down 1%.

Speaking about GAAP.

I've talked a little bit about all companies really having one consistent way of reporting which is GAAP and then they can explain what they want to explain after that, but moving away from things like EBITDA and others that have gotten us in a lot of trouble have been people interpreting what their earnings really are.

So let me go through what our GAAP is and our core is.

For the three months, our GAAP net income was a little more than 3.9 billion or 76 cents a share, 23% above the same period last year and for the nine months, our GAAP net income was 12.85 billion or $2.47 up 25% above the previous year.

We would like to look at managing our company on the basis of core income and the difference between GAAP to core would be that restructuring charges wouldn't be in core income, any sfas charges wouldn't be in core income, discontinued operations and insurance gains and losses would not be in core income.

So our core income for the quarter was 3.8 billion, or 74 cents a share, 19% up from last year and a return on equity in that period of 19.4%.

For the nine months, our core income was 11.2 billion or 2.16 a share up 14% from a year ago.

With a return on equity of approximately 20%.

Our equity at the end of the quarter after deducting the spin-off of the equity from Travelers property and casualty, which was spun out in August, is $87 billion which is far stronger than anybody we compete against in the business and during the quarter, we took advantage of opportunities in the market and bought back a little bit over 77 million shares of common stock.

As I said before, I think this has been a difficult environment and I would like to go over a few areas where we especially had some hard times.

Number one was in our proprietary investment account where the Nasdaq had a specially bad quarter.

And in this quarter we lost 123 million dollars, but that is after offsetting a $325 million gain on the sale of 399 Park.

That is after taxes.

There is $300 million of additional gain pretax that will come in over the 15-year term of our incremental lease.

I think that our proprietary investments now are down to a point where if we lost as much next quarter as we did this quarter would be zero.

So we don't think that that is going to happen.

Second, we lost about $113 million in our insurance bond portfolio and part of that was related to sharp changes in credit from companies that were investment grade and went from investment grade to bankrupt without hardly stopping at go.

We also witnessed substantial corporate bankruptcies in our banking -- corporate banking business as well as problems in South America.

The problems in Argentina have continued those that started nearly a year ago and there was a lot of volatility in Brazil and Venezuela, which overall created a loss for that part of the region to our income.

And also in the quarter, as has been well advertised, there was weak investment banking.

But just really to show the diversity of our income stream and our ability to have double digit increases in revenues and expenses.

Our consumer business again led the way with income up 13% in the quarter, led by 15% revenue growth and 6% expense growth.

Our card income was up 21% and our consumer banking business on a global basis was up 19%, those were the two strongest categories in that area.

Our private bank was up 26% in profitability in the quarter and our asset management globally was up 32%.

Those were the strongest categories in our asset management division.

And corporate fixed income, quarter over quarter last year was up 22% in -- core income and transaction services were up 21% and those were the strongest categories in our global corporate investment bank.

I think, again, Todd will take you through all the numbers, but we think that this is a great example of what recurring and predictable earnings can do even in bad times, and we just think that we are building a base for a very strong future.

However, one of the really important subjects on everybody's mind now is corporate governance and all the regulatory issues that we have and our industry has and basically I think we have said this and hopefully we are acting that way.

Our goal is to not be defensive.

Our goal is to settle these obligations with the regulators and be a leader in moving forward and bringing back confidence in the public markets in the United States and around the world that really our company wants to do what is right and that means not just what is right from a legal point of view, but what is going to appear right in retrospect and what is going to be understood by the person on the street because that is how really a company is going to get credibility.

I think that there are conflicts that are inherent in all businesses.

We all saw the results of the attitude and behavior of the accounting profession and how they fought the battle between trying to manage the conflict between auditing and consulting, and that didn't work out very well, and we now are left with just really very few professionals in that business.

I think that we cannot take that same approach as it relates to the conflicts between research and investment banking and changes have to be made that will take our industry to a level from a regulatory point of view where people will have confidence that what they read is completely independent research.

We have made a lot of steps in this direction.

We have always believed in having an independent board and 75% of our board of directors are independent outside directors.

We have made moves recently to do away with interlocking directorates.

We set up a committee to review all of our practices to make sure that we are a company that is always operating with best practices.

We have created a business practices committee that is going to be chaired by Mike Mason who just joined us from Verizon and had been a director of that company for six years so we can look at not just the things that are appearing today but what could possibly arise as problems in the future and be able to handle those in advance.

And also I'd like to say that I feel very good about Chuck moving down into his new position running the corporate investment bank.

He is a person who is very knowledgeable, very smart, a quick wit, will get along with people and I think has the skills to get us through this regulatory environment and then build on our leadership position in our corporate investment banking on a global basis and over 100 countries being able to really do more for clients than most companies can and get that business moving again as we begin to see through globalization more consolidations of companies in country and cross border transactions to create efficient operations.

As Sheri mentioned, we are here in beautiful downtown Mexico City, and we are reviewing 14 months after the transaction with Banamex and Citigroup how things have gone and I think we have to feel very good about what has happened here.

In our first year of the companies being together we added a million new customers.

So we now have 12 1/2 million customers and this is in a country that I believe is either the 7th or the 9th largest economy in the world.

We have the number one financial services company in profits here in Mexico and will earn over a billion dollars U.S.

GAAP in the year 2002.

We have 50,000 corporate customers, 5 million customers in our pension or 4a accounts, we have 1400 branches, 9 million credit card customers, 30 million deposits and the integration from a technology point of view and from every point of view has gone very, very well.

Last night we had the good fortune here to have President Fox come to our office and talk about his vision and goals for the future of this country and how it will become more and more a part of North America and de-link from its traditional position of being part of Latin America and we think that is really true.

Finally, I think as we think of the future, I think we are blessed that we have a very strong brand globally.

We have - and as you can see from these results, a terrific diversity of income that allows us to overcome problems in particular parts of our business.

The great percentage of our income is recurring and predictable and we have a large capital base as I said before, $87 billion of equity with returns on that equity of approximately 20%.

And finally, our ratings are really the top of the range.

We are double A1 with Moody's and were recently raised to double a plus with Fitch and we're double A minus with S&P and I think with these kind of results we think our ratings are very important and that with a capital base, with the ratings, with the growth in our top line and the ability to bring that down to the bottom line, I think we feel confident about the future, all be it in a difficult environment.

With that, I would like to turn it over to Todd.

Gracias, Senor Weill.

De nada.

As Sandy mentioned, we are broadcasting this from Mexico City, from our Banamex offices here and I just want to add to what Sandy said of a highly successful integration by the Banamex folks down here and by Citigroup.

In less than 12 months we were able to complete this integration and I think the business feels absolutely like part of the Citigroup team at this point.

Not only reducing costs but also continuing to build a client base and it should contribute over a billion dollars in earnings after tax to Citigroup this year.

It banks one-third of the country now in terms of deposits so terrific performance.

Let me turn to the highlights for the quarter.

It is important to recognize it is a tough environment that many of our businesses are operating in.

In fact, many of them are operating in a pretty tough head wind.

The economy is stuck in first gear and all the concerns about corporate governance and reporting and corporate credit, Latin America, the possibility of war are pressuring markets.

So we have got the worst year for the stock markets in 12 years, the worst quarter in 12 years.

The Dow a 4-year low and the Nikkei a 19-year low.

On the consumer side, they are beginning to get a little bit cranky.

Bankruptcies accelerating a little bit.

And the consumer sentiment index from Michigan is at a nine-year low.

Not any better in Japan.

And capital markets are pretty slow.

So tough environment to operate in.

Lots of land mines out there, but our company delivered exceptional performance this quarter.

Core income of 3.8 billion core EPS up 19%, 74 cents a share.

And on a GAAP basis which includes as Sandy mentioned, discontinued operations, are realized gains or in this case losses from the insurance businesses as well as restructuring charges and in this quarter we had a little bit of a release of 3.92 billion in GAAP net income. 76 cents a share, up 25%.

Year to date, again, tougher environment, we have been in it now for a couple of years, year to date, we have got a core income of 11.2 billion after tax, up 14% on the year to date of last year.

Revenues up 10, expenses down 2%.

We did during the quarter increase our loan loss reserves above net credit losses by $283 million to $10.7 billion overall. 190 million of that was in the corporate business.

And we did that.

I'll spend more on that later.

But we did that recognizing the credit environment that we are in and being mindful of the potential for continued high loss rates in the corporate business going forward.

We did during the quarter reach a settlement with the FTC regarding associates and that settlement was as reported about 215 million with the FTC, another 25 million with the lawsuit that was associated with that.

And that issue we have covered with our existing primarily with our existing legal reserves as well as on the balance sheet in getting revenue in booking revenue for customers that elected to receive the insurance to which this was associated.

That revenue comes in over time as they use that insurance and so, as they ought to be a part of the settlement, then we will be able to take the revenue off the books.

So in the combination of what is on our balance sheet for both revenue that was reserved as well as for legal costs at reserve, we covered that issue.

Also during the quarter on July 22nd, the FFIAC issued guidance which addresses income recognition and loss allowance practices for credit card lending.

And basically what this does is it asks us and others to put up a reserve for uncollectable interest and fees on credit card accounts, for delinquent accounts and as a result of that guidance, we created a reserve of $206 million this quarter.

We continue to be in dialogue on other issues with various regulators, and we hope to reach -- we are anxious to reach a settlement there as soon as possible.

However, those are ongoing discussions.

And if and when we can reasonably estimate any financial impact then we will recognize that at that time.

We did on the quarter get 19.4% return on our common equity, which I think again given the environment we are quite proud of.

And additionally in the quarter, Travelers Property Casualty spin-off was completed on August 20th, and the results for Travelers Property Casualty are now shown below core income and discontinued operations.

In addition, in the quarter Global Finance named us the best corporate bank and best consumer bank in its annual survey, so we are proud of that as well.

So tough environment, but exceptional operating performance despite continued weaknesses in capital markets in commercial credit and Latin America, and we also had a few other issues that I'll go through in more detail as we go through the numbers.

Let's go to the numbers now.

Page 3 for those following along.

Global consumer segment $2.2 billion of after tax income up 13%.

In the consumer segment we saw strong performance in cards and retail and we saw a slower growth than we had been seeing in consumer finance.

Revenues for that segment up 11%, expenses only up 3 so continued good operating margin in the business.

Net credit losses up from last year, but the NCL rate actually improved as we expected and as we talked about in the last quarter call.

It improved 16 basis points from second quarter.

Global corporate investment bank income was a billion two down 7%.

Again a very tough environment in capital markets.

And that affected our capital market and banking business, our private client business and the transaction services business and as a result of that type of environment, we had cost reduction efforts across the board in those businesses.

So revenues were only up two for that segment.

Expenses were actually down 7%.

Commercial losses were up 114% to $600 million and on top of that, we added to our loan loss reserve $190 million.

On top of the $600 million in losses, we added $190 million to the loan loss reserve.

In addition, during the quarter we wrote down our Argentina patriot bonds by $88 million pretax and that shows up as a reduction in revenue in that segment.

Investment management up 14%.

A very strong performance in our private bank.

Good income performance in asset management and that was offset by slightly a down performance in our life and annuity business as net investment income continues to be challenged in a rate environment which doesn't allow us to invest at high returns.

Proprietary investment activities shows up as a negative $123 million for the quarter.

And let me explain a little bit what's in that.

Most importantly there was a very significant reduction in the public marks-to-market in our venture capital portfolio.

We feel actually pretty good about the companies in the portfolio.

These are all strong operating companies with good earnings, but that portfolio during the quarter was down about 40%.

In addition, we had some other write downs in our private equity holdings and that was somewhat offset by the $323 million after tax gain on the sale of 399 Park, and that is the part of the gain for the 60% of the building that we do not occupy.

As Sandy mentioned, the overall gain was much higher than that, about $500 million after tax and the other part of the gain will go to reduce our rent expense over the period of our lease which is 15 years.

In corporate other, that was positive for the quarter.

We had lower funding costs, continued to benefit from lower funding costs and a relatively steep interest rate curve.

In addition, we took advantage of the reduction in interest rates during the quarter to realize some gains in our fixed income investments, about $100 million.

So core income, net of all that, $3.793 billion after tax, core EPS up 19%.

We had then below core income a release of previous restructuring that we had put up, the release was about $27 million after tax and that primarily had to do with our restructuring reserves we put up for severance at Banamex which we did not need.

We also had realized losses in our insurance portfolios of $114 million after tax and we had $214 million in discontinued operations, which was the operating performance of TAP (phonetic) as well as we had put up a tax reserve on the sale of the IPO shares and that gain and with the appropriate ruling from the IRS, we were able to release that reserve as well, and so the total positive from discontinued operations from TAP was $214 million.

Last year, you will see that number was a negative number and that was because of the reserves that were established as result of 9/11 issues.

So GAAP net income, 3.9 billion up 23%, diluted GAAP net EPS up 25%.

Let me spend a little bit of time on each of the segments.

To the next page, global cards, very strong performance, lower cost of funds and higher net credit losses from last year, but again, lower net loss rate from second quarter actually declined 61 basis points.

The business had a 2.61% return on assets for the quarter.

So a very strong performance in that business.

We are beginning to increase marketing so marketing expenses and advertising expenses went up a bit and you can see some of the growth in the portfolio with receivables up 5% all on an organic basis.

The provision for credit losses obviously continues to run much higher than last year.

Global consumer finance business, flat performance from last year.

So we have seen strong performance in income during the year for that segment, and now flat continuing to see pretty good performance in the U.S. businesses, continuing to have expense declines there and decent volume growth.

The net credit loss was actually improved in the North American businesses.

The international business, however, declined 11% and that was primarily driven by the Japan net credit loss rate up 391 basis points from last year due to much higher bankruptcies in Japan.

And global retail banking up 19%, really strong performance across the board there with the exception of Latin America.

But very strong performance in Citi banking, continuing to build a deposit base there.

Consumer assets business had record mortgage originations of about 11 1/2 billion for the third quarter, very strong pipeline there and our mortgage servicing rights hedge is working well so we are not dealing with many issues in terms of reducing the value of the mortgage servicing rights.

We're 95% hedged on that versus a lot of the industry which is more in the 50-60% hedge, and that has benefited us terrifically.

Let me go to the global corporate investment bank.

Again, tough revenue story here.

Capital markets and banking is down 8%.

You can see revenue was only up 4, but we took a very close look at the expenses.

Expenses are down 10.

A lot of that was compensation cost.

The provision for credit losses is up 235% to 710 million this quarter.

As I said, that includes some provisions above and beyond credit losses in the quarter.

We did however continue to rank number one in global debt and equity underwriting disclosed fees.

We continue to have strong market share performance in that business.

As an example, our equity underwriting was essentially flat from third quarter last year, industry volume was down 35%, so we gained a lot of share in equity underwriting.

Debt underwriting we were essentially down with the industry, and very strong advisory performance driven by strong basic structured finance offerings.

Trading related revenue was up strongly off of a low third quarter last year.

Obviously with the September 11th issue but is up 26% or $322 million in trading related revenue.

Fixed income was up very strongly.

Part of that was the benefit of credit derivatives that we had in place.

We had a very strong (indiscernible) primarily from Latin America.

And trading revenue and equities was actually negative 6 million for the quarter, that was due to lower customer volumes in Us and Europe equity derivatives as well as we had positioning for lower volatility and ended up with higher volatility in the quarter so we took some reductions there.

Private client business down 8% as well.

Again, very tough quarter.

A little bit lower trading volumes, but the main issue here was lower asset values for our fee based managed accounts.

Obviously the markets have declined, which means the assets in those accounts have declined as a result of market action and therefore the fees that we get on those assests has declined and that affected the revenues strongly in that business.

We did have positive net flows, however, of $7 billion during the quarter and the bank DEPOSITS program is now up to $40 billion in bank DEPOSITS.

And we are still delivering a good profit margin of 18% in the private client business.

Transaction services, a strong income performance.

Again, they are also affected on the revenue line by the decline in markets around the world as well as by the decline in interest rate spreads.

Revenue was only up 4% as they continue to build client balances but a strong focus on expenses, the same thing we have seen in the last few quarters, expenses down 10% driving that 21% increase in income, liability balances and assets under custody both up strongly as I think the business is doing quite well with customers.

The next page just shows that we do continue to have strong leadership positions across the board in capital markets.

Number one in global debt and equity; number one in investment grade debt.

We are up to number two in global equity and up to number 3 in announced M&A so extremely strong performance across the board.

You can see that translates to strong performance at the bottom of the chart.

We were number one again in the third quarter, and so third quarter year to date, almost a billion 6 in disclosed fees, versus the closest competitor at under a billion.

Let me turn to investment management on the next page.

Life insurance and annuities flat.

And the story there is strength in fixed annuities and life sales and we continue to have strong growth in those two pieces of business.

But weakness in variable annuities in the sales and the assets in the annuities are declining.

So variable annuities were actually down 27% in the quarter.

Very strong performance in the private bank. $115 million, a record performance for them.

Up 26% on strong revenue growth and continued expense control.

Client business volumes continued to improve and so again very strong performance in a tough market for the private bank, again.

I think that is the fourth or fifth record quarter for the private bank in earnings.

Asset management up to $137 million in earnings, again strong income performance driven partly by increased revenue, but good focus on expenses.

Expenses actually down 17% year on year in the quarter.

AUMs (phonetic) up slightly.

We had positive net flows in retail of about $700 million, but again, as the market action has reduced the value of mutual funds, the fees in that business are clearly under pressure.

Let me spend a minute on the next page on looking at the same business, but on a regional basis.

Extremely strong performance in Asia, up 29%, and that is driven by both the consumer and corporate businesses up strongly, corporate was actually up 51% versus a relatively weak quarter last year.

We see Hong Kong beginning to stabilize a bit, although we may see increased consumer bankruptcies there going forward.

But very good performance out of Asia.

Also out of Japan, the story in Japan is one where the consumer business was actually flat.

Again hurt by the increased loss rates in consumer finance.

But the corporate business is going gang busters, actually up over 200%.

Strong capital markets in banking at our Niko (phonetic)-Salomon Smith Barney joint venture. (Indiscernible) up 19%.

Growth in Poland and India there again both consumer and corporate strong performance there.

You can see North America up 17% including Mexico.

And then a tough performance in western Europe.

Actually that was strong consumer performance but very weak corporate performance given by weakness in capital markets as well as by higher credit costs in western Europe.

And Latin America actually had a loss of $106 million in the quarter versus a profit of 254 million last year.

So a loss of 106 versus a profit last year of 254.

A very big swing and that is primarily due to the relative performance in Argentina.

Next page just shows year to date, I'm not going to spend a lot of time on that, I want to highlight for the quarter, core income of $11.2 billion after tax up 14% for the year, EPS also up 14% for the year.

And then on a GAAP net income basis, $12.8 billion after tax income up 25%.

And that includes a very strong number from discontinued operations which, again, includes both the operating results of TAP as well as the gain on the sale of IPO back in the first quarter.

For the nine months, revenue was up 10% for Citigroup and expense was down 1. ou can see on the next slide quarter by quarter, we have continued to have very good operating leverage, so the year to date and here I have excluded proprietary investment activities, including that it's 10% revenue growth and 1% expense decline year to date.

If you take out proprietary activities, revenue was up 9, expense was down 1 and that obviously is offsetting 37% increase in credit costs to drive that 14% increase in earnings year to date.

Let me spend a minute on credit, to start with the consumer side.

This is page 11 for those following along.

Again, tough environment in general, the consumer had been improving as you can see from second quarter to third quarter in loss rates.

We had seen a lot of improvement in delinquencies, 90 day past dues and delinquencies, but now we are seeing a flattening of delinquencies, so what we expect, that this environment implies that we are not likely to see much further improvement in the NCLs, in the global consumer business.

We expect it to be sort of flattish.

Probably continued a bit of improvement in the U.S. and continued worsening in Japan and some other parts internationally.

So we are likely to see flat to possibly slight increase in NCLs from the global consumer business next quarter.

We are spending a lot of effort addressing specific problems in Japan where we are developing new scoring models, increasing the frequency of credit bureau updates and tightening the credit criteria we're also focused on reducing expenses in that business as opposed to growing the book at this point.

And I think there is a lot of opportunity to reduce those expenses further in Japan, consumer finance business.

In Asia and Hong Kong, we are tightening the credit criteria, and we are working to exclude some of the riskier segments.

Let me go to the corporate credit as we expected we continued to have relatively high loss rates 1.75% for the quarter.

The issues are the same ones as you might imagine, telecom and cable and Latin America are really driving those loss rates.

The energy sector has also been under some stress.

We will likely see additional losses there.

We did as I mentioned add $190 million to reserves in excess of write-offs given current the environment.

We would expect to see relatively high loss rates for the rest of year and perhaps going out into the first half of next year.

We participated obviously in the shared national credit review and I was very pleased with the results there.

I feel like we did very well, our internal ratings were affirmed.

Very few differences and in general where there were differences, we were more conservative than the regulators.

So very good report card there from the shared national credit review.

I do want to spend a minute on a couple of issues.

One is telecom exposures and the second is Brazil.

Let me talk a little bit about our telecom and cable exposures.

In terms of direct outstanding to what is on the books, it is about 3% of our total GCIB on book exposure, this is both telecom and cable.

So a little over 6 1/2 billion dollars in exposure.

That is 38% investment grade and that amount is down about 1 1/2 billion dollars from the beginning of year.

So we've obviously worked down that exposure.

So 38% investment grade is about a billion and a half to Rbox (phonetic).

So we feel good about that.

Most of the non-investment grade is actually secured by assets so it is in a much better position than some of the unsecured public debt would be.

We also have a billion and a half in credit derivatives against overall exposure here.

And any loans that we have rated two or worse, in addition, has at least 25% reserves against it.

In addition to what is on the books, we have unused commitments and contingent exposure of about 11 1/2 billion and again, that is about 83% to investment grade companies, ones that are currently investment grade so we feel good about that exposure.

We also have some pre-settlement risks for derivatives of about 3 1/2 billion and that's is 94% investment grade.

So we are not concerned about the credit issue there.

So overall, I think we are certainly going to see some losses from our telecom cable exposure, but I think it is very manageable losses on the order of somewhere between 100 and 200 million a quarter.

For the next few quarters, but I think given amount of investment grade exposure we have the credit derivative protection we have and the reserves we have and the fact that most of our non-investment grade is secured by assets, we think overall it will be within our expectations at this point.

Let me turn to Brazil.

There is a slide in your pack on Brazil that shows our local balance sheet in Brazil, the assets and the liabilities.

And you can see we have $7 1/2 billion now in local assets and that is down from $9 billion in the end of the first quarter.

Our liabilities are 4 billion up from 3.8, so the net of that is our net local investment which is the equity and intercompany loans that we have to our local business.

You can see that the loans that we have outstanding, $2.4 billion in corporate and about $100 million in consumer.

That excludes our credit card business which we own one-third of and manage those loans don't show up on the balance sheet and we have a one-line equity pick-up in income for that business.

But, $2.4 billion of corporate loans in Brazil.

We also have in addition to that obviously, exposure to sovereign debt which we have tried to keep to a minimum.

In addition to what you see locally, we have cross border claims both short term and long term, about three and a half billion dollars of that is trade finance which we feel good about and we have worked down those cross border claims from 6.2 billion to 4.6.

So we have had an effort obviously in the past year to get our exposure down to what we think is a manageable level and we tried to do that by as much as possible letting the high risk exposures either roll off or manage them down while maintaining our commitment to other banks and to the country to support the trade lines.

So again, we have about $3.2 billion in trade finance which we could consider to be a low risk effort.

So overall, our total cross border exposure has come down from $11.4 billion at the end of first quarter to $8.1 billion at the end of the third quarter.

All right, that is it on corporate credit.

Let me spend a little bit of time on the capital and balance sheet impacts of the Travelers property casualty spin and the prospective Golden State Bank acquisition.

What you see on the bar on the left-hand side of the next slide is what our assets liabilities and equity and trust securities were at the end of the quarter.

And that gave us a tier 1 capital ratio of 9.5 and total capital ratio of 12.2 if we had not spun TAP out in the quarter.

So that is a pro-forma if we had not spun out TAP.

And in the middle of that you can see the result of what occurred on August 20th.

It removes $58 billion of assets, $50 billion of liabilities and $8 billion of equity and trust securities.

And so brought down our tier 1 capital ratio by 40 basis points and total capital ratio by 30 basis points.

We expect to receive approval to close the Golden State acquisition sometime during the fourth quarter.

We are now awaiting regulatory approval to move forward with that.

But other than that, we are all ready to go and upon the acquisition of GSB that will add $54 billion, about, to assets, about $50 billion to liabilities and about (indiscernible) to equity trust securities.

So that will reduce our tier 1 by 40 basis points and total capital ratio by 50 basis points.

So again, I just want to give you a sense of the balance sheet impacts of those two changes in the third quarter and now as we expect in the current quarter for Golden State.

Final slide in your pack here is where we are with capital, total stockholders equity including trust preferred of nearly $87 billion.

Return on common equity of 19.4%.

So we continue to get a very high return on our common equity.

Tier 1 ratio you can see is improved substantially from where we were at the end of third quarter last year up to 9.1%.

Total capital ratio of 11.9 GAAP assets remained over a trillion, with a trillion 32.

During the quarter, we took the opportunity to repurchase over 77 million shares.

We spent about 2.5, a little under $2.5 billion for that, which means year to date, we bought back 133 million shares for just shy of $5 billion.

So we are able to actually improve our capital ratios while supporting our stock and supporting our shareholders by spending $5 billion for 133 million shares.

So our common shares outstanding have now decreased $56 million for the second quarter.

So that's it.

Again, the quarter was one that we think is exceptional operating performance and at the same time, we were able to deal with a very significant decline in our proprietary investment activities, to deal with the FTC settlement and the new FFIAC credit card guidelines and still deliver almost 19 1/2 percent return on equity.

With that, let me turn it over to questions.

Thank you, at this time, if you would like to ask a question, please press star 1 on your touch tone phone or star 2 to withdraw your question.

Again, if you do have a question, press star 1 on your touch tone phone.

Our first question does come from Glen Shore and please state your company name.

Hi, it is Deutsche Banc.

Hi Glen.

Hi, Todd.

Two quickies, number one, just finishing off your comment on the unfunded commitments, can you refresh us on how unfunded commitments change quarter to quarter and maybe just a little color on pricing and demand for capital in terms of people drawing down because you did mention in terms of the quality, that 83% is investment grade, that is number one and number --

You were breaking up a bit.

Was that in regards to the telecom and cable exposures?

Just a general comment first in terms of the unfunded commitments change from quarter to quarter and an overall comment of the demand for capital.

And the subsequent pricing environment on the corporate side and the second question is related to trading revenues in the GCIB.

And your trading revenues had a little bit of a different complexion versus some other brokers that have already reported.

Meaning equities and currencies were down and fixed income was pretty solid and I'm curious if there is more color that you can add there and if maybe you can help with us the mechanics of if you have a bond that you have a credit derivative hedging, if you -- if the bond falls into bankruptcy, do you take the credit derivative gains through the trading line and the loss goes through the provision or maybe just a little color on what would happen on the trading line?

Let me address the last question first.

Credit derivatives ups and downs would go through the fixed income trading related revenue line.

And credit losses will go through provision and if the company goes in bankruptcy we would take credit losses.

Was that helping this quarter?

In other words, fixed income trading was pretty strong given the spread widening in the quarter and your dominant position in some of the inventory related businesses like high yield and high grade, is that some of what we have seen during the quarter?

Yes, Glen, one of the things that I did mention was that we did see some of the benefit in the fixed income trading line from some of the credit derivatives that we have in place.

And then just the overall comment, Todd, on the unfunded commitments quarter to quarter?

Yes, unfunded commitments, essentially what we call our "osuc" or our outstanding and unused commitments, which is both on the balance sheet as well as commitments, have been relatively flat for the general world for a while.

And so we continue to see those relatively flat.

I think there is no shortage of demand out there for both unfunded commitment as well as capital.

Obviously, the capital markets are pretty cranky, both the debt and equity markets and therefore a lot of people are turning to banks, but I think that there is you know a level of conservatism now that we and others have on the amount of lending and commitments that we want to have out there.

So we kept that relatively flat.

Help me out with just one thought.

If there are commitments in place and the demand is still pretty strong, I'm sure that the demand is coming from maybe not so desirable partners.

How do you not fund it?

In other words, how are unfunded commitments flat if the demand is strong?

Well, unfunded commitments are decisions that we make to provide a line of credit.

On an unfunded basis which they can draw when they need to, assuming that they don't -- assuming they meet the covenants to be able to draw the line.

So obviously we try to write tough covenants and if the company is really in trouble, that would protect us in that case.

But, that is you know, a decision that we choose to use.

Now terms of actually drawing down those lines, once you know a company in good standing has negotiated a line with us, it is their option on when they draw down that line.

Gotcha.

And at that point, it wouldn't be an unfunded commitment.

It would actually show up on the balance sheet.

Right.

Right.

Last thing is --

The other thing I should add, Glen, is that just in terms of corporate credit is cash basis loans did increase a bit in the quarter.

But I think that is a little bit misleading.

Actually the cash basis loans for Europe and North America and Japan were pretty flat.

Most of that increase was an adjustment in city capital for cash basis loans and a little bit more in the emerging markets.

So that was a relatively good sign.

Not in terms of improving corporate credit losses, but at least in stabilizing corporate credit losses.

Okay, last one, Todd.

The 215 million FTC settlement came out of existing reserves.

I know I'm taking a chance here.

But any color you can provide on other legal reserves that have been established versus some of the higher profile ongoing issues?

No, not at this stage.

Most of the ones that you have read about are either so far in the future and so uncertain that we would not see those as estimable or probable at this point.

And some of the nearer term regulatory things I think are so uncertain and the issues there are really not money issues.

It is structural issues.

So until you deal with those, you not dealing with money issues and we could not have at this point established reserves for those.

Great.

Thanks very much.

Our next question comes from Henry McVeigh.

And please state your company name.

It's Henry McVeigh with Morgan Stanley.

Can you hear me?

Hi Henry.

Hi.

A couple of things on the credit side.

I guess, one, on the consumer, if you had 206 million related to the cards and the net on the consumer was 93, did you release reserves in other parts of the consumer business and where was that?

Yeah, we had a couple of places where there were reserve releases.

For example, in our mortgage business in the U.S. where we continue to see very strong credit performance out of the business, and therefore actually need to release a little bit of reserves there.

I think that was the single biggest piece.

There were some other, kind of, "nits and nats" around the place, but that was...

Then on the corporate side, $190 million, I mean, just given what you said about the telecom portfolio do you feel like -- I mean, are you indicating we will see a series of reserves strengthening do you think or was this a one-time event and we are flat from here, just we run at high provisions but no reserves strengthening?

Yeah, we look at that every quarter.

And this quarter we thought it was prudent to go ahead and put up some additional reserves for issues that may come along over the next few quarters.

You know, we'll have to take a look at that every quarter and if we think the environment is improving, then we wouldn't expect to see any additional provisions beyond the credit losses so no more building on the reserve.

If the world got a lot worse, we would have to re-evaluate that.

It looks like in consumer finance you kind of slowed some of the real estate secured receivables, growing auto finance at a pretty rapid clip, are you changing strategies there?

You are right about the numbers, Henry, but it is a little misleading.

Actually, what that is, we are not securetizing as much as the auto, so just keeping it on books.

So we are not actually focused on growing that business at all, there just is a lot less securetizing and more that is sitting on book.

One other.

Just going back to the corporate and investment bank, the other income shot up, is that related to the joint venture and then just on the compensation that you came down quite a bit and it looked like that was the biggest lever, I guess this is a bigger picture question, which is can you continue to get that operating leverage in the bank and just in the company in general, is that sustainable?

In essence, it shows up in others or actually the NICO investment in NICO cordial (phonetic) shows up there and they had stronger performance than they had previously so that was a contributor to the other line.

You know, in terms of compensation, we obviously took a look at that.

I think for the quarter we saw that the compensation costs should probably come down given both how the markets have performed as well as how credit has performed, you know as well as the expectations on revenues for the rest of year.

And so, I think we are in a pretty good shape.

If you actually look at our total compensation costs as a percentage of risk adjusted revenue, which is revenues minus credit costs we have actually accrued a little more this year than we did last year.

Okay.

And just one final one.

Your comments on credit showed up in the results, it looked like Japan, you know, we have doubled in terms of charge-offs, while it is not a huge number on an absolute basis, it is clearly, it seems to me that would be an area of focus and I guess you guys are trying to do a lot on the cost side but will that really be enough and implementing enhanced credit policies, is that really enough to stem the trend lines?

Yeah, I think consumer finance loss rates are really --have increased a lot.

We talked about that last quarter as well and we talked about our concern about it at the end of the first quarter so that continues to be an issue.

We focused on making sure that we are only putting good loans on the books at this point.

We focused on improving both the credit scoring as well as the collection efforts.

And then you know, in a time like this, where you have got significantly rising bankruptcies in Japan and a pretty tough economic environment out there, it is the right time to then focus on running your business tighter and taking costs out, and that business most of which we bought from associates is one that was built up from a series of acquisitions over time.

And now the chance for us to sort of catch our breath on growth and receivables and really focus on taking expense out.

And I do think there is a fair amount of opportunity there.

And on the investment portfolio, did you say it is down by 40% or did you give the absolute dollar amount?

I didn't give the dollar amount, but the public portfolio declined by 40% during the quarter.

Did you comment on the private?

No, we had some write downs in the private portfolio.

Okay, thanks, guys.

Thanks, Henry.

Take care.

Richard (Indiscernible), and please ask your question and state your company name.

Yes - Goldman.

Hi Richard.

A couple of quick questions here.

In the proprietary investments, it actually looks like you put a fair amount of new money to work if we consider that the write downs were pretty significant about I guess $450 million.

And maybe you can just give us a sense as to where you are finding opportunities at this point?

Because it was the first increase in about a year or two.

Sorry, let me just take one look at that.

Net in write downs it looks like you put a billion dollars more to work in your period end assets of your proprietary investments.

Yeah, we're not putting a lot of new money to work there at this point.

We have in investment, CBC has raised the public fund and they are making some investment.

And if fact, at this point in time is the first time in two years that we are beginning to see some decent valuations out there.

So I think they are encouraged for first time.

So there is some investments going on there.

What you've seen over time actually is we have worked out of a significant amount of the investments that we have had in our proprietary investment activities.

We have worked down our Brady bond portfolio by over $3 billion in the past couple of years and worked down the public portfolio substantially in the past two or three years.

Realizing cash of about two and a half billion dollars in the past couple of years so those both have come down.

One of the reasons why the numbers have gone up a little bit over time is as we have purchased things, for example, as we purchased Banamex, we had some additional assets that they had in their proprietary investment activities that ruled into this.

So that is one of the reasons why things have gone up.

So you're saying this quarter the increase net of write downs was from Latin America mostly?

No, not this quarter.

That shouldn't have been the increase.

I'm going to have get back to you.

All right.

And then also you mentioned your equities trading area that you said that the reason why it was so weak in the quarter was that you were positioned for lower volatility, are those positions still on your pads right now?

Are you still positioned for lower volatility?

I'm not too sure where our derivatives book, where equity guides have positioned themselves today, whether it's for higher or lower vol.

Okay.

In Argentina, it looks like you had about $241 million corporate provisioning and then you said $88 million in Argentine securities, so from what we have been able to identify it looks like 329 million dollars, but there were comments that it affected other areas of the business.

What was the total cost of Argentina this quarter?

Approximately.

The total cost of Argentina, we had a couple of things going on.

I mentioned we wrote down the patriot bonds there.

Right.

So that was about $88 million in the GCIB that came out of revenue, pretax basis there was another 10 million that was in consumer -- so $98 million in total.

We wrote those down substantially.

We also had some smaller numbers.

We revalued some other sovereign instruments, what we call the compensation notes, which is things that we were given by the government to compensate us and other banks for the difference between the devaluation of assets and liabilities in the country.

So we wrote those down a little bit further.

We also continued to have losses in the country so we had further write-offs there and some of our private equity write downs were also in Argentina.

A little bit of that was in Argentina as well.

Great.

Okay, well, thank you.

Thanks, Henry.

Our last question today does come from Judah [Krushar].

And please state your company name.

Hi Todd.

Hi, Judah.

I would like you to talk about the outlook for the consumer business going forward and I guess what I'm curious on is without a renewed global expansion, what's the prognosis for the international consumer business to do its part on the growth?

It seems like non-U.S. or non-North American credit card growth 2%, down 11%, retail up 7, and even though you can add up the businesses to show a total that there is growth around the world, it seems like what you suggesting here is that the consumer may be starting to begin to have some new credit issues in the U.S. and you see sort of these ["punk-type"] growth rates internationally, how concerned are you to keep growing the consumer business is my question?

Well obviously the consumer business has had extremely strong performance this year and actually last year as well.

It has been doing quite well.

It has been a mix of things.

It has been retail banking.

It's been cards, it's been consumer finance.

And it has been in many places around the world.

I think going forward I think on the retail banking side we expect to see continued strong performance both in the U.S. as well as around the world.

I think that is going well and we are I would say more at the beginning closer to the beginning than the end if you will of the growth in that segment of the business.

I think consumer finance I think will see a decent performance around the world, especially as we deal with the Japan credit issues.

But I think we will see decent performance.

And then the cards business has had just an extraordinary year.

They benefited obviously from rates coming down as well as I think managing their costs extremely well.

Frankly managing their credit pretty well as well.

And I would expect that that business will continue to have pretty decent performance going forward.

So, you know, our expectation is you know in that business you would continue to see you know strong, strong growth going forward in the double digit range.

But we can't, we are not trying to defy gravity here either.

So I think, if the world turns substantially worse than where it is, we will have some issues.

But as long as the markets remain relatively benign and consumer credit and in GDP, I think we should be in decent shape on the consumer business.

Back on the earlier question on the compensation in the corporate investment bank, well under 40% comp ratio, and I too am curious whether there was a reversal on the comp accruals and whether that could be sustained?

And maybe you can update how many incremental staff cuts you made this period and where you see comp per staff for the year-ending up at this point versus last year?

Head count is down 6, 7, 8% for the year in that business.

We continue to look at areas that don't have a lot of activity and see whether it makes sense to manage down the staff without -- we hadn't made any big announcements about that but continue to see smaller, if you will, reductions in parts of the business.

For the quarter, what we did is we looked at the compensation and benefits for the business and we tried to be realistic about what we needed to pay and how we needed to pay it and to whom.

And as I said earlier, if you look at the comp and benefit accrual on a year to date basis on risk adjusted revenues, taking out revenues and just leaving credit costs, that has a big impact on the business, we are at 45.4% year to date, comp and benefits as a percent of risk adjusted revenues.

Last year we were at 44.3%.

So we are up 100 basis points on that basis.

Which I think is, you know, pretty good.

So we clearly are absolutely going to pay good people good money.

We have an extraordinary franchise that we built over the past few years.

It is leading the industry.

It has gained market share.

We are committed to it and committed to the people it in.

But at the same time, for shareholders, we have to be cognizant of what is going on with revenues in the market, what is going on with credit and what we should be doing in terms of expenses for our shareholders.

I think what that says is (a) because you have a larger credit portfolio than traditional investment banks, your comp ratio should be lower, but I guess you're saying that we shouldn't look for any reversal here, rise in comp ratio.

Sounds like you're kind of managing it based under full year expectations.

There is not a true-up or reversal of prior accruals; is that correct?

I think that is right.

Last thing.

I don't know if you can comment on this.

But on the issue of regulatory settlement possibilities, can you comment -- I know you are not going to comment on anything specifically because you are in discussions, but where are your red lines in terms of things you feel you are adamant about in terms of concern where if you accepted going beyond a certain point that you would compromise your competitive position versus peers?

I think that is a good question.

I think that is one of the things that we are in discussions with.

We obviously don't want to be in a position - and it is unlikely we would put ourselves in a position where we felt we were going to be uncompetitive.

As I said before, it is a fantastic franchise we put together the people are terrific.

I do think they have the right integrity.

They have been trying to do the right thing.

I think Chuck is doing an extraordinary job to get past these sort of I'll call them past issues and move on with the business.

And we think in any kind of a fair playing field, new environment we will continue to have the biggest, strongest, most powerful corporate investment bank out there.

But obviously if we were put in a position where it is an un-level playing field, we would be concerned about that.

So that is why these discussions are likely to be difficult.

It could be long, you know, you never know, you could get to a resolution pretty quickly.

And I do think that the industry would like to get the issues behind them.

Not just us.

These are for the most part industry issues.

We are obviously not the only name in the newspaper.

There has been just about every firm out there in the paper and I think all of us would like to get it behind us.

And I think in order to do so, probably an industry type solution.

Okay, good, Todd, thanks.

Thanks Judah.

Thank you very much.

And once again, quite proud of the quarter.

Take care.